-----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, VKa4fyUbPT2deDwIl4v0t58P4tVoPbTuTntl4urkiL574vVz0NK2FbcwPa/yoQxo kb5S2+PXrFr1Yxcp+7fNkw== 0000891618-97-000133.txt : 19970127 0000891618-97-000133.hdr.sgml : 19970127 ACCESSION NUMBER: 0000891618-97-000133 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970124 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SANGSTAT MEDICAL CORP CENTRAL INDEX KEY: 0000913610 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 943076069 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-20301 FILM NUMBER: 97509937 BUSINESS ADDRESS: STREET 1: 1505 ADAMS DR CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 4153280300 MAIL ADDRESS: STREET 1: 1505 ADAMS DR CITY: MENLO PARK STATE: CA ZIP: 94025 S-3 1 FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 24, 1997 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ SANGSTAT MEDICAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------ DELAWARE 2834 94-3076-069 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------ 1505 ADAMS DRIVE MENLO PARK, CALIFORNIA 94025 (415) 328-0300 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------ PHILIPPE POULETTY, M.D. CHAIRMAN AND CHIEF EXECUTIVE OFFICER SANGSTAT MEDICAL CORPORATION 1505 ADAMS DRIVE MENLO PARK, CALIFORNIA 94025 (415) 328-0300 (NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------ COPIES TO: EDWARD M. LEONARD ALAN K. AUSTIN JEFFREY P. HIGGINS ELIZABETH R. FLINT BROBECK, PHLEGER & HARRISON LLP WILSON, SONSINI, GOODRICH & ROSATI TWO EMBARCADERO PLACE PROFESSIONAL CORPORATION 2200 GENG ROAD 650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94303 PALO ALTO, CALIFORNIA 94304 (415) 424-0160 (415) 493-9300
------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] 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, other than securities offered only in connection with dividend or interest reinvestment plans, 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 From 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TITLE OF EACH AMOUNT PROPOSED PROPOSED CLASS OF SECURITIES TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------- Common Stock, $0.001 par value per share............................... 2,300,000 Shares $30.06 $69,143,750 $20,953
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Includes 300,000 shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(c) based on the average of the high and low prices of the Registrant's Common Stock as reported on the Nasdaq National Market on January 21, 1997. ------------------ 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 THAT 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 SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 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, DATED JANUARY 24, 1997 PROSPECTUS 2,000,000 SHARES LOGO COMMON STOCK All of the 2,000,000 shares of Common Stock offered hereby are being sold by SangStat Medical Corporation ("SangStat" or the "Company"). The Company's Common Stock is quoted on the Nasdaq National Market under the symbol SANG. On January 23, 1997, the last reported sale price of the Common Stock was $28.38 per share. See "Price Range of Common Stock". ------------------ THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON 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.
- ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- PRICE TO PROCEEDS TO PUBLIC UNDERWRITING COMPANY(2) DISCOUNT(1) - ----------------------------------------------------------------------------------------------- Per Share........... $ $ $ - ----------------------------------------------------------------------------------------------- Total(3)............ $ $ $ - ----------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the several Underwriters. (2) Before deducting expenses payable by the Company estimated at $550,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 300,000 additional shares of Common Stock solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are offered by the several Underwriters subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that certificates for such shares will be available for delivery on or about , 1997, at the office of the agent of Hambrecht & Quist LLC in New York, New York. HAMBRECHT & QUIST MONTGOMERY SECURITIES ROBERTSON, STEPHENS & COMPANY , 1997 3 AVAILABLE 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, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices located at Seven World Trade Center, Suite 1300, New York, New York 10048 and Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained in person at prescribed rates from the Public Reference Section of the Commission at its principal office located at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's web site is http://www.sec.gov. The Common Stock of the Company is quoted on the Nasdaq National Market. Reports and other information concerning the Company may be inspected at the National Association of Securities Dealers, Inc. located at 1735 K Street, N.W. Washington, D.C. 20006. This Prospectus, which constitutes a part of a Registration Statement on Form S-3 (herein, together with all amendments and exhibits, referred to as the "Registration Statement") filed by the Company with the Commission under the Securities Act of 1933, as amended (the "Securities Act"), omits certain of the information set forth in the Registration Statement in accordance with the rules and regulations of the Commission. Reference is hereby made to the Registration Statement and to the exhibits thereto for further information with respect to the Company and the securities offered hereby. Copies of the Registration Statement and the exhibits thereto are on file at the offices of the Commission and may be obtained upon payment of the prescribed fee or may be examined without charge at the public reference facilities of the Commission described above. ------------------ INFORMATION INCORPORATED BY REFERENCE The following documents or portions of documents filed by the Company with the Commission (File No. 0-22890) are incorporated herein by reference: (a) Annual Report on Form 10-K for the fiscal year ended December 31, 1995; (b) Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1996, June 30, 1996 and September 30, 1996; (c) the description of the Company's Common Stock which is contained in its Registration Statement on Form 8-B filed under the Exchange Act on December 4, 1995 including any amendment or reports filed for the purpose of updating such description; and (d) all reports and other documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus and the Registration Statement of which it is a part to the extent that a statement contained or incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered a copy of any or all of such documents which are incorporated herein by reference (other than exhibits to such documents unless such exhibits are specifically incorporated by reference into the documents that this Prospectus incorporates). Written requests for copies should be directed to Maree Wall, Vice President, Corporate Communications at the principal executive offices of SangStat Medical Corporation, 1505 Adams Drive, Menlo Park, California 94025. ------------------ IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 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 TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ------------------ ALLOTRAP(R), PRA-STAT(R), CROSS-STAT(R), THE TRANSPLANT PHARMACY(TM) and THE TRANSPLANT COMPANY(TM) are trademarks of the Company. Additionally, this Prospectus contains trademarks of other companies. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." THE COMPANY SangStat, The Transplant Company, is a specialty pharmaceutical company applying a disease management approach to improve the outcome of organ transplantation. The Company's products and product candidates are designed to prevent and treat graft rejection and monitor transplant patients throughout their lifetimes. SangStat's lead drug candidates are THYMOGLOBULIN for the treatment of acute graft rejection episodes, and CYCLOSPORINE, for chronic daily immunosuppression to prevent graft rejection. In January 1997, the Company filed a Product License Application ("PLA") with the FDA for marketing approval of THYMOGLOBULIN. In November 1996, the Company filed an Abbreviated Antibiotic Drug Application ("AADA"), which the FDA accepted for review in January 1997, for marketing approval of its proprietary CYCLOSPORINE formulation. Cyclosporine, which to date has only been marketed by Novartis AG ("Novartis"), is the leading immunosuppressive drug used by transplant patients, with reported worldwide sales of $1.2 billion in 1995. SangStat is also conducting clinical trials for a generic AZATHIOPRINE product candidate for use as an adjunct therapy in chronic immunosuppression. ALLOTRAP 2702, a proprietary HLA peptide designed to promote graft acceptance, is in Phase II clinical trials in Europe. To further the Company's goal of providing comprehensive disease management, the Company has established THE TRANSPLANT PHARMACY, a pilot program designed to provide mail order distribution of drugs and transplant patient management services. Approximately 80,000 transplant candidates are registered on organ transplant waiting lists in 500 transplant centers throughout North America and Europe. Each year approximately 50,000 new patients receive donated organs. More than 200,000 post-transplant patients require daily, lifelong immunosuppressive therapy to prevent graft rejection and graft loss. SangStat's broad portfolio of complementary drugs, monitoring products, product candidates and services is designed to serve the needs of transplant patients at each key phase of transplantation.
TRANSPLANT PHASE PRODUCT/SERVICE POTENTIAL CLINICAL USE STATUS - ------------------ ---------------------- ----------------------------------------- ------------------------ Pre-Transplant PRA-STAT Detects anti-HLA antibodies in candidates Marketed Monitoring CROSS-STAT Detects candidate antibodies Marketed against a specific donor Transplant THYMOGLOBULIN Treats acute kidney rejection episodes PLA submitted in U.S.; Acute Care NDS filed in Canada ALLOTRAP 2702 Promotes graft acceptance Phase II trials (Europe) CELSIOR Preserves organs prior to transplantation Clinical trials Lifetime Post- CYCLOSPORINE Chronic immunosuppression AADA accepted for review Transplant Care in U.S. AZATHIOPRINE Chronic immunosuppression Bioequivalence trials MONITORING PRODUCTS Patient management Clinical trials THE TRANSPLANT Mail order and patient management Piloting at selected PHARMACY program centers
3 5 THYMOGLOBULIN is an anti-T-cell polyclonal antibody approved for use in 39 countries for the treatment of acute graft rejection episodes. The Company has an exclusive license from Pasteur Merieux Connaught ("PMC"), a subsidiary of Rhone Poulenc S.A., to market this drug in the United States and Canada. Following its successful Phase III trial, the Company filed a PLA with the FDA in January 1997 for treatment of graft rejection episodes following kidney transplantation. SangStat has also filed a New Drug Submission ("NDS") and is generating revenues through the distribution of THYMOGLOBULIN in Canada under the Emergency Drug Release ("EDR") program, which permits the distribution of certain products before final regulatory approval. SangStat has developed a proprietary CYCLOSPORINE formulation for chronic immunosuppression. Cyclosporine is the leading immunosuppressive drug used by transplant patients, with reported worldwide sales of $1.2 billion in 1995. Therapy is usually initiated shortly after transplantation and is continued daily for the patient's lifetime. Cyclosporine is marketed by Novartis in different formulations as Sandimmune and Neoral. Although Novartis' composition of matter patent for cyclosporine expired in September 1995 in the United States, Novartis' patents relating to their formulations are expected to continue to present significant barriers to entry to potential competitors. Based on human trial results, the Company believes its CYCLOSPORINE formulation is a bioequivalent to Novartis' newest formulation, Neoral. Since its introduction in 1994, Neoral has become the most commonly used cyclosporine formulation. To seek marketing approval, the Company filed an AADA with the FDA in November 1996, which the FDA accepted for review in January 1997. See "Risk Factors -- Risks Associated With CYCLOSPORINE." Azathioprine is used as an adjunct daily therapy to cyclosporine for chronic immunosuppression in the majority of transplant recipients. SangStat has developed a generic AZATHIOPRINE and is currently conducting human bioequivalence trials. Upon successful completion of these trials, the Company intends to seek marketing approval for AZATHIOPRINE. ALLOTRAP peptides are based on the Company's soluble Human Leukocyte Antigen ("sHLA") technology. SangStat believes that its sHLA technology represents a novel approach to the prevention of transplant rejection. ALLOTRAP peptides are small HLA peptides designed to target the initial phase of the transplant recipient's immune response without suppressing the immune system as a whole. The first ALLOTRAP peptide, ALLOTRAP 2702, is in early stage Phase II clinical trials in Europe. SangStat's monitoring products and product candidates are intended to improve the organ allocation process and the management of rejection episodes. PRA-STAT and CROSS-STAT are designed to improve pre-transplant donor-recipient matching. To guide the management of transplant patients, SangStat is developing additional monitoring products. Furthermore, the Company is developing CELSIOR, an organ preservation solution for which it expects to seek 510(k) market clearance from the FDA subject to successful clinical trials. In the longer-term, XE-9 is a drug candidate for xenotransplantation and XENOJECT is a proprietary platform technology that may result in additional drug candidates for transplant and non-transplant applications. SangStat intends to develop a dedicated sales force to market its transplant products directly to transplant centers and patients. To further this goal and to provide comprehensive disease management, SangStat established in September 1996 THE TRANSPLANT PHARMACY, a pilot program dedicated to providing direct distribution by mail order of drugs and transplant patient management services. This service will promote medication compliance, measure clinical and economic outcomes, and provide feedback directly to clinicians. Patients electing to enroll will be able to have all of their medications filled through the program's central pharmacy. THE TRANSPLANT PHARMACY will also place a key individual, such as a pharmacist, in each transplant center that joins the program to interact directly with physicians, nurses and patients. THE TRANSPLANT PHARMACY program seeks to provide a singular and integrated approach to the management of transplantation, in which the Company's drugs, monitoring products, and services can be supplied to meet the needs of individual transplant centers and their patients. 4 6 THE OFFERING Common Stock offered...................... 2,000,000 shares Common Stock to be outstanding after the offering.................................. 15,106,125 shares(1) Use of proceeds........................... Commercial infrastructure, sales and marketing, clinical testing, research and development, and other general corporate purposes Nasdaq National Market symbol............. SANG - ------------------------------ (1) Based on shares outstanding on September 30, 1996. Excludes 1,153,092 shares of Common Stock issuable upon exercise of options outstanding as of September 30, 1996 at a weighted average exercise price of $6.43 per share. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ------------------ 1993 1994 1995 1995 1996 ------- ------- ------- ------- -------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: Net product sales............................. $ 518 $ 674 $ 2,698 $ 1,856 $ 1,732 Collaborative agreement and government grants..................................... 2,676 3,000 1,125 1,125 -- -------- -------- -------- -------- -------- Total revenues............................. 3,194 3,674 3,823 2,981 1,732 -------- -------- -------- -------- -------- Operating expenses: Cost of sales and manufacturing............... 955 1,503 2,753 1,933 2,018 Research and development...................... 3,679 4,845 6,647 4,582 6,188 Selling, general and administrative........... 2,202 3,157 3,773 2,689 4,169 -------- -------- -------- -------- -------- Total operating expenses................... 6,836 9,505 13,173 9,204 12,375 -------- -------- -------- -------- -------- Loss from operations............................ (3,642) (5,831) (9,350) (6,223) (10,643) Other income (expense) -- net................... (78) 284 672 544 1,456 -------- -------- -------- -------- -------- Net loss................................... $(3,720) $(5,547) $(8,678) $(5,679) $ (9,187) ======== ======== ======== ======== ======== Net loss per common and equivalent share(1)..... $ (0.79) $ (0.92) $ (0.61) $ (0.76) ======== ======== ======== ======== Pro forma net loss per common and equivalent share(1)...................................... $ (0.70) ======== Shares used in per share computations(1)........ 5,309 7,049 9,385 9,306 12,167
SEPTEMBER 30, 1996 -------------------------- ACTUAL AS ADJUSTED(2) ------- -------------- CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments................. $44,671 $ 97,892 Working capital................................................... 44,557 97,778 Total assets...................................................... 47,841 101,062 Total stockholders' equity........................................ 44,501 97,722
- ------------------------------ (1) For a description of the computation of net loss per common and equivalent share and pro forma net loss per common and equivalent share, see Note 1 of Notes to Consolidated Financial Statements. (2) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock offered hereby at an assumed public offering price of $28.38 per share after deducting estimated underwriting discounts, commissions and offering expenses. See "Use of Proceeds" and "Capitalization." Except as otherwise noted, all information contained in this Prospectus assumes no exercise of the Underwriters' over-allotment option. 5 7 RISK FACTORS This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements, including those set forth below and elsewhere in this Prospectus. The following risk factors should be considered carefully in addition to the other information contained in this Prospectus before purchasing the Common Stock offered hereby. NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT. To achieve profitable operations, the Company, alone or with others, must successfully develop, obtain regulatory approval for, manufacture, introduce and market its potential products. Much of the development work for SangStat's potential products remains to be completed. There can be no assurance that the Company's product development efforts will be successfully completed, that required regulatory approvals will be obtained, or that any products if developed and introduced will be successfully marketed. The Company's product candidates will require extensive development, testing and investment, as well as regulatory approval prior to commercialization. Cost overruns due to unanticipated regulatory delays or demands, unexpected adverse side effects or insufficient therapeutic efficacy will prevent or substantially slow the development effort and ultimately would have a material adverse effect on the Company. Furthermore, there can be no assurance that the Company's research and development efforts will be successful and that any given product will be approved by appropriate regulatory authorities or that any product candidate under development will be safe, effective or capable of being manufactured in commercial quantities at an economical cost, will not infringe the proprietary rights of others or will achieve market acceptance. The Company's first drug candidate, THYMOGLOBULIN, for which the Company has licensed the rights from PMC in the United States and Canada, has not been approved for commercial sale in these territories. The Company completed a single multi-center Phase III clinical trial in the United States in August 1996 and filed an Establishment License Application ("ELA") with PMC and PLA with the FDA in August 1996 and January 1997, respectively. The Company has also filed an NDS for marketing approval in Canada. However, there can be no assurance that the results of this Phase III clinical trial, in combination with existing European safety and efficacy data, will be sufficient to support an ELA, PLA, or any future ELA amendments needed for commercial marketing. In addition, there can be no assurance that THYMOGLOBULIN will be demonstrated to have the manufacturing or quality control specifications and requisite safety and efficacy so that an ELA/PLA or NDS will be obtained from either the United States or Canada, respectively, or that THYMOGLOBULIN will become a viable commercial product. The Company's other principal pharmaceutical product candidates, including the Company's formulations of CYCLOSPORINE and AZATHIOPRINE, as well as CELSIOR and ALLOTRAP 2702, have not been approved for commercial sale in any country. The Company commenced human bioequivalence trials with respect to AZATHIOPRINE in October 1996. The Company recently voluntarily withdrew its 510(k) for a two-component CELSIOR product and is now conducting a clinical trial for a redesigned one-component, ready-to-use CELSIOR product candidate. The Company has completed a Phase I clinical trial and an initial Phase II pharmacokinetic and safety clinical trial for ALLOTRAP 2702, both of which took place in France. The Company designed both clinical trials to comply with regulatory standards in France as well as in the United States, so that it may use the data to support its NDA to the FDA. There can be no assurance that such data will be accepted by the FDA. The use of ALLOTRAP peptides to promote graft acceptance in humans is novel and unproven and there can be no assurance that such peptides will prove to be safe or effective in humans for any clinical indication, including for any transplant type or at any dosage. The Company has no clinical evidence in humans that ALLOTRAP peptides will be effective in promoting graft acceptance or safety in transplant patients and there can be no assurance that ALLOTRAP 2702 or any other product candidates based on ALLOTRAP peptides will receive marketing approval or become viable commercial products. Certain of the Company's monitoring product candidates are in development 6 8 and have not been approved for commercial sale. There can be no assurance that these product candidates will be successfully developed, receive regulatory approval or be marketed on a profitable basis. See "Business--Products and Product Candidates." RISKS ASSOCIATED WITH CYCLOSPORINE. The Company is developing a generic CYCLOSPORINE for chronic immunosuppression. Commercialization of the Company's CYCLOSPORINE drug candidate may be several years away and successful development and commercialization is subject to numerous risks, including failure to obtain regulatory approvals and potential intellectual property claims of third parties, including those of Novartis and its manufacturing contractors. In addition, if the Company is unable to demonstrate to the FDA that its formulation is bioequivalent to Neoral, a currently approved Novartis formulation, the Company would be required to undertake additional development work and seek regulatory approval through the potentially longer NDA process if it wished to continue to pursue this product candidate. There can be no assurance that the proposed label, dosage form or manufacturing process of the Company's CYCLOSPORINE, or the results of the Company's CYCLOSPORINE bioequivalence study, will be accepted by the FDA. Furthermore, there can be no assurance that the current FDA policies and regulations pertaining to the Company's products or product candidates will not change in the future. There can be no assurance that Novartis will not seek to protect its market share through litigation, or other actions, against SangStat, its affiliates and partners, or the FDA, or take actions which could adversely affect the regulatory approval process. For example, in November 1996, Novartis filed a citizens' petition with the FDA, as described below, seeking to prohibit the use of Neoral as a reference drug for demonstration of bioequivalence. There also can be no assurance that SangStat's formulation will not be found to infringe on Novartis' proprietary rights. If Novartis brings suit against SangStat in the United States or elsewhere, SangStat could be greatly delayed in obtaining regulatory approval of any CYCLOSPORINE product, in bringing any CYCLOSPORINE product candidate to market, or could be enjoined from selling the product for a significant period of time or ultimately be prevented from selling its CYCLOSPORINE product candidate entirely. A number of key employees were previously employed at Novartis and it is possible a claim could be asserted against SangStat based on such prior employment. While the Company believes that such a claim would be without merit, such a claim could nonetheless result in litigation. Any litigation, whether or not resolved in favor of the Company, is likely to be expensive, lengthy and time consuming and could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. To date no litigation has been threatened, but there can be no assurance that Novartis will not commence litigation or otherwise attempt to delay the marketing of CYCLOSPORINE in the future. Novartis filed a citizens' petition with the FDA to remove the designation of its Neoral cyclosporine product as a reference listed drug in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations (the "Orange Book"). The FDA has accepted for review SangStat's CYCLOSPORINE AADA submitted for approval based on bioequivalence to Neoral. Should the FDA remove Neoral as a reference listed drug in the Orange Book, SangStat may be required to submit a full application rather than an AADA for any generic cyclosporine product submitted for approval based on bioequivalence to Neoral. If the FDA requires SangStat to file a full application rather than an AADA for CYCLOSPORINE the time required for agency review of the application could be materially lengthened and adversely affect the likelihood of agency approval of the application. Novartis may submit additional citizens' petitions and other documents and information to the FDA that may raise other issues related to procedural and substantive requirements for approval of any SangStat CYCLOSPORINE application. The submission of such petitions, documents, and/or information could materially lengthen the time required for agency review of the application and adversely affect the likelihood of agency approval of the application. Cyclosporine is particularly difficult to manufacture and there can be no assurance that SangStat's CYCLOSPORINE drug candidate can be manufactured in commercial quantities at an economical cost. There can be no assurance that SangStat can manufacture, or have manufactured, formulate or 7 9 commercialize its CYCLOSPORINE product without infringing patent or other proprietary rights of Novartis or other third parties. Although Novartis' composition of matter patent for cyclosporine expired in September 1995 in the United States, Novartis' patents relating to cyclosporine formulations are expected to continue to present significant barriers to entry to potential competitors. The Company has contracted for commercial scale production of cyclosporine bulk material for its CYCLOSPORINE drug candidate from an established third-party manufacturing source. The Company has also separately contracted for the manufacture of the finished commercial supply of its CYCLOSPORINE product candidate from an established third-party source. There can be no assurance that such third parties will perform satisfactorily and any such failure may delay regulatory approval, product launch, impair the Company's ability to deliver products on a timely basis, or otherwise impair the Company's competitive position, which would have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. UNCERTAINTY OF MARKET ACCEPTANCE. Even if regulatory approvals are obtained, uncertainty exists as to whether the Company's products will be accepted by the market. In addition, there can be no assurance that the Company will receive an "AB" rating on CYCLOSPORINE or AZATHIOPRINE which in certain cases would require substitution of the Company's CYCLOSPORINE for Neoral and AZATHIOPRINE for Imuran, respectively. In particular, there can be no assurance that the Company's product candidates would obtain significant market share. Factors that may affect the willingness of patients, physicians, pharmacists and third-party payors to convert to SangStat products, if approved, include price, perception of bioequivalence, perceived clinical benefits and risks, ease of use, other product features and brand loyalty. In addition, other factors may limit the market acceptance of products developed by the Company, including the timing of regulatory approval and market entry relative to competitive products, the availability of alternative therapies, the price of the Company's products relative to alternative therapies, the availability of third-party reimbursement and the extent of marketing efforts by the Company or third-party distributors or agents retained by the Company. There can be no assurance that patients, physicians, pharmacists, or third-party payors will accept the Company's products. In particular, with respect to CYCLOSPORINE, there can be no assurance that even if product approval is obtained, the Company will be successful in taking significant market share away from Novartis. UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS. The Company's success depends in part on its ability to obtain and enforce patent protection for its products and to preserve its trade secrets. The Company holds patents and pending patent applications in the United States and abroad. The Company's patents involve specific claims and thus do not provide broad coverage. There can be no assurance that the Company's patent applications or any claims of these patent applications will be allowed, or found to be valid or enforceable, that any patents or any claims of these patents will provide the Company with competitive advantages for its products or that such issued patents and any patents issued under pending patent applications will not be successfully challenged or circumvented by the Company's competitors. The Company has not conducted extensive patent and prior art searches with respect to many of its product candidates and technologies, and there can be no assurance that third-party patents or patent applications do not exist or could not be filed in the United States, Europe or other countries which would have an adverse effect on the Company's ability to market its products. There can be no assurance that any claims in the Company's patent applications would be allowed, or found to be valid or enforceable, or that any of the Company's products would not infringe on others' patents or proprietary rights in the United States or abroad. The ALLOTRAP peptide family is being developed under an exclusive, worldwide license from Stanford University. Although Stanford has filed patent applications with respect to such technology, there can be no assurance that, other than the patent application that has issued, any of the claims of such patent applications will be allowed, or found to be valid or enforceable and as to the issued patent, that the claims will be found to be valid or enforceable. Patent applications in the United States are maintained in secrecy until patents issue. Since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by 8 10 several months, SangStat cannot be certain that it was the first to discover compositions covered by its pending patent applications or the first to file patent applications on such compositions. There can be no assurance that the Company's pending patent applications will result in issued patents or that any of its issued patents will afford protection against a competitor. There can be no assurance that SangStat can manufacture, or have manufactured, formulate or commercialize CYCLOSPORINE without infringing third-party patents. Although Novartis' composition of matter patent for cyclosporine expired in September 1995 in the United States, Novartis' patents relating to cyclosporine are expected to continue to present significant barriers to entry to potential competitors. There can be no assurance that Novartis or its contract manufacturers will not seek to protect its market share through litigation, or otherwise, or that SangStat's CYCLOSPORINE will not be found to infringe Novartis' or others' proprietary rights. Any litigation, brought by Novartis or other parties, whether or not resolved in favor of the Company, is likely to be expensive and time-consuming and could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. No assurance can be given that Novartis will not commence litigation or otherwise attempt to affect the regulatory approval or marketing of CYCLOSPORINE in the future. If Novartis or other companies were to successfully bring legal actions against the Company claiming patent or other intellectual property right infringements, in addition to any liability for damages, the Company could be enjoined by a court from selling such products or processes and might be required to obtain a license to manufacture or sell the affected product or process. There can be no assurance that the Company would prevail in any such action or that the Company could obtain any license required under any such patent on acceptable terms. In particular, in the case of CYCLOSPORINE, the Company believes that no license would be available on acceptable terms. The biotechnology and pharmaceutical industries have experienced significant litigation regarding patent and other intellectual property rights. If the Company becomes involved in such litigation with respect to CYCLOSPORINE or any other product, it could consume a substantial portion of the Company's financial and human resources, regardless of the outcome of such litigation. See "Business--Patents and Proprietary Technology" and "Risk Factors -- Risks Associated with CYCLOSPORINE." The Company also relies on trade secrets and proprietary know-how which it seeks to protect, in part, by confidentiality agreements with its employees and consultants. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known or independently developed by competitors. The Company has registered or applied for registration of the names of most of its products under development or commercialized for research and development use. However, there can be no assurance that any trademark registration will be granted or not challenged by competitors. See "Business--Patents and Proprietary Technology." SUBSTANTIAL COMPETITION. The drugs being developed by the Company compete with existing and new drugs being created by pharmaceutical, biopharmaceutical, biotechnology and diagnostics companies and universities. Many of these entities have significantly greater research and development capabilities, as well as substantial marketing, manufacturing, financial and managerial resources and represent significant competition for the Company. With respect to THYMOGLOBULIN, CYCLOSPORINE and AZATHIOPRINE, the Company will be competing against large companies that have significantly greater financial resources and established marketing and distribution channels for competing products. The drug industry is characterized by intense price competition and the Company anticipates that it will face this and other forms of competition. There can be no assurance that developments by others will not render the Company's products or technologies obsolete or noncompetitive or that the Company will be able to keep pace with technological developments. Many of the competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely different approach or means of accomplishing the desired therapeutic effect than products being developed by the Company and may be more effective and less costly. In addition, many of these competitors have significantly greater experience than the Company in undertaking preclinical testing 9 11 and human clinical trials of pharmaceutical products and obtaining regulatory approvals of such products. Accordingly, the Company's competitors may succeed in commercializing products more rapidly than the Company. For example, the Company believes that the degree of market penetration of its CYCLOSPORINE drug candidate is dependent in part on whether the Company is the first company to market a bioequivalent formulation of cyclosporine. The Company believes that other companies may be developing cyclosporine formulations that may be marketed as generic equivalents. Were these competitors to develop their products more rapidly and complete the regulatory process sooner, it could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. Treatments for the problems associated with transplantation that the Company's products seek to address are currently available. For example, Sandimmune and Neoral, marketed by Novartis would compete with CYCLOSPORINE. Additionally, Orthoclone OKT3, marketed by Johnson & Johnson and ATGAM, marketed by Pharmacia & Upjohn Inc., would be competitive with THYMOGLOBULIN. Prograf, marketed by Fujisawa Pharmaceutical Co. Ltd., CellCept, marketed by Roche Ltd. and Imuran, marketed by Glaxo Wellcome Ltd. would be competitive with CYCLOSPORINE and AZATHIOPRINE. All of the aforementioned competitive and other drugs are commercially available for use as immunosuppressive drugs and are widely prescribed. To the extent these therapeutics, monitoring products or novel transplant procedures address the problems associated with transplantation on which the Company has focused, they may represent significant competition. See "Business--Competition." LIMITED MANUFACTURING CAPABILITY. The Company lacks facilities to manufacture any of its drug candidates in accordance with current good manufacturing practices prescribed and strictly enforced by the FDA. The Company generally relies on third parties to manufacture its compounds for clinical trials, including THYMOGLOBULIN, CYCLOSPORINE, AZATHIOPRINE, CELSIOR and ALLOTRAP 2702 and has contracted or expects to contract for commercial production of these compounds. The Company has an agreement with PMC under which it intends to obtain THYMOGLOBULIN for clinical trials and commercial use. There can be no assurance that PMC or other manufacturers will meet FDA standards governing Good Manufacturing Practices ("GMP") or other regulatory guidelines, that any ELA's required for manufacturing will be approved, or that any third-party manufacturer will pass a preapproval inspection. The Company is currently purchasing ALLOTRAP 2702 for clinical trials from UCB bioproducts S.A. ("UCB") located in Belgium, and intends to contract with UCB for commercial production. The Company is currently purchasing CYCLOSPORINE for clinical trials from an established fermentation manufacturing source under a contract which also provides for the production of commercial scale quantities. The Company has also entered into an agreement with Eli Lilly and Company ("Lilly") under which Lilly has agreed to fill and finish bulk CYCLOSPORINE, provided by the Company, for subsequent commercial sale and distribution worldwide by the Company. There can be no assurance that the Company will be able to enter into secondary bulk material source contracts or successful secondary commercial scale manufacturing contracts or that any other third-party arrangements can be established on a timely or commercially reasonable basis, or at all. The Company will depend on all such third parties to perform their obligations effectively and on a timely basis. There can be no assurance that such parties will perform and any failures by third parties may delay clinical development or submission of products for regulatory approval, or otherwise impair the Company's competitive position which could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. In addition, the manufacturing of drug candidates involves a number of technical steps and requires meeting stringent quality control specifications imposed by government regulatory bodies and by the Company itself. Additionally, such products can only be manufactured in facilities approved by the applicable regulatory authorities. Because of these and other factors, the Company may not be able to replace its manufacturing capacity quickly or efficiently in the event that its manufacturers are unable to manufacture their products at one or more of their facilities. For certain of its potential products, the Company will need to develop its production technologies further for use on a larger scale in order to conduct human clinical trials and produce such products for commercial scale at an acceptable cost. 10 12 To date, the Company is manufacturing only two monitoring products in commercial quantities, PRA-STAT and CROSS-STAT, which are being marketed by SangStat's direct sales force in Europe and North America. To be successful, the Company's products must be manufactured in commercial quantities in compliance with regulatory requirements and at acceptable cost. The Company has limited experience in manufacturing its monitoring products, and there can be no assurance that the Company will be able to continue production of its existing products and scale-up production of future monitoring products to commercial levels. In addition, some materials used in the Company's products may be available only from sole suppliers. There can be no assurance that interruptions in supplies will not occur in the future, which could have a material adverse effect on the Company's ability to manufacture its products or to conduct clinical trials. LIMITED MARKETING CAPABILITY. The Company has a limited marketing and sales staff. To the extent that the Company itself undertakes to market a substantial portion of its products, or is unable to enter into co-promotion agreements or to arrange for third-party distribution of its products, additional expenditures, management resources and time will be required to develop a sales force. Currently, the Company intends to develop a sales force both in North America and Europe to market its products. However, there can be no assurance that the Company will be able to establish a sales force or enter into co-promotion or distribution agreements on terms favorable to the Company or on a timely basis. In addition, if the Company succeeds in bringing products to market, it will compete with many other companies that currently have extensive and well-funded marketing and sales operations. There can be no assurance that the Company's marketing and sales operations would compete successfully against such other companies. The Company has recently established THE TRANSPLANT PHARMACY for the direct distribution by mail order of the Company's products and services, as well as products and services of third parties. Establishing THE TRANSPLANT PHARMACY as a viable distribution system entails a number of risks including the Company's ability to enter into agreements with transplant centers to utilize THE TRANSPLANT PHARMACY's services, compliance with state regulations regarding pharmacy licensing and compliance with federal and state laws regulating payments for referrals for health care services. There can be no assurance that the Company will be successful in establishing THE TRANSPLANT PHARMACY as a viable distribution method for the Company's products and services. See "Business--Marketing." HISTORY OF OPERATING LOSSES; FUTURE PROFITABILITY UNCERTAIN. SangStat was incorporated in 1988 and has experienced significant operating losses since that date. As of September 30, 1996, the Company's accumulated deficit was $37,239,000. The Company expects to incur significant operating losses over the next several years. There can be no assurance that the Company will ever achieve significant revenues from product sales or profitable operations. NO ASSURANCE OF FDA, CANADIAN OR EUROPEAN REGULATORY APPROVAL; GOVERNMENT REGULATION. The Company's research, preclinical development, clinical trials, manufacturing, marketing and distribution of its products in the United States and other countries are subject to extensive regulation by numerous governmental authorities including, but not limited to, the FDA. In order to obtain regulatory approval of a drug product, the Company must demonstrate to the satisfaction of the applicable regulatory agency, among other things, that such product is safe and effective for its intended uses and that the manufacturing facilities are in compliance with GMP requirements. The Company must also demonstrate the approvability of a PLA and ELA for its biological products. The approval of the Company's generic product candidates is dependent on demonstrating bioequivalence with reference products in addition to assurance of the compliance with GMP regulations. In order to market its monitoring products, which are considered to be medical devices, the Company or its licensees will be required either to receive 510(k) marketing clearance or Premarket Approval Application ("PMA") approvals from the FDA for such products among other regulatory requirements. To obtain a 510(k) marketing clearance, the Company must show that a monitoring product is "substantially equivalent" to a legally marketed product not requiring FDA approval. In addition, the Company must demonstrate that it is capable of manufacturing the product to the relevant standards. To obtain PMA approval, the Company must submit extensive data, including pre-clinical and clinical 11 13 trial data to prove the safety and efficacy of the device. Additionally, the Company is currently distributing several monitoring products for research or investigational use. Although the Company believes it is complying with FDA regulations regarding such distribution, there can be no assurance that the FDA will not determine that the Company is violating FDA regulations with respect to the distribution of these products. The process of obtaining FDA and other required regulatory approvals is lengthy and will require the expenditure of substantial resources, and there can be no assurance that the Company will be able to obtain the necessary approvals. Moreover, if and when such approval is obtained, the marketing, distribution and manufacture of the Company's products would remain subject to extensive regulatory requirements administered by the FDA and other regulatory bodies. Failure to comply with applicable regulatory requirements can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant pre-market clearance or pre-market approval, withdrawal of approvals and criminal prosecution of the Company and employees. Additionally, the Company intends to pursue commercialization of its products in European countries. Both the Company's pre-transplant and post-transplant monitoring products should be subject to regulation as in vitro medical devices for which regulations are being presently formulated under harmonized European Directives. This new Directive is likely to impose additional requirements on the pre-transplant donor/recipient matching products and the post-transplant monitoring products. This legislation may include, among other things, requirements with respect to the design, safety and performance of the products as well as impose premarket approval procedures such as product type certification and quality systems certification of manufacturing. The Company's therapeutic products are subject to foreign regulatory requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement, which vary from country to country. The process of obtaining foreign regulatory approvals can be lengthy and require the expenditure of substantial resources, and there can be no assurance that the Company will be able to obtain the necessary approvals or the approvals for the proposed indications. See "Business--Government Regulation." DEPENDENCE ON COLLABORATIVE RELATIONSHIPS. The Company has in the past relied on collaborative relationships to finance certain of its research and development programs. The Company may enter into collaborative relationships with corporate and other partners to develop and commercialize certain of its potential products. There can be no assurance that the Company will be able to negotiate acceptable collaborative arrangements in the future, that such collaborations will be available to the Company on acceptable terms or that any such relationships, if established, will be scientifically or commercially successful. See "Business--Strategic Relationships." DEPENDENCE UPON KEY PERSONNEL. The Company's ability to develop its business depends in part upon its attracting and retaining qualified management and scientific personnel, including consultants and members of its Scientific, Medical and Regulatory Advisory Board. As the number of qualified personnel is limited, competition for such personnel is intense. There can be no assurance that the Company will be able to continue to attract or retain such people. The loss of key personnel or the failure to recruit additional key personnel could significantly impede attainment of the Company's objectives and have a material adverse effect on the Company's financial condition and results of operations. The Company's planned activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel, in areas such as research, product development, preclinical testing, clinical trial management, regulatory affairs, finance, manufacturing, pharmacy affairs and marketing and sales. The inability to acquire such services or to develop such expertise could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Scientific, Medical, Pharmacy and Regulatory Advisory Board" and "Management." UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT. SangStat's ability to commercialize its products may depend in part on the extent to which reimbursement for the cost of such products and related treatment will be available from government health administration authorities, private health coverage insurers and other organizations. Significant uncertainty exists as to the pricing, 12 14 availability of distribution channels and reimbursement status of newly approved healthcare products and there can be no assurance that adequate third party coverage will be available for the Company to maintain price levels sufficient for realization of an appropriate return on its investment in product development. In certain foreign markets, pricing or profitability of healthcare products is subject to government control. In the United States, there have been, and the Company expects that there will continue to be, a number of federal and state proposals to implement similar government control. In addition, an increasing emphasis on managed care in the United States has and will continue to increase the pressure on pharmaceutical pricing. While the Company cannot predict whether any such legislative or regulatory proposals will be adopted or the effect such proposals or managed care efforts may have on its business, the announcement of such proposals or efforts could have a material adverse effect on the Company's ability to raise capital, and the adoption of such proposals or efforts could have a material adverse effect on the Company's business, financial condition and results of operations. Further, to the extent that such proposals or efforts have a material adverse effect on other pharmaceutical companies that are prospective corporate partners for the Company, the Company's ability to establish corporate collaborations may be adversely affected. In addition, third-party payors are increasingly challenging the prices charged for medical products and services. If the Company succeeds in bringing one or more products to the market, there can be no assurance that these products will be considered cost effective or that reimbursement to the consumer will be available or will be sufficient to allow the Company to sell its products on a competitive basis. See "Business--Products, Product Candidates and Services." FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results have fluctuated and are expected to continue to fluctuate in the future as a result of a number of factors including the uncertainty in the timing and the amount of revenue earned upon product sales and achievement of research and development milestones, funding under collaborative research agreements and expenses required for product development, clinical trials and marketing operations. The Company's operating results may also fluctuate significantly depending on other factors, including the introduction of new products by the Company's competition, regulatory actions, market acceptance of the Company's products, adoption of new technologies, manufacturing capabilities, legal actions and third-party reimbursement policies. PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE. The Company faces an inherent business risk of exposure to product liability claims in the event that the use of products manufactured by the Company results in adverse effects during research, clinical development or commercial use. While the Company will attempt to take appropriate precautions, there can be no assurance that it will avoid significant product liability exposure. The Company's product liability insurance coverage is currently limited to $3,000,000 which may not be adequate insurance coverage to cover potential liability exposures. Moreover, there can be no assurance adequate insurance coverage will be available at acceptable cost, if at all, or that a product liability claim would not materially adversely affect the business, financial condition, cash flows and results of operations of the Company. HAZARDOUS MATERIALS. In connection with its research and development activities and operations, the Company is subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens and wastes. There can be no assurance that the Company will not incur significant costs to comply with environmental and health and safety regulations. The Company's research and development involves the controlled use of hazardous materials, including but not limited to certain hazardous chemicals and infectious biological specimens. 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. "See Business--Government Regulation." 13 15 VOLATILITY OF STOCK PRICE. The market prices for securities of biotechnology companies, including the Company's, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new therapeutic products by the Company or its competitors, regulatory developments, disputes or developments related to patent or other proprietary rights, public concern as to the safety of products developed by the Company or others and general market conditions may have a significant effect on the market price of the Common Stock. See "Price Range of Common Stock." EFFECT OF CERTAIN PROVISIONS; ANTITAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS, STOCKHOLDER RIGHTS PLAN AND DELAWARE LAW. Certain provisions of the Company's Certificate of Incorporation and Bylaws could delay or make more difficult a merger, tender offer or proxy contest involving the Company, which could adversely affect the market price of the Company's Common Stock. The Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. Further, the Company has adopted a stockholder rights plan. The plan allows for the issuance of a dividend to stockholders of rights to acquire shares of the Company or, under certain circumstances, an acquiring corporation, at less than half their fair market value. The plan could have the effect of delaying, deferring or preventing a change in control of the Company. In addition, the Company is subject to the antitakeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control of the Company. 14 16 THE COMPANY SangStat was incorporated in California in July 1988 and reincorporated in Delaware in August 1995. SangStat's principal offices are located at 1505 Adams Drive, Menlo Park, California 94025, and its telephone number is (415) 328-0300. Unless the context otherwise requires, references to SangStat or the Company include its subsidiaries, SangStat Atlantique S.A., France, SangStat Canada Ltd. and XenoStat, Inc. USE OF PROCEEDS The net proceeds from the sale of the 2,000,000 shares of Common Stock offered hereby at an assumed public offering price of $28.38 per share are estimated to be $53,221,000 ($61,287,000 if the Underwriters' over-allotment option is exercised in full). The Company anticipates that, combined with its existing resources, the net proceeds of this offering will enable it to more effectively compete in the transplant market on a global level. Specifically, the Company anticipates spending a portion of such resources over the next several years on the following: (i) expansion of the Company's commercial infrastructure, including the establishment of a dedicated sales force to market the Company's current and future products in North America and Europe and the expansion of THE TRANSPLANT PHARMACY in the United States; (ii) additional clinical trials of its product candidates, including THYMOGLOBULIN, CYCLOSPORINE, and AZATHIOPRINE, to study their application in additional populations and indications; (iii) preclinical development of product candidates and expansion of research and development programs; (iv) acquisition of products or technologies complementary to the Company's business, should favorable opportunities arise; and (v) other general corporate purposes. Pending such uses, the Company intends to invest the net proceeds in short-term, interest-bearing obligations, primarily in government and other investment-grade securities. The exact allocation of the proceeds for the purposes set forth above and timing of the expenditures may vary significantly depending upon numerous factors, including research and development programs, the scope and results of clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in obtaining and enforcing patents or any litigation by third parties regarding intellectual property, the status of competitive products, the establishment of manufacturing capacity or third-party manufacturing arrangements, the establishment of sales and marketing capabilities, the establishment of collaborative relationships with other parties, and the costs of manufacturing scale-up. If adequate funds are not available, the Company may be required to delay, scale back or eliminate one or more of its development programs or obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain technologies, product candidates or products that the Company would not otherwise relinquish. The Company anticipates that its existing capital resources, including the net proceeds of this offering and the interest earned thereon will be sufficient to fund its operations through at least the next several years. However, there can be no assurance that the Company will not be required to seek additional financing sooner or that such financing, if required, will be available on terms satisfactory to the Company. See "Risk Factors--History of Operating Losses; Future Profitability Uncertain" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 15 17 PRICE RANGE OF COMMON STOCK The Company's Common Stock commenced trading publicly on the Nasdaq National Market on December 14, 1993 and is traded under the symbol SANG. The following table sets forth for the periods indicated the high and low daily closing prices for the Common Stock:
HIGH LOW ------- ------- FISCAL YEAR ENDED DECEMBER 31, 1995 First Quarter.................................................... $ 7.125 $ 4.500 Second Quarter................................................... 6.375 4.375 Third Quarter.................................................... 8.875 5.125 Fourth Quarter................................................... 10.750 6.875 FISCAL YEAR ENDED DECEMBER 31, 1996 First Quarter.................................................... 19.125 10.250 Second Quarter................................................... 21.250 15.750 Third Quarter.................................................... 26.750 10.500 Fourth Quarter................................................... 30.750 20.375 FISCAL YEAR ENDED DECEMBER 31, 1997 First Quarter (through January 22, 1997)......................... 34.375 28.000
On January 23, 1997, the closing sale price of the Common Stock as reported on the Nasdaq National Market was $28.38 per share. As of January 23, 1997, there were approximately 110 holders of record of the Common Stock. DIVIDEND POLICY The Company has not declared or paid any cash dividends since its inception. The Company currently intends to retain all earnings, if any, for use in the expansion of its business and therefore does not anticipate paying any dividends in the foreseeable future. 16 18 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1996, (i) on an actual basis and (ii) as adjusted to give effect to the receipt by the Company of the net proceeds from the sale of 2,000,000 shares of Common Stock offered hereby at an assumed public offering price of $28.38 per share. This table should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus.
SEPTEMBER 30, 1996 ----------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Short-term debt........................................................ $ 327 $ 327 Long-term debt......................................................... 1,438 1,438 Stockholders' equity Preferred Stock: $0.001 par value per share; 5,000,000 shares authorized, no shares issued and outstanding...................... -- -- Common Stock: $0.001 par value per share; 25,000,000 shares authorized, 13,106,125 shares issued and outstanding, actual; 15,106,125 shares, as adjusted(1)................................. 81,565 134,786 Accumulated deficit.................................................. (37,239) (37,239) Accumulated translation adjustment................................... 19 19 Unrealized gain on investments....................................... 156 156 -------- -------- Total stockholders' equity......................... 44,501 97,722 -------- -------- Total capitalization.......................... $46,266 $ 99,487 ======== ========
- ------------------------------ (1) Excludes 1,153,092 shares of Common Stock issuable upon exercise of options outstanding as of September 30, 1996, at a weighted average exercise price of $6.43 per share. 17 19 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated 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 with respect to the balance sheets as of December 31, 1994 and 1995, are derived from the Consolidated Financial Statements that have been audited by Deloitte & Touche LLP, independent auditors, which are included elsewhere in this Prospectus. The statement of operations data for the years ended December 31, 1991 and 1992, and the balance sheet data as of December 31, 1991, 1992 and 1993, are derived from audited consolidated financial statements not included herein. The selected consolidated financial data as of September 30, 1996 and for the nine months ended September 30, 1995 and 1996 are unaudited but have been prepared on a basis substantially consistent with the applicable financial data included in the audited consolidated financial statements and, in the opinion of management, contain all such adjustments, consisting of only normal recurring adjustments, necessary to present fairly the financial position and results of operations of the Company as of such date and for such periods. Operating results for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996 or any future period. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: Net product sales................................ $ 345 $ 445 $ 518 $ 674 $ 2,698 $ 1,856 $ 1,732 Collaborative agreement.......................... -- -- 2,625 3,000 1,125 1,125 -- Government grants................................ 131 90 51 -- -- -- -- ------- ------- ------- ------- ------- -------- ------- Total revenues............................... 476 535 3,194 3,674 3,823 2,981 1,732 ------- ------- ------- ------- ------- -------- ------- Operating expenses: Cost of sales and manufacturing.................. 907 1,047 955 1,503 2,753 1,933 2,018 Research and development......................... 1,006 2,303 3,679 4,845 6,647 4,582 6,188 Selling, general and administrative.............. 1,703 2,116 2,202 3,157 3,773 2,689 4,169 ------- ------- ------- ------- ------- -------- ------- Total operating expenses..................... 3,616 5,466 6,836 9,505 13,173 9,204 12,375 ------- ------- ------- ------- ------- -------- ------- Loss from operations................................. (3,140) (4,931) (3,642) (5,831) (9,350) (6,223) (10,643) Other income (expense)--net.......................... 73 2 (78) 284 672 544 1,456 ------- ------- ------- ------- ------- -------- ------- Net loss..................................... $(3,067) $(4,929) $(3,720) $(5,547) $(8,678) $ (5,679) $ (9,187) ======= ======= ======= ======= ======= ======== ======= Net loss per common and equivalent share(1).......... $ (0.79) $ (0.92) $ (0.61) $ (0.76) ======= ======= ======== ======= Pro forma net loss per common and equivalent share(1)........................................... $ (1.00) $ (0.70) ======= ======= Shares used in per share computations(1)............. 4,950 5,309 7,049 9,385 9,306 12,167
NINE MONTHS YEAR ENDED DECEMBER 31, ENDED ----------------------------------------------- SEPTEMBER 30, 1991 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- ----------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments..... $ 3,681 $ 622 $10,641 $12,378 $ 9,222 $ 44,671 Working capital....................................... 3,577 305 9,859 11,367 8,451 44,557 Total assets.......................................... 4,735 1,502 12,499 14,450 11,560 47,841 Long-term obligations, excluding current portion...... 352 1,522 1,346 1,153 1,091 1,438 Foreign subsidiary capital converted to capital stock in 1993............................................. 363 363 -- -- -- -- Accumulated deficit................................... (5,178) (10,107) (13,827) (19,374) (28,052) (37,239) Total stockholders' equity............................ 3,314 (1,125) 9,497 11,328 8,281 44,501
- ------------------------------ (1) For a description of the computation of net loss per common and equivalent share and pro forma net loss per common and equivalent share, see Note 1 of Notes to Consolidated Financial Statements. 18 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. Except for the historical information contained herein, the discussion in this Prospectus contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed in "Risk Factors," as well as those discussed elsewhere herein. OVERVIEW Since its inception in 1988, SangStat has focused on the development of products to improve the outcome of organ transplantation. The Company's accumulated deficit from inception through September 30, 1996 was $37,239,000. The Company expects losses to continue for the next several years due to the expansion of clinical trials, research and development programs and sales and marketing activities. The Company's operating results have fluctuated and are expected to continue to fluctuate in the future as a result of a number of factors including the uncertainty in the timing and the amount of revenue to be earned upon product sales, expenses required for product development, clinical trials and marketing operations. In addition, the Company's business is subject to significant risks, including but not limited to, the success of its research and development efforts, litigation by third parties regarding intellectual property, in particular, potential litigation with Novartis regarding the Company's CYCLOSPORINE product candidate, obtaining and enforcing patents important to the Company's business, the lengthy and expensive regulatory approval process, reliance on third parties to manufacture products or product candidates, competition from other products and uncertainties associated with health care reform measures. Even if the Company's products appear promising at various stages of development, they may not reach the market for a number of reasons. Such reasons include, but are not limited to, the possibilities that the product candidates will be found to be ineffective or unsafe to manufacture on a large scale, be uneconomical to market, be precluded from commercialization by proprietary rights of third parties or be unacceptable to providers, payors or patients. Additional expenses, delays and losses of opportunities that may arise out of these and other risks could have a material adverse impact on the Company's business, financial condition, cash flows and results of operations. RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 Total revenues. Net product sales decreased from $1,856,000 in the first nine months of 1995 to $1,732,000 in the first nine months of 1996. This primarily reflects a decrease in revenues for certain contract manufacturing, and other products for research use, partially offset by increases in the demand for THYMOGLOBULIN under Canada's EDR Program and increased sales of PRA-STAT and CROSS-STAT. Effective July 1, 1996, SangStat reacquired exclusive commercial rights for its PRA-STAT and CROSS-STAT monitoring products from Baxter Healthcare Corporation ("Baxter") and since this date, SangStat has been marketing these monitoring products through its own sales staff in the United States and Europe. As expected, no collaborative agreement milestone payments were received from Baxter in 1996, reflecting completion of the final milestones for PRA-STAT and CROSS-STAT in 1995. The final payments of $1,125,000 in the first six months of 1995 represented the completion of $10.0 million received by SangStat for milestones, license fees and equity in 1993 through 1995 under its collaborative agreement with Baxter. Cost of sales and manufacturing. Cost of sales and manufacturing expenses increased from $1,933,000 for the nine months ended September 30, 1995 to $2,018,000 for the first nine months of 1996. This increase primarily reflects an increase in monitoring product manufacturing costs, partially 19 21 offset by lower cost of goods sold in Canada. The Company's monitoring products business does not generate a profit because certain sales are made on a cost recovery basis and the Company has not yet achieved a scale of production that allows it to cover fixed manufacturing costs. Research and development. Research, development and regulatory expenses increased from $4,582,000 in the first nine months of 1995 to $6,188,000 in the first nine months of 1996. This increase reflects expanded research and development activities. Selling, general and administrative. Selling, general and administrative expenses increased from $2,689,000 in the first nine months of 1995 to $4,169,000 in the first nine months of 1996. This primarily reflects expenses for the expansion of its sales staff in both the United States and Europe for the Company's monitoring products, establishment of a pilot program for THE TRANSPLANT PHARMACY, increased activities in investor relations and expanded general administrative activities. Other income. Interest income increased from $646,000 in the first nine months of 1995 to $1,552,000 for the first nine months of 1996. This reflects interest earned from investment of the cash proceeds from the Company's public offering in March 1996. Interest and other expense for capital lease obligations and long term notes remained essentially unchanged at $97,000 in the first nine months of 1996 compared with $102,000 in the first nine months of 1995. RESULTS OF OPERATIONS--FISCAL YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 Net loss increased from $3,720,000 in 1993 to $5,547,000 in 1994 and further to $8,678,000 in 1995, primarily reflecting increases in clinical trial, regulatory affairs, research and development and general, selling and administrative expenses. Total revenues. Net product sales increased from $519,000 in 1993 to $674,000 in 1994 and to $2,698,000 in 1995. Increased sales during these periods resulted primarily from the commencement of distribution of the Company's first therapeutic product, THYMOGLOBULIN, in Canada in January 1995 under the EDR program, and to a lesser extent, increased sales of monitoring products. Revenues from the collaborative agreement with Baxter were $2,625,000, $3,000,000 and $1,125,000 in 1993, 1994 and 1995, respectively. Cost of sales and manufacturing. Cost of sales and manufacturing expenses increased from $955,000 in 1993 to $1,503,000 in 1994 and to $2,753,000 in 1995 as a result of adding to manufacturing staff, expanding manufacturing operations and increasing quality control and quality assurance activities for production of PRA-STAT and CROSS-STAT monitoring products and more significantly in 1995, additional expenses associated with sales of THYMOGLOBULIN in Canada. Research and development. Research and development expenses increased from $3,679,000 in 1993 to $4,845,000 in 1994 due to initiation of the Company's Phase III clinical trial for THYMOGLOBULIN, start of a Phase II clinical trial for ALLOTRAP 2702, CYCLOSPORINE research, continued expenditures for monitoring test products and additional personnel expenses for regulatory affairs and clinical development. Research and development expenses increased further to $6,647,000 in 1995 primarily as a result of the Company's continuing Phase III trial for THYMOGLOBULIN, Phase II clinical trial for ALLOTRAP 2702, development of the Company's CYCLOSPORINE and AZATHIOPRINE product candidates, development and regulatory expenses for CELSIOR and continuing monitoring product development activities. Selling, general and administrative. Selling, general and administrative expenses increased from $2,202,000 in 1993 to $3,157,000 in 1994, reflecting licensing payments for THYMOGLOBULIN, ALLOTRAP and CYCLOSPORINE, including a $500,000 milestone payment to PMC, increased expenses relating to public company reporting requirements and expanded marketing and business development activities. Selling, general and administrative expenses increased to $3,773,000 in 1995, reflecting increased distribution expenses for THYMOGLOBULIN through SangStat Canada, Ltd., increased patent expenses, and additions to staff to support expanding clinical development, marketing, administrative and business development activities. 20 22 Other income (expense) -- net. Other income (expense) -- net was an expense of $78,000 in 1993, income of $284,000 in 1994 and income of $672,000 in 1995. Other income was $82,000, $427,000 and $811,000 for 1993, 1994 and 1995, respectively, which resulted from investing cash from sales of equity securities. Other expense was $160,000, $143,000 and $139,000 for each respective year stated above and includes the interest portion of capital lease obligations, interest on bridge loans and notes to former Series E Preferred stockholders and financing of the Company's various insurance policies. The Company conducts its European operations through its French subsidiary, SangStat Atlantique S.A. and its Canadian operations through SangStat Canada, Ltd. and does not currently engage in any foreign currency hedging activities. See Notes 1, 7 and 14 of Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations since inception through private and public equity sales, licensing fees, grants from the French government and equipment leasing arrangements. Through September 30, 1996, the Company and its subsidiary, SangStat Atlantique S.A. in Nantes, France, had received approximately $21,236,000 from private placements, $6,750,000 in licensing fees and milestone payments from Baxter, and $61,342,000 from public offerings of common stock. During the years ended December 31, 1993, 1994 and 1995, the Company's net cash used in operating activities was approximately $3,198,000, $5,210,000 and $8,591,000, respectively. During the first nine months of 1995 and 1996, the net cash used in operating activities was approximately $6,201,000 and $9,376,000, respectively. The fluctuation in net cash used in operating activities in each of the periods above is primarily due to the varying amount of net loss incurred in each year, as a result of increasing research and development, manufacturing and sales and marketing expenses. As of September 30, 1996, the Company had cash, cash equivalents and short-term investments of $44,671,000 and total assets of $47,841,000. The Company expects to incur significant costs related to, among other things, continued clinical and preclinical testing, regulatory approval activities and research and development programs in the future. The Company may need to raise additional funds through additional financings, including private or public equity offerings and collaborative research and development arrangements with corporate partners. There can be no assurance that adequate funds will be raised on favorable terms, if at all, or that discussions with potential collaborative partners will result in any agreements. The Company anticipates that its existing capital resources, including the net proceeds from this offering and the interest earned thereon, will be sufficient to fund its operations for at least the next several years. The Company's future capital requirements will depend on many factors, including its research and development programs, the scope and results of clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in obtaining and enforcing patents or any litigation by third parties regarding intellectual property, the status of competitive products, the establishment of manufacturing capacity or third-party manufacturing arrangements, the establishment of sales and marketing capabilities, the establishment of collaborative relationships with other parties, and the costs of manufacturing scale-up. If adequate funds are not available, the Company may be required to delay, scale back or eliminate one or more of its development programs or obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain technologies, product candidates or products that the Company would not otherwise relinquish. 21 23 BUSINESS OVERVIEW SangStat, The Transplant Company, is a specialty pharmaceutical company applying a disease management approach to improve the outcome of organ transplantation. The Company's products and product candidates are designed to prevent and treat graft rejection and monitor transplant patients throughout their lifetimes. SangStat's lead drug candidates are THYMOGLOBULIN for the treatement of acute graft rejection episodes, and CYCLOSPORINE, for chronic daily immunosuppression to prevent graft rejection. In January 1997, the Company filed a Product License Application ("PLA") with the FDA for marketing approval of THYMOGLOBULIN. In November 1996, the Company filed an Abbreviated Antibiotic Drug Application ("AADA"), which the FDA accepted for review in January 1997, for marketing approval of its proprietary CYCLOSPORINE formulation. Cyclosporine, which to date has only been marketed by Novartis AG ("Novartis"), is the leading immunosuppressive drug used by transplant patients, with reported worldwide sales of $1.2 billion in 1995. SangStat is also conducting clinical trials for a generic AZATHIOPRINE product candidate for use as an adjunct therapy in chronic immunosuppression. ALLOTRAP 2702, a proprietary HLA peptide designed to promote graft acceptance, is in Phase II clinical trials in Europe. To further the Company's goal of providing comprehensive disease management, the Company has established THE TRANSPLANT PHARMACY, a pilot program designed to provide mail order distribution of drugs and transplant patient management services. SangStat's strategy is to provide a comprehensive disease management approach to the organ transplantation market by developing a family of products that address the needs of patients at each stage of transplant care from pre-transplant monitoring to the lifetime post-transplant phase. The Company plans to capitalize on this broad product pipeline by developing relationships with key providers and managed care organizations to better integrate the management of the transplant patients' care and improve outcomes and lower costs. ORGAN TRANSPLANTATION Organ transplantation can save or improve the lives of patients with organ failures for whom there are few alternative treatments. Transplantation involves surgically replacing the failed organ of a transplant recipient with a viable organ from a donor. Because the success of a transplant depends on the degree of compatibility between the organ donor and the recipient, a typical transplant candidate must wait on a national computerized waiting list until a compatible organ can be found. Currently, there are approximately 80,000 transplant candidates registered on waiting lists in approximately 500 transplant centers throughout North America and Europe. At any given time, approximately 70% of these patients are waiting for kidney transplants. The other patients are waiting for liver, heart, heart-lung, bowel or pancreas transplants. Each year approximately 50,000 new patients receive donated organs. In order to prevent rejection of implanted organs, recipients must begin a life-long regimen of immunosuppressive therapy immediately upon receiving a donated organ. There are more than 200,000 patients in North America and Europe that need daily immunosuppressive therapy to prevent graft rejection and graft loss. In addition to being a life-saving and life-enhancing procedure, transplantation can be cost-effective as well. For example, the cost over a 10-year period of a kidney transplant is generally less than the cost of dialysis. However, transplantation is still very costly, due in substantial part to the costs of lifetime immunosuppressive therapy and associated side effects as well as the costs of treating rejection and infection episodes. Therefore, products that limit the need for immunosuppression and reduce the frequency and severity of rejection and infection episodes could significantly improve the cost-effectiveness of transplantation. The Transplant Immune Response The function of the immune system is to protect the body from damage caused by invading microorganisms or other foreign matter, including donor organs. This defensive function is performed 22 24 by the humoral (B-cell) and cell-mediated (T-cell) arms of the immune system. When challenged, the humoral and cell-mediated systems interact and generate a coordinated immune response to recognize, target and eliminate the pathogen or, in the case of transplantation, the donor organ, thereby resulting in graft rejection. Specifically, the donor organ antigens (HLA molecules) are recognized by the immune system of the graft recipient as being "non-self." The immune response to a transplant depends on the level of compatibility between donor and recipient HLA molecules. The HLA system consists of a complex array of molecules playing a key role in the normal immune response as well as in graft acceptance or rejection. HLAs were originally discovered by Dr. Jean Dausset, a scientific advisor to SangStat, and Nobel Prize laureate for this pioneering discovery. Molecular differences between an organ donor's and a recipient's HLAs lead to the recognition of the donor's HLAs as non-self by the recipient's immune system. Graft rejection results when the recipient's immune system T-cell progenitors recognize the donor's HLAs as non-self, activate against the graft and proliferate into numerous cytotoxic T-cells. When these cytotoxic T-cells invade and attack the graft, rejection and loss of the organ often occur. In addition to T-cells, anti-HLA antibodies can play an active role in the anti-graft immune response. The presence of anti-HLA antibodies in the recipient's blood may indicate a high risk of accelerated rejection. Maximizing HLA compatibility by selecting, for a given recipient, the donor whose HLAs are as similar as possible to the recipient's HLAs and not recognized by antibodies preexisting in the recipient's blood, is key to reducing the risk of rejection. However, because it is extremely difficult to get a perfect HLA match except in identical twins, rejection episodes occur frequently. Current therapies used to reduce the occurrence of rejection episodes involve the chronic use of immunosuppressants, which impair the entire immune system of the recipient. Even with the use of immunosuppressants, graft rejection remains frequent, and their chronic use can lead to serious side effects, including life-threatening infections, kidney or liver toxicity and cancers. The Transplant Process A typical transplant patient progresses through three clinical phases: the pre-transplant phase; the acute phase(surgery and first year post-transplant); and the lifetime post-transplant phase. The Pre-Transplant Phase. A transplant candidate is registered on a national computerized waiting list, which ranks candidates according to the urgency of the need for a transplant and maintains the data necessary to determine if a compatible organ becomes available. A kidney transplant candidate usually waits months or even years for a compatible organ and continues to undergo dialysis several times per week to substitute for the failed kidneys. Typically, a blood sample is collected as frequently as monthly and evaluated to estimate the candidate's level of immune sensitization against a panel of HLA molecules representative of the population of prospective organ donors. This procedure, called Panel Reactive Antibody (PRA) testing utilizes microlymphocytotoxicity, a complex and subjective laboratory method developed in the 1960s. Traditional HLA compatibility testing lacks accuracy and standardization and therefore often results in poor matching of donors and recipients. The Acute Phase (Surgery and First Year Post-Transplant). Most organs are retrieved from trauma victims who are declared brain-dead but maintain cardiac function until their organs are removed. The harvested organs are stored in a preservation solution to prevent deterioration and then tissue typed to determine the level of HLA antigens. Each organ is cross matched with approximately 100 potential recipients on the transplant waiting lists. Once the best candidate for each organ has been chosen, the organ is shipped in an organ preservation solution to the recipient's transplant center. The length of storage time allowed before transplant varies among organ types and can severely limit the distance an organ can be shipped. The quality of organ preservation is therefore an important factor contributing to the viability of the transplant. 23 25 Transplant surgery has become a relatively safe and standardized procedure. After the transplant, the challenge for physicians is to prevent graft rejection by suppressing the activity of T-cells. Consequently, the success of the transplant is highly dependent on the immunosuppressive regimen which is initiated the day of transplantation and continued daily for the rest of the patient's life. In addition, organ recipients must be regularly monitored to measure the body's immune response and blood drug levels and to identify acute rejection episodes. Despite the use of immunosuppressants, during the first year following transplantation many transplant patients (estimates range from 15% in certain populations to more than 60% in others, depending on risk factors and therapy) undergo one or more graft rejection episodes. During a rejection episode, the body mounts an immune attack on the graft, resulting in impaired function of the transplanted organ. Because rejection, infection and drug toxicity produce similar symptoms, diagnosis of rejection may be difficult until it reaches an advanced stage and is confirmed by an invasive graft biopsy. The only way to stop the rejection process is by administering additional immunosuppressive therapy, such as high doses of steroids, and/or anti-T-cell monoclonal and/or polyclonal antibodies. In many cases, rejection can be arrested and organ damage reversed. However, at the end of the first year, about 20% of kidney transplant patients (and a higher percentage for other organs) have lost their grafts. Surgery is typically required to remove the rejected kidney and the patient must return to chronic dialysis and possibly receive a second transplant, which has a lower probability of success than the first. Failure to reverse rejection of other organs often results in the death of the patient. The Lifetime Post-Transplant Phase. The use of immunosuppressants, initiated during the acute phase, is continued daily throughout the patient's lifetime to minimize or prevent the loss of the graft by acute or chronic rejection. Conventional therapy typically combines several drugs, most commonly cyclosporine, azathioprine and steroids, or alternative combinations for certain patients using tacrolimus and/or mycophenolate mofetil. These drugs act nonspecifically and broadly impair the recipient's immune system in order to reduce the immune response against the graft. Cyclosporine is the leading immunosuppressive drug used in the post-transplant phase. In 1995, worldwide sales of Novartis' cyclosporines, Sandimmune and Neoral, were reported at $1.2 billion. Even with the use of immunosuppressants, patients have an approximate 5% to 20% risk of losing grafts per year during the first three years following transplantation, and less than 50% of patients have functioning grafts after approximately ten years. 24 26 PRODUCTS, PRODUCT CANDIDATES AND SERVICES SangStat's portfolio of complementary drugs, monitoring products, product candidates and services are designed to prevent and treat graft rejection and monitor patients throughout the patient's lifetime. The following table summarizes SangStat's products, product candidates and services. - --------------------------------------------------------------------------------
POTENTIAL CLINICAL TRANSPLANT PHASE PRODUCT/SERVICE USE STATUS(1) - ----------------- ----------------- ------------------ ------------------------- Pre-Transplant PRA-STAT Detects anti-HLA Marketed Monitoring antibodies in candidates CROSS-STAT Detects candidate Marketed antibodies against a specific donor Transplant THYMOGLOBULIN(2) Treats acute PLA submitted in U.S.; Acute Care kidney rejection NDS filed in Canada episodes ALLOTRAP 2702 Promotes graft Phase II trials (Europe) acceptance CELSIOR(3) Preserves organs Clinical trials prior to transplantation Lifetime Post- CYCLOSPORINE Chronic AADA accepted for review Transplant Care immunosuppression in U.S. AZATHIOPRINE Chronic Bioequivalence trials immunosuppression MONITORING Patient management Clinical trials PRODUCTS THE TRANSPLANT Mail order and Piloting at selected PHARMACY patient management centers program
------------------------------------ (1) "Phase I, II or III" indicates that the product candidate is in a certain stage of clinical trials. "Bioequivalence Trials" are clinical studies in healthy volunteers which assess pharmacokinetic parameters of the drug candidate against the reference drug to support an application for the approval of a generic drug without the need for safety and efficacy trials. "AADA Accepted for review" means that an Abbreviated Antibiotic Drug Application has been accepted for filing with the FDA on the basis that the product may be bioequivalent to an existing reference listed drug and may conform with AADA regulations. "NDS Filed" means that a New Drug Submission has been filed with the Health Protection Board. "PLA Submitted" means that a Product License Application for approval of a biological product has been submitted to the FDA. "Marketed" means that commercial sales of the product have commenced. See "--Government Regulation." (2) THYMOGLOBULIN is licensed exclusively from PMC for the United States and Canada and commercialized by PMC in many European countries. See "--Strategic Relationships." (3) CELSIOR was licensed from PMC and the Company has the exclusive rights to market the product in the United States and Canada. See "--Strategic Relationships." - -------------------------------------------------------------------------------- THYMOGLOBULIN Thymoglobulin is a pasteurized, rabbit anti-human thymocyte polyclonal antibody preparation which induces immunosuppression as a result of T-cell depletion. The Company filed a PLA with the FDA for market approval in January 1997. SangStat has an exclusive license from PMC to market THYMOGLOBULIN in the United States and Canada. Thymoglobulin is commercially available in many European countries where it is a market leader in its category. Approved for use in 39 25 27 countries, thymoglobulin has been commercialized and used to treat more than 30,000 patients principally in Europe by PMC since 1985. SangStat completed a pivotal Phase III human clinical trial in the United States in August 1996. The trial was designed to demonstrate safety and efficacy equivalent to current anti-T-cell therapy for the treatment of acute kidney rejection episodes. The trial was a double-blinded, randomized, multi-center Phase III clinical trial of THYMOGLOBULIN versus ATGAM (marketed by Pharmacia & Upjohn Inc.) in the treatment of acute rejection episodes following renal transplantation in adults. The 163 adult patients enrolled in the trial were kidney transplant recipients with biopsy-proven acute graft rejection. Patients randomized into the treatment groups were to receive either 1.5 mg/kg per day of THYMOGLOBULIN or 15 mg/kg per day of ATGAM for 7 to 14 days and were followed for three months following enrollment. Patients were stratified into groups according to the degree of rejection severity (steroid resistant mild, moderate or severe rejection). The severity of rejection was based on the kidney biopsy using the standardized international Banff criteria. Of the 162 evaluable patients in the trial, 82 received THYMOGLOBULIN and 80 received ATGAM. The trial was conducted at 28 leading transplant centers around the United States. An intent-to-treat analysis of the data (primary endpoint) indicated that the observed overall success rate in the reversal of acute rejection for THYMOGLOBULIN was 87.8% compared to an observed overall rate of 76.3% for ATGAM. These results, which have not yet been reviewed by the FDA, were statistically significant and demonstrated that THYMOGLOBULIN was not just equivalent to ATGAM, but reversed rejection in a higher number of cases (p = 0.027). However, because the study was designed to show equivalence, there can be no assurance that the FDA will allow a claim of superiority. Success, according to the primary endpoint, was the post-therapy return of serum creatinine level (a measure of kidney function) to, or below, baseline level. A preliminary intent-to-treat analysis of the secondary endpoints showed that the two therapies were equivalent for these secondary endpoints. Secondary endpoints were (i) graft survival at Day 30, (ii) Day 30 creatinine to baseline creatinine ratio and (iii) histological improvement between enrollment and post-therapy biopsies. Patients on both therapies experienced similar side effects and there was no difference in the safety profile between the two therapies. SangStat believes that, because of the preclinical and clinical data available on THYMOGLOBULIN from PMC, only the single completed Phase III trial will be required in the United States to support FDA approval. However, there can be no assurance that the results of a single Phase III clinical trial, in combination with existing European safety and efficacy data, will be sufficient to support an ELA, PLA, or any future ELA amendments needed for commercial marketing. The Company filed an ELA and a PLA with the FDA in August 1996 and January 1997, respectively. SangStat has filed an NDS and is generating revenues through the distribution of THYMOGLOBULIN in Canada under the EDR program, which permits the distribution of certain products before final regulatory approval. In the United States, SangStat has provided THYMOGLOBULIN for compassionate use for over 50 patients. Data in support of the PLA submission were derived from extensive European clinical trials and post-marketing surveys, as well as experience in Canada under the EDR program. SangStat is developing THYMOSTAT, a monitoring assay for THYMOGLOBULIN to assist in optimal definition of the therapeutic regimen. CYCLOSPORINE In North America and Europe there are more than 200,000 transplant recipients requiring daily, expensive immunosuppressive therapy for the rest of their lives, the majority of whom take cyclosporine. The Company estimates that the current cyclosporine cost per patient is $7,000 to $8,000 per year. Cyclosporine is a small, cyclic peptide that works by inhibiting T-cell activation and preventing T-cells from attacking a transplanted organ. The development of cyclosporine for the prevention of graft rejection was a medical breakthrough in the early 1980's and resulted in the rapid growth of organ transplantation. Sandimmune, the original formulation of cyclosporine was introduced by Novartis, formerly Sandoz, in the United States in 1983. Neoral, an improved formulation of 26 28 cyclosporine with increased bioavailability, was launched first in Europe in 1994 and then in the United States in September 1995. Currently, the majority of all new transplant recipients are started on Neoral, and, as of the end of 1996, the Company estimates, based on information released by Novartis, that more than 70% of European and 50% of the United States transplant recipients have been initiated on or converted to Neoral. In November 1996, SangStat filed an AADA with the FDA, which the FDA accepted for review in January 1997, for marketing approval of its proprietary formulation of CYCLOSPORINE. The Company believes its formulation of CYCLOSPORINE is bioequivalent to Novartis' newest formulation, Neoral. Worldwide sales of Novartis' cyclosporine in 1995 are reported at $1.2 billion. Two different formulations of the same drug are considered bioequivalent if the drug's absorption rate, blood concentration and persistence in the bloodstream are demonstrated to be equivalent in healthy volunteers in controlled, crossover trials according to defined regulatory policy. Two key pharmacokinetic parameters, area under the blood concentration vs. time curve (AUC) and the maximum drug concentration (Cmax) are measured in human bioequivalence trials. These parameters are calculated from drug levels measured in the blood over a defined time period following dosing. AUC to a defined time point (AUC (0-t)) and AUC to infinity (AUC (0-()) are calculated separately. Among other factors, if the 90% confidence intervals (for the ratio of the log transformed parameters of SangStat's CYCLOSPORINE and Neoral) are contained within the range of 80% to 125%, the formulations are considered bioequivalent under current FDA policy. SangStat's pivotal trial was a single-dose, randomized, cross over bioequivalence trial in 36 healthy human volunteers comparing, under fasting conditions, SangStat's CYCLOSPORINE with Neoral. Subjects had blood samples taken at defined time points over a 36-hour period and the cyclosporine blood levels were analyzed using a standardized, validated cyclosporine assay. Statistical comparison of the key pharmacokinetic parameters for SangStat's CYCLOSPORINE and Neoral yielded the following results which the Company believes demonstrate bioequivalence; however, the FDA has not yet reviewed any of these data:
SANGSTAT/NEORAL 90% CONFIDENCE PARAMETER LEAST SQUARES MEAN RATIO INTERVAL(1) POWER(2) - ---------- ------------------------ -------------- -------- Cmax 99.6% 96.9 - 104% 99.99% AUC(0-t) 99.8% 97.3 - 103% 99.99% AUC(0-(infinity) 99.4% 97.0 - 103% 99.99%
- --------------- (1) Based on log transformed parameters. (2) Power = Power (%) to detect 20% differences between treatments (alpha=0.05). For the study to be statistically significant, the power should be at least 80%. SangStat has now completed five human trials with its proprietary CYCLOSPORINE formulation in a total of 119 healthy volunteers and patients. In addition to the pivotal trial, a supporting trial in 21 subjects designed to assess food effect on cyclosporine bioavailability also demonstrated statistically significant bioequivalence between SangStat's CYCLOSPORINE and Neoral under fed conditions. The Company subsequently confirmed bioequivalence in two additional healthy volunteer trials in 38 subjects (African Americans and females) and its first patient trial in 24 kidney transplant recipients. In each of the pivotal and additional trials, the incidence, severity or frequency of side effects was similar between the two products. The Company continues to expand its global regulatory clinical trial program with trials ongoing and planned for different populations of organ transplant recipients, and expects to present the results of these trials at upcoming transplant and regulatory meetings. Under current FDA regulations and policy, a generic cyclosporine that is shown to be bioequivalent to Neoral may be approved without the need to duplicate safety and efficacy trials. If the 27 29 FDA approves SangStat's CYCLOSPORINE based on bioequivalence to Neoral, SangStat intends to market its formulation as a branded therapeutic substitute for Neoral. The Company has entered into an agreement for commercial scale production of CYCLOSPORINE bulk material from an established fermentation manufacturing source. The agreement has an initial term of ten years following the first regulatory approval of CYCLOSPORINE for commercial sale in North America and Europe, subject to earlier termination upon 120 days notice in the event of a substantial breach by either party of its material obligations under the agreement. The Company has also separately contracted for the manufacture of the finished commercial supply of its CYCLOSPORINE product candidate from an established third-party source who will fill and finish bulk CYCLOSPORINE, provided by the Company, for subsequent commercial sale and distribution worldwide by the Company. The Company retains the exclusive commercial rights worldwide. There can be no assurance that the Company's third-party manufacturers will perform satisfactorily and any such failure may delay clinical trial development or the submission of product for regulatory approval, impair the Company's ability to deliver products on a timely basis, or otherwise impair the Company's competitive position, which would have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. See "Risk Factors -- Limited Manufacturing Capability." Commercialization of the Company's CYCLOSPORINE drug candidate may be several years away and successful development and commercialization is subject to numerous risks, including failure to obtain regulatory approvals and potential intellectual property claims of third parties, including those of Novartis and its manufacturing contractors. In addition, if the Company is unable to demonstrate to the FDA that its formulation is bioequivalent to Neoral, a currently approved Novartis formulation, the Company would be required to undertake additional development work and seek regulatory approval through the potentially longer NDA process if it wished to continue to pursue this product candidate. Cyclosporine is particularly difficult to manufacture and there can be no assurance that SangStat's CYCLOSPORINE drug candidate can be manufactured in commercial quantities at an economical cost. There can be no assurance that SangStat can manufacture, or have manufactured, formulate or commercialize its CYCLOSPORINE product without infringing patent or other proprietary rights of Novartis or other third parties. Although Novartis' composition of matter patent for cyclosporine expired in September 1995 in the United States, Novartis' patents relating to formulations are expected to continue to present significant barriers to entry to potential competitors. There can be no assurance that Novartis will not seek to protect its market share through litigation, or other actions, against SangStat, its affiliates and partners, or the FDA, or take actions which could adversely affect the regulatory approval process. For example, in November 1996, Novartis filed a citizens' petition with the FDA, seeking to prohibit the use of Neoral as a reference drug for demonstration of bioequivalence. There can be no assurance that SangStat's formulation will not be found to infringe on Novartis' proprietary rights. If Novartis brings suit against SangStat in the United States or elsewhere, SangStat could be greatly delayed in obtaining regulatory approval of any CYCLOSPORINE product, or in bringing any CYCLOSPORINE product candidate to market, or could be enjoined from selling the product for a significant period of time or ultimately be prevented from selling its CYCLOSPORINE product candidate entirely. A number of key employees were previously employed at Novartis and it is possible a claim could be asserted against SangStat based on such prior employment. While the Company believes that such a claim would be without merit, such a claim could nonetheless result in litigation. Any litigation, whether or not resolved in favor of the Company, is likely to be expensive, lengthy and time consuming and could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. To date no litigation has been threatened, but there can be no assurance that Novartis will not commence litigation or otherwise attempt to delay the marketing of CYCLOSPORINE in the future. See "Risk Factors -- Risks Associated with CYCLOSPORINE." 28 30 AZATHIOPRINE Azathioprine is an immunosuppressant that inhibits the development of T-cells by interfering with the differentiation and proliferation of activated lymphocytes. It is used as an adjunct for the prevention of rejection in renal organ transplantation. The patent for azathioprine composition of matter has expired. Therapy is usually initiated shortly after transplantation and continued daily for the patient's lifetime. It is used in conjunction with cyclosporine and steroids in the standard "triple therapy" regimen used by the majority of U.S. transplant centers. It is currently marketed as Imuran by Glaxo Wellcome Ltd. and as generic azathioprine by Roxane Laboratories. United States sales of Imuran and Azathioprine in 1996 were estimated to be $80 million. SangStat has developed a generic AZATHIOPRINE for use in transplantation as an adjunct therapy in chronic immunosuppression and is currently conducting human bioequivalency trials. Pending successful completion of these trials, the Company intends to seek market approval by filing an Abbreviated New Drug Application ("ANDA") with the FDA and to market the product as a branded therapeutic substitute for Imuran. ALLOTRAP PEPTIDES ALLOTRAP 2702 is a small peptide derived from the Company's proprietary sHLA technology that is designed to promote graft acceptance. SangStat believes that the ALLOTRAP family of peptides may enable the body to accept a graft as self without otherwise limiting the normal operation of the immune system, thus possibly reducing the need for chronic immunosuppressive therapy. The Company believes that if an ALLOTRAP peptide is exposed to the recipient's T-cell progenitors simultaneously with the donor's HLAs, the T-cell progenitors are deactivated. As a result, the T-cells are not activated against the donor's HLA and do not reject the graft. The results of an initial Phase II study in Europe showed that ALLOTRAP 2702 was safe and well-tolerated in the study. A key finding, with respect to biological activity, was the statistically significant in vivo inhibition of cell-mediated cytotoxicity by ALLOTRAP 2702. Such inhibition had previously been identified as a key endpoint in preclinical studies. The trial was conducted at the Center of Transplantation at Nantes, the largest kidney/pancreas transplant center in France, and was a double-blinded, randomized, placebo-controlled safety and pharmacokinetic study of ALLOTRAP 2702 in 28 renal transplant recipients. The results showed that there were no adverse effects attributed to ALLOTRAP 2702 therapy, and no anti-peptide antibodies, which would lower the peptide's potential immunosuppressive efficacy, could be detected. Furthermore, renal function, as assessed by serum creatinine levels at one and three months post-transplant, was similar between the high dose peptide group and placebo group. In this study, the investigators also found that ALLOTRAP 2702 resulted in a statistically significant difference in cell-mediated ("Natural Killer" or "NK" cells) cytotoxicity in the group receiving ten days' therapy as compared to controls (p = 0.001). This effect on NK cell activity was previously demonstrated in preclinical studies to be a key marker of efficacy whereby NK cell inhibition correlated with the prolongation of graft survival without the need for continuous immunosuppression. These results indicate that ALLOTRAP 2702 had a biological effect in humans and that NK cell activity may serve as a surrogate endpoint in future trials. Additional human studies are ongoing or planned. Additional ALLOTRAP peptides are in preclinical research. Although the Company believes it conducted its clinical trials taking into account both European and U.S. regulatory standards, there can be no assurance that such data will be accepted by the FDA. The Company expects to conduct several additional Phase II clinical studies to assess product efficacy and optimize dosage before potentially conducting large-scale Phase III trials. The use of ALLOTRAP peptides to promote graft acceptance in humans is novel and unproven and there can be no assurance that such peptides will prove to be safe or effective in humans for any clinical indication for any transplant type or at any dosage. 29 31 Pre-transplant HLA Monitoring Products and Product Candidates SangStat's pre-transplant monitoring products and product candidates are intended to improve HLA compatibility between organ donors and recipients by providing accurate, rapid, efficient and standardized testing. Current HLA testing mainly involves a complex procedure, microlymphocytotoxicity, which is run in specialized transplant laboratories by highly-trained technicians. These tests require viable cells and multiple reagents. Results obtained from visual reading using a microscope are often subjective. This method of HLA testing is labor intensive and lacks accuracy and standardization, often causing inconsistent results. sHLA constitutes a convenient biological material for testing transplant candidates to guide HLA compatible donor selection. Found in whole blood and plasma of all individuals, sHLA molecules are similar to cell HLAs: (i) they have the same basic structure, (ii) they bind to anti-HLA antibodies and (iii) they are polymorphic. SangStat has observed that sHLA molecules can be accurately measured using immunoassay technology and substituted for cell HLAs for detection of anti-HLA antibodies and HLA typing. SangStat's scientists showed that sHLA molecules circulating in blood could be used for accurate and rapid HLA typing and detection of anti-HLA antibodies. These assays form the basis of the technology used to develop PRA-STAT and CROSS-STAT. The Company is currently manufacturing and selling PRA-STAT and CROSS-STAT through its direct sales force. These pre-transplant monitoring products and product candidates together are expected to improve donor/recipient matching and post-transplant monitoring. PRA-STAT is designed for Panel Reactive Antibody (PRA) testing to track the appearance and disappearance of anti-HLA antibodies in transplant candidates, and to analyze such antibodies. This guides the selection criteria of the prospective donor for each transplant candidate. PRA testing is often performed every month on patients waiting for transplants. PRA-STAT was introduced in March 1994 and is currently being marketed. CROSS-STAT is designed to assess which candidate reacts the least to the donor's HLAs, thus determining the best recipient for the available organ (cross matching). If the candidate had antibodies against the donor's HLAs, the HLA compatibility would be poor, and the candidate would not receive the transplant. Crossmatching is the final step in determining the best donor/recipient compatibility. The Company received FDA clearance for CROSS-STAT in May 1995 and the product is currently being marketed. The Company believes that such monitoring products could contribute to better management of transplant patients and immunosuppressive therapy. Organ Preservation Product Candidate The quality of organ preservation is an important factor contributing to the viability of the transplant. Most organs are retrieved from trauma victims who are declared brain-dead but maintain cardiac function until their organs are removed. The harvested organs are stored in a preservation solution to prevent deterioration and tissue typed to determine the HLA antigens. Following this, each donor must be crossmatched with the patients on the transplant waiting lists, each organ being crossmatched with approximately 100 potential recipients. Once the best candidate for each organ has been chosen, the organs are shipped to the recipient's transplant center. The amount of storage time allowed before transplant varies between organ types and can severely limit the distance an organ can be shipped. SangStat has acquired from PMC an exclusive license to commercial rights for CELSIOR in the United States and Canada. CELSIOR is a formulated solution to store and extend viability of organs between organ recovery and transplantation. SangStat intends to assess the effect of CELSIOR on organ viability and speed of post-transplant organ function recovery. After consultation with the FDA, the Company recently voluntarily withdrew its 510(k) for a two-component CELSIOR product in favor of a one component product. The Company is now conducting a clinical trial for a redesigned, one-component, ready-to-use CELSIOR product candidate and intends to submit a new 510(k). 30 32 Post-transplant Monitoring Product Candidates The efficacy and safety of a transplant depends on individual susceptibility to graft rejection and immunosuppressive therapy. Few tools exist for post-transplant surveillance to assist physicians in prescribing each patient's immunosuppressive drug regimen. SangStat is developing several monitoring products to assist the physician in customizing drug therapy for each patient, such as THYMOSTAT to monitor patients treated with THYMOGLOBULIN. THE TRANSPLANT PHARMACY To further the Company's goal to provide comprehensive disease management, in September 1996 SangStat established THE TRANSPLANT PHARMACY, a pilot program designed to provide mail order distribution of drugs and other services for transplant patients. Its first site of operation opened in September 1996 at the University of Tennessee Bowld Hospital Organ Transplant Center in Memphis, Tennessee. The Company has also established a central mail order facility in Menlo Park, California. SangStat intends to develop a dedicated sales force to market its transplant products directly to transplant centers and patients. To further this goal and to provide comprehensive disease management, SangStat established in September 1996 THE TRANSPLANT PHARMACY, a pilot program dedicated to providing direct distribution by mail order of drugs and transplant patient management services. This service will promote medication compliance, measure clinical and economic outcomes, and provide feedback directly to clinicians. Patients electing to enroll will be able to have all of their medications filled through the program's central pharmacy. THE TRANSPLANT PHARMACY will also place a key individual, such as a pharmacist, in each transplant center that joins the program to interact directly with physicians, nurses and patients. THE TRANSPLANT PHARMACY program seeks to provide a singular and integrated approach to the management of transplantation, in which the Company's drugs, monitoring products, and services can be supplied to meet the needs of individual transplant centers and their patients. Xenotransplantation SangStat is working on a xenotransplantation technology (XE-9) through its wholly-owned subsidiary, XenoStat, Inc. ("XenoStat"). Xenotransplantation is the transplantation of an organ from one species to a different species. If successful in humans, it could partly overcome the current limited availability of organs. SangStat does not expect any application of the XenoStat technology in humans for the next several years, if at all. Such applications will require extensive clinical trials and regulatory approvals. XENOJECT Technology SangStat is developing a new platform technology called XENOJECT. The Company believes XENOJECT will promote the elimination of undesirable cells by halting the acceptance process of the immune system. XENOJECT specifically redirects a graft immune response from its natural target to an undesirable target by adding incompatible transplantation antigens to the surface of the undesirable cell. XENOJECT may become an enabling technology which offers major potential advantages over other specific immunotherapy technologies, such as therapeutic monoclonal antibodies (murine or humanized) or immunotoxins. Potential benefits include increased potency, decreased immunogenicity, easier manufacturing (small molecule) and potential for oral administration. Potential clinical applications include cancer and infectious disease therapy. Currently, the Company conducts discovery research in the field of cancer and immune disorders. STRATEGIC RELATIONSHIPS The Company evaluates on an ongoing basis potential collaborative relationships with corporate and other partners where such relationships may complement and expand SangStat's research, development, sales and marketing capabilities. There can be no assurance that the Company will be 31 33 interested in or able to negotiate any additional collaborative arrangements or that, if established, such relationships will be successful. Pasteur Merieux Connaught In October 1993, SangStat entered into an exclusive licensing agreement with PMC for the clinical development, marketing and sale of THYMOGLOBULIN and CELSIOR in the United States and Canada. The agreement provides, among other things, that (i) SangStat will use commercially reasonable efforts to obtain regulatory approval through a Phase III clinical trial for THYMOGLOBULIN for treatment of kidney rejection episodes; (ii) PMC will manufacture and supply products for clinical and commercial use; and (iii) SangStat will pay a fee upon achievement of milestones as well as royalties based upon commercial sales. Although THYMOGLOBULIN has been approved and is sold on a commercial basis in several European countries, there can be no assurance that regulatory approval will be obtained in the United States or Canada. The agreement has an initial term of fifteen years, subject to earlier termination upon 120 days notice of a substantial breach by either party of its material obligations under the agreement. Center of Transplantation of Nantes, France SangStat's subsidiary, SangStat Atlantique S.A., leases approximately 2,500 square feet of office space within the Center of Transplantation of Nantes, France (Centre Hospitalier Universitaire de Nantes). The Center of Transplantation is the largest kidney transplant center in France and has provided equipment and personnel to perform development work for SangStat in the area of immunointervention. Work projects are funded by SangStat on a project by project basis. Although it is not obligated to do so, the Center of Transplantation has provided limited funding for certain expenses incurred as part of the clinical development of ALLOTRAP peptides. Stanford University SangStat has a worldwide, exclusive license from Stanford University to make, sell or otherwise distribute products covered by patents and patent applications on certain HLA peptides, including the ALLOTRAP peptides. Stanford University has no obligation to conduct any further research with respect to such ALLOTRAP peptides. The exclusivity of SangStat's rights under the license agreement with Stanford University expire after the earlier of October 2007, or 10 years from the date of first commercial sale of any product covered by the patent application licensed from Stanford University. Additionally, under the terms of this agreement, SangStat must pay to Stanford University annual license fees and a royalty on products covered by the license agreement. COMPETITION The drugs being developed by the Company compete with existing and new drugs being created by pharmaceutical, biopharmaceutical, biotechnology companies and universities. Many of these entities have significantly greater research and development capabilities, as well as substantial marketing, manufacturing, financial and managerial resources and represent significant competition for the Company. With respect to THYMOGLOBULIN, CYCLOSPORINE and AZATHIOPRINE, the Company will be competing against large companies that have significantly greater financial resources and established marketing and distribution channels for equivalent products. The generic drug industry is characterized by intense price competition and the Company anticipates that it will face this and other forms of competition. There can be no assurance that developments by others will not render the Company's products or technologies obsolete or noncompetitive or that the Company will be able to keep pace with technological developments. Many of the competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely different approach or means of accomplishing the desired therapeutic effect than products being developed by the Company and may be more effective and less costly. In addition, many of these competitors have significantly greater experience 32 34 than the Company in undertaking preclinical testing and human clinical trials of pharmaceutical products and obtaining regulatory approvals of such products. Accordingly, the Company's competitors may succeed in commercializing products more rapidly than the Company. For example, the Company believes that the degree of market penetration of its CYCLOSPORINE drug candidate is dependent in part on whether the Company is the first company to market a generic formulation of cyclosporine. The Company believes that other companies are developing cyclosporine formulations that may be marketed as generic equivalents. Were these competitors to develop their products more rapidly and complete the regulatory process sooner, it could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. Treatments for the problems associated with transplantation that the Company's products seek to address are currently available. For example, Sandimmune and Neoral, marketed by Novartis, Orthoclone OKT3, marketed by Johnson & Johnson and ATGAM, marketed by Pharmacia & Upjohn Inc., are all commercially available for use as immunosuppressive drugs and are widely prescribed. In addition, One Lambda Inc., Pel Freez, Biotest Diagnostics Corp., and Genetic Therapy, Inc. market products for pre-transplant HLA monitoring and Abbott Laboratories markets a cyclosporine level post-transplant monitoring device, all of which are widely used. Additional therapeutics and monitoring products are available or are under development by these and other parties including, but not limited to: Roche (mycophenolate mofetil), Glaxo-Wellcome and Roxane (azathioprine) American Home Products Corp. (rapamycin), Fujisawa Pharmaceutical Co. Ltd. (tacrolimus), Bristol Myers Squibb (CTLA4), and DuPont Merck (ViaSpan), and other companies including, but not limited to Abbott, MedImmune Inc., Novartis, BioTransplant, Inc., PMC, and Ivax Corp. In addition, THE TRANSPLANT PHARMACY also competes with other drug distribution companies, such as Chronimed Inc., HMI and Stadtlander Drug Company. To the extent these companies' therapeutics, monitoring products and services address the problems associated with transplantation on which the Company has focused, they may represent significant competition. PATENTS AND PROPRIETARY TECHNOLOGY The Company's policy is to seek patent protection and to enforce its intellectual property rights. The Company has ten issued patents which cover several different test formats for sHLA-based and allied assays, including PRA-STAT and CROSS-STAT. SangStat has patent applications pending in the United States in the pretransplant and post-transplant monitoring, CYCLOSPORINE, XENOJECT and xenotransplantation areas. The Company has also filed patent applications with respect to several product candidates in many other countries, including Japan, Canada and the countries regulated by the European Patent Office. There can be no assurance that SangStat can manufacture, or have manufactured, formulate or commercialize its CYCLOSPORINE product without infringing patent or other proprietary rights of Novartis or other third parties. Although Novartis' composition of matter patent for cyclosporine expired in September 1995 in the United States, Novartis' patents relating to cyclosporine are expected to continue to present significant barriers to entry to potential competitors. There can be no assurance that Novartis or others will not seek to protect their market share through litigation or otherwise against SangStat, its affiliates and partners or the FDA, or actions which adversely affect the regulatory approval process, such as citizens' petitions, or that SangStat's formulation will not be found to infringe Novartis' or others' proprietary rights. If Novartis or others bring suit against SangStat, the Company could be greatly delayed in bringing its CYCLOSPORINE product to market, enjoined from selling the product for a significant period of time or ultimately be prevented from selling its CYCLOSPORINE product candidate entirely. See "Risk Factors -- Risks Associated with CYCLOSPORINE." The Company's family of ALLOTRAP peptides is being developed under an exclusive, worldwide, license from Stanford University. Although Stanford has filed patent applications with respect to such technology, no assurance can be given that the patent application or any of its claims will be allowed, valid, or enforceable or that the Company's products will not infringe on other patents. 33 35 Patent applications in the United States are maintained in secrecy until patents issue. Since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, SangStat cannot be certain that it was the first to discover compositions covered by its pending patent applications or the first to file patent applications on such compositions. There can be no assurance that the Company's pending patent applications will result in issued patents or that any of its issued patents will afford protection against a competitor. There can be no assurance that any patent issued to, or licensed by, the Company will provide protection that has commercial significance. The Company's patents involve specific claims and thus do not provide broad coverage. There can be no assurance that the Company's patent applications or any claims of these patent applications will be allowed, valid or enforceable, that any patents or any claims of these patents will provide the Company with competitive advantages for its products or that they will not be successfully challenged or circumvented by the Company's competitors. The Company also relies on trade secrets and proprietary know-how which it seeks to protect, in part, by confidentiality agreements with its employees and consultants. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known or independently developed by competitors. The Company has registered or applied for registration of the names of most of its products under development or commercialized for research and development use. However, there can be no assurance that any trademark registration will be granted or not challenged by competitors. MANUFACTURING The Company lacks facilities to manufacture any of its drug candidates in accordance with current GMP prescribed by the FDA. The Company generally relies on third parties to manufacture its compounds for clinical trials, including THYMOGLOBULIN, CYCLOSPORINE, ALLOTRAP, AZATHIOPRINE and CELSIOR and has contracted or expects to contract for commercial production of these compounds. There can be no assurance that it will be able to enter into commercial scale manufacturing contracts or that any other third-party arrangements can be established on a timely or commercially reasonable basis, or at all. If such arrangements are established, the Company will depend on such third parties to perform their obligations effectively and on a timely basis. There can be no assurance that such parties will perform and any such failure may delay clinical development or submission of products for regulatory approval, or otherwise impair the Company's competitive position which could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. In addition, the manufacturing of drug candidates involves a number of technical steps and requires meeting stringent quality control specifications imposed by government regulatory bodies and by the Company itself. Additionally, such products can only be manufactured in facilities approved by the applicable regulatory authorities. Because of these and other factors, the Company may not be able to quickly and efficiently replace its manufacturing capacity in the event that its manufacturers are unable to manufacture their products at one or more of their facilities. If these manufacturers were affected for any reason, the Company's ability to ship its products could be impaired, which could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. For certain of its potential products, the Company will need to develop further its production technologies for use on a larger scale in order to conduct human clinical trials and produce such potential products for commercial sale at an acceptable cost. The Company intends to rely on its third-party manufacturers to meet FDA required GMP. However, the Company is ultimately responsible for any failure of such manufacturers to meet such requirements. The Company intends to obtain quantities of THYMOGLOBULIN for clinical trials and commercial use under an agreement with PMC. There can be no assurance that PMC or any other 34 36 manufacturer will meet FDA standards governing GMP or that any ELA's required for manufacturing will be approved or that PMC will fulfill its obligations to SangStat. The Company has contracted for commercial scale production of cyclosporine and azathioprine bulk material for its CYCLOSPORINE and AZATHIOPRINE drug candidates from established third-party manufacturing sources. The Company has also separately contracted for the manufacture of the finished commercial supply of its CYCLOSPORINE product candidate from an established third-party source. There can be no assurance that such third parties will perform satisfactorily and any such failure may delay clinical trial development or the submission of the product for regulatory approval, impair the Company's ability to deliver products on a timely basis, or otherwise impair the Company's competitive position, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Risks Associated with CYCLOSPORINE." The Company is currently purchasing ALLOTRAP peptides for its clinical trials under a supply agreement with UCB. The Company believes that UCB adheres to established GMP production methods and complies with the Company's quality control and quality assurance standards. More than 10 lots of clinical amounts of ALLOTRAP peptides have been manufactured by UCB to date. The Company expects to purchase ALLOTRAP peptides from UCB for commercial sale. However, there can be no assurance that UCB will be able to scale up its manufacturing to support the commercial sale of ALLOTRAP peptides or that supply of ALLOTRAP peptides to the Company will be uninterrupted. The Company does not expect to establish any significant manufacturing capacity with respect to therapeutic products in the near future. With respect to its monitoring products including PRA-STAT and CROSS-STAT the Company currently has in-house manufacturing capabilities and believes it operates in compliance with GMP. However, there can be no assurance that SangStat would pass a regulatory inspection from the FDA or other agencies. The Company has retained all rights to manufacture its monitoring products and intends to build or lease commercial-scale manufacturing facilities or utilize third party facilities as the needs arise. There can be no assurance that such facilities will be available on commercially acceptable terms or that such facilities would be adequate for SangStat's long-term needs. The raw materials required for the majority of the Company's products and product candidates are currently available from several suppliers in quantities sufficient to conduct the Company's research, development and clinical development activities. However, there can be no assurance that the raw materials necessary for the manufacture of the Company's products and product candidates will be available in sufficient quantities or at a reasonable cost. Complications or delays in obtaining raw materials or in product manufacturing could delay the submission of products for regulatory approval, product launch and the initiation of new development programs, which could materially impair the Company's business, financial condition, cash flows and results of operations. See "Risk Factors--Limited Manufacturing Capability." MARKETING SangStat currently retains all commercial rights to its products and plans to market directly those products for which it obtains regulatory approval. However, for certain territories, the Company may also enter into co-promotion arrangements or other licensing arrangements with pharmaceutical, diagnostic or biotechnology companies. SangStat intends to expand its direct sales force to market all of its transplant products, including THYMOGLOBULIN, CYCLOSPORINE, AZATHIOPRINE, CELSIOR, ALLOTRAP 2702, PRA-STAT, CROSS-STAT and other monitoring products. Implementation of this strategy will depend on many factors, including the market potential of any products the Company develops as well as on the Company's financial resources. The Company sells certain of its monitoring products for research or investigational use through a small, direct sales operation. SangStat has also established THE TRANSPLANT PHARMACY, a pilot program furthering the Company's approach of comprehensive disease management, which will directly dispense all needed medications by mail to transplant recipients enrolled in the program. See "Business--THE TRANSPLANT PHARMACY." To the extent the Company enters into co-promotion or other licensing arrangements, any revenues 35 37 received by the Company will be dependent on the efforts of third parties and there can be no assurance that such efforts will be successful. To the extent that the Company itself undertakes to market a substantial portion of its products, or is unable to enter into co-promotion agreements or to arrange for third party distribution of its products, additional expenditures, management resources and time will be required to develop a sales force. GOVERNMENT REGULATION SangStat's research and development activities, preclinical studies and clinical trials, and ultimately the manufacturing, marketing and labeling of its products, are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries. The United States Federal Food, Drug, and Cosmetic Act (the "Act") and the regulations promulgated thereunder and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising, promotion, import and export of the Company's products. Preclinical study and clinical trial requirements and the regulatory approval process typically take years and require the expenditure of substantial resources. Additional government regulation may be established that could prevent or delay regulatory approval of the Company's product candidates. Delays or rejections in obtaining regulatory approvals would adversely affect the Company's ability to commercialize any product candidates the Company develops and the Company's ability to receive product revenues or royalties. If regulatory approval of a product candidate is granted, the approval may include significant limitations on the indicated uses for which the product may be marketed. The FDA and other regulatory authorities require that the safety and efficacy of certain of the Company's product candidates be supported through adequate and well-controlled clinical trials. If the results of pivotal clinical trials submitted by the Company in applications for approval do not establish the safety and efficacy of the Company's product candidates to the satisfaction of the FDA and other regulatory authorities, the Company will not receive the approvals necessary to market its product candidates, which would have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. FDA Regulation--Approval of Therapeutic Products The Company's therapeutic products are regulated as drugs and, in the case of THYMOGLOBULIN, as biological products. The steps ordinarily required before a drug or biological product may be marketed in the United States include (a) preclinical and clinical studies, (b) the submission to the FDA of an Investigational New Drug application ("IND"), which must become effective before human clinical trials may commence, (c) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug, (d) the submission to the FDA of New Drug Application ("NDA"), or Product License Application ("PLA") together with an Establishment License Application ("ELA"), if applicable, and (e) FDA approval of the application, including approval of all product labeling. Preclinical tests include laboratory evaluation of product chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of each product. Preclinical safety tests must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practice. The results of the preclinical tests are submitted to the FDA as part of an IND and are reviewed by the FDA before the commencement of human clinical trials. Unless the FDA objects to an IND, the IND will become effective 30 days following its receipt by the FDA. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials or that the lack of an objection means that the FDA will ultimately approve an application for marketing approval. Clinical trials involve the administration of the investigational product to humans under the supervision of a qualified principal investigator. Clinical trials must be conducted in accordance with Good Clinical Practices ("GCP") under protocols submitted to the FDA as part of the IND. Also, each 36 38 clinical trial must be approved and conducted under the auspices of an Institutional Review Board ("IRB") and with patient informed consent. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution conducting the clinical trials. Clinical trials are typically conducted in three sequential phases, but the phases may overlap. Phase I clinical trials involve the initial introduction of the drug into healthy human volunteers. In Phase I clinical trials, the drug is tested for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical Pharmacology). Phase II clinical trials are conducted in a target patient population to gather evidence about the pharmacokinetics, safety and biological or clinical efficacy of the drug for specific indications; to determine dosage tolerance and optimal dosage; and to identify possible adverse effects and safety risks. When a compound has shown evidence of efficacy and an acceptable safety profile in Phase II evaluations, Phase III clinical trials are undertaken to evaluate clinical efficacy and to test for safety in an expanded patient population. There can be no assurance that any of the Company's clinical trials will be completed successfully or within any specified time period. The Company or the FDA may suspend clinical trials at any time, if either entity concludes that clinical subjects are being exposed to an unacceptable health risk, or for other reasons. There can be no assurance that, after the results of the Phase III clinical trials have been announced, the FDA will not disagree with the design of the Phase III clinical trial protocols. In addition, the FDA inspects and reviews clinical trial sites, informed consent forms, data from the clinical trial sites, including case report forms and record keeping procedures, and the performance of the protocols by clinical trial personnel to determine compliance with good clinical practice. The FDA also examines whether there was bias in the conduct of clinical trials. The conduct of clinical trials is complex and difficult, especially in Phase III. There can be no assurance that the design or the performance of the Phase III clinical trial protocols will be successful. The results of preclinical studies and clinical trials, if successful, are submitted in an application to seek the FDA approval to market the drug or biological product for a specified use. The testing and approval process requires substantial time and effort, and there can be no assurance that any approval will be granted for any product or that approval will be granted according to any schedule. The FDA may refuse to approve an application if it believes that applicable regulatory criteria are not satisfied. The FDA may also require additional testing for safety and efficacy of the drug. Moreover, if regulatory approval of a drug product is granted, the approval will be limited to specific indications. There can be no assurance that any of the Company's product candidates will receive regulatory approvals for marketing, or if approved, that approval will be for the indications requested by the Company. The FDA has implemented an accelerated review process for drugs that treat serious or life threatening diseases and conditions. Such approval is subject to the additional requirement that, following product launch, a Company continue to study the drug to verify and describe its clinical benefit. Under these FDA Accelerated Approval Procedures, the FDA may withdraw approval if the Company fails to show due diligence in conducting post-marketing clinical trials or if these clinical trials fail to demonstrate clinical benefit to the FDA's satisfaction. When appropriate, the Company intends to pursue opportunities for accelerated review of its products. The Company cannot predict the ultimate opportunities for accelerated review of its products. The Company cannot predict the ultimate effect of the accelerated review process on the timing or likelihood of FDA review of any of its product candidates. For certain drugs that are generic versions of previously approved products, there is an abbreviated FDA approval process. A sponsor may submit an Abbreviated Application for: (1) a drug product that is the "same" as the drug product listed in the approved drug product list published by the FDA (the "listed drug") with respect to active ingredient(s), route of administration, dosage form, strength and conditions of use recommended in the labeling; (2) a drug product that differs with regard to certain changes from a listed drug if the FDA has approved a petition from a prospective applicant permitting the submission of an Abbreviated Application for the changed product; and (3) a 37 39 drug that is a duplicate of, or meets the monograph for, an approved antibiotic drug. While the Company believes that CYCLOSPORINE and AZATHIOPRINE will qualify for this abbreviated format, there can be no assurance that the FDA will not require additional information or that these products will be approved for marketing. An Abbreviated Application need not contain the clinical and preclinical data supporting the safety and effectiveness of the product. The applicant must instead demonstrate that the product is bioequivalent to the listed drug. FDA regulations define bioequivalence as the absence of a significant difference in the rate and the extent to which the active ingredient moiety becomes available at the site of drug action when administered at the same molar dose under similar conditions in an appropriately designed study. If the approved generic drug is both bioequivalent and pharmaceutically equivalent to the listed drug, the agency may assign a code to the product in an FDA publication that will represent a determination by the agency that the product is therapeutically equivalent to the listed drug. This designation will be considered by third parties in determining whether the generic drug will be utilized as an alternative to the listed drug. There can be no assurance that the Company will receive an "AB" rating on CYCLOSPORINE and AZATHIOPRINE, which in certain cases would require substitution of the Company's CYCLOSPORINE for Neoral and AZATHIOPRINE for Immuran. FDA Regulation--Approval of Monitoring Products The Company's monitoring products are regulated as medical devices by the FDA and as such require regulatory clearance prior to commercial distribution. New medical devices are generally introduced to the market based on a premarket notification or "510(k)" submission to the FDA in which the sponsor establishes that the proposed device is "substantially equivalent" to a legally marketed Class I or Class II medical device or to a Class III medical device for which the FDA has not required premarket approval. The claim of substantial equivalence will generally have to be supported by various types of data and materials including, in some instances, preclinical and/or clinical test results. Following submission of the 510(k), the sponsor may not place the device into U.S. commercial distribution until a substantial equivalence order is issued by the FDA. The order may be sent within 90 days of submission but could take significantly longer. The order may declare the FDA's determination that the device is "substantially equivalent" to another legally marketed device and allow the proposed device to be marketed in the United States. The FDA may, however, determine that the proposed device is not substantially equivalent, or may require further information, such as additional test data, before the FDA is able to make a determination regarding substantial equivalence. Such determination or request for additional information could delay the Company's market introduction of its products by several quarters or more and could have a material adverse effect on the Company's business, financial condition and results of operations. There is no assurance that a 510(k) marketing clearance will be granted for these products. Additional regulatory barriers may be encountered by not meeting performance requirements of American Society of Histocompatability and Immunogenetics ("ASHI") and the labeling requirements of Clinical Laboratory Improvements Amendment ("CLIA"). If the sponsor of a 510(k) cannot obtain an FDA order declaring substantial equivalence, the sponsor will have to submit a premarket approval application ("PMA"). A PMA will generally have to be supported by extensive data, including preclinical and clinical trial data, to prove the safety and efficacy of the device. Although, by statute, the FDA has 180 days to review a PMA once it has been accepted for filing. PMA reviews more often involve a significantly longer time period, usually 12 to 24 months or longer from the date of filing. There also can be no assurance that the data collected by the sponsor would support a PMA marketing approval. The sponsor may be required to obtain an Investigational Device Exemption ("IDE") before it commences clinical testing to support a 510(k) submission or PMA. Each clinical trial must be 38 40 approved and conducted under the auspices of an IRB and with patient informed consent. The IRB will consider, among other things, ethical factors, the safety of human subjects, and the possible liability of the institution conducting the clinical trials. For some products, the sponsor must also submit the protocol to the FDA. The sponsor of the IDE may be able to distribute limited amounts of these products for research use only if certain FDA requirements are met. Some of these requirements may also apply to distribution for clinical investigational use only. The FDA monitors and oversees the use and distribution of all "research use only" and "investigational use only" devices. There can be no assurances that the FDA will determine that the Company's product candidates are substantially equivalent to other legally marketed devices. The FDA may require the submission of a PMA, which would delay the Company's market introduction of its products and could have a material adverse effect on the Company's business, financial condition and results of operations. The testing and approval process will require substantial time and effort, and there can be no assurance that any approval will be granted for any product or that approval will be granted according to any schedule. The FDA may refuse to approve a PMA if it believes that applicable regulatory criteria are not satisfied. The FDA may also require additional testing for safety and efficacy of the device. Moreover, if the PMA is approved, the approval will be limited to specific indications or uses. There can be no assurance that any of the Company's product candidates will receive regulatory approvals for commercial distribution, or if approved that approval will be for the indications requested by the Company. Prior to any approval of the Company's products for marketing, all manufacturing facilities must pass the FDA preapproval inspections. FDA Regulation--Post-Approval Requirements Even if regulatory approvals for the Company's product candidates are obtained, the Company, its products and the facilities manufacturing the Company's products are subject to continual review and periodic inspection. Each U.S. drug and device manufacturing establishment must be registered with the FDA. Domestic manufacturing establishments are subject to biennial inspections by the FDA and must comply with the FDA's GMP regulations. To supply device products for use in the United States, foreign manufacturing establishments must comply with the FDA's GMP regulations and are subject to periodic inspection by the FDA or by regulatory authorities in those countries under reciprocal agreements with the FDA. In complying with GMP regulations, manufacturers must expend funds, time and effort in the area of production and quality control to ensure full technical compliance. The FDA stringently applies regulatory standards for manufacturing. Labeling and promotional activities are regulated by the FDA and, in certain instances, by the Federal Trade Commission. The Company must also report certain adverse events involving its drugs and devices to the agency under regulations issued by the FDA. The FDA can impose other post-marketing controls on the Company and its products, and has expanded authority in this regard for certain products, such as devices approved under PMAs. Failure to comply with applicable regulatory requirements, can result in, among other things, warning letters, fines, injunctions, civil penalties recall or seizure of products, total or partial suspension of production, refusal of the government to grant approvals, premarket clearance or pre-market approval, withdrawal of approvals and criminal prosecution of the Company and employees. European Regulation The Company's activities in Europe are regulated by both the law of the European Union ("EU") and by the national law of the EU Member States. There are a number of EU Regulations and Directives in force governing the authorization and the marketing of medicinal products. The purpose of such Regulations and Directives is to harmonize the legal framework regulating medicinal products in the EU. In the event of a conflict between EU legislation and national law, EU legislation takes precedence over national law. Once adopted, Regulations apply immediately in Member States, 39 41 Directives must be implemented into national law by Member States. Failure to implement Directives by national governments either properly or in a timely fashion still leaves significant areas of regulation to national law. Efforts to harmonize regulation of medicines within the EU began in 1965 with the adoption of Directive 65/65 which required Member States to establish premarket approval requirements and prescribed the criteria for approval. Since then, the EU has issued a series of measures aimed at making regulation of medicinal products more uniform. European Regulation--Approval of Therapeutic Products In addition to Regulations and Directives, the EU has formulated non-binding guidelines (the "Guidelines") which set out detailed EU requirements relating to the quality, safety and efficacy of medicinal products. Such Guidelines have been formulated by the European Commission in consultation with the Committee for Proprietary Medicinal Products ("CPMP"). Although these Guidelines are not legally binding, failure to comply with them makes it less likely that product research work submitted in support of an application for marketing authorizations will be acceptable to the competent authorities throughout the EU. In European countries which are not EU Member States, national laws apply which are frequently divergent from the EU framework. The following paragraphs relate only to regulation in EU Member States. When adequate preclinical data are available, an application normally will be made either to the relevant national regulatory authority and/or to an ethics committee for approval to carry out a clinical trial with the unlicensed medicinal product. While marketing authorizations must be supported by clinical trials of a type and extent set out in the Directives and Guidelines, the actual approval process for commencement of clinical trials is not currently harmonized by EU law and varies from state to state. Clinical trials are typically conducted in three sequential phases which may overlap. In Phase I, the product is tested in humans to determine certain parameters relating to safety, potential adverse effects and/or pharmacokinetics. Phase II involves studies in a target patient population to collect additional pharmacokinetic clinical data demonstrating safety and, subsequently, to determine the preliminary biological or clinical efficacy and optional dosage of the product. Phase III trials are then undertaken to collect further data to demonstrate quality, safety and efficacy within an expanded target patient population. The various European regulatory authorities may require multiple Phase III trials to support the quality, safety and efficacy of the product. This process may take three to six or more years to complete. When appropriate clinical trial data supporting quality, safety and efficacy are available, an application for a marketing authorization may be submitted. In 1993, legislation was adopted which established a very new and amended system for the registration of medicinal products in the EU. The main purpose of this system is to prevent the existence of essentially separate national approval systems which have been a major obstacle to harmonization. One of the most significant features of this new system is the establishment of a new European Agency for the Evaluation of Medicinal Products ("EMEA"). Under the new system, marketing authorizations, broadly speaking, may be submitted at either a centralized, a decentralized or a national level. The centralized procedure is administered by the EMEA; this procedure is mandatory for the approval of biotechnology and high technology products and available at the applicant's option for other products. The centralized procedure provides for the first time in the EU for the grant of a single marketing authorization which is valid in all EU Member States. As of January 1995, a mutual recognition procedure is available at the request of the applicant for all medicinal products which are not subject to the centralized procedure under the so-called "decentralized procedure". The decentralized procedure will be mandatory beginning January 1, 1998. The decentralized procedure creates a new system for mutual recognition of national approval decisions, makes changes in existing procedures for national approvals and establishes procedures for co-ordinated EU action on product suspensions and withdrawals. Under this procedure, the holder of a 40 42 national marketing authorization for which mutual recognition is sought may submit an application to one or more Member States, certify that the dossier is identical to that on which the first approval was based or explain any differences and certify that identical dossiers are being submitted to all Member States from which recognition is sought. Within 90 days of receiving the application and assessment report, each Member State must decide whether to recognize the approval. The procedure encourages Member States to work with applicants and other regulatory authorities to resolve disputes concerning mutual recognition. If such disputes cannot be resolved within the 90-day period provided for review, the application will be subject to a binding arbitration procedure. The Company will choose the appropriate route of European regulatory filing to accomplish the most rapid regulatory approvals. However, there can be no assurance that the chosen regulatory strategy will secure regulatory approvals or approvals of the Company's chosen products indications. Under all procedures approval of an application must be refused if, after review, it appears that the quality, safety or efficacy of a medicinal product has not been adequately demonstrated by the applicant. In practice, requirements for specific post-marketing surveillance, or Phase IV studies, are increasingly imposed as de facto conditions of the grant of a marketing authorization. In some Member States, before a product is marketed, it is also necessary to obtain approval for the price to be charged for the product. However, this is not, the position in the United Kingdom, for example, where the initial price is set by the Company (subject to the constraints of the Pharmaceutical Price Regulation System, which controls the profitability of a Company's business with the National Health Service). The European Commission is presently reviewing various matters relating to the pricing of medicinal products within the EU. Currently EU regulation does not harmonize the pricing measures Member States may enact, but only seeks to guarantee the transparency of these measures. The Company believes it is unlikely the EU will regulate in the area of health care financing. The Company believes that determination of prices and reimbursement of health care products is therefore likely to remain a prerogative to the Member States for the foreseeable future. There can be no assurance that Member States will not adopt new cost containment policies that will limit marketing opportunities in the EU. The passage of a product through the approval system is likely to take a considerable period of time. However, it is hoped that the new authorization system will limit the length of time the review process will take. Generally under the scheme the review process is intended to take a maximum of 210 days after the receipt of a valid application. It should also be noted that each national regulatory authority has the power to suspend or revoke a marketing authorization any time if it is no longer satisfied as to the product's safety, quality and efficacy. Increasing harmonization of decision-making by national authorities through the CPMP and/or the new European Agency, and the existence of a mechanism by which any EU distribution could compel a Member State to act in accordance with a CPMP opinion, should result in more efficiency and importantly, future market authorization process. EU law requires that companies manufacturing products must hold a manufacturer's authorization and must comply with EU requirements as to GMP. These standards are enforced by inspection. Primary responsibility for ensuring that manufacturing procedures conform to marketing authorizations and good manufacturing practice requirements will rest with the authorities in the Member States where the product is manufactured or first imported into the EU. A procedure for abridged applications for generic products also exists in the EU. The general effect of the abridged application procedure is to give scope for the emergence of generic competition once patent protection has expired and the original product has been on the market for at least six years or ten years. Independent of any patent protection, under the abridged procedure, new products benefit in principle from a basic six-year period of protection (commencing with the data of first authorization in the EU) from abridged applications for a marketing authorization. Abridged applications can be made principally for medicinal products which are essentially similar to medicinal 41 43 products which have been authorized for either six or ten years. Under the abridged application procedure, the applicant is not required to provide the results of pharmacological and toxicological tests or the results of clinical trials. For such abridged applications, all data concerning manufacturing, quality and bioavailability are required. The applicant submitting the abridged application generally must provide evidence or information that the drug product subject to this application is essentially similar to that of the listed drug product: (1) it has the same qualitative and quantitative composition with respect to the active ingredient; (2) the dosage form; and (3) similarity in bioavailability between the new drug product and the reference listed drug. This period of protection is extended to ten years in respect of products derived from certain biotechnological processes or other high-technology medicinal products viewed by the competent authorities as representing a significant innovation. Further, each Member State may have a discretion to extend the basic six-year period of protection to a ten-year period, to all products marketed in its territory. Most Member States have exercised such discretion. This protection does not prevent another Company from making a full application supported by all necessary pharmacological, toxicological and clinical data within the period of protection. The application of the rules of marketing exclusivity to various product situations remains uncertain, and divergent views are taken by some of the EU regulatory authorities on the availability of the period of protection where new products are different from existing products only in terms of, for instance, strength or dosage form. European Regulations--Monitoring Products The Commission of the European Communities proposed a draft of new directives to govern approvals of in vitro diagnostic medical devices in late 1995, amending the existing Directive. Future approvals of the Company's monitoring products may therefore be dependent on meeting the conditions of the proposed Directive. The compliance with this proposed Directive must be in place no later than April 1, 1998. The Company's monitoring products will likely have to meet the essential requirements of the Directive. Once deemed acceptable such monitoring products will have CE markings of conformity. Environmental Regulation In connection with its research and development activities and its manufacturing materials and products, the Company is subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens, and wastes. 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 action to correct any 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 infectious biological specimens. 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. SCIENTIFIC, MEDICAL, PHARMACY AND REGULATORY ADVISORY BOARD The Scientific, Medical, Pharmacy and Regulatory Advisory Board consists of individuals with recognized expertise in immunology, transplantation or regulatory affairs. The Scientific, Medical, Pharmacy and Regulatory Advisory Board members advise the Company about present and long-term scientific planning, research and development. Members meet individually or as a group with the management of the Company from time to time. Each member of the Scientific, Medical, Pharmacy and Regulatory Advisory Board has entered into a consulting agreement with the Company. 42 44 The following persons are members of one or more of the Company's Scientific, Medical Pharmacy and Regulatory Advisory Boards: RITA ALLOWAY, PHARM.D., is an Associate Professor in the Department of Clinical Pharmacy at the University of Tennessee, Memphis, Tennessee. Dr. Alloway is a Board Certified Pharmacotherapy Specialist practicing at the UT William F. Bowld Hospital. Her current research is focused on individualizing and optimizing immune suppressive regimes for the transplant recipient. Dr. Alloway is the Past President of the Mid South College of Clinical Pharmacy. CAROL CLAYBERGER, PH.D., is an Assistant Professor of Immunology in the Department of Cardiothoracic Surgery of Stanford University School of Medicine, Stanford, California. Dr. Clayberger's current research is centered on an understanding of the effect of synthetic peptides on the immune response and the development of novel immunomodulatory agents. Dr. Clayberger holds a Ph.D. in Cell Biology from Yale University. JEAN DAUSSET, M.D., received a Nobel Prize in Medicine in 1980 for work that led to the discovery of HLA. In 1984, he founded and is currently serving as President of the Human Polymorphism Study Center (CEPH) which is currently engaged in research directed toward mapping the human genome. Professor Dausset is a member of the French Academy of Sciences, a foreign member of the American Academy of Arts and Sciences and of the National Academy of Sciences. ROY FIRST, M.D., is a Professor of Internal Medicine at the University of Cincinnati Medical Center, and Director of the Section of Transplantation in the Division of Nephrology and Hypertension. He is a Past President of the American Society of Transplant Physicians (ASTP), and is current Chairman of the Ad Hoc Committee for Organ Donation of the United Network for Organ Sharing (UNOS). Dr. First obtained his medical degree at the University of Witwatersrand in Johannesburg, South Africa in 1966. A. OSAMA GABER, M.D., is Associate Professor, Department of Surgery, University of Tennessee and President of the Medical Staff at UT William F. Bowld Hospital. He was President of the Tennessee Transplant Society and is Co-Chair SEOPF Pancreas Transplant Committee. F. CARL GRUMET, M.D., is a Professor of Pathology at Stanford University, Stanford, California. He is the Director of both the Transfusion Service and the Histocompatibility Laboratory at Stanford University Medical Center, the Director of the Stanford Specialized Center for Research in Transfusion Medicine and Associate Medical Director of the Stanford University Medical School Blood Center. RONALD D. GUTTMANN, M.D., FRCPC, is Director of the McGill Center for Clinical Immunobiology and Transplantation, and a Professor of Medicine at the McGill University Faculty of Medicine, Montreal, Quebec, Canada. Dr. Guttmann was previously affiliated with the Peter Bent Brigham Hospital and Harvard Medical School. ANDREW J. PERLMAN, M.D., PH.D., has been the Vice President of Medical Research at Tularik, Inc., a private biotechnology company, since January 1993. From 1987 to 1993, Dr. Perlman served in various positions at Genentech, Inc., most recently as Senior Director, Clinical Research. Dr. Perlman has a M.D. and a Ph.D. in Physiology from New York University. ROGER RATOUIS, PH.D., is a consultant for regulatory affairs. From 1959 to 1990, Dr. Ratouis was employed by Roussel Uclaf where he held various positions, first in research, then in pharmaceutical development, before heading the Regulatory Affairs and Planning Department in the Health Care Division. JEAN-PAUL SOULILLOU, M.D., is a Professor of Immunology at the University of Nantes, Nantes, France. He is the Director of the kidney transplant program, which in 1992 performed the largest number of kidney transplants in France and is one of the largest programs in Europe. He is the Director of INSERM-U211 research laboratory and the founder and scientific director of Fondation 43 45 Transvie, a non-profit research organization for xenotransplantation. Dr. Soulillou is also on the editorial boards of Transplantation and The New England Journal of Medicine. EMPLOYEES As of September 30, 1996, the Company employed 72 people. Of these employees, 58 were dedicated to research, development, manufacturing, quality assurance and quality control, regulatory affairs or preclinical testing. The Company is the beneficiary of key person life insurance policy covering Dr. Pouletty in the amount of $1,000,000. None of the Company's current employees is represented by a labor union or is the subject of a collective bargaining agreement. The Company believes that it maintains good relations with its employees. PROPERTIES The Company headquarters are located in Menlo Park, California. Floor space in California is approximately 19,500 square feet, including offices, storage area, laboratory space and specialized areas for pilot production and preclinical testing. The Menlo Park facility serves as the principal site for preclinical research, clinical trial management, process development, monitoring product production, quality assurance and quality control, and regulatory affairs. The lease for this building space expires in 1999 and may be renewed for subsequent years. In addition, the Company leases approximately 1,500 square feet in Menlo Park for its central mail order pharmacy. This facility's lease contains an option to lease another 1,500 square feet. The Company also leases approximately 2,500 square feet from the Center of Transplantation in Nantes, France, which is the primary site for preclinical development of therapeutics. This lease expires in December 1998 and the Company has the option to renew its lease for use of these facilities for additional five-year periods. The Company leases approximately 2,000 square feet in Missassauga, Ontario, Canada. The lease for this facility expires in August 1999, and the Company has the option to renew its lease for subsequent five-year periods. This site is used as headquarters for marketing and sales activities of SangStat Canada, Ltd. 44 46 MANAGEMENT Executive officers, directors and key employees of the Company, and their ages are as follows:
NAME AGE POSITION - ----------------------------------- --- -------------------------------------------------- Philippe Pouletty, M.D............. 38 Chief Executive Officer and Chairman David Winter, M.D.................. 61 President, Chief Operating Officer Timothy J. Schroeder............... 37 Executive Vice President, Clinical Development Ralph Levy......................... 47 Senior Vice President, Operations, and Secretary Hana Berger Moran, Ph.D............ 50 Senior Vice President, Regulatory Affairs Roland Buelow, Ph.D................ 39 Vice President, Research and Development Randell J. Correia, Pharm.D........ 38 Vice President, The Transplant Pharmacy Henry N. Edmunds, Ph.D............. 51 Vice President, Chief Financial Officer Robert Floc'h, Ph.D................ 46 Vice President, Pharmaceutical Development and General Manager, SangStat Atlantique Gilles des Gachons, M.D............ 35 General Manager, SangStat Canada, Ltd. Maree Wall......................... 32 Vice President, Corporate Communications Gordon Russell(2).................. 62 Director Fredric J. Feldman, Ph.D........... 57 Director Elizabeth Greetham................. 47 Director Richard D. Murdock................. 49 Director Andrew J. Perlman, M.D., Ph.D.(1).. 46 Director Vincent R. Worms(1)(2)............. 42 Director
- ------------------------------ (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Philippe Pouletty, M.D., founded SangStat in 1988 and has served as Chief Executive Officer since then. Dr. Pouletty has also been a Director since 1988, and has served as Chairman since February 1995. Dr. Pouletty was a founder and, from 1984 to 1988, a Director of Research at Clonatec, a French diagnostics company. Dr. Pouletty has a M.D. degree from the University of Paris VI. He holds a M.S. in immunology and a M.S. in virology from Institut Pasteur. Dr. Pouletty conducted research as a post-doctoral fellow at Stanford University. He serves as Vice-President of Fondation Transvie, a non-profit foundation for xenotransplantation. David Winter, M.D., joined SangStat in February 1995 as President and Chief Operating Officer. From October 1992 to February 1995 he was President and Chief Operating Officer at GenPharm International, Inc. He was formerly Vice President, Clinical Research & Development, and Vice President, Scientific and External Affairs for Sandoz Pharmaceuticals Corporation (now Novartis) from 1985 to 1992. Dr. Winter received his M.D. from Washington University of St. Louis. Timothy J. Schroeder joined SangStat in October 1993 as its Executive Vice President, Clinical Development. From 1987 to 1993, he was the Director of Transplant Laboratory Services at the University of Cincinnati Hospital and from 1990 to 1993, he was an Assistant Professor of Pathology and Laboratory Medicine at the University of Cincinnati. Mr. Schroeder has been a consultant to several pharmaceutical companies. He is a member of the American Society of Transplant Physicians, of the Transplantation Society and of the International Liver Transplant Society. His graduate degree is from the University of Cincinnati College of Medicine. Ralph Levy joined the Company in July 1990 as Vice President of Operations. In December 1995 Mr. Levy was promoted to Senior Vice President, Operations. From 1988 to 1989, he was the Director 45 47 of Operations for Syva Company. From 1987 to 1988, he was the Director of Manufacturing and Materials Management at Gen-Probe, Inc. Mr. Levy has an B.S. in Chemistry from City College of New York and a M.S. in Chemistry from Seton Hall University. Hana Berger Moran, Ph.D., joined SangStat in April 1994 as Senior Vice President, Regulatory Affairs. From 1991 to 1994 she was Director of Regulatory Affairs at Athena Neurosciences, Inc., and from 1990 to 1991 was Associate Director of Regulatory Affairs at Fujisawa Pharmaceutical Co. Dr. Berger Moran holds an M.S. degree in chemical engineering in pharmaceutical sciences and technology from Slovak Institute of Technology and a Ph.D. in organic chemistry of natural products from Feinberg Graduate School at the Weizmann Institute of Science in Rehovoth, Israel. Roland Buelow, Ph.D., joined the Company in February 1993 as Vice President, Research. From 1989 to January 1993 he was Project Leader at Immulogic Pharmaceutical Corporation. From 1987 to 1989, Dr. Buelow was Research Scientist at Stanford University. Dr. Buelow received his Ph.D. from the Max-Planck Institute for Biology in Tuebingen, Germany. Randell J. Correia, Pharm.D., joined SangStat in October 1995 as Vice President of Pharmacy Affairs. From 1988 to 1994 he was the Chief Executive Officer of California Infusion Services, a subsidiary of California Healthcare System. In 1995 he served as Program Manager for Stanford Health Systems Home Pharmacy. Dr. Correia is an Assistant Clinical Professor for the University of California at San Francisco and the University of the Pacific Schools of Pharmacy. Dr. Correia has a Doctor of Pharmacy Degree from the University of the Pacific, Stockton, California. Henry N. Edmunds, Ph.D., joined SangStat in June 1992 as Vice President, Chief Financial Officer. From 1984 to 1992, Dr. Edmunds was the Director of Business Development and Business Manager of Genencor, Inc. Dr. Edmunds has a Ph.D. in Biochemistry from the University of California at Berkeley and an M.B.A. from the Stanford Graduate School of Business. Robert Floc'h, Ph.D., joined SangStat Atlantique in November 1992 as General Manager and Vice President, Pharmaceutical Development. From 1991 to 1992 he was General Manager of Departmental Laboratories at the Department of Loire Atlantique. From 1980 to 1991, Dr. Floc'h was with Rhone Poulenc S.A., where he held various positions of increasing responsibility most recently as head of the Department of Chemical and Biopharmaceutical Development of Rhone Merieux since 1986. Dr. Floc'h is a pharmacist and holds a Ph.D. in Medicinal Chemistry from the University at Nantes. Gilles des Gachons, M.D., joined the Company in June 1994 as the General Manager, SangStat Canada Ltd. From 1992 to 1994, he was Product Director for Ortho Biotech, Inc., becoming also Clinical Director in 1993. He joined Johnson & Johnson, International as Product Manager in 1989. Dr. des Gachons earned two post-graduate degrees in Health Economics, and Medical and Odontological Evaluation, from the University of Paris, and graduated in the Political Science Program in Public Administration at the Institut d'Etudes Politiques de Paris. He has an M.D. from the University of Paris and an M.P.H. from Harvard University. Maree Wall joined SangStat in January 1996 as Vice President, Corporate Communications. From 1986 to 1992 she was a sales representative and Product Manager at Sandoz Australia Pty. Ltd. (now Novartis). She transferred to Sandoz' U.S. affiliate in 1992 and was assigned to the Immunology Product Marketing Group and worked on both Transplantation and Autoimmune Disease indications. Most recently, she was an Associate Director in the Transplant Business Unit at Sandoz Pharmaceutical Corporation (now Novartis). Ms. Wall holds a B.S. degree in Microbiology and Physiology from the University of Western Australia. Gordon Russell has served as Chairman of the Board from January 1992 until February 1995, and as a Director of the Company continuously since February 1990. In February 1995, Mr. Russell resigned from his post as Chairman of the Board. Mr. Russell serves on the Board of ChemTrak Incorporated and has been a General Partner of Sequoia Capital since 1979. Mr. Russell is Chairman of the Board of Overseers of the Dartmouth Medical School and the C. Everett Koop Institute at Dartmouth. He also 46 48 serves as Chairman of the Board of Trustees of the Palo Alto Medical Foundation. Mr. Russell has an A.B. in History from Dartmouth College. Fredric J. Feldman, Ph.D., has been a Director of the Company since March 1992. He is currently CEO and a Director of Biex, Inc., a women's healthcare company, and a Director of OrthoLogic Corporation and Oncogenetics, Inc. From 1992 to 1995 he was Chairman and CEO of Oncogenetics, Inc. From 1988 to 1992, he was President and CEO of Microgenics Corporation, a medical diagnostics product manufacturer. From 1984 to 1988, Dr. Feldman served as the President of Instrumentation Laboratory, a diagnostic instrument company. Dr. Feldman has a Ph.D. in Analytical Chemistry from the University of Maryland and a B.S. in Chemistry from Brooklyn College of City University of New York. Elizabeth Greetham has been a Director of the Company since September 1996. She is currently Portfolio Manager of Life Sciences L.P. Funds and handles analytical responsibilities for all healthcare investments for the institutional, Mutual and High Individual Net Worth Accounts at Weiss, Peck & Greer Investments, where she has been employed since 1990. Ms. Greetham also serves as a Director of various pharmaceutical companies, including Medco Research, Chemex Pharmaceutical, Progenics Pharmaceutical, Repligen, Guilford Pharmaceutical and ChiRex. Ms. Greetham has a M.A. in Economics from Edinburgh University. Richard D. Murdock has been a Director of the Company since October 1993. He is also a Director of Matrix Pharmaceutical, a public biotechnology company. Mr. Murdock has been the CEO and a Director of CellPro, Incorporated, a public biotechnology company, since June 1992. From August to December 1991, he was CellPro's Vice President of Marketing and Corporate Development and in December 1991 he was appointed President. From 1989 to 1991, he was European Vice President of the Fenwal Division of Baxter, which specializes in automated blood-processing equipment. From 1986 to 1989, he was Vice President of Marketing for Fenwal Automated Systems Inc. Mr. Murdock received a B.S. in Zoology from the University of California at Berkeley in 1969. Andrew J. Perlman, M.D., Ph.D., has been a Director of the Company since December 1992. Dr. Perlman has been the Vice President of Medical Research at Tularik, Inc., a private biotechnology company, since January 1993. From 1987 to 1993, Dr. Perlman served in various positions at Genentech, Inc., most recently as Senior Director, Clinical Research. Dr. Perlman has an M.D. and a Ph.D. in Physiology from New York University. Vincent R. Worms has been a Director of the Company since October 1991. Mr. Worms has been a General Partner of Partech International since 1982. He has an engineering degree from Ecole Polytechnique in Paris, and an M.S. degree from the Massachusetts Institute of Technology. Mr. Worms is presently a Director of Visioneer and Business Objects. The Company's bylaws authorize the Board of Directors to fix the number of directors. The number is currently fixed at seven. All Directors hold office until the next annual meeting of stockholders and until their successors have been elected and qualified. Officers are appointed to serve at the discretion of the Board of Directors. There are no family relationships among executive officers or Directors of the Company. 47 49 PRINCIPAL STOCKHOLDERS The following table sets forth certain information known to the Company with respect to the beneficial ownership of the Company's Common Stock as of December 31, 1996 by (i) all persons who are beneficial owners of five percent (5%) or more of the Company's Common Stock, (ii) each director, (iii) certain executive officers and (iv) all directors and executive officers as a group.
PERCENTAGE OF SHARES NUMBER BENEFICIALLY OWNED OF SHARES --------------------- BENEFICIALLY BEFORE AFTER NAME AND ADDRESS (AS REQUIRED) OF BENEFICIAL OWNER OWNED (#) OFFERING OFFERING - ------------------------------------------------------------- --------- -------- -------- Partech International(1)..................................... 967,976 7.4% 6.4% 101 California Street Suite 3150 San Francisco, CA 94111 David Rammler(2)............................................. 841,128 6.4% 5.6% 3000 Sand Hill Road Suite 280, Bldg. 4 Menlo Park, CA 94025 Sequoia Capital(3)........................................... 722,034 5.5% 4.8% 3000 Sand Hill Road Suite 280, Bldg. 4 Menlo Park, CA 94025 Philippe Pouletty, M.D.(4)................................... 576,153 4.3% 3.7% SangStat Medical Corporation 1505 Adams Drive Menlo Park, California 94025 David Winter, M.D.(5)........................................ 135,700 1.0% * Timothy J. Schroeder(6)...................................... 68,700 * * Ralph Levy(7)................................................ 75,500 * * Hana Berger Moran, Ph.D.(8).................................. 53,500 * * Roland Buelow, Ph.D.(9)...................................... 67,500 * * Henry N. Edmunds, Ph.D.(10).................................. 43,500 * * Robert Floc'h, Ph.D.(11)..................................... 45,500 * * Gordon Russell(3)............................................ 758,615 5.8% 5.0% Fredric J. Feldman, Ph.D.(12)................................ 36,525 * * Elizabeth Greetham(13)....................................... 274,000 2.1% 1.8% Richard D. Murdock(14)....................................... 18,600 * * Andrew J. Perlman, M.D., Ph.D.(15)........................... 23,400 * * Vincent R. Worms(1).......................................... 981,976 7.5% 6.5% All directors and officers as a group (14 persons)........... 3,159,169 22.6% 20.9%
- ------------------------------ * Does not exceed one percent. (#) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the "Commission") and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options which are currently exercisable or convertible or which will become exercisable or convertible within sixty (60) days after December 31, 1996 are deemed outstanding for computing the beneficial ownership of the person holding such option but are not outstanding for computing the beneficial ownership of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (1) Includes 102,774 shares held by Parvest Europe Investment II, C.V. Includes 285,001 shares held by Parvest U.S. Growth Fund Partners, C.V. Includes 333,646 shares held by Parvest U.S. 48 50 Partners II, C.V. Includes 246,555 shares held by entities which are affiliates of Partech International. Mr. Worms, a director of the Company, is a general partner of Parvest Europe Investment II, C.V., Parvest U.S. Growth Fund Partners, C.V. and Parvest U.S. Partners II, C.V. and either a general partner or a director of the affiliates referred to in the preceding sentence, and may be deemed to share voting and investment power with respect to such shares. The shares beneficially owned by Mr. Worms include options to purchase 14,000 shares granted in July 1996, subject to stockholder approval. (2) Includes 8,000 shares Common Stock held by Christine Rammler, Mr. Rammler's wife. Includes options to purchase 12,000 shares granted to David Rammler under the Option Plan. (3) Includes 663,434 shares held by Sequoia Capital Growth Fund. Includes 42,347 shares held by Sequoia Technology Partners III. Includes 323 shares held by Sequoia XX. Includes 12,470 shares held by Sequoia XXI. Includes 2,894 shares held by Sequoia XXII. Includes 566 shares held by Sequoia XXIII. Mr. Russell, a director of the Company, is a general partner of Sequoia Capital, and may be deemed to share voting and investment power with respect to such shares. Mr. Russell disclaims beneficial ownership of such shares, except to the extent of his interest in such shares arising from his interests in the entities referred to above. The shares beneficially owned by Mr. Russell include 36,581 shares owned by Mr. Russell and options to purchase 14,000 shares granted in July 1996, subject to stockholder approval. (4) Includes options to purchase 301,160 shares of Common Stock. (5) Includes options to purchase 125,000 shares granted under the Option Plan. (6) Includes options to purchase 64,700 shares granted under the Option Plan. (7) Includes options to purchase 62,120 shares granted under the Option Plan. (8) Represents options to purchase 53,500 shares granted under the Option Plan. (9) Includes options to purchase 49,500 shares granted under the Option Plan. (10) Includes options to purchase 19,479 shares granted under the Option Plan. (11) Represents options to purchase 20,000 shares granted under the Company's 1993 Stock Option Plan (France) and options to purchase 25,500 shares granted under the Option Plan. (12) Represents 13,125 shares held by the Feldman family trust, options to purchase 14,400 shares granted under the Option Plan, and options to purchase 9,000 shares granted in July 1996, subject to stockholder approval. (13) Includes 255,000 shares held by Weiss, Peck & Greer Investments. Ms. Greetham, a Director of the Company, handles all healthcare investments for the institutional, Mutual and High Individual Net Worth Accounts at Weiss, Peck & Greer Investments, and may be deemed to have share voting and investment power in such shares arising from her interest in the entity above. Ms. Greetham disclaims beneficial ownership of such shares, except to the extent of her interest in the entity referred to above. Ms. Greetham disclaims beneficial ownership of such shares, except to the extent of her interest in the entity referred to above. The shares beneficially owned by Ms. Greetham include options to purchase 19,000 shares granted in September 1996, subject to stockholder approval. (14) Represents options to purchase 9,600 shares granted under the Option Plan and options to purchase 9,000 shares granted in July 1996, subject to stockholder approval. (15) Represents options to purchase 14,400 shares granted under the Option Plan and options to purchase 9,000 shares granted in July 1996, subject to stockholder approval. 49 51 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, Hambrecht & Quist LLC, Montgomery Securities and Robertson, Stephens & Company LLC have severally agreed to purchase from the Company the following respective number of shares of Common Stock:
NUMBER OF NAME SHARES -------------------------------------------------------------------------- --------- Hambrecht & Quist LLC..................................................... Montgomery Securities..................................................... Robertson, Stephens & Company LLC......................................... --------- Total..................................................................... 2,000,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel and independent auditors. The nature of the Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the public offering of the shares, the offering price and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 300,000 additional shares of Common Stock at the public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell such shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the shares of Common Stock offered hereby. The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. The officers, directors and certain stockholders of the Company who will own or have the right to acquire within 60 days after January 23, 1997 in the aggregate 3,931,597 shares of Common Stock after the offering, have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, directly or indirectly sell, offer, contract to sell, make any short sale, pledge or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or 50 52 exercisable for or any other rights to purchase or acquire Common Stock during the 90-day period following the date of this Prospectus, except that such individuals may transfer shares to members of their immediate families or to trusts the beneficiaries of which are such individuals and/or members of their immediate families, so long as such transferees agree not to dispose of such shares as provided above. Hambrecht & Quist LLC may release such officers, directors and stockholders from such obligations from time to time without notice. In general, the rules of the Commission will prohibit the Underwriters from making a market in the Company's Common Stock during the "cooling off" period immediately preceding the commencement of sales in the offering. The Commission has, however, adopted exemptions from these rules that permit passive market making under certain conditions. These rules permit an underwriter to continue to make a market subject to the conditions, among others, that its bid not exceed the highest bid by a market maker not connected with the offering and that its net purchases on any one trading day not exceed prescribed limits. Pursuant to these exemptions, certain Underwriters, selling group members (if any) or their respective affiliates intend to engage in passive market making in the Company's Common Stock during the cooling off period. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, Palo Alto, California. As of the date of this Prospectus, a partner of Brobeck, Phleger & Harrison LLP, beneficially owned 71,515 shares of the Company's Common Stock. Wilson Sonsini Goodrich & Rosati, Professional Corporation, is acting as legal counsel for the Underwriters in connection with certain legal matters related to the shares of Common Stock offered hereby. EXPERTS The consolidated financial statements of SangStat Medical Corporation at December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, included and incorporated by reference in this Prospectus and the financial statement schedule incorporated by reference in such Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports included and incorporated by reference in the Prospectus, which is part of this Registration Statement, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The statements included in the Prospectus under the captions "Risk Factors--Uncertainty Regarding Patents and Proprietary Rights and--Risks Associated With CYCLOSPORINE" and "Business--Patents and Proprietary Technology," and other references herein to intellectual property matters have been reviewed and approved by Flehr, Hohbach, Test, Albritton & Herbert, patent counsel for the Company, as experts on such matters, and are included herein in reliance upon that review and approval. 51 53 SANGSTAT MEDICAL CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- Independent Auditors' Report.......................................................... F-2 Consolidated Balance Sheets at December 31, 1994 and 1995 and (unaudited) September 30, 1996............................................................................ F-3 Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and (unaudited) Nine Months Ended September 30, 1995 and 1996.................. F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994 and 1995 and (unaudited) Nine Months Ended September 30, 1996.................. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and (unaudited) Nine Months Ended September 30, 1995 and 1996.................. F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 54 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of SangStat Medical Corporation: We have audited the accompanying consolidated balance sheets of SangStat Medical Corporation and subsidiaries (the Company) as of December 31, 1994 and 1995, and the related consolidated statements of operations, stockholders' 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, such consolidated financial statements present fairly, in all material respects, the financial position of SangStat Medical Corporation and subsidiaries at December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Jose, California January 29, 1996 F-2 55 SANGSTAT MEDICAL CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------------- SEPTEMBER 30, 1994 1995 1996 ------------ ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents...................... $ 9,828,928 $ 4,609,186 $ 19,343,204 Short-term investments......................... 2,548,642 4,612,565 25,327,732 Accounts receivable............................ 183,484 406,153 432,689 Other receivables.............................. 117,815 170,118 375,777 Inventories.................................... 608,106 766,124 779,244 Prepaid expenses............................... 49,880 73,531 199,927 ------------ ------------ ------------ Total current assets................... 13,336,855 10,637,677 46,458,573 PROPERTY AND EQUIPMENT -- Net.................... 617,410 528,962 997,872 OTHER ASSETS..................................... 495,775 393,238 384,373 ------------ ------------ ------------ TOTAL............................................ $ 14,450,040 $ 11,559,877 $ 47,840,818 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................... $ 946,117 $ 1,041,389 $ 899,591 Accrued liabilities............................ 531,451 652,742 675,349 Capital lease obligations -- current portion... 241,190 238,651 133,834 Notes payable -- current portion............... 251,060 254,249 193,168 ------------ ------------ ------------ Total current liabilities.............. 1,969,818 2,187,031 1,901,942 ------------ ------------ ------------ CAPITAL LEASE OBLIGATIONS........................ 296,114 286,558 498,015 ------------ ------------ ------------ NOTES PAYABLE.................................... 856,463 804,811 939,754 ------------ ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.001 par value 5,000,000 shares authorized; none outstanding......... -- -- -- Common stock, $0.001 par value, 25,000,000 shares authorized; outstanding: 1994, 8,468,391 shares; 1995, 9,598,083 shares; 1996, 13,106,125 shares..................... 30,695,155 36,275,765 81,564,711 Accumulated deficit............................ (19,373,994) (28,051,991) (37,238,606) Accumulated translation adjustment............. 58,442 46,811 18,585 Unrealized gain (loss) on investments.......... (51,958) 10,892 156,417 ------------ ------------ ------------ Total stockholders' equity............. 11,327,645 8,281,477 44,501,107 ------------ ------------ ------------ TOTAL............................................ $ 14,450,040 $ 11,559,877 $ 47,840,818 ============ ============ ============
See notes to consolidated financial statements. F-3 56 SANGSTAT MEDICAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ------------ (UNAUDITED) REVENUES: Net product sales............ $ 518,561 $ 674,253 $ 2,697,759 $ 1,855,931 $ 1,732,263 Revenue from collaborative agreement (see Note 6).... 2,625,000 3,000,000 1,125,000 1,125,000 -- French government grants..... 50,816 -- -- -- -- ----------- ----------- ----------- ----------- ------------ Total revenues....... 3,194,377 3,674,253 3,822,759 2,980,931 1,732,263 ----------- ----------- ----------- ----------- ------------ COSTS AND OPERATING EXPENSES: Cost of sales and manufacturing expense..... 954,549 1,503,307 2,753,173 1,932,417 2,018,416 Research and development..... 3,678,969 4,845,382 6,647,232 4,582,333 6,187,703 Selling, general and administrative............ 2,202,416 3,157,015 3,772,289 2,688,685 4,168,592 ----------- ----------- ----------- ----------- ------------ Total operating expenses........... 6,835,934 9,505,704 13,172,694 9,203,435 12,374,711 ----------- ----------- ----------- ----------- ------------ Loss from operations......... (3,641,557) (5,831,451) (9,349,935) (6,222,504) (10,642,448) OTHER INCOME (EXPENSE): Interest income.............. 81,739 427,253 811,056 645,530 1,552,462 Interest expense............. (99,895) (143,222) (139,118) (101,569) (96,629) Foreign currency transaction loss...................... (59,879) -- -- -- -- ----------- ----------- ----------- ----------- ------------ Other income (expense) -- net... (78,035) 284,031 671,938 543,961 1,455,833 ----------- ----------- ----------- ----------- ------------ NET LOSS....................... $(3,719,592) $(5,547,420) $(8,677,997) $(5,678,543) $ (9,186,615) =========== =========== =========== =========== ============ NET LOSS PER COMMON AND EQUIVALENT SHARE (Note 1).... $ (0.79) $ (0.92) $ (0.61) $ (0.76) =========== =========== =========== ============ PROFORMA NET LOSS PER COMMON AND EQUIVALENT SHARE (Note 1)........................... $ (0.70) =========== SHARES USED IN PER SHARE COMPUTATION.................. 5,308,858 7,049,032 9,384,726 9,306,312 12,166,640 =========== =========== =========== =========== ============
See notes to consolidated financial statements. F-4 57 SANGSTAT MEDICAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK --------------------------- ------------------------- ACCUMULATED SHARES AMOUNT SHARES AMOUNT DEFICIT ---------- ------------ --------- ----------- ------------ BALANCES, January 1, 1993................... 4,720,608 $ 8,983,358 587,715 $ 13,734 $(10,106,982) Sale of Series E preferred stock (net of issuance costs of $48,487)................. 558,111 5,091,715 Conversion of foreign subsidiary capital upon exercise of call feature.............. 138,927 335,970 80,000 27,428 Sale of warrants for preferred stock........ 22,929 Exercise of stock options and warrants...... 134,365 490,370 Conversion of preferred stock into common stock...................................... (5,417,646) (14,433,972) 4,334,117 14,433,972 Issuance of note payable to former Series E preferred stockholders..................... (1,240,897) Issuance of common stock upon initial public offering (net of issuance costs of $660,972).................................. 1,571,429 9,569,031 Accumulated translation adjustment.......... Net loss.................................... (3,719,592) ---------- ------------ ---------- ------------ ------------ BALANCES, December 31, 1993................. -- -- 6,707,626 23,293,638 (13,826,574) Sale of common stock (net of issuance costs of $6,000)................................. 244,314 1,576,823 Sale of common stock upon private placement offering (net of issuance costs of $40,000)................................... 1,400,000 5,560,000 Exercise of stock options and warrants...... 116,451 264,694 Accumulated translation adjustment.......... Unrealized loss on investments.............. Net loss.................................... (5,547,420) ---------- ------------ ---------- ------------ ------------ BALANCES, December 31, 1994................. -- -- 8,468,391 30,695,155 (19,373,994) Sale of common stock (net of issuance costs of $317,818)............................... 1,000,000 5,182,182 Exercise of stock options and warrants...... 129,692 398,428 Accumulated translation adjustment.......... Unrealized gain on investments.............. Net loss.................................... (8,677,997) ---------- ------------ ---------- ------------ ------------ BALANCES, December 31, 1995................. -- -- 9,598,083 36,275,765 (28,051,991) Sale of common stock (net of issuance costs of $408,729)*.............................. 3,450,000 45,062,271 Exercise of stock options*.................. 58,042 62,675 Stock option compensation expense*.......... 164,000 Accumulated translation adjustment*......... Unrealized gain on investments*............. Net loss*................................... (9,186,615) ---------- ------------ ---------- ------------ ------------ BALANCES, September 30, 1996*............... -- $ -- 13,106,125 $81,564,711 $(37,238,606) ========== ============ ========== ============ ============ UNREALIZED ACCUMULATED GAIN TRANSLATION (LOSS) ON ADJUSTMENT INVESTMENTS TOTAL ----------- ----------- ----------- BALANCES, January 1, 1993................... $ (15,191) $ -- $(1,125,081) Sale of Series E preferred stock (net of issuance costs of $48,487)................. 5,091,715 Conversion of foreign subsidiary capital upon exercise of call feature.............. 363,398 Sale of warrants for preferred stock........ 22,929 Exercise of stock options and warrants...... 490,370 Conversion of preferred stock into common stock...................................... -- Issuance of note payable to former Series E preferred stockholders..................... (1,240,897) Issuance of common stock upon initial public offering (net of issuance costs of $660,972).................................. 9,569,031 Accumulated translation adjustment.......... 45,614 45,614 Net loss.................................... (3,719,592) -------- --------- ------------ BALANCES, December 31, 1993................. 30,423 -- 9,497,487 Sale of common stock (net of issuance costs of $6,000)................................. 1,576,823 Sale of common stock upon private placement offering (net of issuance costs of $40,000)................................... 5,560,000 Exercise of stock options and warrants...... 264,694 Accumulated translation adjustment.......... 28,019 28,019 Unrealized loss on investments.............. (51,958) (51,958) Net loss.................................... (5,547,420) -------- --------- ------------ BALANCES, December 31, 1994................. 58,442 (51,958) 11,327,645 Sale of common stock (net of issuance costs of $317,818)............................... 5,182,182 Exercise of stock options and warrants...... 398,428 Accumulated translation adjustment.......... (11,631) (11,631) Unrealized gain on investments.............. 62,850 62,850 Net loss.................................... (8,677,997) -------- --------- ------------ BALANCES, December 31, 1995................. 46,811 10,892 8,281,477 Sale of common stock (net of issuance costs of $408,729)*.............................. 45,062,271 Exercise of stock options*.................. 62,675 Stock option compensation expense*.......... 164,000 Accumulated translation adjustment*......... (28,226) (28,226) Unrealized gain on investments*............. 145,525 145,525 Net loss*................................... (9,186,615) -------- --------- ------------ BALANCES, September 30, 1996*............... $ 18,585 $ 156,417 $44,501,107 ======== ========= ============
- --------------- * Unaudited See notes to consolidated financial statements. F-5 58 SANGSTAT MEDICAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------- --------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ------------ ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss....................................... $(3,719,592) $(5,547,420) $ (8,677,997) $ (5,678,543) $ (9,186,615) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................ 244,315 323,171 349,420 259,719 286,323 Changes in assets and liabilities: Accounts receivable........................ 13,217 (80,124) (222,518) (151,480) (27,141) Other receivables.......................... (26,911) 24,994 (46,503) (134,463) (208,010) Inventories................................ (148,071) (298,149) (157,992) (348,350) (13,631) Prepaid expenses........................... (303,355) 276,357 (23,357) (38,692) (127,902) Accounts payable........................... 661,993 (111,325) 77,110 131,727 (131,123) Accrued liabilities........................ 130,670 202,443 110,547 (240,588) 31,856 Deferred grant revenue..................... (50,189) -- -- -- -- ------------ ------------ ------------- ------------- ------------- Net cash used in operating activities... (3,197,923) (5,210,053) (8,591,290) (6,200,670) (9,376,243) ------------ ------------ ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of preferred stock, net of issuance costs........................................ 3,201,508 -- -- -- -- Sale of common stock and warrants.............. 10,082,330 7,401,517 5,580,610 5,548,400 45,288,946 Note payable borrowings........................ 934,225 -- 252,033 252,033 133,904 Note payable repayments........................ (500,003) -- (333,650) (281,444) (307,722) Repayment of capital lease obligations......... (119,815) (224,475) (285,627) (185,157) (238,685) ------------ ------------ ------------- ------------- ------------- Net cash provided by financing activities............................ 13,598,245 7,177,042 5,213,366 5,333,832 44,876,443 ------------ ------------ ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment............ (116,441) (107,580) (20,262) (2,569) (144,356) Maturities of short-term investments........... -- 2,017,189 20,401,597 14,982,433 10,294,309 Purchase of short-term investments............. -- (4,615,020) (22,392,910) (19,645,283) (30,861,139) Other assets................................... (291,838) (129,230) 138,994 196,413 (14,114) ------------ ------------ ------------- ------------- ------------- Net cash used in investing activities... (408,279) (2,834,641) (1,872,581) (4,469,006) (20,725,300) ------------ ------------ ------------- ------------- ------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH.......... 27,236 55,093 30,763 (46,328) (40,882) ------------ ------------ ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS.................................... 10,019,279 (812,559) (5,219,742) (5,382,172) 14,734,018 CASH AND EQUIVALENTS, Beginning of period........ 622,208 10,641,487 9,828,928 9,828,928 4,609,186 ------------ ------------ ------------- ------------- ------------- CASH AND EQUIVALENTS, End of period.............. $10,641,487 $ 9,828,928 $ 4,609,186 $ 4,446,756 $ 19,343,204 ============ ============ ============= ============= ============= NONCASH INVESTING AND FINANCING ACTIVITIES: Property acquired under capital leases......... $ 370,894 $ 196,346 $ 273,532 $ 239,645 $ 345,325 ============ ============ ============= ============= ============= Property acquired under notes payable.......... $ -- $ -- $ -- $ -- $ 268,322 ============ ============ ============= ============= ============= Preferred stock issued upon conversion of notes payable...................................... $ 1,890,207 $ -- $ -- $ -- $ -- ============ ============ ============= ============= ============= Preferred and common stock issued to exercise call option.................................. $ 363,398 $ -- $ -- $ -- $ -- ============ ============ ============= ============= ============= Note payable issued upon conversion of preferred stock.............................. $ 1,240,897 $ -- $ -- $ -- $ -- ============ ============ ============= ============= ============= Unrealized gain (loss) on investments.......... $ -- $ (51,958) $ 62,580 $ 64,190 $ 145,525 ============ ============ ============= ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -- Cash paid during the year for interest......... $ 96,270 $ 92,757 $ 143,950 $ 113,118 $ 115,686 ============ ============ ============= ============= =============
See notes to consolidated financial statements. F-6 59 SANGSTAT MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- SangStat Medical Corporation and subsidiaries (the Company) is a specialty pharmaceutical company applying a disease management approach to improve the outcome of organ transplantation. The Company's products and product candidates are designed to prevent and treat graft rejection and monitor patients throughout the lifelong transplantation process. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of the Company and its subsidiaries, SangStat Atlantique and Lynatech (French corporations), which were formed in 1990 and SangStat Canada and Xenostat which were formed in 1994. In July 1993, the Company exercised its call option described below by issuing an aggregate of 138,927 shares of Series C convertible preferred stock and 80,000 shares of common stock whereby SangStat Atlantique and Lynatech became wholly-owned subsidiaries. Prior to July 1993, SangStat Atlantique was a 49% owned subsidiary engaged in marketing the Company's products in Europe. The Company had an option to acquire at any time all of the remaining 51% ownership of SangStat Atlantique by issuing 116,194 shares of Series C preferred stock. Similarly, the holders of the remaining 51% ownership had the ability to require the Company to acquire their SangStat Atlantique stock for 116,194 shares of Series C preferred stock at any time. Prior to July 1993, Lynatech was a 34% owned subsidiary of SangStat Atlantique. Lynatech is engaged in conducting research and development in collaboration with the Centre of Transplantation in Europe. The Company had an option to acquire substantially all of the remaining 66% ownership of Lynatech by issuing 80,000 shares of common stock and 22,733 shares of Series C preferred stock. Similarly, the holders of the remaining 66% ownership had the ability to require the Company to acquire their Lynatech stock for 80,000 shares of common stock and 22,733 shares of its Series C preferred stock upon completion of certain product development milestones. The exchange ratios of the Company's stock for subsidiary stock were established based upon the number of the Company's shares the subsidiary investors would have acquired had they invested the funds directly into the Company. Further, the Company has exercised operating control over the subsidiaries' operations. The put/call features and the operating control exercised by the Company made the shares held by the subsidiary investors the virtual equivalent of convertible securities with all terms and conditions fixed. The entire amount of the subsidiaries' losses since inception has been included in the consolidated financial statements of the Company. Intercompany accounts and transactions are eliminated. REVENUE RECOGNITION -- Revenue from product sales is recognized upon shipment. Revenue from collaborative agreements is recognized in accordance with the contract terms, generally as milestones are met and no significant obligation for future services exists (see Note 6). Subsidiaries of the Company have received grants from French government agencies to fund research and development efforts. Revenue from such grants was recognized ratably over the grant period as funds were expended. CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid debt instruments purchased with an original maturity date of three months or less to be cash equivalents. SHORT-TERM INVESTMENTS -- Short-term investments consist primarily of highly liquid debt instruments purchased with a remaining maturity date of greater than three months. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." There was no effect of adopting SFAS 115 at January 1, 1994. The Company has classified all of its short-term investments as "available-for-sale securities." The carrying value of such securities is adjusted to fair market value, with F-7 60 SANGSTAT MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) unrealized gains and losses being recorded as a separate component of stockholders' equity (see Note 2). INVENTORIES -- Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over estimated useful lives of three to five years. Leasehold improvements and assets under capital leases are amortized over their estimated useful lives or the lease term, whichever is appropriate. INCOME TAXES -- The Company adopted Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes," in 1993. The adoption of this standard had no effect on the Company's financial position or results of operations. FOREIGN CURRENCY TRANSLATION -- Operations of the Company's foreign subsidiaries are measured using local currency as the functional currency for each subsidiary. Assets and liabilities of the foreign subsidiaries are translated into U.S. dollars at the exchange rates in effect as of the balance sheet dates, and results of operations for each subsidiary are translated using average rates in effect for the periods presented. Foreign currency transaction gains and losses are included in the consolidated statements of operations. NET LOSS PER COMMON AND EQUIVALENT SHARE -- Net loss per common and equivalent share is based on the weighted average number of common and common equivalent shares outstanding during the periods. Common equivalent shares include the dilutive effect of stock options and warrants. Pro forma net loss per common and equivalent share includes convertible preferred stock and, pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, all common shares issued and options and warrants to purchase shares of common and preferred stock granted by the Company at a price less than the initial public offering price of $7.00 per share during the twelve months preceding the initial public offering date (using the treasury stock method for options and warrants) as if they were outstanding for all periods presented prior to the initial public offering. Options and warrants granted by the Company prior or subsequent to the aforementioned twelve-month period have been excluded in the calculation of common and common equivalent shares since they are antidilutive. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company sells its products to organizations in the healthcare industry in North America and Europe, and does not require its customers to provide collateral or other security to support accounts receivable. While the Company maintains allowances for potential bad debt losses, such losses to date have not been material. The Company participates in the very dynamic biotechnology industry. The Company believes that changes in any of the following areas could have a negative impact on the Company in terms of its future financial position and results of operations: ability to obtain additional financing; successful product development; manufacturing and marketing capabilities; ability to negotiate acceptable collaborative relationships; obtaining necessary FDA and foreign regulatory approvals; ability to attract and retain key personnel; litigation and other claims against the Company, including, but not limited to, patent claims; increased competition; uncertainty regarding health care reimbursement and reform; and potential exposure for product liability and hazardous materials. F-8 61 SANGSTAT MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INTERIM FINANCIAL STATEMENTS (UNAUDITED) -- The accompanying balance sheet as of September 30, 1996 and the statements of operations, stockholders' equity and cash flows for the nine months ended September 30, 1995 and 1996 are unaudited. In the opinion of management, these financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments and accruals, necessary for the fair presentation of the financial position and operating results as of such date and for such periods. The information disclosed in these Notes to Financial Statements related to these periods is unaudited. Operating results for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996 or any future period. 2. SHORT-TERM INVESTMENTS Short-term investments consist of the following:
DECEMBER 31, 1994 ----------------------------------------------------------- UNREALIZED UNREALIZED AMORTIZED GAIN ON LOSS ON MARKET COST INVESTMENTS INVESTMENTS VALUE ----------- ----------- ----------- ----------- Corporate bonds......................... $ 1,503,665 $ -- $ (16,260) $ 1,487,405 U.S. Treasury notes..................... 998,759 -- (30,479) 968,280 Foreign issues.......................... 98,176 -- (5,219) 92,957 ---------- ------- -------- ---------- Total......................... $ 2,600,600 $ -- $ (51,958) $ 2,548,642 ========== ======= ======== ==========
DECEMBER 31, 1995 ----------------------------------------------------------- UNREALIZED UNREALIZED AMORTIZED GAIN ON LOSS ON MARKET COST INVESTMENTS INVESTMENTS VALUE ----------- ----------- ----------- ----------- Corporate bonds......................... $ 3,005,790 $ 7,115 $ (10,130) $ 3,002,775 U.S. Treasury notes..................... 1,492,847 13,907 -- 1,506,754 Foreign issues.......................... 103,036 -- -- 103,036 ---------- ------- -------- ---------- Total......................... $ 4,601,673 $ 21,022 $ (10,130) $ 4,612,565 ========== ======= ======== ==========
SEPTEMBER 30, 1996 (UNAUDITED) ----------------------------------------------------------- UNREALIZED UNREALIZED AMORTIZED GAIN ON LOSS ON MARKET COST INVESTMENTS INVESTMENTS VALUE ----------- ----------- ----------- ----------- Corporate bonds......................... $25,171,314 $ 163,013 $ (6,595) $25,327,732 =========== =========== =========== ===========
At December 31, 1995 and September 30, 1996, all short-term investments had maturities of less than one year. 3. INVENTORIES Inventories consist of:
DECEMBER 31, --------------------- 1994 1995 -------- -------- SEPTEMBER 30, 1996 ------------ (UNAUDITED) Raw materials.................................... $450,893 $432,549 $472,798 Work in process.................................. 153,777 213,863 210,816 Finished goods................................... 3,436 119,712 95,630 -------- -------- -------- Total.................................. $608,106 $766,124 $779,244 ======== ======== ========
F-9 62 SANGSTAT MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY AND EQUIPMENT Property and equipment consist of:
DECEMBER 31, -------------------------- 1994 1995 ---------- ----------- SEPTEMBER 30, 1996 ------------ (UNAUDITED) Machinery and equipment...................... $1,439,854 $ 1,677,929 $2,405,094 Furniture and fixtures....................... 14,122 23,323 48,504 Leasehold improvements....................... 68,301 83,760 88,914 ---------- ----------- -------- Total.............................. 1,522,277 1,785,012 2,542,512 Accumulated depreciation and amortization.... (904,867) (1,256,050) (1,544,640) ---------- ----------- -------- Property and equipment -- net...... $ 617,410 $ 528,962 $ 997,872 ========== =========== ========
Included in machinery and equipment at December 31, 1994 and 1995 are assets leased under capital leases of $395,528 and $441,837 (net of accumulated amortization of $600,708 and $460,287), respectively. 5. ACCRUED LIABILITIES Accrued liabilities consist of:
DECEMBER 31, --------------------- SEPTEMBER 30, 1994 1995 1996 -------- -------- ------------- (UNAUDITED) Salaries and related benefits........................... $435,448 $545,803 $ 572,500 Other................................................... 96,003 106,939 102,849 -------- -------- -------- Total......................................... $531,451 $652,742 $ 675,349 ======== ======== ========
6. COLLABORATIVE AGREEMENTS In April 1993, the Company entered into a collaborative licensing, marketing and development agreement (the Agreement) with Baxter Healthcare Corporation (Baxter). The Agreement provides to Baxter exclusive marketing rights to certain products. In addition, the Agreement specifies that the Company develop certain products pursuant to specifications and milestones as outlined in the Agreement. In connection with the Agreement, a licensing fee in exchange for exclusivity of $1,750,000, which is nonrefundable unless the Company terminates the license, was received and has been included in revenue for 1993. Also in connection with the Agreement, $875,000 was earned upon completion of the first milestone and has been included in revenue for 1993. In 1994 and 1995, an additional $3,000,000 and $1,125,000, respectively, was earned as additional milestones were attained. The Agreement was amended upon written consent of the parties in June 1996 to allow the Company to market certain products on an exclusive basis. The costs associated with the development of the products encompassed under the Agreement and achievement of related milestones were approximately $900,000, $1,400,000 and $1,400,000 in 1993, 1994 and 1995, respectively; such costs have been included in research and development expenses in the Consolidated Statements of Operations. Additionally, in April 1993, Baxter purchased 352,877 shares of the Company's Series E convertible preferred stock at $9.21 per share (see Note 8). Effective July 1, 1996, SangStat reacquired exclusive commercial rights for these two monitoring products from Baxter, and since this date, SangStat has been marketing these monitoring products through its own sales staff in the United States and Europe. As expected, no collaborative agreement milestone payments were received from Baxter in 1996, reflecting completion of the final milestones for PRA-STAT and CROSS-STAT in 1995. The final F-10 63 SANGSTAT MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) payments of $1,125,000 in the first six months of 1995 represented the completion of $10.0 million received by SangStat for milestones, license fees and equity in 1993 through 1995 under its collaborative agreement with Baxter. In October 1993, the Company entered into an agreement with Pasteur Merieux Serums et Vaccins (the Merieux Agreement). The Merieux Agreement specifies that the Company will have exclusive rights to market certain Merieux products in the United States and Canada upon approval of the FDA or similar agencies. The Company must use reasonable commercial efforts to obtain FDA approval. The Merieux Agreement provides for payments by the Company upon completion of certain milestones totaling $2,000,000 and royalties on sales of products, subject to minimum amounts. In 1994, $500,000 was expensed under the Merieux Agreement as the first milestone was attained (none in 1993 or 1995). 7. NOTES PAYABLE Notes payable consist of:
DECEMBER 31, ------------------------- SEPTEMBER 30, 1994 1995 1996 ---------- ---------- ------------- (UNAUDITED) Note due to former Series E preferred stockholders... $ 740,894 $ 666,804 $ 592,715 Research and development loan........................ 280,584 295,156 218,428 Other loans.......................................... 86,045 97,100 321,779 ---------- ---------- ---------- Total...................................... 1,107,523 1,059,060 1,132,922 Less current portion................................. (251,060) (254,249) (193,168) ---------- ---------- ---------- Long-term.................................. $ 856,463 $ 804,811 $ 939,754 ========== ========== ==========
Upon the Company's initial public offering in 1993, notes payable of $1,240,897 were issued to Series E preferred stockholders in accordance with certain antidilution provisions of the Series E preferred stock purchase agreement. Of this amount, $500,003 and $74,090 was paid in 1993 and 1995, respectively, to Baxter Healthcare Corporation, and the remaining $666,804 at December 31, 1995 is payable in nine equal annual installments and bears interest at 6.06%. The research and development loan provided by the French government is denominated in French Francs, does not bear interest and is payable (based on the exchange rate at December 31, 1995) in the amounts of $65,000, $98,000 and $132,000 in 1996, 1997 and 1998, respectively. The other loans consist primarily of a noninterest bearing loan denominated in French Francs provided by a French government agency and are payable in the amounts of $40,000 in 1996 and $19,000 in 1997, 1998 and 1999. 8. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK--Upon the initial public offering in December 1993, all shares of preferred stock were automatically converted to common stock at a ratio of four shares of common stock for each five shares of preferred stock. COMMON STOCK--In December 1994, the Company issued 1,400,000 shares of common stock in a private placement for aggregate consideration of $5,600,000, in February 1995 issued 1,000,000 shares of common stock in a public offering for aggregate consideration of $5,500,000, and in March 1996 issued 3,450,000 shares of common stock in a public offering for aggregate consideration of $48,300,000. F-11 64 SANGSTAT MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCKHOLDER RIGHTS PLAN--In August 1995, the Company's Board of Directors approved a plan to protect stockholders' rights in the event of a proposed takeover of the Company. Under the plan, a preferred share purchase right (Right) is attached to each share of common stock. The Rights are exercisable only if a person or group acquires 15% or more of the Company's common stock or announces a tender offer the consummation of which would result in ownership by a person or group of 15% or more of the Company's common stock. Each Right will entitle stockholders to buy one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $45 upon certain events. If, after the Rights become exercisable, the Company is acquired in a merger or other business combination transaction, or sells 50% or more of its assets or earnings power, each Right will entitle its holder to purchase, at the Right's then-current price, a number of the acquiring company's common shares having a market value at the time of twice the Right's exercise price. If a person or group acquires 15% or more of the Company's outstanding common stock, each Right will entitle its holder (other than such person or members of such group) to purchase, at the Right's then-current exercise price, a number of the Company's common shares (or cash, other securities or property) having a market value twice the Right's exercise price. At any time within ten days after a person or group has acquired beneficial ownership of 15% or more of the Company's common stock, the Rights are redeemable for $.01 per Right at the option of the Board of Directors. The Rights expire on August 25, 2005, unless earlier redeemed or exchanged. WARRANTS AND OPTIONS--In 1991, in connection with the sale of Series D preferred stock and the investment in SangStat Atlantique and in Lynatech, the Company issued warrants to purchase 259,268 shares of common stock at $4.075 per share. In 1993 and 1994, 113,068 and 59,261 of these warrants were exercised for total proceeds to the Company of $460,752 and $241,489, respectively. In 1995, the remaining 86,939 warrants were exercised for total proceeds to the Company of $354,276. RECENTLY ISSUED ACCOUNTING STANDARD--In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The new standard defines a fair value method of accounting for stock options and other equity instruments, such as stock purchase plans. Under this method, compensation cost is measured based on the fair value of the stock award when granted and is recognized as an expense over the service period, which is usually the vesting period. This standard is effective for the Company beginning in 1996 and requires measurement of awards made beginning in 1995. The new standard permits companies to continue to account for equity transactions with employees under existing accounting rules, but requires disclosure in a note to the financial statements of the pro forma net income and earnings per share as if the Company had applied the new method of accounting. The Company intends to implement these disclosure requirements for its employee stock plans beginning with its annual financial statements for the year ending December 31, 1996. Based on the Company's current use of equity instruments, adoption of the new standard will not impact reported net income per share, and will have no effect on the Company's cash flows. STOCK OPTION PLAN--Under the Company's stock option plans, incentive or nonstatutory stock options to purchase up to 1,090,200 shares of common stock may be granted to employees, directors, and consultants. Incentive stock options must be granted at not less than fair market value at the date of grant. Nonstatutory options must be granted at not less than 85% of fair market value at the date of the grant. F-12 65 SANGSTAT MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of stock option activity is as follows:
OPTION OPTION PRICE SHARES PER SHARE --------- ------------- Balances, January 1, 1993.......................................... 295,795 $ .19 - $ .41 Options granted.................................................... 314,084 $ .41 - $3.75 Options exercised.................................................. (21,297) $ .19 - $ .41 Options cancelled.................................................. (12,867) $ .27 - $ .41 --------- Balances, December 31, 1993........................................ 575,715 $ .19 - $3.75 Options granted.................................................... 71,600 $7.00 Options exercised.................................................. (57,190) $ .41 Options cancelled.................................................. (32,850) $ .41 - $7.00 --------- Balances, December 31, 1994........................................ 557,275 $ .19 - $7.00 Options granted.................................................... 501,080 $4.75 - $8.00 Options exercised.................................................. (37,460) $ .27 - $1.44 Options cancelled.................................................. (6,682) $ .41 --------- Balances, December 31, 1995........................................ 1,014,213 $ .19 - $8.00 =========
Options to purchase common stock generally vest over a period of four years, are exercisable immediately and expire ten years from the date of grant. Options for 433,184 shares were vested at December 31, 1995. Unvested common shares acquired under the plans are subject to repurchase by the Company. As of December 31, 1995, options for 48,720 shares, which were granted outside of the stock option plans, were outstanding and are included in the above table. As of December 31, 1995, 4,555 shares were available under the plans for future grant. 9. LEASING ARRANGEMENTS The Company leases administrative facilities under operating leases and machinery and equipment under capital leases expiring through 1999. As of December 31, 1995, future minimum annual payments under capital and operating leases are as follows:
CAPITAL OPERATING YEARS ENDING DECEMBER 31, LEASES LEASES --------- -------- 1996.......................................................... $ 293,294 $258,716 1997.......................................................... 215,647 259,072 1998.......................................................... 89,528 259,227 1999.......................................................... 11,659 130,685 --------- -------- Total minimum lease payments........................ 610,128 $907,700 ======== Less amounts representing interest............................ (84,919) --------- Present value of minimum lease payments....................... 525,209 Less current portion.......................................... (238,651) --------- Capital lease obligations........................... $ 286,558 =========
Rent expense for the years ended December 31, 1993, 1994 and 1995 was $167,217, $225,687 and $267,312, respectively. F-13 66 SANGSTAT MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. INCOME TAXES The Company adopted Statement of Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," effective January 1, 1993. The adoption of this standard had no effect on the Company's financial position or results of operations. Loss before income taxes consists of the following:
DECEMBER 31, ------------------------------------------- 1993 1994 1995 ----------- ----------- ----------- Loss before income taxes: Domestic.................................. $(2,803,602) $(4,655,695) $(7,592,246) Foreign................................... (915,990) (891,725) (1,085,751) ----------- ----------- ----------- $(3,719,592) $(5,547,420) $(8,677,997) =========== =========== ===========
No income tax provision (benefit) has been provided due to the Company's continuing losses. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss and tax credit carryforwards. Significant components of the Company's deferred income tax assets and liabilities are as follows:
DECEMBER 31, ---------------------------- 1994 1995 ----------- ------------ Deferred tax assets: Net operating losses........................................... $ 6,974,526 $ 9,701,724 General business credits....................................... 643,691 1,127,395 Accruals deductible in different periods....................... 122,106 380,695 Depreciation................................................... 249,556 115,809 ------------ ------------- 7,989,879 11,325,623 Valuation allowance.............................................. (7,989,879) (11,325,623) ------------ ------------- Total.................................................. $ -- $ -- ============ =============
As a result of the Company's history of operating losses, management believes that realization of its deferred tax assets is not considered more likely than not. Accordingly the Company has recorded a valuation allowance of $7,989,879 and $11,325,623 against its otherwise recognizable net deferred tax assets at December 31, 1994 and 1995, respectively. At December 31, 1995, the Company had federal, California and foreign net operating loss carryforwards of approximately $24,800,000, $11,800,000, and $500,000, respectively, available to reduce future taxable income. Such carryforwards expire beginning in 1996 through 2010. Also at December 31, 1995, the Company had research and experimentation credit carryforwards available of approximately $734,000 for federal and $393,000 for state tax purposes. The federal tax credit carryforwards expire beginning in 2004 and the state tax credit carryforwards have no expiration date. 11. EMPLOYEE BENEFIT PLAN In May 1995, the Company established a 401(k) tax-deferred savings plan, whereby eligible employees may contribute up to 20% of their eligible compensation (to a maximum of approximately F-14 67 SANGSTAT MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $9,500 per year). Company contributions are discretionary and as of December 31, 1995 the Company had not made any contributions. 12. RELATED PARTIES A shareholder of the Company leased $120,098 of machinery and equipment to the Company during 1989 under a capital lease arrangement. Payments of $2,289 are due monthly based on a 15% interest rate. The lease expired in 1996. At December 31, 1994 and 1995, capital lease obligations on this lease were $31,215 and $6,975, respectively. See Note 6 regarding the collaborative licensing, marketing and development agreement with Baxter Healthcare Corporation, a shareholder of the Company. 13. MAJOR CUSTOMER Baxter Healthcare Corporation accounted for approximately 82%, 90% and 49% of total revenues in 1993, 1994 and 1995, respectively (see Note 6). 14. FOREIGN OPERATIONS The Company is engaged in one business segment: the development and marketing of both monitoring test products and therapeutic products for use in transplantation. The Company's operations in Europe are primarily related to research and development and clinical trials for therapeutic products. Summarized data for the Company's domestic and foreign operations are as follows:
NORTH AMERICA EUROPE CONSOLIDATED ----------- ----------- ----------- Year ended December 31, 1993: Sales to unaffiliated customers................... $ 3,109,189 $ 34,372 $ 3,143,561 French government grants.......................... -- 50,816 50,816 ----------- ----------- ----------- Total revenue............................. $ 3,109,189 $ 85,188 $ 3,194,377 =========== =========== =========== Loss from operations.............................. $(2,795,635) $ (845,922) $(3,641,557) =========== =========== =========== Total assets.............................. $12,040,014 $ 459,230 $12,499,244 =========== =========== =========== Year ended December 31, 1994: Sales to unaffiliated customers................... $ 3,656,051 $ 18,202 $ 3,674,253 =========== =========== =========== Loss from operations.............................. $(4,966,934) $ (864,517) $(5,831,451) =========== =========== =========== Total assets.............................. $13,844,892 $ 605,148 $14,450,040 =========== =========== =========== Year ended December 31, 1995: Sales to unaffiliated customers................... $ 3,822,759 $ -- $ 3,822,759 =========== =========== =========== Loss from operations.............................. $(8,283,088) $(1,066,847) $(9,349,935) =========== =========== =========== Total assets.............................. $10,949,862 $ 610,015 $11,559,877 =========== =========== ===========
F-15 68 - ------------------------------------------------------------ - ------------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Available Information..................... 2 Incorporation of Certain Documents by Reference............................... 2 Prospectus Summary........................ 3 Risk Factors.............................. 6 The Company............................... 15 Use of Proceeds........................... 15 Price Range of Common Stock............... 16 Dividend Policy........................... 16 Capitalization............................ 17 Selected Consolidated Financial Data...... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 19 Business.................................. 22 Management................................ 45 Principal Stockholders.................... 48 Underwriting.............................. 50 Legal Matters............................. 51 Experts................................... 51
- ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ 2,000,000 SHARES LOGO COMMON STOCK ------------------------ PROSPECTUS ------------------------ HAMBRECHT & QUIST MONTGOMERY SECURITIES ROBERTSON, STEPHENS & COMPANY , 1997 - ------------------------------------------------------------ - ------------------------------------------------------------ 69 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All of the amounts shown are estimates except the registration fee and the NASD filing fees.
AMOUNT TO BE PAID ---------- SEC Registration fee..................................................... $ 21,000 NASD fee................................................................. 7,500 Nasdaq Additional Listing fee............................................ 17,500 Accounting fees and expenses............................................. 90,000 Printing and engraving................................................... 80,000 Transfer agent fees...................................................... 8,000 Blue Sky fees and expenses............................................... 5,000 Legal fees and Company expenses.......................................... 250,000 Miscellaneous............................................................ 71,000 ---------- Total.......................................................... $ 550,000 ==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law, as amended (the "DGCL"), provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Section 145 further provides that a corporation similarly may indemnify any such person serving in any such capacity who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor, against expenses actually and reasonably incurred in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or such other court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 102(b)(7) of the DGCL permits a corporation to include in its certificate of incorporation a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL II-1 70 (relating to unlawful payment of dividends and unlawful stock purchase and redemption) or (iv) for any transaction from which the director derived an improper personal benefit. The Registrant's Restated Certificate of Incorporation provides that the Registrant's directors shall not be liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that exculpation from liabilities is not permitted under the DGCL as in effect at the time such liability is determined. The Registrant has entered into indemnification agreements with all of its officers and directors, as permitted by the DGCL. Reference is also made to Section of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant against certain liabilities. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS
EXHIBIT NUMBER EXHIBIT TABLE - ------------ ------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement. 2.1(7) Agreement and Plan of Merger dated as of July 24, 1995 between the Registrant and SangStat Medical Corporation, a California corporation, as filed with the Delaware Secretary of State on August 11, 1995. 3.1(7) Amended and Restated Articles of Incorporation of the Registrant filed November 29, 1993. 3.3(7) Bylaws of Registrant. 3.4(6) Certificate of Designation for the Series A Junior Participating Preferred Stock, filed with the Delaware Secretary of State on August 16, 1995. 4.1(3) Form of Warrant to purchase Series D Preferred Stock issued by Registrant on July 15, 1991. 4.2(3) Form of Warrant to Purchase Series E Preferred Stock issued by Registrant on April 19, 1993. 4.5(3) Specimen Common Stock Certificate of Registrant. 5.1 Opinion of Brobeck, Phleger & Harrison LLP. 10.1(1)(3) Collaborative Agreement effective April 19, 1993, as amended, between SangStat and Baxter Healthcare Corporation. 10.2(1)(3) License Agreement, dated October 21, 1991, between the Registrant and The Board of Trustees of Leland Stanford Junior University. 10.3(3) Contract for the Provision of Services, dated October 5, 1993 between the Centre Hospitalier Universitaire de Nantes and SangStat Atlantique. 10.4(1)(3) License Agreement, dated October 13, 1993, between the Registrant and Pasteur Merieux Serums et Vaccins. 10.5(1)(3) Letter Agreement between SangStat and Ortho Biotech. 10.6(2)(3) 1990 Stock Option Plan, as amended October 1992 and form of Stock Option Agreement. 10.7(2)(3) 1993 Stock Option/Stock Issuance Plan. 10.8(3) Series B Stock Purchase Agreement, dated September 21, 1989, between the Registrant and the Investors listed in Schedule A thereto. 10.9(3) Series C Stock and Warrant Purchase Agreement, dated January 26, 1990, between the Registrant and the Investors listed in Schedule A thereto. 10.10(3) Series D Stock and Warrant Purchase Agreement, dated July 15, 1991, between the Registrant and the Investors listed in Schedule A thereto. 10.11(3) Amendment Agreement to the Series D Stock and Warrant Purchase Agreement, dated October 5, 1992, between the Registrant and the Investors listed in Schedule A of that certain Series D Stock and Warrant Purchase Agreement, dated July 15, 1991. 10.12(3) Note and Warrant Purchase Agreement, dated October 2, 1992, between the Registrant and the Investors listed in the Schedule of Lenders thereto.
II-2 71
EXHIBIT NUMBER EXHIBIT TABLE - ------------ ------------------------------------------------------------------------------- 10.13(3) Series E Stock and Warrant Purchase Agreement, dated April 19, 1993, between the Registrant and the Investors listed in Schedule A thereto. 10.14(2)(3) Amended and Restated Shareholders Agreement, dated January 26, 1990, between the Registrant and Philippe Pouletty. 10.15(3) Equipment Lease Agreement dated October 11, 1990 between SangStat and David Rammler. 10.16(3) Real Property Lease, dated August 20, 1990, between the Registrant and Menlo Business Park and Patrician Associates, Inc. 10.17(3) Lease Agreement dated September 1, 1993 between SangStat Atlantique and Centre Hospitalier. 10.18(7) Form of Indemnification Agreement to be entered into between the Registrant and each of its officers and directors. 10.19(1)(3) License Agreement, dated November 15, 1993, between the Registrant and the Board of Trustees of Leland Stanford Junior University. 10.20(3) Letter Agreement between the Registrant and Baxter Healthcare Corporation dated December 11, 1993. 10.21(1)(5) License Agreement with Pasteur Merieux Serums et Vaccins. 10.22(2)(5) Supply Agreement with Pasteur Merieux Serums et Vaccins. 10.23(4) Common Stock Purchase Agreement, dated December 23, 1994, between the Registrant and the Investors listed in Schedule A thereto. 11.1(8) Calculation of Net Loss Per Common and Equivalent Share. 20.1(4) Press Release of the Registrant, dated December 27, 1994. 21.1(5) Subsidiaries of Registrant. 23.1 Independent Auditors' Consent. 23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1). 23.3(8) Consent of Flehr, Hohbach, Test Albritton & Herbert. 24.1(8) Power of Attorney. (Reference is made to page II-5)
- ------------------------------ (1) Confidential Treatment has been granted for the deleted portions of this document. (2) Management contract or compensatory plan or arrangement. (3) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-70436). (4) Previously filed as an Exhibit to the Registrant's Form 8-K filed January 6, 1994. (5) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-88432). (6) Previously filed as an Exhibit to Registrant's Form 8-K filed August 14, 1995. (7) Previously filed as an Exhibit to the Registrant's Registration Statement on Form 8-B filed December 4, 1995. (8) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-3 (No. 333-1260). ITEM 17. UNDERTAKINGS. The undersigned hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report, to security holders that is incorporated by reference in the prospectus and furnished pursuant to and II-3 72 meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the Delaware General Corporation Law, the Certificate of Incorporation or the Bylaws of Registrant, indemnification agreements entered into between Registrant and its officers and directors, the Underwriting Agreement, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a director, officer or controlling person of 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, Registrant will, unless in the opinion of its counsel, the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 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 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 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 hereof. II-4 73 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Menlo Park, State of California on this 24th day of January, 1997. SANGSTAT MEDICAL CORPORATION By: /s/ HENRY N. EDMUNDS ------------------------------ Henry N. Edmunds, Ph.D. Vice President, Chief Financial Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Philippe Pouletty and Henry Edmunds, and each of them, his attorneys-in-fact, each with the power of substitution for him in any and all capacities, to sign any amendments (including, without limitation, post-effective amendments or any abbreviated registration statement increasing the amount of securities for which registration is sought) to this Registration Statement on Form S-3 and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------- ----------------------------------- ----------------- /s/ PHILIPPE POULETTY Chief Executive Officer and January 24, 1997 - ------------------------------------- Chairman of the Board of Directors (Philippe Pouletty) (Principal Executive Officer) /s/ HENRY N. EDMUNDS Vice President and Chief Financial January 24, 1997 - ------------------------------------- Officer (Principal Financial and (Henry N. Edmunds) Accounting Officer) /s/ GORDON RUSSELL Director January 24, 1997 - ------------------------------------- (Gordon Russell) Director January , 1997 - ------------------------------------- (Fredric J. Feldman) Director January , 1997 - ------------------------------------- (Elizabeth Greetham) /s/ RICHARD D. MURDOCK Director January 24, 1997 - ------------------------------------- (Richard D. Murdock) /s/ ANDREW PERLMAN Director January 24, 1997 - ------------------------------------- (Andrew Perlman) Director January , 1997 - ------------------------------------- (Vincent Worms)
II-5 74 SANGSTAT MEDICAL CORPORATION INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED EXHIBIT DESCRIPTION PAGE - -------- ------------------------------------------------------------------- ------------ 1.1 Form of Underwriting Agreement. 2.1 (7) Agreement and Plan of Merger dated as of July 24, 1995 between the Registrant and SangStat Medical Corporation, a California corporation, as filed with the Delaware Secretary of State on August 11, 1995. 3.1 (7) Amended and Restated Articles of Incorporation of the Registrant filed November 29, 1993. 3.3 (7) Bylaws of Registrant. 3.4 (6) Certificate of Designation for the Series A Junior Participating Preferred Stock, filed with the Delaware Secretary of State on August 16, 1995. 4.1 (3) Form of Warrant to purchase Series D Preferred Stock issued by Registrant on July 15, 1991. 4.2 (3) Form of Warrant to Purchase Series E Preferred Stock issued by Registrant on April 19, 1993. 4.5 (3) Specimen Common Stock Certificate of Registrant. 5.1 Opinion of Brobeck, Phleger & Harrison LLP 10.1 (1)(3) Collaborative Agreement effective April 19, 1993, as amended, between SangStat and Baxter Healthcare Corporation. 10.2 (1)(3) License Agreement, dated October 21, 1991, between the Registrant and The Board of Trustees of Leland Stanford Junior University. 10.3 (3) Contract for the Provision of Services, dated October 5, 1993 between the Centre Hospitalier Universitaire de Nantes and SangStat Atlantique. 10.4 (1)(3) License Agreement, dated October 13, 1993, between the Registrant and Pasteur Merieux Serums et Vaccins. 10.5 (1)(3) Letter Agreement between SangStat and Ortho Biotech. 10.6 (2)(3) 1990 Stock Option Plan, as amended October 1992 and form of Stock Option Agreement. 10.7 (2)(3) 1993 Stock Option/Stock Issuance Plan. 10.8 (3) Series B Stock Purchase Agreement, dated September 21, 1989, between the Registrant and the Investors listed in Schedule A thereto. 10.9 (3) Series C Stock and Warrant Purchase Agreement, dated January 26, 1990, between the Registrant and the Investors listed in Schedule A thereto. 10.10(3) Series D Stock and Warrant Purchase Agreement, dated July 15, 1991, between the Registrant and the Investors listed in Schedule A thereto. 10.11(3) Amendment Agreement to the Series D Stock and Warrant Purchase Agreement, dated October 5, 1992, between the Registrant and the Investors listed in Schedule A of that certain Series D Stock and Warrant Purchase Agreement, dated July 15, 1991. 10.12(3) Note and Warrant Purchase Agreement, dated October 2, 1992, between the Registrant and the Investors listed in the Schedule of Lenders thereto.
75
SEQUENTIALLY NUMBERED EXHIBIT DESCRIPTION PAGE - -------- ------------------------------------------------------------------- ------------ 10.13(3) Series E Stock and Warrant Purchase Agreement, dated April 19, 1993, between the Registrant and the Investors listed in Schedule A thereto. 10.14(2)(3) Amended and Restated Shareholders Agreement, dated January 26, 1990, between the Registrant and Philippe Pouletty. 10.15(3) Equipment Lease Agreement dated October 11, 1990 between SangStat and David Rammler. 10.16(3) Real Property Lease, dated August 20, 1990, between the Registrant and Menlo Business Park and Patrician Associates, Inc. 10.17(3) Lease Agreement dated September 1, 1993 between SangStat Atlantique and Centre Hospitalier. 10.18(7) Form of Indemnification Agreement to be entered into between the Registrant and each of its officers and directors. 10.19(1)(3) License Agreement, dated November 15, 1993, between the Registrant and the Board of Trustees of Leland Stanford Junior University. 10.20(3) Letter Agreement between the Registrant and Baxter Healthcare Corporation dated December 11, 1993. 10.21(1)(5) License Agreement with Pasteur Merieux Serums et Vaccins. 10.22(2)(5) Supply Agreement with Pasteur Merieux Serums et Vaccins. 10.23(4) Common Stock Purchase Agreement, dated December 23, 1994, between the Registrant and the Investors listed in Schedule A thereto. 11.1 (8) Calculation of Net Loss Per Common and Equivalent Share. 20.1 (4) Press Release of the Registrant, dated December 27, 1994. 21.1 (5) Subsidiaries of Registrant. 23.1 Independent Auditors' Consent. 23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1). 23.3 (8) Consent of Flehr, Hohbach, Test Albritton & Herbert. 24.1 (8) Power of Attorney. (Reference is made to page II-5)
- ------------------------------ * To be filed by amendment. (1) Confidential Treatment has been granted for the deleted portions of this document. (2) Management contract or compensatory plan or arrangement. (3) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-70436). (4) Previously filed as an Exhibit to the Registrant's Form 8-K filed January 6, 1994. (5) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-88432). (6) Previously filed as an Exhibit to Registrant's Form 8-K filed August 14, 1995. (7) Previously filed as an Exhibit to the Registrant's Registration Statement on Form 8-B filed December 4, 1995. (8) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-3 (No. 333-1260). EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 SANGSTAT MEDICAL CORPORATION 2,000,000 SHARES(1) COMMON STOCK UNDERWRITING AGREEMENT February , 1997 HAMBRECHT & QUIST LLC MONTGOMERY SECURITIES ROBERTSON STEPHENS & COMPANY LLC c/o Hambrecht & Quist LLC One Bush Street San Francisco, CA 94104 Ladies and Gentlemen: SangStat Medical Corporation, a Delaware corporation (herein called the Company), proposes to issue and sell 2,000,000 shares of its authorized but unissued Common Stock, $0.001 par value (herein called the Common Stock) (said 2,000,000 shares of Common Stock being herein called the Underwritten Stock). The Company proposes to grant to the Underwriters (as hereinafter defined) an option to purchase up to 300,000 additional shares of Common Stock (herein called the Option Stock and with the Underwritten Stock herein collectively called the Stock). The Common Stock is more fully described in the Registration Statement and the Prospectus hereinafter mentioned. The Company hereby confirms the agreements made with respect to the purchase of the Stock by the several underwriters, for whom you are acting, named in Schedule I hereto (herein collectively called the Underwriters, which term shall also include any underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent and warrant that you have been authorized by each of the other Underwriters to enter into this Agreement on its behalf and to act for it in the manner herein provided. 1. REGISTRATION STATEMENT. The Company has filed with the Securities and Exchange Commission (herein called the Commission) a registration statement on Form S-3 (No. 333- ), including the related preliminary prospectus, for the registration under the Securities Act of 1933, as amended (herein called the Securities Act), of the Stock. Copies of such registration statement and of each amendment thereto, if any, including the related preliminary prospectus (meeting the requirements of Rule 430A of the rules and regulations of the Commission) heretofore filed by the Company with the Commission have been delivered to you. The term Registration Statement as used in this Agreement shall mean such registration statement, including all documents incorporated by reference therein, all exhibits and financial statements, all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, in the form in which it became effective, and any registration statement filed pursuant to Rule 462(b) of the rules and regulations of the Commission with respect to the Stock (herein called a Rule 462(b) registration statement), and, in the event of any amendment thereto after the effective date of such registration statement (herein called the Effective Date), shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended (including any Rule 462(b) registration statement). The term Prospectus as used in this Agreement shall mean the - --------------- (1) Plus an option to purchase from the Company up to 300,000 additional shares to cover over- allotments. 2 prospectus, including the documents incorporated by reference therein, relating to the Stock first filed with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as included in the Registration Statement) and, in the event of any supplement or amendment to such prospectus after the Effective Date, shall also mean (from and after the filing with the Commission of such supplement or the effectiveness of such amendment) such prospectus as so supplemented or amended. The term Preliminary Prospectus as used in this Agreement shall mean each preliminary prospectus, including the documents incorporated by reference therein, included in such registration statement prior to the time it becomes effective. The Registration Statement has been declared effective under the Securities Act, and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. The Company has caused to be delivered to you copies of each Preliminary Prospectus and has consented to the use of such copies for the purposes permitted by the Securities Act. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants as follows: (a) (i) The Registration Statement and any amendments thereto comply, and any subsequent amendments will comply, in all material respects with the provisions of the Securities Act and the Securities Exchange Act of 1934, as amended (the Exchange Act), and the rules and regulations of the Commission thereunder and do not, and will not, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and (ii) the Prospectus and any supplements thereto do not, and will not, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this paragraph (a) shall not apply to statements or omissions in the Registration Statement, the Prospectus or any Preliminary Prospectus (or any supplement or amendment to them) based upon information set forth (i) on the cover page of the Prospectus with respect to price, underwriting discount and terms of the offering, and (ii) under "Underwriting" in the Prospectus furnished to the Company in writing by or on behalf of any Underwriter through you, expressly for use therein. (b) Each Preliminary Prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 (a) or (b) under the Act, complied when so filed in all material respects with the Securities Act; and the Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus nor instituted proceedings for that purpose. (c) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as it is currently being conducted, as described in the Prospectus, and to own, lease and operate its properties; is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have material adverse effect on the Company. (d) The Company does not presently own or control, directly or indirectly, any interest in any corporation, association, or other business entity other than SangStat Atlantique S.A., SangStat Canada Ltd. and XenoStat, Inc. (e) All the outstanding shares of capital stock of the Company, as set forth under the heading "Capitalization" in the Prospectus, have been duly authorized and validly issued and are fully paid, nonassessable and not subject to any preemptive or similar rights, have been issued in compliance with all federal and state securities laws, and conform to the description thereof contained in the Prospectus; and the Stock has been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be 2 3 validly issued, fully paid and non-assessable, and the issuance of such Stock will not be subject to any preemptive or similar rights. (f) The authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained in the Prospectus. No shareholder of the Company has any right which has not been waived to require the Company to register the sale of any shares owned by such shareholder under the Securities Act in the public offering contemplated by this Agreement. No further approval or authority of the shareholders or the Board of Directors of the Company will be required for the issuance and sale of the Stock to be sold by the Company as contemplated herein. (g) Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, there are no outstanding warrants or options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of the Company's capital stock or any such warrants, options, rights, convertible securities or obligations. The description of the Company's stock option, stock purchase and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately presents the information required to be shown with respect to such plans, arrangements, options and rights. (h) The Company is not in violation of its charter or by-laws or in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness material to the conduct of the business of the Company or in any other agreement, indenture or instrument material to the conduct of the business of the Company to which the Company is a party or by which it or its property is bound which default would have a material adverse effect on the Company. (i) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by applicable law and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally, or by general equitable principles. The execution, delivery and performance of this Agreement, compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except as such may be required under the securities or Blue Sky laws of the various states) and the clearance of the offering with the National Association of Securities Dealers, Inc. (the "NASD"); and will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any agreement or other instrument to which it is a party or by which its property is bound, or violate or conflict with any laws, administrative regulation or ruling or court decrees applicable to the Company or its property, which breach, default or conflict would have a material adverse effect on the Company. (j) Except as otherwise set forth in the Prospectus, there are no material legal, governmental or administrative proceedings pending to which the Company is a party or of which its property is subject, and, to the best of the Company's knowledge, no such proceedings are currently threatened. (k) The Company has not violated any foreign, federal, state or local laws relating to the protection of human health and safety, the environment, or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws") or similar law applicable to its business, nor any federal or state law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal or state wages and hours laws, nor any provisions of the 3 4 Employee Retirement Income Security Act or the rules and regulations promulgated thereunder, which in each case might result in any material adverse change in the business, financial condition or results of operation of the Company. (l) Except as otherwise set forth in the Prospectus or such as are not material to the business, financial condition or results of operation of the Company, the Company has good and indefeasible title, free and clear of all liens, claims, encumbrances and restrictions except liens for taxes not yet due and payable, and other liens which do not have a material adverse effect on the Company, to all property and assets described in the Registration Statement as being owned by it. All leases to which the Company is a party are valid and binding on the Company and no default has occurred or is continuing thereunder which might result in any material adverse change in the business, financial condition or results of operation of the Company, and the Company enjoys peaceful and undisturbed possession under all such leases to which it is a party as lessee with such exceptions as do not materially interfere with the use made by the Company. (m) The Company has filed all foreign, federal, state and local income tax returns which have been required to be filed and has paid all taxes indicated by said returns and all assessments received by it, except those contested by the Company in good faith. There is no tax deficiency which has been, or to the Company's knowledge, might be asserted or threatened against the Company which could materially and adversely affect the business operations or property or business prospects of the Company. The Company has paid all sales, use and transfer taxes applicable to it and its business and operations, except those contested by the Company in good faith. The Company has not received any notice of deficiency or claim for payment from any governmental or regulatory body with respect to such sales, use or transfer taxes. (n) The Company maintains insurance of the types and in amounts which it deems adequate for its business, including but not limited to general liability insurance and insurance covering all real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against by business organizations that are similarly situated, all of which insurance is in full force and effect. (o) Deloitte & Touche, who have expressed their opinion with respect to the financial statements and schedules filed with the Commission as a part of the Registration Statement and included in the Prospectus and in the Registration Statement are independent public accountants with respect to the Company as required by the Act. (p) The audited financial statements, taken as a whole, together with related schedules and notes forming part of the Registration Statement and the Prospectus (and any amendment or supplement thereto), present fairly the consolidated financial position, results of operations and changes in financial position of the Company on the basis stated in the Registration Statement as of the respective dates or for the respective periods to which they apply, such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) is, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company, as certified by the independent accountants named in Section 2(o) herein. (q) There are no contracts or other documents required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement by the Securities Act or by the rules and regulations which have not been described or filed as required. The contracts so described in the Prospectus are in full force and effect on the date hereof, and neither the Company nor, to the Company's actual knowledge, any other party, is in material breach of or default under any of such contracts. 4 5 (r) Since the respective dates as of which information is given in the Registration Statement and Prospectus, and except as described in or specifically contemplated by the Prospectus: (i) the Company has not incurred any material liabilities or obligations, indirect, direct or contingent, or entered into any material verbal or written agreement or other transaction which is not in the ordinary course of business or which could result in a material reduction in the future earnings of the Company, (ii) the Company has not sustained any material loss or interference with its business or properties from fire, flood, windstorm, earthquake, accident or other calamity, whether or not covered by insurance; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock and the Company is not in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock (other than upon the sale of the Stock hereunder and upon the exercise of options and warrants) or indebtedness material to the Company (other than in the ordinary course of business); and (v) there has not been any material adverse change in the condition (financial or otherwise), business, properties, results of operations or prospects of the Company. (s) Except as disclosed in or specifically contemplated by the Prospectus, the Company owns or possesses adequate licenses or other rights to use all trademarks, servicemarks, trade names, patents, patent rights, inventions, copyrights, know-how, licenses, approvals and governmental authorizations to conduct its business as now conducted or as proposed to be conducted by it as described in the Prospectus. Except as disclosed in the Prospectus, the expiration of any trademarks, trade names, patent rights, copyrights, licenses, approvals or governmental authorizations would not have a material adverse effect on the condition (financial or otherwise), business, results or operations or prospects of the Company and the Company has no knowledge of any material infringement by it of trademark, trade name rights, patent rights, copyrights, licenses, trade secret or other similar rights of others. 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, patent rights, inventions, trademarks, service marks, trade names, copyrights or know-how which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially adversely affect the business, operations, financial condition, income or business prospects of the Company, and the 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. (t) No holder of any security of the Company has any right to require registration of the shares of Common Stock or any other security of the Company within [90] days of the date hereof, except as have been waived in writing. (u) All transactions between the Company and the officers, directors, promoters and principal shareholders of the Company required to be disclosed under the Securities Act have been accurately disclosed in the Prospectus; and the Company believes that terms of each such transaction are fair to the Company and no less favorable to the Company than the terms that could have been obtained from unrelated parties. (v) The Company has not, directly or indirectly, at any time during the past five years (i) made any unlawful contribution to any candidate for public office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any United States or foreign federal, state or local governmental agency, officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the applicable jurisdiction. (w) The Company has obtained such permits, licenses, franchises and authorizations of governmental or regulatory authorities (the "Permits"), including, without limitation, under 5 6 applicable Environmental Laws, as are necessary to own, lease and operate its properties and conduct its business, and the Company has fulfilled and performed all of its material obligations with respect to such Permits and no event has occurred which allows, or after notice or lapse of time would allow, the revocation or termination thereof or result in any other material impairment of the rights of the holder of any such Permit, and except as described in the Prospectus, such Permits contain no restrictions which are materially burdensome to the Company. (x) The Company has filed in a timely manner all documents that the Company was required to file with the Commission under Sections 13, 14(a) and 15(d) of the Exchange Act during the 12 months preceding the date on which the Registration Statement became effective. 3. PURCHASE OF THE STOCK BY THE UNDERWRITERS. (a) On the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to issue and sell the Underwritten Stock to the several Underwriters and each of the Underwriters agrees to purchase from the Company the respective aggregate number of shares of Underwritten Stock set forth opposite its name in Schedule I. The price at which such Underwritten Stock shall be sold by the Company and purchased by the several Underwriters shall be $ per share. In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is to purchase only the respective number of shares of Underwritten Stock specified in Schedule I. (b) If for any reason one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for the number of shares of Stock agreed to be purchased by such Underwriter or Underwriters, the Company shall immediately give notice thereof to you, and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by you of such notice to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon between you and such purchasing Underwriter or Underwriters and upon the terms herein set forth, all or any part of the Stock which such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to make such arrangements with respect to all such shares and portion, the number of shares of Stock which each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining shares and portion which the defaulting Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the shares and portion which the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such shares of Stock exceeds 10% of the total number of shares of Stock which all Underwriters agreed to purchase hereunder. If the total number of shares of Stock which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within 24 hours next succeeding the 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to you for purchase of such shares and portion on the terms herein set forth. In any such case, either you or the Company shall have the right to postpone the Closing Date determined as provided in Section 5 hereof for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 5 in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If the shares which the defaulting Underwriter or Underwriters failed to purchase exceeds 10% of the Underwritten Stock, and neither the non-defaulting Underwriters nor the Company shall make arrangements within the 24-hour periods stated above for the purchase of all the Stock which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no action taken hereunder, shall relieve any 6 7 defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. (c) On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Company grants an option to the several Underwriters to purchase, severally and not jointly, the Option Stock from the Company at the same price per share as the Underwriters shall pay for the Underwritten Stock. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Stock by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the thirtieth day after the date of this Agreement upon written or telegraphic notice by you to the Company setting forth the aggregate number of shares of Option Stock as to which the several Underwriters are exercising the option. Delivery of certificates for the Option Stock, and payment therefor, shall be made as provided in Section 5 hereof. The number of shares of Option Shares to be purchased by each Underwriter shall be the same percentage of the total number of shares of Option Stock to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Stock, as adjusted by you in such manner as you deem advisable to avoid fractional shares. 4. OFFERING BY UNDERWRITERS. (a) The terms of the initial public offering by the Underwriters of the Stock to be purchased by them shall be as set forth in the Prospectus. The Underwriters may from time to time change the public offering price after the closing of the initial public offering and increase or decrease the concessions and discounts to dealers as they may determine. (b) The information set forth in the last paragraph on the front cover page and the first paragraph, chart, second paragraph, third paragraph, fifth paragraph and last paragraph under "Underwriting" in the Registration Statement, any Preliminary Prospectus and the Prospectus relating to the Stock filed by the Company (insofar as such information relates to the Underwriters) constitutes the only information furnished by the Underwriters to the Company for inclusion in the Registration Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of the respective Underwriters represent and warrant to the Company that the statements made therein are correct. 5. DELIVERY OF AND PAYMENT FOR THE STOCK. (a) Delivery of certificates for the Underwritten Stock and the Option Stock (if the option granted by Section 3(c) hereof shall have been exercised not later than 7:00 A.M., San Francisco time, on the date two business days preceding the Closing Date (as defined herein)), and payment therefor, shall be made at the office of Brobeck, Phleger & Harrison in Palo Alto, California, at 7:00 a.m., San Francisco time, on the fourth business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such fourth business day, as shall be agreed upon in writing by the Company and you. The date and hour of such delivery and payment (which may be postponed as provided in Section 3(b) hereof) are herein called the Closing Date. (b) If the option granted by Section 3(c) hereof shall be exercised after 7:00 a.m., San Francisco time, on the date two business days preceding the Closing Date, delivery of certificates for the shares of Option Stock, and payment therefor, shall be made at the office of Brobeck, Phleger & Harrison in Palo Alto, California, at 7:00 a.m., San Francisco time, on the third business day after the exercise of such option. The date and hour of such delivery and payment are herein called the Option Closing Date. (c) Payment for the Stock purchased from the Company shall be made to the Company or its order by one or more certified or official bank check or checks in next day funds (and the Company agrees not to deposit any such check in the bank on which drawn until the day following the date of its delivery to the Company). Such payment shall be made upon delivery of certificates for the Stock to you for the respective accounts of the several Underwriters against receipt therefor signed by you. Certificates for the Stock to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least one business day before the Closing Date, in the 7 8 case of Underwritten Stock, and at least one business day prior to the purchase thereof, in the case of the Option Stock. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New York, New York 10004 on the business day prior to the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York time, on the business day preceding the date of purchase. It is understood that you, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company for shares to be purchased by any Underwriter whose check shall not have been received by you on the Closing Date or any later date on which Option Stock is purchased for the account of such Underwriter. Any such payment by you shall not relieve such Underwriter from any of its obligations hereunder. 6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees as follows: (a) To use its best efforts to cause the Registration Statement and any amendment thereto, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective. (b) To advise you promptly in writing, (i) of the receipt of any comments of the Commission, (ii) when the Registration Statement has become effective and when any post-effective amendment to the Registration Statement becomes effective, (iii) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Stock for offering or sale in any jurisdiction(s) or the initiation of any proceeding for such purposes, and (v) of the happening of any event during the period referred to in paragraph (e) below which makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal or lifting of such order at the earliest possible time. (c) To furnish to you, without charge, three signed copies of the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits, and to furnish to you and each Underwriter designated by you such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits, as you may reasonably request. (d) Not to file any amendment to the Registration Statement (other than a post effective amendment of which the purpose is to deregister any portion of Option Stock remaining unpurchased upon lapse or cancellation of the Underwriters option) including, without limitation, documents incorporated by reference, whether before or after the time when it becomes effective, or to make any amendment or supplement to the Prospectus of which you have not been furnished with a copy a reasonable time prior to such filing or to which you reasonably object or which is not in compliance with the Securities Act; and to prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or supplement to the Prospectus which may be necessary or advisable in connection with the distribution of the Stock by you, and to use its best efforts to cause the same to become promptly effective. (e) Promptly after the Registration Statement becomes effective, and from time to time thereafter for such period as in the opinion of counsel for the Underwriters a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, to furnish to each Underwriter and dealer as many copies of the Registration Statement, the Prospectus, any Preliminary Prospectus, and any amendment or supplement to the Prospectus as such Underwriter or dealer may reasonably request. 8 9 (f) If during the period specified in paragraph (e) any event shall occur as a result of which, in the opinion of counsel for the Underwriters, it becomes necessary or advisable to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at any time that the Prospectus is required to be delivered under the Act, not misleading, or if it is necessary to amend or supplement the Prospectus to comply with any law, to prepare and file with the Commission, without delay and at the Company's expense, an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not in the light of the circumstances existing when it is so delivered, be misleading, or so that the Prospectus will comply with applicable laws, and to cause the Registration Statement to become effective as soon as practicable, and to furnish to each Underwriter and to such dealers as you shall specify, such number of copies thereof as such Underwriter or dealers may reasonably request. (g) Prior to any public offering of the Stock, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification (or exemption from the application of the state securities or Blue Sky laws) of the Stock for offer and sale by the several Underwriters and by dealers under such laws of such states and other jurisdictions as you may request, and to continue such qualification in effect for a period of five years after the date hereof, provided that the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. (h) To advise you promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Stock for offering, sale or trading in any state or other jurisdiction or any initiation or threat of any proceeding for any such purpose, and, in the event of the issuance of any order suspending such qualification, registration or exemption, to use its best efforts, with your cooperation, to obtain the withdrawal thereof. (i) To mail and make generally available to its stockholders as soon as reasonably practicable, but not later than 45 days after the end of the first fiscal quarter ending after the first anniversary of the "effective date of the Registration Statement" (as defined in Rule 158(c) of the Act), an earnings statement (which need not be audited) covering a period of at least twelve months following the effective date of the Registration Statement which shall satisfy the provisions of the last paragraph of Section 11(a) of the Act. (j) During the period of five years following the date hereof, the Company will furnish to its stockholders, as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent certified public accountants) and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and will furnish to you and the other several Underwriters hereunder, upon request (i) concurrently with furnishing such report to its stockholders, statements of operations of the Company for each of the first three quarters in the form furnished to the Company's stockholders; (ii) concurrently with furnishing to its stockholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of stockholders' equity, and of cash flows of the Company for such fiscal year, accompanied by a copy of a certificate or report thereon of independent certified public accountants; (iii) as soon as they are available, copies of all reports (financial or other) mailed to stockholders; (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the National Association of Securities Dealers, Inc. ("NASD"); and (v) any additional information of a public nature concerning the Company or its business that you may reasonably request. (k) To pay all costs, expenses, fees and taxes incident to the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, all costs, fees, expenses and taxes incident to (i) the preparation, printing, filing and distribution under the Securities Act of the Registration Statement (including financial statements and exhibits), Preliminary Prospectus and all amendments and supplements to any of them prior to or during the period specified in paragraph (e), (ii) the printing and delivery of each Preliminary Prospectus and the Prospectus and all amendments 9 10 or supplements thereto during the period specified in paragraph (e), (iii) the printing and delivery of this Agreement, the Preliminary and Supplemental Blue Sky Memoranda and all other agreements, memoranda, correspondence and other documents printed and delivered in connection with the offering of the Stock (including in each case any disbursements of counsel for the Underwriters relating to such printing and delivery), (iv) the registration or qualification of the Stock for offer and sale under the securities or Blue Sky laws of the several states (including in each case the fees and disbursements of counsel for the Underwriters relating to such registration or qualification and memoranda relating thereto), (v) filing fees with the NASD in connection with the offering, (vi) the listing of the Stock on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") National Market System, (vii) furnishing such copies of the Registration Statement, the Prospectus and all amendments and supplements thereto as may be requested for use in connection with the offering or sale of the Stock by the Underwriters or by dealers to whom Stock may be sold, (viii) the registration and transfer of the Stock, including but not limited to all fees and expenses of the Registrar and Transfer Agent, (ix) the issue and sale of Stock to the Underwriters, including but not limited to all necessary issue, transfer and other stamp taxes, (x) services provided by Company's counsel and independent accountants, and (xi) all other fees, costs and expenses referred to in Item 14 of the Registration Statement. Except as provided in this Section 6(k), and Section 6(l) and Section 7 hereof, the Underwriters shall pay all of their own expenses, including the fees and disbursements of their counsel (excluding those relating to qualification, registration or exemption under the Blue Sky Laws). (l) To reimburse the several Underwriters for out-of-pocket expenses, including fees and disbursements of counsel, incurred in connection with investigating, marketing and proposing to market the Stock or in contemplation of performing their obligations hereunder, if this Agreement shall not be consummated because the obligations of the Underwriters under this Agreement are discharged pursuant to clause (iii) of Section 9(d) hereof, or by reason of any failure, refusal or inability on the part of the Company to perform any undertaking or to satisfy any condition of this Agreement or to comply with any of the terms hereof on their part to be performed, unless such failure to satisfy said condition or to comply with said terms is due to the default or omission of any Underwriter, but the Company shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Stock. (m) During the period of 90 days following the effective date of the Registration Statement, without the prior written consent of Hambrecht & Quist, not to directly or indirectly offer to sell, contract to sell or otherwise sell, pledge, transfer or dispose of any shares of Common Stock of the Company, or any securities convertible into or exchangeable for shares of Common Stock of the Company or options, rights or warrants with respect to any shares of Common Stock of the Company except for (i) the sale of the Underwritten Stock and the Option Stock hereunder, (ii) the issuance of Common Stock pursuant to the exercise of outstanding options and warrants disclosed in the Prospectus, (iii) the grant of options under the Company's Option Plan as disclosed in the Prospectus as such Plan exists on the date of the Prospectus and (iv) pursuant to equipment or lease financing activities entered into in the ordinary course of the Company's business. (n) To apply the net proceeds of the sale of the Stock substantially in accordance with its statements under the caption "Use of Proceeds" in the Prospectus. (o) To use its best efforts to maintain the inclusion of such Common Stock in the NASDAQ National Market System (or on a national securities exchange) for a period of five years after the effective date of the Registration Statement. (p) During a period of 90 days from the effective date of the Registration Statement, without the prior written consent of the Representatives, not to file a registration statement registering shares under any stock option or other employee benefit plan. 10 11 (q) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date or the Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Stock. 7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Securities Exchange Act of 1934, as amended (herein called the Exchange Act), the common law or otherwise, and the Company agrees to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that (1) the indemnity agreements of the Company contained in this paragraph (a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of any Underwriter for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto and (2) the indemnity agreement contained in this paragraph (a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Stock which is the subject thereof (or to the benefit of any person controlling such Underwriter) if at or prior to the written confirmation of the sale of such Stock a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person (excluding the documents incorporated therein by reference) and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented) unless the failure is the result of noncompliance by the Company with paragraph (e) of Section 6 hereof. The indemnity agreements of the Company contained in this paragraph (a) and the representations and warranties of the Company contained in Section 2 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement on his own behalf or pursuant to a power of attorney, each of its directors, each other Underwriter and each person (including each partner or officer thereof) who controls the Company or any such other Underwriter within the meaning of Section 15 of the Securities Act, from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, the common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such 11 12 losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of such indemnifying Underwriter for use in the Registration Statement, any Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto. The indemnity agreement of each Underwriter contained in this paragraph (b) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (c) Each party indemnified under the provision of paragraphs (a) and (b) of this Section 7 agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of or proceeding against it in respect of which indemnity may be sought on account of any indemnity agreement contained in such paragraphs, it will promptly give written notice (herein called the Notice) of such service or notification to the party or parties from whom indemnification may be sought hereunder. No indemnification provided for in such paragraphs shall be available to any party who shall fail so to give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related and was prejudiced by the failure to give the Notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of such indemnity agreement. Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation of or inquiry into, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (herein called the Notice of Defense) to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then counsel for the indemnified party or parties shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties and (ii) in any event, the indemnified party or parties shall be entitled to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under paragraphs (a) through (c) of this Section 7 for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties 12 13 shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the indemnifying party or parties shall bear such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each indemnifying party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Stock received by the Company and the total underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Stock. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this paragraph (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 in the first sentence of this paragraph (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, preparing to defend or defending against any action or claim which is the subject of this paragraph (d). Notwithstanding the provisions of this paragraph (d), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Stock purchased by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f)of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this paragraph (d) to contribute are several in proportion to their respective underwriting obligations and not joint. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in paragraph (c) of this Section 7). (e) The Company will not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of each such 13 14 Underwriter and each controlling person thereof from all liability arising out of such claim, action, suit or proceeding. 8. TERMINATION. This Agreement may be terminated by you at any time prior to the Closing Date by giving written notice to the Company if after the date of this Agreement trading in the common stock of the Company shall have been suspended, or if there shall have occurred (i) the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, (ii) any outbreak of hostilities or other national or international calamity, crisis or change in economic or political conditions in the financial markets of the United States would, in the Underwriters' reasonable judgement, make the offering or delivery of the Stock impracticable, (iii) suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on any such exchange or system, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation or rule, or the order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in the Underwriters' reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Underwriters' reasonable opinion has a material adverse effect on the securities markets in the United States. If this Agreement shall be terminated pursuant to this Section 8, there shall be no liability of the Company to the Underwriters and no liability of the Underwriters to the Company; provided, however, that in the event of any such termination the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraph (k) of Section 6 hereof. 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Stock shall be subject to the performance by the Company of all its obligations to be performed hereunder at or prior to the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and to the following further conditions: (a) The Registration Statement shall have become effective, and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for such an order shall be pending or threatened by the Commission. (b) The legality and sufficiency of the sale of Stock hereunder and the validity and form of the certificates representing the Stock, all corporate proceedings and other legal matters incident to the foregoing, and the form of the Registration Statement and of the Prospectus (except as to the financial statements contained therein), shall have been approved at or prior to the Closing Date by Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Underwriters. (c) The Registration Statement shall have become effective 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 you may approve in writing, and if the filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of the Act, the Prospectus shall have been filed in the manner and within the time period required by Rule 424(b) of the Act; at the Closing Date no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement, or otherwise, shall have been complied with to your satisfaction. (d) You shall be satisfied that (i) as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to 14 15 make the statements therein, respectively, not misleading, (ii) since the Effective Date, no event has occurred which is required to be set forth in a supplement or amendment to the Prospectus which has not been set forth in such a supplement or amendment, (iii) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the business, properties, financial condition or results of operations of the Company, whether or not arising from transactions in the ordinary course of business, and, since such dates, except in the ordinary course of business, the Company has not entered into any material transaction not referred to in the Registration Statement in the form in which it originally become effective and the Prospectus contained therein, (iv) the Company does not have any material contingent obligations which are not disclosed in the Registration Statement and the Prospectus, (v) there are not any pending or known threatened legal proceedings to which the Company is a party or of which property of the Company or any of its subsidiaries is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus, (vi) there are not any franchises, contracts, leases or other documents which are required to be filed as exhibits to the Registration Statement which have not been filed as required, (vii) the representations and warranties of the Company herein are true and correct in all material respects as of the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and (viii) there has not been any material change in the market for securities in general or in political, financial or economic conditions from those reasonably foreseeable as to render it impracticable in your reasonable judgment to make a public offering of the Stock, or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. (e) You shall have received on the Closing Date and on any later date on which Option Stock is purchased a certificate, dated the Closing Date or such later date, as the case may be, and signed by the President and the Chief Financial Officer of the Company, stating that the respective signers of said certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus contained therein and any supplements or amendments thereto, and that the statements included in clauses (i) through (vii) of paragraph (d) of this Section 9 are true and correct. (f) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Brobeck, Phleger & Harrison, counsel for the Company, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware with full corporate power and authority to own and lease its properties and to conduct its business as described in the Registration Statement; (ii) The Company is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have material adverse effect on the Company; (iii) The authorized, issued and outstanding capital stock of the Company conforms as to legal matters in all material respects to the description thereof set forth under the captions "Capitalization" and "Description of Capital Stock" in the Prospectus (including documents incorporated therein by reference); all necessary and proper corporate proceedings have been taken in order to validly authorize such authorized Common Stock; (iv) The issued and outstanding shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and nonassessable, have been issued in compliance with federal and applicable state securities laws and are not subject to any preemptive or similar rights, other than preemptive and other rights which have been waived or not exercised; 15 16 (v) Based on oral representations from the Commission, the Registration Statement has become effective under the Act and, to the best knowledge of such counsel, no stop order suspending its effectiveness has been issued and no proceedings for that purpose are, to the best knowledge of such counsel, pending before or contemplated by the Commission; any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Act has been made; (vi) This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement of the Company enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general equitable principles; (vii) The certificates evidencing the Stock to be delivered hereunder are in due and proper form under Delaware law, and when duly countersigned by the Company's transfer agent and registrar, and delivered to you or upon your order against payment of the agreed consideration therefor in accordance with the provisions of this Agreement, the Stock represented thereby will be duly authorized and validly issued, fully paid and nonassessable, will not have been issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities other than preemptive and other rights which were waived or not exercised, and will conform in all respects to the description thereof contained in the Prospectus; (viii) Except as disclosed in or specifically contemplated by the Prospectus, to such counsel's knowledge, there are no outstanding options, warrants or other rights calling for the issuance of any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company; (ix) The statements under the caption "Description of Capital Stock" in the Prospectus (including documents incorporated therein by reference) and under Item 15 of Part II of the Registration Statement, insofar as such statements constitute a summary of legal matters, documents or proceedings referred to therein, accurately present the information called for with respect to such legal matters, documents and proceedings; (x) The Company is not in violation of its charter or by-laws and, to such counsel's knowledge, the Company is not in material default in the performance of any obligation, agreement, or condition contained in any agreement or document filed or required to be filed as an exhibit to the Registration Statement; to such counsel's knowledge, after due inquiry, there are no contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are accurately summarized in all respects and such summaries thereof do not omit any material facts; (xi) The execution and delivery by the Company and performance by the Company of its obligations under this Agreement, compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not violate any of the provisions of its charter or bylaws, will not require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except as such may be required under the Securities Act or other securities or Blue Sky laws) and will not conflict with or constitute a breach of any of the terms or provisions of, or a default under any indenture or any agreement or document filed as an exhibit to the Registration Statement; (xii) After due inquiry, such counsel does not know of any legal, regulatory, administrative or governmental proceeding pending or threatened to which the Company is a party or to which any of its property is subject which is required to be described in the Registration Statement or the Prospectus and is not so described; 16 17 (xiii) To such counsel's knowledge, no holder of any security of the Company has any right to require registration of shares of Common Stock or any other security of the Company that has not been waived in connection with the offering, or a right (which has not been waived) of participation or first refusal with respect to the sale of the Stock by the Company contemplated by this Agreement; (xiv) No facts have come to such counsel's attention which lead them to believe that (1) the Registration Statement and the Prospectus and any supplement or amendment thereto at the time the Registration Statement was declared effective by the Commission (except for financial statements and schedules as to which no opinion need be expressed) did not comply as to form in all material respects with the Act, or (2) (except for financial statements and schedules, as aforesaid) the Registration Statement and the Prospectus included therein at the time the Registration Statement became effective 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 therein, in light of the circumstances under which they were made, not misleading, or (3) that the Prospectus, as amended or supplemented, if applicable, (except for financial statements and schedules, as aforesaid) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; In giving such opinion with respect to the matters covered by clause (xiv) such counsel may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. (g) You shall have received opinions of [Didier Lacroix], French counsel for the Company, and Canadian counsel for the Company, dated the Closing Date, in substantially the following form: (i) SangStat Atlantique S.A. or SangStat Canada Ltd. (each, a "Subsidiary"), as the case may be, has been duly incorporated and is validly existing as a corporation in good standing under the laws of its respective jurisdiction of incorporation, with full corporate power and authority to own or lease its properties and conduct its business. (ii) All of the outstanding capital stock of the Subsidiary has been duly and validly authorized and issued and is owned by the Company, and there are no outstanding rights to purchase any of the Subsidiary's capital stock. (h) You shall have received on the Closing Date an opinion, dated the Closing Date, of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Underwriters, with respect to the incorporation of the Company, the sufficiency of all corporate proceedings and other legal matters relating to this Agreement, the validity of the Stock, the Registration Statement and the Prospectus and other related matters as you may reasonably require, and the Company shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they may reasonably request for the purpose of enabling them to pass judgment upon such matters. In giving such opinion, such counsel may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and the Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. (i) You shall have received an opinion of Flehr, Hohbach, Test, Albritton & Herbert, patent counsel for the Company, dated the Closing Date, in substantially the following form: (i) To the best of such counsel's knowledge and without having conducted independent research, the Company owns or possesses sufficient licenses or other rights to use all patents, trade secrets, technology and know-how believed by such counsel to be necessary to conduct the business now being conducted or proposed to be conducted by the Company as described in the Prospectus. 17 18 (ii) The Company, its licensor or prospective licensor is the sole assignee for each patent and patent application listed in Exhibit I hereto (the "Patent Portfolio"). Except as noted otherwise in the Patent Portfolio, the assignments by the named inventors have been submitted to the United States Patent and Trademark Office (the "Patent Office") and those assignments have been recorded in the Patent Office's title records. However, in one or more of the patents and patent applications in the Patent Portfolio, the United States government may hold a nonexclusive, royalty free license as a result of providing research funding. (iii) There is no claim or pending or threatened challenge to the Company's ownership rights in the United States or foreign patents and patent applications listed in the Patent Portfolio, except for the instance noted above in which the United States government may have a nonexclusive, royalty-free license to one or more patents and patent applications in the Patent Portfolio, as set forth in paragraph (ii) above. (iv) The U.S. patent applications in the Patent Portfolio (except for patents prepared by others and identified as licensed by the Company) have been prepared and filed in the Patent Office in a form and with accompanying papers that are acceptable to the Patent Office for purposes of according each such application a filing date and a serial number, and of placing each such application in condition for eventual examination on the merits as to patentability. For each such U.S. application an Official Filing Receipt has been received from the Patent Office. There is no assurance that the Patent Office will not reject the claims of the U.S. patent applications as being unpatentable, or that any claims will be allowed without amendment, or that the Patent Office will ultimately conclude that any claims in such U.S. patent applications meet all requirements for patentability, including unobviousness, novelty, enablement, and disclosure of the best mode. As to each of such applications, such counsel is not aware of any material defect of form in preparation or filing. However, such counsel has not been consulted by the Company with respect to determining whether there is any material defect of form in preparation or filing of the patent applications, and such counsel has not undertaken such a determination. (v) The patent applications in the Patent Portfolio are being diligently pursued. (vi) As to each foreign application in the Patent Portfolio, such applications have either (a) been submitted to patent firms in the respective foreign countries with instructions to file the applications in the patent offices of those countries naming the Company as the owner of record, or (b) as to certain Patent Cooperation Treaty applications which are in the national phase, been submitted directly to the relevant patent office of those countries naming the Company or its licensor as the owner of record or (c) as to certain Patent Cooperation Treaty applications which are awaiting national filing within the permitted time period, been properly filed with the proper Patent Cooperation Treaty receiving office. As to each application referenced in clauses (a), (b) and (c) above, written confirmation has been received that the application has, in fact, been accepted for filing by such patent offices, except as otherwise noted in the Patent Portfolio. As explained in paragraph (iv) above, there is no assurance that the patent offices of the respective countries will not reject the claims of the foreign patent applications as being unpatentable, or that any claims will be allowed without amendment, nor is there any assurance that those patent offices will ultimately conclude that the foreign patent applications meet all requirements for patentability. As to each such application, there is no known material defect in preparation or filing. (vii) Such counsel is not aware of any pending or threatened actions, suits, proceedings, or claims of any other party challenging the validity, enforceability or scope of any United States or foreign patent application and/or patent in the Patent Portfolio. (viii) Such counsel has been consulted by the Company with respect to determining whether any United States or foreign patent held by another is valid or will be infringed by the activities being conducted or contemplated by the Company solely with respect to U.S. Patent Nos. 4,632,901 and 4,727,019 that claim methods and an apparatus for use in immunoassay, and has 18 19 performed an independent evaluation thereof. No actual or threatened claim of infringement by the Company of a patent held by any third party has been brought to the attention of such counsel. (ix) Such counsel has been consulted by the Company with respect to determining whether any United States patent held by Sandoz Ltd and any of its affiliates relating to cyclosporine ("Sandoz' Patents") will be infringed by the activities being conducted or contemplated by the Company solely with respect to U.S. Patents relating to the Company's CYCLOSPORINE product and has performed an independent evaluation thereof. Based upon such evaluation and the scientific information provided such counsel by the Company, such counsel does not believe that activities being conducted or contemplated by the Company will infringe upon Sandoz' Patents. No actual or threatened claim of infringement by the Company of any Sandoz Patent has been brought to such counsel's attention. (x) Such counsel has not been consulted by the Company with respect to any proceeding or claim which has been instituted or threatened charging that the manufacture, use, or sale of any product, device, instrument, drug, or other material made or used or sold by or on behalf of the Company is an infringement of any valid United States or foreign patent held by another or a violation of any trade secret rights of another, nor is such counsel presently aware of any such pending or threatened claim, nor has such counsel in the course of representing the Company concluded that any valid patent or trade secret of any third party would be infringed or violated by such acts. (xi) The status of each United States and foreign patent and patent application in the Patent Portfolio is set forth in Schedule 2 hereto, including whether now pending or issued, and if issued, the maintenance fees that are next due, including those which have recently been paid. (xii) The statements contained in the Registration Statement and the Prospectus that are under the captions "Risk Factors -- Uncertainty Regarding Patent and Proprietary Rights," "Risk Factors -- Risks Associated with CYCLOSPORINE," "Business -- Products, Product Candidates and Services -- CYCLOSPORINE," "Business - Pretransplant HLA Monitoring Products and Product Candidates" and "Business -- Patents and Proprietary Technology" and elsewhere in the Registration Statement and the Prospectus that make reference to Proprietary Information (collectively the "Patent Portion"), insofar as such statements constitute a summary or summaries of the Company's patents, foreign patents, applications and foreign applications and proprietary technology, including, without limitation, all intellectual property, including patents licensed by the Company, are in all material respects accurate summaries and fairly summarize in all material respects the legal matters, documents and proceedings relating thereto. (xiii) Such counsel does not know of any contracts or other documents relating to patents or proprietary information of a character required to be filed as exhibits to the Registration Statement or the Prospectus or required to be described in the Registration Statement or the Prospectus that are not filed or described as required. (xiv) Such counsel has no reason to believe that the information contained under the captions "Risk Factors -- Uncertainty Regarding Patent and Proprietary Rights," "Risk Factors -- Risks Associated with CYCLOSPORINE," "Business -- Products, Product Candidates and Services -- CYCLOSPORINE," "Business -- Pre-transplant HLA Monitoring Products and Product Candidates" and "Business -- Patents and Proprietary Technology" at the time the Registration Statement and Prospectus, with noted amendments, became effective, contained any untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that as of the date of such opinion, the information contained in such sections of the Registration Statement and Prospectus contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. 19 20 (xv) Such opinion is limited to the items referred to above, and such counsel is not passing upon, and does not assume responsibility for, the accuracy, completeness, or fairness of any other statements contained in the Registration Statement or the Prospectus. (j) You shall have opinion of David Adams, Olsson, Frank & Weeds, regulatory counsel for the Company, dated the Closing Date, in substantially the following form: (i) The information in the Prospectus under the captions "Risk Factors -- No Assurance of Successful Product Development," "Risk Factors -- Limited Manufacturing Capability," "Risk Factors -- No Assurance of FDA Approval or European Regulatory Approval; Government Regulation," "Business -- Manufacturing," "Business -- Government Regulation," "Business -- FDA Regulation -- Approval of Therapeutic Products," "Business -- FDA Regulation -- Approval of Monitoring Products," "Business -- FDA Regulation -- Post-Approval Requirements," "Business -- European Regulation," "Business -- European Regulation -- Approval of Therapeutic Products" and "Business -- European Regulations -- Monitoring Products" (collectively, the "Regulatory Sections"), to the extent that such sections constitute matters of law or legal conclusions relating to health care related regulatory matters, has been reviewed by such counsel and such information and sections are accurate summaries and fairly summarize such matters and conclusions. (ii) Such counsel has no reason to believe that the information contained in the Regulatory Sections, to the extent that such information in such sections involves matters of law or legal conclusions relating to regulatory matters at the time the Registration Statement and Prospectus, with noted amendments, became effective, contained any untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that as of the date of such opinion and to such counsel's knowledge the information contained in such sections of the Registration Statement and Prospectus contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. (iii) Such opinion is limited to the items referred to above, and such counsel is not passing upon, and does not assume responsibility for the accuracy, completeness or fairness of any other statements contained in the Registration Statement or the Prospectus. (k) You shall have received from Deloitte & Touche, independent public accountants, a letter or letters, addressed to the Underwriters and dated the Closing Date and any later date on which Option Stock is purchased, confirming that they are independent public accountants with respect to the Company within the meaning of the Securities Act and the applicable published rules and regulations thereunder and based upon the procedures described in their letter delivered to you concurrently with the execution of this Agreement (herein called the Original Letter), but carried out to a date not more than three business days prior to the Closing Date or such later date on which Option Stock is purchased (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. The letters shall not disclose any change, or any development involving a prospective change, in or affecting the business or properties of the Company which, in your sole judgment, makes it impractical or inadvisable to proceed with the public offering of the Stock or the purchase of the Option Stock as contemplated by the Prospectus. (l) The Company shall have delivered to you the agreements specified in Section 9(p) hereof. 20 21 (m) The Company shall not have failed at or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company at or prior to the Closing Date. (n) You shall have been furnished evidence in usual written or telegraphic form from the appropriate authorities of the several jurisdictions, or other evidence satisfactory to you, of the qualification referred to in paragraph (g) of Section 6 hereof. (o) Prior to the Closing Date, the Stock to be issued and sold by the Company shall have been duly authorized for listing by the Nasdaq National Market upon official notice of issuance. (p) On or prior to the Closing Date, you shall have received from all directors, officers and specified beneficial holders of more than 5% of the outstanding Common Stock stockholders agreements, in form previously supplied to the Company by Hambrecht & Quist LLC, stating that without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will not, for a period of 90 days following the effective date of the Registration Statement directly or indirectly sell, offer, contract to sell, make any short sale, pledge, or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock, whether any such transaction described above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Underwriters, shall be satisfied that they comply in form and scope. In case any of the conditions specified in this Section 9 shall not be fulfilled, this Agreement may be terminated by you by giving notice to the Company. Any such termination shall be without liability of the Company to the Underwriters and without liability of the Underwriters to the Company; provided, however, that (i) in the event of such termination, the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraphs (k) and (l) of Section 6 hereof, and (ii) if this Agreement is terminated by you because of any refusal, inability or failure on the part of the Company to perform any agreement herein, to fulfill any of the conditions herein, or to comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the transactions contemplated hereby. 10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the Company to deliver the Stock shall be subject to the conditions that (a) the Registration Statement shall have become effective and (b) no stop order suspending the effectiveness thereof shall be in effect and no proceedings therefor shall be pending or threatened by the Commission. In case either of the conditions specified in this Section 10 shall not be fulfilled, this Agreement may be terminated by the Company by giving notice to you. Any such termination shall be without liability of the Company to the Underwriters and without liability of the Underwriters to the Company; provided, however, that in the event of any such termination the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraphs (k) and (l) of Section 6 hereof. 11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other obligations under Section 7 of this Agreement, the Company hereby agrees to reimburse on a quarterly basis the Underwriters for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or 21 22 omission, or any alleged statement or omission, described in paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 11 and the possibility that such payments might later be held to be improper; provided, however, that (i) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them and (ii) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. 12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of the Company and the several Underwriters and, with respect to the provisions of Section 7 hereof, the several parties (in addition to the Company and the several Underwriters) indemnified under the provisions of said Section 7, and their respective personal representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Stock from any of the several Underwriters. 13. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing or by telegraph and, if to the Underwriters, shall be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street, San Francisco, California 94104; and if to the Company, shall be mailed, telegraphed or delivered to it at its office, 1505 Adams Drive, Menlo Park, California, Attention: Philippe Pouletty, M.D. All notices given by telegraph shall be promptly confirmed by letter. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or their respective directors or officers, and (c) delivery and payment for the Stock under this Agreement; provided, however, that if this Agreement is terminated prior to the Closing Date, the provisions of paragraph (m) of Section 6 hereof shall be of no further force or effect. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 22 23 This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. Please sign and return to the Company the enclosed duplicates of this letter, whereupon this letter will become a binding agreement between the Company and the several Underwriters in accordance with its terms. Very truly yours, SANGSTAT MEDICAL CORPORATION By: ------------------------------------ Henry N. Edmunds Vice President and Chief Financial Officer The foregoing Agreement is hereby confirmed and accepted as of the date first above written. HAMBRECHT & QUIST LLC MONTGOMERY SECURITIES ROBERTSON STEPHENS & COMPANY LLC By Hambrecht & Quist LLC By: --------------------------------------- Gregory J. Ingram Managing Director Acting on behalf of the several Underwriters, including themselves, named in Schedule I hereto. 23 24 SCHEDULE I UNDERWRITERS
NUMBER OF SHARES TO BE UNDERWRITERS PURCHASED - ---------------------------------------------------------------------------------- --------- Hambrecht & Quist LLC............................................................. Montgomery Securities............................................................. Robertson Stephens & Company LLC.................................................. --------- Total................................................................... =========
24 EX-5.1 3 OPINION OF BROBECK, PHLEGER & HARRISON LLP 1 EXHIBIT 5.1 January 23, 1997 SangStat Medical Corporation 1505 Adams Drive Menlo Park, CA 94025 Re: Registration Statement on Form S-3 Ladies and Gentlemen: We have examined the Registration Statement on Form S-3 originally filed by SangStat Medical Corporation (the "Company") with the Securities and Exchange Commission (the "Commission") to be filed on January 24, 1997, as thereafter amended or supplemented (the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of 2,300,000 shares of the Company's Common Stock (the "Shares"). The Shares include an over-allotment option to the Underwriters to purchase up to 300,000 additional shares of the Company's Common Stock and are to be sold to the Underwriters as described in the Registration Statement for resale to the public. As your counsel in connection with this transaction, 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 conclusion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Shares, the Shares, when issued and sold in the manner described in the Registration Statement, will be validly issued, fully paid and nonassessable. We consent to the use of this Opinion as an exhibit to said Registration Statement, and further consent to the use of our name wherever appearing in said Registration Statement, including the prospectus constituting a part thereof, and in any amendment thereto. Very truly yours, /s/ Brobeck, Phleger & Harrison LLP Brobeck, Phleger & Harrison LLP EX-23.1 4 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT SangStat Medical Corporation: We consent to the use in this Registration Statement of SangStat Medical Corporation on Form S-3 of our report dated January 29, 1996 appearing and incorporated by reference in the Prospectus, which is a part of this Registration Statement and to the incorporation by reference of our report dated March 27, 1996 relating to the financial statement schedule appearing in the Annual Report on Form 10-K of SangStat Medical Corporation for the year ended December 31, 1995. We also consent to the references to us under the headings of "Selected Consolidated Financial Data" and "Experts" in such Prospectus. DELOITTE & TOUCHE LLP San Jose, California January 23, 1997 -----END PRIVACY-ENHANCED MESSAGE-----