-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qk1SaV1FGG9iy3MZKltyr9KZA1zf4yA7klgU+5iwAok0WowZKoj8gEP5yAGmJayi 8XfH9nGfQk121cUj7nCyTQ== 0000950149-96-000807.txt : 19960701 0000950149-96-000807.hdr.sgml : 19960701 ACCESSION NUMBER: 0000950149-96-000807 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19960628 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANERGEN INC CENTRAL INDEX KEY: 0000877929 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 770183594 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-07245 FILM NUMBER: 96588817 BUSINESS ADDRESS: STREET 1: 301 PENOBSCOT DR CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 4153618901 MAIL ADDRESS: STREET 1: 301 PENOBSCOT DRIVE CITY: REDWOOD CITY STATE: CA ZIP: 94063 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 1996 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ ANERGEN, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 2836 77-0183594 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
301 PENOBSCOT DRIVE REDWOOD CITY, CALIFORNIA 94063 (415) 361-8901 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ BARRY M. SHERMAN, M.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER ANERGEN, INC. 301 PENOBSCOT DRIVE REDWOOD CITY, CALIFORNIA 94063 TELEPHONE: (415) 361-8901 TELECOPY: (415) 361-8958 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: BARRY E. TAYLOR, ESQ. WILLIAM H. HINMAN, JR., ESQ. TREVOR J. CHAPLICK, ESQ. SHEARMAN & STERLING ROBERT G. O'CONNOR, ESQ. 555 CALIFORNIA STREET, SUITE 2000 WILSON SONSINI GOODRICH & ROSATI SAN FRANCISCO, CALIFORNIA 94104 PROFESSIONAL CORPORATION (415) 616-1100 650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94304 (415) 493-9300
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------ CALCULATION OF REGISTRATION FEE
================================================================================================================ PROPOSED PROPOSED TITLE OF EACH CLASS OF AMOUNT TO MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------- Common Stock, no par value.................. 4,600,000 shares $4.6875 $21,562,500 $7,436 ================================================================================================================
(1) Includes 600,000 shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457 under the Securities Act of 1933, as amended. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. ================================================================================ 2 ANERGEN, INC. ------------------------ CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM S-1
ITEM NUMBER AND HEADING IN FORM S-1 REGISTRATION STATEMENT LOCATION OF CAPTION IN PROSPECTUS ------------------------------------------- ------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus..... Forepart of Registration Statement; Outside Front Cover Page; Additional Information 2. Inside Front and Outside Back Cover Pages of Prospectus.............................. Inside Front Cover Page; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Not Applicable 6. Dilution................................... Dilution; Risk Factors 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Outside and Inside Front Cover Pages; Underwriting; Outside Back Cover Page 9. Description of Securities to be Registered................................. Prospectus Summary; Dividend Policy; Capitalization; Description of Capital Stock; Shares Eligible for Future Sale 10. Interests of Named Experts and Counsel..... Not Applicable 11. Information with Respect to the Registrant................................. Outside and Inside Front Cover Pages; Prospectus Summary; Risk Factors; Use of Proceeds; Dividend Policy; Capitalization; Price Range of Common Stock; Dilution; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Stockholders; Description of Capital Stock; Shares Eligible for Future Sale; Financial Statements; Outside Back Cover Page 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................................ Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JUNE 28, 1996 4,000,000 SHARES [LOGO] COMMON STOCK ------------------------ All the shares of Common Stock offered hereby are being sold by Anergen, Inc. The Common Stock is traded on the Nasdaq National Market under the symbol ANRG. On June 27, 1996, the closing sale price of the Company's Common Stock as reported by Nasdaq was $4.63 per share. See "Price Range of Common Stock." THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE 6. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- Underwriting Price to Discounts and Proceeds to Public Commissions(1) Company(2) - ----------------------------------------------------------------------------------------------- Per Share....................... $ $ $ - ----------------------------------------------------------------------------------------------- Total........................... $ $ $ - ----------------------------------------------------------------------------------------------- Total Assuming Full Exercise of Over-Allotment Option(3)...... $ $ $ - ----------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------
(1) See "Underwriting." (2) Before deducting expenses estimated at $400,000, which are payable by the Company. (3) Assuming exercise in full of the 30-day option granted by the Company to the Underwriters to purchase up to 600,000 additional shares, on the same terms, solely to cover over-allotments. See "Underwriting." ------------------------ The shares of Common Stock are offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to their right to reject orders in whole or in part. It is expected that delivery of the Common Stock will be in New York City on or about , 1996. ------------------------ PAINEWEBBER INCORPORATED VECTOR SECURITIES INTERNATIONAL, INC. ------------------------ THE DATE OF THIS PROSPECTUS IS , 1996. 4 [Graphic entitled "Autoimmune Cascade in Multiple Sclerosis" depicting a macrophage engulfing a self-antigen from a nerve cell and presenting that self-antigen on its surface. It further shows that the binding of the self-antigen to the T cell receptor, when accompanied by "second signals" from the macrophage, triggers T cell proliferation and the production of cytokines that attack and damage the nerve cell] [graphic subtitled "AnergiX(TM)" depicting T cells being bound by AnergiX compounds, going into a state of inactivation or anergy, and not attacking the nerve cell] [graphic subtitled "AnervaX(TM)" depicting patient's antibodies binding to a portion of the MHC protein on the surface of a macrophage, thereby preventing the interaction between a T cell and the self-antigen presented by the macrophage] The terms Anergen, AnergiX, MS/AnergiX, MG/AnergiX, RA/AnergiX, IDDM/AnergiX, and AnervaX are trademarks of the Company. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET-MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward- looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" as well as elsewhere in this Prospectus. THE COMPANY Anergen, Inc. ("Anergen" or "the Company") is focused on the treatment of autoimmune diseases through the discovery and development of proprietary therapeutics that selectively interrupt the disease process. Anergen's current research and development efforts are focused on two distinct core technologies, AnergiX(TM) and AnervaX(TM), that the Company believes may be used to treat a broad range of autoimmune diseases without generally suppressing the immune system. Patient selection has begun for a Phase I clinical trial of the Company's AnergiX compound for the treatment of multiple sclerosis ("MS") and the Company has initiated a Phase II clinical trial of its AnervaX compound for the treatment of rheumatoid arthritis ("RA"). Since 1993, the Company has collaborated with Novo Nordisk A/S ("Novo Nordisk") in the development of AnergiX treatments for MS, insulin dependent diabetic mellitus ("IDDM") and myasthenia gravis ("MG"). In June 1996, the Company announced a collaborative agreement with N.V. Organon ("Organon") to develop an AnergiX treatment for RA. In the body's immune system, T cells normally regulate the identification and destruction of foreign substances and malignant cells. Autoimmune diseases are caused by abnormal destruction of healthy body tissues by disease-specific T cells. Anergen's results to date suggest that treatments based on its core technologies may interrupt the chain of events fundamental to the onset and continuation of certain autoimmune diseases. The Company's AnergiX technology selectively destroys or inactivates (anergizes) the T cells implicated in the disease process. Its second core technology, AnervaX, stimulates the immune system to produce antibodies that block the presentation of self-antigens to destructive T cells. The Company believes that, because its potential therapeutics target only disease-specific T cells, the normal function of the immune system should remain unaffected. In contrast, currently available therapies for autoimmune diseases treat only the symptoms of the disease or broadly suppress the immune system, which can compromise the ability of the immune system to protect against foreign substances. Anergen received investigational new drug application ("IND") clearance in December 1995 with the United States Food and Drug Administration ("FDA") to begin Phase I clinical testing of its AnergiX compound for the treatment of MS. In preclinical studies, the administration of an AnergiX compound prevented or reduced disease symptoms caused by the T cell initiated autoimmune response in animal models. The Company has also demonstrated in vitro that its AnergiX compound can inactivate human T cells associated with MS. The Company is collaborating with Novo Nordisk on the development of this compound. In April 1996, the Company initiated a multicenter, double-blind, placebo-controlled Phase II clinical trial of its AnervaX compound for the treatment of RA. The results of a Phase I clinical trial completed in October 1995 indicated that AnervaX is well tolerated and can stimulate an immune response in RA patients. Preclinical results have also demonstrated that the Company's AnervaX approach may prevent the onset or reduce the severity of autoimmune disease in animal models. The Company entered into a collaborative agreement with Novo Nordisk in August 1993 under which Novo Nordisk, in exchange for certain marketing rights, will support research and development of the Company's MS, MG and IDDM programs, make milestone payments, and pay royalties on product sales, if any. The Company has the right to co-promote any resultant products for MS and MG in North America. In addition, at the time of the agreement, Novo Nordisk made an $8 million equity investment in the Company. 3 6 In March 1996, the development program with Novo Nordisk was extended through August 1998, increasing total funds expected to be received by the Company under the collaboration from $25 million to $35 million. These amounts do not include the cost of clinical trials that will be borne directly by Novo Nordisk. In June 1996, the Company entered into a collaborative agreement with Organon under which Organon, in exchange for certain marketing rights, will support research and development of an AnergiX compound to treat RA that incorporates a proprietary peptide discovered by Organon. Under the arrangement, Organon will also pay the Company a one-time license fee, make milestone payments and pay royalties on product sales, if any. The license fee, research and development support and milestone payments that the Company may receive under this agreement are estimated to exceed $15 million. These amounts do not include the cost of clinical trials that will be borne directly by Organon. The Company was incorporated in California in April 1988 as Biospan Corporation and changed its name to Anergen, Inc. in July 1991. The Company's principal executive offices are located at 301 Penobscot Drive, Redwood City, California 94063, and its telephone number at that location is (415) 361-8901. 4 7 THE OFFERING Common Stock Offered by the Company....... 4,000,000 shares(1) Common Stock to be Outstanding after the Offering................................ 19,029,430 shares(2) Use of Proceeds........................... Research and product development, clinical trials, additional personnel, capital equipment, manufacturing expansion and other working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol............. ANRG
- --------------- (1) Assumes no exercise of the Underwriters' over-allotment option to purchase up to 600,000 additional shares of Common Stock. (2) Based upon the number of shares outstanding as of March 31, 1996. Excludes 825,815 shares issuable upon exercise of options outstanding under the Company's 1988 Stock Option Plan, 20,000 shares issuable upon exercise of options outstanding under the Company's 1995 Director Option Plan and 459,015 shares of Common Stock issuable upon exercise of outstanding warrants. See "Capitalization," "Management -- Incentive Stock Plans" and Note 6 to Financial Statements. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- STATEMENTS OF OPERATIONS DATA: Revenues: Contract revenues -- related party...... $ -- $ -- $ 339 $ 2,325 $ 3,001 $ 551 $ 783 Interest income......................... 163 544 312 207 533 17 139 ------- ------- ------- ------- ------- ------- ------- Total revenues................... 163 544 651 2,532 3,534 568 922 ------- ------- ------- ------- ------- ------- ------- Expenses: Research and development................ 2,696 4,525 5,553 7,423 8,322 1,898 1,895 General and administrative.............. 1,218 1,494 1,716 1,831 1,976 462 503 Interest expense........................ 142 78 226 238 322 71 55 ------- ------- ------- ------- ------- ------- ------- Total expenses................... 4,056 6,097 7,495 9,492 10,620 2,431 2,453 ------- ------- ------- ------- ------- ------- ------- Net loss.................................. $(3,893) $(5,553) $(6,844) $(6,960) $(7,086) $(1,863) $(1,531) ======= ======= ======= ======= ======= ======= ======= Net loss per share(1)..................... $ (0.96) $ (0.99) $ (1.12) $ (0.97) $ (0.55) $ (0.25) $ (0.10) ======= ======= ======= ======= ======= ======= ======= Shares used in calculating per share data(1)................................. 4,059 5,599 6,118 7,202 12,859 7,527 14,984 ======= ======= ======= ======= ======= ======= =======
MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED(2) ------- -------------- BALANCE SHEET DATA: Cash, equivalents and short-term investments...................... $ 9,653 $ 27,953 Total assets...................................................... 12,461 30,761 Long-term portion of capital lease obligations and debt........... 636 636 Total shareholders' equity........................................ 10,190 28,490
- --------------- (1) See Note 1 to Financial Statements for the method used to determine shares used in calculating per share data. (2) Adjusted to reflect the sale by the Company of the 4,000,000 shares of Common Stock offered hereby at an assumed public offering price of $5.00 per share. 5 8 RISK FACTORS An investment in the shares being offered hereby involves a high degree of risk. Prospective investors should carefully consider the following risk factors, in addition to the other information contained in this Prospectus, before purchasing the shares of Common Stock offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" as well as elsewhere in this Prospectus. EARLY STAGE OF PRODUCT DEVELOPMENT; LACK OF COMMERCIAL PRODUCTS; NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT The Company was founded in 1988 to discover and develop biopharmaceutical compounds for the treatment of autoimmune diseases. To achieve profitable operations, the Company, alone or with others, must successfully develop, obtain regulatory approval for, manufacture and market products. The Company does not have any products available for sale nor does it expect to have any products commercially available for at least several years, if at all. The Company's potential products are at the early stages of research and development, with only limited human testing of certain of the Company's products undertaken to date. The products currently under development by the Company will require significant additional research, laboratory testing and clinical trials and investment of capital prior to their commercialization. There can be no assurance that any potential products will be successfully developed, prove to be safe and efficacious in clinical trials, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable costs or be successfully marketed. See "Business -- Products Under Development." HISTORY OF NET LOSSES; ACCUMULATED DEFICIT The Company has experienced significant net losses every year since its inception in 1988. Net losses for the fiscal years ended December 31, 1994 and 1995 and the quarter ended March 31, 1996 were approximately $7.0 million, $7.1 million and $1.5 million, respectively, and the Company had an accumulated deficit of approximately $37.8 million as of March 31, 1996. The Company expects to incur substantial and increasing net losses for at least the next several years. The amount of net losses and the time required by the Company to reach profitability are highly uncertain. There can be no assurance that the Company will ever be able to generate product revenue or achieve profitability on a substantial basis or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." FUTURE REQUIREMENT FOR SIGNIFICANT ADDITIONAL CAPITAL The Company anticipates that its current cash and short-term investments and expected revenues under its collaborations, combined with the estimated net proceeds of this offering, will be sufficient to fund the Company's operations for at least two years. The Company anticipates that such resources will be primarily used to fund clinical testing of AnervaX for RA, and continued research and development and preparation for clinical testing of AnergiX for the treatment of IDDM and MG and additional research and development. The balance of such resources will be used to fund continued limited research on other autoimmune diseases and general and administrative activities, including those associated with seeking collaborative arrangements to enable the Company to increase its research and development activities in other autoimmune diseases. The Company's working capital requirements over the next two years may vary depending upon numerous factors, including the progress of the Company's research and development programs, manufacturing activities, the progress of the Company's clinical programs, the results of laboratory testing, the time and cost required to seek regulatory approvals to commence clinical trials for the Company's initial products, the need to obtain licenses to other proprietary rights, any required adjustments to the Company's operating plan to respond to competitive pressures or technological advances, developments with respect to existing or future collaborative arrangements and the availability of various methods of financing. In addition to this offering, the Company expects to seek to raise additional capital through equity or debt financing, research and development collaborations with corporate partners or through other sources. Any additional equity financing may be 6 9 dilutive to shareholders, and debt financing, if available, may involve restrictions on stock dividends and other restrictions on the Company. Adequate funds for the Company's operations, whether from equity or debt financings, collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or on terms attractive to the Company. Insufficient funds may require the Company to delay, scale back or eliminate some or all of its research and product development programs or to license third parties to commercialize products or technologies that the Company would otherwise seek to develop itself. The Company's liquidity will be reduced as amounts are expended for continuing research and development. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." UNCERTAINTIES RELATED TO PRECLINICAL AND CLINICAL TRIALS Before obtaining regulatory approvals for the commercial sale of any of its products under development, the Company must demonstrate through preclinical studies and clinical trials that the product is safe and efficacious for use in each target indication. The results from preclinical studies and early clinical trials may not be predictive of results that will be obtained in large-scale testing, and there can be no assurance that the Company's clinical trials will demonstrate the safety and efficacy of any products or will result in any marketable products. A number of companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and efficacy of a therapeutic product under development could delay or prevent regulatory approval of the product and could have a material adverse effect on the Company. The rate of completion of the Company's clinical trials is dependent upon, among other factors, the FDA's willingness to allow Anergen to proceed; the results of Anergen's continued research and development, including test results and success in producing the epitopes and MHC molecules for each AnergiX compound; the number of skilled scientists, clinicians, and consultants the Company is able to employ in its efforts and the general interest in the medical community in a therapeutic using the Company's approach for treatment of the diseases targeted by the Company. Currently, the Company does not anticipate establishing its own clinical trials facility. The rate of completion of clinical trials is also dependent on patient enrollment, which is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites and the existence of competitive trials. If the Company is unable to successfully complete its clinical trials, its business, financial condition and results of operations could be materially and adversely affected. See "Business -- Government Regulation." UNCERTAINTY OF MARKET ACCEPTANCE Even if the requisite regulatory approvals are obtained for the Company's potential products or for products developed in collaboration with the Company, uncertainty exists as to whether such products will be accepted by the market. A number of factors also may limit the market acceptance of a product which may be developed by, or discovered through collaboration with, the Company, including the rate of adoption by health care practitioners, the indications for which the product is approved, the rate of the product's acceptance by the target population, the timing of market entry relative to competitive products, the availability of alternative therapies, the price of the Company's product relative to alternative therapies, the availability of third-party reimbursement and the extent of marketing efforts by the Company and third-party distributors or agents retained by the Company. Side effects or unfavorable publicity concerning a Company product or any similar product could have an adverse effect on the Company's ability to obtain physician, patient or third-party payor acceptance and on efforts to sell that product. There can be no assurance of the Company's ability, or the length of time required, to achieve commercialization of the Company's products or that physicians, patients or third party payors will accept any of the Company's products as readily as alternative therapies, or at all. See "Business -- Products Under Development" and "-- Pharmaceutical Pricing and Reimbursement." GOVERNMENT REGULATION; NO ASSURANCE OF OBTAINING PRODUCT APPROVALS The Company's research and development activities are subject to regulation by numerous governmental authorities in the United States and other countries. Further, the future production and marketing of any 7 10 products developed by the Company would also be regulated, particularly as to safety and efficacy. In the United States, vaccines, drugs and biologics are subject to rigorous FDA review. The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, approval, advertising and promotion of such products. Noncompliance with applicable requirements can result in fines, recall or seizure of products, clinical study holds, total or partial suspension of production, refusal of the government to approve New Drug Applications ("NDA"), Product License Applications ("PLA"), Establishment License Applications ("ELA") or allow the Company to enter into supply contracts and criminal prosecution. The FDA also has the authority to revoke PLAs and ELAs previously granted. In order to obtain FDA approval of a new biological product, the Company must submit proof of safety, purity, potency and efficacy. In most cases such proof entails extensive pre-clinical, laboratory, and clinical tests. The testing, preparation of necessary marketing applications and processing of those applications by the FDA is expensive and time consuming, can vary based on the type of product, and may take several years to complete. There is no assurance that the FDA will act favorably or quickly in making such reviews, and significant difficulties or costs may be encountered by the Company in its efforts to obtain FDA approvals that could delay or preclude the Company from marketing any products it may develop or furnish an advantage to competitors. The FDA may also require post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of such products. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. In addition, delays imposed by the governmental approval process may materially reduce the period during which the Company may have the exclusive right to exploit patented products or technologies. The FDA approval process for a new biological drug involves completion of pre-clinical studies which include laboratory tests and animal studies to assess safety and effectiveness of the drug. Among other things, the results of these studies as well as how the product will be manufactured, are submitted to the FDA in an IND and, unless the FDA objects, the IND becomes effective 30 days following receipt by the FDA. FDA-cleared human clinical trials may then be conducted. The results of the clinical trials are submitted to the FDA as part of a PLA. In addition to obtaining FDA approval for each AnergiX indication, an ELA must be filed and the FDA must approve the manufacturing facilities for the product. Product sales may commence only if the PLA and ELA are approved. Regulatory requirements for obtaining such FDA approvals are rigorous and there can be no assurance that such approvals will be obtained on a timely basis or at all. Sales of pharmaceutical products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. The time required to obtain approvals required by foreign countries may be longer or shorter than that required for FDA approval, and requirements for licensing may differ from FDA requirements. If approval is obtained, the Company will be subject to continuing FDA obligations. When manufacturing biologics, the Company will be required to adhere to regulations setting forth current Good Manufacturing Practices ("GMP"), which require that the Company manufacture its products and maintain its records in a prescribed manner with respect to manufacturing, testing and quality control activities. Further, the Company must pass a preapproval inspection of its manufacturing facilities by the FDA before obtaining approval. Satisfaction of these FDA requirements, or similar requirements by foreign regulatory agencies, typically takes several years and the time needed to satisfy them may vary substantially, based upon the type, complexity and novelty of the pharmaceutical product. The effect of government regulation may be to delay or to prevent marketing of potential products for a considerable period of time and to impose costly procedures upon the Company's activities. There can be no assurance that the FDA or any other regulatory agency will grant approval for any products or indications being developed by the Company on a timely basis, or at all. Success in preclinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. If regulatory approval of a product is granted, such approval may impose limitations on the indicated uses for which a product may be marketed. Further, even if regulatory approval is 8 11 obtained, later discovery of previously unknown problems with a product may result in restrictions on the product, including withdrawal of the product from the market. Delay in obtaining or failure to obtain regulatory approvals would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Government Regulation." DEPENDENCE UPON COLLABORATIVE PARTNERS The Company's strategy for the development, clinical trials, manufacturing and commercialization of its products includes maintaining and entering into various collaborations with corporate partners, licensors, licensees and others. To date, the Company has entered into collaborative arrangements with Novo Nordisk with respect to the Company's AnergiX compounds for the treatment of MS, MG and IDDM, and with Organon with respect to an AnergiX compound for the treatment of RA. There can be no assurance that the interests and motivations of the Company's collaborators are, or will remain, aligned with those of the Company or that such collaborators will successfully perform their development, regulatory compliance, manufacturing or marketing functions or that such collaborations will continue. There can also be no assurance that the Company will be able to negotiate additional collaborative arrangements in the future on acceptable terms, if at all, or that any such collaborative arrangements will be successful. To the extent that the Company is not able to maintain or establish such arrangements, the Company would be required to undertake such activities at its own expense, which would significantly increase the Company's capital requirements and limit the programs the Company is able to pursue. In addition, the Company may encounter significant delays in introducing its products into certain markets or find that the development, manufacture or sale of its products in such markets is adversely affected by the absence of such collaborative agreements. The Company cannot control the amount and timing of resources which its collaborative partners devote to the Company's program or potential products, which can vary because of factors unrelated to the potential product. Collaborator participation will depend not only on the achievement of research objectives by the Company and its collaborators, which cannot be assured, but also on each collaborator's own financial, competitive, marketing and strategic considerations, which are outside the Company's control. Such strategic considerations may include the relative advantages of alternative products being marketed or developed by others, including relevant patent and proprietary positions. The Company's collaborative partners may develop, either alone or with others, products that compete with the development and marketing of the Company's products. Competing products, either developed by the collaborative partners or to which the collaborative partners have rights, may result in their withdrawal of support with respect to all or a portion of the Company's technology, which would have a material adverse effect on the Company's business, financial condition and results of operations. If Novo Nordisk, Organon or any future collaborative partner breaches or terminates their agreements with the Company or otherwise fails to conduct their collaborative activities in a timely manner, the preclinical or clinical development or commercialization of product candidates or research programs will be delayed, and the Company will be required to devote additional resources to product development and commercialization or terminate certain development programs. There also can be no assurance that disputes will not arise in the future with respect to the ownership of rights to any technology developed with third parties. These and other possible disagreements between collaborators and the Company could lead to delays in the collaborative research, development and commercialization of certain product candidates or could require or result in litigation or arbitration, which would be time consuming and expensive, and would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Collaborative Arrangements" and "-- Manufacturing." UNCERTAINTY RELATING TO PATENTS AND PROPRIETARY RIGHTS The Company's success will depend in significant part on its ability to maintain patent protection for its therapeutic approach and for any developed products, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. Although the Company has obtained patents covering certain aspects of its technology, no assurance can be given that additional patents will be issued or, if issued, that the 9 12 scope of any patent protection will be significant, or that the patents will be held valid if subsequently challenged. Moreover, the Company cannot ascertain with certainty that no patent conflict will exist with other products or processes which could compete with the Company's approaches. Because of the length of time and expense associated with bringing new products through development and to the marketplace, and the length of time required for the governmental approval process, the pharmaceutical industry has traditionally placed considerable importance on obtaining and maintaining patent and trade secret protection for significant new technologies, products and processes. The Company and other biotechnology and pharmaceutical firms have applied, and are applying, for patents for their products and certain aspects of their technologies. The enforceability of patents issued to biotechnology and pharmaceutical firms is highly uncertain. Federal court decisions indicating legal considerations surrounding the validity of patents in the field are in transition, and there can be no assurance that the historical legal standards surrounding questions of validity will continue to be applied or that current defenses as to issued patents in the field will offer protection in the future. In addition, there can be no assurance as to the degree and range of protection any patents will afford, whether patents will issue or the extent to which the Company will be successful in not infringing patents granted to others. While the Company pursues patent protection for products and processes where appropriate, it also relies on trade secrets, know-how and continuing technological advancement to develop and maintain its competitive position. The Company's policy is to have each employee enter into an agreement that contains provisions prohibiting the disclosure of confidential information to anyone outside the Company. Research and development contracts and relationships between the Company and its scientific consultants provide access to aspects of the Company's know-how that is protected generally under confidentiality agreements with the parties involved. There can be no assurance, however, that these confidentiality agreements will be honored or that the Company can effectively protect its rights to its unpatented trade secrets. Moreover, there can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets. The Company may be required to obtain licenses to patents or other proprietary rights from third parties. There can be no assurance that any licenses required under any patents or proprietary rights will be made available on terms acceptable to the Company, if at all. If the Company does not obtain required licenses, it could encounter delays in product development while it attempts to redesign products or methods or it could find that the development, manufacture or sale of products requiring such licenses could be foreclosed. The Company is aware of a European patent and corresponding U.S. and Australian patents which contain claims that relate to certain of the Company's proposed products and their uses. In accordance with European Patent Office ("EPO") procedures, third parties can oppose an EPO patent grant by presenting information which they believe justifies narrowing or revoking the grant of the patent. The Company is opposing the aforementioned grant in the EPO. There can, however, be no assurance that the granted EPO claims will be revoked or significantly narrowed in scope as a result of the opposition proceeding. If valid claims in these patents are found to be infringed by the Company's products, the Company's ability to make, use, offer to sell, or sell, such products could be materially and adversely affected. In addition, the Company could incur substantial costs in defending any patent litigation brought against it or in asserting the Company's patent rights, including those licensed to the Company by others, in a suit against another party. The United States Patent and Trademark Office (the "USPTO") could institute interference proceedings in connection with one or more of the Company's patents or patent applications, which proceedings could result in an adverse decision as to priority of an invention. The USPTO also could institute reexamination proceedings in connection with one or more of the Company's patents or patent applications, which could result in an adverse decision as to the patents' validity or scope. See "Business -- Patents and Proprietary Rights." NEED TO DEVELOP MANUFACTURING CAPABILITIES; RELIANCE ON SOLE SUPPLIER The Company has no volume manufacturing capacity or experience in volume manufacturing of pharmaceutical or other biological products. Establishing its own volume manufacturing capabilities would 10 13 require significant scale-up expenses and additions to facilities and personnel. In addition, the Company must successfully develop the process required for volume manufacturing. The pharmaceutical products under development by the Company have never been manufactured on a commercial scale and there can be no assurance that such products can be manufactured at a cost or in quantities to make them commercially viable. The Company will be required to establish arrangements with contract manufacturers to supply a portion of its compounds for subsequent clinical trials as well as the manufacture, packaging, labeling and distribution of finished products. If the Company is unable to contract for sufficient supply of a portion of its compounds on acceptable terms, and it is unable to develop the capability to produce the epitopes internally, the Company's human clinical testing schedule would be delayed, resulting in the delay of submission of products for regulatory approval and initiation of new development programs, which would have a material adverse effect on the Company. If the Company should encounter delays or difficulties in establishing relationships with manufacturers to produce, package and distribute its finished products, market introduction and subsequent sales of such products would be adversely affected. Moreover, contract manufacturers that the Company may use must adhere to current GMP regulations enforced by the FDA through its facilities inspection program. If these facilities cannot pass a pre-approval plant inspection, the FDA pre-market approval of the products will be adversely affected. The Company is dependent on a single supplier, HyClone Laboratories, Inc. ("HyClone"), for approximately 14% of its consumable supplies in fiscal 1995. The Company does not have a contractual agreement with HyClone and orders all supplies using purchase orders. The Company solicited price quotations from several vendors before choosing HyClone as its supplier, and if HyClone is unable or unwilling to supply the Company in the future, the Company would need to repeat its search for a supplier. This search could delay or hamper development and manufacture of the Company's products. There can be no assurance that Anergen will be able to continue its relationship with HyClone on acceptable terms or that it would be able to find an alternative supplier should their relationship discontinue. LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES The Company currently has no sales, marketing or distribution capability. The Company intends to rely on relationships with one or more pharmaceutical companies with established distribution systems and direct sales forces to market its products. In the event that the Company is unable to reach agreement with one or more pharmaceutical companies to market its products, it may be required to market its products directly and to develop a marketing and sales force with technical expertise and supporting distribution capability. There can be no assurance that the Company will be able to establish in-house sales and distribution capabilities or relationships with third parties, or that it will be successful in gaining market acceptance for its products. To the extent that the Company decides to utilize existing or future co-promotion or other licensing arrangements, the Company must develop its own sales, marketing or distribution capability, and there can be no assurance that such efforts will be successful. See "Business -- Collaborative Arrangements" and "-- Marketing and Sales." COMPETITION AND TECHNOLOGICAL CHANGE The biotechnology and pharmaceutical industries are characterized by rapidly evolving technology and intense competition. The Company's competitors include major pharmaceutical, chemical and specialized biotechnology companies, most of which have financial, technical, research and development, manufacturing, clinical and marketing resources significantly greater than those of the Company. The Company believes that these other entities recognize the need for effective therapies for the autoimmune diseases targeted by the Company and are highly motivated to develop such therapies. In addition, many specialized biotechnology companies have formed collaborations with large, established companies to support research, development and commercialization of products that may be competitive with those of the Company. Academic institutions, governmental agencies and other public and private research organizations are also conducting research activities and seeking patent protection and may commercialize products on their own or through joint ventures. The Company is aware of certain products in development by competitors that are intended to be used for the prevention or treatment of certain diseases the Company has targeted for product development. 11 14 The existence of these products, or other products or treatments of which the Company is not aware, or products or treatments that may be developed in the future which may be more effective, may adversely affect the commercialization or marketability of products which may be developed by the Company or potentially render the Company's technology obsolete or non-competitive. The Company's competitive position will depend on its ability to attract and retain qualified scientific and other personnel, develop effective proprietary products, implement production and marketing plans, obtain patent protection and secure adequate capital resources. In addition, the first pharmaceutical product to reach the market in a therapeutic or preventive area is often at a significant competitive advantage relative to later entrants to the market. The Company expects its products, if approved for sale, to compete primarily on the basis of product efficacy, safety, patent position, reliability, price and patient convenience. See "Business -- Competition." UNCERTAINTY RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT Political, economic and regulatory influences are subjecting the health care industry in the United States to fundamental change. Initiatives to reduce the federal deficit and to reform health care delivery are increasing these cost containment efforts. The Company anticipates that Congress, state legislatures and the private sector will continue to review and assess alternative benefits, controls on health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, price controls on pharmaceuticals and other fundamental changes to the health care delivery system. Any such proposed or actual changes could cause existing and potential partners of the Company to limit or eliminate spending on collaborative development projects. Legislative debate is expected to continue in the future, market forces are expected to demand reduced costs and Anergen cannot predict what impact the adoption of any federal or state health care reform measures or future private sector reforms may have on its business. In both domestic and foreign markets, sales of the Company's proposed products will depend in part upon the availability of reimbursement from third-party payors, such as government health administration authorities, private health insurers and other organizations. In addition, other third-party payors are increasingly challenging the price and cost effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products. There can be no assurance that the Company's potential products or products discovered in collaboration with the Company will be considered cost-effective or that adequate third-party reimbursement will be available to enable Anergen to maintain price levels sufficient to realize an appropriate return on its significant investment in product research and development. Legislation and regulations affecting the pricing of pharmaceuticals may change before the Company's proposed products are approved for marketing. Adoption of such legislation could further limit reimbursement for medical products. If adequate coverage and reimbursement levels are not provided by the government and third-party payors for the Company's products, the market acceptance of these products would be adversely affected, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Pharmaceutical Pricing and Reimbursement." DEPENDENCE ON AND NEED FOR ADDITIONAL KEY PERSONNEL; RELIANCE ON ACADEMIC COLLABORATORS The success of the Company and of its business strategy is dependent in large part on the ability of the Company to attract and retain key management and operating personnel. Such persons are in high demand and are often subject to competing offers. The Company will need to develop expertise and add skilled employees or retain consultants in such areas as research and development, clinical testing, government approvals, marketing and manufacturing in the future. There can be no assurance that the Company will be able to attract and retain the qualified personnel or develop the expertise needed for its business. The loss of the services of one or more of the Company's officers or other members of the research or management group or the inability to hire additional personnel and develop expertise as needed would have a material adverse effect on the Company. 12 15 A significant portion of the Company's research and development and clinical trials is conducted under sponsored research programs with several universities. The Company depends on the availability of the principal investigator for each such program, and the Company cannot assure that these individuals or their research staffs will be available to conduct research and development or clinical trials. The Company's academic 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. In addition, the Company's academic collaborators are employed by major institutions which have collaborative relationships with other parties, some of which may be competitors of the Company. Accordingly, there can be no assurance that research and development, preclinical and clinical testing performed by these collaborators will be completed in a timely manner, if at all, and any inability to do so could have a material adverse effect on the Company. POTENTIAL PRODUCT LIABILITY The testing, marketing and sale of human health care products entail an inherent risk of exposure to product liability claims in the event that the use of the Company's technology or prospective products is alleged to have resulted in adverse effects. While the Company has taken, and will continue to take, what it believes are appropriate precautions to minimize exposure to product liability, there can be no assurance that it will avoid significant liability. The Company possesses limited general liability and product liability insurance related to its clinical trials of AnervaX for RA and intends to seek such insurance related to its clinical trials of AnergiX for MS and certain other types of insurance customarily obtained by business organizations. There can be no assurance that the existing insurance coverage is adequate or that it will avoid liability. The Company intends to seek insurance against product liability risks associated with the testing, manufacturing or marketing of its products. However, there can be no assurance that it will be able to obtain such insurance in the future, or that if obtained, such insurance will be sufficient in amount. Consequently, a product liability claim or other claims with respect to uninsured liabilities or in excess of insured liabilities could have a material adverse effect on the business or financial condition of the Company. HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS The Company is subject to regulation by the Occupational Safety and Health Administration ("OSHA") and the Environmental Protection Agency ("EPA") and to regulation under the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other regulatory statutes, and may in the future be subject to other federal, state or local regulations. Although the Company believes that it has complied with these laws, regulations and policies in all material respects and has not been required to take any significant action to correct any material noncompliance, there can be no assurance that the Company will not be required to incur significant costs to comply with environmental and health and safety regulations in the future. The Company's research and development involves the controlled use of hazardous materials, including but not limited to certain hazardous chemicals and radioactive materials. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be 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. In addition, regulations may be promulgated governing biotechnology that may affect the Company's research and development programs. The Company is unable to predict whether any agency will adopt any regulation which would have a material adverse effect on the Company's business, financial condition and results of operations. VOLATILITY OF STOCK PRICE The market price of the Company's Common Stock, similar to the securities of other biotechnology companies, has been and is likely to continue to be highly volatile. Announcements regarding the results of regulatory approval filings, clinical trials or other testing, technological innovations or new commercial products by the Company or its competitors, patents and intellectual property rights by the Company or its competitors, developments as to current or future collaborations by the Company or its competitors, 13 16 government regulations, the status of health care reform initiatives, fluctuations in operating results, changes in recommendations by financial analysts, and general market conditions for biotechnology stocks could have a significant impact on the future price of the Common Stock. Trading volume of the Company's Common Stock has been relatively limited and sales of substantial amounts of Common Stock could have an adverse effect on the price of the Common Stock. See "Price Range of Common Stock." CONTROL BY EXISTING STOCKHOLDERS Upon completion of the offering, the Company's officers, directors and principal shareholders, namely Warburg, Pincus Ventures, L.P. ("Warburg"), International Biotechnology Trust PLC ("IBT"), and Novo Nordisk, collectively will beneficially own approximately 47.0% of the Company's outstanding Common Stock, or approximately 45.6% if the Underwriters' over-allotment option is exercised in full. Under a March 1995 common stock purchase agreement with Warburg and IBT ("Warburg/IBT Purchase Agreement"), the Company is currently obligated to include in the slate of nominees recommended by the Company's Board of Directors and management, at each election of directors, two candidates selected by Warburg, one candidate selected by IBT and one candidate mutually agreed to by IBT and Warburg. In addition, pursuant to an August 1993 common stock purchase agreement with Novo Nordisk entered into in connection with the Novo Nordisk collaboration, the Company is similarly obligated to include in its slate of nominees, at each election of directors, one candidate selected by Novo Nordisk. The ownership of the Company's Common Stock, and the ability to designate candidates for the Company's recommended slate of nominees for the Board of Directors, of Warburg, IBT and Novo Nordisk will enable such shareholders to have significant influence over major corporate transactions as well as the election of directors of the Company and control over board decisions and could have the effect of delaying, deterring or preventing a change in control of the Company. See "Principal Stockholders" and "Description of Capital Stock." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Sales of significant amounts of the Company's Common Stock in the public market after this offering by other shareholders and option and warrant holders could adversely affect the market price of the Company's Common Stock. Upon the completion of this offering, the Company will have 19,066,042 shares of Common Stock outstanding, assuming no exercise of outstanding options or warrants after May 31, 1996. Approximately 18,652,077 shares (including the 4,000,000 shares sold in this offering) of Common Stock are eligible for immediate sale in the public market without restriction unless they are subject to lockup agreements or held by "affiliates" of the Company within the meaning of Rule 144 ("Rule 144") of the Securities Act of 1933, as amended (the "Securities Act"), although shares held by persons who may be deemed affiliates are subject to volume restrictions applicable to affiliates under Rule 144. As of May 31, 1996, 8,786,074 shares were held by persons who may be deemed affiliates under Rule 144. In addition, 1,279,815 shares of Common Stock were subject to options outstanding as of May 31, 1996, and 451,300 of these shares were fully vested. Upon exercise of the currently vested portion of such options, all shares will be eligible for immediate sale in the public market, subject to Rule 144 volume restrictions applicable to affiliates or lockup agreements, if applicable. As of May 31, 1996, there were 459,015 shares of Common Stock subject to warrants which, upon exercise of such warrants, may be freely tradeable pursuant to Rule 144 or as a result of registration pursuant to registration rights. The Company and each of its officers, directors and 5% or greater stockholders have agreed not to sell or otherwise dispose of Common Stock of the Company for a 90-day period following the effective date of the Registration Statement of which this Prospectus is a part. The Commission has recently proposed to reduce the Rule 144 holding periods. If enacted, such modification will have a material effect on the timing of when shares of the Company's Common Stock become eligible for resale. Further, certain shareholders have the right, subject to certain conditions, to participate in future Company registrations and to cause the Company to register certain Common Stock owned by them. See "Description of Capital Stock" and "Shares Eligible for Future Sale." 14 17 ABSENCE OF DIVIDENDS; DILUTION The Company has never paid any cash dividends and does not anticipate paying cash dividends in the foreseeable future. Purchasers of the Common Stock offered hereby will experience immediate and substantial dilution in the amount of $3.50 in net tangible book value per share. Additional dilution will occur upon exercise of outstanding stock options and warrants. See "Dividend Policy" and "Dilution." ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK OR ACCELERATION OF OPTION VESTING The Board of Directors has authority, without further action by shareholders, to issue up to 10,000,000 shares of Preferred Stock with rights, preferences and privileges designated by the Board of Directors. This Preferred Stock could be issued quickly with terms calculated to delay or prevent a change in control of the Company or to make removal of management more difficult. In certain circumstances, such issuance could have the effect of decreasing the market price of the Common Stock or of delaying, deterring or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock. Further, pursuant to the Company's option plans, in the event of certain mergers of the Company with other entities, transfers of voting control of the Company's capital stock or sale of all or substantially all of the Company's assets, the Company's Board of Directors has the right under certain circumstances to cause all outstanding options to become fully vested prior to the event causing such acceleration and all unexercised options will terminate upon completion of such event. See "Management -- Employment Agreements and Change of Control Arrangements." 15 18 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby are estimated to be approximately $18.3 million ($21.1 million if the Underwriters' over-allotment option is exercised in full) assuming an offering price of $5.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses. The Company expects to use the net proceeds from this offering for working capital and general corporate purposes, including research and development, clinical trials, hiring additional technical personnel, acquiring capital equipment, and expanding manufacturing capabilities. The Company anticipates that its current cash and short-term investments and expected revenues under its collaborations, combined with the estimated net proceeds of this offering, will be sufficient to fund its operations for at least two years. Consistent with its past allocation of expenses, the Company intends to spend approximately 80% (or approximately $14.6 million) of the net proceeds of this offering on research and development related activities, and approximately 20% (or approximately $3.7 million) of such proceeds on general and administrative activities. The research and development expenditures will be allocated principally to the Company's ongoing Phase II clinical trials of AnervaX for RA; manufacturing of GMP grade material for the Phase I clinical trial of the Company's AnergiX for MS and the conduct of such clinical trial; research activities in its core AnervaX and AnergiX technologies to further current programs in RA, MS, IDDM and MG and to develop programs in other autoimmune diseases; and support of research activities in academic institutions. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. In particular, the Company has not identified precisely the amounts it plans to spend on its various programs for production capabilities, facilities, or working capital and general corporate purposes. The use of proceeds is subject to change based upon the progress of the Company's research and development programs, manufacturing activities, the progress of the Company's clinical programs, the results of laboratory testing, the time and cost required to seek regulatory approvals to commence clinical trials for the Company's initial products, the need to obtain licenses to other proprietary rights, any required adjustments to the Company's operating plan to respond to competitive pressures or technological advances, developments with respect to the Company's existing or future collaborative arrangements and the availability of various methods of financing. The Company reserves the right at the discretion of its Board of Directors to reallocate its use of proceeds of this offering in response to these and other factors. See "Risk Factors -- Future Requirement for Significant Additional Capital", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Collaborative Arrangements." Pending such uses, the Company intends to invest the net proceeds of the offering in high-grade, interest-bearing financial instruments. DIVIDEND POLICY The Company has not declared or paid any dividends since its inception and does not intend to pay any dividends in the foreseeable future. In addition, there are restrictions imposed upon the Company's ability to pay cash dividends under certain of the Company's credit arrangements. 16 19 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996, and as adjusted as of such date to reflect the receipt of the estimated net proceeds from the sale of the 4,000,000 shares of Common Stock offered hereby (after deducting the underwriting discounts and commissions and estimated offering expenses). See "Use of Proceeds."
MARCH 31, 1996 ------------------------ AS ACTUAL ADJUSTED(1) -------- ----------- (IN THOUSANDS) Long-term portion of capital lease obligations and debt............... $ 636 $ 636 -------- -------- Shareholders' equity: Preferred Stock: no par value, 10,000,000 shares authorized; none outstanding...................................................... -- -- Common Stock: no par value, 40,000,000 shares, authorized; 15,029,430 shares issued and outstanding and: 19,029,430 shares issued and outstanding as adjusted(2)(3)......................... 47,400 65,700 Additional paid-in capital.......................................... 648 648 Unrealized loss on investments...................................... (18) (18) Accumulated deficit................................................. (37,840) (37,840) -------- -------- Total shareholders' equity.................................. 10,190 28,490 -------- -------- Total capitalization.................................................. $ 10,826 $ 29,126 ======== ========
- --------------- (1) Assumes net proceeds of approximately $18.3 million from this offering based on an assumed offering price of $5.00 per share. (2) See Note 6 to Financial Statements. (3) As adjusted shares include 4,000,000 shares of Common Stock to be issued on the closing of this offering. Excludes 825,815 shares issuable upon exercise of stock options outstanding under the Company's 1988 Stock Plan, 20,000 shares issuable upon exercise of options outstanding under the Company's 1995 Director Option Stock Plan and 459,015 shares issuable upon exercise of warrants outstanding as of March 31, 1996. Subsequent to March 31, 1996, additional options for 434,000 shares were granted and options for 681 shares were exercised. See "Management -- Incentive Stock Plans" and Note 6 to Financial Statements. PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the Nasdaq National Market under the symbol "ANRG". The following table sets forth, for the periods indicated, the range of low and high sale prices for the Company's Common Stock as reported on the Nasdaq National Market since January 1, 1994:
LOW HIGH ----- ----- 1994 First Quarter.............................................. $4.25 $7.00 Second Quarter............................................. 3.25 5.50 Third Quarter.............................................. 3.00 5.25 Fourth Quarter............................................. 1.88 3.75 1995 First Quarter.............................................. $1.75 $4.00 Second Quarter............................................. 2.13 4.13 Third Quarter.............................................. 3.13 5.50 Fourth Quarter............................................. 2.63 5.50 1996 First Quarter.............................................. $3.34 $4.50 Second Quarter (through June 27, 1996)..................... 3.13 6.34
As of May 31, 1996 there were approximately 375 holders of record of the Company's Common Stock. On June 27, 1996, the last sale price reported on the Nasdaq National Market for the Company's Common Stock was $4.63 per share. See "Risk Factors -- Volatility of Stock Price." 17 20 DILUTION The net tangible book value of the Company as of March 31, 1996 was $10,190,000 or approximately $0.68 per share of Common Stock. Net tangible book value per share is determined by dividing the net tangible book value (tangible assets less total liabilities) by the number of shares of Common Stock outstanding at that date. After giving effect to the receipt of the net proceeds from the sale of the 4,000,000 shares of Common Stock offered hereby at the estimated offering price of $5.00 per share, the pro forma net tangible book value of the Company as of March 31, 1996 would have been approximately $28,490,000 or $1.50 per share of Common Stock. This represents an immediate increase in net tangible book value of $0.82 per share to existing shareholders and an immediate dilution of $3.50 per share to purchasers of Common Stock in this offering. The following table illustrates this per share dilution: Public offering price per share(1)................................ $ 5.00 ------- Net tangible book value per share before the offering........... 0.68 Increase per share attributable to new investors................ 0.82 ------ Pro forma net tangible book value per share after the offering.... 1.50 ------- Dilution per share to new investors............................... $ 3.50 =======
- --------------- (1) Before deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. 18 21 SELECTED FINANCIAL DATA The selected financial data set forth below with respect to the Company's statements of operations for each of the three years in the period ended December 31, 1995, and for the Company's balance sheets at December 31, 1994 and 1995, are derived from the Company's financial statements that have been audited by Ernst & Young LLP, independent auditors, which are included elsewhere in this Prospectus and are qualified by reference to such financial statements. The balance sheet data as of December 31, 1991, 1992, and 1993 and the statements of operations data for the years ended December 31, 1991 and 1992 have been derived from the Company's audited financial statements which are not included herein. The selected financial data at March 31, 1996 and for the three months ended March 31, 1995 and 1996 are derived from the unaudited financial statements included elsewhere in this Prospectus. The unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of its financial position and results of operations for those periods. Operating results for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for the full year ending December 31, 1996. The data set forth below should be read in conjunction with the financial statements and the notes related thereto.
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenues: Contract revenues -- related party...... $ -- $ -- $ 339 $ 2,325 $ 3,001 $ 551 $ 783 Interest income......................... 163 544 312 207 533 17 139 ------- ------- ------- ------- ------- ------- ------- Total revenues................... 163 544 651 2,532 3,534 568 922 Expenses: Research and development................ 2,696 4,525 5,553 7,423 8,322 1,898 1,895 General and administrative.............. 1,218 1,494 1,716 1,831 1,976 462 503 Interest expense........................ 142 78 226 238 322 71 55 ------- ------- ------- ------- ------- ------- ------- Total expenses................... 4,056 6,097 7,495 9,492 10,620 2,431 2,453 ------- ------- ------- ------- ------- ------- ------- Net loss.................................. $(3,893) $(5,553) $(6,844) $(6,960) $(7,086) $(1,863) $(1,531) ======= ======= ======= ======= ======= ======= ======= Net loss per share........................ $ (0.96) $ (0.99) $ (1.12) $ (0.97) $ (0.55) $ (0.25) $ (0.10) ======= ======= ======= ======= ======= ======= ======= Shares used in calculating per share data(1)................................. 4,059 5,599 6,118 7,202 12,859 7,527 14,984 ======= ======= ======= ======= ======= ======= =======
DECEMBER 31, ----------------------------------------------- MARCH 31, 1991 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- ----------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, equivalents and short-term investments........................... $13,655 $ 8,918 $ 9,585 $ 3,756 $11,492 $ 9,653 Total assets............................ 14,350 10,724 11,763 6,797 14,455 12,461 Long-term portion of capital lease obligations and debt.................. 241 1,112 956 990 818 636 Total shareholders' equity.............. 13,188 7,857 9,251 3,870 11,714 10,190
- --------------- (1) Based on the number of shares outstanding for each applicable period. Excludes employee stock options, director stock options and warrants outstanding on March 31, 1996, for 825,815, 20,000 and 459,015 shares of Common Stock, respectively, at weighted average exercise prices of $5.28, $3.72 and $4.85 per share, respectively. In addition, 37,341 shares were reserved for issuance under the Company's 1992 Consultant Stock Plan. See "Management -- Incentive Stock Plans" and "Description of Capital Stock." 19 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of Anergen, Inc. should be read in conjunction with the Financial Statements and related Notes thereto included elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed herein and in "Risk Factors" and "Business" as well as elsewhere in this Prospectus. LIQUIDITY AND CAPITAL RESOURCES To date, the Company has financed its operations primarily through private placements of its equity securities with venture capitalists (which raised an aggregate of approximately $7.6 million in net proceeds), through an initial public offering of its Common Stock in October of 1991 (which raised approximately $14.2 million in net proceeds), through the sale of its Common Stock to Novo Nordisk, in August of 1993 (which raised approximately $8 million in net proceeds), and in June, 1994 through the issuance of 413,965 shares of Common Stock and Warrants to purchase an additional 236,863 shares of Common Stock at an exercise price of $3.52 per share through a private placement to two purchasers in exchange for $1.5 million in proceeds. In April 1995 the Company issued 7,317,073 shares of the Company's Common Stock to two new investors in exchange for approximately $14.7 million in net proceeds. At March 31, 1996, the Company's cash and short-term investments were approximately $9.7 million and the Company had shareholders' equity of approximately $10.2 million. As of March 31, 1996 the Company had net borrowings of $1.4 million under three loan agreements. Lease lines and loans have been and will continue to be used by the Company to the extent that their terms are commercially attractive; however, there can be no assurance that additional borrowing facilities will be available. No amounts were available under debt or lease lines at March 31, 1996. At March 31, 1996 the Company had no material commitments for capital expenditures. The Company anticipates that its current cash, short-term investments and expected revenues under its collaborations, combined with the estimated net proceeds of this offering, will be sufficient to fund the Company's operations for at least two years. The Company anticipates that its current resources will be primarily used to fund clinical testing of AnervaX for RA, and continued research and development and preparation for clinical testing of AnergiX for the treatment of IDDM and MG and additional research and development. The balance of such resources will be used to fund continued limited research on other autoimmune diseases and general and administrative activities, including those associated with seeking collaborative arrangements to enable the Company to increase its research and development activities in other autoimmune diseases. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. In particular, the Company's capital requirements will vary depending upon numerous factors many of which are outside the Company's control. These factors include the progress of the Company's research and development programs, manufacturing activities, the progress of the Company's clinical programs, the results of laboratory testing, the time and cost required to seek regulatory approvals to commence clinical trials for the Company's initial products, the need to obtain licenses to other proprietary rights, any required adjustments to the Company's operating plan to respond to competitive pressures or technological advances, developments with respect to the Company's existing or future collaborative arrangements, and the availability of various methods of financing. The Company expects to seek to raise additional capital through equity or debt financing, research and development collaborations with corporate partners or through other sources. Any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictions on stock dividends and other restrictions on the Company. Adequate funds for the Company's operations, whether from equity or debt, collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or on terms attractive to the Company. Insufficient funds may require the Company to delay, scale back or eliminate some or all of its research and product development programs or to license third parties to commercialize products or technologies that the Company would otherwise seek to develop itself. The Company's liquidity will be reduced as amounts are expended for continuing research and development. 20 23 RESULTS OF OPERATIONS Since its inception, the Company has engaged entirely in research and development activities. The Company has been unprofitable to date, has generated only limited revenues and expects to incur substantial and increasing net losses over at least the next several years due to continued and expanded requirements for research and development, laboratory testing, clinical trials, manufacturing and regulatory activities. For the period from its inception through March 31, 1996, the Company has incurred a cumulative deficit of approximately $37.8 million. Years Ended December 31, 1995, 1994 and 1993 The Company's net losses increased to $7.1 million in 1995 from $7.0 million in 1994 and from $6.8 million in 1993. The Company expects to incur substantial and increasing net losses for at least the next several years. The Company's total expenses increased to $10.6 million in 1995 from $9.5 million in 1994 and $7.5 million in 1993. In 1995, increased expenses were substantially offset by contract revenues totaling approximately $3.0 million from its corporate partner. The Company began earning contract revenues in the fourth quarter of 1993 under the collaborative agreement with the Company's corporate partner, Novo Nordisk. Contract revenues represent reimbursement of certain research and development costs and totaled $3.0 million in 1995 compared with $2.3 million for fiscal 1994 and $339,000 in 1993. Research and development expenses increased to $8.3 million in 1995 from $7.4 million in 1994 and $5.6 million in 1993. The 12% increase from 1994 to 1995 was primarily due to clinical trial costs for the Phase I trial for the Company's AnervaX product for RA, preclinical costs associated with the Company's filing of an IND for its AnergiX product for MS and increased activities related to the Company's research project involving IDDM. The 34% increase from 1993 to 1994 was due primarily to the initiation of clinical trials for the Company's AnervaX product for RA and increased activities related to preparation for filing an IND for the Company's AnergiX product for MS. The Company expects research and development spending to continue to increase during the next several years. General and administrative expenses were approximately $2.0 million, $1.8 million and $1.7 million in 1995, 1994 and 1993, respectively. These increases were due to adding personnel and providing necessary business, administrative and finance resources to support increased research and development activities. The Company expects to incur higher general and administrative expenses in the next several years to support its expanded research and development efforts and to pursue strategic relationships and continued funding for the Company's operations. In 1995 interest income rose to $533,000 due to an increase in cash and short term investment balances resulting from proceeds received from the follow-on financing completed in April 1995. Interest income fell to $207,000 in 1994 from $312,000 in 1993 due to decreasing cash and short-term investment balances. Interest expense increased in 1995 to $322,000 due to debt financing of the Company's facility expansion and addition of laboratory equipment. Interest expense rose to $238,000 in 1994 from $226,000 in 1993 due to debt financing related to the improvement of facilities and the purchase of additional equipment. At December 31, 1995, the Company had federal and state net operating loss carryforwards of approximately $33.7 million and $16.6 million, respectively, which expire in varying amounts through 2010. The Company's stock offering in April 1995 resulted in a change in ownership for tax purposes and it is expected that the entire net operating loss and credit carryforwards will be subject to an annual limitation based on the Company's pre-change value. The annual limitation will result in the expiration of the net operating losses and credits before utilization. See Note 8 to Financial Statements. 21 24 Three Months Ended March 31, 1996 and 1995 The Company's net loss decreased 18% to $1,531,000 in the fiscal quarter ended March 31, 1996 compared to a $1,863,000 loss in the corresponding period in the previous year due to increases in contract revenues and interest income of $232,000 and $122,000, respectively. The Company's contract revenues relate to its collaborative agreement with Novo Nordisk. Total expenses increased slightly to $2,453,000 from $2,431,000. The Company expects total operating expenses to increase as it increases research and development efforts, laboratory testing, clinical trials, manufacturing and regulatory activities. Research and development expenses decreased slightly to $1,895,000 for the quarter ended March 31, 1996 from $1,898,000 in the corresponding period in the previous year. In 1996, research and development costs relate to preparation for Phase II clinical trials for AnervaX for RA and for a Phase I trial of AnergiX for MS and to increased research activities in the IDDM program. In 1995, these costs related primarily to the initiation of clinical trials of AnervaX for RA and research activities in preparation of filing an IND for AnergiX for MS. General and administrative expenses increased 9% to $503,000 for the quarter ended March 31, 1996 compared to $462,000 in the corresponding period in the previous year primarily due to increased corporate development activities. Interest income increased to $139,000 for the quarter ended March 31, 1996 as compared to interest income of $17,000 in the corresponding period in the previous year due to increased cash and short-term investment balances primarily due to the sale of Common Stock to new investors in April 1995. Interest expense decreased to $55,000 for the quarter ended March 31, 1996 as compared to interest expense of $71,000 in the corresponding period in the previous year due to a lower debt balance. Interest income is expected to increase as a result of the temporary investment of the net proceeds of this offering and to decline gradually as invested capital is used for operating activities. 22 25 BUSINESS This Prospectus contains certain forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors set forth herein and those discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as elsewhere in this Prospectus. GENERAL The Company is focused on the treatment of autoimmune diseases through the discovery and development of proprietary therapeutics that selectively interrupt the disease process. Anergen's current research and development efforts are focused on two distinct core technologies, AnergiX and AnervaX, that the Company believes may be used to treat a broad range of autoimmune diseases without generally suppressing the immune system. Patient selection has begun for a Phase I clinical trial of the Company's AnergiX compound for the treatment of MS and the Company has initiated a Phase II clinical trial of its AnervaX compound for the treatment of RA. Since 1993, the Company has collaborated with Novo Nordisk in the development of AnergiX treatments for MS, IDDM and MG. In June 1996, the Company announced a collaborative agreement with Organon to develop an AnergiX treatment for RA. In the body's immune system, T cells normally regulate the identification and destruction of foreign substances and malignant cells. Autoimmune diseases are caused by abnormal destruction of healthy body tissues by disease-specific T cells. Anergen's results to date suggest that treatments based on its core technologies may interrupt the chain of events fundamental to the onset and continuation of certain autoimmune diseases. The Company's AnergiX technology selectively destroys or inactivates (anergizes) the T cells implicated in the disease process. Its second core technology, AnervaX, stimulates the immune system to produce antibodies that block the presentation of self-antigens to destructive T cells. The Company believes that, because its potential therapeutics target only disease-specific T cells, the normal function of the immune system should remain unaffected. In contrast, currently available therapies for autoimmune diseases treat only the symptoms of the disease or broadly suppress the immune system, which can compromise the ability of the immune system to protect against foreign substances. Anergen received IND clearance in December 1995 with the FDA to begin Phase I clinical testing of its AnergiX compound for the treatment of MS. In preclinical studies, the administration of an AnergiX compound prevented or reduced disease symptoms caused by the T cell initiated autoimmune response in animal models. The Company has also demonstrated in vitro that its AnergiX compound can inactivate human T cells associated with MS. The Company is collaborating with Novo Nordisk on the development of this compound. In April 1996, the Company initiated a multicenter, double-blind, placebo-controlled Phase II clinical trial of its AnervaX compound for the treatment of RA. The results of a Phase I clinical trial completed in October 1995 indicated that AnervaX is well tolerated and can stimulate an immune response in RA patients. Preclinical results have also demonstrated that the Company's AnervaX approach may prevent the onset or reduce the severity of autoimmune disease in animal models. The Company entered into a collaborative agreement with Novo Nordisk in August 1993 under which Novo Nordisk, in exchange for certain marketing rights, will support research and development of the Company's MS, MG and IDDM programs, make milestone payments, and pay royalties on product sales, if any. The Company has the right to co-promote any resultant products for MS and MG in North America. In addition, at the time of the agreement Novo Nordisk made an $8 million equity investment in the Company. In March 1996, the development program with Novo Nordisk was extended through August 1998, increasing total funds expected to be received by the Company under the collaboration from $25 million to $35 million. These amounts do not include the cost of clinical trials that will be borne directly by Novo Nordisk. In June 1996, the Company entered into a collaborative agreement with Organon under which Organon, in exchange for certain marketing rights, will support research and development of an AnergiX compound to treat RA that incorporates a proprietary peptide discovered by Organon. Under the arrangement, Organon will also pay the Company a one-time license fee, make milestone payments and pay royalties on product sales, if any. The license fee, research and development support and milestone payments that the Company may receive under this agreement are estimated to exceed $15 million. These amounts do not include the cost of clinical trials that will be borne directly by Organon. 23 26 AUTOIMMUNE DISEASES Background. Normally, the immune system recognizes and distinguishes between invading foreign substances or "antigens" and the body's own tissue. The body is able to react continually to a wide variety of antigens, to remember a foreign substance to which it has been exposed previously, and to rid itself of a foreign substance. The ability of the immune system to distinguish between its own tissue (self) and foreign substances is essential for its normal function. The recognition and memory processes of the immune system are controlled by the activity of several types of cells. One of the most important, the "T cell," plays a critical role in recognizing antigens, initiating an immune response and regulating the resulting cascade of immunological events. Another type of cell, the "B cell," secretes antibodies that are involved in the recognition and neutralization of antigens. These processes require the involvement of proteins called human leukocyte antigen ("HLA") molecules which are found on the surface of certain cells in the body. The HLA molecules are encoded by a gene complex called MHC. The terms HLA and MHC are sometimes used interchangeably. When a foreign substance enters the body, antigen presenting cells, which act as scavenger cells, encounter and engulf the foreign substance. These scavenger cells break down the antigen into smaller components called "peptides." The antigen presenting cell then transports each individual peptide, called an "epitope," bound to the MHC molecules as a complex, to its outer cell membrane where it is presented to various T cells. Once a responsive T cell is stimulated, it initiates an immune response that eliminates the foreign substance from the body. T cells recognize specific MHC-epitope complexes through receptors on their surfaces, with each type of T cell recognizing only one out of millions of possible MHC-epitope complexes. There are several classes of MHC molecules, with MHC Class II ("MHC II") molecules involved in the presentation of self-antigens. While the immune system is normally extremely efficient in seeking and destroying foreign substances, in some cases, for reasons that are not yet understood, the immune system is triggered to begin destroying the body's own healthy tissue, resulting in autoimmune diseases such as RA, MS, IDDM and MG. In these diseases, "self" tissue is presented to T cells which respond by initiating an immune response that destroys healthy tissue. For example, T cells are involved in the destruction of nerve structures in MS, joint tissue in RA, and insulin-producing (LOGO)b cells in IDDM. Existing Therapeutic Approaches. Traditional therapies for autoimmune diseases include steroids and other immunosuppressive drugs that generally treat the symptoms rather than the cause of the disease and are unable to prevent the activation of T cells that initiate the destructive autoimmune response. Current treatments are typically administered based on disease severity. For mild forms of these diseases, drugs that ameliorate the symptoms may be given. These drugs do not prevent the progression of tissue destruction and are relatively ineffective in treating more severe symptoms. In advanced disease stages, more powerful immunosuppressive drugs are used to suppress the body's entire immune system. This has some therapeutic effect, but also limits the body's ability to respond to invading foreign substances, which substantially increases the risk of contracting other illnesses. In addition, such drugs generally have numerous other unwanted and often severe side effects. ANERGEN TECHNOLOGY The Company's technology programs focus on the discovery and development of proprietary therapeutics that destroy or inactivate T cells involved in the disease process or selectively interrupt antigen presentation to the T cells without affecting the protective functions of the immune system. Anergen believes that its approaches to preventing or arresting autoimmune diseases may result in therapies that are more specific and have fewer side effects than currently available treatments. The two core technologies, AnergiX and AnervaX, under development by the Company are summarized below and are illustrated on the inside cover of this Prospectus. AnergiX Technology. The Company's AnergiX technology is currently being used to develop products for MS, RA, IDDM and MG. An AnergiX compound consists of an epitope of the self-antigen that would 24 27 normally be associated with triggering an autoimmune response in a particular disease, combined with a soluble MHC II molecule. The AnergiX compound thus has two of the three primary elements associated with the autoimmune response, but lacks the third element, the antigen presenting cell. It is believed that the activation of T cells requires not only the initial signal provided by the binding to the T cell receptor of the MHC-epitope complex which is on the surface of antigen presenting cells, but also a "second signal" provided by the antigen presenting cell itself. Anergen believes that the binding of its AnergiX compound to the receptor site on the destructive T cell, in the absence of the antigen presently cell and its "second signal," inactivates that T cell. This inactivated or nonresponsive state is referred to as a state of "anergy." The Company believes that by inducing anergy, the autoimmune response can be interrupted. In addition, the Company has shown that in the presence of AnergiX, a significant percentage of T cells may undergo apoptosis, or programmed cell death, which will also serve to interrupt the autoimmune process. The Company believes, based on its research to date, that the state of anergy created by the introduction of the Company's AnergiX may last for periods of up to several months. The results of the Company's research demonstrated that a state of anergy may also be induced in T cells that have already been activated, indicating that such T cells could be inactivated even after the destructive chain reaction has begun. Because the Company believes that its AnergiX compounds will bind only to T cells specific to a disease, other T cells are not expected to be affected, and the rest of the immune system should remain responsive to foreign substances. AnervaX Technology. The Company's AnervaX technology is currently being developed to treat RA. AnervaX is a synthetic peptide vaccine consisting of a small portion of the MHC II molecule. AnervaX is designed to elicit an immune response that interferes with the presentation of self-antigens to T cells. This immune response is intended to stimulate the production of a patient's own antibodies to a subset of the MHC molecules on the patient's antigen presenting cells. The Company believes that because AnervaX targets only the subset of MHC molecules that appear to be involved in the particular autoimmune disease, this approach potentially will allow the prevention or treatment of autoimmune disease without generally suppressing the patient's overall immune system. PRODUCTS UNDER DEVELOPMENT The following table sets forth the current status of Anergen's product development programs. - -------------------------------------------------------------------------------- ANERGEN'S DEVELOPMENT PROGRAMS
PATIENT POPULATION CORPORATE DEVELOPMENT DISEASE TARGET TECHNOLOGY U.S./WORLDWIDE ALLIANCES(1) STATUS(2) ----------------------------- ---------- ------------------- ------------- ----------- Multiple Sclerosis........... AnergiX 300,000/650,000 Novo Nordisk Phase I Rheumatoid Arthritis......... AnervaX 2,500,000/8,000,000 -- Phase II AnergiX 2,500,000/8,000,000 Organon Preclinical Insulin Dependent Diabetes Mellitus................... AnergiX 600,000/1,800,000 Novo Nordisk Research Myasthenia Gravis............ AnergiX 25,000/50,000 Novo Nordisk Preclinical
(1) See "Business -- Collaborative Arrangements" for a discussion of the relative rights of the Company and its collaborative partners. (2) Research: Initiation of research studies. Preclinical: Identification of a specific molecule for potential human testing. Phase I: Initial phase of human clinical testing to determine safety and measure certain biological parameters. Phase II: Multicenter, double-blind, placebo-controlled clinical trial for safety, immunogenicity, dosage determination and initial efficacy in a limited patient population. - -------------------------------------------------------------------------------- 25 28 Multiple Sclerosis. MS is a progressive inflammatory disease of the central nervous system that predominantly affects young adults and causes increasing neurologic damage and disability throughout life. Symptoms range from painful facial muscle spasms, vertigo and vomiting to a myriad of motor and sensory problems. In the United States, the average longevity of patients after diagnosis with MS is over thirty years. The care of MS patients requires long-term medical, neurologic and psychological treatment and support. The use of steroids and immunosuppressant drugs is the most common treatment for MS today, but these drugs often have significant unwanted side effects such as nausea and high blood pressure. Based on published data and other sources, the Company believes that there are approximately 650,000 cases of MS worldwide. The Company and Novo Nordisk have developed a potential therapeutic, MS/Anergix, which is a compound of an MHC molecule combined with a peptide derived from myelin basic protein, the self-antigen believed to be involved in MS. The Company received IND clearance from the FDA in December 1995 and patient selection for a Phase I clinical trial has begun. The costs of this and future trials are fully supported by Novo Nordisk. The Company's preclinical tests demonstrated that the use of an MS/AnergiX compound prevented or reduced paralysis caused by the T cell-initiated destructive autoimmune response in an animal model of MS. Additionally, in vitro testing of MS/AnergiX on human cells demonstrated inactivation of T cells associated with MS. This study also indicated that patients' T cells respond to the same antigen over time and that potentially effective doses appear to be low. Under the Company's collaborative agreement with Novo Nordisk, Novo Nordisk will support research and development of the Company's MS program, including the full cost of all clinical testing, and will pay royalties on worldwide sales of any resulting products. The Company has retained co-promotion rights in North America for therapeutics in MS. See "Risk Factors -- Dependence Upon Collaborative Partners" and "Business -- Collaborative Arrangements -- Novo Nordisk A/S." Rheumatoid Arthritis. RA is a systemic inflammatory disease that causes joint pain, swelling and, eventually, deformities. Patients afflicted with RA may experience severe musculoskeletal disability. Over time, progression of the disease involves degradation and destruction of the surrounding cartilage and bone. Current treatment of RA involves the use of a variety of drugs in successive stages: first, with drugs having analgesic actions such as aspirin and other non-steroidal and anti-inflammatory drugs; second, with agents such as gold and penicillamine that reduce the symptoms of RA; and third, with drugs that attempt to contain the disease, including immunosuppressive drugs such as corticosteroids and methotrexate. Each of these three approaches has side effects of varying intensity and risks that increase as one moves to the more aggressive therapies. Based on published data and other sources, the Company believes that there are approximately 8,000,000 cases of RA worldwide. The Company completed Phase I clinical testing of its AnervaX peptide vaccine to treat RA in October 1995 and began Phase II clinical testing in April 1996. Preclinical studies demonstrated that Anergen's AnervaX approach may prevent the onset of disease and reduce the severity of active disease in certain animal models of autoimmune disease (experimental allergic encephalomyelitis and non-obese diabetic ("NOD") mice). In vitro testing indicated that animals treated with the AnervaX peptide vaccine generate antibodies against MHC II molecules. The Company believes that such antibodies bind to MHC II molecules and that this binding may interfere with the interaction between MHC and T cells that is involved in the progression of autoimmune disease. The results of the Phase I study showed the vaccine to be well tolerated and capable of inducing an antibody response. In addition, the Company is developing an AnergiX compound to treat RA in conjunction with Organon under an agreement entered into in June 1996. The compound to be developed uses Anergen's proprietary AnergiX technology and incorporates a proprietary peptide discovered by Organon. Under the agreement, Organon, in exchange for certain marketing rights, will support research and development, including the full cost of all clinical testing, pay a one-time license fee, make milestone payments and pay royalties on product sales, if any. See "Risk Factors -- Dependence Upon Collaborative Partners" and "Business -- Collaborative Arrangements." Insulin Dependent Diabetes Mellitus. IDDM, or Type I diabetes, is caused by an autoimmune attack resulting in the destruction of the insulin-producing SS cells in the pancreas. Insulin regulates the cellular 26 29 uptake and metabolism of glucose, and its deficiency leads to hyperglycemia, diabetic acidosis, and diabetic coma. Long term complications include vision loss, renal failure and peripheral neuropathy. Currently, individuals with IDDM are given insulin to supplement their ability to produce sufficient amounts of the hormone. IDDM usually appears in individuals before the age of 20 and affects about 0.5% of the Caucasian population worldwide. Based on published data and other sources, the Company believes that there are approximately 1,800,000 cases of IDDM worldwide. The Company has performed preclinical studies using an IDDM/AnergiX compound composed of an MHC II molecule coupled with a synthetic glutamic acid decarboxylase ("GAD") peptide in NOD mice, an animal model of IDDM. The GAD peptide is suspected to be the self-antigen, which leads to the autoimmune attack in diabetes. The Company tested this compound by treating NOD mice in a dosing regimen designed to inactivate or anergize disease-causing T cells, thereby preventing diabetes. Results of the study showed that treatment with the IDDM/AnergiX complex reduced the rate of destruction of insulin-producing SS cells in a dose dependent manner, while treatment with the GAD peptide alone accelerated the disease. Under the Company's collaborative agreement with Novo Nordisk, Novo Nordisk will support research and development of the Company's program and will pay royalties on worldwide sales of any resulting products. See "Risk Factors -- Dependence Upon Collaborative Partners" and "Business -- Collaborative Arrangements -- N.V. Organon. Myasthenia Gravis. MG is a neuromuscular disorder that is characterized by muscle weakness and may lead to death in severe cases. Current methods of treatment for MG utilize drugs that only ameliorate the symptoms and generally are not effective in most cases of moderate or progressive MG. The more powerful of these drugs have significant unwanted side effects. Based on published data and other sources, the Company believes that there are approximately 50,000 cases of MG worldwide. The Company has established an in vivo experimental model of autoimmune myasthenia gravis ("EAMG") in rats, which is considered pathologically and clinically comparable to human MG. Initial results indicate that the Company's MG/AnergiX reduces clinical symptoms of this disease in rats. Additionally, the Company tested its therapeutic approach for MG on human cells. Through this study, the Company has identified what it believes to be an appropriate antigenic peptide involved in MG. Using MG/AnergiX, the Company has demonstrated in vitro inactivation of T cells associated with MG. This study also indicated that the patients' T cells respond to the same antigen over time and that potentially effective doses appear to be low. Under the Company's collaborative agreement with Novo Nordisk, Novo Nordisk will support research and development of the Company's MG program and will pay royalties on worldwide sales of any resulting products. The Company has retained co-promotion rights in North America for therapeutics in MG. See "Risk Factors -- Dependence Upon Collaborative Partners" and "Business -- Collaborative Arrangements -- Novo Nordisk A/S." ADDITIONAL APPLICATIONS FOR ANERGEN TECHNOLOGIES The Company believes that its core technologies could be applied to a number of other autoimmune diseases. To create an effective AnergiX product intended to inactivate the T cells associated with a specific autoimmune disease, one must correctly combine a proper epitope specific for the target autoimmune disease with a proper MHC molecule associated with that disease. Recent advances in the understanding of events that trigger autoimmune diseases have accelerated the search for the epitopes associated with particular diseases. Anergen intends to license technology developed by others and to collaborate in the research and development of epitopes that, when combined with the Company's MHC molecules in a proprietary soluble form, would result in AnergiX compounds for the treatment of other autoimmune diseases. In 1994, the Company initiated a research collaboration with a physician at the University of Medicine and Dentistry of New Jersey to identify the epitope associated with inflamatory bowel disease. In order to develop additional AnervaX peptide vaccine products, the Company must first identify the particular MHC sub-type involved with initiation and continuation of the particular autoimmune disease. The Company must then identify that portion of the MHC molecule sub-type that triggers an immune response. It is this response that interferes with the presentation of the self antigen to disease-related T cells. Based upon recent advances in the understanding of the genetic clustering of MHC sub-types and their involvement in 27 30 other autoimmune diseases, the Company believes additional product candidates may be developed utilizing its AnervaX core technology. While development and commercialization of the Company's approach to altering autoimmune disease states remains Anergen's focus, the Company is also monitoring other opportunities that may arise out of its technology and expertise, including the development of diagnostics for autoimmune and related diseases and the possibility of adapting its T cell-specific drug delivery approach to delivering compounds that would kill particular T cells, a method that may prove useful in severe cases where an autoimmune disease has substantially progressed. The Company expects to pursue funding from collaborative partners prior to extensive research in any of these areas. COLLABORATIVE ARRANGEMENTS Novo Nordisk A/S. In August 1993, the Company entered into a collaborative agreement with Novo Nordisk with an initial three-year development program term and Novo Nordisk made an equity investment in the Company. Under the collaborative agreement, Novo Nordisk will make milestone payments and support research and development of the Company's MS, MG and IDDM programs in exchange for exclusive worldwide rights to products developed under the collaboration, including rights to commercialize these products, subject to the payment of royalties to the Company. The Company has retained rights of co-promotion in North America for therapeutics in MS and MG. In the event the Company engages in co-promotion of its MS and MG products in North America, Novo Nordisk has agreed to modify the royalty payments made to the Company to compensate for the level of its marketing and sales efforts in amounts to be negotiated. In March 1996, the Company and Novo Nordisk extended the term of the development program by an additional two-year period through August 1998. Novo Nordisk may terminate the agreement with respect to its development rights upon six months prior written notice. The development program is subject to ongoing review by a research committee that includes equal representation of both partners. The development expenses incurred by the Company and reimbursable by Novo Nordisk are significant and expected to increase. Under the original agreement, the research and development support and milestone payments which may be received by the Company under this agreement are estimated to total $25 million, including an $8 million equity investment made in the Company in August of 1993 for 1,219,745 shares of the Company's Common Stock. The Company recorded $3.0 million in contract revenues related to this agreement in 1995 as compared to $2.3 million in 1994. The expansion of this agreement and extension of the term of the development program in March 1996 increased the estimated total proceeds to the Company by an additional $10 million to $35 million. N.V. Organon In June 1996, the Company entered into a collaborative agreement with Organon under which Organon will pay the Company a license fee, make milestone payments, and support research and development of an AnergiX compound intended for the treatment of RA in exchange for certain marketing rights, including certain rights to the commercialization of these products, subject to the payment of royalties to the Company. The compound to be developed uses Anergen's proprietary technology and incorporates a proprietary peptide discovered by Organon coupled with an MHC molecule. This arrangement has no effect on the Company's ownership of its AnervaX therapeutic intended to treat RA, which is currently in Phase II clinical testing. The Company's development program under the Organon agreement has an initial three-year term. Under the agreement, Anergen granted to Organon exclusive worldwide rights to any products developed under the collaborative agreement, including rights to commercialize the products. While the agreement initially grants Organon rights to any AnergiX compounds within the field of RA, after an initial Phase I study, Anergen has the right, at its sole discretion, to convert Organon's rights to a non-exclusive basis, in which case milestone payments and royalty rates would be modified. The agreement with respect to marketing rights continues in full force for as long as Organon is engaged in marketing such products. Organon may terminate the development program after thirty months by giving the Company six months prior written notice. The Company has retained certain limited rights of co- promotion in North America for therapeutics developed under the arrangement. In the event the Company engages in co-promotion of products in North America, Organon has agreed to modify the royalty payments made to the Company to compensate for the level of its marketing and sales efforts in amounts to be 28 31 negotiated. The development program is subject to ongoing review by a research committee which includes equal representation of both partners. The development expenses incurred by the Company and reimbursable by Organon are expected to be significant and to increase. Other Arrangements. The Company has several collaborations with academic and clinical researchers to perform certain research, development and clinical trial activities. To the extent that the Company is unable to maintain or establish such collaborative arrangements, the Company's research, development and clinical activities and business would be adversely affected. The Company's strategy for the development, clinical trials, manufacturing and commercialization of its products includes maintaining existing and establishing additional collaborations with corporate partners, licensors, licensees and others. There can be no assurance that the Company will be able to maintain existing collaborative arrangements or establish new collaborative arrangements in the future. To the extent that the Company is unable to maintain or establish such collaborative arrangements, the Company's research and development efforts and business would be adversely affected. In addition, the Company's collaborative partners may develop, either alone or with others, products that compete with the development and marketing of the Company's products. The development of such competing products may result in the withdrawal of support with respect to all or a portion of the Company's technology which would have a material adverse effect on the Company's business, financial conditions and results of operations. See "Risk Factors -- Dependence Upon Collaborative Partners" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." MANUFACTURING Manufacture of the Company's AnergiX compounds requires the production of two basic parts: the disease specific epitope and the MHC molecule. The Company then combines these two component parts and puts them in a soluble form suitable for a therapeutic product. The Company is currently synthesizing several different epitopes related to MS, IDDM and MG for use in its research and development operations. To date, the Company has contracted with an outside manufacturer to produce the selected MS specific peptide under GMP guidelines. In the future the Company may consider scaling up its synthesis operations in order to produce these epitopes internally. Production of MHC molecules can be accomplished in one of two ways: MHC molecules can be extracted from cells cloned from commercially available cell lines or MHC molecules can be produced using recombinant DNA technology. During 1993, the Company began producing MHC molecules in its pilot clinical manufacturing facility. The initial production utilizes a mammalian cell culture system to grow cells from a human cell line from which MHC molecules are extracted. In 1995, the Company was inspected and granted a site license to manufacture products for human use by the California Food and Drug Administration. The Company, together with Novo Nordisk, is currently in the process of evaluating production of MHC molecules using recombinant DNA technology. The Company believes that either production methodology will provide sufficient quantities of MHC for the Company's anticipated clinical trials. The Company has contracted with an outside manufacturer to fill, finish and package its final compounds. The Company's strategy is to maintain control over its AnergiX manufacturing technology which will facilitate seeking of patent protection and enable timely supply of products for clinical trials. Whether the Company will choose to develop a full-scale manufacturing facility, rely on its corporate partner, or rely on outside contract manufacturing will be determined in the future after consideration of the Company's financial and scientific resources and the potential advantages and disadvantages of these alternatives. Anergen and Novo Nordisk have agreed to share manufacturing of AnergiX, but it is at the discretion of Novo Nordisk to determine the degree to which the Company will share in the manufacture of AnergiX. See "Risk Factors -- Need to Develop Manufacturing Capabilities; Reliance on Sole Supplier." Manufacture of the Company's AnervaX compounds is performed by an outside contract manufacturer and the resultant product is filled and finished by a second subcontractor. There can be no assurance that such parties will be able to meet the Company's needs either with respect to timing, quantity or quality. If the 29 32 Company is unable to obtain or retain third party manufacturing on acceptable terms, it may be delayed in its ability to commercialize AnervaX. The Company's dependence upon third parties for the manufacturing of AnervaX may adversely affect the Company's profit margins and its ability to develop, deliver and sell products on a timely and competitive basis, if at all. MARKETING AND SALES The Company currently has no sales, marketing or distribution capability. The Company has entered into collaborative relationships with Novo Nordisk and Organon for the commercialization of its MS, RA, IDDM and MG products. For other potential products, the Company intends to rely on relationships with one or more pharmaceutical companies with established distribution systems and direct sales forces to market its products. In the event that the Company is unable to reach agreement with one or more pharmaceutical companies to market its products, it may be required to market its products directly and to develop a marketing and sales force with technical expertise and with supporting distribution capability. There can be no assurance that the Company will be able to establish in-house sales and distribution capabilities or relationships with third parties, or that it will be successful in gaining market acceptance for its products. To the extent that the Company enters into co-promotion or other licensing arrangements, any revenues received by the Company will depend upon the efforts of third parties, and there can be no assurance that such efforts will be successful. PATENTS AND PROPRIETARY RIGHTS The Company is pursuing patent protection for its proprietary technologies. In July 1992, the Company was issued a U.S. patent that covers pharmaceutical compositions comprising MHC-peptide complexes. Four subsequent U.S. patents have provided additional protection for these complexes, methods of making them, and their use to induce anergy in T cells. The last patent in this series was issued in November 1995 and all five U.S. patents in such series expire in 2009. The Company has also been issued one other U.S. patent based upon other aspects of its research, expiring in 2011. In June 1996, the Company received a grant for a European patent directed to the MHC-peptide complexes, expiring in 2008. A related patent has also been issued in Korea, expiring in 2008. In addition, Anergen has filed other patent applications in Canada, the EPO and Japan. Pending patent applications in the U.S. and other countries include those covering different aspects of the Company's AnergiX and AnervaX technologies. The Company has also entered into a number of collaborative research arrangements with consultants at academic institutions. These agreements generally provide for exchanges of information and for nondisclosure of technical information by both parties, but the Company's current agreements do not obligate the Company to release any of its technology for use by any other entities nor commit the Company to pay royalties on any discovery made in connection with such research agreements. In the future, the Company may enter into agreements which provide for royalties in exchange for technology rights. The Company's success will depend in significant part on its ability to maintain patent protection for its therapeutic approach and for any developed products, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. Although the Company has obtained patents covering certain aspects of its technology, no assurances can be given that additional patents will be issued or, if issued, that the scope of any patent protection will be significant, or that the patents will be held valid if subsequently challenged. Moreover, the Company cannot ascertain with certainty that no patent conflict will exist with other products or processes which could compete with the Company's approaches. Because of the length of time and expense associated with bringing new products through development and to the marketplace, and the length of time required for the governmental approval process, the pharmaceutical industry has traditionally placed considerable importance on obtaining and maintaining patent and trade secret protection for significant new technologies, products and processes. The Company and other 30 33 biotechnology and pharmaceutical firms have applied, and are applying, for patents for their products and certain aspects of their technologies. The enforceability of patents issued to biotechnology and pharmaceutical firms is highly uncertain. Federal court decisions indicating legal considerations surrounding the validity of patents in the field are in transition, and there can be no assurance that the historical legal standards surrounding questions of validity will continue to be applied or that current defenses as to issued patents in the field will offer protection in the future. In addition, there can be no assurance as to the degree and range of protection any patents will afford, whether patents will issue or the extent to which the Company will be successful in not infringing patents granted to others. While the Company pursues patent protection for products and processes where appropriate, it also relies on trade secrets, know-how and continuing technological advancement to develop and maintain its competitive position. The Company's policy is to have each employee enter into an agreement that contains provisions prohibiting the disclosure of confidential information to anyone outside the Company. Research and development contracts and relationships between the Company and its scientific consultants provide access to aspects of the Company's know-how that is protected generally under confidentiality agreements with the parties involved. There can be no assurance, however, that these confidentiality agreements will be honored or that the Company can effectively protect its rights to its unpatented trade secrets. Moreover, there can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets. The Company may be required to obtain licenses to patents or other proprietary rights from third parties. The Company has not performed regular patent watches for patents potentially covering each of its proposed products. There can be no assurance that any licenses required under any patents or proprietary rights will be made available on terms acceptable to the Company, if at all. If the Company does not obtain required licenses, it could encounter delays in product development while it attempts to redesign products or methods or it could find that the development, manufacture or sale of products requiring such licenses could be foreclosed. The Company is aware of a European patent and corresponding U.S. and Australian patents which contain claims that relate to certain of the Company's proposed products and their uses. In accordance with EPO procedures, third parties can oppose an EPO patent grant by presenting information which they believe justifies narrowing or revoking the grant of the patent. The Company is opposing the aforementioned grant in the EPO. There can, however, be no assurance that the granted EPO claims will be revoked or significantly narrowed in scope as a result of the opposition proceeding. If valid claims in these patents are found to be infringed by the Company's products, the Company's ability to make, use, offer to sell, or sell, such products could be materially and adversely affected. In addition, the Company could incur substantial costs in defending any patent litigation brought against it or in asserting the Company's patent rights, including those licensed to the Company by others, in a suit against another party. The USPTO could institute interference proceedings in connection with one or more of the Company's patents or patent applications, which proceedings could result in an adverse decision as to priority of an invention. The USPTO also could institute reexamination proceedings in connection with one or more of the Company's patents or patent applications, which could result in an adverse decision as to the patents' validity or scope. See "Business -- Patents and Proprietary Rights." The terms Anergen, AnergiX, MS/AnergiX, MG/AnergiX, RA/AnergiX, IDDM/AnergiX and AnervaX are trademarks of the Company. The Company's registration of the trademarks Anergen, AnergiX and AnervaX are currently pending, and the Company intends to register the remaining trademarks. COMPETITION The biotechnology and pharmaceutical industries are characterized by rapidly evolving technology and intense competition. The Company's competitors include major pharmaceutical, chemical and specialized biotechnology companies, most of which have financial, technical, research and development, manufacturing, clinical and marketing resources significantly greater than those of the Company. The Company believes that these other entities recognize the need for effective therapies for the autoimmune diseases targeted by the Company and are highly motivated to develop such therapies. In addition, many specialized biotechnology 31 34 companies have formed collaborations with large, established companies to support research, development and commercialization of products that may be competitive with those of the Company. Academic institutions, governmental agencies and other public and private research organizations are also conducting research activities and seeking patent protection and may commercialize products on their own or through joint ventures. The Company is aware of certain products in development by competitors that are intended to be used for the prevention or treatment of certain diseases the Company has targeted for product development. The existence of these products, or other products or treatments of which the Company is not aware, or products or treatments that may be developed in the future which may be more effective, may adversely affect the commercialization or marketability of products which may be developed by the Company or potentially render the Company's technology obsolete or non-competitive. The Company's competitive position will depend on its ability to attract and retain qualified scientific and other personnel, develop effective proprietary products, implement production and marketing plans, obtain patent protection and secure adequate capital resources. In addition, the first pharmaceutical product to reach the market in a therapeutic or preventive area is often at a significant competitive advantage relative to later entrants to the market. The Company expects its products, if approved for sale, to compete primarily on the basis of product efficacy, safety, patent position, reliability, price and patient convenience. There are numerous pharmaceutical and biotechnology companies developing therapies against autoimmune diseases. Many pharmaceutical companies are working on products to treat MS. Current therapies, which have limited impact on the disease state and primarily affect symptoms, include two beta interferon drugs. Other potential therapeutics which target the underlying disease state include oral tolerance therapy and peptide-based therapies. In RA, there are also many upgrades under development which target the underlying disease state including oral tolerance, peptide based therapies, peptide vaccines to the T cell receptors and humanized antibodies. In IDDM, one experimental approach is based on non-specific inhibition of T cells using cyclosporin, a general immunosuppressant. In patients who already have IDDM, transplantation of pancreas or insulin-producing beta cells is also being explored. Autoimmune diseases are a major target for many companies developing therapeutics, and it is unclear which approaches will work most effectively. The Company believes that the ability of its AnergiX to inactivate only the specific T cells related to a particular autoimmune disease may provide, if the Company's products are successfully developed, an important competitive advantage over companies using approaches which have broader suppressive effects on the human immune system. Anergen also believes that its ability to inactivate these specific T cells without the use of toxins, if successfully demonstrated, would be advantageous. The Company also believes that its AnervaX approach, if successfully developed, may offer a competitive advantage if it is found to interrupt disease progression without severely suppressing the immune system. GOVERNMENT REGULATION The Company's research and development activities are subject to regulation by numerous governmental authorities in the United States and other countries, and the production and marketing of any products developed by the Company would also be regulated, particularly as to safety and efficacy. In the United States, vaccines, drugs and biologics are subject to rigorous FDA review. The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, approval, advertising and promotion of such products. Noncompliance with applicable requirements can result in fines, recall or seizure of products, clinical study holds, total or partial suspension of production, refusal of the government to approve product license applications or allow the Company to enter into supply contracts and criminal prosecution. The FDA also has the authority to revoke PLAs, and ELAs previously granted. In order to obtain FDA approval of a new biological product, the Company must submit proof of safety, purity, potency and efficacy. In most cases such proof entails extensive pre-clinical, laboratory and clinical tests. The testing, preparation of necessary applications and processing of those applications by the FDA is expensive and time consuming, can vary based on the type of product, and may take several years to complete. There is no assurance that the FDA will act favorably or quickly in making such reviews, and significant 32 35 difficulties or costs may be encountered by the Company in its efforts to obtain FDA approvals that could delay or preclude the Company from marketing any products it may develop or furnish an advantage to competitors. The FDA may also require post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of such products. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. In addition, delays imposed by the governmental approval process may materially reduce the period during which the Company may have the exclusive right to exploit patented products or technologies. The FDA approval process for a new biological drug involves completion of pre-clinical studies which include laboratory tests and animal studies to assess safety and effectiveness of the drug. Among other things, the results of these studies as well as how the product will be manufactured are submitted to the FDA as part of an IND and, unless the FDA objects, the IND becomes effective 30 days following receipt by the FDA. FDA cleared human clinical trials may then be conducted. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials. The results of the clinical trials are submitted to the FDA as part of a PLA. In addition to obtaining FDA approval for each AnergiX indication, an ELA must be filed and the FDA must approve the manufacturing facilities for the product. Product sales may only commence if the PLA and ELA are approved. Regulatory requirements for obtaining such FDA approvals are rigorous and there can be no assurance that such approvals will be obtained on a timely basis or at all. Human clinical trials are typically conducted in three sequential phases, but the phases may overlap. Phase I trials consist of testing the product in a small number of patients primarily for safety at one or more dosage levels. In Phase II, in addition to safety, the efficacy of the product is evaluated in a patient population slightly larger than Phase I trials, and appropriate dosage is established. Phase III trials typically involve additional testing for safety and clinical efficacy in an expanded patient population at geographically dispersed test sites, and with the dosage that will be submitted for approval. A clinical plan, or "protocol", accompanied by the approval of the institutional review board at the institution participating in the trials, and patient- informed consent form must be submitted to the FDA prior to commencement of each clinical trial. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time if it believes patient safety is at risk. The Company's regulatory strategy is to seek input from the FDA at all stages of clinical testing and manufacturing process development. The results of the pre-clinical and clinical studies on biological drugs such as the Company's AnergiX are submitted to the FDA in the form of a PLA and ELA for approval to commence commercial sales. After completion of the FDA's preliminary review of the PLA submission, the submission is sent to an FDA selected scientific advisory panel composed of physicians and scientists with expertise in the particular field. The FDA scientific advisory panel issues a recommendation to the FDA that includes conditions for approval of the PLA. Although the recommendation is not binding, the agency generally follows an advisory panel's advice. Toward the end of the PLA review process, the FDA will conduct an inspection of the manufacturer's facilities to ensure that they are in compliance with the applicable GMP requirements. If the FDA evaluation of both the ELA application and manufacturing facilities contained in the PLA application are favorable, the FDA will issue an approval letter, which usually contains a number of conditions which must be met in order to secure final approval. In responding to the PLA, the FDA may grant marketing approval, require additional testing or information, or deny the application. Governmental approval of products developed by the Company may entail limitations on the indicated uses for which such products may be marketed. Continued compliance with all FDA requirements and the conditions in an approved application, including product specification, manufacturing process, labeling and promotional material and record keeping and reporting requirements, is necessary for all products. Failure to comply, or the occurrence of unanticipated adverse effects during commercial marketing, could lead to the need for product recall or other FDA-initiated action, which could delay further marketing until the products are brought into compliance. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug. An orphan drug is a drug intended to treat a "rare disease or condition," which is a disease or condition that affects populations of fewer than 200,000 individuals in the United States or, if victims of a disease number more than 200,000, the 33 36 sponsor establishes that it does not realistically anticipate that its product sales will be sufficient to recover its costs. If a product is designated as an orphan drug, then the sponsor is entitled to receive certain incentives to undertake the development and marketing of the product, including limited tax credits and high priority FDA review of an NDA. In addition, the sponsor that obtains the first marketing approval for a designated orphan drug for a given rare disease is eligible to receive marketing exclusivity for a period of seven years. There may be multiple designations of an orphan drug; however, only the sponsor of the first approved NDA for a given drug for its use in treating a given rare disease may receive marketing exclusivity. The Company may apply for orphan drug designation for some of its products and indications in development. There is no assurance that the FDA would grant orphan drug designation or marketing exclusivity for any such indications or products. The Company is also subject to regulation by the OSHA and the EPA and to regulation under the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other regulatory statutes, and may in the future be subject to other federal, state or local regulations. Although the Company believes that its safety procedures for handling and disposing of hazardous materials comply with the standards prescribed by current 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. In addition, regulations may be promulgated governing biotechnology that may affect the Company's research and development programs. The Company is unable to predict whether any agency will adopt any regulation which would have a material adverse effect on the Company's operations. Sales of pharmaceutical products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. The time required to obtain approvals required by foreign countries may be longer or shorter than that required for FDA approval, and requirements for licensing may differ from FDA requirements. Satisfaction of these FDA requirements, or similar requirements by foreign regulatory agencies, typically takes several years and the time needed to satisfy them may vary substantially, based upon the type, complexity and novelty of the pharmaceutical product. The effect of government regulation may be to delay or to prevent marketing of potential products for a considerable period of time and to impose costly procedures upon the Company's activities. There can be no assurance that the FDA or any other regulatory agency will grant approval for any products being developed by the Company on a timely basis, or at all. Success in preclinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. If regulatory approval of a product is granted, such approval may impose limitations on the indicated uses for which a product may be marketed. Further, even if regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product, including withdrawal of the product from the market. Delay in obtaining or failure to obtain regulatory approvals would have a material adverse effect on the Company's business financial condition or results of operations. PHARMACEUTICAL PRICING AND REIMBURSEMENT Political, economic and regulatory influences are subjecting the health care industry in the United States to fundamental change. Initiatives to reduce the federal deficit and to reform health care delivery are increasing these cost containment efforts. The Company anticipates that Congress, state legislatures and the private sector will continue to review and assess alternative benefits, controls on health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, price controls on pharmaceuticals and other fundamental changes to the health care delivery system. Any such proposed or actual changes could cause any potential partners of the Company to limit or eliminate spending on collaborative development projects. Legislative debate is expected to continue in the future, market forces are expected to demand reduced costs and Anergen cannot predict what impact the adoption of any federal or state health care reform measures or future private sector reforms may have on its business. 34 37 In both domestic and foreign markets, sales of the Company's proposed products will depend in part upon the availability of reimbursement from third-party payors, such as government health administration authorities, private health insurers and other organizations. In addition, other third-party payors are increasingly challenging the price and cost effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products. There can be no assurance that the Company's potential products or products discovered in collaboration with the Company will be considered cost-effective or that adequate third-party reimbursement will be available to enable Anergen to maintain price levels sufficient to realize an appropriate return on its investment in product research, discovery and development. Legislation and regulations affecting the pricing of pharmaceuticals may change before the Company's proposed products are approved for marketing. Adoption of such legislation could further limit reimbursement for medical products. If adequate coverage and reimbursement levels are not provided by the government and third-party payors for the Company's products, the market acceptance of these products would be adversely affected, which would have a material adverse effect on the Company's business, financial condition and results of operations. PRODUCT LIABILITY INSURANCE The testing, marketing and sale of human health care products entail an inherent risk of exposure to product liability claims in the event that the use of the Company's technology or prospective products is alleged to have resulted in adverse effects. While the Company has taken, and will continue to take, what it believes are appropriate precautions to minimize exposure to product liability, there can be no assurance that it will avoid significant liability. The Company possesses limited general liability and product liability insurance related to its clinical trials of AnervaX for RA and intends to seek such insurance related to its clinical trials of AnergiX for MS, and certain other types of insurance customarily obtained by business organizations. There can be no assurance that the existing insurance coverage is adequate or that it will avoid liability. The Company intends to seek insurance against product liability risks associated with the testing, manufacturing or marketing of its products. However, there can be no assurance that it will be able to obtain such insurance in the future, or that if obtained, such insurance will be sufficient in amount. Consequently, a product liability claim or other claims with respect to uninsured liabilities or in excess of insured liabilities could have a material adverse effect on the business or financial condition of the Company. EMPLOYEES As of May 31, 1996, the Company had 60 full-time employees, of whom fourteen hold doctoral or medical degrees. Of the 60 full-time employees, 51 were engaged in, or directly supporting, the Company's research and development activities. The Company also employs several part-time workers. The Company considers relations with its employees to be good. None of the Company's employees is covered by a collective bargaining agreement. FACILITIES The Company's laboratory and administrative facilities occupy approximately 27,000 square feet of space in Redwood City, California. The majority of these facilities are subject to a lease which expires on January 3, 1999, with a two-year renewal option. The Company believes that this space is adequate for its immediate needs, and that it will be able to obtain additional space as necessary. SCIENTIFIC ADVISORY BOARD Anergen benefits from the advice and assistance of its Scientific Advisory Board, most of whom are involved in ongoing discussions with the Company's researchers and all of whom are involved in full-time teaching and research at academic institutions. The names of the members of the scientific advisory board and some background information about them are set forth below. Mark Davis, Ph.D., Professor, Department of Microbiology and Immunology, Stanford University School of Medicine. Dr. Davis has been involved in research on the structure and function of the T cell receptor. His 35 38 group isolated and characterized a T cell receptor gene and recently succeeded in expressing both T cell antigen receptor and MHC II molecules in a soluble form to facilitate analysis of their properties. Patricia Jones, Ph.D., Professor, Department of Biological Sciences, Stanford University. Dr. Jones has been involved in research on the biochemistry and molecular biology of MHC II molecules. Harden McConnell, Ph.D., Robert Eckels Swain Professor and Chairman of the Department of Chemistry, Stanford University. Dr. McConnell has been involved in research on the properties, structure and functioning of cell membrane components including MHC II proteins. He is also a director of the Company. Subramaniam Sriram, M.D., Professor of Neurology, Vanderbilt University Medical Center. Dr. Sriram's research efforts are directed towards elucidating immunological mechanisms of autoimmune diseases of the central nervous system. He has been involved in advancing the concept that MHC II molecules and helper T cells are necessary parts of the pathology of autoimmune diseases. The Company believes it has a good working relationship with its Scientific Advisory Board. Communication with many members of the Scientific Advisory Board takes place on a regular basis and in some cases at least weekly. In accordance with consulting agreements the Company has with these advisors, information conveyed to the Company as part of the consulting activity is the property of the Company. Should scientific discoveries be made by a member of the Scientific Advisory Board in conjunction with other research at another institution rather than while acting as a consultant to the Company, that discovery would generally be owned by the researcher or that institution. If such a discovery were deemed to be helpful in the Company's own research, the Company would have to enter into a license agreement in order to utilize the discovery. The Company relies on its scientific advisors to assist the Company in formulating its research and development strategy. Retaining and attracting qualified advisors will be critical to the Company's success. Each of the scientific advisory Board members is paid $12,000 annually for his or her services. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. 36 39 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the directors and executive officers of the Company:
NAME AGE POSITION WITH THE COMPANY - ---------------------------------------------- --- -------------------------------------------- Barry M. Sherman, M.D. ....................... 55 President, Chief Executive Officer and Director John W. Varian................................ 37 Vice President, Finance and Chief Financial Officer Jeffrey L. Winkelhake, Ph.D. ................. 51 Vice President, Pharmaceutical Development Bruce L.A. Carter, Ph.D. ..................... 52 Director Nicholas J. Lowcock........................... 32 Director Harden M. McConnell, Ph.D. ................... 67 Director Harry H. Penner, Jr. ......................... 50 Director James E. Thomas............................... 36 Director Nicole Vitullo................................ 39 Director
BARRY M. SHERMAN, M.D., joined the Company as President and Chief Executive Officer and as a director in May 1996. Dr. Sherman previously served as Senior Vice President and Chief Medical Officer at Genentech, Inc. ("Genentech"), a biotechnology company. Dr. Sherman joined Genentech in 1985, and while there served as a member of the Operations Committee and was responsible for the company's overall clinical development activities. Since 1986, Dr. Sherman has also been a Clinical Professor of Internal Medicine at Stanford University. From 1971 to 1985, Dr. Sherman was a Professor of Internal Medicine, Director of the Clinical Research Center and Associate Chairman of the Department of Internal Medicine at the University of Iowa College of Medicine. Dr. Sherman received his M.D. in 1966 from the University of Michigan. JOHN W. VARIAN joined the Company as Vice President, Finance and Chief Financial Officer in August 1991. Prior to joining the Company, and since 1987, Mr. Varian was a Senior Manager with Ernst & Young LLP. Mr. Varian is a certified public accountant and received his BBA from Western Michigan University. JEFFREY L. WINKELHAKE, PH.D., joined the Company in April 1993 as Vice President, Pharmaceutical Development. Prior to joining the Company, Dr. Winkelhake served for three years as Director of Program Management at Cytel Corporation, a biotechnology company. Prior to that, he served for over six years as Director of Pharmacology at Cetus Corporation, also a biotechnology company. From 1976 to 1984, Dr. Winkelhake was a Professor of Microbiology at the Medical College of Wisconsin. Dr. Winkelhake received his Ph.D. in Immunochemistry/Pharmacology from the University of Illinois. BRUCE L. A. CARTER, PH.D., has served as a director of the Company since February 1994. Since 1994 Dr. Carter has served as Corporate Executive Vice President and Chief Scientific Officer of Novo Nordisk, a pharmaceutical and bio-industrial company. From 1988 to 1995, Dr. Carter served as president of ZymoGenetics, Inc., a biotechnology company that is a subsidiary of Novo Nordisk, and has served as its chairman since 1994. NICHOLAS J. LOWCOCK has served as a director of the Company since April 1995. Since August 1994, Mr. Lowcock has been an associate with E.M. Warburg, Pincus & Co., Inc., a venture financing firm. Prior to August 1994, Mr. Lowcock was a consultant with The Boston Consulting Group. HARDEN M. MCCONNELL, PH.D., has served as a director of the Company since May 1989. Dr. McConnell has been a Professor of Chemistry at Stanford University since 1964 and became Chairman of the Department of Chemistry in 1989. He is also a member of the Company's Scientific Advisory Board. 37 40 HARRY H. PENNER, JR. has served as a director of the Company since August 1993. Since December 1993, Mr. Penner has been President and Chief Executive Officer of Neurogen Corporation, a neuropharmaceutical company. From 1985 to December 1993, Mr. Penner was Executive Vice President of Novo Nordisk and, beginning in 1988, President of Novo Nordisk of North America, a subsidiary of Novo Nordisk. JAMES E. THOMAS has served as a director of the Company since April 1995. Since 1989, Mr. Thomas has been employed by E.M. Warburg, Pincus & Co., Inc., a venture financing firm, where he currently serves as Managing Director. Prior to 1989, Mr. Thomas was a Vice President of Goldman Sachs International in London. Mr. Thomas is also a director of Celtrix Pharmaceuticals, Inc., Menley & James Laboratories, Inc. and a number of privately held companies. NICOLE VITULLO has served as a director of the Company since April 1995. Ms. Vitullo is an Investment Advisor for Rothschild Asset Management, Ltd., a manager of two publicly traded biotechnology funds, Biotechnology Investments Limited and IBT. Prior to joining Rothschild in 1992, Ms. Vitullo was a Director of Corporate Communications and Investor Relations at Cephalon, Inc., a neuropharmaceutical company. Prior to 1992, Ms. Vitullo was Manager of Healthcare Investments for Eastman Kodak, Co. Ms. Vitullo is also a director of Cytel Corporation. Directors are elected annually and hold office until their successors are elected and qualified, or until their earlier removal or resignation. Bruce L. A. Carter, Ph.D. was nominated to the Board pursuant to rights held by Novo Nordisk under the Novo Nordisk common stock purchase agreement. Nicholas J. Lowcock and James E. Thomas were nominated to the Board pursuant to rights held by Warburg under the Warburg/IBT Purchase Agreement, and Nicole Vitullo was nominated to the Board pursuant to rights held by IBT under the Warburg/IBT Purchase Agreement. See "Business -- Collaborative Arrangements" and "Certain Transactions." There are no family relationships among the directors or executive officers of the Company. BOARD COMMITTEES The Board of Directors has a Compensation Committee and an Audit Committee. The Compensation Committee makes recommendations to the Board concerning salaries and incentive compensation for the Company's officers and employees. The Audit Committee reviews the results and scope of the audit and other accounting and related services and reviews and evaluates the Company's internal control functions. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board of Directors consists of directors Messrs. Penner and Thomas and Ms. Vitullo. The Compensation Committee makes recommendations to the Board of Directors concerning salaries and incentive compensation for employees of and consultants to the Company, except that the Compensation Committee has full power and authority to grant stock options to the Company's executive officers under the Company's 1988 Stock Plan. No director or executive officer of the Company has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity. In addition, Mr. Thomas and Ms. Vitullo are affiliates of Warburg and IBT, respectively, and were nominated to the Board of Directors pursuant to the Warburg/IBT Purchase Agreement. Mr. Carter is an officer of Novo Nordisk and was nominated to the Board of Directors pursuant to the Novo Nordisk common stock purchase agreement. See "Certain Transactions." EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS In May 1996, the Company entered into an employment agreement with Dr. Barry M. Sherman effective in May 1996 providing for a base salary of $250,000 per year and an option to purchase 400,000 shares of Common Stock at an exercise price of $3.75 per share subject to a four-year vesting schedule. The term of Dr. Sherman's employment agreement is through May 2000, subject to extension by mutual agreement of both parties and subject to voluntary termination by Dr. Sherman and earlier termination by the Company with or without cause. If the Company terminates Dr. Sherman without cause or constructively terminates Dr. Sherman, Dr. Sherman is entitled to twelve months severance pay and accelerated vesting of the lesser of the unvested portion or one-quarter of the options referred to above (or the lesser of the unvested portion or one- 38 41 half of such options if the termination occurs after a change of control). At the end of twelve months, Dr. Sherman is eligible to receive a performance bonus of up to twenty-five percent of his annual salary based on full or partial completion of certain goals established by mutual agreement of Dr. Sherman and the Board of Directors. In February 1996, the Company entered into an agreement with John W. Fara, Ph.D., the Company's former President and Chief Executive Officer, regarding his retirement from the Company. On May 31, 1996, Dr. Fara formally resigned as President and Chief Executive Officer and as a director of the Company. Dr. Fara will serve the Company on a part-time employment basis. Under the agreement, Dr. Fara continues to receive a salary at an annual rate of $250,000 for a period of twelve months. Dr. Fara is also eligible for bonuses for each substantial development or license agreement that the Company enters into with certain third parties or in the event of a sale of all or substantially all the Company's assets, merger or consolidation of the Company with any other corporation or the acquisition of 40% or more of the Company's outstanding Common Stock before November 30, 1996. Dr. Fara's stock options continue to vest as long as he is employed on a part-time basis and when he is no longer an employee all options to acquire shares of the Company's Common Stock which were unvested as of such date become fully exercisable. The 1995 Director Option Plan provides that upon a change in control of the Company, the unvested portion of all outstanding options under such Plan shall become immediately exercisable. The 1988 Stock Option Plan and the 1992 Consultant Stock Plan, each provides that in the event of a change in control of the Company, outstanding stock options and stock purchase rights under such Plans shall be assumed or equivalent options or rights shall be substituted by the successor entity. If such successor corporation does not agree to such assumption or substitution, the Company's Board of Directors must provide for such options or rights to become immediately exercisable in full. There are no other compensatory plans or arrangements with respect to an executive officer that will result in payments upon resignation, retirement, or any other termination of such executive officer's employment or from a change of control of the Company. EXECUTIVE COMPENSATION The following table sets forth the compensation paid by the Company for each of the three years in the period ended December 31, 1995 to the Chief Executive Officer and each other executive officer of the Company (the "Named Executive Officers"). In May 1996, Dr. Sherman became President and Chief Executive Officer and Dr. Fara resigned from such positions. See "-- Employment Agreements and Change of Control Arrangements." SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------- ANNUAL COMPENSATION AWARD OF ------------------- OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) (# OF SHARES) COMPENSATION(3) - -------------------------------------- ---- -------- -------- ------------- --------------- John W. Fara, Ph.D.................... 1995 $240,000 $50,000 225,000(2) $ 5,674 President and Chief Executive 1994 225,000 -- -- 6,774 Officer 1993 205,000 40,000 50,000 6,668 John W. Varian........................ 1995 135,000 45,000 130,740(2) 3,520 Vice President, Finance and 1994 125,000 -- -- 3,882 Chief Financial Officer 1993 109,792 20,000 12,500 3,592 Jeffrey L. Winkelhake, Ph.D........... 1995 145,000 45,000 130,000(2) 3,719 Vice President, Pharmaceutical 1994 135,000 -- -- 2,948 Development 1993(4) 89,154 20,000 75,000 6,705
- --------------- (1) Represents payments for achievements of corporate objectives in 1995 and 1993, as applicable. (2) Option awards in 1995 include 75,000, 55,000 and 55,000 shares subject to incentive options related to 1995 officer compensation and 150,000, 75,740 and 75,000 shares subject to incentive options issued to 39 42 replace options forfeited by Dr. Fara, Mr. Varian and Dr. Winkelhake, respectively, in conjunction with the elective extension of exercise periods for options granted prior to February 1995. (3) Amounts included in "All Other Compensation" for 1995 include Company matching contributions to the Anergen Retirement Savings Plan ("401(k) Contributions"), payments by the Company on term life insurance policies ("Life Insurance Payments"), and relocation expenses. Specifically, the amount stated for Dr. Fara in 1995 consists of 401(k) Contributions of $3,720 and Life Insurance Payments of $1,954; the amount stated for Mr. Varian in 1995 consists of 401(k) Contributions of $2,362 and Life Insurance Payments of $1,158; and the amount stated for Dr. Winkelhake in 1995 consists of 401(k) Contributions of $2,900 and Life Insurance Payments of $819. (4) Dr. Winkelhake joined the Company in April 1993. In February 1995, executive officers, employees and consultants had the option to elect to extend the option exercise period for stock options granted prior to February 1995 by four years. Elections to extend 555,113 options were made. The following table sets forth each grant of stock options made during the year ended December 31, 1995 to each executive officer, including 150,000, 75,740 and 75,000 shares subject to incentive options issued to replace options forfeited by Dr. Fara, Mr. Varian and Dr. Winkelhake, respectively, in conjunction with the elective extension of exercise periods for options granted prior to February 1995: OPTION GRANTS IN FISCAL 1995
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ---------------------------------------------------- VALUE AT ASSUMED ANNUAL NUMBER OF % OF TOTAL RATES OF STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR OPTION UNDERLYING GRANTED TO TERM(3) OPTIONS EMPLOYEES EXERCISE OR EXPIRATION ----------------------- NAME GRANTED(1) IN 1995 BASE PRICE(2) DATE 5% 10% - -------------------------------- ---------- ---------- ------------- ---------- ---------- ---------- John W. Fara, Ph.D.............. 100,000 11.9% $9.00 10/14/01 $ 0 $ 0 50,000 6.0 5.50 12/28/02 24,009 139,102 75,000 9.0 2.75 03/17/04 288,236 545,346 John W. Varian.................. 38,240 4.6 2.00 08/16/00 130,941 185,260 25,000 3.0 9.00 10/14/01 0 0 12,500 1.5 5.50 12/28/02 6,002 34,776 25,000 3.0 2.75 03/17/04 96,079 181,782 30,000 3.6 3.25 12/13/04 100,294 203,138 Jeffrey L. Winkelhake, Ph.D..... 50,000 6.0 7.75 04/07/02 0 26,602 25,000 3.0 5.50 12/28/02 12,004 69,551 30,000 3.6 2.75 03/17/04 115,294 218,138 25,000 3.0 3.25 12/13/04 83,579 169,282
- --------------- (1) The listed options become exercisable as to 1/48th of the shares subject to the option at the end of each month after the date of grant, with full vesting occurring four years after the date of grant. Under the terms of the Company's 1988 Incentive Stock Plan, the Board of Directors retains discretion, subject to plan limits, to modify the terms of outstanding options and to reprice the options. (2) The exercise price and tax withholding obligations related to exercise may in some cases, be paid by delivery of other shares or by offset of the shares subject to the options. (3) The dollar amounts under these columns are the result of calculations at the 5% and 10% rates set by the SEC and therefore are not intended to forecast the possible future appreciation, if any, of the Company's stock price. The Company did not use an alternative formula for a grant date valuation, as the Company does not believe that any formula will determine with reasonable accuracy a present value based on future unknown or volatile factors. 40 43 The following table sets forth, for each of the executive officers, each exercise of stock options during the year ended December 31, 1995 and the year-end value of unexercised options: AGGREGATED OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR-END VALUES
NUMBER OF SECURITIES VALUE(2) OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT ACQUIRED ON VALUE OPTIONS AT YEAR-END YEAR-END NAME EXERCISE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ------------------------------- ----------- ----------- ------------------------- ------------------------- John W. Fara, Ph.D. ........... 157,000 $ 280,889 150,220/106,780 $148,588/$91,413 John W. Varian................. 0 0 68,967/61,773 $93,074/$60,467 Jeffrey L. Winkelhake, Ph.D. ....................... 0 0 51,471/78,529 $8,438/$61,563
- --------------- (1) Based on the closing price of the Company's Common Stock on the date of exercise. (2) Based on a fair market value of $4.25 which was the closing price of the Company's Common Stock on December 29, 1995. INCENTIVE STOCK PLANS 1991 Employee Stock Purchase Plan. The Company's 1991 Employee Stock Purchase Plan (the "Purchase Plan") is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The Purchase Plan was amended by the Board in March 1996 and such amendment was approved by shareholders in June 1996 to increase the number of shares available for issuance thereunder to a total of 250,000 shares. Under the Purchase Plan, the Company withholds a specified percentage of each salary payment to participating employees over certain offering periods. Unless the Board of Directors or its committee determines otherwise, each offering period runs for 24 months and is divided into four consecutive purchase periods of six months each. The Purchase Plan expires by its terms in 2011. The price at which stock is purchased under the Purchase Plan is equal to 85% of the fair market value of the Common Stock on the first day of the applicable offering period or the last day of the applicable purchase period, whichever is lower. To the extent permitted by Rule 16b-3, if the purchase price of the Common Stock at the end of a purchase period in any offering period is lower than the purchase price at the beginning of that offering period, then all participants in that offering period are automatically withdrawn from that offering period immediately after the exercise of their options and automatically re-enrolled in the immediately following offering period. As of May 31, 1996, a total of 133,079 shares of Common Stock have been issued to employees at an aggregate purchase price of $453,909 and a weighted average purchase price of $3.41 per share pursuant to offerings under the Purchase Plan and 116,921 shares remained available for future issuance under the Purchase Plan. 1988 Stock Option Plan. A total of 1,800,000 shares of the Company's Common Stock has been reserved for issuance under the Company's 1988 Stock Option Plan (the "Option Plan") adopted by the Board of Directors in 1988 and amended in 1990, 1991, 1992 and 1995. The Option Plan expires by its own terms in 1998. As of May 31, 1996, options to purchase 1,259,815 shares were outstanding at a weighted average exercise price of $4.76 per share, and options to purchase 417,457 shares had been exercised and 122,728 shares remained available for the grant of options. The Option Plan provides for the grant of "incentive stock options" within the meaning of Section 422 of the Code and nonqualified stock options to employees, directors and consultants of the Company. Incentive stock options may be granted only to employees. The Option Plan is administered by the Board of Directors, which determines the terms of options granted, including the exercise price, the number of shares subject to the option, and the option's exercisability. Options granted to employees are generally immediately exercisable, but typically vest at the rate of 6/48ths of the shares after six months and an additional 1/48th of the shares per month thereafter. The Option Plan requires that the exercise price of incentive stock options must be at least equal to the fair market value of such shares on the date of grant and the exercise price of nonqualified stock options must be at least 85% of the fair market value of such shares on the date of the grant. 41 44 The maximum term of options granted under the Option Plan is ten years. With respect to any participant who owns stock possessing more than 10% of the voting rights or value of the Company's outstanding capital stock, the exercise price of any option must be at least equal to 110% of the fair market value of such shares on the date of grant and the term may be no longer than five years. In the event of certain mergers of the Company with other entities, transfers of voting control of the Company's capital stock or sales of all or substantially all of the Company's assets, the Company will request that the acquiring entity assume the Company's rights and obligations under the Option Plan or provide similar options in substitution therefor. If the acquiring entity chooses not to assume such rights and obligations or provide substitute options, then the Company's Board of Directors will cause all outstanding options (together with shares purchased upon exercise thereof) to become fully vested prior to the event causing such acceleration and all unexercised options will terminate upon completion of such event. 1995 Director Option Plan. A total of 200,000 shares of the Company's Common Stock has been reserved for issuance under the Company's 1995 Director Option Plan (the "Director Plan"), adopted by the Board of Directors in 1995. The Director Plan expires by its own terms in 2005. At May 31, 1996, options to purchase 20,000 shares were outstanding at a weighted average exercise price of $3.72 per share and no options had been exercised. The Director Plan provides for the grant of "nonstatutory options" to non-employee directors of the Company. The Director Plan is administered by the Board of Directors. All grants of options under the Director Plan are automatic and non-discretionary pursuant to the terms of the Director Plan. Each non- employee director is automatically granted a nonstatutory option to purchase 25,000 shares of Common Stock on the date such person first becomes a director (provided that non-employee directors who were directors on the effective date of the Director Plan were granted a nonstatutory option to purchase 5,000 shares in lieu of such grant). On the first day of each fiscal year thereafter, each incumbent non-employee director will automatically be granted a nonstatutory option to purchase 5,000 shares of Common Stock (provided such person has served on the Board at least six months). Options granted to directors are generally immediately exercisable, but typically vest at the rate of 1/48th of the shares per month after the date of grant. The Director Plan requires that the exercise price of nonstatutory stock options is equal to the fair market value of such shares on the date of grant. The term of options granted under the Director Plan is ten years. In the event of certain mergers of the Company with other entities, transfers of voting control of the Company's capital stock or sales of all or substantially all of the Company's assets, all outstanding options shall become fully vested. As of May 31, 1996, only Dr. Harden McConnell and Mr. Harry H. Penner, Jr. participated in the Director Plan. 1992 Consultant Stock Plan. A total of 50,000 shares of the Company's Common Stock has been reserved for issuance under the Company's 1992 Consultant Stock Plan (the "Consultant Plan") adopted by the Board of Directors in 1992. The Consultant Plan expires by its term in 2002. The Consultant Plan permits the Company to grant "nonstatutory options" (or bonus shares) to consultants who are not directors or officers of the Company. The Board of Directors (or a committee thereof) administers the plan and determines, among other things, the individuals to whom options should be granted and the terms of options granted, including exercise price, the number of shares subject to the option and the option's exercisability. In the event of a merger of the Company with another entity or the sale of all or substantially all of the Company's assets, the Company will request that the acquiring entity assume the Company's rights and obligations under the Consultant Plan or provide similar options in exchange for outstanding options. If the acquiring entity chooses not to assume such rights and obligations or provide substitute options, then the Company's Board of Directors will make such options fully exercisable for a period of fifteen days after notice to the holders, after which time the options will terminate. At May 31, 1996, 17,465 shares had been issued and no options had been granted under the Consultant Plan. 42 45 401(k) PLAN In January 1992, the Company adopted a tax-qualified employee savings and retirement plan (the "401(k) Plan"), which generally covers all of the Company's full-time employees who have attained age 18. Pursuant to the 401(k) Plan, employees may elect to defer up to 15% of their current compensation (subject to certain statutorily prescribed limits, including an annual limit of $9,240 in 1995). These deferred amounts are contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, additional matching and Company contributions on behalf of participants. Since the Plan's inception, the Company has contributed an amount equal to 50% of each participant's contribution for up to 4% of their eligible compensation. The 401(k) Plan is intended to qualify under Sections 401(k) and 401(a) of the Code. Contributions to such a qualified plan are deductible to the Company when made and neither the contributions nor the income earned on those contributions is taxable to participants until withdrawn. All 401(k) Plan contributions are credited to separate accounts maintained in trust by two individual trustees. Contributions are invested, at the participant's direction, in one or more of the investment funds available under the 401(k) Plan. All account balances are adjusted at least annually to reflect the investment earnings and losses of the trust fund. Each participant is fully vested in his or her salary deferral accounts under the 401(k) Plan. Distributions may be made from a participant's account pursuant to the 401(k) Plan's hardship withdrawal provisions as well as upon a participant's termination of employment, disability or attainment of age 59 1/2. Distributions will be in the form of a lump sum, installment payments or an annuity, in the participant's discretion. Federal tax laws limit the amount that may be added to a participant's accounts for any one year under a qualified plan such as the 401(k) Plan to the lesser of (i) $30,000 or (ii) 25% of the participant's compensation (net of salary deferral contributions) for the year. LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION The Company's Articles of Incorporation and Bylaws provide for indemnification of the officers and directors of the Company to the full extent permitted by California law. The General Corporation Law of the State of California permits a corporation to limit, under certain circumstances, a director's liability for monetary damages in actions brought by or in the right of the corporation. The Company's Articles of Incorporation also provide for the elimination of the liability of directors for monetary damages to the full extent permitted by law. The Company has entered into agreements to indemnify its directors and officers in addition to the indemnification provided for in the Articles of Incorporation and Bylaws. These agreements will, among other things, indemnify the Company's directors and officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred in any action or proceeding, including any action by or in the right of the Company, on account of services as a director or officer of any other enterprise to which the person provides services at the request of the Company. The Company believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. The Company currently maintains a directors' and officers' insurance policy. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Company as to which indemnification is sought, nor is the Company aware of any threatened litigation or proceeding that may result in claims for indemnification. 43 46 CERTAIN TRANSACTIONS In March 1995, the Company, Warburg and IBT (collectively, the "Purchasers") entered into the Warburg/IBT Purchase Agreement pursuant to which the Purchasers agreed to purchase 7,317,073 shares of Common Stock from the Company for approximately $15 million. This transaction was approved by the Company's shareholders and was completed on April 13, 1995. The Purchasers have the right at any time after October 13, 1997 to request the Company to effect a registration of at least 30% of the aggregate number of shares held by the requesting Purchaser or any lesser percentage if the aggregate net offering price would exceed $1,000,000. The Purchasers also have the right to have their shares included in a registration by the Company of its securities for its own account or the account of any of its shareholders. The Purchasers have certain rights of representation on the Company's Board of Directors based on certain minimum levels of ownership of the Company's Common Stock. Under the Warburg/IBT Purchase Agreement, the Company is currently obligated to include in the slate of nominees recommended by the Board of Directors and management at each election of directors two candidates selected by Warburg, one candidate selected by IBT and one candidate as mutually agreed to by IBT and Warburg. Upon the closing of this transaction, the Board of Directors appointed to the Board to fill vacancies two new members representing Warburg, Mr. Nicholas J. Lowcock and Mr. James E. Thomas, and one new member representing IBT, Ms. Nicole Vitullo. These three individuals have been reelected to the Board at the annual meeting of shareholders in June 1996. Mr. Thomas and Ms. Vitullo are affiliates of Warburg and IBT, respectively. It is expected that during the next fiscal year IBT and Warburg may identify an appropriate industry representative for nomination to the Board pursuant to their right to mutually designate such candidate under the Warburg/IBT Purchase Agreement. In March 1996, the Company and Novo Nordisk agreed to expand their collaborative research and development agreement to establish certain milestones for products developed under the agreement targeting IDDM and to extend the term of the development program by an additional two-year period through August 1998. See "Business -- Collaborative Arrangements -- Novo Nordisk A/S." Bruce L.A. Carter, the Corporate Executive Vice President and Chief Scientific Officer of Novo Nordisk, has served as a director of the Company since February 1994 pursuant to rights under the Novo Nordisk Purchase Agreement. In May 1996, the Company entered into an employment agreement with Dr. Barry M. Sherman, President and Chief Executive Officer and a director of the Company. In February 1996, the Company entered into an agreement with John W. Fara, Ph.D., the Company's former President and Chief Executive Officer. See "Management -- Employment Agreements and Change of Control Arrangements." 44 47 PRINCIPAL STOCKHOLDERS The following table sets forth information known to the Company with respect to the beneficial ownership of the Common Stock as of April 30, 1996, and as adjusted to reflect the sale of Common Stock offered hereby, for (i) each person who is known by the Company to own beneficially more than 5% of the Common Stock, (ii) each of the Company's directors, (iii) each executive officer named in the Summary Compensation Table and (iv) all directors and executive officers as a group.
NO. OF SHARES PERCENTAGE(2) BENEFICIALLY -------------------------------------- NAME(1) OWNED % BEFORE OFFERING % AFTER OFFERING - ------------------------------------------------- ------------- ----------------- ---------------- Warburg, Pincus Ventures, L.P.(3)................ 4,878,049 32.4% 25.6% 466 Lexington Avenue New York, NY 10017 Warburg, Pincus & Co.(4)......................... 4,878,049 32.4% 25.6% 466 Lexington Avenue New York, NY 10017 International Biotechnology Trust PLC............ 2,439,024 16.2% 12.8% Five Arrows House St. Swithin's Lane London, EC4N 8NR England Novo Nordisk A/S................................. 1,219,745 8.1% 6.4% Novo Alle 2880 Basgvaerd Denmark John W. Fara, Ph.D.(5)........................... 347,212 2.3% 1.8% Barry M. Sherman, M.D.(6)........................ 16,667 * * John W. Varian(7)................................ 100,350 * * Jeffrey Winkelhake, Ph.D.(8)..................... 64,349 * * Bruce L.A. Carter, Ph.D.(9)...................... 1,219,745 8.1% 6.4% Harden M. McConnell, Ph.D.(10)................... 37,776 * * Harry H. Penner, Jr.(11)......................... 22,502 * * James E. Thomas(12).............................. 4,878,049 32.4% 25.6% Nicholas J. Lowcock(13).......................... 0 -- -- Nicole Vitullo(14)............................... 0 -- -- All directors and officers as a group (10 persons)(15)................................... 6,686,650 43.4% 34.5%
- --------------- * Represents less than 1% of the outstanding Common Stock. (1) The persons named in the table, to the Company's knowledge, have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes hereunder. (2) Applicable percentage of ownership is based on 15,063,180 and 19,063,180 shares of Common Stock outstanding as of April 30, 1996 before and after the proposed offering, respectively, on a pro forma basis, together with applicable options and warrants held by such stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting and investment power with respect to shares. Shares of Common Stock subject to options exercisable within 60 days of April 30, 1996 are deemed outstanding for computing the percentage ownership of the person holding such options, but are not deemed outstanding for computing the percentage ownership of any other person. (3) The sole general partner of Warburg, Pincus Ventures, L.P. ("Warburg") is Warburg, Pincus & Co., a New York general partnership ("WP"). Lionel I. Pincus is the managing partner of WP and may be deemed to control it. E.M. Warburg, Pincus & Company, a New York general partnership 45 48 ("E.M. Warburg"), manages Warburg. WP has a 15% interest in the profits of Warburg as the general partner, and also owns approximately 1.5% of the limited partnership interests in Warburg. (4) Represents shares held by Warburg. As the sole general partner of Warburg (as described in footnote 3 above), WP may be deemed to be a beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934) of the shares held by Warburg. (5) Includes 146,342 shares subject to options exercisable within 60 days of April 30, 1996. (6) Includes 16,667 shares subject to options exercisable within 60 days of April 30, 1996. Dr. Sherman joined the Company as President and Chief Executive Officer and as a director of the Company in May 1996. (7) Includes 81,571 shares subject to options exercisable within 60 days of April 30, 1996. (8) Includes 63,142 shares subject to options exercisable within 60 days of April 30, 1996. (9) Includes 1,219,745 shares held by Novo Nordisk, of which Dr. Carter is an executive officer. Dr. Carter disclaims beneficial ownership of these shares. (10) Includes 14,376 shares subject to options exercisable within 60 days of April 30, 1996. (11) Includes 17,502 shares subject to options exercisable within 60 days of April 30, 1996. (12) Represents shares held by Warburg. Mr. Thomas, a director of the Company, is a Managing Director of E.M. Warburg, Pincus & Co., Inc., a wholly-owned subsidiary of WP ("EMW"), and a general partner of WP and E.M. Warburg. As such, Mr. Thomas may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under the Securities Exchange Act of 1934) in an indeterminate portion of the shares beneficially owned by Warburg and WP. Mr. Thomas disclaims beneficial ownership of these shares within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934. (13) Does not include shares held by Warburg. Mr. Lowcock is employed by EMW and is a director of the Company. Mr. Lowcock disclaims beneficial ownership of the shares held by Warburg and WP. (14) Does not include shares held by IBT. Ms. Vitullo, a director of the Company, is an employee of Rothschild, Inc., a corporation affiliated with Rothschild Asset Management, Ltd., investment manager for IBT. Ms. Vitullo disclaims beneficial ownership of the shares of IBT. (15) Includes 339,600 shares subject to options exercisable within 60 days of April 30, 1996. Reflects the shares of Warburg of which Mr. Thomas may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 of the Securities Exchange Act of 1934) and the shares of Novo Nordisk of which Dr. Carter is an executive officer. Does not reflect beneficial ownership of Mr. Lowcock of Warburg and Ms. Vitullo of IBT who each disclaim beneficial ownership of the shares held by their respective entities. Also includes shares beneficially held by Dr. Sherman, who joined the Company as President and Chief Executive Officer and as a director in May 1996. 46 49 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 40,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. At May 31, 1996, there were 15,066,042 shares of Common Stock outstanding, held by 375 shareholders of record. At May 31, 1996, options to purchase an aggregate of 1,279,815 shares and warrants to purchase an aggregate of 459,015 shares of Common Stock were outstanding. See "Management -- Incentive Stock Plans" and "Certain Transactions." COMMON STOCK Each holder of Common Stock is entitled to one vote for each share held. The holders of Common Stock, voting as a single class, are entitled to elect all of the directors. Although California law generally permits holders of Common Stock to cumulate votes for the election of directors upon giving notice as required by law, the Articles of Incorporation provide, as permitted by California law, that the right to cumulate votes will be eliminated if the Company has at least 800 holders of its equity securities as of the record date of the Company's most recent annual meeting of shareholders. The Company believes it has more than 800 shareholders. The elimination of cumulative voting will have the effect of making it more difficult for a minority shareholder to elect a member of the board of directors because while an owner of just over 15% of the outstanding shares could currently elect a director, after the elimination of cumulative voting, more than 50% ownership of the Company is required to guarantee election of a director. The Common Stock is not convertible into any other security. Holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock would be entitled to share in the Company's assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted the holders of any outstanding shares of Preferred Stock. The Common Stock has no preemptive or other subscription rights. The outstanding shares of Common Stock are, and the Common Stock offered hereby will be when issued, fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority, without further action by shareholders, to issue up to 10,000,000 shares of Preferred Stock in one or more series, and to fix the designations, rights, preferences, privileges, qualifications and restrictions thereof, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of the Common Stock. The Board of Directors, without shareholder approval, can issue Preferred Stock with voting, conversion and other rights which could adversely affect the voting power and other rights of the holders of Common Stock. Preferred Stock could thus be issued quickly with terms calculated to delay or prevent a change in control of the Company or to make removal of management more difficult. In certain circumstances, such issuance could have the effect of decreasing the market price of the Common Stock. The issuance of Preferred Stock may have the effect of delaying, deterring or preventing a change in control of the Company without any further action by the shareholders. The Company has no present plan to issue any shares of Preferred Stock. WARRANTS In connection with its initial public offering on October 10, 1991, the Company sold warrants to the underwriters of its initial public offering (the "Representative's Warrants") to purchase from the Company up to 196,656 shares of Common Stock at an exercise price per share equal to $5.98 per share, subject to adjustment. The Representative's Warrants are exercisable until October 9, 1996, and are not transferable except to officers of the Representative and certain successors in interest of the Representative. In addition, the Company has granted certain rights to the holders of the Representative's Warrants to register the Common Stock underlying the Representative's Warrants under the Securities Act. 47 50 In connection with a facilities and equipment financings, the Company issued warrants to purchase 16,919 and 8,577 shares of Common Stock at $9.93 and $5.83, respectively, subject to adjustment ("MMC Warrants"). The 16,919 share MMC Warrant is exercisable at any time until December 29, 1999 and the 8,577 share MMC Warrant is exercisable at any time until December 30, 2000. In connection with a Securities Purchase Agreement entered into on May 11, 1994 (the "1994 Purchase Agreement"), the Company issued warrants to a group of private investors to purchase 236,863 shares of the Company's Common Stock at an exercise price of $3.52 per share, subject to adjustment. These warrants are exercisable at any time until June 30, 1997. The Company may redeem the warrants after June 30, 1996 if the closing price of the Company's Common Stock as quoted on the Nasdaq National Market exceeds the exercise price by 150% for ten days within a period of 20 consecutive trading days. REGISTRATION RIGHTS OF CERTAIN HOLDERS Warburg and IBT (collectively the "Purchasers"), who in the aggregate hold 7,317,073 shares of Common Stock, are entitled to certain rights with respect to the registration of such shares under the Securities Act. These rights are provided under the terms of the Warburg/IBT Purchase Agreement. Subject to certain limitations in the agreement, the Purchasers have the right at any time after October 13, 1997 to request the Company to effect a registration of at least 30% of the aggregate number of shares held by the requesting Purchaser or any lesser percentage if the aggregate net offering price would exceed $1,000,000. The Purchasers also have the right to have their shares included in a registration by the Company of its securities for its own account or the account of any of its shareholders. The MMC Warrants grant the holders thereof registration rights which are in pari passu with certain registration rights of the holders of Registrable Securities. If the Company registers any of its Common Stock either for its own account or for the account of other security holders, the holders of the MMC Warrants are entitled to include the shares issuable upon exercise of such MMC Warrants in the registration, subject to the ability of the underwriters to limit the number of shares included in the offering and provided that the Company does not in good faith determine that the incremental cost and effort in so doing is significant. Additionally, the Representative's Warrants provide certain rights with respect to the registration under the Securities Act of the 196,656 shares issuable upon exercise thereof (the "Warrant Shares"). The holders of at least 50% of the Warrant Shares may require on one occasion that the Company use its best efforts to register the Warrant Shares for public resale. Until October 9, 1996, if the Company registers any of its Common Stock either for its own account for the account of other security holders, the holders of the Warrant Shares are entitled to include their shares of Common Stock in the registration. Novo Nordisk has the right at any time after August 17, 1996 to require that the Company use its best efforts to register any shares of Common Stock held by Novo Nordisk for public resale. The right is provided under the Novo Nordisk common stock purchase agreement. Novo Nordisk may require the Company on no more than one occasion every six months to effect such a registration. Novo Nordisk must bear all of the out-of-pocket expenses incurred by the Company in connection with such a registration unless Form S-3 is not available, in which case the Company shall bear all registration expenses. The Company, however, shall not be required to effect such registration if in the reasonable opinion of counsel, Novo Nordisk's shares of Common Stock may be sold in the public market under the Securities Act without registration. Under the 1994 Purchase Agreement, $1.5 million was received by the Company from two purchasers in exchange for 413,965 shares of Common Stock and warrants to purchase an additional 236,863 shares of Common Stock at an exercise price of $3.52 per share, subject to adjustment. The Company is obligated to register at the Company's expense the 236,863 shares of Common Stock issuable upon exercise of such warrants if so requested by the warrant holders. Except as otherwise noted, all registration expenses must be borne by the Company and all selling expenses must be borne by the holders of the securities being registered. 48 51 TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Chemical Trust Company of California. SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of the Company's Common Stock in the public market by existing shareholders could adversely affect the market price of the Company's Common Stock. Upon the completion of this offering, the Company will have 19,066,042 shares of Common Stock outstanding, assuming no exercise of outstanding options or warrants after May 31, 1996. Approximately 18,652,077 of the shares (including the 4,000,000 shares sold in this offering) are eligible for immediate sale in the public market without restriction, although shares held by persons who may be deemed affiliates are subject to volume restrictions applicable to affiliates under Rule 144. As of May 31, 1996, 8,786,074 shares were held by persons who may be deemed affiliates under Rule 144. In addition, 1,279,815 shares of Common Stock were subject to options outstanding as of May 31, 1996, and 451,300 of these shares were fully vested. Upon exercise of the currently vested portion of such options, all shares will be eligible for immediate sale in the public market, subject to Rule 144 volume restrictions applicable to affiliates. As of May 31, 1996, there were 459,015 shares of Common Stock subject to warrants which, upon exercise of such warrants, may be freely tradeable pursuant to Rule 144 or as a result of registration pursuant to registration rights. The Commission has recently proposed to reduce the Rule 144 holding periods. If enacted, such modification will have a material effect on the timing of when shares of the Company's Common Stock become eligible for resale. The Company's directors, executive officers, certain principal stockholders, who in the aggregate hold 9,125,674 of the shares of Common Stock or securities convertible into Common Stock of the Company outstanding immediately prior to the completion of this offering, have entered into lock-up agreements under which they have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of, or agree to dispose of, directly or indirectly, any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into Common Stock owned by them for a period of 90 days after the date of this Prospectus, without the prior written consent of PaineWebber Incorporated. The Company has entered into a similar agreement, except that the Company may grant options and issue stock under its current stock option and stock purchase plans and pursuant to other currently outstanding options. See "Risk Factors -- Future Requirements for Significant Additional Capital." Upon expiration of the lock-up agreements, approximately 9,164,112 shares of Common Stock (including approximately 378,038 shares subject to outstanding vested options) will become eligible for immediate public resale, subject in some cases to vesting provisions and volume limitations pursuant to Rule 144. The number of shares sold in the public market could increase if holders subject to volume restrictions exercise their registration rights. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least two years (including the holding period of any prior owner, except an affiliate) is entitled to sell in "broker's transactions" or to market makers, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of (i) one percent of the number of shares of Common Stock then outstanding (approximately 190,632 shares immediately after this offering) or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are generally subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least three years, is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Under Rule 701 under the Securities Act, persons who purchase shares upon exercise of options 49 52 granted prior to the effective date of this offering are entitled to sell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice provisions of Rule 144. See "Risk Factors -- Shares Eligible for Future Sale; Registration Rights." 50 53 UNDERWRITING The Underwriters named below, for whom PaineWebber Incorporated and Vector Securities International, Inc. are acting as Representatives (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement among the Company and the Representatives (the "Underwriting Agreement"), to purchase from the Company, and the Company has agreed to sell to the Underwriters, the number of shares of Common Stock set forth opposite each Underwriter's name in the following table.
NUMBER UNDERWRITER OF SHARES -------------------------------------------------------------------------- --------- PaineWebber Incorporated.................................................. Vector Securities International, Inc...................................... --------- Total........................................................... 4,000,000 =========
In the Underwriting Agreement, the several Underwriters have agreed, subject to certain conditions, to purchase all of the shares of Common Stock being sold pursuant to such Agreement (other than those covered by the over-allotment option described below), if any are purchased. The Underwriting Agreement provides that, in the event of a default by an Underwriter, in certain circumstances, the purchase commitments of non-defaulting Underwriters may be increased or the Underwriting Agreement may be terminated. The Company has been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public at the price to the public set forth on the cover page of this Prospectus, and in part to certain securities dealers (who may include Underwriters) at such price less a concession not in excess of $ per share and that the Underwriters and such dealers may reallow a discount not in excess of $ per share to the other dealers, including the Underwriters. After the closing of the public offering, the public offering price, the concession to selected dealers and the discounts to other dealers may be changed by the Representatives. The Company has granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, under which the Underwriters may purchase up to an additional 600,000 shares of Common Stock from the Company at the price to the public set forth on the cover page of this Prospectus less the underwriting discounts and commissions. The Underwriters may exercise the option solely for the purpose of covering over-allotments, if any. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as it was obligated to purchase pursuant to the Underwriting Agreement. The Company, its directors and officers and 5% or greater stockholders of the Company have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock, or rights to acquire shares of Common Stock, for a period of 90 days after the date of this Prospectus without the prior written consent of PaineWebber Incorporated. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. In connection with this offering, certain Underwriters may engage in passive market making transactions in the Common Stock on Nasdaq immediately prior to the commencement of sales in this offering, in accordance with Rule 10b-6A under the Exchange Act. Passive market making consists of displaying bids on Nasdaq limited by the bid prices of independent market makers for a security and making purchases of a security which are limited by such prices and effected in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the Common Stock during a specified prior period and must be discontinued when such 51 54 limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Shearman & Sterling, San Francisco, California. EXPERTS The financial statements of Anergen, Inc. at December 31, 1994 and 1995, and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. Portions of this Prospectus entitled "Risk Factors -- Uncertainty Relating to Patents and Proprietary Rights" and "Business -- Patents and Proprietary Rights," except for the second and ninth paragraphs thereof, have been reviewed and approved by Townsend and Townsend and Crew LLP, as experts in patent law, and are included herein in reliance upon their review and approval. ADDITIONAL INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy and information statements filed by the Company with the Commission pursuant to the informational requirements of the Exchange Act may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: New York Regional Office, 26 Federal Plaza, Room 1102, New York, New York 10007; and Chicago Regional Office, Everett McKinley Dirksen Building, 219 South Dearborn Street, Room 1204, Chicago, Illinois 60604. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. In addition, reports, proxy statements and other information concerning the Company (symbol: ANRG) can be inspected and copied at the offices of the Nasdaq National Market, Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006, on which the Common Stock of the Company is quoted. The Company has filed with the Commission a Registration Statement under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected without charge at the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from the Public Reference Section of the Commission upon the payment of the fees prescribed by the Commission. 52 55 INDEX TO FINANCIAL STATEMENTS
ITEM PAGE - -------------------------------------------------------------------------------------- ---- Report of Independent Auditors........................................................ F-2 Audited Financial Statements Balance Sheets at December 31, 1994 and 1995 and March 31, 1996 (unaudited)........... F-3 Statements of Operations for each of the three years in the period ended December 31, 1995 and the three months ended March 31, 1995 and 1996 (unaudited)................. F-4 Statement of Shareholders' Equity for each of the three years in the period ended December 31, 1995 and for the three months ended March 31, 1996 (unaudited)......... F-5 Statements of Cash Flows for each of the three years in the period ended December 31, 1995 and the three months ended March 31, 1995 and 1996 (unaudited)................. F-6 Notes to Financial Statements......................................................... F-7
F-1 56 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Anergen, Inc. We have audited the accompanying balance sheets of Anergen, Inc. as of December 31, 1994 and 1995, and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Anergen, Inc. at December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Francisco, California February 9, 1996 F-2 57 ANERGEN, INC. BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AMOUNTS) ASSETS
DECEMBER 31, --------------------- 1994 1995 -------- -------- MARCH 31, 1996 ----------- (UNAUDITED) Current assets: Cash and equivalents.................................... $ 1,248 $ 468 $ 310 Short-term investments.................................. 2,508 11,024 9,343 Contract receivables-related party...................... 592 815 783 Prepaid expenses........................................ 178 102 103 -------- -------- -------- Total current assets............................ 4,526 12,409 10,539 Property and equipment, net............................... 2,251 2,010 1,886 Other assets.............................................. 20 36 36 -------- -------- -------- $ 6,797 $ 14,455 $ 12,461 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities................ $ 977 $ 1,040 $ 889 Current portion of capital lease obligations and debt... 960 883 746 -------- -------- -------- Total current liabilities....................... 1,937 1,923 1,635 Long-term portion of capital lease obligations and debt... 990 818 636 Commitments Shareholders' equity: Preferred stock, no par value; 10,000,000 shares authorized; none issued and outstanding.............. -- -- -- Common stock, no par value; 40,000,000 shares authorized; 7,438,495 and 14,967,680 shares issued and outstanding at December 31, 1994 and 1995, respectively (15,029,430 shares at March 31, 1996 (unaudited))......................................... 32,572 47,359 47,400 Additional paid-in capital.............................. 648 648 648 Deferred compensation................................... (36) -- -- Unrealized gain (loss) on investments................... (91) 16 (18) Accumulated deficit..................................... (29,223) (36,309) (37,840) -------- -------- -------- Total shareholders' equity...................... 3,870 11,714 10,190 -------- -------- -------- $ 6,797 $ 14,455 $ 12,461 ======== ======== ========
See accompanying notes. F-3 58 ANERGEN, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEARS ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, ------------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- (UNAUDITED) Revenues: Contract revenues-related party........ $ 339 $ 2,325 $ 3,001 $ 551 $ 783 Interest income........................ 312 207 533 17 139 ------- ------- ------- ------- ------- Total revenues................. 651 2,532 3,534 568 922 ------- ------- ------- ------- ------- Expenses: Research and development............... 5,553 7,423 8,322 1,898 1,895 General and administrative............. 1,716 1,831 1,976 462 503 Interest expense....................... 226 238 322 71 55 ------- ------- ------- ------- ------- Total expenses................. 7,495 9,492 10,620 2,431 2,453 ------- ------- ------- ------- ------- Net loss................................. $(6,844) $(6,960) $(7,086) $(1,863) $(1,531) ======= ======= ======= ======= ======= Net loss per share....................... $ (1.12) $ (0.97) $ (0.55) $ (0.25) $ (0.10) ======= ======= ======= ======= ======= Shares used in calculating per share data................................... 6,118 7,202 12,859 7,527 14,984 ======= ======= ======= ======= =======
See accompanying notes. F-4 59 ANERGEN, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE AMOUNTS)
ADDITIONAL UNREALIZED TOTAL PREFERRED COMMON PAID-IN DEFERRED GAIN(LOSS) ON ACCUMULATED SHAREHOLDERS' STOCK STOCK CAPITAL COMPENSATION INVESTMENTS DEFICIT EQUITY --------- ------- ---------- ------------ -------------- ----------- ------------- BALANCE, DECEMBER 31, 1992....... $ -- $22,929 $648 $ (301) $ -- $ (15,419) $ 7,857 Issuance of 1,219,745 shares of common stock to Novo Nordisk A/S............................ -- 8,000 -- -- -- -- 8,000 Issuance of common stock to employees under option and purchase plans................. -- 175 -- -- -- -- 175 Amortization of deferred compensation................... -- -- -- 133 -- -- 133 Unrealized gain(loss) on investments available-for-sale............. -- -- -- -- (70) -- (70) Net loss......................... -- -- -- -- -- (6,844) (6,844) ----- ------- ---- ----- ---- -------- ------- BALANCE, DECEMBER 31, 1993....... -- 31,104 648 (168) (70) (22,263) 9,251 Issuance of 413,965 shares of common stock and 236,863 warrants to private investors, net............................ -- 1,370 -- -- -- -- 1,370 Issuance of common stock to employees under option and purchase plans................. -- 98 -- -- -- -- 98 Amortization of deferred compensation................... -- -- -- 132 -- -- 132 Unrealized gain(loss) on investments available-for-sale............. -- -- -- -- (21) -- (21) Net loss......................... -- -- -- -- -- (6,960) (6,960) ----- ------- ---- ----- ---- -------- ------- BALANCE, DECEMBER 31, 1994....... -- 32,572 648 (36) (91) (29,223) 3,870 Issuance of 7,317,073 shares of common stock in follow-on offering, net.................. -- 14,651 -- -- -- -- 14,651 Issuance of common stock to employees under option and purchase plans................. -- 136 -- -- -- -- 136 Amortization of deferred compensation................... -- -- -- 36 -- -- 36 Unrealized gain(loss) on investments available-for-sale............. -- -- -- -- 107 -- 107 Net loss......................... -- -- -- -- -- (7,086) (7,086) ----- ------- ---- ----- ---- -------- ------- BALANCE, DECEMBER 31, 1995....... -- 47,359 648 -- 16 (36,309) 11,714 Issuance of common stock to employees under option and purchase plans (unaudited)..... -- 41 -- -- -- -- 41 Unrealized gain(loss) on investments available-for-sale (unaudited).................... -- -- -- -- (34) -- (34) Net loss (unaudited)............. -- -- -- -- -- (1,531) (1,531) ----- ------- ---- ----- ---- -------- ------- BALANCE, MARCH 31, 1996 (UNAUDITED).................... $ -- $47,400 $648 $ -- $(18) $ (37,840) $10,190 ===== ======= ==== ===== ==== ======== =======
See accompanying notes. F-5 60 ANERGEN, INC. STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND EQUIVALENTS (IN THOUSANDS)
THREE MONTHS YEARS ENDED ENDED DECEMBER 31, MARCH 31, ------------------------------ ----------------- 1993 1994 1995 1995 1996 -------- -------- -------- ------- ------- (UNAUDITED) Cash used in operating activities: Net loss.................................... $ (6,844) $ (6,960) $ (7,086) $(1,863) $(1,531) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............ 711 781 1,031 191 267 Deferred compensation amortization....... 133 132 36 33 -- Loss on sale of equipment................ -- 4 -- -- -- Changes in operating assets and liabilities: Contract receivables-related party....... (339) (253) (223) 41 32 Prepaid expenses......................... (57) (50) 76 (50) (1) Other assets............................. (1) -- (16) (16) -- Accounts payable and accrued liabilities............................ (213) 10 63 31 (151) -------- -------- -------- ------- ------- Net cash used in operating activities........................ (6,610) (6,336) (6,119) (1,633) (1,384) Cash provided by (used in) investing activities: Purchase of investments available-for-sale....................... (19,214) (10,784) (30,172) (1,016) (1,554) Sales and maturities of investments available-for-sale....................... 17,695 16,654 21,763 2,683 3,201 Proceeds from sale of equipment............. -- 41 -- -- -- Purchase of equipment....................... (686) (1,386) (790) (68) (143) -------- -------- -------- ------- ------- Net cash provided by (used in) investing activities.............. (2,205) 4,525 (9,199) 1,599 1,504 Cash provided by financing activities: Repayments of capital lease obligations and debt..................................... (604) (688) (1,038) (231) (319) Proceeds from facility and equipment debt financing................................ 462 1,093 789 -- -- Issuance of common stock, net............... 8,175 1,468 14,787 36 41 -------- -------- -------- ------- ------- Net cash provided by financing activities........................ 8,033 1,873 14,538 (195) (278) -------- -------- -------- ------- ------- Net increase (decrease) in cash and equivalents................................. (782) 62 (780) (229) (158) Cash and equivalents at beginning of period... 1,968 1,186 1,248 1,248 468 -------- -------- -------- ------- ------- Cash and equivalents at end of period......... 1,186 1,248 468 1,019 310 Short-term investments at end of period....... 8,399 2,508 11,024 897 9,343 -------- -------- -------- ------- ------- Cash and short-term investments at end of period...................................... $ 9,585 $ 3,756 $ 11,492 $ 1,916 $ 9,653 ======== ======== ======== ======= =======
See accompanying notes. F-6 61 ANERGEN, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of business Anergen, Inc. (the "Company") was incorporated on April 26, 1988 for the purpose of developing therapies using biopharmaceutical compounds for the treatment of autoimmune diseases. The Company devotes its efforts to research and development on its own behalf and also, since September 1993, on behalf of its corporate partner, Novo Nordisk A/S. In the course of its activities, the Company has sustained continuing operating losses and expects such losses to continue. The Company plans to finance future operations with a combination of stock sales, payments from collaborative partnerships and licensing of certain technology and, in the longer term, revenues from product sales, if any. The Company anticipates that its current cash, short-term investments and expected revenues under its collaborative agreement with Novo Nordisk A/S will be sufficient to fund its operations through the first half of 1997. If financing arrangements contemplated by management are not consummated, the Company may have to seek other sources of capital or reevaluate operating plans. Interim financial information (unaudited) The financial statements at March 31, 1996 and for the three months ended March 31, 1995 and 1996 are unaudited, but include all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair statement of its financial position at such dates and its operating results and cash flows for those periods. Results for interim periods are not necessarily indicative of results for the entire year. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and equivalents Cash and equivalents are carried at cost which approximates fair value (based on quoted market prices) and include primarily interest bearing demand deposits and U.S. Government notes with original maturities of three months or less. Securities available-for-sale The Company accounts for its short-term investments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities"("Statement 115"). Under Statement 115 management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Marketable securities and debt securities not classified as held-to-maturity are classified as available-for-sale. To date, all marketable securities have been classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. F-7 62 ANERGEN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) Property and equipment Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is provided over the estimated useful lives (3 to 4 years) of the respective assets using the straight-line method. Leasehold improvements are amortized over the shorter of the life of the lease or their estimated useful lives using the straight-line method. Contract revenues Contract revenues consist of revenues from the Company's corporate partner, Novo Nordisk A/S. Contract revenues derived from the corporate partner agreement are recorded as earned based on the level of research effort performed by the Company. The Company is also entitled to receive (i) development milestone payments upon the occurrence of certain events and (ii) royalties on product sales, if any. Research and development Research and development costs are expensed as incurred and include personnel costs, materials consumed in research and development activities, depreciation on equipment used and the cost of facilities used for research and development. Stock compensation The Company continues to account for its stock compensation under APB 25, the intrinsic value method. The Company has not elected adoption of FAS 123 (effective in fiscal year 1996), however it plans to disclose the pro forma effects of recognizing the fair market value of options granted as compensation expense beginning in 1996. Income taxes The Company accounts for income taxes using the liability method as prescribed by Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes." Research and development tax credits will be accounted for under the "flow through" method when utilized. Net loss per share Net loss per share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and warrants are excluded from the computation as their effect is anti-dilutive. 2. COLLABORATION WITH NOVO NORDISK A/S - RELATED PARTIES In August 1993, the Company entered into a development and license agreement ("Agreement") with Novo Nordisk A/S for the purpose of developing and commercializing the Company's AnergiX(TM) products for multiple sclerosis ("MS"), myasthenia gravis ("MG"), and insulin dependent diabetes mellitis. Under the Agreement the Company is entitled to receive (i) research and development cost reimbursement (ii) development milestone payments and (iii) royalties on product sales, if any. For the years ended December 31, 1993, 1994 and 1995, the Company recorded contract revenues $339,000, $2,325,000 and $3,001,000, respectively, and $783,000 in the three months ended March 31, 1996, under this agreement. The Company has granted to Novo Nordisk A/S exclusive worldwide rights to products developed under the Agreement, including rights to commercialize these products. The Company has retained rights of co- F-8 63 ANERGEN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) promotion in North America for therapeutics in MS and MG. In addition, in August of 1993, Novo Nordisk A/S purchased 1,219,745 shares of common stock for $8 million, and an officer of Novo Nordisk A/S became a member of the Company's Board of Directors. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 1994 and 1995 (in thousands):
1994 1995 ------- ------- Research and office leasehold improvements....................... $ 608 $ 998 Research and office equipment.................................... 2,458 2,843 Pilot manufacturing facility leasehold improvements.............. 600 600 Pilot manufacturing facility equipment........................... 972 987 ------- ------- 4,638 5,428 Less accumulated depreciation and amortization................... (2,387) (3,418) ------- ------- $ 2,251 $ 2,010 ======= =======
4. INVESTMENTS The following is a summary of short-term investments (available-for-sale securities) (in thousands):
AVAILABLE-FOR-SALE SECURITIES --------------------------------------------------- GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------- ---------- ---------- --------- December 31, 1994 U.S. corporate securities................ $ 530 $ -- $(19) $ 511 U.S. government obligations.............. 2,069 -- (72) 1,997 ------- --- ---- ------- Total debt securities.......... $ 2,599 $ -- $(91) $ 2,508 ======= === ==== ======= December 31, 1995 U.S. corporate securities................ $ 7,671 $ 11 $ -- U.S. government obligations.............. 3,337 5 -- 3,342 ------- --- ---- ------- Total debt securities.......... $11,008 $ 16 $ -- $11,024 ======= === ==== =======
The net adjustment to unrealized holding gains(losses) on available-for-sale securities included as a separate component of shareholders' equity was ($21,000) and $107,000 in 1994 and 1995, respectively. F-9 64 ANERGEN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) The amortized cost and estimated fair value of debt and marketable equity securities at December 31, 1994 and 1995, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
ESTIMATED BOOK FAIR VALUE VALUE ------- --------- December 31, 1994 Available-for-Sale Due in one year or less....................... $ 2,599 $ 2,508 Due after one year through three years........ -- -- Due after three years......................... -- -- ------- ------- $ 2,599 $ 2,508 ======= ======= December 31, 1995 Available-for-Sale Due in one year or less....................... $ 5,825 $ 5,828 Due after one year through three years........ 5,183 5,196 Due after three years......................... -- -- ------- ------- $11,008 $11,024 ======= =======
5. LEASE AND DEBT OBLIGATIONS The Company leases its facilities under noncancelable operating leases. Facilities rent expense for 1993, 1994, and 1995 was $292,000, $321,000, and $551,000, respectively. Property and equipment at December 31, 1995 includes $263,000 of equipment under capital lease obligations, less accumulated amortization of $244,000. The leases provide that the Company pay taxes, insurance and maintenance expense related to the leased assets. On December 29, 1992, the Company entered into a loan agreement which provided $1,400,000 in financing related to the Company's pilot manufacturing facility. As of April 12, 1993, the Company had borrowed the full amount available under this agreement. Slightly under half of this debt is unsecured while the remainder is secured by equipment in the Company's pilot manufacturing facility. This loan is repayable over a 36 month period with the final payment to be based on the fair market value of the leasehold improvements and equipment (but not less than 10% or more than 20% of the original cost). Warrants to purchase 16,919 shares of the Company's common stock at an exercise price of $9.93 per share were issued to the lender under this loan agreement. No value was assigned to these warrants due to immateriality. At December 31, 1995 the Company had net borrowings of $146,000 under the loan. On December 30, 1993, the Company amended the above agreement to provide for an additional $500,000 in financing related to equipment purchases. At March 31, 1994, the Company had borrowed the full amount available under this agreement, all of which is secured by equipment purchased by the Company. At December 31, 1995, the Company had net borrowings of $257,000 under the loan. This loan is repayable over a 36 month period with the final payment to be based on the fair market value of the equipment (but not less than 10% or more than 20% of the original cost). Warrants to purchase 8,577 shares of the Company's common stock at an exercise price of $5.83 per share were issued to the lender under this amendment to the loan agreement. No value was assigned to these warrants due to immateriality. F-10 65 ANERGEN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) On April 18, 1994 the Company entered into a loan agreement with Silicon Valley Bank of California which provided $1,200,000. As of December 31, 1994 $957,000 had been drawn down upon under this agreement, all of which is secured by equipment purchased by the Company. At December 31, 1995, the Company had net borrowings of $561,000 under the loan. On June 23, 1995 the Company entered into a second loan agreement with Silicon Valley Bank of California which provided $800,000 in financing available through December 31, 1995. As of December 31, 1995 the Company had borrowed the full amount available under this agreement, ($712,000 balance outstanding at December 31, 1995), all of which is secured by equipment purchased by the Company. Under agreements with Silicon Valley Bank there are restrictions imposed upon the Company's ability to declare cash dividends. Future minimum payments, by year and in the aggregate, under the debt and capital leases and noncancelable operating leases consisted of the following at December 31, 1995 (in thousands):
DEBT AND CAPITAL OPERATING LEASES LEASES ---------------- --------- 1996....................................... $1,020 $ 578 1997....................................... 688 541 1998....................................... 190 505 1999....................................... -- 39 ------ ------ Total minimum debt and lease payments...... 1,898 $ 1,663 ====== Less amount representing interest.......... 197 ------ Present value of future minimum debt and lease payments........................... 1,701 Less current portion of debt and lease obligations.............................. 883 ------ Long-term debt and lease obligations....... $ 818 ======
6. SHAREHOLDERS' EQUITY 1988 Stock Option Plan The Company has granted certain officers, employees and consultants options to purchase shares of the Company's common stock at prices ranging from $0.16 to $11.00 per share under its 1988 Stock Option Plan ("option plan"). The Company has reserved 1,800,000 shares of common stock for issuance under the option plan. These options vest over periods of up to four years and, once vested, can be exercised at any time for a period of 5 years from the date of grant. The Company recorded deferred compensation of $529,000 in 1991 related to the issuance of certain stock options. This compensation was charged to operations ratably over the F-11 66 ANERGEN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) vesting period of the options. As of December 31, 1995, all of this amount had been amortized and charged to operations. The activity under the option plan is as follows:
NUMBER OF PRICE PER SHARES SHARE --------- ----------- Balance at December 31, 1992................ 645,000 $0.16-11.00 Granted..................................... 257,000 5.50- 9.50 Exercised................................... (56,000) 0.16- 2.00 Forfeited................................... (11,000) 0.21-11.00 ----------- -------- Balance at December 31, 1993................ 835,000 $0.16-11.00 Granted..................................... 109,000 2.62- 5.75 Exercised................................... (45,000) 0.16- 0.27 Forfeited................................... (94,000) 0.21-10.75 ----------- -------- Balance at December 31, 1994................ 805,000 $0.21-11.00 Granted..................................... 283,000 2.00- 3.25 Exercised................................... (168,000) 0.21- 2.62 Forfeited................................... (41,000) 2.62-11.00 ----------- -------- Balance at December 31, 1995................ 879,000 $0.21-11.00 Granted (unaudited)......................... 11,000 4.00 Exercised (unaudited)....................... (61,000) 0.21- 2.75 Forfeited (unaudited)....................... (3,000) 2.62-10.75 ----------- -------- Balance at March 31, 1996 (unaudited)....... 826,000 $0.21-11.00 ======== =========== Vested at December 31, 1995................. 430,000 $0.21-11.00 ======== =========== Vested at March 31, 1996 (unaudited)........ 417,000 $2.00-11.00 ======== ===========
The Company's Board of Directors has approved a plan whereby the Company's officers, employees and consultants had the option during the month of February 1995 to elect to extend the option exercise period by four years. Elections to extend 555,113 options were made. All vested shares under grants subsequent to February 1995 can be exercised at any time for a period of nine years from the date of grant. Warrants In connection with the October 10, 1991 initial public offering, the Company's underwriters were granted a warrant exercisable for five years to purchase up to 196,656 shares of the Company's common stock for $5.98 per share; it remains unexercised as of December 31, 1995. In June, 1994 the Company issued warrants to purchase 236,863 shares of Common Stock at an exercise price of $3.52 per share through a private placement to two purchasers; it remains unexercised as of December 31, 1995. Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan under which a total of 150,000 shares of common stock have been reserved and made available for purchase by eligible employees. Eligible employees may have up to 10% of their wages withheld for purchases of common stock of the Company. On September 30 and March 31 of each year, the funds then in each employee's account are applied to the purchase of shares of common stock at 85% of the fair market value at such date or at six month retroactive intervals up to 24 months, whichever is less. As of December 31, 1995, 97,205 shares had been purchased with such funds. F-12 67 ANERGEN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AT MARCH 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities include the following (in thousands):
1994 1995 ---- ------ Accounts payable.................................... $537 $ 559 Accrued collaborative expenses...................... 87 87 Outside production support.......................... 21 20 Accrued vacation pay................................ 103 114 Accrued professional fees........................... 142 157 Other............................................... 87 103 ---- ------ Total accounts payable and accrued liabilities............................. $977 $1,040 ==== ======
8. INCOME TAXES At December 31, 1995, the Company had federal and state net operating loss carryforwards of approximately $33.7 million and $16.6 million, respectively, which expire in varying amounts through 2010. Additionally, the Company has research and development tax credit carryforwards for federal tax purposes of approximately $1.3 million. The Company's stock offering in April 1995 resulted in a change in ownership and it is expected that the entire net operating loss and credit carryforwards as of April 1995 may be subject to an annual limitation based on the Company's pre-change value. The annual limitation will result in the expiration of the net operating losses and credits before utilization. Net operating losses incurred subsequent to April 1995 may also be subject to an annual limitation such that the net operating losses may expire before utilization. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1994 and 1995 are as follows (in thousands):
YEAR ENDED DECEMBER 31, --------------------- 1994 1995 -------- -------- Deferred income tax assets: Net operating loss carryforwards............. $ 9,502 $ 12,500 Research credits............................. 1,666 1,700 Other deferred tax assets.................... 87 200 ---------- ---------- -- -- Net deferred tax assets........................ 11,255 14,400 Valuation allowance for deferred tax assets.... (11,255) (14,400) ---------- ---------- -- -- Total deferred tax assets...................... $ -- $ -- ============ ============
The net valuation allowance increased by $2,508,000 during the year ended December 31, 1994 ($5,953,000 in 1993). F-13 68 - ------------------------------------------------------ - ------------------------------------------------------ NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. ------------------------ TABLE OF CONTENTS
PAGE ---- Summary............................... 3 Risk Factors.......................... 6 Use of Proceeds....................... 16 Dividend Policy....................... 16 Capitalization........................ 17 Price Range of Common Stock........... 17 Dilution.............................. 18 Selected Financial Data............... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Business.............................. 23 Management............................ 37 Certain Transactions.................. 44 Principal Stockholders................ 45 Description of Capital Stock.......... 47 Shares Eligible for Future Sale....... 49 Underwriting.......................... 51 Legal Matters......................... 52 Experts............................... 52 Additional Information................ 52 Index to Financial Statements......... F-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 4,000,000 SHARES ANERGEN, INC. COMMON STOCK ------------------------ P R O S P E C T U S ------------------------ PAINEWEBBER INCORPORATED VECTOR SECURITIES INTERNATIONAL, INC. ------------------------ , 1996 - ------------------------------------------------------ - ------------------------------------------------------ 69 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC registration fee.............................................. $ 7,436 NASD filing fee................................................... 2,656 Nasdaq National Market listing fee................................ 17,500 Printing and engraving costs...................................... 150,000 Legal fees and expenses........................................... 100,000 Accounting fees and expenses...................................... 50,000 Blue Sky fees and expenses........................................ 20,000 Transfer Agent and Registrar fees................................. 5,000 Miscellaneous expenses............................................ 47,408 -------- Total................................................... $400,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Articles of Incorporation and Bylaws provide for indemnification of the officers and directors of the Company to the full extent permitted by law. The General Corporation Law of the State of California permits a corporation to limit, under certain circumstances, a director's liability for monetary damages in actions brought by or in the right of the corporation. The Company's Articles of Incorporation also provide for the elimination of the liability of directors for monetary damages to the full extent permitted by law. The Company has entered into agreements to indemnify its directors and officers in addition to the indemnification provided for in the Articles of Incorporation and Bylaws. These agreements will, among other things, indemnify the Company's directors and officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred in any action or proceeding, including any action by or in the right of the Company, on account of services as a director or officer of any other enterprise to which the person provides services at the request of the Company. The Company believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. The Company currently maintains a directors' and officers' insurance policy. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Company as to which indemnification is sought, nor is the Company aware of any threatened litigation or proceeding that may result in claims for indemnification. II-1 70 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since October 10, 1991, the Registrant has issued and sold (without payment of any selling commission to any person) the following unregistered securities: (1) In August 1993, the Registrant issued and sold an aggregate of 1,219,745 shares of Common Stock to Novo Nordisk A/S for an aggregate purchase price of $8 million. See "Certain Transactions." (2) In June 1994, the Registrant issued and sold to an unaffiliated investor an aggregate of 413,965 shares of Common Stock and 236,863 warrants to purchase Common Stock for an aggregate purchase price of $1.5 million. The sales and issuances of securities in the transactions described above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) and/or Rule 506 promulgated under the Securities Act. The purchasers in each case represented their intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate legends are affixed to the stock certificates issued in such transactions. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT DESCRIPTION - --------- -------------------------------------------------------------------------------- *1.1 Form of Underwriting Agreement 3.1 Restated and Amended Articles of Incorporation(1) 3.2 Bylaws, as amended(1) 4.1 Form of Common Stock Certificate(1) *5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation 10.1 Form of Indemnification Agreement for directors and officers(1) 10.2 1988 Stock Option Plan (as amended) and form of agreements thereunder(1) 10.3 1991 Employee Stock Purchase Plan, as amended(1) 10.4 1992 Consultant Stock Plan(2) 10.5 Representative Preferred Stock Purchase Agreement(1) 10.5A Sublease dated December 15, 1989 between Registrant and Invitron Corporation, with amendment dated February 28, 1990(1) 10.5B Landlord's Consent to Sublease dated March 2, 1990 among the Registrant, Invitron Corporation and Seaport Centre Venture Phase II(1) 10.5C Ten-Year Industrial Net Lease Agreement dated June 5, 1987 between Invitron Corporation and Seaport Centre Venture Phase II, with amendments dated November 9, 1987; October 31, 1988; August 1989; and February 28, 1990(1) 10.5D Amendments to Seaport Center Standard Lease between the Registrant and Metropolitan Life Insurance Company dated January 10, 1995; and March 24, 1995(7) 10.5E Industrial Lease Agreement Group, with amendments dated March 31, 1993; and June 17, 1994(10) 10.6A Master Lease Agreement dated July 8, 1988 between the Registrant and Comdisco, Inc. With Equipment Schedule No. VL-1 dated July 8, 1988 and Equipment Schedule No. VL-2 dated April 4, 1990(1) 10.7 Form of Representative's Warrant Agreement(1) 10.8A Loan and Security agreement dated December 29, 1992 between the Registrant and MMC/GATX Partnership No. I(3) 10.8B Secured Promissory Note dated December 29, 1992 issued by the Registrant to MMC/GATX Partnership No. I(3)
II-2 71
EXHIBIT DESCRIPTION - --------- -------------------------------------------------------------------------------- 10.8C Warrant dated December 29, 1992 issued by the Registrant to MMC/GATX Partnership No. I(3) 10.8D Amendment to the Loan and Security agreement dated December 30, 1993 between the Registrant and MMC/GATX Partnership No. I(4) 10.8E Warrant dated December 30, 1993 issued by the Registrant to MMC/GATX Partnership No. I(4) 10.9A Development and License agreement dated August 17, 1993 between the Registrant and Novo Nordisk A/S(5) 10.9B Common Stock Purchase Agreement dated August 17, 1993 between the Registrant and Novo Nordisk A/S(5) 10.9C Amendment No. 1 dated March 26, 1996 to the Development and License Agreement between the Registrant and Novo Nordisk A/S(11) 10.9D Addendum dated March 26, 1996 to the Development and License Agreement between the Registrant and Novo Nordisk A/S(11) 10.10A Loan and Security agreement dated April 18, 1994 between the Registrant and Silicon Valley Bank(6) 10.10B Loan and Security agreement dated June 23, 1995 between the Registrant and Silicon Valley Bank(9) 10.10C Loan Modification Agreement dated August 31, 1994 between the registrant and Silicon Valley Bank(10) 10.11A Securities Purchase Agreement dated May 11, 1994 between the Registrant and certain purchasers(6) 10.11B Warrant dated June 30, 1994 issued to Ortelius Trading L.P.(8) 10.11B-1 Letter related to Warrant issued to Ortelius Trading L.P.(9) 10.11C Warrant dated June 30, 1994 issued to GDK, Inc.(8) 10.11C-1 Letter related to Warrant issued to GDK, Inc.(9) 10.11D Amendment to Securities Purchase Agreement dated June 30, 1994 between the Registrant and certain purchasers(8) 10.11E Amendment to Securities Purchase Agreement dated February 15, 1995 between the Registrant and certain purchasers(7) 10.12A Common Stock Purchase agreement dated March 10, 195 between the Registrant and Warburg, Pincus Ventures, L.P. and International Biotechnology Trust PLC(7) 10.12B Amendment to Common Stock Purchase Agreement dated March 15, 1995(7) 10.13 1995 Director Option Plan(10) 10.14 Transition Agreement and Mutual Release between the Company and John W. Fara, Ph.D.(11)
II-3 72
EXHIBIT DESCRIPTION - --------- -------------------------------------------------------------------------------- *10.15(12) Product Development and License Agreement dated June 28, 1996 between the Registrant and N.V. Organon *10.16 Employment Agreement of Barry M. Sherman, M.D. *23.1 Consent of Ernst & Young LLP, independent auditors *23.2 Consent of Townsend and Townsend and Crew LLP *23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (contained in Exhibit 5.1 hereto) *27.1 Financial Data Schedule
- --------------- * Filed herewith (1) Incorporated by reference to the exhibit filed with Registrant's Registration Statement on Form S-1 (No. 33-42107), as amended. (2) Incorporated by reference to exhibit filed with the Company's Form S-8 (No. 33-52186). (3) Incorporated by reference to the exhibit filed with the Company's Annual Report on Form 10K for the year ended December 31, 1992. (4) Incorporated by reference to the exhibit filed with the Company's quarterly Report on Form 10Q for the quarter ended September 30, 1993. (5) Incorporated by reference to the exhibit filed with the Company's Annual Report on Form 10K for the year ended December 31, 1992. (6) Incorporated by reference to the exhibit filed with the Company's Quarterly Report on Form 10Q for the quarter ended March 31, 1994. (7) Incorporated by reference to the exhibit filed with the Company's Annual Report on Form 10K for the year ended December 31, 1994. (8) Incorporated by reference to the exhibit filed with Registrant's Registration Statement on Form S-1 (No. 33-84310), as amended. (9) Incorporated by reference to the exhibit filed with the Company's Quarterly Report on Form 10Q for the quarter ended June 30, 1995. (10) Incorporated by reference to the exhibit filed with the Company's Annual Report on Form 10K for the year ended December 31, 1995. (11) Incorporated by reference to the exhibit filed with the Company's Annual Report on Form 10K/A for the year ended December 31, 1995. (12) Confidential treatment sought for portions of this exhibit. (b) FINANCIAL STATEMENT SCHEDULES Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, II-4 73 submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 74 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Redwood City in the State of California on the 27th day of June, 1996. By: /S/ BARRY M. SHERMAN, M.D. ------------------------------------ Barry M. Sherman, M.D. President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Barry M. Sherman, M.D. and John W. Varian and each of them, his attorneys-in-fact, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all 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 and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed on the 27th day of June, 1996 by the following persons in the capacities indicated:
SIGNATURE TITLE - --------------------------------------------- ---------------------------------------------- /S/ BARRY M. SHERMAN, M.D. President, Chief Executive Officer and - --------------------------------------------- Director (Principal Executive Officer) Barry M. Sherman, M.D. /S/ JOHN W. VARIAN Vice President and Chief Financial Officer - --------------------------------------------- (Principal Financial and Accounting Officer) John W. Varian /S/ BRUCE L.A. CARTER, PH.D. Director - --------------------------------------------- Bruce L. A. Carter, Ph.D. /S/ NICHOLAS LOWCOCK Director - --------------------------------------------- Nicholas Lowcock /S/ HARDEN MCCONNELL, PH.D. Director - --------------------------------------------- Harden McConnell, Ph.D. /S/ HARRY H. PENNER, JR. Director - --------------------------------------------- Harry H. Penner, Jr. /S/ JAMES E. THOMAS Director - --------------------------------------------- James E. Thomas /S/ NICOLE VITULLO Director - --------------------------------------------- Nicole Vitullo
II-6 EX-1.1 2 EXHIBIT 1.1 1 EXHIBIT 1.1 S&S Draft 6/24/96 4,000,000 Shares ANERGEN, INC. Common Stock UNDERWRITING AGREEMENT -, 1996 PAINEWEBBER INCORPORATED VECTOR SECURITIES INTERNATIONAL, INC. As Representatives of the several Underwriters c/o PaineWebber Incorporated 1285 Avenue of the Americas New York, New York 10019 Dear Sirs: Anergen, Inc., a California corporation (the "Company"), proposes to sell an aggregate of 4,000,000 shares (the "Firm Shares") of the Company's Common Stock, no par value (the "Common Stock"), to you and to the other underwriters named in Schedule I (collectively, the "Underwriters"), for whom you are acting as representatives (the "Representatives"). The Company has also agreed to grant to you and the other Underwriters an option (the "Option") to purchase up to an additional 600,000 shares of Common Stock (the "Option Shares") on the terms and for the purposes set forth in Section 1(b). The Firm Shares and the Option Shares are hereinafter collectively referred to as the "Shares." The initial public offering price per share for the Shares and the purchase price per share for the Shares to be paid by the several Underwriters shall be agreed upon by the Company and the Representatives, acting on behalf of the several Underwriters, and such agreement shall be set forth in a separate written instrument substantially in the form of Exhibit A hereto (the "Price Determination Agreement"). The Price Determination Agreement may take the form of an exchange of any standard form of written telecommunication among the Company and the Representatives and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Shares will be governed by this Agreement, as supplemented by the Price Determination Agreement. From and after the date of the execution and delivery of the Price Determination Agreement, this Agreement shall be deemed to incorporate, and, unless the context otherwise indicates, all 2 2 references contained herein to "this Agreement" and to the phrase "herein" shall be deemed to include, the Price Determination Agreement. The Company confirms as follows its agreements with the Representatives and the several other Underwriters. 1. Agreement to Sell and Purchase. (a) On the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions of this Agreement, the Company agrees to sell to each Underwriter named below, and each Underwriter, severally and not jointly, agrees to purchase from the Company at the purchase price per share for the Firm Shares to be agreed upon by the Representatives and the Company in accordance with Section 1(c) or 1(d) and set forth in the Price Determination Agreement, the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I, plus such additional number of Firm Shares which such Underwriter may become obligated to purchase pursuant to Section 8 hereof. Schedule I may be attached to the Price Determination Agreement. (b) Subject to all the terms and conditions of this Agreement, the Company grants the Option to the several Underwriters to purchase, severally and not jointly, up to 600,000 Option Shares from the Company at the same price per share as the Underwriters shall pay for the Firm Shares. The Option may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the 30th day after the date of this Agreement (or, if the Company has elected to rely on Rule 430A (as defined in Section 3(a) below), on or before the 30th day after the date of the Price Determination Agreement), upon written or telegraphic notice (the "Option Shares Notice") by the Representatives to the Company no later than 12:00 noon, New York City time, at least two and no more than five business days before the date specified for closing in the Option Shares Notice (the "Option Closing Date") setting forth the aggregate number of Option Shares to be purchased and the time and date for such purchase. On the Option Closing Date, the Company will issue and sell to the Underwriters the number of Option Shares set forth in the Option Shares Notice, and each Underwriter will purchase such percentage of the Option Shares as is equal to the percentage of Firm Shares that such Underwriter is purchasing, as adjusted by the Representatives in such manner as they deem advisable to avoid fractional shares. (c) If the Company has elected to rely on Rule 430A, the initial public offering price per share for the Firm Shares and the purchase price per share for the Firm Shares to be paid by the several Underwriters shall be agreed upon and set forth in the Price Determination Agreement. In the event such price has not been agreed upon and the Price Determination Agreement has not been executed by the close of business on the 3 3 fourteenth business day following the date on which the Registration Statement becomes effective, this Agreement shall terminate forthwith, without liability of any party to any other party except that Section 6 shall remain in effect. 2. Delivery and Payment. Delivery of the Firm Shares shall be made to the Representatives for the accounts of the Underwriters against payment of the purchase price by certified or official bank check or by wire transfer to an account designated by the Company in Federal (same-day) funds. Such payments shall be made at 10:00 a.m., New York City time, on the fourth business day after the date on which the first bona fide offering of the Shares to the public is made by the Underwriters or at such time on such other date, not later than ten business days after such date, as may be agreed upon by the Company and the Representatives (such date is hereinafter referred to as the "Closing Date"). (a) To the extent the Option is exercised, delivery of the Option Shares against payment by the Underwriters (in the manner specified above) will take place at the offices specified above for the Closing Date at the time and date (which may be the Closing Date) specified in the Option Shares Notice. (b) The cost of original issue tax stamps, if any, in connection with the issuance and delivery of the Firm Shares and Option Shares by the Company to the respective Underwriters shall be borne by the Company. The Company will pay and save each Underwriter and any subsequent holder of the Shares harmless from any and all liabilities with respect to or resulting from any failure or delay in paying Federal and state stamp and other transfer taxes, if any, which may be payable or determined to be payable in connection with the original issuance or sale to such Underwriter of the Firm Shares and Option Shares. 3. Representations and Warranties of the Company. The Company represents, warrants and covenants to each Underwriter that: (a) A registration statement (Registration No. -) on Form S-1 relating to the Shares, including a preliminary prospectus and such amendments to such registration statement as may have been required to the date of this Agreement, has been prepared by the Company under the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (collectively referred to as the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission. The term "preliminary prospectus" as used herein means a preliminary prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A") of the Rules and Regulations included at any time as part of the registration statement. Copies of such registration statement and amendments and of each related preliminary prospectus have been delivered to the Representatives. The term "Registration Statement" means the 4 4 registration statement as amended at the time it becomes or became effective (the "Effective Date"), including financial statements and all exhibits and any information deemed to be included therein by Rule 430A or Rule 434 of the Rules and Regulations. If the Company files a registration statement to register a portion of the Shares and relies on Rule 462(b) of the Rules and Regulations for such registration statement to become effective upon filing with the Commission (the "Rule 462 Registration Statement"), then any reference to the "Registration Statement" shall be deemed to include the Rule 462 Registration Statement, as amended from time to time. The term "Prospectus" means the prospectus as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is required, the form of final prospectus included in the Registration Statement at the Effective Date. (b) On the Effective Date, the date the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if required), at all times subsequent to and including the Closing Date and, if later, the Option Closing Date and when any post-effective amendment to the Registration Statement becomes effective or any amendment or supplement to the Prospectus is filed with the Commission, the Registration Statement and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement thereto), including the financial statements included in the Prospectus, did or will comply in all material respects with all applicable provisions of the Act and the Rules and Regulations and will contain all statements required to be stated therein in accordance with the Act and the Rules and Regulations. On the Effective Date and when any post-effective amendment to the Registration Statement becomes effective, no part of the Registration Statement or any such amendment did or will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. At the Effective Date, the date the Prospectus or any amendment or supplement to the Prospectus is filed with the Commission and at the Closing Date and, if later, the Option Closing Date, the Prospectus did not or will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing representations and warranties in this Section 3(b) do not apply to any statements or omissions made in reliance on and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives specifically for inclusion in the Registration Statement or Prospectus or any amendment or supplement thereto. For all purposes of this Agreement, the amounts of the selling concession and reallowance set forth in the Prospectus constitute the only information relating to any Underwriter furnished in writing to the Company by the Representatives specifically for inclusion in the Registration Statement, the preliminary prospectus or the Prospectus. The Company has not distributed any offering material in connection with the offering or sale of the Shares other than the Registration Statement, the preliminary prospectus, the Prospectus or any other materials, if any, permitted by the Act. 5 5 (c) The Company is, and at the Closing Date will be, a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. The Company has, and at the Closing Date will have, full corporate power and authority to own or lease all the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus. The Company is, and at the Closing Date will be, duly licensed or qualified to do business and in good standing as a foreign corporation in all jurisdictions in which the nature of the activities conducted by it or the character of the assets owned or leased by it makes such licensing or qualification necessary, except as the failure to be so licensed or qualified will not have a material adverse effect on the Company's business, properties, business prospects, condition (financial or otherwise) or results of operations. Except as disclosed in the Registration Statement, the Company does not own, and at the Closing Date will not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity. Complete and correct copies of the articles of incorporation and of the by-laws of the Company and all amendments thereto have been delivered to the Representatives, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date or, if later, the Option Closing Date. (d) The outstanding shares of Common Stock have been, and the Shares to be issued and sold by the Company upon such issuance will be, duly authorized, validly issued, fully paid and nonassessable and will not be subject to any preemptive or similar right. The description of the Common Stock in the Registration Statement and the Prospectus under the caption "Description of Capital Stock" is, and at the Closing Date will be, complete and accurate in all material respects. Except as set forth in the Prospectus, the Company does not have outstanding, and at the Closing Date will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell, any shares of Common Stock or any such warrants, convertible securities or obligations. (e) The financial statements included in the Registration Statement or the Prospectus present fairly the financial condition of the Company as of the respective dates thereof and the results of operations and cash flows of the Company for the respective periods covered thereby, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the entire period involved, except as otherwise disclosed in the Prospectus. No other financial statements 6 6 of the Company are required by the Act or the Rules and Regulations to be included in the Registration Statement or the Prospectus. Ernst & Young LLP (the "Accountants") who have reported on such financial statements, are independent accountants with respect to the Company as required by the Act and the Rules and Regulations. To the Company's knowledge, the statements included in the Registration Statement with respect to the Accountants pursuant to Rule 509 of Regulation S-K of the Rules and Regulations are true and correct in all material respects. (f) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (g) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the Closing Date, except as set forth in or contemplated by the Registration Statement and the Prospectus, (i) there has not been and will not have been any change in the capitalization of the Company, or in the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company, arising for any reason whatsoever, (ii) the Company has not incurred nor will it incur any material liabilities or obligations, direct or indirect, nor has it entered into nor will it enter into any material transactions other than pursuant to this Agreement and the transactions referred to herein and (iii) the Company has not and will not have paid or declared any dividends or other distributions of any kind on any class of its capital stock. (h) The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. (i) Except as set forth in the Registration Statement and the Prospectus, there are no actions, suits or proceedings pending or, to the Company's knowledge, threatened against or affecting the Company or any of its officers in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might materially and adversely affect the Company or its business, properties, business prospects, condition (financial or otherwise) or results of operations. 7 7 (j) The Company has, and at the Closing Date will have, (i) all governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on its business as contemplated in the Prospectus, (ii) complied in all material respects with all laws, regulations and orders applicable to it or its business and (iii) performed all its obligations required to be performed by it, and is not, and at the Closing Date will not be, in material default, under any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement, lease, contract or other material agreement or instrument (collectively, a "contract or other agreement") to which it is a party or by which its property is bound or affected. To the best knowledge of the Company, no other party under any contract or other agreement to which it is a party is in default in any material respect thereunder. The Company is not, nor at the Closing Date will be, in violation of any provisions of its articles of incorporation or by-laws. (k) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the authorization, issuance, transfer, sale or delivery of the Shares by the Company, in connection with the execution, delivery and performance of this Agreement by the Company or in connection with the taking by the Company of any action contemplated hereby, except such as have been obtained under the Act or the Rules and Regulations and such as may be required under state securities or Blue Sky laws or the by-laws and rules of the National Association of Securities Dealers, Inc. (the "NASD") in connection with the purchase and distribution by the Underwriters of the Shares. (l) The Company has full corporate power and authority to enter into this Agreement. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company and is enforceable against the Company in accordance with the terms hereof. The performance of this Agreement and the consummation of the transactions contemplated hereby and the application of the net proceeds from the offering and sale of the Shares in the manner set forth in the Prospectus under "Use of Proceeds" will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of the Company pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the articles of incorporation or by-laws of the Company, any contract or other agreement to which the Company is a party or by which the Company or any of its properties is bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of the Company. (m) The Company has good and marketable title to all properties and assets described in the Prospectus as owned by it, free and clear of all liens, charges, 8 8 encumbrances or restrictions, except such as are described in the Prospectus or are not material to the business of the Company. The Company has valid, subsisting and enforceable leases for the properties described in the Prospectus as leased by it, with such exceptions as are not material and do not materially interfere with the use made and proposed to be made of such properties by the Company. (n) There is no document or contract of a character required to be described in the Registration Statement or the Prospectus or to be filed or incorporated by reference as an exhibit to the Registration Statement which is not described, filed or incorporated by reference as required. All such contracts to which the Company is a party have been duly authorized, executed and delivered by the Company, constitute valid and binding agreements of the Company and are enforceable against the Company in accordance with the terms thereof, except as the enforceability of such agreements may be (i) subject to bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally; and (ii) subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity) including principles of commercial reasonableness or conscionability and an implied covenant of good faith and fair dealing. (o) Neither the Company nor, to the Company's knowledge, any of its directors, officers or controlling persons has taken, directly or indirectly, any action intended, or which might reasonably be expected, to cause or result, under the Act or otherwise, in, or which has constituted, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (p) No holder of securities of the Company has rights to the registration of any securities of the Company because of the filing of the Registration Statement. (q) The Shares have been approved for quotation on the Nasdaq National Market. (r) The Company is not involved in any material labor dispute nor, to the knowledge of the Company, is any such dispute threatened. (s) The Company owns, or is licensed or otherwise has the full exclusive right to use, all material trademarks and trade names which are used in or necessary for the conduct of its business as described in the Prospectus. No claims have been asserted by any person to the use of any such trademarks or trade names or challenging or questioning the validity or effectiveness of any such trademark or trade name. The use, in connection with the business and operations of the Company of such trademarks and trade names does not, to the Company's knowledge, infringe on the rights of any person. 9 9 (t) The Company nor, to the Company's knowledge, any employee or agent of the Company has made any payment of funds of the Company or received or retained any funds in violation of any law, rule or regulation or of a character required to be disclosed in the Prospectus. (u) The Company has complied, and until the completion of the distribution of the Shares will comply, with all of the provisions of (including, without limitation, filing all forms required by) Section 517.075 of the Florida Securities and Investor Protection Act and regulation 3E-900.001 issued thereunder with respect to the offering and sale of the Shares. (v) The Company owns or possesses adequate licenses or other rights to use all patents, trademarks, service marks, trade names, copyrights, mask works, technology and know-how necessary to conduct the business now or proposed to be conducted by it as described in the Prospectus, and the Company has not received any notice of infringement of or conflict with (and knows of no such infringement of or conflict with) asserted rights of others with respect to any patents, trademarks, service marks, trade names, copyrights, mask works, technology or know-how which could result in any material adverse effect upon the Company; and the Company's discoveries, inventions, products or processes referred to in the Prospectus do not, to the knowledge of the Company, infringe or conflict with any right or patent, or any discovery, invention, product or process which is the subject of a patent application known to the Company, which infringement or conflict could result in any material adverse effect upon the Company. (w) The Company has obtained any permits, consents and authorizations required to be obtained by it under laws or regulations relating to the protection of the environment or concerning the handling, storage, disposal or discharge of toxic materials (collectively "Environmental Laws"), and any such permits, consents and authorizations remain in full force and effect. The Company is in compliance with the Environmental Laws in all material respects, and there is no pending or, to the Company's knowledge, threatened, action or proceeding against the Company alleging violations of the Environmental Laws. (x) Except as disclosed in the Registration Statement or the Prospectus, the Company maintains insurance of the types and in amounts generally deemed adequate for its businesses and consistent with insurance coverage maintained by similar companies and businesses, all of which insurance is in full force and effect. 4. Agreements of the Company. The Company agrees with the several Underwriters as follows: 10 10 (a) The Company will not, either prior to the Effective Date or thereafter during such period as the Prospectus is required by law to be delivered in connection with sales of the Shares by an Underwriter or dealer, file any amendment or supplement to the Registration Statement or the Prospectus, unless a copy thereof shall first have been submitted to the Representatives within a reasonable period of time prior to the filing thereof and the Representatives shall not have objected thereto in good faith. (b) The Company will use its best efforts to cause the Registration Statement to become effective, and will notify the Representatives promptly, and will confirm such advice in writing, (1) when the Registration Statement has become effective and when any post-effective amendment thereto becomes effective, (2) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (3) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose or the threat thereof, (4) of the happening of any event during the period mentioned in the second sentence of Section 4(e) that in the judgment of the Company makes any statement made in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances in which they are made, not misleading and (5) of receipt by the Company or any representative or attorney of the Company of any other communication from the Commission relating to the Company, the Registration Statement, any preliminary prospectus or the Prospectus. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible moment. The Company will use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to Rule 430A and to notify the Representatives promptly of all such filings. (c) The Company will furnish to the Representatives, without charge, two signed copies of the Registration Statement and of any post-effective amendment thereto, including financial statements and schedules, and all exhibits thereto and will furnish to the Representatives, without charge, for transmittal to each of the other Underwriters, a copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules but without exhibits. (d) The Company will comply with all the provisions of any undertakings contained in the Registration Statement. (e) On the Effective Date, and thereafter from time to time, the Company will deliver to each of the Underwriters, without charge, as many copies of the Prospectus or any amendment or supplement thereto as the Representatives may reasonably request. The Company consents to the use of the Prospectus or any amendment or 11 11 supplement thereto by the several Underwriters and by all dealers to whom the Shares may be sold, both in connection with the offering or sale of the Shares and for any period of time thereafter during which the Prospectus is required by law to be delivered in connection therewith. If during such period of time any event shall occur which in the judgment of the Company or counsel to the Underwriters should be set forth in the Prospectus in order to make any statement therein, in the light of the circumstances under which it was made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with law, the Company will forthwith prepare and duly file with the Commission an appropriate supplement or amendment thereto, and will deliver to each of the Underwriters, without charge, such number of copies thereof as the Representatives may reasonably request. (f) Prior to any public offering of the Shares by the Underwriters, the Company will cooperate with the Representatives and counsel to the Underwriters in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representatives may request; provided, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject. (g) During the period of five years commencing on the Effective Date, the Company will furnish to the Representatives and each other Underwriter who may so request copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock, and will furnish to the Representatives and each other Underwriter who may so request a copy of each annual or other report it shall be required to file with the Commission. (h) The Company will make generally available to holders of its securities as soon as may be practicable but in no event later than the last day of the fifteenth full calendar month following the calendar quarter in which the Effective Date falls, an earnings statement (which need not be audited but shall be in reasonable detail) for a period of 12 months ended commencing after the Effective Date, and satisfying the provisions of Section 11(a) of the Act (including Rule 158 of the Rules and Regulations). (i) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay, or reimburse if paid by the Representatives, all costs and expenses incident to the performance of the obligations of the Company under this Agreement, including but not limited to costs and expenses of or relating to (1) the preparation, printing and filing of the Registration Statement and exhibits to it, each preliminary prospectus, the Prospectus and any amendment or supplement to the Registration Statement or the Prospectus, (2) the preparation and delivery of certificates representing the Shares, (3) the printing of this Agreement, the 12 12 Agreement Among Underwriters, any Dealer Agreements and any Underwriters' Questionnaire, (4) furnishing (including costs of shipping, mailing and courier) such copies of the Registration Statement, the Prospectus and any preliminary prospectus, and all amendments and supplements thereto, as may be requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold, (5) the quotation of the Shares on the Nasdaq National Market, (6) any filings required to be made by the Underwriters with the NASD, and the fees, disbursements and other charges of counsel for the Underwriters in connection therewith, (7) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions designated pursuant to Section 4(f), including the fees, disbursements and other charges of counsel to the Underwriters in connection therewith, and the preparation and printing of preliminary, supplemental and final Blue Sky memoranda, (8) counsel to the Company, (9) the transfer agent for the Shares and (10) the Accountants. (j) If this Agreement shall be terminated by the Company pursuant to any of the provisions hereof (otherwise than pursuant to Section 8) or if for any reason the Company shall be unable to perform its obligations hereunder, the Company will reimburse the several Underwriters for all out-of-pocket expenses (including the fees, disbursements and other charges of counsel to the Underwriters) reasonably incurred by them in connection herewith. (k) The Company will not at any time, directly or indirectly, take any action intended, or which might reasonably be expected, to cause or result in, or which will constitute, stabilization of the price of the shares of Common Stock to facilitate the sale or resale of any of the Shares. (l) The Company will apply the net proceeds from the offering and sale of the Shares to be sold by the Company substantially in the manner set forth in the Prospectus under "Use of Proceeds." (m) The Company will not, and will cause each of its executive officers, directors and each beneficial owner of more than 5% of the outstanding shares of Common Stock to enter into agreements with the Representatives in the form set forth in Exhibit B to the effect that they will not, for a period of 90 days after the commencement of the public offering of the Shares, without the prior written consent of PaineWebber Incorporated, sell, contract to sell or otherwise dispose of any shares of Common Stock or rights to acquire such shares (other than pursuant to employee stock option plans or in connection with other employee incentive compensation arrangements). 5. Conditions of the Obligations of the Underwriters. In addition to the execution and delivery of the Price Determination Agreement, the obligations of each Underwriter hereunder are subject to the following conditions: 13 13 (a) Notification that the Registration Statement has become effective shall be received by the Representatives not later than 5:00 p.m., New York City time, on the date of this Agreement or at such later date and time as shall be consented to in writing by the Representatives and all filings required by Rule 424 of the Rules and Regulations and Rule 430A shall have been made. (b) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall be pending or threatened by the Commission, (ii) no order suspending the effectiveness of the Registration Statement or the qualification or registration of the Shares under the securities or Blue Sky laws of any jurisdiction shall be in effect and no proceeding for such purpose shall be pending before or threatened or contemplated by the Commission or the authorities of any such jurisdiction, (iii) any request for additional information on the part of the staff of the Commission or any such authorities shall have been complied with to the satisfaction of the staff of the Commission or such authorities and (iv) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to the Representatives and the Representatives did not object thereto in good faith, and the Representatives shall have received certificates, dated the Closing Date and the Option Closing Date and signed by the Chief Executive Officer or the Chairman of the Board of Directors of the Company and the Chief Financial Officer of the Company (who may, as to proceedings threatened, rely upon the best of their information and belief), to the effect of clauses (i), (ii) and (iii). (c) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) there shall not have been a material adverse change in the general affairs, business, business prospects, properties, management, condition (financial or otherwise) or results of operations of the Company, taken as a whole, whether or not arising from transactions in the ordinary course of business, in each case other than as set forth in or contemplated by the Registration Statement and the Prospectus and (ii) the Company shall not have sustained any material loss or interference with its business or properties from fire, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree, which is not set forth in the Registration Statement and the Prospectus, if in the judgment of the Representatives any such development makes it impracticable or inadvisable to consummate the sale and delivery of the Shares by the Underwriters at the initial public offering price. (d) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no litigation or other proceeding instituted against the Company or any of its officers or directors in their capacities as such, before or by any Federal, state or local court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, in which 14 14 litigation or proceeding an unfavorable ruling, decision or finding would materially and adversely affect the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company taken at a whole. (e) Each of the representations and warranties of the Company contained herein shall be true and correct in all material respects at the Closing Date and, with respect to the Option Shares, at the Option Closing Date, as if made at the Closing Date and, with respect to the Option Shares, at the Option Closing Date, and all covenants and agreements herein contained to be performed on the part of the Company and all conditions herein contained to be fulfilled or complied with by the Company at or prior to the Closing Date and, with respect to the Option Shares, at or prior to the Option Closing Date, shall have been duly performed, fulfilled or complied with. (f) The Representatives shall have received an opinion, dated the Closing Date and, with respect to the Option Shares, the Option Closing Date, and satisfactory in form and substance to counsel for the Underwriters, from Wilson Sonsini Goodrich & Rosati, counsel to the Company, to the effect set forth in Exhibit C. (g) The Representatives shall have received an opinion, dated the Closing Date, and with respect to the Option Shares, the Option Closing Date, and satisfactory in form and substance to counsel for the Underwriters, from Townsend and Townsend and Crew LLP, patent counsel to the Company, to the effect set forth in Exhibit D. (h) The Representatives shall have received an opinion, dated the Closing Date and the Option Closing Date, from Shearman & Sterling, counsel to the Underwriters, with respect to the Registration Statement, the Prospectus and this Agreement, which opinion shall be satisfactory in all respects to the Representatives. (i) On the date of the Prospectus, the Accountants shall have furnished to the Representatives a letter, dated the date of its delivery, addressed to the Representatives and in form and substance satisfactory to the Representatives, confirming that they are independent accountants with respect to the Company as required by the Act and the Rules and Regulations and with respect to the financial and other statistical and numerical information contained in the Registration Statement. At the Closing Date and, as to the Option Shares, the Option Closing Date, the Accountants shall have furnished to the Representatives a letter, dated the date of its delivery, which shall confirm, on the basis of a review in accordance with the procedures set forth in the letter from the Accountants, that nothing has come to their attention during the period from the date of the letter referred to in the prior sentence to a date (specified in the letter) not more than five days prior to the Closing Date and the Option Closing Date which would require any change in their letter dated the date of the Prospectus, if it were required to be dated and delivered at the Closing Date and the Option Closing Date. 15 15 (j) At the Closing Date and, as to the Option Shares, the Option Closing Date, there shall be furnished to the Representatives an accurate certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and the Chief Financial Officer of the Company, in form and substance satisfactory to the Representatives, to the effect that: (i) Each signer of such certificate has carefully examined the Registration Statement and the Prospectus and (A) as of the date of such certificate, such documents are true and correct in all material respects and do not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not untrue or misleading and (B) since the Effective Date, no event has occurred as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein not untrue or misleading in any material respect. (ii) Each of the representations and warranties of the Company contained in this Agreement were, when originally made, and are, at the time such certificate is delivered, true and correct in all material respects. (iii) Each of the covenants required herein to be performed by the Company on or prior to the delivery of such certificate has been duly, timely and fully performed and each condition herein required to be complied with by the Company on or prior to the date of such certificate has been duly, timely and fully complied with. (k) On or prior to the Closing Date, the Representatives shall have received the executed agreements referred to in Section 4(m). (l) The Shares shall be qualified for sale in such states as the Representatives may reasonably request, each such qualification shall be in effect and not subject to any stop order or other proceeding on the Closing Date and the Option Closing Date. (m) Prior to the Closing Date, the Shares shall have been qualified for quotation on the Nasdaq National Market. (n) The Company shall have furnished to the Representatives such certificates, in addition to those specifically mentioned herein, as the Representatives may have reasonably requested as to the accuracy and completeness at the Closing Date and the Option Closing Date of any statement in the Registration Statement or the Prospectus as to the accuracy at the Closing Date and the Option Closing Date of the representations and warranties of the Company herein, as to the performance by the Company of its obligations 16 16 hereunder, or as to the fulfillment of the conditions concurrent and precedent to the obligations hereunder of the Representatives. 6. Indemnification. (a) The Company will indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of each Underwriter and each person, if any, who controls each Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") from and against any and all losses, claims, liabilities, expenses and damages (including any and all investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding between any of the indemnified parties and any indemnifying parties or between any indemnified party and any third party, or otherwise, or any claim asserted), to which they, or any of them, may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, liabilities, expenses or damages arise out of or are based on any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus, or the omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading, provided that the Company will not be liable to the extent that such loss, claim, liability, expense or damage arises from the sale of the Shares in the public offering to any person by an Underwriter and is based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives on behalf of any Underwriter expressly for inclusion in the Registration Statement, any preliminary prospectus or the Prospectus. This indemnity agreement will be in addition to any liability that the Company might otherwise have. (b) Each Underwriter will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company and each officer of the Company who signs the Registration Statement to the same extent as the foregoing indemnity from the Company to each Underwriter, but only insofar as losses, claims, liabilities, expenses or damages arise out of or are based on any untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives on behalf of such Underwriter expressly for use in the Registration Statement, the Preliminary Prospectus or the Prospectus. This indemnity will be in addition to any liability that each Underwriter might otherwise have. 17 17 (c) Any party that proposes to assert the right to be indemnified under this Section 6 will, promptly after receipt of notice of commencement of any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 6, notify each such indemnifying party of the commencement of such action, enclosing a copy of all papers served, but the omission so to notify such indemnifying party will not relieve it from any liability that it may have to any indemnified party under the foregoing provisions of this Section 6 unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action, with counsel satisfactory to the indemnified party, and after notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable costs of investigation subsequently incurred by the indemnified party in connection with the defense. The indemnified party will have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such indemnified party unless (1) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (2) the indemnified party has reasonably concluded (based on advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (3) a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (4) the indemnifying party has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. All such fees, disbursements and other charges will be reimbursed by the indemnifying party promptly as they are incurred. An indemnifying party will not be liable for any settlement of any action or claim effected without its written consent (which consent will not be unreasonably withheld). No indemnifying party shall, without the prior written consent of each indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated by this Section 6 (whether or not any indemnified party is a party thereto), unless such settlement, compromise or consent 18 18 includes an unconditional release of each indemnified party from all liability arising or that may arise out of such claim, action or proceeding. (d) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in the foregoing paragraphs of this Section 6 is applicable in accordance with its terms but for any reason is held to be unavailable from the Company or the Underwriters, the Company and the Underwriters will contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, but after deducting any contribution received by the Company from persons other than the Underwriters, such as persons who control the Company within the meaning of the Act, officers of the Company who signed the Registration Statement and directors of the Company, who also may be liable for contribution) to which the Company and any one or more of the Underwriters may be subject in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. If, but only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to reflect not only the relative benefits referred to in the foregoing sentence but also the relative fault of the Company, on the one hand, and the Underwriters, on the other, with respect to the statements or omissions which resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable considerations with respect to such offering. Such relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Representatives on behalf of the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 6(d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, liability, expense or damage, or action in respect thereof, referred to above in this Section 6(d) shall be deemed to include, for purpose of this Section 6(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6(d), no Underwriter shall be required to contribute any amount in excess of the underwriting discounts received by it and no person found guilty of fraudulent 19 19 misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 6(d) are several in proportion to their respective underwriting obligations and not joint. For purposes of this Section 6(d), any person who controls a party to this Agreement within the meaning of the Act will have the same rights to contribution as that party, and each officer of the Company who signed the Registration Statement will have the same rights to contribution as the Company, subject in each case to the provisions hereof. Any party entitled to contribution, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution may be made under this Section 6(d), will notify any such party or parties from whom contribution may be sought, but the omission so to notify will not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have under this Section 6(d). No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld). (e) The indemnity and contribution agreements contained in this Section 6 and the representations and warranties of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of the Underwriters, (ii) acceptance of the Shares and payment therefor or (iii) any termination of this Agreement. 7. Termination. The obligations of the several Underwriters under this Agreement may be terminated at any time on or prior to the Closing Date (or, with respect to the Option Shares, on or prior to the Option Closing Date), by notice to the Company from the Representatives, without liability on the part of any Underwriter to the Company, if, prior to delivery and payment for the Shares (or the Option Shares, as the case may be), in the sole judgment of the Representatives, (i) trading in any of the equity securities of the Company shall have been suspended by the Commission, by an exchange that lists the Shares or by the Nasdaq Stock Market, (ii) trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum or maximum prices shall have been generally established on such exchange, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by such exchange or by order of the Commission or any court or other governmental authority, (iii) a general banking moratorium shall have been declared by either Federal or New York State authorities or (iv) any material adverse change in the financial or securities markets in the United States or in political, financial or economic conditions in the United States or any outbreak or material escalation of hostilities or declaration by the United States of a national emergency or war or other calamity or crisis shall have occurred the effect of any of which is such as to make it, in the sole judgment of the Representatives, impracticable or inadvisable to market the Shares on the terms and in the manner contemplated by the Prospectus. 20 20 8. Substitution of Underwriters. If any one or more of the Underwriters shall fail or refuse to purchase any of the Firm Shares which it or they have agreed to purchase hereunder, and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of Firm Shares, the other Underwriters shall be obligated, severally, to purchase the Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase, in the proportions which the number of Firm Shares which they have respectively agreed to purchase pursuant to Section 1 bears to the aggregate number of Firm Shares which all such non-defaulting Underwriters have so agreed to purchase, or in such other proportions as the Representatives may specify; provided that in no event shall the maximum number of Firm Shares which any Underwriter has become obligated to purchase pursuant to Section 1 be increased pursuant to this Section 8 by more than one-ninth of the number of Firm Shares agreed to be purchased by such Underwriter without the prior written consent of such Underwriter. If any Underwriter or Underwriters shall fail or refuse to purchase any Firm Shares and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase exceeds one-tenth of the aggregate number of the Firm Shares and arrangements satisfactory to the Representatives and the Company for the purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company for the purchase or sale of any Shares under this Agreement. In any such case either the Representatives or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. Any action taken pursuant to this Section 8 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 9. Miscellaneous. Notice given pursuant to any of the provisions of this Agreement shall be in writing and, unless otherwise specified, shall be mailed or delivered (a) if to the Company, at the office of the Company, 301 Penobscot Drive, Redwood City, California 94063, Attention: John Varian, Vice President, Finance and Chief Financial Officer, or (b) if to the Underwriters, to the Representatives at the offices of PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York 10019, Attention: Corporate Finance Department. Any such notice shall be effective only upon receipt. Any notice under Section 7 or 8 may be made by telex or telephone, but if so made shall be subsequently confirmed in writing. This Agreement has been and is made solely for the benefit of the several Underwriters and the Company and of the controlling persons, directors and officers referred to in Section 6, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" 21 21 as used in this Agreement shall not include a purchaser, as such purchaser, of Shares from any of the several Underwriters. All representations, warranties and agreements of the Company contained herein or in certificates or other instruments delivered pursuant hereto, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any of its controlling persons and shall survive delivery of and payment for the Shares hereunder. Any action required or permitted to be taken by the Representatives under this Agreement may be taken by them jointly or by PaineWebber Incorporated. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH STATE. This Agreement may be signed in two or more counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. In case any provision in this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. The Company and the Underwriters each hereby irrevocably waive any right they may have to a trial by jury in respect of any claim based upon or arising out of this Agreement or the transactions contemplated hereby. This Agreement may not be amended or otherwise modified or any provision hereof waived except by an instrument in writing signed by the Representatives and the Company. Please confirm that the foregoing correctly sets forth the agreement among the Company and the several Underwriters. Very truly yours, ANERGEN, INC. By: -------------------------- Title: 22 22 Confirmed as of the date first above mentioned: PAINEWEBBER INCORPORATED VECTOR SECURITIES INTERNATIONAL, INC. Acting on behalf of themselves and as the Representatives of the other several Underwriters named in Schedule I hereof. By: PAINEWEBBER INCORPORATED By: --------------------------- Title: 23 SCHEDULE I UNDERWRITERS
Number of Name of Firm Shares Underwriters to be Purchased - ------------ --------------- PaineWebber Incorporated Vector Securities International, Inc. Total ......................................................... ------------- 4,000,000 -------------
24 EXHIBIT A ANERGEN, INC. --------------------- PRICE DETERMINATION AGREEMENT -, 1996 PAINEWEBBER INCORPORATED VECTOR SECURITIES INTERNATIONAL, INC. As Representatives of the several Underwriters c/o PaineWebber Incorporated 1285 Avenue of the Americas New York, New York 10019 Dear Sirs: Reference is made to the Underwriting Agreement, dated -, 1996 (the "Underwriting Agreement"), among Anergen, Inc., a California corporation (the "Company") and the several Underwriters named in Schedule I thereto or hereto (the "Underwriters"), for whom PaineWebber Incorporated and Vector Securities International, Inc. are acting as representatives (the "U.S. Representatives"). The Underwriting Agreement provides for the purchase by the Underwriters from the Company, subject to the terms and conditions set forth therein, of an aggregate of 4,000,000 shares (the "Firm Shares") of the Company's common stock, no par value. This Agreement is the Price Determination Agreement referred to in the Underwriting Agreement. Pursuant to Section 1 of the Underwriting Agreement, the undersigned agree with the Representatives as follows: The initial public offering price per share for the Firm Shares shall be $______. 25 2 The purchase price per share for the Firm Shares to be paid by the several Underwriters shall be $_______ representing an amount equal to the initial public offering price set forth above, less $______ per share. The Company represents and warrants to each of the Underwriters that the representations and warranties of the Company set forth in Section 3 of the Underwriting Agreement are accurate as though expressly made at and as of the date hereof. As contemplated by the Underwriting Agreement, attached as Schedule I is a completed list of the several Underwriters, which shall be a part of this Agreement and the Underwriting Agreement. THIS AGREEMENT SHALL BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH STATE. If the foregoing is in accordance with your understanding of the agreement among the Underwriters and the Company, please sign and return to the Company a counterpart hereof, whereupon this instrument along with all counterparts and together with the Underwriting Agreement shall be a binding agreement among the Underwriters and the Company in accordance with its terms and the terms of the Underwriting Agreement. Very truly yours, ANERGEN, INC. By: ------------------------ Title: 26 3 Confirmed as of the date first above mentioned: PAINEWEBBER INCORPORATED VECTOR SECURITIES INTERNATIONAL, INC. Acting on behalf of themselves and as the Representatives of the other several Underwriters named in Schedule I hereof. By: PAINEWEBBER INCORPORATED By: ----------------------------- Title: 27 EXHIBIT B June ___ , 1996 PAINEWEBBER INCORPORATED VECTOR SECURITIES INTERNATIONAL, INC. As Representatives of the several Underwriters c/o PaineWebber Incorporated 1285 Avenue of the Americas New York, New York 10019 Dear Sirs: In consideration of the agreement of the several U.S. Underwriters, pursuant to which PaineWebber Incorporated and Vector Securities International, Inc. (the "Representatives") intend to act as Representatives to underwrite a proposed public offering (the "Offering") of shares of Common Stock, no par value (the "Common Stock"), of Anergen, Inc., a California corporation, as contemplated by a registration statement (the "Registration Statement") with respect to such shares to be filed with the Securities and Exchange Commission on Form S-1, the undersigned hereby agrees that the undersigned will not for a period of 90 days after the commencement of the public offering of such shares, without the prior written consent of PaineWebber Incorporated, (1) offer to sell, sell, contract to sell, grant an option to sell, or otherwise dispose of, or require the Company to file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 to register, any shares of Common Stock or securities convertible into or exchangeable for Common Stock or warrants or other rights to acquire shares of Common Stock of which the undersigned is now, or may in the future become, the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934 [(other than pursuant to employee stock option plans or in connection with other employee incentive compensation arrangements)]1 or (2) enter into any swap or similar agreement that transfers, in whole or in part, any of the economic consequences of the ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. Very truly yours, By: ---------------------- Print Name: ---------------------- - ------------------ 1 Insert if this letter agreement will be signed by an employee of the Company. 28 EXHIBIT C Form of Opinion of Counsel to the Company* 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has full corporate power and authority to own or lease all the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus. 2. All of the outstanding shares of Common Stock have been, and the Shares, when paid for by the Underwriters in accordance with the terms of the Agreement, will be, duly authorized, validly issued, fully paid and nonassessable and will not be subject to any preemptive or similar right under (i) the statutes, judicial and administrative decisions, and the rules and regulations of the governmental agencies of the State of California, (ii) the Company's articles of incorporation or by-laws or (iii) any instrument, document, contract or other agreement referred to in the Registration Statement or any instrument, document, contract or agreement filed as an exhibit to the Registration Statement. Except as described in the Registration Statement or the Prospectus, to our knowledge, there is no commitment or arrangement to issue, and there are no outstanding options, warrants or other rights calling for the issuance of, any share of capital stock of the Company to any person or any security or other instrument that by its terms is convertible into, exercisable for or exchangeable for capital stock of the Company. 3. To our knowledge, no consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the authorization, issuance, transfer, sale or delivery of the Shares by the Company, in connection with the execution, delivery and performance of the Agreement by the Company or in connection with the taking by the Company of any action contemplated thereby, except such as have been obtained under the Act and the Rules and Regulations and such as may be required under state securities or "Blue Sky" laws or by the by-laws and rules of the NASD in connection with the purchase and distribution by the Underwriters of the Shares to be sold by the Company. - --------------- * All references in this opinion to the Agreement shall include the Price Determination Agreement. Capitalized terms used herein and not otherwise defined have the same meanings as in the Underwriting Agreement. 29 2 4. The authorized, issued and outstanding capital stock of the Company is as set forth in the Registration Statement and the Prospectus under the caption "Capitalization." The description of the Common Stock contained in the Prospectus under the caption "Description of Capital Stock" is complete and accurate in all material respects. The form of certificate used to evidence the Common Stock is in due and proper form and complies in all material respects with all applicable statutory requirements. 5. The Registration Statement and the Prospectus comply in all material respects as to form with the requirements of the Act and the Rules and Regulations (except that we express no opinion as to financial statements, schedules and other financial data contained in the Registration Statement or the Prospectus). To our knowledge, any instrument, document, lease, license, contract or other agreement (collectively, "Documents") required to be described or referred to in the Registration Statement or the Prospectus has, in all material respects, been properly described or referred to therein and any Document required to be filed as an exhibit to the Registration Statement has been filed as an exhibit thereto or has been incorporated as an exhibit by reference in the Registration Statement; and to our knowledge, no default exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any Document filed or required to be filed as an exhibit to the Registration Statement. 6. To our knowledge, except as disclosed in the Registration Statement or the Prospectus, no person or entity has the right to require the registration under the Act of shares of Common Stock or other securities of the Company by reason of the filing or effectiveness of the Registration Statement. 7. To our knowledge, the Company is not in violation of, or in default with respect to, any law, rule, regulation, order, judgment or decree, except as may be described in the Prospectus or such as in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business or assets of the Company taken as a whole. 8. All descriptions in the Prospectus of statutes, regulations or legal or governmental proceedings accurately and fairly present, in all material respects, the information required to be shown. 9. The Agreement has been duly authorized, executed and delivered by the Company, is a valid and binding agreement of the Company and, except for the indemnification and contribution provisions thereof, as to which we express no opinion, is enforceable against the Company in accordance with the terms thereof. 30 3 10. The execution and delivery by the Company of, and the performance by the Company of its agreements in, the Agreement do not and will not (i) violate the articles of incorporation or by-laws of the Company, (ii) breach or result in a default under, cause the time for performance of any obligation to be accelerated under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of the Company pursuant to the terms of, (x) any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement, capital lease or other evidence of indebtedness of which we have knowledge, (y) any voting trust arrangement or any contract or other agreement to which the Company is a party that restricts the ability of the Company to issue securities and of which we have knowledge or (z) any Document filed as an exhibit to the Registration Statement, which breach, default, accelerations or impositions, individually or in the aggregate, could reasonably be expected to have a material adverse effect on the Company's business, properties, business prospects, condition (financial or otherwise) or results of operations, (iii) breach or otherwise violate any existing obligation of the Company under any court or administrative order, judgment or decree of which we have knowledge or (iv) violate applicable provisions of any statute or regulation in the State of California or of the United States. Delivery of certificates for the Shares will transfer valid and marketable title thereto to each Underwriter that has purchased such Shares in good faith and without notice of any adverse claim with respect thereto. 11. The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. 12. We have been advised by the Nasdaq Stock Market, Inc. that the Shares have been duly approved for quotation on the Nasdaq National Market. 13. The Registration Statement has become effective under the Act and, to our knowledge, no order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or is pending, threatened or contemplated. 14. To our knowledge, there are no actions, suits, proceedings or investigations pending or overtly threatened in writing against the Company, or any of its officers or directors in their capacities as such, before or by any Federal, State or foreign court, governmental agency or arbitrator which if determined adversely to the Company, would individually or in the aggregate, have a material adverse effect on the Company or its business, properties, business prospects, condition (financial or otherwise) or 31 4 results of operations, taken as a whole. 15. We have participated in the preparation of the Registration Statement and the Prospectus and, without assuming any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus or in any amendment or supplement thereto, nothing has come to our attention that causes us to believe that, as of the Effective Date, the Registration Statement or any amendment thereto contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any Prospectus or any amendment or supplement thereto, at the time such Prospectus was issued, at the time any such amended or supplemented Prospectus was issued, at the Closing Date and the Option Closing Date, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading (except that we express no opinion as to financial statements, schedules and other financial data contained in the Registration Statement or the Prospectus. Opinion 10 is subject to the qualification that the enforceability of the Agreement may be: (i) subject to bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally; and (ii) subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity) including principles of commercial reasonableness or conscionability and an implied covenant of good faith and fair dealing. This letter is furnished by us solely for your benefit in connection with the transactions referred to in the Agreement and may not be circulated to, or relied upon by, any other person, except that this letter may be relied upon by your counsel in connection with the opinion letter to be delivered to you pursuant to Section 5(h). In rendering the foregoing opinion, counsel may rely, to the extent they deem such reliance proper, on the opinions (in form and substance reasonably satisfactory to Underwriters' counsel) of other counsel reasonably acceptable to Underwriters' counsel as to matters governed by the laws of jurisdictions other than the United States and the State of California, and as to matters of fact, upon certificates of officers of the Company and of government officials; provided that such counsel shall state that the opinion of any other counsel is in form satisfactory to such counsel. Copies of all such opinions and certificates shall be furnished to counsel to the Underwriters on the Closing Date. EX-5.1 3 EXHIBIT 5.1 1 EXHIBIT 5.1 [ON WILSON SONSINI GOODRICH & ROSATI LETTERHEAD] June 27, 1996 Anergen, Inc. 301 Penobscot Drive Redwood City, CA 94063 RE: REGISTRATION STATEMENT ON FORM S-1 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 to be filed by you with the Securities and Exchange Commission on June 28, 1996 (as such may thereafter be amended or supplemented, the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of up to 4,600,000 shares of your Common Stock, no par value (the "Shares"). We understand that the Shares are to be sold to the underwriters of the offering for resale to the public as described in the Registration Statement. As your legal counsel, we have examined the proceedings taken, and are familiar with the proceedings proposed to be taken, by you in connection with the sale and issuance of the Shares. It is our opinion that, upon completion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Shares, including the proceedings being taken in order to permit such transaction to be carried out in accordance with applicable state securities laws, the Shares, when issued and sold in the manner described in the Registration Statement and in accordance with the resolutions adopted by the Board of Directors of Anergen, Inc., will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof, and any amendments thereto. Very truly yours, WILSON, SONSINI, GOODRICH & ROSATI Professional Corporation /s/ WILSON SONSINI GOODRICH & ROSATI EX-10.15 4 EXHIBIT 10.15 1 EXHIBIT 10.15 PRODUCT DEVELOPMENT AND LICENSE AGREEMENT This Product Development and License Agreement ("the Agreement") entered into on June 28, 1996, is made and entered into by and between Anergen, Inc., a California corporation, with a principal place of business at 301 Penobscot Drive, Seaport Centre, Redwood City, California 94063, U.S.A. ("ANERGEN"), and N.V. Organon, a company incorporated under the laws of The Netherlands, having its registered place of business at P.O. Box 20, 5340 BH Oss, The Netherlands ("ORGANON"), together referred to as "PARTIES", or individually as a "PARTY." WHEREAS: (1) ANERGEN has developed and is developing proprietary Major Histocompatibility Complex Class II ("MHC II" ) peptide complexes designated for the treatment of autoimmune disease and has offered rights to its technology to ORGANON for use in the treatment of rheumatoid arthritis ("RA"); and (2) ORGANON wishes ANERGEN to conduct feasibility studies leading to the development of a product or products which incorporate a proprietary ORGANON peptide epitope for the treatment of RA and makes use of ANERGEN's aforesaid technology, and wishes to receive a license under ANERGEN's proprietary rights for the purpose of development, manufacturing and marketing such product or products; and (3) The PARTIES wish to enter into a collaboration to develop and commercialize such product or products in the field of RA, on the terms and conditions herein. NOW, THEREFORE, the PARTIES hereby agree as follows: ARTICLE 1 - DEFINITIONS In this Agreement, the following terms shall have the following meanings: 1.1 "AFFILIATE" shall mean any corporation or other entity that is directly or indirectly controlling, controlled by or under common control with a PARTY. For the purpose of this definition, "control" shall mean the direct or indirect ownership of more than fifty percent (50%) of the shares of the subject entity entitled to vote in the election of directors or other managing authority of such entity. 1.2 "ANERGEN KNOW-HOW" shall mean any and all confidential scientific, technical and engineering information, experience and know-how relating to the MHC PEPTIDE TECHNOLOGY that is owned, invented, developed or acquired (with a right to sublicense) by ANERGEN now or during the term of the DEVELOPMENT PROGRAM. 2 1.3 "ANERGEN PATENTS" shall mean the United States patents and patent applications listed on Exhibit A, and any patents issuing thereon, and any corresponding foreign patent applications and patents, and any division, re-examination, continuation, continuation-in-part, extension, substitution or reissue of any of the preceding patent applications and patents. 1.4 "DEVELOPMENT PROGRAM" shall mean the research, scale-up manufacturing, regulatory and clinical program described in Exhibit B of this Agreement. 1.5 "EFFECTIVE DATE" shall mean the date this Agreement is entered into. 1.6 "FDA" shall mean the U.S. Food and Drug Administration. 1.7 "FIELD" shall mean the treatment of rheumatoid arthritis. 1.8 "FUTURE PATENTS" shall mean all patent applications in any jurisdiction made and owned by either PARTY, claiming inventions made by a PARTY or jointly by the PARTIES during and in connection with the DEVELOPMENT PROGRAM relating to the MHC PEPTIDE TECHNOLOGY, or the PRODUCT(S) or the manufacture or use thereof, and any patents issuing thereon, and any division, re-examination, continuation, continuation-in-part, extension, substitution and reissue of any of the preceding patent applications or patents. 1.9 "IND" shall mean an Investigational New Drug Exemption for a PRODUCT, as defined in the U.S.A. Food, Drug and Cosmetic Act and the regulations promulgated thereunder, or its equivalent in other countries. 1.10 "JOINT KNOW-HOW" shall have the meaning set forth in Section 14.3 herein. 1.11 "LAUNCH DATE" shall mean the date on which a PRODUCT is first offered for commercial sale in any country of the TERRITORY by ORGANON or an ORGANON AFFILIATE or sublicensee. 1.12 "MAJOR COUNTRY" shall mean any of the United States, Japan, Germany, the United Kingdom, France or Italy. 1.13 "MHC PEPTIDE TECHNOLOGY" shall mean methods for making and combining a MHC II heterodimer or a portion thereof, or functional equivalents thereof, with a peptide capable of forming a complex. 1.14 "NET SALES" shall mean the invoice price billed by ORGANON, its AFFILIATES or its sublicensees to third parties for the sale of PRODUCT(S), less the following: (a) trade and/or quantity discounts actually allowed and taken; (b) sales, value added, or other excise taxes paid, and duties actually absorbed, or allowed; -2- 3 (c) amounts repaid or credited by reason of purchase chargebacks, rebates, rejections, defects or return; and (d) charges for freight, insurance, handling and transportation. 1.15 "ORGANON KNOW-HOW" shall mean any and all confidential scientific, technical and engineering information, experience and know-how relating to the PRODUCT(S), that are owned, invented, developed, or acquired (with a right to sublicense) by ORGANON during the term of the DEVELOPMENT PROGRAM, including, but not limited to, information, data, drawings and other materials relating to the development, manufacture, use and/or sale of the PRODUCT(S). 1.16 "ORGANON PATENTS" shall mean the patent applications and patents listed on Exhibit C, and any patents issuing thereon, and any division, re-examination, continuation, continuation- in-part, extension, substitution or reissue of any of the preceding patent applications and patents. 1.17 "PAYMENT COMPUTATION PERIOD" shall mean each three (3) month period ending on March 31st, June 30th, September 30th, and December 31st of a given year during the term of this Agreement. 1.18 "PLA" shall mean a Product License Application for a PRODUCT, as defined in the U.S.A. Food, Drug and Cosmetic Act and the regulations promulgated thereunder, or its equivalent in other countries. 1.19 "PRODUCT," "PRODUCTS," OR PRODUCT(S)" shall mean any pharmaceutical active composition for the treatment of RA developed in connection with the DEVELOPMENT PROGRAM, which is derived by the use of the MHC PEPTIDE TECHNOLOGY and which incorporates one or more specific proprietary ORGANON epitopes and/or an ANERGEN epitopes selected under 4.5. 1.20 "PROJECT INITIATION DATE" shall mean the date that ORGANON provides initial quantities of the initial ORGANON epitope to ANERGEN. 1.21 "STEERING COMMITTEE" or "SC" shall mean the joint steering committee responsible for the management of the initial feasibility stage of the DEVELOPMENT PROGRAM, described in Article 3 of this Agreement. 1.22 "TERRITORY" shall mean all countries of the world. ARTICLE 2 - DEVELOPMENT PROGRAM -3- 4 2.1 The PARTIES shall conduct the DEVELOPMENT PROGRAM with the goal of developing a PRODUCT OR PRODUCTS. Each PARTY shall perform its responsibilities under the DEVELOPMENT PROGRAM in accordance with the timetables set forth in the development plan. 2.2 The DEVELOPMENT PROGRAM shall have three stages, as follows: (a) the initial feasibility stage shall consist of pre-clinical research and development, scale-up manufacture and the conduct of an initial Phase I/II clinical trial using samples of a PRODUCT to demonstrate proof of principle in RA, according to criteria to be established by the SC. The initial feasibility stage shall commence on the EFFECTIVE DATE and terminate upon the completion of the first Phase I/II clinical trial of the PRODUCT. For purposes of this Agreement, a clinical trial shall be deemed completed when all patients enrolled in such trial have been treated with the PRODUCT, and all patient case report forms have been submitted to ANERGEN or its designee and ANERGEN has fully reported to ORGANON in writing its detailed evaluation of the results of such trial; (b) the second stage shall commence on the completion of the initial phase and terminate upon the first approval for the sale of a PRODUCT in a MAJOR COUNTRY, and shall consist of the conduct of further clinical trials, including pivotal trials, of the PRODUCT(S), and if appropriate, further pre-clinical studies with regard to the PRODUCT(S); and (c) the third stage shall commence on the completion of the second phase and shall consist of the conduct of post-approval clinical studies and PRODUCT commercialization activities. 2.3 Prior to the PROJECT INITIATION DATE, the PARTIES shall agree on a written development plan for the activities each PARTY will conduct in connection with the initial feasibility stage of the DEVELOPMENT PROGRAM. The SC shall review the development plan on an ongoing basis and from time to time may make changes to the development plan; provided, however, the development plan shall not be modified except as agreed in writing by ANERGEN and ORGANON. 2.4 In the event that ORGANON after consideration by the SC and review of the recommendation of the SC determines that it is [*] FIELD [*] or [*], ORGANON may [*] subject to the terms and conditions set forth in this Agreement and provided [*]. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -4- 5 It is understood and agreed that ORGANON [*] the epitope described on Exhibit D hereto (the "Initial Epitope "). Until the [*] anniversary of the EFFECTIVE DATE, ORGANON may [*] (a) [*] (b) [*] Notwithstanding the above, it is understood and agreed by PARTIES that [*] (c) [*] (d) [*] Notwithstanding the above, it is understood and agreed that [*] [*] 2.5 The DEVELOPMENT PROGRAM shall commence on the date of this Agreement and shall continue thereafter for a period of at least thirty-six (36) months from the PROJECT INITIATION DATE. The DEVELOPMENT PROGRAM shall automatically renew thereafter unless ORGANON gives ANERGEN six (6) months written notice not to continue the DEVELOPMENT PROGRAM; provided ORGANON may not give such notice prior to thirty (30) months after the PROJECT INITIATION DATE and provided any extension of * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -5- 6 the DEVELOPMENT PROGRAM beyond the fifth anniversary of the EFFECTIVE DATE must be mutually agreed in writing by the PARTIES. 2.6 At least every three (3) months, the SC shall provide each PARTY with a written report summarizing the activities performed according to the initial feasibility stage of the DEVELOPMENT PROGRAM, and the costs incurred in connection with such activities. Periodically, but no less often than annually, each PARTY shall provide the SC with a written report summarizing the status of its PATENTS and FUTURE PATENTS worldwide, and any material scientific or commercial issues relating to the PRODUCT(S). 2.7 Except as expressly provided in Section 2.8, ORGANON shall be responsible for all costs projected or approved by the SC to be incurred in connection with the initial feasibility phase of the DEVELOPMENT PROGRAM (Exhibit B), including, but not limited to, pre-clinical research costs, the costs of clinical trials including product liability insurance, expenses of outside parties assisting in any such trial, and other clinical trial expenses, costs of toxicology and pharmacokinetic studies, regulatory filing fees and costs of other research activities. ORGANON shall pay to ANERGEN quarterly, in advance, amounts equal to the fully burdened direct and indirect expenses projected or approved by the SC to be incurred by ANERGEN in connection with DEVELOPMENT PROGRAM activities in the next quarter. 2.8 In the event that the SC determines that any intellectual property must be licensed from a third party for the conduct of the DEVELOPMENT PROGRAM, ORGANON shall be responsible for all license fees and costs associated with such license; provided, ANERGEN shall [*] of such fees and costs to ORGANON for a license of any intellectual property necessary for the use of the MHC PEPTIDE TECHNOLOGY. Unless otherwise agreed by the PARTIES, ANERGEN shall be the licensee of any intellectual property necessary for the use of the MHC PEPTIDE TECHNOLOGY, and ORGANON shall be the licensee of any other third party intellectual property. If a third party license is obtained by either PARTY which covers any PRODUCT(S), it is agreed the licensing PARTY will attempt in good faith to obtain the right to sublicense the same, and if it obtains such rights, will offer to sublicense such rights to the other PARTY for consideration equal to a pro rata share of any license fees, and payments for any amounts owed to the licensor for any activities conducted by the sublicensee, and on other terms fully consistent with the license. Any such sublicense will, if possible, have the same life as the other license rights granted herein. It is further agreed that each PARTY will attempt to maintain these third party licenses as long as they are important to the other PARTY and the sublicensee has not committed any breach of the sublicensed rights. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -6- 7 ARTICLE 3 - STEERING COMMITTEE 3.1 In order to plan, establish budgets for, and review and monitor progress with respect to the initial feasibility stage of the DEVELOPMENT PROGRAM, ANERGEN and ORGANON shall establish a STEERING COMMITTEE. The SC shall be comprised of three (3) representatives of each PARTY, such representatives to be selected and replaced by the respective PARTIES. 3.2 Any approval, determination or other action of the SC must be agreed to by the representatives of both PARTIES, with each PARTY having one vote. The SC shall act to resolve, if possible, any disputes between the PARTIES, and to address other significant matters which may arise hereunder. In the event of a tie, the matter shall be referred to the chief executive officers of each PARTY, or their designees, who shall promptly negotiate in good faith to resolve such dispute. In the event that such individuals are unable to resolve such dispute, the matter shall be resolved by binding arbitration pursuant to Section 20.2. 3.3 Each year during the initial feasibility stage of the DEVELOPMENT PROGRAM, on or before October 31, the SC shall agree on a budget for the initial feasibility stage of the DEVELOPMENT PROGRAM activities to be conducted during the next year. Each PARTY shall finally approve the budget established by the SC for the next year by December 1 of each year. The PARTIES shall agree on the budget for the first year of the DEVELOPMENT PROGRAM prior to the PROJECT INITIATION DATE. 3.4 Until the termination of the initial feasibility phase of the DEVELOPMENT PROGRAM, the SC shall meet at least quarterly, unless otherwise agreed by the PARTIES, at times and places as agreed upon in the prior meeting of the SC. The SC shall keep written minutes of its meetings. ORGANON shall pay all reasonable out-of-pocket expenses, including, without limitation, travel and lodging expenses, associated with the attendance of SC representatives at SC meetings. Such out-of-pocket expenses shall be included as part of the DEVELOPMENT PROGRAM budget. ARTICLE 4 - LICENSE GRANTS 4.1 Subject to the terms and conditions of this Agreement, ANERGEN hereby grants to ORGANON, and ORGANON hereby accepts, the following, royalty-bearing license under the ANERGEN PATENTS, ANERGEN KNOW HOW, and ANERGEN's interest in the FUTURE PATENTS and JOINT KNOW-HOW: (a) to develop, have developed, evaluate, have evaluated, validate and have validated the PRODUCT(S) in the FIELD; (b) to conduct clinical and nonclinical studies with respect to validation, safety and efficacy of the PRODUCT(S) in the FIELD; and -7- 8 (c) subject to Sections 10.1 and 10.3 below, to make, have made, import, use, offer for sale and sell the PRODUCT(S) in the FIELD in the TERRITORY. 4.2 ORGANON shall have the right (with the right to sublicense to its AFFILIATES and other third parties) the right to manufacture, have manufactured, use and sell the PRODUCT(S) developed in connection with the DEVELOPMENT PROGRAM, provided that such sublicensees agree in writing to comply with the terms and conditions of this Agreement and ANERGEN is an express third party beneficiary of such a sublicense agreement. The PRODUCT(S) may be sold under ORGANON trademarks; provided any such PRODUCT(S) shall bear a statement disclosing that any such PRODUCT(S) was developed in collaboration with and under a license from ANERGEN. 4.3 ORGANON hereby grants to ANERGEN, and ANERGEN hereby accepts, a non-exclusive, worldwide, royalty-free license (with the right to grant sublicenses) to use and practice the ORGANON PATENTS and ORGANON KNOW-HOW solely for the purpose of conducting the DEVELOPMENT PROGRAM and fulfilling its obligations under this Agreement. 4.4 Each PARTY shall have the right to practice and commercialize, itself or with third parties, the JOINT KNOW-HOW and FUTURE PATENTS outside the FIELD, without the consent of the other PARTY and with no obligation to account to the other PARTY. 4.5 ORGANON acknowledges that the PRODUCT(S) will contain one or more proprietary ORGANON epitopes, but that its non-MHC portion will not contain any ANERGEN epitopes unless the PARTIES agree to amend this Agreement to include an ANERGEN epitope(s) in which event as part of such amendment the milestone payment for IND non- rejection in Section 6.2 shall be increased to U.S.[*] and each of the royalty rates in Section 7.1 shall each be increased by [*] for sales of PRODUCT(S) using an ANERGEN epitope. ARTICLE 5 - PROVISIONS ON EXCLUSIVITY IN THE FIELD 5.1 [*] 5.2 After the date set forth in Section 5.1, ANERGEN shall have the right to enter into an agreement to research, develop and/or commercialize with third parties (or alone to research, develop and/or commercialize), products other than the PRODUCT(S) for use in the FIELD which incorporate the MHC PEPTIDE TECHNOLOGY, provided that such products do not * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -8- 9 incorporate any ORGANON epitope and/or ANERGEN epitope agreed by the parties pursuant to Section 4.5. ANERGEN agrees that any exercise of such retained rights shall not prevent it from performing its obligations with respect to the DEVELOPMENT PROGRAM. In the event ANERGEN enters into an agreement with one additional third party and in connection therewith files a PLA, or if ANERGEN alone files a PLA with respect to the use of the MHC PEPTIDE TECHNOLOGY in the FIELD, ORGANON's rights under this Agreement shall be non-exclusive in the FIELD and the milestone payments and royalties due to ANERGEN thereafter shall be those set forth in Sections 6.2 (b) and 7.1 (b), respectively. ANERGEN must notify ORGANON within 10 days of any change in exclusivity. ARTICLE 6 - MILESTONE PAYMENTS 6.1 On the EFFECTIVE DATE, ORGANON shall pay to ANERGEN a technology access fee of [*]. 6.2 Within thirty (30) days following the achievement of each of the following milestones, ORGANON shall pay to ANERGEN the corresponding milestone payment set forth below. (a) [*] (b) [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -9- 10 If ORGANON'S rights become non-exclusive pursuant to Section 5.2 resulting in milestone payments as reflected in Section 6.2(b), because an ANERGEN or a third party PLA is filed within [*] from the filing of ORGANON'S PLA, then [*] of the higher milestone amounts paid under Section 6.2 (a) versus the milestone amounts that would have been paid under Section 6.2 (b) will be creditable against future royalties to ANERGEN. If the ANERGEN or third party PLA is filed more than [*] from the filing of ORGANON'S PLA, then [*]. 6.3 [*] ARTICLE 7 - ROYALTIES 7.1 ORGANON will pay running royalties to ANERGEN based on worldwide annual aggregate NET SALES by ORGANON, its AFFILIATES and sublicensees of all PRODUCT(S) subject to this Agreement as follows: (a) [*] (b) [*] (c) [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -10- 11 [*] (d) In the event ANERGEN pursues commercialization of the MHC PEPTIDE TECHNOLOGY in the FIELD alone or with more than one additional third party by the filing of more than one PLA with respect to a product in the FIELD (other than a PRODUCT subject to this Agreement), then from the time of the filing of the second PLA for such a product in a MAJOR COUNTRY by the additional third party or by ANERGEN, the royalty rates in Section 7 due ANERGEN shall be reduced [*]. 7.2 Royalties shall be payable according to Section 7.1, on a country-by-country and product-by- product basis, from the LAUNCH DATE in such country until the later of (i) the expiration of all ANERGEN PATENTS and FUTURE PATENTS covering a particular PRODUCT in such country, or (ii)[*] following the LAUNCH DATE of such PRODUCT in such country. 7.3 Within thirty (30) days after the end of each PAYMENT COMPUTATION PERIOD, ORGANON shall send a written report to ANERGEN stating, on a country-by-country basis, the NET SALES and the quantity of PRODUCT(S) sold in the TERRITORY by ORGANON, its AFFILIATES and sublicensees, the percentage of royalties applicable, and the royalties payable to ANERGEN. Prior to January 1 of each year ORGANON shall provide to ANERGEN a copy of ORGANON's internal forecast for sales of PRODUCT(S) for such year and the blended annual royalty rate that would be payable for such sales. Royalties payable for the first three PAYMENT COMPUTATION PERIODS shall use such blended royalty rate. The report for the period ending March 31st of each year will include a final report of actual NET SALES for the prior year and the adjustment required in the final royalty payable for such year. A final report shall also be submitted within ninety (90) days after termination or expiration of this Agreement. All royalties, as set forth above, shall be due and payable to ANERGEN simultaneously with the submission by ORGANON of each report under this Section 7.4. 7.4 All payments due under this Agreement are quoted in U.S. dollars and shall be paid to ANERGEN in U.S. dollars via wire transfer to a bank account designated by ANERGEN. All payments that are not paid on the date due shall bear interest at the prime rate as reported by the Bank of America on the date such payment is due, calculated based on the number of days * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -11- 12 such payment is delinquent, or if such rate is not lawful, at the highest rate permitted by applicable law. 7.5 NET SALES, and the amounts payable hereunder, shall first be determined in the currency of the country in which the PRODUCTS were sold, shall then be converted into Dutch Guilders at the exchange rate used by ORGANON for consolidation purposes (which shall be closely related to the market currency exchange rates in effect at the time of each conversion) and shall then be further converted into an equivalent amount of U.S. dollars. ORGANON will pay to ANERGEN the amount due in U.S. dollars by applying the appropriate exchange rate published in The Wall Street Journal on the last banking day of the relevant PAYMENT COMPUTATION PERIOD. 7.6 ORGANON and its AFFILIATES and sublicensees shall keep records of the sales of the PRODUCTS in sufficient detail to permit the determination of the royalties due and payable to ANERGEN. At the request and expense of ANERGEN, ORGANON shall permit an independent auditor or certified public accountant, appointed by ANERGEN and reasonably acceptable to ORGANON, to examine these records during ordinary business hours to verify the royalties due and payable to ANERGEN under this Agreement. Inspections shall be at the expense of ANERGEN, unless there has been an underpayment of five percent (5%) or more in any reporting period, in which event the costs of such inspection shall be borne by ORGANON. The results of any such examination shall be made available to both ANERGEN and ORGANON. ORGANON's agreements with its AFFILIATES and sublicensees shall include record keeping provisions and audit rights on behalf of ANERGEN substantially similar to this Section 7.7. ARTICLE 8 - TAXES Each PARTY undertakes to cooperate with the other party to achieve the tax arrangements which are most favorable for the PARTIES, within the limits of applicable law. ORGANON may withhold from payments made to ANERGEN under this Agreement any income taxes required to be withheld by ORGANON in relation to payments to ANERGEN under the applicable laws of the relevant countries. Such amount shall be paid to the appropriate taxing authorities and ORGANON shall provide ANERGEN with official receipts issued by said taxing authority or such other evidence as is reasonably available to establish that such taxes have been paid and are available for credit by ANERGEN for United States income tax purposes. Notwithstanding the foregoing, ORGANON shall assist ANERGEN and take all actions reasonably necessary in order to secure a reduction or elimination of withholding taxes pursuant to any income tax treaty in force between the United States and the relevant countries. ARTICLE 9 - EXCHANGE OF KNOW-HOW -12- 13 9.1 Pursuant to the license granted in Article 4, each PARTY shall provide the other PARTY with all the KNOW-HOW necessary to conduct the DEVELOPMENT PROGRAM during the term thereof, without unreasonable delay. 9.2 During the term of this Agreement, each PARTY shall promptly provide to the other PARTY all safety and efficacy data, information and results developed or acquired by it with respect to the PRODUCTS; provided however, neither PARTY shall be obliged to disclose data, information and results which that PARTY is legally prevented from disclosing. Each PARTY shall have the right to use such data, information and results developed by the other PARTY without charge to such PARTY to exercise its rights and perform its obligations under this Agreement. Each PARTY shall keep such data, information and results confidential, whether developed by either PARTY, according to the provisions of Article 12. 9.3 All KNOW-HOW and other INFORMATION (as defined in Article 12) furnished by one PARTY to the other PARTY hereunder shall remain the property of the disclosing PARTY. 9.4 Each PARTY will assist the other PARTY in understanding its KNOW-HOW, as judged useful by the SC. 9.5 ORGANON shall have access to and the right to use, free of any charge, any parts of the IND and PLA submission dossiers and files prepared by ANERGEN in connection with any governmental approval of any PRODUCT. ANERGEN shall have access, free of charge, to such parts of the IND and PLA submission dossiers and files prepared by ORGANON as is reasonably required in connection with any governmental approval of any PRODUCT and, only after the explicit prior written approval of ORGANON (not to be unreasonably withheld), shall have the right to use such information. If such use relates to any commercialization, the PARTIES shall negotiate in good faith a reasonable compensation to ORGANON for such use. ARTICLE 10 - SUPPLY OF MATERIALS DURING INITIAL FEASIBILITY PERIOD 10.1 ORGANON shall have the right to make and supply to ANERGEN all peptide and ANERGEN shall make, or have made, and supply to ORGANON all MHC II and PRODUCT(S) necessary for development work (including preclinical and clinical investigation) to be conducted during the DEVELOPMENT PROGRAM, subject to Section 10.2 below, and ANERGEN's capacity limitations. ORGANON will reimburse ANERGEN for all fully burdened direct and indirect costs related to the manufacture and supply of MHC II and PRODUCT(S) (exclusive of peptide provided by ORGANON) necessary for the conduct of the DEVELOPMENT PROGRAM. If ORGANON does not provide the peptide, ANERGEN will procure such peptide from a third party and be reimbursed the costs thereof. 10.2 The SC shall supply ANERGEN with estimates of the quantities of the MHC II and/or epitope required during the DEVELOPMENT PROGRAM for preclinical and clinical -13- 14 investigation purposes. Such estimates shall form the basis for orders to be submitted by ORGANON to ANERGEN for the MHC II and/or epitope and ANERGEN shall inform ORGANON of the quantity of epitope required, in a form and subject to a procedure to be agreed between the PARTIES. ARTICLE 11 - COMMERCIALIZATION 11.1 Following the termination of the initial phase of the DEVELOPMENT PROGRAM and until the first PLA approval in the United States or a MAJOR COUNTRY, ORGANON shall use its reasonable best efforts to complete development of a PRODUCT or PRODUCTS for the use of the PRODUCT(S) for the treatment of RA. ORGANON shall prepare an annual development plan and provide a copy of such plan to ANERGEN within thirty (30) days prior to each calendar year and shall provide ANERGEN with a copy of any material revisions to such plan during the year. If pursuant to Section 7.1(d), ANERGEN, alone or with a third party, files two or more PLAs with respect to products in the FIELD (other than PRODUCTS subject to this Agreement), as of the date of filing of the second such PLA ORGANON shall no longer be required to prepare or provide ANERGEN with an annual development plan. 11.2 Following the first PLA approval, ORGANON shall use its reasonable best efforts to commercialize the PRODUCT(S) throughout the TERRITORY. After the first PLA filing with respect to a PRODUCT, ORGANON shall prepare and provide ANERGEN a reasonable plan for worldwide commercialization, which may include a staged introduction of the PRODUCT(S) in different countries. ORGANON shall promptly provide to ANERGEN all material updates of the plan, as it may be revised from time to time. If pursuant to Section 7.1(d), ANERGEN, alone or with a third party, files two or more PLAs with respect to products in the FIELD (other than PRODUCTS subject to this Agreement), as of the date the filing of the second such PLA ORGANON shall no longer be required to prepare or provide ANERGEN with updates to the commercialization plan. 11.3 ANERGEN shall have an exclusive option to co-promote the PRODUCT(S) in the United States and Canada, together with ORGANON, its AFFILIATES or sublicensees, under terms and conditions to be mutually agreed. Within thirty-six (36) months after ANERGEN receives notice from ORGANON of a PLA filing for the PRODUCT(S) in the United States, ANERGEN shall notify ORGANON of its intention to exercise such co-promotion right. If ANERGEN does not exercise such co-promotion right within said thirty-six (36) month period, the option to co-promote will expire. If requested by either PARTY, the PARTIES shall negotiate in good faith the terms of separate agreements for such co-promotion relationship in the United States and/or Canada, and provided such terms shall reflect the respective contributions of the PARTIES during the DEVELOPMENT PROGRAM, including amounts expended by the PARTIES on research and clinical trial costs, PRODUCT registration fees, patent expenses and the like. If ANERGEN co-promotes the PRODUCT(S), both PARTIES will market and conduct sales activities for the PRODUCT(S), and ORGANON will remunerate ANERGEN for such marketing and sales -14- 15 activities, commensurate with the level of effort expended, as mutually agreed. The PARTIES agree that all PRODUCT(S) sales shall be invoiced by ORGANON. If during the thirty six (36) month period following notice from ORGANON of a PLA filing in the United States with respect to a PRODUCT, ANERGEN, pursuant to Section 7.1(d), alone or with a third party, files a PLA in the United States with respect to a product in the FIELD (other than PRODUCT subject to this Agreement), then ANERGEN shall be required to notify ORGANON of its intention to exercise such co-promotion right thereto within thirty (30) days of such change. 11.4 Insofar as required to perform co-promotion, in the event that ANERGEN exercises its option to co-promote, ORGANON shall grant to ANERGEN a non-exclusive, royalty-free license under the ORGANON PATENTS, ORGANON KNOW-HOW and ORGANON's interest in and FUTURE KNOW-HOW and FUTURE PATENTS (with the right to sublicense to an AFFILIATE in the relevant territory) to offer for sale the PRODUCT(S) in the United States and/or Canada. 11.5 Prior to the completion of the initial Phase I/II clinical trial of a PRODUCT, ANERGEN shall disclose to ORGANON all ANERGEN KNOW-HOW relating to the manufacture of the PRODUCT(S). Prior to the commencement of the first Phase III clinical trial of a PRODUCT(S), the PARTIES shall [*]. The PARTIES shall negotiate [*] and/or the PRODUCT(S) to be sold in certain agreed geographic regions. 11.6 Upon termination of this Agreement with respect to the TERRITORY or a MAJOR COUNTRY, the PARTIES shall discuss in good faith either (i) a grant of rights to ANERGEN with respect to any ORGANON manufacturing technology necessary or useful for the manufacture of the PRODUCT(S) (including an obligation to transfer such technology and provide reasonable technical assistance and training with respect thereto and an interim supply obligation), or (ii) if the PARTIES cannot negotiate such an agreement, a supply agreement for the PRODUCT(S), pursuant to reasonable terms and conditions. If pursuant to Section 7.1(d), ANERGEN, alone or with a third party, files a PLA with respect to products in the FIELD (other than PRODUCTS subject to this Agreement) as of the date of filing of such PLA, Section 11.6 shall no longer apply. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -15- 16 ARTICLE 12 - CONFIDENTIALITY 12.1 During the term of this Agreement, and for a period of ten (10) years after its termination or expiration, each PARTY (the "RECEIVING PARTY") shall hold in confidence and not disclose to any third party, (except to AFFILIATES and permitted sublicensees) or use for any purpose other than as permitted or required by this Agreement, any KNOW-HOW or other confidential information ("INFORMATION") disclosed by or acquired from the other PARTY hereto (the "DISCLOSING PARTY") without prior written consent of the DISCLOSING PARTY. This confidentiality obligation shall not apply to information which that PARTY (the "RECEIVING PARTY") can demonstrate to the reasonable satisfaction of the DISCLOSING PARTY: (a) was in the possession of the RECEIVING PARTY prior to the disclosure thereof by the DISCLOSING PARTY without a confidentiality obligation; or (b) was at the time of disclosure, or thereafter becomes public knowledge, through no fault of the RECEIVING PARTY; or (c) is acquired lawfully by the RECEIVING PARTY from a third party who has no secrecy obligation to the DISCLOSING PARTY; or (d) is obtained through the PARTY's in-house development, independent of this Agreement. 12.2 Prior written consent shall be deemed to have been given: (a) to the disclosure of INFORMATION to any regulatory authority insofar as necessary in connection with an application for registration of the PRODUCT in any country of the TERRITORY; (b) to the disclosure of INFORMATION insofar as necessary in connection with any clinical trial of the PRODUCT to persons involved in the conduct of such trial, provided they are bound by obligations of confidentiality acceptable to the PARTIES; and (c) to the disclosure of INFORMATION to employees and consultants on a "need to know" basis, provided they are bound by obligations of confidentiality at least equivalent to those in this Article. 12.3 Any publication or patent applications based on all or any part of the DEVELOPMENT PROGRAM, or the results of the DEVELOPMENT PROGRAM, shall be submitted to the other PARTY by the PARTY wishing to publish the material or file or abandon the patent application as contemplated by this Agreement. The SC shall make a recommendation -16- 17 regarding publication or filing or abandonment of the patent application as applicable within thirty (30) days after receiving such request. 12.4 The PARTIES shall not issue any press release concerning this Agreement or any activities related thereto without consulting with the other; provided, however that either PARTY may disclose this Agreement or information regarding the terms of the Agreement which are not confidential or the activities conducted hereunder from time to time without the other PARTY's approval, (i) if such approval has been requested and not received within seventy- two (72) hours and such PARTY reasonably believes disclosure is required by law or (ii) if such information has already become publicly available without a breach of the confidentiality provisions of this Agreement. 12.5 Notwithstanding any other provision of this Article 12, either PARTY may disclose this Agreement and the terms hereof as required by law, and to its attorneys and other professional advisors, its investment bankers, and, subject to obligations of confidentiality at least equivalent to those of this Article, actual and prospective investors. ARTICLE 13 - REPRESENTATIONS AND WARRANTIES ANERGEN and ORGANON specifically disclaim any guarantee that the DEVELOPMENT PROGRAM will be successful in whole or part. ANERGEN MAKES NO REPRESEN TATIONS AND WARRANTIES WITH RESPECT TO THE ANERGEN PATENTS, FUTURE PATENT RIGHTS, PRODUCT, MHC PEPTIDE TECHNOLOGY OR ANERGEN KNOW-HOW, WHETHER EXPRESS, IMPLIED, OR STATUTORY, INCLUDING BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, VALIDITY, OR NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. NOTWITH STANDING THE FOREGOING, ANERGEN REPRESENTS AND WARRANTS THAT: (i) ANERGEN IS THE OWNER OF THE ANERGEN PATENTS AS OF THE EFFECTIVE DATE; (ii) IT HAS NOT GRANTED TO ANY PARTY OTHER THAN ORGANON A LICENSE UNDER THE ANERGEN PATENTS WITHIN THE FIELD, (iii) TO THE BEST OF ANERGEN'S KNOWLEDGE AS OF THE EFFECTIVE DATE, NO THIRD PARTY CURRENTLY HAS FILED, PURSUED OR MAINTAINED OR HAS THREATENED TO FILE, PURSUE OR MAINTAIN, ANY CLAIM, CHARGE, COMPLAINT OR OTHER ACTION ALLEGING THAT THE ANERGEN PATENTS ARE INVALID OR UNENFORCEABLE AND (iv) TO THE BEST OF ANERGEN'S KNOWLEDGE, AS OF THE EFFECTIVE DATE, ANERGEN IS NOT AWARE OF ANY POSSIBLE FUTURE INFRINGEMENT OF THIRD PARTY PATENTS BY ANERGEN IN THE FIELD. IN ADDITION, ANERGEN IS NOT AWARE OF ANERGEN'S PATENTS OR PATENT APPLICATIONS LIKELY TO BECOME THE SUBJECT OF INTERFERENCE PROCEEDINGS WITH THIRD PARTY PATENTS OR PATENT APPLICATIONS IN THE U.S. PATENT OFFICE. -17- 18 ARTICLE 14 - OWNERSHIP OF INTELLECTUAL PROPERTY 14.1 ANERGEN shall retain all right, title and interest in and to any KNOW-HOW invented, developed or acquired solely by ANERGEN and the ANERGEN PATENTS. 14.2 ORGANON shall retain all right, title and interest in and to any KNOW-HOW invented, developed or acquired solely by ORGANON and the ORGANON PATENTS. 14.3 All right, title and interest in and to KNOW-HOW, whether or not patentable, that is invented or developed by at least one employee or agent of ANERGEN and at least one employee or agent of ORGANON in connection with the DEVELOPMENT PROGRAM shall be owned jointly by ORGANON and ANERGEN ("JOINT KNOW-HOW"). Inventorship of inventions and other intellectual property conceived and reduced to practice in connection with the DEVELOPMENT PROGRAM, and the rights of ownership with respect to such inventions and other intellectual property, whether such JOINT KNOW-HOW is patentable or not, shall be determined in accordance with United States patent law if conceived or reduced to practice in the USA, and in accordance with Dutch law if conceived and reduced to practice elsewhere. ARTICLE 15 - PATENT PROSECUTION AND ENFORCEMENT 15.1 ANERGEN will be responsible for the preparation, prosecution and maintenance of the ANERGEN PATENTS and FUTURE PATENTS owned solely by ANERGEN and conducting oppositions, re-examination and interferences with respect thereto, using patent counsel of its choice and according to ANERGEN's reasonable business and scientific judgment. ANERGEN will pay all costs of conducting such activities with respect to such PATENTS. 15.2 Each PARTY will cooperate with the other as reasonably requested in obtaining patent protection for JOINT KNOW-HOW and shall agree on which PARTY shall have principal authority for conducting such activities with respect to such FUTURE PATENTS. Each PARTY shall keep the other informed as to material developments in this regard. ANERGEN and ORGANON shall equally share the expenses related to obtaining and maintaining patents with regard to any inventions within the JOINT KNOW-HOW in the names of ANERGEN and ORGANON; provided, with ninety (90) days notice either PARTY may continue to decline to fund such activities with regard to any patent application or patent within the FUTURE PATENTS, and in such event such PARTY shall assign its entire interest in such patent application or patent to the other PARTY hereto. 15.3 ANERGEN and ORGANON will immediately inform each other of any actual or suspected infringement of the ANERGEN PATENTS, ORGANON PATENTS or FUTURE PATENTS by third parties which such PARTY would reasonably believe would effect the commercial success of a PRODUCT. -18- 19 15.4 Unless otherwise agreed between the PARTIES, ANERGEN shall have the right, but not the obligation, to bring proceedings against any infringer of the ANERGEN PATENTS and FUTURE PATENTS owned solely by ANERGEN, at ANERGEN's risk and expense. ANERGEN shall be entitled to retain any award or damages obtained in any such suit or proceeding to the extent of the costs incurred to bring such proceedings, with the remainder apportioned by good faith negotiation of the PARTIES to reflect losses suffered. At ANERGEN's request and expense, ORGANON shall give ANERGEN all reasonable assistance required to institute and carry on any such suit or proceeding. 15.5 If ANERGEN does not advise ORGANON within two (2) months after receipt of notice of infringement from ORGANON of ANERGEN's intention to pursue a commercially significant patent infringement matter relating solely to an infringement of an ANERGEN PATENT or FUTURE PATENT owned solely by ANERGEN in the FIELD, ORGANON shall have the right and may elect to prosecute and fund such matter. If ORGANON has brought an action for patent infringement at its own expense, ORGANON may keep any judgment and awards arising from such an action. ANERGEN shall give ORGANON all reasonable assistance, at ORGANON's request and expense, required to institute and carry on any such suit or proceeding. 15.6 The PARTIES shall consult and jointly prosecute infringement actions with respect to jointly owned FUTURE PATENTS and shall share the costs of such actions and any proceeds thereof, provided if any PARTY elects not to participate, the other PARTY shall have the right, at its own expense, to prosecute infringement actions in such patents, without a duty to account to the other for the proceeds thereof. ARTICLE 16 - TERM AND TERMINATION 16.1 This Agreement shall become effective as of the EFFECTIVE DATE, and unless terminated earlier in accordance with this Agreement, shall continue in full force and effect on a country- by-country basis, as long as ORGANON is engaged in developing or commercializing a PRODUCT in such country. 16.2 If a PARTY hereto commits a material breach of any provision of this Agreement, and fails to remedy such breach within ninety (90) days after written notice thereof by the other PARTY, in addition to remedies for damages and/or injunctive relief, the PARTY not in default may, at its option, terminate this Agreement, and the licenses granted herein, by giving thirty (30) days prior written notice to the PARTY in default. 16.3 In addition to the provisions in Section 2.5 affecting the DEVELOPMENT PROGRAM, ORGANON may terminate this Agreement, and the licenses granted herein, with respect to any PRODUCT in any country in the TERRITORY by giving ninety (90) days (except as in Section 16.3(d), in which case it will be one hundred eighty (180) days or such shorter period as PARTIES may mutually agree to), prior written notice to ANERGEN: -19- 20 (a) if ORGANON determines that the PRODUCT cannot reasonably be developed or marketed in such country for reasons of safety or efficacy or for other scientific, medical or commercial reasons of a compelling nature; (b) if the PRODUCT cannot be commercially marketed in any such country as a result of a final written official governmental unappealable or unappealed order, which ORGANON has used reasonable efforts to appeal; (c) if the PRODUCT would infringe patent rights held by third parties, with the result that the sale and distribution of the PRODUCT by ORGANON in such country, is or would be likely to be enjoined or otherwise prohibited; or (d) if during the DEVELOPMENT PROGRAM it is mutually agreed in writing by PARTIES following good faith discussions that the development of the PRODUCT cannot be pursued due to fundamental medical, scientific, or safety issues. 16.4 ANERGEN may request arbitration to terminate this Agreement with respect to any PRODUCT in any country in the TERRITORY in which ORGANON failed to exercise its obligations to commercialize such PRODUCT pursuant to Article 11. 16.5 In any country in which ORGANON's rights and licenses to the PRODUCT terminate hereunder, ANERGEN shall have the right to fully exploit the PRODUCT in such country, itself or with a third party for use within the FIELD unless ORGANON'S reasons for not exploiting such rights in that country were for safety, efficacy, regulatory or economic nonfeasibility (for which ORGANON shall be required to provide a reasonable basis) reasons rather than solely commercial reasons. 16.6 Any termination of this Agreement shall not affect any accrued rights or liabilities of either PARTY, without prejudice to its other rights or remedies at law, or in equity. 16.7 Upon early termination of this Agreement, each PARTY shall return to the other all KNOW- HOW and other INFORMATION of the other PARTY, except one copy which may be retained for archival purposes. 16.8 Sections 11.6, 15.2, 15.6, and Articles 7 (as to obligations incurred prior to termination), 8 (as to obligations incurred prior to termination), 12, 14, 17, 19, 20 and 21 shall survive the termination of this Agreement for any reason. ARTICLE 17 - FORCE MAJEURE 17.1 If either PARTY is affected by circumstances beyond its reasonable control, such as any Act of God, earthquake, flood, fire, riot, war, accident, labor disturbance, breakdown of plant or equipment, lack or failure of transportation facilities, sources of supply or labor, raw -20- 21 materials, power or supplies, infectious diseases of animals, or by reason of any law, order, proclamation, regulation, ordinance, demand or requirement of any relevant government or any subdivision, authority or representative thereof ("Force Majeure"), it shall, as soon as reasonably practicable, notify the other PARTY of the nature and extent thereof and take all reasonable steps to minimize the loss occasioned to that other PARTY. 17.2 Neither PARTY shall be deemed to be in breach of this Agreement or otherwise be liable to the other PARTY by reason of any delay in performance or nonperformance of any of its obligations hereunder to the extent that such delay or nonperformance is due to any Force Majeure of which it has notified the PARTY, and the time for performance of that obligation shall be extended accordingly. 17.3 If the Force Majeure in question prevails for a continuous period of more than three (3) months, the PARTIES shall enter into good faith discussions with a view to alleviating its effect or agreeing upon such alternative arrangements as may be fair and reasonable. Failure by the PARTIES to reach a mutually satisfactory agreement within a further period of three (3) months after entering into such discussions, shall entitle either PARTY to commence arbitration upon notice in writing. ARTICLE 18 - ASSIGNMENT 18.1 This Agreement shall not be assigned by either PARTY except that either PARTY may assign this Agreement to an AFFILIATE, or a successor of all or substantially all of such PARTY's business or assets. ARTICLE 19 - INDEMNIFICATION 19.1 ANERGEN shall indemnify ORGANON and its AFFILIATES, and the directors, officers, employees, agents and counsel of ORGANON and such AFFILIATES, and the successors and assigns of any of the foregoing (the "ORGANON Indemnitees"), harmless from and against any and all liabilities, damages, losses, costs or expenses (including reasonable attorneys' and professional fees and other expenses of litigation and/or arbitration) resulting from a claim, suit or proceeding brought by a third party against a ORGANON Indemnitee, arising from or occurring as a result of activities performed by ANERGEN in the DEVELOPMENT PROGRAM, or the manufacture or co-promotion of the PRODUCT(S) by ANERGEN, except to the extent caused by the negligence or willful misconduct of ORGANON. 19.2 ORGANON shall indemnify ANERGEN and its AFFILIATES and the directors, officers, employees, agents and counsel of ANERGEN and such AFFILIATES and the successors and assigns of any of the foregoing (the "ANERGEN Indemnitees"), from and against any and all liabilities, damages, losses, costs or expenses (including reasonable attorneys' and professional -21- 22 fees and other expenses of litigation and/or arbitration) resulting from a claim, suit or proceeding brought by a third party against a ANERGEN Indemnitee, arising from or occurring as a result of activities performed by ORGANON in the DEVELOPMENT PROGRAM, or the manufacture or commercialization of the PRODUCT(S) by ORGANON or its AFFILIATES or sublicensees, except to the extent caused by the negligence or willful misconduct of ANERGEN. 19.3 A PARTY (the "Indemnitee") that intends to claim indemnification under this Article 19 shall promptly notify the other party (the "Indemnitor") in writing of any loss, claim, damage, liability or action in respect of which the Indemnitee or any of its AFFILIATES, Sublicensees or their directors, officers, employees or agents intend to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the Indemnitor so desires, to assume the defense thereof with counsel mutually satisfactory to the PARTIES. The indemnity agreement in this Article 19 shall not apply to amounts paid in settlement of any loss, claim, damage, liability or action if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article 19. At the Indemnitor's request, the Indemnitee under this Article 19, and its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives in the investigation of any action, claim or liability covered by this indemnification and provide full information with respect thereto. ARTICLE 20 - GOVERNING LAW AND ARBITRATION 20.1 This Agreement shall be governed by and construed in accordance with the laws of New York, without reference to principles of conflicts of law. 20.2 The PARTIES shall attempt in good faith to resolve promptly by negotiation any dispute which may arise out of or in connection with this Agreement or the application, interpretation, implementation, validity, breach or termination of this Agreement, any provision thereof or any agreement concluded in pursuant of this Agreement. 20.3 If the dispute has not been resolved by negotiation within forty-five (45) days of the disputing party's notice, or if the PARTIES fail to meet within twenty (20) days as from such notice, the PARTIES shall endeavor to settle the dispute by mediation under the current European CPR Mediation Procedure for Business Disputes. Unless otherwise agreed, the PARTIES shall select a mediator from the European CPR Panels of Neutrals. 20.4 If the dispute has not been resolved by non-binding means as provided in 20.3 above within ninety (90) days of the initiation of such procedure, the dispute shall be finally and exclusively settled by the arbitration in New York, New York, under the Uncitral Arbitration Rules by three (3) arbitrators appointed in accordance with said Rules. The appointing authority shall -22- 23 be the International Chamber of Commerce in Zurich. The language of the arbitration shall be English. The arbitration shall be in lieu of any other remedy and the award shall be final, binding and enforceable by any court having jurisdiction for that purpose. ARTICLE 21 - MISCELLANEOUS 21.1 Nothing in this Agreement shall be construed as conferring a right to use in advertising, publicity or otherwise any trademark or trade name of the other PARTY, without the other PARTY's prior express written permission. 21.2 No failure or delay by any PARTY in exercising any right or remedy shall operate as a waiver thereof, nor shall any single or partial exercise or waiver of any right or remedy preclude its further exercise or the exercise of any other right or remedy. 21.3 This Agreement shall not constitute either PARTY as the joint venturer, legal representative or agent of the other PARTY for any purpose whatsoever. Neither PARTY shall have any right or authority to assume or create any obligation or responsibility for or on behalf of the other PARTY, or to otherwise bind the other PARTY. 21.4 Any notice required or permitted to be given under this Agreement shall be made in writing and shall be deemed to have been sufficiently given, for all purposes, if mailed by registered or certified mail, return receipt requested, or by private overnight delivery services, or by telefax and confirmed by registered or certified mail, addressed to such other PARTY at its respective address, as follows: If to: N.V. Organon P.O. Box 20 5340 BH Oss The Netherlands Attention: President If to: Anergen, Inc. 301 Penobscot Drive Seaport Centre Redwood City, California 94063 Attention: President Either PARTY, from time to time, may change the address to which notices are given by sending notice of such change to the other PARTY hereto. 21.5 ORGANON agrees to mark and have its AFFILIATES and sublicensees mark all PRODUCT sold pursuant to this Agreement in accordance with the applicable statute or regulations relating to patent marking in the country or countries of manufacture and sale thereof. -23- 24 21.6 The PARTIES recognize that this Agreement is a Master Agreement covering a number of countries. If, for any country in the TERRITORY, it becomes necessary to execute a separate instrument for any such country in order to satisfy local law or regulatory requirements, the PARTIES agree to execute such further instrument, which shall, to the extent permitted by the laws of that country, conform to the terms and conditions of this Agreement. 21.7 This Agreement is in the English language, which language shall be controlling in all respects, and all versions hereof in any other language shall be for accommodation only and shall not be binding upon the PARTIES hereto. All communications and notices to be made or given pursuant to this Agreement shall be in the English language. 21.8 In the event that any provisions of this Agreement are determined to be invalid or unenforceable by a court of competent jurisdiction in any jurisdiction, the remainder of the Agreement shall remain in full force and effect without said provision in said jurisdiction and such determination shall not affect the validity or enforceability of such Article or the Agreement in any other jurisdiction. The PARTIES shall in good faith negotiate a substitute clause for any provision declared invalid or unenforceable,, which shall most nearly approximate the intent of the PARTIES in entering this Agreement. 21.9 This Agreement may not be altered, amended or modified in any way except by a writing signed by both PARTIES. The failure of a party to enforce any provision of the Agreement shall not be construed to be a waiver of the right of such PARTY to thereafter enforce that provision or any other provision or right. 21.10 NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES ARISING OUT OF THIS Agreement, HOWEVER CAUSED AND UNDER ANY THEORY OF LIABILITY. 21.11 The PARTIES hereto acknowledge that this Agreement and its Exhibits set forth the entire agreement and understanding of the PARTIES hereto as to the subject matter hereof, and supersedes all prior discussions, agreements and writings in respect hereto. 21.12 THIS Agreement may be executed in two (2) counterparts, each of which shall be deemed an original but both of which together shall constitute one and the same instrument. -24- 25 IN WITNESS WHEREOF, the PARTIES hereto have caused this Agreement to be duly executed by their duly authorized officers. ANERGEN, INC. N.V. ORGANON By: /s/ JOHN W. VARIAN By: /s/ DRIEK VERGOUWEN _____________________________ _____________________________ Title: V.P. Finance, C.F.O. Title: Managing Director R&D __________________________ __________________________ Date: 6/28/96 Date: 6/28/96 ___________________________ ___________________________ Exhibit A: ANERGEN PATENTS [*] B: DEVELOPMENT PROGRAM [*] C: ORGANON PATENTS [*] D: ORIGINAL EPITOPE PEPTIDE SEQUENCE [*] -25- 26 EXHIBIT A ANERGEN PATENTS [ * ] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 27 EXHIBIT B DEVELOPMENT PROGRAM [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 28 EXHIBIT C ORGANON PATENTS [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 29 EXHIBIT D ORIGINAL EPITOPE PEPTIDE SEQUENCE [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. EX-10.16 5 EXHIBIT 10.16 1 EXHIBIT 10.16 EMPLOYMENT AGREEMENT THIS AGREEMENT, by and between Barry Sherman, M.D. (the "Employee") and Anergen, Inc., a California corporation (the "Company"), shall become effective as of May 27, 1996. In consideration of the mutual covenants herein contained, and in consideration of the employment of Employee by the Company, the parties agree as follows: 1. Duties and Scope of Employment. (a) Position. The Company agrees to employ the Employee under the terms of this Agreement in the position of President and Chief Executive Officer. Employee shall report to the Board of Directors. In addition, Employee shall be elected to the Board of Directors of the Company as of the effective date and shall be nominated for re-election at each meeting of the shareholders where directors are elected during the term of this Agreement. Employee agrees to resign from the Board of Directors upon termination of employment with the Company. (b) Obligations and Duties. During the term of this Agreement, the Employee shall devote his full business efforts and time to the Company and shall use his best efforts to promote and protect the business interests of the Company. Specifically, Employee's responsibilities will be to manage the operations of the Company; to build and maintain an outstanding and harmonious working team of both scientific and business employees; to secure, promote and maintain the appropriate financing and capital structure of the Company; to manage and direct the strategic development of the Company's business plan and its implementation; and to oversee the overall scientific affairs of the Company. The foregoing, however, shall not preclude the Employee from engaging in appropriate civic, charitable or religious activities or from devoting a reasonable amount of time to private investments, writing of books, journals and/or articles, and making public appearances or from serving on the boards of directors of other entities, as long as such activities and service do not interfere or conflict with his responsibilities to the Company and do not represent business conflicts with the Company's business. (c) Rules, Regulations and Policies. Employee shall comply with all of the Company's reasonable rules and regulations applicable to the employees of the Company and with all of the Company's reasonable policies established by its management and Board of Directors. 2. Compensation. Beginning on the effective date of this Agreement, the Employee shall be paid a base salary (the "Base Compensation") of $250,000 annually, paid in bi-monthly payments. Employee shall also be eligible at the end of 12 months to receive a performance bonus of up to 25% of the Base Compensation at the direction of the Board of Directors. The bonus shall be determined based upon full or partial completion of reasonable goals established by mutual agreement between the Employee and the Board of Directors. The Employee's base salary and bonus shall be reviewed by the Board of Directors for possible increases annually. 2 3. Employee Benefits. (a) General. During the term of his employment under this Agreement, Employee will be entitled to receive all employee benefits currently and hereafter provided to senior management at the Company including medical, dental, and life insurance so long as and to the extent these benefits exist, provided that Employee is otherwise eligible and insurable in accordance to the terms of such plan(s), and subject in each case to the generally applicable terms and conditions of the plan or program in question and to the administrative determinations of any committee or the Board of Directors administering such plan or program. Employee will be eligible for participation in the Company's Employee Stock purchase plan on the next enrollment date, which is October 1, 1996. Employee may participate in the Company's 401(k) plan beginning on July 1, 1997, which is the next enrollment date after one year from date of employment. The Board will provide Employee with an equivalent benefit to offset any loss resulting from unavailability of immediate enrollment in the plan. (b) Stock Awards. Through the Company Stock Option Plan, Employee will be granted options to acquire an aggregate 400,000 shares of Common Stock of the Company at a price per share on May 14, 1996, the date of acceptance of employment. These options will vest over a four-year period at the rate of 6/48th of the shares after 6 months, and 1/48th per share per month thereafter. The options will be subject to the standard terms and conditions under the stock option plan. 4. Business Expenses and Travel. During the term of his employment under this Agreement, the Employee shall be authorized to incur necessary and reasonable travel, entertainment and other business expenses in connection with his duties hereunder. The Company shall reimburse the Employee for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Company's generally applicable policies. 5. Definitions. As used herein, the following definitions shall apply: (a) "Cause" shall mean the termination of employment of Employee shall have taken place as a result of (i) Employee's continued failure to substantially perform his principal duties (other than as a result of Disability) after thirty (30) days' written notice from the Company specifying the nature of Employee's failure and demanding that such failure be remedied; (ii) Employee's material and continuing breach of his obligations to the Company set forth in this Agreement or the Proprietary Information Agreement after thirty (30) days' written notice from the Company specifying the nature of Employee's breach and demanding that such breach be remedied (unless such breach by its nature cannot be cured, in which case notice and an opportunity to cure shall not be required); (iii) Employee's being convicted of a felony or (iv) act or acts of dishonesty undertaken by Employee and intended to result in substantial gain or personal enrichment of Employee at the expense of the Company. (b) "Change in Control" shall mean the occurrence of any of the following events: -2- 3 (i) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation or entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or such surviving entity's parent outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets, except a sale to an entity of which at least fifty percent (50%) of the total voting power represented by the voting securities of such entity are held by stockholders of the Company at the time of such sale. (ii) The acquisition by any Person as Beneficial Owner (as such terms are defined in the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities. (iii) A majority of the Board of Directors of the Company in office at the beginning of any thirty-six (36) month period is replaced during the course of such thirty-six (36) month period (other than by voluntary resignation of individual directors in the ordinary course of business) and such replacement was not initiated by the Board of Directors of the Company as constituted at the beginning of such thirty-six (36) month period and as changed during such period to add directors approved by the incumbent Board of Directors. (c) "Constructive Termination" shall mean (i) a material reduction in Employee's salary, title, bonus opportunity or benefits not agreed to by Employee (except in connection with a decrease to be applied because the Company's performance has decreased and which is also applied to other officers, and excluding the substitution of substantially equivalent compensation and benefits), (ii) a significant reduction in Employee's responsibilities not agreed to by Employee, or (iii) a change in reporting from the Board of Directors to another officer. (d) "Disability" shall mean that the Employee, at the time notice is given, has been unable to perform his duties under this Agreement for a period of not less than ninety (90) days consecutively as the result of his incapacity due to physical or mental illness. In the event that the Employee resumes the performance of substantially all of his duties hereunder before the termination of his employment under Section 6(b)(iii) becomes effective, the notice of termination shall automatically be deemed to have been revoked. 6. Termination of Employment. (a) Termination by the Company. The Company may terminate Employee's employment at any time, for any reason or for no reason, with fifteen (15) days advance notice in writing. -3- 4 (i) Termination Without Cause. If the Company terminates Employee's employment for any reason whatsoever, including a Constructive Termination, and other than voluntary termination of Employment or Termination for Cause, the provisions of Section 7(a) shall apply. (ii) Termination for Cause. If the Company terminates Employee's employment for Cause, the provisions of Section 7(b) shall apply. (iii) Termination on Death or Disability. If the Company terminates Employee's employment as a result of Employee's Death or Disability, the provisions of Section 7(c) shall apply. (iv) Constructive Termination. If any of the circumstances which are described in Section 5(c) occur when the Company terminates Employee's employment, the Employee shall be deemed to be terminated without Cause and the provisions of Section 7(a) shall apply. (b) Voluntary Termination by the Employee. The Employee may terminate his employment voluntarily by giving the Company thirty (30) days' advance notice in writing, at which time the provisions of Section 7(b) shall apply. However, if the Employee terminates his employment pursuant to this Section 6(b) as a result of a Constructive Termination, the provisions of Section 7(a) shall apply, provided the Employee has provided written notice to the Company reasonably specifying the reasons why a Constructive Termination has occurred and the Company has not cured (retroactively where possible) such Constructive Termination within twenty (20) days after receipt of such notice. (c) Waiver of Notice. Any waiver of notice shall be valid only if it is made in writing and expressly refers to the applicable notice requirement in this Section 6. 7. Payments Upon Termination of Employment. (a) Payments Upon Termination Pursuant to Section 6(a)(i) and Constructive Termination. If, during the term of this Agreement, the Employee's employment is terminated by the Company pursuant to Section 6(a)(i) or voluntarily by Employee under Section 6(b) as a result of a Constructive Termination, the Employee shall be entitled to receive the following: (i) Severance Payment. The Company shall continue to pay to the Employee his Base Compensation and provide medical, dental and life insurance benefits for twelve (12) months following termination (the "Severance Payment"). Such Base Compensation amount shall be determined with reference to the Base Compensation in effect for the month in which the date of employment termination occurs. -4- 5 (ii) Stock Options. The stock options referred to in Section 3(b) shall be exercisable to the extent that reflects an additional twelve (12) months of vesting from the date of termination. Employee shall have six (6) months from the date of termination of employment in which to exercise any non-qualified stock option and three (3) months from the date of termination of employment to exercise any incentive stock option. (iii) Method of Payment. The Severance Payment shall be made in monthly installments. (iv) Payment in Lieu of Contract Damages. The Severance Payment shall be in lieu of any further payments to the Employee and any further accrual of benefits with respect to periods subsequent to the date of the employment termination. (v) No Duty To Mitigate. The Employee shall not be required to mitigate the amount of any payment contemplated by this Section 7(a) (whether by seeking new employment or in any other manner). (b) Termination By Company for Cause or Voluntary Termination. If the Employee's employment is terminated pursuant to Section 6(a)(ii) or voluntarily (other than a Constructive Termination) pursuant to Section 6(b), no compensation or payments will be paid or provided to the Employee for the periods following the date when such a termination of employment is effective. Notwithstanding the preceding sentence, the Employee's rights under the benefit plans and option agreements of the Company shall be determined under the provisions of those plans and agreements, provided Employee shall have six (6) months from the date of termination of employment in which to exercise any non-qualified stock option and three (3) months from the date of termination of employment to exercise any incentive stock option in each case to the extent such options are exercisable as of the date of termination. (c) Termination on Death or Disability. If the Employee's employment is terminated because of Employee's Death or Disability (as defined in Section 3(c) herein), then no payments for the period following such termination shall be owed under this Agreement and Employee shall receive severance and disability payments as provided in the Company's standard benefit plans. Employee's stock options shall be exercisable as provided in the option agreement. (d) Termination After a Change in Control. In the event that after a Change in Control the Employee's employment is terminated pursuant to Section 6(a)(i) or voluntarily by Employee under Section 6(b) as a result of a Constructive Termination, then the provisions of Section 7(a) shall apply except that the accelerated vesting of the exercisability of stock options shall be twenty-four (24) months instead of twelve (12) months or such longer period than twenty-four (24) months for which accelerated vesting may be granted without incurring Federal excise tax imposed pursuant to Section 4996 of the Internal Revenue Code (or without increasing any such excise tax otherwise payable without regard to such additional vesting), and provided Employee shall receive acceleration of less options than twenty-four (24) months if Employee would receive a greater -5- 6 after tax benefit as a result of any such excise tax than if Employee received acceleration of the full twenty-four (24) months. 8. Proprietary Information. The Employee agrees to comply fully with the Company's policies relating to non-disclosure of the Company's trade secrets and proprietary information and processes, as set out in the Proprietary Information Agreement set out as Exhibit B hereto. 9. Non-Competition. For the twelve (12) month period after termination of this Agreement for any reason, Executive shall not provide services, whether for compensation or otherwise, as an officer, director, employee, consultant or in any other capacity to any person or company that competes with the products, projects or technology which on the date of termination are actively being pursued by the Company for the diagnosis, prevention or treatment of disease. In this regard, Executive acknowledges that this period of time, scope of business and geographic extent are reasonably necessary to protect the legitimate business interest of the Company. In the event Executive breaches this Section, Executive agrees that all obligations of the Company to make the Severance Payment and to accelerate options upon the termination shall immediately terminate and Executive shall repay any amounts paid to Executive after the date Executive breached this Section and return any shares issued upon exercise of any options which were accelerated. The foregoing shall be the sole remedy for any breach of this provision. 10. No Conflicts. Employee covenants that he is not subject to any agreement or obligation that conflicts with or would be breached by the provisions of this Agreement. 11. Successors. (a) Company's Successors. The Company shall require in any agreement through which any successor to the Company (whether directly or indirectly and whether by purchase, lease, merger, consolidation, liquidation or otherwise) acquires all or substantially all of the Company's business and/or assets such successor to assume this Agreement and agree expressly to perform this Agreement in the same manner and to the same extent as the Company would be required to perform it in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by this Agreement by operation of law. (b) Employee's Successors. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 12. Notice. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or five days after being mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall -6- 7 be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Chief Executive Officer. 13. Termination of Agreement. This Agreement shall terminate upon the earlier of (i) the date that all obligations of the parties hereunder have been satisfied or (ii) May __, 2000. A termination of this Agreement pursuant to the preceding sentence shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits on account of a termination of employment occurring prior to or upon the termination of this Agreement. No payments under this Agreement shall be required for any termination of employment occurring after May __, 2000. The parties contemplate that at the end of the four year term of this Agreement, the parties will negotiate a new agreement for a further term of employment. In the event that a new agreement is not reached between the parties, this Agreement shall continue to govern the terms of Employee's employment until a new agreement is entered into. 14. Miscellaneous Provisions. (a) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by the Chief Executive Officer or a director of the Company authorized by the Board of Directors. No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (b) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof, except for the Indemnification Agreement and Proprietary Information Agreement between the Employee and the Company, each of which shall remain in full force and effect notwithstanding termination of this Agreement. This Agreement shall supersede the provisions regarding acceleration of vesting after a Change in Control as defined and provided in any stock options. (c) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (d) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (e) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in San Mateo County, California, in accor dance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. -7- 8 (f) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection (f) shall be void. (g) Employment At Will; Limitation of Remedies. The Company and the Employee acknowledge that the Employee's employment is at will, as defined under applicable law. If the Employee's employment terminates for any reason, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement. (h) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable taxes. (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. ANERGEN, INC. /s/ BARRY M. SHERMAN, M.D. By: /s/ NICOLE VITULLO - ----------------------------- ---------------------------------- Barry M. Sherman, M.D. Print Name: Nicole Vitullo -------------------------- Title: Director ------------------------------- -8- EX-23.1 6 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report dated February 9, 1996, in the Registration Statement (on Form S-1 dated June 28, 1996) and related Prospectus of Anergen, Inc. for the registration of 4,600,000 shares of its Common Stock. ERNST & YOUNG LLP San Francisco, California June 28, 1996 EX-23.2 7 EXHIBIT 23.2 1 Exhibit D Form of Opinion of Townsend and Townsend and Crew LLP 1. The portions of the Registration Statement and the Prospectus entitled "Risk Factors -- Uncertainty Relating to Patents and Proprietary Rights" and "Business --Patents and Proprietary Rights," (together, the "Patent Paragraphs") are accurate and complete statements or summaries of the matters set forth therein. 2. There are no legal or governmental proceedings, other than patent applications pending, relating to patent rights of the Company, to which the Company is a party, and, to our knowledge, no such proceedings are threatened or contemplated by governmental authorities or others and no basis for any such proceedings exist. 3. To our knowledge, the Company has not received any communication in which it is alleged that the Company is infringing or violating patent rights of third parties. 4. The Company owns or possesses licenses or other rights to use all patents, trade secrets, trademarks, service marks or other proprietary information or materials necessary to conduct the business now being or proposed to be conducted by the Company as described in the Prospectus. 5. Although we have not independently verified the accuracy and completeness of the statements contained in the Registration Statement and the Prospectus, nothing has come to our attention that would cause us to believe that, at the time the Registration Statement became effective under the Securities Act of 1933, as amended, the description and statements in the Patent Paragraphs of the Registration Statement contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein not misleading; or as of the date of the Prospectus or the date of this opinion, the description and statements in the Patent Paragraphs of the Prospectus contained or contain any untrue statement of a material fact or omitted or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. We hereby consent to the reference to our firm under the caption "Experts" in the Registration Statement. EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 AND UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) REGISTRATION STATEMENT ON FORM S-1. 1,000 YEAR 3-MOS DEC-31-1995 MAR-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 MAR-31-1996 468 310 11024 9343 815 783 0 0 0 0 12409 10539 5428 5572 3418 3686 14455 12461 1040 889 1701 1382 0 0 0 0 47359 47400 (35645) (37210) 14455 12461 0 0 3001 783 0 0 8322 1895 1976 503 0 0 322 55 (7086) (1531) 0 0 (7086) (1531) 0 0 0 0 0 0 (7086) (1531) (0.55) (0.10) (0.55) (0.10)
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