-----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, HqrVeEVREP6WQunUtHJIKlNuxIjG1ywdaB9GOjAn9viKEd6gleob1hyiTTBaElBP lRveakx0UmAZ32vnDEuqKQ== 0000891020-96-000586.txt : 19960531 0000891020-96-000586.hdr.sgml : 19960531 ACCESSION NUMBER: 0000891020-96-000586 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19960530 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TARGETED GENETICS CORP /WA/ CENTRAL INDEX KEY: 0000921114 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 911549568 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-03592 FILM NUMBER: 96574407 BUSINESS ADDRESS: STREET 1: 1100 OLIVE WAY STREET 2: STE 100 CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2066237612 MAIL ADDRESS: STREET 1: 1100 OLIVE WAY STREET 2: STE 100 CITY: SEATTLE STATE: WA ZIP: 98101 S-1/A 1 FORM S-1, AMENDMENT NO. 1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1996. REGISTRATION NO. 333-03592 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 TARGETED GENETICS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ WASHINGTON 2836 91-1549568 (STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
1100 OLIVE WAY, SUITE 100 SEATTLE, WASHINGTON 98101 (206) 623-7612 (ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) H. STEWART PARKER CHIEF EXECUTIVE OFFICER 1100 OLIVE WAY, SUITE 100 SEATTLE, WASHINGTON 98101 (206) 623-7612 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) ------------------------ COPIES TO: STEPHEN M. GRAHAM CHARLES W. MULANEY, JR. STEPHANIE G. DALEY-WATSON SKADDEN, ARPS, SLATE, MEAGHER & FLOM PERKINS COIE 333 WEST WACKER DRIVE 1201 THIRD AVENUE, 40TH FLOOR CHICAGO, ILLINOIS 60606 SEATTLE, WASHINGTON 98101-3099 (312) 407-0700 (206) 583-8888
------------------------ Approximate date of commencement of proposed sale to the public: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, 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. / / ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS 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. PRELIMINARY PROSPECTUS, DATED MAY 30, 1996 PROSPECTUS 3,500,000 SHARES [TARGETED GENETICS LOGO] COMMON STOCK All of the 3,500,000 shares of Common Stock offered hereby are being sold by Targeted Genetics Corporation ("Targeted Genetics" or the "Company"). The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "TGEN." On May 24, 1996, the last reported sale price for the Common Stock was $5.75 per share. See "Price Range of Common Stock." THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================================== UNDERWRITING DISCOUNTS AND PROCEEDS TO PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------------------------------------------ Per Share.................................... $ $ $ - ------------------------------------------------------------------------------------------------------------------ Total(3)..................................... $ $ $ ==================================================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the Offering payable by the Company estimated at $350,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to 525,000 additional shares of Common Stock on the same terms and conditions set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." --------------------------- The shares of Common Stock offered by the Underwriters are 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 delivery of such shares will be made at the offices of the agent of Vector Securities International, Inc., in New York, New York, on or about , 1996. --------------------------- Vector Securities International, Inc. Genesis Merchant Group Securities , 1996 3 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere in this Prospectus constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward- looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions; competition; technological advances; ability to obtain rights to technology; ability to obtain and enforce patents; ability to commercialize and manufacture products; results of clinical studies; results of research and development activities; business abilities and judgment of personnel; availability of qualified personnel; changes in, or failure to comply with, governmental regulations; ability to obtain adequate financing in the future; and other factors referenced in this Prospectus. See "Risk Factors." IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) 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." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus, including information under "Risk Factors." Except as otherwise noted, all information in this Prospectus, including financial information and share and per share data, assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." Special Note: Certain statements set forth below constitute "forward-looking statements" within the meaning of the Reform Act. See "Special Note Regarding Forward-Looking Statements" on page 2 for additional factors relating to such statements. THE COMPANY Targeted Genetics is focused on the development of gene and cell therapies for the treatment of certain acquired and inherited diseases. The Company is developing a broad base of core technologies that it believes will allow it to address a variety of such diseases. These technologies include proprietary viral and non-viral gene delivery systems as well as novel techniques for cytotoxic T lymphocyte ("CTL") immunotherapy. In order to expand its technology base with respect to non-viral gene delivery systems and to enhance its product development programs, the Company recently agreed to acquire RGene Therapeutics, Inc. ("RGene"), a privately held company focused on the development and use of non-viral gene delivery systems. The Company is using its core technology platform to develop potential products for the treatment of various genetic disorders, cancer and infectious diseases, and is currently conducting clinical trials in certain of these indications. The Company believes that in the area of gene therapy, different disease targets will require different methods of gene delivery, depending on the target cell to be modified, the duration of gene expression required and the need for ex vivo or in vivo delivery. Accordingly, the Company is developing multiple gene delivery systems based on three different vector technologies: adeno-associated viral ("AAV"), retroviral and non-viral. The Company believes these systems may provide it with the flexibility necessary to develop gene therapies for a broader range of diseases than would be possible using a single gene delivery system. Targeted Genetics was the first company to initiate clinical trials using AAV vectors and is not aware of any other company conducting clinical trials using these vectors. In addition, the Company has exclusive rights to an improved type of retroviral vector which has been shown in preclinical experiments to be more efficient than earlier retroviral vectors at delivering genes into certain types of blood cells. The Company also is developing non-viral gene delivery systems which may provide greater flexibility relative to the size and sequence of transferred genes and allow targeted delivery in vivo. Through its pending acquisition of RGene (the "RGene Acquisition"), the Company will acquire rights to proprietary non-viral gene delivery technology based on the use of cationic lipids that promote the uptake of DNA into cells. This technology includes several formulations with the potential for increased stability and improved transduction efficiency, as well as the potential ability to deliver genes to specific target cells. The Company will also acquire rights to the E1A tumor suppressor gene which is currently in clinical trials for the treatment of ovarian and breast cancer. In the area of cell therapy, the Company's expertise with CTLs enables it to isolate from patients and efficiently multiply antigen-specific CTLs, which are immune cells that target and kill specific diseased cells. This expertise forms the basis for a series of potential immunotherapies for the treatment of cancer and infectious diseases. The CTL immunotherapy program is based on the Company's proprietary Rapid Expansion Method ("REM") technology, which is used to grow CTLs ex vivo prior to infusion into the patient. The Company has demonstrated that REM enables it to grow billions of CTLs from individual cloned cells over several weeks, while preserving the cells' specific disease-fighting capabilities in vitro. Other methods of expanding CTL clones generally require several months. Targeted Genetics is currently conducting multiple clinical trials utilizing its viral gene delivery systems as well as its CTL immunotherapy technology. Following the completion of the RGene Acquisition, the Company also will have a clinical trial using a non-viral gene delivery system. The 3 5 Company is currently conducting a Phase I and a Phase I/II clinical trial examining the use of AAV vectors to deliver in vivo the cystic fibrosis transmembrane regulator ("CFTR") gene for the treatment of cystic fibrosis. The Phase II part of the latter trial is expected to begin in late 1996. RGene has initiated a Phase I clinical trial of a non-viral system to deliver in vivo the E1A tumor suppressor gene to patients with ovarian or breast cancer. In addition, the Company is conducting a Phase I clinical trial examining the use of HIV-specific CTLs to prevent the onset of full-blown AIDS in HIV-infected patients. The Company also is collaborating on two physician-sponsored Phase I clinical trials examining gene therapies for the treatment of Gaucher disease and melanoma. Patient accrual for all these Phase I clinical trials is expected to be completed by the end of 1996. The Company was incorporated in Washington in 1989 as a wholly owned subsidiary of Immunex Corporation ("Immunex"), and commenced operations in 1992. The Company's headquarters are located at 1100 Olive Way, Suite 100, Seattle, Washington 98101. Its telephone number is (206) 623-7612. THE OFFERING Common Stock offered.................................. 3,500,000 shares Common Stock to be outstanding after the Offering..... 19,533,848 shares (1) Nasdaq National Market symbol......................... TGEN Use of proceeds....................................... For research and development; clinical testing; capital expenditures, including expansion of existing facilities; working capital; and general corporate purposes.
- --------------- (1) Based on shares outstanding as of March 31, 1996. Includes 3,636,364 shares to be issued to RGene stockholders upon completion of the RGene Acquisition. Excludes (i) 1,177,014 shares issuable upon exercise of options outstanding at March 31, 1996, with a weighted average exercise price of $3.20 per share; (ii) 831,614 shares issuable upon exercise of warrants outstanding at March 31, 1996, with a weighted average exercise price of $4.78 per share; (iii) 281,686 shares reserved for issuance under the Company's stock option plans at March 31, 1996; and (iv) an indeterminate number of additional shares of Common Stock that may be issued to RGene stockholders in the event certain milestones are achieved before December 31, 1998. See "Management -- Benefit Plans" and "RGene Acquisition." 4 6 SUMMARY ACTUAL AND PRO FORMA FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, --------------------------------------------------- ------------------------------------- PRO FORMA PRO FORMA 1993 1994 1995 1995 (1) 1995 1996 1996 (2) ------- ------- ------- --------- ------- ------- --------- STATEMENT OF OPERATIONS DATA: Revenues............... $ 412 $ 449 $ 842 $ 1,195 $ 132 $ 183 $ 2,706 Expenses: Research and development........ 4,261 6,763 8,195 11,268 1,978 2,366 4,636 General and administrative..... 1,217 1,892 2,267 3,020 701 617 888 Interest............. -- 193 302 302 75 92 92 ------- ------- ------- -------- ------- ------- ------- Total expenses... 5,478 8,848 10,764 14,590 2,754 3,075 5,616 ------- ------- ------- -------- ------- ------- ------- Net loss............... $(5,066) $(8,399) $(9,922) $(13,395) $(2,622) $(2,892) $ (2,910) ======= ======= ======= ======== ======= ======= ======= Net loss per share..... $ (0.94) $ (0.95) $ (0.29) $ (0.23) $ (0.18) ======= ======== ======= ======= ======= Shares used in computation of net loss per share....... 10,533 14,169 8,966 12,343 15,979 Pro forma, assuming conversion of Preferred Stock to Common Stock (3): Net loss per share... $ (1.03) ======= Shares used in computation of net loss per share..... 8,152
MARCH 31, 1996 -------------------------------------------- PRO FORMA ACTUAL PRO FORMA (4) AS ADJUSTED (5) -------- ------------- --------------- BALANCE SHEET DATA: Cash, cash equivalents and securities available for sale.............. $ 11,878 $ 14,105 $ 32,622 Working capital....................................................... 10,408 11,017 29,534 Total assets.......................................................... 17,381 19,930 38,447 Long-term obligations................................................. 2,634 2,634 2,634 Deficit accumulated during development stage.......................... (30,481) (44,550) (44,550) Total shareholders' equity............................................ 13,119 13,904 32,421
- ------------------ (1) Gives effect to the RGene Acquisition as if it had occurred on January 1, 1995. See "Unaudited Pro Forma Consolidated Financial Statements." (2) Gives effect to the RGene Acquisition as if it had occurred on January 1, 1996. See "Unaudited Pro Forma Consolidated Financial Statements." (3) Computed on the basis described in Note 2 of Notes to Targeted Genetics Financial Statements. (4) Gives effect to the RGene Acquisition as if it had occurred on March 31, 1996. See "Unaudited Pro Forma Consolidated Financial Statements." (5) Gives effect to the RGene Acquisition as if it had occurred on March 31, 1996, the sale by the Company of the 3,500,000 shares of Common Stock offered hereby at an assumed public offering price of $5.75 per share and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds." 5 7 RGENE ACQUISITION In keeping with its strategy of building a broad-based technology platform, in April 1996, the Company entered into a definitive merger agreement (the "Merger Agreement") with RGene pursuant to which the Company has agreed to acquire RGene by merging a wholly owned subsidiary of the Company formed to facilitate the transaction with and into RGene. The Merger Agreement provides that, in exchange for all of the issued and outstanding shares of capital stock of RGene, Targeted Genetics will issue 3,636,364 shares of the Common Stock (representing an aggregate value of $18.7 million, assuming a price of $5.13 per share, the closing price of the Common Stock on the date of execution of the Merger Agreement) to the RGene stockholders upon closing of the RGene Acquisition. In addition, the RGene stockholders would have the right to receive up to an additional $5 million of the Common Stock if certain milestones relating to RGene's potential products and technology are achieved prior to December 31, 1998. The first such milestone (the "First Milestone") relates to the enrollment of at least one patient in a Phase II clinical trial for RGene's E1A tumor suppressor gene therapy in the United States and the enrollment of at least one patient in a similar clinical trial in a member country of the European Economic Union. Achievement of the First Milestone would result in the issuance of $1 million, $2 million or $3 million of the Common Stock, depending upon whether the First Milestone is achieved on or before December 31, 1997 or December 31, 1998, and depending upon whether the First Milestone is achieved in the United States only or in the United States and Europe, as set forth in the following table:
MILESTONE ACHIEVEMENT GEOGRAPHIC TERRITORY DEADLINE COMMON STOCK ISSUABLE - ---------------------------- ---------------------------- ---------------------------- United States only December 31, 1997 $2 million Europe only December 31, 1997 $0 United States and Europe December 31, 1997 $3 million United States only December 31, 1998 $1 million Europe only December 31, 1998 $1 million(1) United States and Europe December 31, 1998 $2 million(2)
- --------------- (1) To be issued only if the First Milestone is achieved in the United States during calendar year 1998. If the First Milestone is achieved in the United States prior to January 1, 1998, or if it is not achieved at all in the United States, then no Common Stock will be issued for achieving the First Milestone in Europe during 1998. (2) The maximum amount of Common Stock that may be issued in the event that the First Milestone is not achieved in the United States until 1998 is $2 million. The second milestone (the "Second Milestone") is the execution on or before December 31, 1997 of a definitive collaboration agreement with a third party for the development of genetic vaccines using RGene's technology, which collaboration agreement must provide minimum revenue to the Company of $2 million during the first year following its execution, of which at least $1.5 million may not be subject to any specific funding commitment under any license or research agreement. Achievement of the Second Milestone would result in the issuance of $2 million of the Common Stock. The aggregate number of shares of Common Stock issued upon achievement of a milestone will equal the applicable aggregate value of such shares issuable upon achievement of such milestone divided by the milestone average trading price, which is the average closing sale price for the Common Stock for the 30 trading days preceding the date of achievement of the milestone. Such shares will be issued pro rata, based upon the number of shares of RGene capital stock outstanding on the closing of the RGene Acquisition, to the former RGene stockholders as promptly as practicable, but in no event later than 20 days after the achievement of the applicable milestone. Assuming the milestone average trading price equals $5.75 (the closing sale price per share of Common Stock as reported on the Nasdaq National Market on May 24, 1996), achievement of both milestones would result in the issuance of a maximum of 869,565 shares of Common Stock. Based upon the number of shares outstanding as of May 24, 1996, and assuming the issuance of 3,636,364 6 8 shares of Common Stock at the closing of the RGene Acquisition, upon issuance, such shares representing the additional consideration would represent approximately 6% of the outstanding Common Stock. The shares of Common Stock issued to RGene stockholders are subject to certain limitations on transfer and are covered by certain registration rights. See "Risk Factors -- Shares Eligible for Future Sale; Registration Rights" and "Description of Capital Stock -- Registration Rights." For a period of one year after completion of the RGene Acquisition, the Company will hold in escrow 363,636 of the shares issued to RGene stockholders upon the closing of the RGene Acquisition in order to satisfy potential claims made by the Company against the former RGene stockholders in connection with any breach of any representation or warranty, or any failure to comply with any covenant or agreement, contained in the Merger Agreement. Promptly following the closing of the RGene Acquisition, the Targeted Genetics Board of Directors will appoint Austin M. Long, III and Martin P. Sutter as RGene's designees to the Targeted Genetics Board of Directors. Messrs. Long and Sutter will stand for election at the next annual meeting of shareholders. Completion of the RGene Acquisition is subject to the approval of the shareholders of both companies and the satisfaction of customary conditions, such as no material adverse change in the condition of either company. Holders of a number of RGene shares sufficient to approve the RGene Acquisition have agreed to vote their shares in favor of the transaction. Because Targeted Genetics will be issuing shares of Common Stock to the RGene stockholders in an amount in excess of 20% of the shares of Common Stock outstanding prior to the RGene Acquisition, the Company's shareholders must approve the issuance of such shares under applicable provisions of Schedule D to the Bylaws of the National Association of Securities Dealers, Inc. The approval required is a majority of the total votes cast on the proposal in person or by proxy at a special meeting called for the purpose of approving such issuance. Subject to receipt of shareholder approval and satisfaction or waiver of the conditions precedent, the Company anticipates that the RGene Acquisition will be completed before the end of the second quarter of 1996. The Company does not intend to complete the Offering until the RGene Acquisition is consummated. 7 9 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. Prospective investors should carefully consider the following risk factors, in addition to the other information in this Prospectus. Special Note: Certain statements set forth below constitute "forward-looking statements" within the meaning of the Reform Act. See "Special Note Regarding Forward-Looking Statements" on page 2 for additional factors relating to such statements. EARLY STAGE OF PRODUCT DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY. The Company has no commercial products and all of its potential products are in research, development or early-stage clinical trials. As such, the Company cannot predict when or if any of its products under development will be commercialized. Products, if any, resulting from the Company's research and development programs are not expected to be commercially available for a number of years, if at all, even if they are successfully developed and proven safe and effective. While many approaches to gene therapy and cell therapy are being pursued by pharmaceutical and biotechnology companies, there are currently no marketed gene therapies and a limited number of marketed cell therapies. Existing preclinical and clinical data relating to the Company's specific gene and cell therapy approaches are very limited. Prior to any commercial use, the products and technologies currently under development by the Company will require significant additional research and development efforts, extensive preclinical and clinical testing and regulatory approval. Clinical trials in humans are necessary to determine product safety and efficacy. Product development involving new therapies is highly uncertain and unanticipated developments, clinical and regulatory delays, adverse or unexpected side effects or immune responses or inadequate therapeutic efficacy could slow or prevent the successful completion of the Company's product and technology development efforts and have a material adverse effect on the Company's business, financial condition and results of operations. In addition, gene and cell therapy products are subject to the risks of failure inherent in the development of products based on innovative technologies. There can be no assurance that Targeted Genetics will be permitted to undertake additional or complete ongoing clinical trials of its potential products within the time periods indicated in this Prospectus or otherwise, that sufficient numbers of patients can be accrued for such trials or that clinical trials will demonstrate that the products tested are safe and effective. Even if clinical trials are successful, there can be no assurance that the Company will obtain regulatory approval for any indication, that an approved product can be produced in commercial quantities at reasonable costs or gain acceptance for use by physicians and healthcare providers or that any potential products will be successfully marketed at prices that would permit the Company to operate profitably, any of which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Development Programs." HISTORY OF LOSSES AND UNCERTAINTY OF FUTURE RESULTS. Targeted Genetics is a development stage company and has generated minimal revenues since inception. At March 31, 1996, the Company had an accumulated deficit of approximately $30.5 million. On a pro forma basis, giving effect to the RGene Acquisition as if it had occurred on March 31, 1996, the accumulated deficit would have been approximately $44.6 million. Losses have resulted from expenses incurred in the Company's research and development programs and, to a lesser extent, from general and administrative and interest expenses. The Company expects to incur substantial additional losses over at least the next several years and expects cumulative losses to increase substantially as it continues or expands its research and development activities. Payments from collaborative partners, if any, and investment income are expected to be the only sources of revenue for the foreseeable future and revenues from commercial sales of products are not expected for a number of years, if at all. To achieve profitable operations, Targeted Genetics, alone or with corporate collaborative partners, must successfully develop, manufacture, obtain regulatory approvals and market potential products, of which there can be no assurance. The time required to reach sustained profitability is highly uncertain and there can be no assurance that the Company will be able to achieve profitability on a sustained basis, if at all. Moreover, if 8 10 profitability is achieved, the level of profitability cannot be predicted and it may vary significantly from quarter to quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." UNCERTAINTIES RELATING TO CLINICAL TRIALS AND PRODUCT DEVELOPMENT. Existing data on the safety and efficacy of gene and cell therapy treatments are very limited. The Company has performed only limited preclinical and clinical testing of certain of its product candidates and technologies under development. Preclinical studies of product candidates may not predict and do not ensure safety or efficacy in humans and are not necessarily indicative of the results that may be achieved in clinical trials with humans. Possible serious side effects of retroviral vector-based gene transfer include viral infections resulting from contamination with replication-competent retroviruses. In addition, the development of cancer in a patient is theoretically a possible side effect of all methods of gene transfer. Furthermore, as with most other biopharmaceutical products, there is also a possibility of toxicity or decreased efficacy associated with a host immune response toward any vector used in the Company's treatments. The possibility of such response may be increased if there is a need to deliver the vector frequently. There can be no assurance that unacceptable side effects will not be discovered during preclinical and clinical testing of the Company's potential products. Even after being cleared by the United States Food and Drug Administration (the "FDA") or the regulatory authorities of other countries, a product may later be shown to be unsafe or to not have its purported effect, thereby preventing its widespread use or requiring its withdrawal from the market. The rate of completion of the Company's clinical trials depends on, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the clinical protocol, the proximity of patients to clinical sites and the eligibility criteria for the trial. Delays in planned patient enrollment may result in increased costs, delays or termination of clinical trials, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company has a limited clinical staff and, as a result, will rely on third parties to assist it in overseeing and monitoring clinical trials, which may result in delays in completing, or failure to complete, clinical trials if such third parties fail to perform under their agreements with the Company or fail to meet regulatory standards in the performance of their obligations under such agreements. See "Business -- Governmental Regulation." NEED FOR ADDITIONAL CAPITAL. The Company expects negative cash flow from operations to continue and to increase for the foreseeable future. The Company will require substantial additional funds to continue research and development; to conduct further preclinical studies and clinical trials; to establish pilot-scale and commercial-scale manufacturing processes and facilities; and to expand or establish quality-control, regulatory, marketing, sales and administrative capabilities. The Company's future capital requirements will depend on numerous factors, including the successful consolidation of RGene with the Company; continued scientific progress in the Company's research and development programs; the results of research and development activities; preclinical studies and clinical trials; acquisition of products or technology, if any; relationships with corporate collaborators, if any; competing technological and market developments; the time and costs involved in obtaining regulatory approvals; the costs involved in filing, prosecuting and enforcing patent claims; the time and costs of manufacturing scale-up and commercialization activities; and other factors. The Company estimates that, at its planned rate of spending, adjusted to reflect the increased expenses expected to result from the RGene Acquisition, its existing cash, cash equivalents and securities available for sale, together with the projected amount of cash or investments expected to be obtained as a result of the RGene Acquisition, the net proceeds of the Offering and the interest income thereon, will be sufficient to meet its capital requirements until late 1997. There can be no assurance that the underlying assumed levels of revenue and expense will prove to be accurate. Whether or not these assumptions prove to be accurate, the Company will need to raise substantial additional capital to fund operations. The Company intends to seek additional funding through public or private financing, including equity financing, and through collaborative arrangements. Adequate funds for these purposes, whether obtained through financial markets or from collaborative or other arrangements with corporate partners or other sources, may not be available when needed or may not be available on terms favorable to 9 11 the Company. If additional funds are raised by issuing equity securities, dilution to existing shareholders may result. In addition, in the event that additional funds are obtained through arrangements with collaborative partners, such arrangements may require the Company to relinquish rights to certain of its technologies or potential products that it would otherwise seek to develop or commercialize itself. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." EFFECT OF FAILURE TO OBTAIN ADEQUATE FUNDING. If funding is insufficient at any time in the future, the Company may be required to delay, scale back or eliminate some or all of its research and development programs or to license third parties to commercialize products or technologies that the Company would otherwise seek to develop itself. Furthermore, the terms of any such license agreements might be less favorable than if the Company were negotiating from a stronger position. Moreover, if funding is insufficient at any time in the future, and the Company's existing funds are depleted, the Company may be required to cease operations. UNCERTAINTY OF PATENT POSITION AND PROPRIETARY RIGHTS; ACCESS TO PROPRIETARY GENES. The Company's success will depend in part on the ability of the Company and its licensors to obtain and maintain patent protection for the Company's technology and to preserve its trade secrets and operate without infringing on the proprietary rights of others, both in the United States and in other countries. The failure of the Company or its licensors to obtain and maintain patent protection for the Company's technology could have a material adverse effect on the Company. Patent positions in the biotechnology field are highly uncertain and involve complex legal, scientific and factual questions. To date, there has emerged no consistent policy regarding the breadth of claims allowed in biotechnology patents, particularly in regard to human therapeutic uses. There can be no assurance that patent applications relating to the technology used by the Company will result in patents being issued or that, if issued, the patent will not be subjected to further proceedings limiting the scope of the rights under the patent or that such patent will provide a competitive advantage or will afford protection against competitors with similar technology, or will not be challenged successfully, invalidated or circumvented by competitors. Moreover, because patent applications in the United States are maintained in secrecy until patents issue and patent applications in certain other countries generally are not published until more than 18 months after they are filed, and since publication of discoveries in scientific or patent literature often lags behind actual discoveries, the Company cannot be certain that it or any licensor was the first creator of inventions covered by pending patent applications or that it or such licensor was the first to file patent applications for such inventions. The Company is currently involved in one patent interference proceeding declared by the United States Patent and Trademark Office (the "USPTO") to determine priority of invention relating to certain components that may be useful in retroviral vectors, and may have to participate in additional interference proceedings. Although the Company does not anticipate that material expenditures will be made in connection with such proceedings, participation could result in substantial cost to the Company, even if the eventual outcome were favorable to it. In addition, although the Company believes that the technology which is the subject of the current patent interference proceeding is not material to its current product development programs, there can be no assurance that such technology will not become material in the future. If the outcome of the current or any additional interference proceeding were unfavorable, the Company may be unable to obtain rights to the invention involved. With respect to the lipid DC cholesterol ("DC Chol") technology to be acquired through the RGene Acquisition, the Company will become involved in an opposition proceeding in Australia concerning an issued patent and also must defend an application pending in Europe against an opposer. In addition, the Company may become involved in further proceedings before the USPTO concerning RGene's issued DC Chol patent. The costs associated with such proceedings or an unfavorable outcome in any such proceedings may have a material adverse effect on the Company's business, financial condition and results of operations. The Company's processes and potential products may conflict with patents that have been or may be granted to competitors, universities or others. For example, a U.S. patent directed to ex vivo gene therapy using human cells has been issued to other parties. As the biotechnology industry expands 10 12 and more patents are issued, the risk increases that the Company's processes and potential products may give rise to claims that they infringe the patents of others. Such other persons could bring legal actions against the Company claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected product or use of the affected process. Litigation may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company or to determine the enforceability, scope and validity of proprietary rights of others. If the Company becomes involved in such litigation, it could result in substantial expense to the Company and significant diversion of effort by the Company's technical and management personnel. In addition to any potential liability for significant damages, the Company could be required to obtain a license to continue to manufacture or market the affected product or use the affected process. Costs associated with any licensing arrangement may be substantial and could include ongoing royalties. There can be no assurance that any license required under any such patent would be made available to the Company on acceptable terms, if at all. If such licenses could not be obtained on acceptable terms, the Company could be prevented from manufacturing and marketing its potential products. Accordingly, an adverse determination in such litigation could have a material adverse effect on the Company's business, financial condition and results of operations. The Company also relies upon unpatented proprietary technology. There can be no assurance that the Company can meaningfully protect its rights in such unpatented proprietary technology, that any obligation to maintain the confidentiality of such proprietary technology will not be breached by employees, consultants, advisors or others, or that others will not independently develop substantially equivalent technology. The genes that the Company expects to deliver as part of any gene therapy products are generally the subject of issued patents or patent applications. The Company has entered into licenses granting it certain rights to the use of certain genes currently required in the Company's product development programs. Failure by the Company to obtain or maintain in effect a license to any genes it may require to commercialize its potential products may have a material adverse effect on its business, financial condition and results of operations. Some of the vectors the Company currently produces for its product development programs are based on technology in the public domain, as well as nonexclusive licenses to patented technology. In addition, disputes may arise as to the ownership of proprietary rights to the extent that outside collaborators apply technological information developed independently by them or by others to Company projects or apply Company technology to other projects. See "Business -- Patents and Proprietary Rights" and "-- Research Collaborations and Licensing Agreements." UNCERTAINTY OF GOVERNMENTAL REGULATORY REQUIREMENTS; LENGTHY APPROVAL PROCESS. The Company's potential products are subject to extensive regulation by the FDA and foreign governmental authorities. The process of obtaining regulatory approvals for clinical trials or for the manufacturing or marketing of the Company's potential products is costly and time-consuming and is subject to unanticipated delays. Because gene and cell therapy are relatively new technologies and have not been extensively tested in humans, the regulatory requirements governing gene and cell therapy products and related clinical procedures are uncertain and are likely to be modified. There can be no assurance as to the length of the clinical trial period or the number of patients required to be enrolled in clinical trials in order to establish the safety, efficacy and potency of therapeutic products. Accordingly, delays, rejections or unexpected costs may be encountered based on changes in the policy or regulations of the FDA or foreign governmental authorities during the period of product development and regulatory review, which changes may result in limitations or restrictions on the Company's ability to utilize its technology or develop its product candidates. Regulatory requirements ultimately imposed could also adversely affect the ability of the Company to clinically test, manufacture or market products. In addition, many academic institutions and companies conducting research in the gene and cell therapy fields are using a variety of approaches and technologies. Any adverse results obtained by such researchers in preclinical studies or clinical trials could materially adversely affect the regulatory environment for gene and cell therapy products generally, possibly leading to delays in the regulatory 11 13 review and approval process for the Company's potential products. Furthermore, the Company or governmental authorities may suspend clinical trials at any time if it is determined that the subjects participating in such trials are exposed to unacceptable health risks. There can be no assurance that the Company will not encounter these or other problems in clinical trials that will cause the Company or governmental authorities to delay or suspend such trials. Even if regulatory approval of a potential product is obtained, such approval may entail limitations on the indicated uses for which such product may be marketed, which may restrict the patient population for which any product may be prescribed. In addition, a marketed product is subject to continual FDA review. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on marketing a product or withdrawal of the product from the market, as well as possible criminal or civil sanctions. To commercialize any product and prior to submitting the application for marketing approval in the United States, the Company must sponsor and file an Investigational New Drug application ("IND") for each proposed product and must be responsible for initiating and overseeing the clinical studies to demonstrate the safety and efficacy that are necessary to obtain FDA approval of such product. Certain of the Company's current and planned Phase I clinical trials are under investigator-sponsored INDs. Although the Company expects to be able to use data from such clinical trials in proceeding with clinical trials in the United States and in Europe, there can be no assurance that the FDA or foreign governmental authorities will permit the Company to rely on such data. In addition, there can be no assurance that the Company will be able to obtain the necessary clearances for clinical trials or approvals for manufacturing or marketing any of its product candidates. After completion of clinical trials of a new product, FDA marketing approval must be obtained. At that time, the Company must submit relevant data, including the results of product development activities, preclinical studies and clinical trials, in addition to detailed manufacturing information. Notwithstanding the submission of relevant data, the FDA may withhold marketing approval and may require additional clinical trials. All manufacturing operations also are subject to the FDA's current Good Manufacturing Practice ("cGMP") requirements on an ongoing basis. There can be no assurance that the Company will be able to attain or maintain compliance with cGMP requirements. The Company is similarly subject to regulation by foreign governmental authorities. Failure to obtain regulatory approvals for its product candidates or to either attain or maintain compliance with cGMP or other manufacturing requirements would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Governmental Regulation." INTENSE COMPETITION. The Company is experiencing intense competition from companies developing gene and cell therapy technologies as well as those using more traditional approaches to treating human diseases. The Company is aware of a number of companies and institutions that are developing or considering the development of potential gene and cell therapy treatments, including early-stage gene therapy companies, fully integrated pharmaceutical companies, universities, research institutions, governmental agencies and other healthcare providers. In addition, the Company's potential products will be required to compete with existing pharmaceutical products, or products developed in the future, that are based on established technologies. Many of the Company's competitors have substantially more financial and other resources, larger research and development staffs, and more experience and capabilities in researching, developing and testing products in clinical trials, in obtaining FDA and other regulatory approvals, and in manufacturing, marketing and distribution than the Company. In addition, the competitive positions of other early-stage companies may be enhanced significantly through their collaborative arrangements with large pharmaceutical companies or academic institutions. The Company's competitors may succeed in developing, obtaining patent protection for, receiving FDA and other regulatory approvals for, or commercializing products more rapidly than the Company. If the Company is successful in commercializing its products, it will be required to compete with respect to manufacturing efficiency and marketing capabilities, areas in which it has no experience. The Company also competes with others in acquiring products or technology from re- 12 14 search institutions or universities. The Company's competitors may develop new technologies and products that are available for sale prior to the Company's potential products or that are more effective than the Company's potential products. In addition, competitive products may be manufactured and marketed more successfully than the Company's potential products. Such developments could render the Company's potential products less competitive or obsolete, and could have a material adverse effect on the Company's business, financial condition and results of operations. RAPID TECHNOLOGICAL CHANGE. Gene and cell therapy are new and rapidly evolving fields, and are expected to continue to undergo significant and rapid technological change. Considerable experimentation and clinical testing must be completed successfully before gene and cell therapies are used in practice. Rapid technological development could result in actual and proposed technologies, products or processes of the Company becoming obsolete prior to successful commercialization. There can be no assurance that the Company's research and development efforts will be successful. DEPENDENCE ON REIMBURSEMENT. Successful commercial sales of the Company's potential products will depend in part on the availability of reimbursement from third-party payors, such as government and private insurance plans. There is significant uncertainty concerning the reimbursement status of newly approved healthcare products, and third-party payors are increasingly challenging the prices charged for medical products and services. There can be no assurance that adequate third-party reimbursement will be available for the Company's potential products, or that any third-party reimbursement that is obtained will be adequate to enable the Company to maintain price levels sufficient to realize an adequate return on its investments in manufacturing and product development. If adequate reimbursement is not provided by government and third-party payors for the Company's potential products, the Company's business, financial condition and results of operations would be materially adversely affected. HEALTHCARE REFORM. The healthcare industry in the United States and in Europe is undergoing fundamental changes as the result of political, economic and regulatory influences. Reforms proposed from time to time include mandated basic healthcare benefits, controls on healthcare spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups and fundamental changes to the healthcare delivery system. The Company anticipates that alternative healthcare delivery systems and methods of payment will continue to be reviewed and assessed, and public debate of these issues will likely continue. The Company cannot predict whether any reform initiatives will result or, if adopted, what impact they might have on the Company, and there can be no assurance that the adoption of reform proposals will not have a material adverse effect on the Company's business, financial condition and results of operations. Announcements of reform proposals and the investment community's reaction to such proposals, announcements by competitors and payors of their strategy in responding to reform initiatives, and general industry conditions could produce volatility in the trading and market price of the Common Stock. DEPENDENCE ON KEY PERSONNEL AND SCIENTIFIC COLLABORATORS. The Company is highly dependent on the principal members of its scientific and management staff. Loss of any of these persons could materially adversely affect the Company's business, financial condition and results of operations. The Company does not have any employment contracts or key person life insurance. The Company's success will depend in large part on its ability to attract and retain key employees and scientific advisors. Competition among biotechnology and pharmaceutical companies for highly skilled scientific and management personnel is intense. There can be no assurance that the Company will be successful in retaining its existing personnel or advisors, or in attracting additional qualified employees. The Company's anticipated expansion of existing functions and entry into new areas and activities requiring additional expertise, such as clinical testing, regulatory compliance, manufacturing, marketing and distribution, are expected to place increased demands on the Company's resources. These activities are expected to require the addition of new personnel with expertise in these areas and the development of additional expertise by existing personnel. The failure to attract and retain such 13 15 personnel, loss of existing personnel or failure to develop such expertise could have a material adverse effect on the Company's business, financial condition and results of operations. The Company also depends on the continued availability of outside scientific collaborators who perform research, which may be funded by the Company, in certain areas relevant to the Company's research. The Company's scientific collaborators are not employees of the Company and generally may terminate their relationship with the Company at any time. In addition, certain of the Company's collaborators have consulting or other advisory relationships with other entities that may conflict with their obligations to the Company. As a result, the Company has limited control over their activities and can expect that only limited amounts of their time will be dedicated to Company activities. For these reasons, there can be no assurance that inventions or processes developed by the Company's collaborators will become the property of the Company. Although certain of the Company's scientific collaborators have agreed not to engage in activities that would involve a conflict of interest with the Company, there can be no assurance that this will not occur. The Company has relied upon scientific, technical, clinical, commercial and other data supplied and disclosed by outside collaborators and will rely in part on such data in support of INDs and subsequent clinical trials for its potential products. There can be no assurance that such information will not contain errors or omissions of fact or will not otherwise prove inadequate to support the Company's research and development efforts. NO COMMERCIAL MANUFACTURING, DISTRIBUTION OR MARKETING CAPABILITY. The Company's current facilities and staff will need to be expanded or supplemented for large-scale clinical or commercial production of its potential products. Large-scale manufacturing of gene and cell therapy products has not been demonstrated by any third party. The Company will be required to contract with others or to construct a production facility in order to complete all the clinical trials necessary for product commercialization. Certain of the Company's products under development may be delivered through the processing of patient cells in specialized laboratories. The Company will be required to construct its own commercial-scale laboratories or contract with others for such processing. In addition, the Company has no experience in sales and marketing. To market any products that may result from its development programs, Targeted Genetics will have to develop marketing and sales capabilities, either on its own or in conjunction with others. The Company will depend to a significant extent on collaborative partners, licensees or other entities for development, manufacturing and commercialization of its potential products. There can be no assurance that the Company will be able to enter into any such arrangements on acceptable terms, if at all. If the Company is unable to obtain or retain third- party manufacturing on commercially acceptable terms, its ability to commercialize potential products may be delayed or foreclosed. The Company's dependence upon third parties for the manufacture, marketing and sale of its potential products may materially adversely affect the Company's ability to develop and deliver products on a timely and competitive basis. If the Company chooses in the future to directly engage in commercial-scale manufacturing and marketing of its potential products, it will require substantial additional funds, personnel and production facilities. See "-- Need for Additional Capital" and "-- Dependence on Corporate Collaborators." UNCERTAINTY ASSOCIATED WITH INTEGRATION. Immediately after the RGene Acquisition, integration of the operations of RGene into the operations of Targeted Genetics will require dedication of significant management resources. Although RGene has only seven employees, its operations are limited and its assets consist primarily of intellectual property and contract rights, successful integration with Targeted Genetics will distract Targeted Genetics' management from the day-to-day business of the Company. Accordingly, any delays in achieving integration may have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON CORPORATE COLLABORATORS. The Company expects to rely in the future on corporate collaborative partners to conduct clinical trials, obtain regulatory approvals and manufacture and market any resulting products. Although the Company believes that such collaborative partners would have an economic motivation to commercialize products that result from the Company's research and development efforts, the amount and timing of resources devoted to these activities by such parties could depend on the achievement of technical and research goals by the Company and 14 16 generally would be controlled by such partners. The sale of products may depend on the successful completion of arrangements with future partners, licensees or distributors in each territory. There can be no assurance that the Company will be successful in establishing any such collaborative arrangements or that any such future partner would be successful in commercializing products. RGene has entered into a nonbinding letter of intent with a pharmaceutical company for the development in Europe of RGene's E1A tumor suppressor product candidate. Although negotiations are underway to enter into a definitive agreement, there can be no assurance that a definitive agreement will be executed. See "Business -- Research Collaborations and Licensing Agreements." HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS. The Company's research and development activities involve the controlled use of hazardous materials, chemicals, biological materials and radioactive compounds. The Company is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any resulting damages, and any such liability could exceed the Company's resources. The Company may be required to incur significant costs to comply with environmental laws and regulations in the future. Current or future environmental laws or regulations may have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Governmental Regulation." PRODUCT LIABILITY. The testing, manufacture, marketing and sale of human healthcare products entail the inherent risk of liability claims or product recalls and associated adverse publicity. The Company currently has a limited amount of product liability insurance. Such insurance is expensive and there can be no assurance that it will continue to be available in sufficient amounts and on acceptable terms, if at all. A product liability claim or product recall could inhibit or prevent commercialization of products being developed by the Company. Any product liability claim or product recall could have a material adverse effect on the Company's business, financial condition and results of operations. POTENTIAL VOLATILITY OF STOCK PRICE; ABSENCE OF DIVIDENDS. Since the Company's initial public offering, the market price of the Common Stock has fluctuated significantly. The stock market has experienced significant price and volume fluctuations that are often unrelated to the operating performance of particular companies. In addition, the market price of the Common Stock, similar to that of securities of other biotechnology companies, may, at times, be highly volatile. Factors such as the results of preclinical studies and clinical trials by the Company or its competitors, other evidence of the safety or efficacy of products of the Company or its competitors, announcements of technological innovations or new products by the Company or its competitors, changes in governmental regulation, developments in patent or other proprietary rights of the Company or its competitors, including litigation, fluctuations in the Company's operating results and changes in general market conditions for biotechnology stocks could have a significant impact on the future price of the Common Stock. The Company has never paid cash dividends on the Common Stock and does not anticipate paying cash dividends in the foreseeable future. See "Price Range of Common Stock" and "Dividend Policy." CONCENTRATION OF OWNERSHIP AND ANTITAKEOVER CONSIDERATIONS. As of May 24, 1996, the Company's directors, executive officers and principal shareholders owned beneficially approximately 50% of the outstanding shares of Common Stock. In particular, Immunex owned beneficially approximately 21% of such outstanding shares. Accordingly, these shareholders have significant influence over the election of the Company's directors and most other shareholder actions. The Company has the authority to issue up to 6,000,000 shares of Preferred Stock in one or more series and to fix the powers, designations, preferences and relative rights thereof without any further vote or action by the Company's shareholders. The issuance of Preferred Stock could dilute the voting power of holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company. Certain provisions of the Company's Restated Articles of Incorporation (the "Articles of Incorporation"), the Amended and Restated Bylaws (the "Bylaws") and employee benefit plans, as 15 17 well as Washington law, may operate in a manner that could discourage or render more difficult a takeover of the Company, the removal of directors or the ability to call a special meeting of the shareholders, or may limit the price certain investors may be willing to pay in the future for shares of Common Stock. See "Management -- Benefit Plans," "Principal Shareholders" and "Description of Capital Stock -- Certain Charter Provisions and Washington Law." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of shares of Common Stock in the public market following the Offering or the perception that such sales could occur could have a material adverse effect on the price of the Common Stock. Upon completion of the Offering, the Company will have 19,537,248 shares of Common Stock outstanding (assuming no exercise of the Underwriters' over-allotment option), including the 3,636,364 shares of Common Stock issuable in connection with the RGene Acquisition. Of these shares, the 3,500,000 shares to be sold in the Offering and, as of May 24, 1996, approximately 8,309,573 additional shares of Common Stock (as well as an additional 769,598 shares issuable upon exercise of warrants to purchase Common Stock) will be or are freely tradable without restriction under the Securities Act of 1933, as amended (the "Securities Act"). The remaining 7,727,675 outstanding shares of Common Stock (including the 3,636,364 shares issuable in connection with the RGene Acquisition) are restricted shares ("Restricted Shares") under the Securities Act and may only be sold if they are registered or qualify for an exemption from registration under Rule 144 of the Securities Act ("Rule 144"). The Company's current directors and executive officers and certain shareholders, who immediately after the Offering will hold in the aggregate 4,088,850 shares of Common Stock (all of which are Restricted Shares), have agreed not to sell any of these shares for 90 days after the date of this Prospectus without the prior written consent of Vector Securities International, Inc. Commencing 91 days from the date of this Prospectus, all the shares of Common Stock subject to such agreements will be available for immediate sale in the public market, subject to certain volume, manner of sale and other limitations under Rule 144. In addition, it is a condition to closing the RGene Acquisition that the RGene stockholders, who will hold 3,636,364 shares of Common Stock, agree not to sell any such shares (or shares issued in connection with the milestone payments) for a period of 30 months following the closing of such transaction, subject to the release of such shares from the lock-up agreements in increments of 20% at the end of each six-month period following the closing of the RGene Acquisition. Prior to the one-year anniversary of the closing of the RGene Acquisition, the Company is obligated to file a registration statement under the Securities Act in order to register for sale in the public market 50% of the 3,636,364 shares of Common Stock issuable to the RGene stockholders, as well as shares issued in connection with the milestone payments. The Company has agreed to cause such registration statement, which the Company may defer under certain circumstances, to remain effective for a period ending 24 months after the completion of the RGene Acquisition. Following the closing of the Offering, the holders of 3,806,775 shares of Common Stock (as well as 62,016 shares issuable upon exercise of outstanding warrants) will be entitled to certain rights with respect to registration of such shares for sale in the public market. See "Description of Capital Stock -- Registration Rights." DILUTION. The assumed public offering price in the Offering is substantially higher than the book value per share of Common Stock. Investors purchasing shares of Common Stock in the Offering will incur immediate and substantial dilution. Additional dilution is likely to occur upon the exercise of outstanding warrants and stock options. See "Dilution." 16 18 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,500,000 shares of Common Stock offered hereby (after deducting the underwriting discounts and commissions and estimated offering expenses) at an assumed public offering price of $5.75 per share are estimated to be approximately $18,517,000 ($21,347,000 if the Underwriters' over-allotment option is exercised in full). The Company anticipates that the net proceeds of the Offering will be used principally to fund research and development; clinical testing; capital expenditures, including expansion of existing facilities; working capital; and for general corporate purposes. Research and development activities to be funded by the net proceeds will involve hiring additional scientific staff and conducting clinical trials. Net proceeds may also be used to acquire technology, products or businesses that complement the Company's business. No such transactions involving a material amount of cash consideration are being negotiated as of the date of this Prospectus. The amounts actually expended for each purpose will depend on numerous factors, including the successful consolidation of RGene with the Company; continued scientific progress in the Company's research and development programs; the results of research and development; preclinical studies and clinical trials; acquisition of products or technology, if any; relationships with corporate collaborators, if any; competing technological and market developments; the time and costs involved in obtaining regulatory approvals; the costs involved in filing, prosecuting and enforcing patent claims; the time and costs of manufacturing scale-up and commercialization activities; and other factors. The Company estimates that, at its planned rate of spending, adjusted to reflect the increased expenses expected to result from the RGene Acquisition, the net proceeds of the Offering and the interest income thereon, together with existing cash, cash equivalents, securities available for sale and the projected amount of cash or investments expected to be obtained as a result of the RGene Acquisition, will be sufficient to meet its capital requirements until late 1997. In the event that all outstanding warrants with an exercise price of $4.68 per share and expiring in July 1997 are exercised, the Company will receive an additional $3.6 million, which amount should enable the Company to fund its capital requirements until early 1998. There can be no assurance that the underlying assumed levels of revenue and expense will prove to be accurate or that any warrants will in fact be exercised. If the Company is successful in its efforts to establish one or more collaborative research and development arrangements with corporate partners, funding received under such arrangements would extend the period during which the net offering proceeds, together with existing resources, would fund the Company's capital requirements. See "Risk Factors -- History of Losses and Uncertainty of Future Results" and "-- Need for Additional Capital" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Pending the above uses, the net proceeds of the Offering will be invested in investment grade, interest-bearing securities. 17 19 PRICE RANGE OF COMMON STOCK The Company completed its initial public offering on May 20, 1994. The Common Stock is quoted on the Nasdaq National Market under the symbol "TGEN." On May 24, 1996, the last reported sale price for the Common Stock on the Nasdaq National Market was $5.75 per share. The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock as reported by Nasdaq.
HIGH LOW ----- ----- 1994 Second Quarter (beginning May 20, 1994).................. $7.13 $5.63 Third Quarter............................................ 6.13 3.81 Fourth Quarter........................................... 5.75 3.75 1995 First Quarter............................................ $6.38 $3.88 Second Quarter........................................... 5.63 3.50 Third Quarter............................................ 6.50 3.63 Fourth Quarter........................................... 5.63 3.75 1996 First Quarter............................................ $7.25 $4.00 Second Quarter (through May 24, 1996).................... 6.25 5.00
As of May 24, 1996, there were approximately 1,500 holders of the Common Stock. DIVIDEND POLICY The Company has never paid cash dividends on the Common Stock. The Company currently intends to retain any future earnings to finance the growth and development of its business and therefore does not anticipate paying cash dividends on the Common Stock in the foreseeable future. 18 20 DILUTION At March 31, 1996, the Company had a pro forma net tangible book value of approximately $13,679,000, or $0.85 per share of Common Stock. Pro forma net tangible book value per share represents the amount of total tangible assets less total liabilities divided by the number of shares of Common Stock outstanding and gives effect to the RGene Acquisition. Without taking into account any other changes in pro forma net tangible book value after March 31, 1996, other than to give effect to the receipt of the estimated net proceeds from the sale of the 3,500,000 shares of Common Stock offered hereby at an assumed public offering price of $5.75 per share, the pro forma net tangible book value of the Company at March 31, 1996 would have been approximately $32,196,000, or $1.65 per share. This represents an immediate increase in pro forma net tangible book value of $0.80 per share to existing shareholders and an immediate dilution of $4.10 per share to purchasers of shares of Common Stock in the Offering. The following table illustrates this per share dilution: Assumed public offering price per share.............................. $5.75 Pro forma net tangible book value per share at March 31, 1996...... $0.85 Increase per share attributable to new investors................... 0.80 ----- Pro forma net tangible book value per share after the Offering....... 1.65 ----- Dilution per share to new investors.................................. $4.10 =====
The foregoing table assumes no exercise of outstanding stock options or warrants. The Company has reserved 1,520,000 shares of Common Stock for issuance pursuant to its stock option plans, 1,177,014 of which were issuable upon the exercise of stock options outstanding as of March 31, 1996, at exercise prices ranging from $0.50 to $6.25 per share, with a weighted average exercise price of $3.20 per share. In addition, the Company has reserved 831,614 shares of Common Stock for issuance upon exercise of outstanding warrants, at exercise prices ranging from $4.68 to $8.75 per share, with a weighted average exercise price of $4.78 per share. To the extent these options or warrants are exercised, there will be further dilution to new investors. The table does not take into account the issuance of an indeterminate number of shares of Common Stock that may be issued to RGene stockholders in the event certain milestones are achieved by December 31, 1998. See "Management -- Benefit Plans," "Description of Capital Stock -- Warrants," "RGene Acquisition" and Note 6 of Notes to Targeted Genetics Financial Statements. 19 21 CAPITALIZATION The following table sets forth (i) the actual capitalization of the Company as of March 31, 1996; (ii) such capitalization after giving pro forma effect to the RGene Acquisition; and (iii) such pro forma capitalization as adjusted to reflect the receipt of the estimated net proceeds from the sale of the 3,500,000 shares of Common Stock offered hereby, based on an assumed offering price of $5.75 per share. The information set forth in this table should be read in conjunction with the Company's Financial Statements and Notes thereto included elsewhere herein. See "Unaudited Pro Forma Consolidated Financial Statements."
MARCH 31, 1996 --------------------------------------------- PRO FORMA ACTUAL(1) PRO FORMA(2) AS ADJUSTED(3) --------- ------------ -------------- (IN THOUSANDS) Long-term obligations................................. $ 2,634 $ 2,634 $ 2,634 Shareholders' equity: Preferred Stock, $.01 par value; 6,000,000 shares authorized: no shares outstanding................ -- -- -- Common Stock, $.01 par value; 40,000,000 shares authorized: 12,397,484 shares issued and outstanding, actual; 16,033,848 shares issued and outstanding, pro forma; and 19,533,848 shares issued and outstanding, pro forma as adjusted.... 43,605 58,459 76,976 Unrealized losses on securities available for sale............................................. (5) (5) (5) Deficit accumulated during development stage........ (30,481) (44,550) (44,550) -------- -------- -------- Total shareholders' equity....................... 13,119 13,904 32,421 -------- -------- -------- Total capitalization........................... $ 15,753 $ 16,538 $ 35,055 ======== ======== ========
- ------------------ (1) Excludes 1,177,014 shares issuable upon exercise of options outstanding at March 31, 1996, with a weighted average exercise price of $3.20 per share, and 831,614 shares issuable upon exercise of warrants outstanding at March 31, 1996, with a weighted average exercise price of $4.78 per share. See "Management -- Benefit Plans," "Description of Capital Stock -- Warrants" and Note 6 of Notes to Targeted Genetics Financial Statements. (2) Includes the 3,636,364 shares to be issued upon completion of the RGene Acquisition. Excludes an indeterminate number of shares of Common Stock to be issued to RGene stockholders in the event certain milestones are achieved before December 31, 1998. See "RGene Acquisition." (3) Gives effect to the RGene Acquisition as if it had occurred on March 31, 1996, the sale by the Company of the 3,500,000 shares of Common Stock offered hereby at an assumed public offering price of $5.75 per share and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds." 20 22 SELECTED FINANCIAL DATA The selected financial data presented below with respect to the Company's statements of operations for each of the three years in the period ended December 31, 1995 and balance sheet at December 31, 1994 and 1995 are derived from the Company's financial statements that have been audited by Ernst & Young LLP, independent auditors, which are included elsewhere herein, and are qualified by reference to such Financial Statements and Notes related thereto. The selected financial data with respect to the Company's statements of operations for the years ended December 31, 1991 and 1992 and the balance sheets at December 31, 1992 and 1993 are derived from the audited financial statements of the Company that have been audited by Ernst & Young LLP, independent auditors, which are not included herein. The financial data at March 31, 1996 and for the three months ended March 31, 1995 and 1996 are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of the financial position and results of operations for those periods. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Notes thereto included elsewhere in this Prospectus. The pro forma financial statement data at March 31, 1996 and for the year ended December 31, 1995 and the three months ended March 31, 1996 are unaudited.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------------------- ------------------------------- PRO FORMA PRO FORMA 1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996(2) -------- ------- ------- ------- ------- --------- ------- ------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues................. $ -- $ 549 $ 412 $ 449 $ 842 $ 1,195 $ 132 $ 183 $ 2,706 Expenses: Research and development.......... 1,084 1,477 4,261 6,763 8,195 11,268 1,978 2,366 4,636 General and administrative....... 299 466 1,217 1,892 2,267 3,020 701 617 888 Interest............... -- -- -- 193 302 302 75 92 92 ------- ------- ------- ------- ------- -------- ------- ------- ------- Total expenses..... 1,383 1,943 5,478 8,848 10,764 14,590 2,754 3,075 5,616 ------- ------- ------- ------- ------- -------- ------- ------- ------- Net loss................. $(1,383) $(1,394) $(5,066) $(8,399) $(9,922) $(13,395) $(2,622) $(2,892) $(2,910) ======= ======= ======= ======= ======= ======== ======= ======= ======= Net loss per share....... $(0.94) $ (0.95) $ (0.29) $ (0.23) $ (0.18) ======= ======== ======= ======= ======= Shares used in computation of net loss per share.............. 10,533 14,169 8,966 12,343 15,979 Pro forma, assuming conversion of Preferred Stock to Common Stock (3): Net loss per share..... $ (1.03) ======= Shares used in computation of net loss per share....... 8,152
MARCH 31, DECEMBER 31, --------------------- ------------------------------------------- PRO FORMA 1992(4) 1993 1994 1995 1996 1996(5) -------- ------- -------- -------- -------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and securities available for sale.................................................. $ 15,266 $ 6,797 $ 11,475 $ 14,443 $ 11,878 $ 14,105 Working capital......................................... 14,776 6,021 10,178 12,856 10,408 11,017 Total assets............................................ 15,877 12,115 17,046 19,960 17,381 19,930 Long-term obligations................................... 15 1,015 2,253 2,405 2,634 2,634 Deficit accumulated during development stage............ (4,202) (9,267) (17,667) (27,589) (30,481) (44,550) Total shareholders' equity.............................. 15,297 10,231 13,242 15,773 13,119 13,904
- ------------------ (1) Gives effect to the RGene Acquisition as if it had occurred on January 1, 1995. See "Unaudited Pro Forma Consolidated Financial Statements." (2) Gives effect to the RGene Acquisition as if it had occurred on January 1, 1996. See "Unaudited Pro Forma Consolidated Financial Statements." (3) Computed on the basis described in Note 2 of Notes to Targeted Genetics Financial Statements. (4) Prior to 1992, the Company was a wholly owned subsidiary of Immunex and, accordingly, balance sheet data did not exist. (5) Gives effect to the RGene Acquisition as if it had occurred on March 31, 1996. See "Unaudited Pro Forma Consolidated Financial Statements." 21 23 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following Pro Forma Consolidated Financial Statements as of March 31, 1996, for the year ended December 31, 1995 and for the three months ended March 31, 1996 are unaudited. The Unaudited Pro Forma Consolidated Balance Sheet was prepared as if the RGene Acquisition was effective at March 31, 1996. The Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 1995 was prepared as if the RGene Acquisition was effective as of January 1, 1995. The Unaudited Pro Forma Statement of Operations for the three months ended March 31, 1996 was prepared as if the RGene Acquisition was effective as of January 1, 1996. The Unaudited Pro Forma Consolidated Financial Statements do not purport to represent what the Company's financial position or results of operations would actually have been if the RGene Acquisition had in fact occurred on such dates or to project the Company's financial position or results of operations as of any future date or for any future period. The Unaudited Pro Forma Consolidated Financial Statements are based on the historical financial statements of the Company and RGene and give effect to the RGene Acquisition under the purchase method of accounting. The Unaudited Pro Forma Consolidated Balance Sheet, as adjusted, reflects the application of the net proceeds from the sale of 3,500,000 shares of Common Stock offered by the Company hereby (after deducting the underwriting discounts and commissions and estimated offering expenses) at an assumed offering price of $5.75 per share. The Unaudited Pro Forma Consolidated Financial Statements should be read in conjunction with the Targeted Genetics and RGene audited Financial Statements and Notes thereto included elsewhere herein. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 31, 1996 (IN THOUSANDS) ASSETS
TARGETED PRO FORMA ADJUSTMENTS PRO FORMA, GENETICS RGENE ADJUSTMENTS PRO FORMA FOR OFFERING AS ADJUSTED -------- ------- ----------- --------- ------------- ----------- Current assets: Cash and cash equivalents............... $ 1,526 $1,677 $ 550(1) $ 3,753 $ 18,517(6) $ 22,270 Securities available for sale........... 10,352 -- -- 10,352 -- 10,352 Deposits, prepaid expenses and other.... 158 146 -- 304 -- 304 -------- ------- ------- -------- -------- -------- Total current assets.................. 12,036 1,823 550 14,409 18,517 32,926 Property, plant and equipment, net........ 4,991 176 -- 5,167 -- 5,167 In-process research and development....... -- -- 14,069(1) -- -- -- (14,069)(2) Other assets.............................. 354 -- -- 354 -- 354 -------- ------- ------- -------- -------- -------- $17,381 $1,999 $ 550 $ 19,930 $ 18,517 $ 38,447 ======== ======= ======= ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable........................ $ 403 $ 264 $ -- $ 667 $ -- $ 667 Notes payable to related parties........ -- 1,000 (1,000)(3) -- -- -- Accrued payroll and other liabilities... 229 -- -- 229 -- 229 Payable to related parties.............. -- 1,500 -- 1,500 -- 1,500 Current portion of long-term obligations........................... 996 -- -- 996 -- 996 -------- ------- ------- -------- -------- -------- Total current liabilities............. 1,628 2,764 (1,000) 3,392 -- 3,392 Long-term obligations..................... 2,634 -- -- 2,634 -- 2,634 Shareholders' equity (deficit): Preferred stock......................... -- 4,000 (4,000)(4) -- -- -- Common stock............................ 43,605 360 1,000(3) 58,459 18,517(6) 76,976 (1,360)(4) 14,854(5) Unrealized losses on securities available for sale.................... (5) -- -- (5) -- (5) Deficit accumulated during development stage................................. (30,481) (5,125) (14,069)(2) (44,550) -- (44,550) 5,125(4) -------- ------- ------- -------- -------- -------- Total shareholders' equity (deficit)........................... 13,119 (765) 1,550 13,904 18,517 32,421 -------- ------- ------- -------- -------- -------- $17,381 $1,999 $ 550 $ 19,930 $ 18,517 $ 38,447 ======== ======= ======= ======== ======== ========
22 24 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
TARGETED PRO FORMA GENETICS RGENE ADJUSTMENTS PRO FORMA --------- ------- ----------- --------- Revenues: Investment income................................... $ 668 $ 53 $ -- $ 721 Other............................................... 174 300 -- 474 ------- ------- ---- -------- Total revenues................................... 842 353 -- 1,195 ------- ------- ---- -------- Expenses: Research and development............................ 8,195 3,073 -- 11,268 General and administrative.......................... 2,267 753 -- 3,020 Interest............................................ 302 22 (22)(3) 302 ------- ------- ---- -------- Total expenses................................... 10,764 3,848 (22) 14,590 ------- ------- ---- -------- Net loss.............................................. $(9,922) $(3,495) $ 22 $(13,395) ======= ======= ==== ======== Net loss per share.................................... $ (0.94) $ (0.95) ======= ======== Shares used in computation of net loss per share...... 10,533(7) 14,169 (8) ======= ========
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
TARGETED PRO FORMA GENETICS RGENE ADJUSTMENTS PRO FORMA --------- ------- ----------- --------- Revenues: License and other fees.............................. $ -- $ 2,500 $ -- $ 2,500 Investment income................................... 183 23 -- 206 ------- ------- ---- -------- Total revenues................................... 183 2,523 -- 2,706 ------- ------- ---- -------- Expenses: Research and development............................ 2,366 2,270 -- 4,636 General and administrative.......................... 617 271 -- 888 Interest............................................ 92 32 (32)(3) 92 ------- ------- ---- -------- Total expenses................................... 3,075 2,573 (32) 5,616 ------- ------- ---- -------- Net loss.............................................. $(2,892) $ (50) $ 32 $ (2,910) ======= ======= ==== ======== Net loss per share.................................... $ (0.23) $ (0.18) ======= ======== Shares used in computation of net loss per share...... 12,343(7) 15,979 (8) ======= ========
23 25 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The accompanying Unaudited Pro Forma Consolidated Financial Statements give effect to the RGene Acquisition using the purchase method of accounting. The allocation of the purchase price in the accompanying Unaudited Pro Forma Consolidated Financial Statements is based on the Company's estimates. Amounts allocated to RGene assets and liabilities will be based on the estimated fair values at the actual time of the RGene Acquisition. The consideration to be paid for RGene consists of 3,636,364 shares of Common Stock. These shares are unregistered and, accordingly, cannot be freely traded until such shares are registered or an exemption from registration is available. The Company is obligated to register 50% of such shares for resale under the Securities Act prior to the one-year anniversary of the effective date of the RGene Acquisition. Additionally, all of such shares are restricted pursuant to lock-up agreements under which the shares are released in 20% increments every six months beginning six months after the effective date of the RGene Acquisition. For purposes of the Unaudited Pro Forma Consolidated Financial Statements, the shares have been valued at an average price of approximately $4.08 per share. This valuation was calculated using the closing price of the Common Stock on April 16, 1996, the date the Merger Agreement was signed, discounted at rates that reflect the varying periods of restriction. The resulting total consideration of $16,618,000 includes liabilities assumed totaling $1,764,000. Such liabilities include $1.5 million payable to related parties under the existing terms of certain license agreements. Under the terms of the Merger Agreement, prior to the closing of the RGene Acquisition, RGene is required to negotiate changes to a license agreement such that this liability and future payments under the agreement will be substantially reduced. The amount of the reduction cannot be estimated at this time. The total consideration does not reflect the additional $5 million of Common Stock which may be issuable to RGene stockholders upon the achievement of certain milestones. At the time any such Common Stock becomes issuable, the Company will be required to record additional noncash expense, representing in-process research and development, equal to the value of such Common Stock. See "RGene Acquisition." The pro forma adjustments are described in the following notes: (1) Allocates the estimated purchase price to identifiable assets acquired and liabilities assumed as follows (in thousands):
PRO FORMA TOTAL RGENE BALANCE SHEET PURCHASE PRICE BALANCE SHEET ADJUSTMENTS -------------- ------------- ------------- Cash and cash equivalents..................... $ 2,227 $ 1,677 $ 550 Deposits, prepaid expenses and other.......... 146 146 -- Property, plant and equipment, net............ 176 176 -- In-process research and development........... 14,069 -- 14,069 ------- ----- ------- $ 16,618 $ 1,999 $14,619 ======= ===== =======
The amount allocated to cash and cash equivalents reflects $550,000 of additional capital being contributed by RGene's existing investors under the terms of the Merger Agreement. (2) Records the write-off of in-process research and development acquired by the Company. This adjustment has not been reflected in the Unaudited Pro Forma Statement of Operations as the charge is considered nonrecurring. (3) Reflects the conversion of notes payable into shares of RGene common stock prior to the merger and eliminates interest expense thereon. (4) Eliminates the historical stockholders' equity accounts of RGene. (5) Reflects the issuance of 3,636,364 shares of Common Stock to the stockholders of RGene, valued as described above. (6) Reflects the receipt of the estimated net proceeds of the Offering. See "Use of Proceeds." (7) Computed on the basis described in Note 2 of Notes to Targeted Genetics Financial Statements. (8) Reflects the issuance of 3,636,364 shares of Common Stock to the stockholders of RGene. 24 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include the factors discussed below as well as the factors discussed in "Risk Factors" and elsewhere in this Prospectus. Special Note: Certain statements set forth below constitute "forward-looking statements" within the meaning of the Reform Act. See "Special Note Regarding Forward-Looking Statements" on page 2 for additional factors relating to such statements. OVERVIEW Targeted Genetics, a development stage company, was incorporated in March 1989 as a wholly owned subsidiary of Immunex. The Company's activities were carried out as a project within Immunex through December 31, 1991. In 1992, the Company began to operate independently of Immunex and raised $16.6 million, net of expenses, in a private placement of Preferred Stock. The Company subsequently raised an additional $23.8 million in two public offerings of Common Stock. Currently, the Company has no significant revenue sources other than interest income earned on investments, and it has generated an accumulated deficit of approximately $30.5 million through March 31, 1996. It is not anticipated that the Company will have any product-related revenues for a number of years. Accordingly, the Company expects to generate substantial additional losses in the future attributable to the continuation of preclinical and clinical research programs, development of manufacturing capabilities and the preparation for commercialization of its products under development. The Company's ability to achieve profitability depends in part on its ability alone and/or with others to complete the development of product candidates, obtain regulatory approvals, comply with applicable regulatory requirements and manufacture and market such products, of which there can be no assurance. In April 1996, the Company entered into the Merger Agreement with RGene, another development stage company, pursuant to which it agreed to complete the RGene Acquisition, subject to, among other things, final approval of the shareholders of both companies. The effect of the RGene Acquisition on the Company's results of operations is discussed in "-- Results of Operations -- RGene Acquisition." The effect of the RGene Acquisition on the Company's liquidity and capital resources is also discussed below. See "Unaudited Pro Forma Consolidated Financial Statements." RESULTS OF OPERATIONS Three Months Ended March 31, 1995 and 1996 Over the past several years, the Company's net loss has grown, consistent with the growth in the Company's scope and size of operations. In the near term, the Company plans additional moderate growth in employee headcount necessary to address increasing requirements in the areas of manufacturing, quality control, clinical and regulatory affairs. Assuming capital is available to finance such growth, the Company's operating expenses will continue to increase as a result. At least until such time as the Company enters into an arrangement providing research and development funding, the net loss will continue to increase as well. For the three months ended March 31, 1996, interest income increased to $183,000 compared to $132,000 during the three months ended March 31, 1995. The increase was attributable to a higher average investment balance and higher rates of return on those balances compared to the same period in 1995. Research and development expenses were $1,978,000 and $2,366,000 for the three-month periods ended March 31, 1995 and 1996, respectively. Factors that contributed to this increase were: additional employees and related expenses in preclinical immunology and clinical affairs; a moderate increase in 25 27 the level of expenses related to development, manufacturing, quality control and regulatory activities; and increased employee benefits costs. General and administrative expenses were $701,000 and $617,000 for the three months ended March 31, 1995 and 1996, respectively. The decrease reflects a one-time expense of $185,000 related to certain corporate development activities in the quarter ended March 31, 1995. Otherwise, during the first quarter of 1996, higher expenses related to corporate communications, shareholder reporting and employee benefits contributed to the increase compared to the first quarter of 1995. Interest expense was $75,000 and $92,000 for the three months ended March 31, 1995 and 1996, respectively. The increase was attributable to additional equipment leases entered into by the Company. Years Ended December 31, 1993, 1994 and 1995 Revenues were $412,000, $449,000 and $842,000 for the years ended December 31, 1993, 1994 and 1995, respectively. The significant increase in 1995 was attributable to a higher average investment balance during the year and higher rates of return on those balances. In 1995, the Company earned other income of $175,000 from research and development arrangements. Research and development expenses were $4,261,000, $6,763,000 and $8,195,000 for the years ended December 31, 1993, 1994 and 1995, respectively. For the year ended December 31, 1994, the increase in research and development expenses was largely due to the increased emphasis on supporting the advancement of clinical, manufacturing process development and regulatory programs. The increase in research and development expenses in 1995 was largely attributable to the continued expansion of manufacturing process development expertise and other nominal increases in research, clinical and regulatory expenses, including staffing. Research and development expenses will continue to increase in the future, especially as related to clinical trials. Continued growth in expenses, however, is dependent on the availability of capital. General and administrative expenses were $1,217,000, $1,892,000 and $2,267,000 for the years ended December 31, 1993, 1994 and 1995, respectively. The increase in general and administrative expenses in 1994 was attributable to the addition of administrative staff in the areas of business development, finance, human resources and facility management to support research and development activities. During 1994, the Company also experienced an increase in expenses associated with being a publicly traded company. For the year ended December 31, 1995, the Company experienced modest growth in general and administrative expenses compared with 1994. The growth was related to an increase in corporate development activities and, to a lesser extent, additional administrative staffing. Over the three years presented, the increase in general and administrative expenses has roughly tracked the rate of increase in research and development spending. The Company expects this relationship to continue in future years. The Company began incurring interest expense in 1994 related to equipment financing transactions. The substantial increase for the year ended December 31, 1995 versus 1994 is due to an increased level of equipment financing. It is expected that the Company will continue to finance equipment purchases if favorable terms are available. RGene Acquisition On a pro forma basis, after giving effect to the RGene Acquisition as if it had occurred on January 1, 1995, the net loss for the year ended December 31, 1995 would have been $13.4 million. The increase over the Company's actual net loss of $9.9 million for such period is primarily attributable to added research and development expenses of $3.1 million and general and administrative expenses of $753,000, offset by $300,000 of license fee revenues. The Company expects that such 1995 expense additions are generally indicative of the increases in the Company's operating expenses that, going forward, will result from the RGene Acquisition, in that (i) RGene's research and clinical programs, 26 28 and the related costs, are expected to be maintained and (ii) there are no significant savings expected from the elimination of duplicative expenses. There can be no assurance, however, that future expenses will be consistent with 1995 expenses. The pro forma results of operations for the three months ended March 31, 1996 reflect operating expense levels higher than what are expected to result from the RGene Acquisition due to the inclusion of (i) $157,000 of noncash compensation expense related to RGene stock purchase agreements and stock options, all of which will be exercised prior to the closing of the RGene Acquisition, and (ii) $1.5 million payable to related parties related to option fees received by RGene during the quarter. Additional payments to related parties are only anticipated to be payable in the future in the event RGene or the Company receives additional license-related fees. Furthermore, the amount of any such payments is expected to be substantially reduced as a result of provisions in the Merger Agreement requiring RGene to negotiate changes to an existing license agreement. For both the year ended December 31, 1995 and the three months ended March 31, 1996, the pro forma results of operations include revenues from license and option fees. Future license and related milestone revenues under an existing RGene license agreement or any other agreements under negotiation cannot be predicted. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1995, the Company had cash, cash equivalents and securities available for sale totaling $14.4 million, compared to $11.5 million at December 31, 1994. The increase was primarily attributable to the completion of a self-managed stock and warrant offering, which resulted in net proceeds of $12.2 million in July 1995. The Company also completed equipment financing transactions totaling $1.1 million during 1995. Offsetting these increases, the Company used $8.5 million to fund its operations, $1.4 million for purchases of equipment, laboratory expansion and acquisition of technology and patent rights and $657,000 for payments under equipment leases and notes. The Company had cash, cash equivalents and securities available for sale totaling $11.9 million at March 31, 1996, compared to $14.4 million at December 31, 1995. The decrease was primarily attributable to the Company's use of $2.6 million to fund its operations during the first three months of 1996. The Company expects that its cash needs will continue to increase in future periods, in part because of the RGene Acquisition, due to expansion of research and development programs, increased clinical trial activity, growth of administrative staff and expansion of its facilities to accommodate increased numbers of employees. Accordingly, the Company will need to raise substantial additional funds to continue development and commercialization of its products. The Company's future cash requirements will depend on many factors, including the successful consolidation of RGene with the Company; continued scientific progress in its research and development programs; the results of research and development, preclinical studies and clinical trials; acquisition of products or technology, if any; relationships with corporate collaborators; competing technological and market developments; the time and costs involved in obtaining regulatory approvals; the costs involved in filing, prosecuting and enforcing patent claims; the time and costs of manufacturing scale-up and commercialization activities; and other factors. The Company estimates that, at its planned rate of spending, adjusted to reflect the increased expenses expected to result from the RGene Acquisition, its existing cash, cash equivalents and securities available for sale, together with the projected amount of cash or investments expected to be obtained as a result of the RGene Acquisition, the net proceeds of the Offering and the interest income thereon will be sufficient to meet its capital requirements until late 1997. In the event that all outstanding warrants with an exercise price of $4.68 per share and expiring in July 1997 are exercised, the Company will receive an additional $3.6 million, which amount should enable the Company to fund its capital requirements until early 1998. There can be no assurance that the underlying assumed levels of revenue and expense will prove to be accurate or that any warrants will in fact be exercised. In order to further strengthen its cash position, the Company is aggressively pursuing agreements with corporate partners that would provide research and development funding and equity investment. If the Company is successful in these efforts, funding received under such arrangements could extend the 27 29 period during which the aforementioned resources would fund the Company's capital requirements. The Company also intends to seek additional funding through public or private financing, including equity financing. There can be no assurance, however, that adequate funds will be available when needed or will be available on terms favorable to the Company. See "Risk Factors -- Effect of Failure to Obtain Adequate Funding." 28 30 BUSINESS Targeted Genetics is focused on the development of gene and cell therapies for the treatment of certain acquired and inherited diseases. The Company is developing a broad base of core technologies that it believes will allow it to address a variety of such diseases. These technologies include proprietary viral and non-viral gene delivery systems as well as novel techniques for cytotoxic T lymphocyte ("CTL") immunotherapy. In order to expand its technology base with respect to non-viral gene delivery systems and to enhance its product development programs, the Company recently agreed to acquire RGene Therapeutics, Inc. ("RGene"), a privately held company focused on the development and use of non-viral gene delivery systems. The Company is using its core technology platform to develop potential products for the treatment of various genetic disorders, cancer and infectious diseases, and is currently conducting clinical trials in certain of these indications. The Company believes that in the area of gene therapy, different disease targets will require different methods of gene delivery, depending on the target cell to be modified, the duration of gene expression required and the need for ex vivo or in vivo delivery. Accordingly, the Company is developing multiple gene delivery systems based on three different vector technologies: adeno-associated viral ("AAV"), retroviral and non-viral. The Company believes these systems may provide it with the flexibility necessary to develop gene therapies for a broader range of diseases than would be possible using a single gene delivery system. Targeted Genetics was the first company to initiate clinical trials using AAV vectors and is not aware of any other company conducting clinical trials using these vectors. In addition, the Company has exclusive rights to an improved type of retroviral vector which has been shown in preclinical experiments to be more efficient than earlier retroviral vectors at delivering genes into certain types of blood cells. The Company also is developing non-viral gene delivery systems which may provide greater flexibility relative to the size and sequence of transferred genes and allow targeted delivery in vivo. Through its pending acquisition of RGene (the "RGene Acquisition"), the Company will acquire rights to proprietary non-viral gene delivery technology based on the use of cationic lipids that promote the uptake of DNA into cells. This technology includes several formulations with the potential for increased stability, and improved transduction efficiency as well as the potential ability to deliver genes to specific target cells. The Company will also acquire rights to the E1A tumor suppressor gene which is currently in clinical trials for the treatment of ovarian and breast cancer. In the area of cell therapy, the Company's expertise with CTLs enables it to isolate from patients and efficiently multiply antigen-specific CTLs, which are immune cells that target and kill specific diseased cells. This expertise forms the basis for a series of potential immunotherapies for the treatment of cancer and infectious diseases. The CTL immunotherapy program is based on the Company's proprietary Rapid Expansion Method ("REM") technology, which is used to grow CTLs ex vivo prior to infusion into the patient. The Company has demonstrated that REM enables it to grow billions of CTLs from individual cloned cells over several weeks, while preserving the cells' specific disease-fighting capabilities in vitro. Other methods of expanding CTL clones generally require several months. Targeted Genetics is currently conducting multiple clinical trials utilizing its viral gene delivery systems as well as its CTL immunotherapy technology. Following the completion of the RGene Acquisition, the Company also will have a clinical trial using a non-viral gene delivery system. The Company is conducting a Phase I and a Phase I/II clinical trial examining the use of AAV vectors to deliver in vivo the cystic fibrosis transmembrane regulator ("CFTR") gene for the treatment of cystic fibrosis. The Phase II part of the latter trial is expected to begin in late 1996. RGene has initiated a Phase I clinical trial of a non-viral system to deliver in vivo the E1A tumor suppressor gene to patients with ovarian or breast cancer. In addition, the Company is conducting a Phase I clinical trial examining the use of HIV-specific CTLs to prevent the onset of full-blown AIDS in HIV-infected patients. The Company also is collaborating on two physician-sponsored Phase I clinical trials examining gene therapies for the treatment of Gaucher disease and melanoma. Patient accrual for all these Phase I clinical trials is expected to be completed by the end of 1996. There can be no assurance that these clinical trials will proceed or will be completed as indicated or that any products or technologies being 29 31 tested will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors -- Early Stage of Product Development; Technological Uncertainty" and "-- Uncertainties Relating to Clinical Trials and Product Development." DEVELOPMENT PROGRAMS Targeted Genetics is utilizing its core technologies to develop potential products for the treatment of single-gene disorders, cancer and infectious diseases. As part of its product development strategy, Targeted Genetics is using early clinical trials to assess product opportunities and determine the effectiveness of using its vector technologies to administer genes to patients, as well as to support its overall development activities. The most advanced product-directed development programs are the AAV gene therapy for the treatment of cystic fibrosis, the E1A non-viral gene therapy for the treatment of ovarian and breast cancer and CTL immunotherapy for HIV infection. The following table summarizes the Company's and RGene's development programs and related technologies:
TECHNOLOGY ---------------------------------------------------- DEVELOPMENT PROGRAM TYPE OF THERAPY DELIVERY SYSTEM GENE STATUS - -------------------- --------------------- ----------------- ---------- ----------- SINGLE-GENE DISORDERS Cystic Fibrosis Gene Therapy AAV Vector CFTR Phase I/II Gaucher Disease Stem Cell Gene Retroviral Vector GC Phase I Therapy CANCER Ovarian/Breast* Gene Therapy Non-Viral Vector E1A Tumor Phase I Suppressor Melanoma Tumor Vaccine Retroviral Vector IL-7 Phase I Breast/Colon CTL Immunotherapy -- -- Preclinical (Tumor-Specific CTLs) INFECTIOUS DISEASES HIV CTL Immunotherapy -- -- Phase I (HIV-Specific CTLs)
- ------------------ * To be acquired through the RGene Acquisition. SINGLE-GENE DISORDERS CYSTIC FIBROSIS. Cystic fibrosis is the most common single-gene deficiency affecting the Caucasian population, afflicting approximately 30,000 people in the United States and 60,000 people worldwide. The disease is caused by a dysfunctional CFTR gene, which results in a build up of mucus in the lungs, infections and early death. Current treatments for cystic fibrosis offer only symptomatic relief and cannot cure or halt the progression of the disease. Based on preclinical findings by the Company and its scientific collaborators, the Company believes that the persistence of expression and lack of toxicity obtained with its AAV-based gene delivery vector potentially make it better suited for delivery of the CFTR gene to the lung than other vectors. In preclinical studies in rabbits, the Company and its collaborators at The Johns Hopkins University ("Johns Hopkins") were able to detect expression of the CFTR gene for periods of up to six months with no observed side effects when single doses of an AAV-CFTR vector were instilled directly into the right lower lobe of the rabbit lung with a bronchoscope. These results were confirmed in similar studies in rhesus monkeys, in which gene transfer occurred in up to 50% of target airway cells, and gene expression, which was confirmed in all animals, persisted for up to six months. In these 30 32 studies, there was no evidence of toxicity, as indicated by the absence of any significant changes in clinical parameters and levels of inflammatory cytokines. Furthermore, histopathology examination showed no evidence of any cellular immune response. In addition, the monkeys used in the study were seropositive for AAV, and thus a preexisting humoral immune response did not prevent gene transfer. The studies compare favorably to preclinical studies known to the Company with other delivery systems in which only short-term gene expression was observed in the lung. Based on these preclinical data, the Company began two clinical trials in late 1995 to evaluate the safety and feasibility of in vivo gene therapy for the treatment of cystic fibrosis by direct delivery of the CFTR gene using an AAV vector. The first clinical trial, which began in November 1995, is a Phase I clinical trial at Johns Hopkins in which an AAV vector containing the CFTR gene is being delivered to the nose and lung of adult cystic fibrosis patients having mild lung disease. The trial is designed as an interpatient dose escalation trial and will enroll a total of 12 patients. Two patients are being treated at each of six escalating dose levels. An AAV-CFTR vector will be administered in an open-label single dose to the right lower lobe of the lung via bronchoscopy. Additionally, each patient will be randomized to receive a single dose of an AAV-CFTR vector administered to one nostril and a placebo to the other. Patients will be monitored for, among other things, safety and assessment of gene transfer and expression. The nasal administration is intended to determine if physiologic measurement of CFTR function can be obtained in the nasal epithelium. The Company expects to complete this clinical trial in late 1996. If the results of the trial confirm the Company's preclinical findings of safety and gene transfer, the Company intends to conduct subsequent clinical trials in 1997 involving aerosol delivery of an AAV-CFTR vector to the whole lung. The Company is currently developing aerosol formulations for testing in preclinical models. The second clinical trial began in December 1995 at Stanford University. This trial is designed as a Phase I/II trial, pursuant to which an AAV-CFTR vector will be administered to the maxillary sinuses of cystic fibrosis patients with chronic sinusitis. The Phase I part of this trial is designed as a dose escalation study. Six patients will be enrolled, and each patient will initially receive one dose in one maxillary sinus and a subsequent dose in the contralateral maxillary sinus approximately one to two months later. The trial will assess safety and efficacy of gene transfer and also may provide an initial assessment of the effect of repeat delivery on gene transfer and expression. Additionally, the dose level will be established for the Phase II part of the trial, in which up to 50 patients will receive an AAV-CFTR vector in one sinus and a placebo in the other. Patients in the Phase II trial will be monitored to assess the ability of an AAV-CFTR vector to prevent the relapse of chronic sinusitis. The Company expects to complete patient accrual for the Phase I trial in mid-1996 and to initiate the Phase II trial in late 1996. There can be no assurance that clinical trials will proceed or be completed as indicated, or that the AAV-CFTR gene therapy will prove safe and effective, receive applicable regulatory approvals or be successfully developed or marketed. See "Risk Factors -- Early Stage of Product Development; Technological Uncertainty" and "-- Uncertainties Relating to Clinical Trials and Product Development." GAUCHER DISEASE. Gaucher disease results from the deficiency of a gene that produces an enzyme called glucocerebrosidase ("GC"), which normally metabolizes a lipid called glucocerebroside. The enzyme deficiency results in accumulation of this lipid in cells in the spleen, liver and bone marrow. Symptoms of the disease include hematologic disorders, enlargement of the liver and spleen, bone erosion and pain. The estimated annual incidence of Gaucher disease in the United States is 5,000 severe cases and 15,000 mild to moderate cases. Current therapies for Gaucher disease include bone marrow transplantation from sibling-matched donors and enzyme replacement therapy. Only 25% of patients are candidates for bone marrow transplantation due to lack of appropriate donors. Furthermore, the risk of transplant-related morbidity and mortality restricts this therapy to severely affected individuals. Although enzyme replacement therapy appears to be effective, this therapy is currently extremely expensive. 31 33 Targeted Genetics selected Gaucher disease as an initial disease target for the assessment of its stem cell gene therapy technology based on the scientific theory that genetic correction in as little as 5% of a Gaucher disease patient's blood cells may be adequate to achieve reversal of the disease. The Company believes that although stem cell transduction techniques, including its own, may not provide adequate levels of gene transfer and expression, current clinical trials will provide baseline data that are necessary to facilitate the development of improved methods for stem cell transduction. The Company is collaborating on a physician-sponsored Phase I clinical trial at the Fred Hutchinson Cancer Research Center (the "Hutchinson Center") in which peripheral blood stem cells are being reinfused into Gaucher disease patients after ex vivo transduction with a retroviral vector containing the GC gene. Patients undergoing this therapy will be monitored for safety and long-term persistence of the genetically modified cells. The Company believes that a series of Phase I trials to test potentially improved techniques for stem cell gene transfer will be required prior to initiation of a Phase II Gaucher disease clinical trial. See "-- Core Technologies -- Retroviral Vectors." CANCER Cancer is the second leading cause of death in the United States, with over one million new cases diagnosed each year. The Company is pursuing two primary approaches for the treatment of cancer. In the first approach, the Company and its collaborators are investigating the uses of CTL-based immunotherapy to enhance the immune system's natural ability to eliminate cancer cells selectively. The second approach, which will be acquired by the Company through the RGene Acquisition, will utilize RGene's proprietary non-viral system to deliver in vivo an E1A tumor suppressor gene to cancer cells. E1A TUMOR SUPPRESSOR GENE THERAPY. This program is designed to test the feasibility of treating certain cancers by introducing the proprietary E1A tumor suppressor gene into cancer cells using RGene's proprietary non-viral delivery system. Overexpression of the Her-2/neu oncogene occurs in approximately 30% of a number of cancers, including ovarian, breast, head and neck, stomach, pancreatic, liver, cervical and prostate cancer, and has been associated with enhanced metastatic potential, drug resistance and poor survival rates. The E1A tumor suppressor gene has been shown to inhibit the overexpression of the Her-2/neu oncogene in certain tumor cells in vitro. In addition, in preclinical mouse studies the E1A tumor suppressor gene was shown to inhibit the intraperitoneal growth of ovarian cancer cells that were overexpressing the Her-2/neu oncogene, and significantly increase the long-term survival of the mice. A Phase I clinical trial of the E1A tumor suppressor gene therapy in patients with metastatic ovarian or breast cancer that overexpresses the Her-2/neu oncogene is now open for enrollment at M.D. Anderson Cancer Center/University of Texas ("M.D. Anderson"). In the Phase I trial, 12 patients with ovarian cancer and 12 patients with breast cancer that overexpress the Her-2/neu oncogene will be administered weekly doses of the E1A tumor suppressor gene for a six-month period. The doses will be administered using RGene's proprietary non-viral delivery system. This trial will be conducted as an interpatient, ascending dose study with doses of the E1A tumor suppressor gene delivered intraperitoneally in the ovarian cancer patients and intrapleurally in the breast cancer patients. The objectives of the trial are to assess safety, levels of gene transfer and expression and tumor response. It is expected that this clinical trial will be completed in mid-1997. There can be no assurance that the clinical trials of the E1A tumor suppressor gene will proceed or be completed as indicated or that the E1A tumor suppressor gene therapy will prove safe and effective, receive applicable regulatory approvals or be successfully developed or marketed. See "Risk Factors -- Early Stage of Product Development; Technological Uncertainty" and "-- Uncertainties Relating to Clinical Trials and Product Development." CTL IMMUNOTHERAPY. The objective of the Company's cancer CTL immunotherapy program is to restore an effective immune response through the infusion of large numbers of antigen-specific CTLs, immune cells that target and kill specific tumor cells. The CTL immunotherapy program is based on the Company's proprietary REM technology, which is used to grow CTLs prior to infusion. The 32 34 program involves isolating antigen-specific CTLs, multiplying them ex vivo and reinfusing them into the patient. The Company believes that therapies based on antigen-specific CTLs may be more effective and have fewer side effects than other types of cell therapies that utilize broader classes of T cells or lymphocytes. The first clinical trial using antigen-specific CTLs was conducted by the Company's scientific collaborators at the Hutchinson Center in an examination of a CTL immunotherapy for the prevention of cytomegalovirus ("CMV") disease in patients undergoing bone marrow transplants for the treatment of certain cancers. CMV is a virulent infection that occurs frequently in immunocompromised patients and causes severe illness that may lead to death. In this trial, 14 patients were administered donor-derived CMV-specific CTLs. None of the patients who received the CTLs developed CMV viremia or disease. Based on this Hutchinson Center trial, the Company believes that CTL immunotherapy may be useful in treating or preventing a number of diseases, such as cancer, that may occur due to a lack of adequate T cell response. The Company is conducting preclinical studies directed to the isolation and ex vivo multiplication of tumor-specific CTLs against certain types of cancer, including breast and colon cancers. The Company plans to use the data generated by these preclinical studies to design clinical trials of CTL immunotherapy for the treatment of these cancers. To date, the Company has been able to generate CTLs specific to peptides associated with human prostate and melanoma tumors, multiply these CTLs in the REM process and use them to kill cancer cells in vitro. IL-7 TUMOR VACCINE. The Company is collaborating with clinicians at the University of California at Los Angeles on an investigator-sponsored Phase I clinical trial involving the administration of an IL-7 gene to nine patients with metastatic melanoma in an attempt to stimulate CTL responses against the tumor. The Company is collaborating in this investigator-sponsored study to determine whether antigen-specific CTLs can be isolated and then multiplied using the Company's REM process and retain their potency. IL-7 is an immunomodulatory protein that has been demonstrated to activate antigen-specific CTLs in in vivo preclinical studies and cause them to infiltrate tumor cells. In connection with this trial, a melanoma tumor cell line was genetically modified to produce IL-7. These modified cells are mixed with the patient's own tumor cells and the cell mixture is injected into the patient. These modified tumor cells may act to enhance the immune system's ability to recognize cancer cells as foreign and to generate a potent CTL response against the tumor. As part of this trial the Company has been able to isolate melanoma-specific CTLs from blood samples of patients who have received the therapy and is currently examining these CTLs to assess their ability to kill cancer cells. INFECTIOUS DISEASES: HUMAN IMMUNODEFICIENCY VIRUS ("HIV") CTL IMMUNOTHERAPY. HIV is a retrovirus that is the cause of AIDS, a condition that is characterized by loss of CD4 cells and progressive immunologic impairment and death. Currently there is no effective treatment for AIDS, and no effective way to prevent an HIV-infected person from developing AIDS. According to the Centers for Disease Control and Prevention, approximately one million people in the United States have been infected with HIV. The World Health Organization estimates that approximately 17 million people worldwide have been infected with HIV and projects that the worldwide incidence of HIV infection will grow to 30 million to 40 million people by the end of the century. The Company and certain other researchers believe that the key to successful HIV therapy may lie in manipulating and harnessing the cell-mediated arm of the immune response. Researchers have found that HIV-infected people who remain symptom-free for prolonged periods have high levels of CTLs that suppress viral proliferation in CD4 cells. In addition, uninfected partners of HIV-infected people, and uninfected infants born to HIV-infected mothers, have been found to have high levels of HIV-specific CTLs, which appear to have kept them HIV-free. The Company believes that the provision of large quantities of cloned HIV-specific CTLs may provide a means of allowing HIV-infected people to maintain an effective immune response, thereby delaying the onset of full-blown AIDS. 33 35 In 1995, the Company completed a Phase I clinical trial of HIV-specific CTLs modified with a HyTK safety gene at the Hutchinson Center. Individual clones of these CTLs specific for the HIV gag protein were isolated, modified with a retroviral vector containing the HyTK gene and multiplied to more than one billion cells. The HyTK gene was used to mark the cells and allow for ablation of the cells by administration of ganciclovir if undesirable side effects resulted from the therapy. After ex vivo expansion, the autologous HyTK-transduced gag-specific CTL clones were reinfused intravenously in four ascending doses administered at 14-day intervals. Based on the six patients tested, the CTLs were shown to engraft, and the therapy appeared to be safe and well tolerated, with no significant side effects. No patients required ablation with ganciclovir. Once reinfused, the HIV-specific CTLs did not persist as long as anticipated, apparently because of a primary CTL response directed against the HyTK gene. Since the CTL immunotherapy appears to be safe, the use of the HyTK gene for the original reason of safety will no longer be required. In early 1996, the Company began a follow-up Phase I clinical trial, also at the Hutchinson Center, in which up to eight HIV-infected patients are being administered five escalating doses of HIV gag-specific CTLs. The first three doses will consist of unmarked cells and the last two will consist of cells modified with a retroviral vector containing the neo gene, a marking gene that has not been shown to be immunogenic. Patients in the trial will be monitored for safety, persistence of the infused CTLs and changes in viral burden. Patient accrual in this trial is expected to be complete in late 1996. There can be no assurance that the clinical trials will proceed or be completed as indicated or that the CTL immunotherapy will prove safe and effective, receive applicable regulatory approvals, or be successfully developed or marketed. See "Risk Factors -- Early Stage of Product Development; Technological Uncertainty" and "-- Uncertainties Relating to Clinical Trials and Product Development." INTRACELLULAR VACCINE IN CD4 CELLS. As a complementary approach to its CTL immunotherapy for the treatment of HIV, the Company is collaborating on the preclinical and clinical development of intracellular vaccines for HIV with Dr. Philip Greenberg of the Hutchinson Center. In the planned physician-sponsored Phase I trial, HIV-infected patients will be treated with genetically modified CD4 helper cells. Two subgroups of these CD4 cells will be modified with retroviral vectors expressing two different intracellular vaccine candidates for which preclinical data indicate potential utility as protective agents against HIV replication. These candidates are genes that express RNA molecules that can act as decoys to bind HIV proteins essential for HIV replication. A third subgroup of CD4 cells will be unmodified except for a marking gene. The trial's goal is to provide general safety data and comparative data as to which of the intracellular vaccine constructs may be more promising, based on length of cell persistence in vivo versus the marked cells. Since only a small fraction of the patient's CD4 cells will be modified to resist HIV in this trial, it is unlikely that long-term therapeutic benefit will result. To generate larger numbers of HIV-resistant CD4 cells, it will be necessary to introduce the intracellular vaccine gene into stem cells from which CD4 cells are derived. The Company believes that continued improvement in the efficiency of stem cell gene transfer and expression will be necessary to provide the rationale for future clinical testing of intracellular vaccines for HIV in stem cells. See "-- Core Technologies -- Gene Therapy -- Retroviral Vectors." OTHER THERAPEUTIC AREAS In addition to the development program for cystic fibrosis, the Company is conducting research to assess the potential for delivery of genes to other target cells using AAV vectors. Also, upon completion of the RGene Acquisition, the Company expects to begin investigating the treatment of cancer using antisense molecules to inhibit the activity of certain oncogenes. CARDIOVASCULAR. The Company is collaborating with researchers at the Bowman Gray School of Medicine in Winston-Salem, North Carolina to examine, in animal models, the ability of AAV vectors to deliver genes in vivo to certain cardiovascular cells. These studies are investigating in vivo delivery of AAV vectors in monkeys exhibiting arteriosclerotic disease. AAV vectors are being used to deliver 34 36 genes via a balloon catheter inserted into a monkey artery. To date, these studies have demonstrated that certain vascular endothelial cells can be targeted for gene expression with AAV vectors, indicating that AAV vectors may be feasible delivery systems for gene therapy treatments directed at various cardiovascular disorders, including the inhibition of cell growth associated with restenosis or the treatment of vascular disease with angiogenic factors. MUCOSAL IMMUNITY. The Company is evaluating the feasibility of using AAV vectors to deliver genes for applications relating to mucosal immunity. Certain inflammatory and immune-related diseases may be treated by delivery of anti-inflammatory or immune stimulating genes to mucosal surfaces such as the gastrointestinal tract. In initial studies using in vivo animal models, the Company is assessing the ability of AAV vectors to deliver genes directly to cells of the intestinal epithelium. ANTISENSE OLIGONUCLEOTIDES. RGene is investigating the potential treatment of cancer by using antisense molecules to inhibit the activity of certain oncogenes. Antisense molecules can prevent expression of the protein product of a gene by binding to the messenger RNA copied from the DNA coding for that gene. These antisense molecules are composed of oligonucleotides, which are short pieces of DNA. Antisense molecules can be incorporated into liposomes for delivery to target cells. Chronic myelogenous leukemia ("CML") is a cancer associated with the presence of an aberrant chromosome, the Philadelphia chromosome, which results in generation of an oncogene, the bcr-abl fusion gene. The protein product of the bcr-abl oncogene is believed to be involved in the pathogenesis of CML by promoting selective proliferation of myeloid cells. The bcr-abl gene is present only in leukemia cells and may be specifically targeted with antisense oligonucleotides. RGene plans to test a proprietary liposomal anti-bcr-abl oligonucleotide for treatment of CML, in collaboration with Dr. Gabriel Lopez-Berestein at M.D. Anderson. In in vitro experiments this formulation was shown to selectively inhibit proliferation of the cancer cells. An initial Phase I/II dose escalation study to test the safety and efficacy of repeated intravenous injections of the liposomal/antisense complex is being planned in chronic-phase CML patients who are not candidates for bone marrow transplants and who have received no benefit from standard therapy. There can be no assurance that these clinical trials will proceed or will be completed as indicated or that any products or technologies being tested will prove safe and effective, meet applicable regulatory standards or be successfully marketed. See "Risk Factors -- Early Stage of Product Development; Technological Uncertainty" and "-- Uncertainties Relating to Clinical Trials and Product Development." CORE TECHNOLOGIES The Company is developing a broad range of core technologies that it believes will allow it to address issues specific to a variety of diseases. The Company believes that in the area of gene therapy, different disease targets will require different methods of gene delivery, depending on the target cell to be modified, the duration of gene expression required and the need for ex vivo or in vivo delivery. Accordingly, the Company is developing multiple gene delivery systems based on three different vector technologies: AAV, retroviral and non-viral. In certain treatments, for which in vivo modification of slowly dividing or nondividing target cells is required or preferred, such as modification of lung cells to treat cystic fibrosis, the Company is utilizing its AAV vector technology. The Company uses its retroviral vector technology in therapeutic areas where permanent modification of rapidly dividing cells may be necessary. In therapeutic indications where the use of AAV and retroviral vectors is not desirable or feasible, the Company is utilizing its non-viral delivery systems. The Company believes that non-viral vectors may provide greater flexibility relating to the size and sequence of transfer genes and may also allow targeted delivery in vivo. The Company's non-viral technology platform will be significantly enhanced as a result of the RGene Acquisition. In the area of cell therapy, the Company's CTL immunotherapy expertise enables it to efficiently isolate and multiply CTLs, immune cells that target and kill only specific diseased cells, and forms the basis for a series of potential immunotherapies. 35 37 GENE THERAPY OVERVIEW. Gene therapy is an approach to the treatment and prevention of genetic and acquired diseases that involves the insertion of genetic information into target cells to produce specific proteins needed to correct or modulate disease conditions. Proteins are the fundamental components of all living cells and are essential to cellular structure, growth and function. Proteins are produced by cells from a set of genetic instructions encoded in DNA, which contains all the information necessary to control cellular biological processes. DNA is organized into segments called genes, with each gene containing the information required to express, or produce, a specific protein. An alteration in the function of, or absence of, specific genes is responsible for causing some diseases, including inherited diseases such as cystic fibrosis and Gaucher disease and certain types of cancer. Gene therapy may be used to treat such diseases by replacing a missing or defective gene to facilitate the normal protein production capabilities of cells. In addition, gene therapy may be used to enable cells to perform additional roles in the body, such as enhancing the function of the immune system to fight infectious diseases or cancer. Gene therapy may also be used to inhibit production of undesirable proteins or viruses within cells. A key factor in the progress of gene therapy is the development of safe and efficient methods of transferring genes into cells. For transfer into cells, the gene is incorporated into a delivery system called a vector. Vectors may be derived from either viral or non-viral systems. The most common gene delivery approach to date relies on viral gene transfer, whereby modified viruses are used to transfer the desired genetic material into host cells. The process of gene transfer can be accomplished ex vivo (outside the body), in which cells are removed from the patient, genetically modified, and then reinfused into the patient, or in vivo (inside the body), in which vectors are introduced directly into the patient's body. The use of viruses takes advantage of their natural ability to introduce genes into host cell and use the host's metabolic machinery to produce proteins essential for the survival and function of the virus. In gene therapy applications, viruses are genetically modified to contain the desired genes and to inhibit the ability of the virus to reproduce. Successful application of viral gene transfer to indications requiring long-term gene expression entails a number of essential technical requirements, including the ability of the viral vector to carry desired segments of genes, to transfer genes into a sufficient number of target cells and to enable genes contained in the viral vector to persist in the host cell. A number of different viral vectors, including AAV and retroviral vectors, are being used for potential gene therapy applications requiring long-term gene expression. Current non-viral vector systems generally consist of DNA incorporating the desired gene, combined with various compounds aimed at enabling the DNA to be taken up by the host cell. These in vivo gene delivery approaches include encapsulating genes into lipid carriers such as liposomes, which facilitate the entry of DNA into cells; ionically binding negatively charged DNA to the surface of cationic lipids which are positively charged prior to infusion; injecting pure plasmid or "naked" DNA in an aqueous solution; and directing DNA to receptors on target cells by combining the gene with protein carriers that are taken up by the cell. AAV VECTORS. Targeted Genetics and its scientific collaborators have developed significant expertise with respect to the design and use of AAV vectors in gene therapy. The Company believes that certain features of AAV vectors make them particularly well suited for the treatment of a number of diseases: (i) AAV has never been associated with causing any human disease; (ii) AAV generally cannot replicate without the presence of a helper virus; (iii) AAV vectors contain no viral genes that, if present, might produce unwanted immune responses leading to side effects or reduced efficacy; (iv) unlike some other types of viral systems, AAV vectors can introduce genes into nondividing or slowly dividing cells, such as cells lining the airway of the lung; (v) AAV vectors may persist in the host cell to provide relatively long-term expression; and (vi) AAV vectors can be purified and concentrated, and thereby may allow for more efficient manufacturing. 36 38 The Company is building a proprietary position in AAV through the development or acquisition of exclusive rights to inventions that (i) provide important enhancements to AAV vectors; (ii) demonstrate novel approaches to the use of AAV vectors for gene therapy; and (iii) establish new and improved methods for large-scale production of AAV vectors. The Company has exclusive rights from the National Institutes of Health (the "NIH") to a patent for use of a novel AAV vector for cystic fibrosis. Notice of allowance has been granted with respect to this patent. See "-- Patents and Proprietary Rights" and "Risk Factors -- Uncertainty of Patent Position and Proprietary Rights; Access to Proprietary Genes." NON-VIRAL VECTORS. As a result of the RGene Acquisition, the Company will acquire rights to a significant body of non-viral gene delivery technology based on the use of cationic lipids to promote the uptake of DNA into cells. The Company believes that non-viral vectors may have several characteristics that may make them particularly well suited for the treatment of certain diseases, including (i) the ability to target such vectors to a specific cell type; (ii) relative ease of manufacture; and (iii) the ability to transfer relatively large segments of DNA in a single vector. RGene's vectors are formulated by complexing negatively charged DNA with cationic lipids which are positively charged to promote DNA uptake by cells. Such complexes appear to have good safety profiles and can be used ex vivo as well as in vivo. For in vivo use, these complexes can potentially be delivered topically, intravenously, intraperitoneally, intrapleurally or by aerosol. The Company will be utilizing a series of these non-viral delivery technologies developed by Dr. Leaf Huang of the University of Pittsburgh. His original DC Chol system, which appears to have a favorable clinical toxicity profile, has been used in two previous clinical trials by other unaffiliated investigators for other disease indications and is now being used in the E1A tumor suppressor gene clinical trial. The Company will be acquiring an exclusive license to an issued U.S. patent for the original DC Chol system for the treatment of certain cancers, including, among others, breast, ovarian and lung cancers. Dr. Huang is developing a series of non-viral delivery systems for which RGene has exclusive worldwide rights in the field of cancer. RGene is currently engaged in negotiations with the University of Pittsburgh of the Commonwealth System of Higher Education ("Pittsburgh") to expand the license to additional fields and technologies. See "-- Research Collaborations and Licensing Agreements -- RGene Agreements -- University of Pittsburgh." One type of system under development employs additional analogs of DC Chol that may have a more favorable toxicity profile. In another system, the DNA is condensed into particles of defined size that have transduction efficiency that is fifty- to eighty-fold higher than the original DC Chol system. An alternate version of this system is being developed that includes specific ligands to enhance delivery to specific target cells and to increase stability when delivered intravenously. An additional system being developed also has increased efficiency of gene transduction and higher stability in serum for intravenous delivery. Specific formulations will be chosen for various applications based on the type of target cell, desired mode of administration and biology of the disease. RETROVIRAL VECTORS. The Company is using retroviral vectors to modify T cells and stem cells. These cells multiply to generate large numbers of progeny (daughter) cells and are well suited as targets for retroviral vectors that can modify only rapidly dividing cells. The Company believes that it has positioned itself at the forefront of retroviral gene delivery technology through its exclusive relationship with Dr. A. Dusty Miller, a leader in the development of packaging cell lines for retroviral vectors. One of Dr. Miller's more recent inventions in this area is a new type of retroviral vector packaging cell line called PG13, which the Company has licensed exclusively from the Hutchinson Center. Vectors produced in this cell line have been shown to have improved efficiency for ex vivo transduction of human blood cells such as T cells and stem cells. Hematopoietic stem cells are the progenitor cells from which all circulating blood cells are derived. Thus, a large number of genetic diseases might be treated using stem cell gene therapy. However, Targeted Genetics believes that many of these diseases cannot be successfully treated using currently available gene delivery technologies. Increased efficiency of gene transfer and expression will be required to achieve the level of genetically modified cells necessary to result in modulation of many such diseases. Accordingly, the Company's effort in stem cell gene therapy is directed to improving the efficiency of gene transfer and 37 39 expression in stem cells using the PG13 retroviral vector together with an internally developed proprietary stem cell transduction protocol. CTL IMMUNOTHERAPY OVERVIEW. The immune system is the body's major defense mechanism responsible for protecting against disease. It functions through a complex interplay of components and allows the body to detect foreign agents and thereby defend against infections and diseases. The immune system recognizes parts of proteins called antigens that are present on the surface of diseased cells but are not present on normal cells. The immune response to an antigen involves the integrated action of various classes of white blood cells, including lymphocytes. Lymphocytes comprise two major classes: B cells, which produce antibodies that mediate humoral immunity, and T cells, which direct cell-mediated immunity. T cells direct cell-mediated immunity by recognizing antigens on diseased cells. The two main classes of T cells are CD4 cells and CD8 cells. In general, CD8 cells are CTLs that recognize, contact and kill the diseased cells. CD4 cells are primarily helper cells that coordinate the function of other immune cells, including CTLs, by secreting growth factors known as cytokines. CTLs are disease-specific, i.e., they individually recognize and bind to only a single, specific antigen. Furthermore, only in the presence of CD4 helper cells do these specific CTLs proliferate to produce the large population of antigen-specific CTLs required to elicit an effective immune response. In some disease states, the immune system fails to mount or maintain an effective immune response. For certain diseases, including HIV and cancer, it is believed such failure may be associated with an inadequate CTL response. For example, HIV infects and kills CD4 cells, which leads to subsequent loss of CTL function and, thus, to destruction of the immune system by the virus. One approach to the treatment of immune deficiencies, adoptive immunotherapy, has been demonstrated in animal models to be effective against certain cancers and infectious diseases. Adoptive immunotherapy is designed to harness and bolster the body's natural immune capabilities to fight or prevent disease. In adoptive immunotherapy, cells are harvested from the patient, multiplied ex vivo and reinfused. However, the efficacy of adoptive immunotherapies has been limited to date, due in part to the lack of uniform antigen specificity in the expanded cell population and side effects resulting from the activation of a broad-based immune response. Targeted Genetics believes that the more uniform specificity obtained by expanding individual clones of antigen-specific CTLs may potentially enhance the efficacy and reduce the side effects of adoptive immunotherapies. THE COMPANY'S CTL IMMUNOTHERAPY PROGRAM. Targeted Genetics is working to develop a highly targeted form of cell therapy, which is intended to produce a powerful, disease-specific immune response through the infusion of large numbers of antigen-specific CTLs. The Company's CTL immunotherapy program involves isolating antigen-specific CTLs from a small sample of the patient's blood, multiplying them to large numbers ex vivo and reinfusing them into the patient. In essence, the Company's CTL immunotherapy is intended to amplify the natural disease-fighting function of the immune system relating to specific infected or cancerous cells. The Company believes that its CTL immunotherapy represents an improvement over other approaches to immunotherapy because it is based on cloned, antigen-specific CTLs. The Company believes that the efficacy of its CTL immunotherapy may be more effective than other immunotherapy approaches because virtually all of the reinfused cells will be CTLs targeting the specific diseased cells. The Company also believes that the safety and side effect profile may be improved over other immunotherapy approaches because of the uniformity and consistency of the reinfused cells. The Company's focus on antigen-specific CTLs as a basis for immunotherapy originated from research conducted by its collaborators at the Hutchinson Center, Drs. Philip Greenberg and Stanley Riddell. These researchers conducted a Phase I clinical trial to evaluate the safety of infusing donor-derived, CMV-specific CTLs to bone marrow transplant patients, and the potential of this approach for providing an immune response against CMV during the short period in which transplant patients 38 40 have a high probability of developing CMV. This trial, which was published in The New England Journal of Medicine in October 1995, was the first clinical trial in which cloned, antigen-specific CTLs had been used in a clinical trial. None of the 14 patients receiving the CTLs developed CMV viremia or disease. See "-- Development Programs -- Cancer -- Infectious Diseases: Human Immunodeficiency Virus ("HIV") -- CTL Immunotherapy." RAPID EXPANSION METHOD. The CTL immunotherapy program is based on the Company's proprietary REM technology, which is used to rapidly grow CTLs prior to infusion into the patient. REM represents a significant improvement over other methods of multiplying T cell clones. Using REM, CTL clones can be multiplied over a thousandfold in less than two weeks. The Company has demonstrated that REM enables it to grow billions of CTLs from individual cloned cells over several weeks, while preserving the cells' disease-fighting capabilities in vitro. The Company has seen consistent results from REM in both CD8 and CD4 T cells and for all disease specificities tested to date. The Company has shown that REM is effective for growing CTLs specific for HIV, CMV, malignant melanoma and prostate tumor peptides. Clinical testing will be required to determine whether cloned cells maintain their disease-fighting capabilities and are effective after being reinfused into humans, as to which there can be no assurance. See "-- Development Programs -- Cancer -- CTL Immunotherapy" and "-- Development Progams -- Infectious Diseases: Human Immunodeficiency Virus ("HIV") -- CTL Immunotherapy." The Company has filed patent applications, on a worldwide basis, relating to the original process and to process improvements. See "-- Patents and Proprietary Rights" and "Risk Factors -- Uncertainty of Patent Position and Proprietary Rights; Access to Proprietary Genes." GENETIC MODIFICATION OF CTLS. The Company believes that, on a long-term basis, the effectiveness of CTL immunotherapy may be further improved through genetic modification of the CTL clones. Currently, the Company is developing methods to genetically modify CTLs to give them the capability of producing their own cytokines, which are required for CTL proliferation and activation. TUMOR SUPPRESSOR GENES Many pathways of gene regulation control cell growth and division, and cancer arises from disruption of these pathways. Certain of these pathways are regulated by cellular oncogenes or tumor suppressor genes. Cancer may result from the structural alteration and abnormal expression of cellular oncogenes or from mutation or deletion of tumor suppressor genes. Certain genes, including Her-2/neu, abl, bcr, crkl, and bcl-2, function as parts of signal transduction pathways that promote cell growth and division. Tumor suppressor genes function by inhibiting cell growth and the expression of cellular growth factors. Malfunctioning oncogenes and tumor suppressor genes represent targets through which the growth of malignant cancer cells may be regulated. Thus, introduction of tumor suppressor genes may be a viable approach to down-regulate the expression of oncogenes or to replace functions lost by mutation or deletion of a tumor suppressor gene. Some viruses have evolved genes that may mimic functions normally exhibited by cellular genes. One such example is the E1A gene of the adenovirus type 5. The E1A gene was shown by Dr. Mien-Chie Hung, in experiments conducted at M.D. Anderson, to function as a tumor suppressor and to suppress expression of the Her-2/neu oncogene, which is known to be overexpressed in certain cancers. As a result of the RGene Acquisition, the Company will have worldwide rights to use the E1A gene as a tumor suppressor. An open Phase I clinical trial is evaluating the ability of the E1A tumor suppressor gene to down-regulate the Her-2/neu oncogene in ovarian and breast cancers. Preclinical research is also being conducted to assess the feasibility of using non-viral delivery systems to deliver a variety of other cellular tumor suppressor genes to treat certain cancers. See "-- Development Programs -- Cancer -- E1A Tumor Suppressor Gene Therapy." 39 41 RESEARCH COLLABORATIONS AND LICENSING AGREEMENTS Targeted Genetics and RGene have entered into a number of research collaboration and licensing agreements. Generally, under the license agreements, the Company and RGene have agreed to pay (i) an initial fee upon execution of the agreement; (ii) annual maintenance or royalty fees; (iii) milestone payments upon realization of certain benchmarks; and (iv) royalties on sublicense fees and sales of products, if any, incorporating the underlying technology. Under the research collaboration agreements, the companies are generally obligated to pay research fees, and receive options to obtain exclusive licenses to technology developed under these agreements. There can be no assurance that any of the research collaborations and licensing agreements will result in the Company's acquisition of valuable rights. In addition, RGene has entered into a licensing agreement with Pasteur Merieux Serums & Vaccins S.A. ("Pasteur Merieux") in which RGene has received a development fee and an upfront license fee. RGene has also entered into a nonbinding letter of intent with a pharmaceutical company for the development in Europe of RGene's E1A tumor suppressor product candidate. In connection with the execution of this letter of intent, RGene has received an upfront $2.5 million nonrefundable option fee. Negotiations are underway to enter into a definitive agreement. There can be no assurance, however, that a definitive agreement will be executed. The following is a summary of the principal agreements of both Targeted Genetics and RGene. TARGETED GENETICS AGREEMENTS FRED HUTCHINSON CANCER RESEARCH CENTER -- ADOPTIVE TRANSFER OF IMMUNE CELLS. Between January 1994 and February 1995, Targeted Genetics entered into research and license agreements with the Hutchinson Center and the University of Washington in connection with the Company's CTL-based immunotherapy product development program. The Company agreed to pay the Hutchinson Center and the University of Washington annual research support until December 1996 and July 1996, respectively, for research to be conducted by Drs. Philip Greenberg and Stanley Riddell at the University of Washington and the Hutchinson Center, respectively, in the area of methods of conferring immunity in humans by adoptive transfer of genetically modified CTLs. These agreements replaced other contractual arrangements that had been entered into by Targeted Genetics with the Hutchinson Center and the University of Washington between 1991 and 1993 in this area. Pursuant to these agreements, Targeted Genetics has acquired an exclusive worldwide license to inventions previously licensed by Targeted Genetics or developed under these prior agreements, and has a continuing right, effective until termination of this program, to incorporate and add new inventions arising from this program to the research and license agreements. FRED HUTCHINSON CANCER RESEARCH CENTER -- RETROVIRAL VECTORS. In November 1991, the Company entered into an agreement with the Hutchinson Center pursuant to which the Company obtained a nonexclusive license to develop and market products utilizing the PG13 packaging cell line technology for retroviral vectors. In addition, in March 1994, Targeted Genetics entered into an agreement with the Hutchinson Center pursuant to which the Company obtained an exclusive license to develop and market products utilizing a second packaging cell line technology for retroviral vectors. A patent covering this technology was issued by the USPTO in November 1995. THE JOHNS HOPKINS UNIVERSITY. In April 1993, Targeted Genetics entered into a sponsored research agreement with Johns Hopkins pursuant to which the Company agreed to pay Johns Hopkins an annual fee for a one-year period for research to be conducted under the direction of Dr. Terence Flotte in the area of developing AAV vectors for in vivo gene delivery. In March 1994, Targeted Genetics entered into an agreement with Johns Hopkins for technology relating to methods for producing AAV vectors co-invented by scientists at Johns Hopkins and Targeted Genetics under this research program, pursuant to which Johns Hopkins granted the Company an exclusive license to its interest in such technology. MEDICAL COLLEGE OF OHIO. In March 1994, Targeted Genetics entered into an agreement with the Medical College of Ohio pursuant to which the Company obtained an exclusive worldwide license to develop and market products utilizing technology relating to methods for producing AAV vectors. 40 42 NATIONAL INSTITUTES OF HEALTH. In March 1994, Targeted Genetics entered into an agreement with the NIH pursuant to which the Company obtained an exclusive worldwide license to a patent application covering an AAV vector capable of expression from a novel promoter for the field of viral vector-based gene therapy for the treatment of cystic fibrosis. In February 1996, the USPTO issued a notice of allowance for this patent application. UNIVERSITY OF MICHIGAN. In March 1994, the Company entered into a nonexclusive license agreement with the University of Michigan and HSC (Hospital for Sick Children) Research and Development Limited Partnership for a patent application covering the CFTR gene used in the Company's AAV therapy for the treatment of cystic fibrosis. RGENE AGREEMENTS Following the RGene Acquisition, the Company will assume all the rights and obligations of the following agreements previously entered into by RGene. ARONEX PHARMACEUTICALS, INC. In April 1994, RGene and Argus Pharmaceuticals, Inc. (now Aronex Pharmaceuticals, Inc. ("Aronex")) entered into a Development Agreement, an Assignment and Assumption Agreement and a Sublicense Agreement. As part of the exchange for 642,307 shares of RGene's common stock, Aronex licensed to RGene, on a nonexclusive, royalty-free basis, certain of Aronex's technology, including technology in the area of liposomal drug delivery and manufacturing, which may be useful or necessary in the development of certain products. Aronex also assigned to RGene certain rights in an exclusive license agreement between the University of Texas Board of Regents, M.D. Anderson and Aronex for a patent relating to liposomal methylphosphonate oligonucleotides for the treatment of cancer. In addition, Aronex granted to RGene an exclusive worldwide sublicense to patent applications and technology relating to delivery of genes into cells using novel cationic cholesterol derivatives for use in certain fields, including lung, colon, breast, ovarian and hematological cancers. This technology was licensed exclusively by Aronex from the University of Tennessee Research Corporation ("UTRC") for use in certain fields in November 1993. Under the Development Agreement, Aronex and RGene agreed to conduct certain research and experiments and to develop certain products incorporating Aronex technology, the costs of which are borne by RGene. The patent rights to jointly conduct research are governed by the Assignment and Assumption Agreement and the Sublicense Agreement. The Development Agreement expires in April 1997, and can be extended by mutual agreement of the parties. M.D. ANDERSON CANCER CENTER/UNIVERSITY OF TEXAS. In March 1994, RGene entered into a license agreement with the University of Texas Board of Regents and M.D. Anderson pursuant to which RGene obtained an exclusive worldwide license to develop and market products utilizing the E1A tumor suppressor gene for Her-2/neu targeted cancer therapy. This agreement was amended in December 1994 to provide RGene an exclusive worldwide license to develop and market products utilizing lipid technology to deliver oligonucleotides for the treatment of CML. In addition to the license agreement, in March 1994, RGene entered into a sponsored research agreement with M.D. Anderson pursuant to which RGene agreed to pay M.D. Anderson an annual fee for three years for research to be performed under the supervision of Dr. Mien-Chie Hung in the area of Her-2/neu targeted cancer therapy. RGene entered into a second sponsored research agreement with M.D. Anderson in March 1994 pursuant to which RGene agreed to pay M.D. Anderson an annual fee for two years for research to be performed under the supervision of Dr. Lopez-Berestein in the area of targeting and delivery of oligonucleotides to leukemic cells. UNIVERSITY OF TENNESSEE RESEARCH CORPORATION. In October 1995, RGene entered into an agreement with UTRC pursuant to which RGene obtained an exclusive worldwide license to develop and market products utilizing technology relating to delivery of genes into cells using DC Chol for certain cancers, including, among others, breast, ovarian and lung cancer. 41 43 UNIVERSITY OF PITTSBURGH. In October 1994, RGene entered into an exclusive worldwide license agreement with Pittsburgh to develop and market products utilizing technology related to non-viral delivery systems for cancer treatment (the "Field of Research") developed by Dr. Leaf Huang. Also in October 1994, RGene entered into a sponsored research agreement with Pittsburgh pursuant to which RGene agreed to pay Pittsburgh an annual fee for four years for research to be performed under the supervision of Dr. Huang in the area of developing gene therapy products to treat cancer. Dr. Huang's research program includes developing novel cationic lipids and the bacteriophage T-7-based expression system. Any inventions made under this agreement in the Field of Research will be incorporated into the October 1994 exclusive license agreement. In addition, RGene has a right of first refusal to acquire an exclusive license to any inventions developed under the sponsored research agreement outside of the Field of Research. RGene is currently engaged in negotiations with Pittsburgh to expand the Field of Research to other areas of interest to RGene. There can be no assurance that such negotiations will be successful. See "-- Core Technologies -- Non-Viral Vectors." PASTEUR MERIEUX. In December 1995, RGene entered into an agreement with Pasteur Merieux pursuant to which RGene granted to Pasteur Merieux an exclusive worldwide license and sublicense to certain technology and patent rights relating to DC Chol as an immunoadjuvant in traditional vaccines. In consideration of such grant, RGene was paid a process development fee and an upfront license fee. In addition, it may receive milestone payments upon realization of certain benchmarks and a royalty on sales of the products, if any, incorporating the underlying technology. PATENTS AND PROPRIETARY RIGHTS Patents and licenses are important to the Company's business. The Company's policy is to file patent applications to protect technology, inventions and improvements to inventions that are considered important to the development of its business. The Company also relies on trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. To date, the Company has filed or exclusively licensed 24 patent applications relating to its product and vector development programs with the USPTO, as well as foreign counterparts of certain of these applications in Europe, Japan and certain other countries, as follows: CTL immunotherapy program, nine; AAV vector program, seven; other vector development programs, eight. Of the 24 patent applications, four patents licensed exclusively to the Company have been issued or allowed by the USPTO. No U.S. or foreign patent has been issued directly to the Company to date. One of the issued patents, in the CTL immunotherapy field, covers a method for generating helper-independent CTLs. With respect to the Company's AAV program, a notice of allowance has been received for the patent application covering the vector being used in the Company's cystic fibrosis program. Two patents have issued relating to Targeted Genetics' other vector development programs, including one covering PG13, the novel retrovirus packaging cell line exclusively licensed from the Hutchinson Center. Among Targeted Genetics' 24 patent applications relating to development programs are three key patent applications relating to the Company's proprietary REM technology. In addition, the Company has filed or exclusively licensed three patent applications relating to proprietary methods for manufacturing AAV vectors. A patent application has also been filed by Targeted Genetics relating to an improved method of delivering genes to hematopoietic stem cells. In addition to the intellectual property that Targeted Genetics owns or has exclusively licensed, the Company has licensed several issued and pending patents that relate to its development programs on a nonexclusive basis. Among these are the two key patents that relate to the use of AAV vectors for gene therapy licensed from the NIH and the University of Florida Research Foundation. In addition, the Company has acquired nonexclusive rights to the cystic fibrosis gene being delivered in an AAV vector. 42 44 Through the RGene Acquisition, Targeted Genetics will acquire rights and an exclusive license with respect to eight patent applications filed with the USPTO, as well as foreign counterparts of certain of these applications. Five of these patent applications, two of which have issued, relate to non-viral gene delivery technology covering the use of DC Chol and other cholesterol-based systems for delivering genes into cells and the use of liposomal antisense oligonucleotides. In regard to one of the issued patents, prior art has been brought to the attention of the Company, which may result in further proceedings in the USPTO with respect to one or more claims. Three patent applications related to the E1A tumor suppressor gene are currently pending. The patent positions of pharmaceutical and biotechnology firms, including the Company, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved, particularly in regard to human therapeutic uses. In addition, the coverage claimed in a patent application can be significantly reduced before a patent is issued. Consequently, the Company does not know whether any patent applications will result in the issuance of patents or, if any patents are issued, whether the patents will be subjected to further proceedings limiting their scope, whether they will provide significant proprietary protection or will be circumvented or invalidated. Since patent applications in the United States are maintained in secrecy until patents issue and patent applications in certain other countries generally are not published until more than 18 months after they are filed, and since publication of discoveries in scientific or patent literature often lags behind actual discoveries, the Company cannot be certain that it or any licensor was the first creator of inventions covered by pending patent applications or that it or such licensor was the first to file patent applications for such inventions. Moreover, the Company is currently involved in one patent interference proceeding declared by the USPTO to determine priority of invention relating to certain components that may be useful in retroviral vectors, and may have to participate in additional interference proceedings. Although the Company does not anticipate that material expenditures will be made in connection with such proceedings, participation could result in substantial cost to the Company, even if the eventual outcome were favorable to it. In addition, although the Company believes that the technology which is the subject of the current patent interference proceeding is not material to its current product development programs, there can be no assurance that such technology will not become material in the future. If the outcome of the current or any additional interference proceeding were unfavorable, the Company may be unable to obtain rights to the invention involved. There can be no assurance that the Company's patents, if issued, would be held valid or enforceable by a court or that a competitor's technology or product would be found to infringe such patents. Litigation, which could result in substantial cost to the Company, may be necessary to enforce the Company's patents or to determine the scope and validity of other parties' proprietary rights. If the outcome of any such litigation were adverse, the Company's business could be materially adversely affected. The Company is unable to predict how courts will resolve any future issues relating to the validity and scope of its patents should they be challenged. A number of pharmaceutical and biotechnology companies and research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to the Company's business. Some of these technologies, applications or patents may conflict with the Company's technologies or patent applications. Such conflict could limit the scope of the patents, if any, that the Company may be able to obtain or result in denial of the Company's patent applications. In addition, if patents that cover the Company's activities are issued to other companies, there can be no assurance that the Company would be able to develop or obtain alternative technology. Furthermore, as the biotechnology industry expands and more patents are issued, the risk increases that the Company's processes and potential products may give rise to claims that they infringe the patents of others. Such other persons could bring legal actions against the Company claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected product or use of the affected process. Litigation may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company or to determine the enforceability, scope and validity of proprietary rights of others. If the Company becomes involved in such litigation, it could result in substantial expense to the Company and significant diversion of effort by the Com- 43 45 pany's technical and management personnel. If there were an adverse outcome of any such litigation, the Company's business could be materially adversely affected. In addition to any potential liability for significant damages, the Company could be required to obtain a license to continue to manufacture or market the affected product or use the affected process. Costs associated with any licensing arrangement may be substantial and could include ongoing royalties. There can be no assurance that any license required under any such patent would be made available to the Company on acceptable terms, if at all. In addition to patent protection, the Company also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology. To protect its trade secrets, the Company requires its employees, consultants, scientific advisors and parties to collaborative agreements to execute confidentiality agreements upon the commencement of employment, the consulting relationship or the collaboration with the Company. In the case of employees, the agreements also provide that all inventions resulting from work performed by them while in the employ of the Company will be the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection of the Company's trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information. See "Risk Factors -- Uncertainty of Patent Position and Proprietary Rights; Access to Proprietary Genes." COMPETITION The Company is aware of a number of companies and institutions that are developing or considering the development of potential gene therapy and cell therapy treatments, including early-stage gene therapy companies, fully integrated pharmaceutical companies, universities, research institutions, governmental agencies and other healthcare providers. In addition, the Company's potential products will be required to compete with existing pharmaceutical products, or products developed in the future, that are based on established technologies. Many of the Company's competitors have substantially more financial and other resources, larger research and development staffs, and more experience and capabilities in researching, developing and testing products in clinical trials, in obtaining FDA and other regulatory approvals, and in manufacturing, marketing and distribution than the Company. In addition, the competitive positions of other early-stage companies may be enhanced significantly through their collaborative arrangements with large pharmaceutical companies or academic institutions. The Company's competitors may succeed in developing, obtaining patent protection for, receiving FDA and other regulatory approvals for, or commercializing products more rapidly than the Company. If the Company is successful in commercializing its products, it will be required to compete with respect to manufacturing efficiency and marketing capabilities, areas in which it has no experience. The Company also competes with others in acquiring products or technology from research institutions or universities. The Company's competitors may develop new technologies and products that are available for sale prior to the Company's potential products or that are more effective than the Company's potential products. In addition, competitive products may be manufactured and marketed more successfully than the Company's potential products. Such developments could render the Company's potential products less competitive or obsolete, and could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENTAL REGULATION All of the Company's potential products will require regulatory approval by U.S. and foreign governmental agencies prior to commercialization in such countries. Human therapeutic products are subject to rigorous preclinical and clinical testing and other premarket approval procedures administered by the FDA and similar authorities in foreign countries. The FDA exercises regulatory authority over the development, testing, formulation, manufacture, labeling, storage, record keeping, reporting, quality control, advertising, promotion, export and sale of the Company's potential products. Similar requirements are imposed by foreign regulators. In some cases, state requirements also apply. See "Risk Factors -- Uncertainty of Governmental Regulatory Requirements; Lengthy Approval Process." 44 46 Gene therapy and cell therapy are relatively new technologies and have not been extensively tested in humans. The regulatory requirements governing gene and cell therapy products and related clinical procedures are uncertain and are subject to change. Obtaining approval from the FDA and other regulatory authorities for a new therapeutic product is likely to take several years, if ever, and involve substantial expenditures. Moreover, ongoing compliance with applicable requirements can entail the expenditure of substantial resources. Difficulties or unanticipated costs may be encountered by the Company in its efforts to secure necessary governmental approvals, which could delay or preclude the Company from marketing its products. The activities required before a new therapeutic agent may be marketed in the United States begin with preclinical testing. Preclinical tests include laboratory evaluation and may require animal studies to assess the product's potential safety and efficacy. Animal safety studies must be conducted in accordance with the FDA's Good Laboratory Practice regulations. The results of these studies must be submitted to the FDA as part of an IND, which must be reviewed and cleared by the FDA before proposed clinical testing can begin. Clinical trials must be conducted in accordance with Good Clinical Practices under protocols that detail the objectives of the trial, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. The FDA's review or approval of a study protocol does not necessarily mean that, if the trial is successful, it will constitute proof of efficacy or safety. Further, each clinical trial must be approved by and conducted under the auspices of an independent Institutional Review Board ("IRB") at the institution at which the trial will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. The IRB is also responsible for continuing oversight of the approved protocols in active trials. An IRB may require changes in a protocol, and there can be no assurance that an IRB will permit any given trial to be initiated or completed. Clinical trials are typically conducted in three sequential phases, although the phases may overlap. In Phase I, gene therapy clinical trials generally are conducted with a small number of patients, who may or may not be afflicted with a specific disease, to determine the preliminary safety profile. In Phase II, clinical trials are conducted with larger groups of patients afflicted with a specific disease in order to determine preliminary efficacy and optimal dosages and to obtain expanded evidence of safety. In Phase III, large-scale, multicenter, comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data for the statistical proof of efficacy and safety required by the FDA and others for market approval. The FDA receives reports on the progress of each phase of clinical testing, and it may require the modification, suspension or termination of clinical trials if an unwarranted risk is presented to patients. Because gene therapy products are a new category of therapeutics, there can be no assurance as to the length of the clinical trial period or the number of patients the FDA will require to be enrolled in the clinical trials in order to establish to its satisfaction the safety and efficacy of such products. FDA marketing approval must be obtained after completion of clinical trials of a new product. The Company expects that its products will be regulated as biologic drugs. According to the FDA's 1993 notice outlining its regulatory approach to somatic and gene therapy products, these products are also subject to the drug provisions of the Federal Food, Drug and Cosmetic Act. This notice also stated, however, that the FDA's regulatory approach may evolve as scientific knowledge increases in the area of somatic and gene therapy. Current regulations relating to biologic drugs will require the Company to submit to the FDA both a Product License Application ("PLA") and an Establishment License Application ("ELA"), which must be approved by the FDA before commercial marketing is permitted. The PLA/ELA must include results of product development activities, preclinical studies and clinical trials, in addition to detailed manufacturing information. FDA approval of PLA/ELAs generally takes at least one year. The process may take substantially longer if the FDA has questions or concerns about a product. The FDA may also request additional data relating to safety or efficacy. Notwithstanding the submission of relevant data, the FDA may ultimately decide that a PLA/ELA does not satisfy its regulatory criteria for approval. The FDA may also modify the scope of the desired claims or require 45 47 the addition of warnings or other safety-related information and require additional clinical tests following approval to confirm product safety and efficacy (Phase IV trials). Even if FDA regulatory clearances are obtained, a marketed product is subject to continual review, and later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on marketing a product or in withdrawal of the product from the market, as well as possible civil or criminal sanctions. The FDA requires that manufacturers of a product comply with cGMP requirements, both as a condition of product approval and on a continuing basis. In complying with cGMP requirements, manufacturers must expend time, money and effort on a continuing basis in production, record keeping and quality control. Manufacturing facilities are subject to periodic inspections by the FDA to ensure compliance. Failure to pass such inspections may subject the manufacturer to possible FDA action such as the suspension of manufacturing, seizure of the product, withdrawal of approval or other regulatory sanctions. The FDA may also require the manufacturer to recall a product. In addition to regulations enforced by the FDA, the Company is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other federal, state and local regulations. The Company's research and development activities involve the controlled use of hazardous materials, chemicals, biological materials and radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any resulting damages, and any such liability could exceed the Company's resources. See "Risk Factors -- Uncertainty of Governmental Regulatory Requirements; Lengthy Approval Process" and "-- Hazardous Materials; Environmental Matters." HUMAN RESOURCES At March 31, 1996, Targeted Genetics had 77 employees; 62 of these employees were directly involved in research and development, of whom 18 had Ph.D. or M.D. degrees. A significant number of the Company's management and professional employees have prior experience with other biotechnology or pharmaceutical companies. The Company considers its relations with its employees to be good. The Company's success will depend in large part on its ability to attract and retain key employees and scientific advisors. Competition among biotechnology and pharmaceutical companies for highly skilled scientific and management personnel is intense. There can be no assurance that the Company will be successful in retaining its existing personnel or advisors, or in attracting additional qualified employees. See "Risk Factors -- Dependence on Key Personnel and Scientific Collaborators." FACILITIES Targeted Genetics currently occupies approximately 33,000 square feet of laboratory and office space in a single facility in Seattle, Washington. Rental payments in 1995 totaled $396,220. The lease expires on April 1, 1999 and includes options to extend the lease term for three consecutive five-year periods. The Company believes this facility, together with approximately 2,000 square feet of expansion space and space available in an adjoining office complex, will be adequate to meet its projected needs for the next two to three years. Within that time frame, the Company may be required to locate alternative facilities, depending on the Company's growth and development. 46 48 MANAGEMENT DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS The following are the directors, director nominees and executive officers of Targeted Genetics, and their ages as of March 31, 1996, each of whom will serve in the capacities noted until their successors are duly appointed and qualified.
NAME AGE POSITION - ------------------------------------- --- ------------------------------------------------- H. Stewart Parker.................... 40 President, Chief Executive Officer and Director Barrie J. Carter, Ph.D............... 51 Executive Vice President and Director of Research and Development Richard Daifuku, M.D., Ph.D.......... 43 Vice President, Clinical Affairs James A. Johnson..................... 39 Vice President, Finance, Chief Financial Officer, Treasurer and Secretary Jeremy Curnock Cook.................. 47 Director Stephen A. Duzan..................... 54 Director James D. Grant....................... 63 Director Donald E. O'Neill.................... 70 Director Austin M. Long, III.................. 51 Director Nominee Martin P. Sutter..................... 41 Director Nominee
The Company's directors are divided into three classes and will serve for terms of three years, with one class being elected by the shareholders each year. The terms of the current directors expire as follows: Stephen A. Duzan and James D. Grant in 1996, H. Stewart Parker in 1997 and Donald E. O'Neill in 1998. Jeremy Curnock Cook was elected to the Board of Directors in July 1995 to fill a vacancy and has been nominated for election at Targeted Genetics' 1996 annual shareholders meeting for a term expiring in 1998. Pursuant to the Merger Agreement, the Company's Board of Directors will appoint Austin M. Long, III and Martin P. Sutter as RGene's designees to the Company's Board of Directors. The Company has agreed to cause Messrs. Long and Sutter to be nominated for election at the Company's 1997 annual meeting of shareholders. H. STEWART PARKER managed the formation of Targeted Genetics as a wholly owned subsidiary of Immunex and has been President, Chief Executive Officer and a director since the Company's inception in 1989. She served in various capacities at Immunex from August 1981 through December 1991, most recently as Vice President, Corporate Development. Ms. Parker also served as President and a director of Receptech Corporation, a company formed by Immunex in 1989 to accelerate the development of soluble cytokine receptor products, from February 1991 to January 1993, and was Chairperson of the Washington State Biotechnology Association. She received her B.A. and M.B.A. from the University of Washington. BARRIE J. CARTER, PH.D. is Executive Vice President and Director of Research and Development of Targeted Genetics. He joined the Company in August 1992. For the previous 22 years he was employed by the NIH in Bethesda, Maryland where he was Chief of the Laboratory of Molecular and Cellular Biology in the National Institute for Diabetes, Digestive and Kidney Diseases from 1982 to 1992. He spent a period of postdoctoral training at the Imperial Cancer Research Fund Laboratories in London, England before joining the NIH. His long-term research interests are in molecular biology of viruses, development of AAV vectors and gene therapy. Dr. Carter serves on the Editorial Boards of Journal of Virology, Gene Therapy Newsletter and Human Gene Therapy, and as an Associate Editor of Virology. He is an Affiliate Professor of Medicine at the University of Washington Medical School. Dr. Carter received his B.Sc. (Honors) from the University of Otago, Dunedin, New Zealand and his Ph.D. in the Biochemistry Department of the University of Otago Medical School. 47 49 RICHARD DAIFUKU, M.D., PH.D. joined the Company in January 1995 as Vice President, Clinical Affairs. From January 1992 to January 1995, Dr. Daifuku served in a variety of positions at Amgen Corporation, a biotechnology company, including Associate Director, Infectious Diseases and Product Development Team Leader. From June 1990 to January 1992, he was Associate Medical Director at Cetus Corporation, a biotechnology company, and a Clinical Instructor at the University of California at San Francisco. Dr. Daifuku is board-certified in internal medicine and, from 1987 to 1990, completed his fellowship in infectious disease at the UCLA Center for Health Sciences. Dr. Daifuku received his B.A. in biology from Boston University, his M.S. in Environmental Health Sciences from Harvard School of Public Health and his M.D. and Ph.D. in Epidemiology from the University of Washington. JAMES A. JOHNSON joined the Company in March 1994 as Vice President, Finance, Chief Financial Officer, Treasurer and Secretary. He was employed by Immunex from January 1988 to February 1994, initially as Director of Finance and as Vice President, Finance beginning in February 1990. Mr. Johnson has served as Treasurer of Targeted Genetics from its inception in 1989 to the present. From November 1989 to January 1993, he also served as Treasurer and Assistant Secretary of Receptech Corporation. He received his B.A. from the University of Washington. JEREMY CURNOCK COOK has been a director of the Company since 1995. Mr. Cook is a director of Rothschild Asset Management Limited and has been responsible for the Rothschild Bioscience Unit since 1987. Mr. Cook founded the International Biochemicals Group in 1975, which he subsequently sold to Royal Dutch Shell in 1985, remaining as Managing Director until 1987. He currently serves on the board of directors of Cell Therapeutics Inc., Creative BioMolecules Inc. and Ribozyme Pharmaceuticals Inc., as well as several public and privately held companies outside the United States, including International Biotechnology Trust plc ("IBT"). STEPHEN A. DUZAN has been a director of the Company since its inception in 1989. He is currently Chairman of the Board and Chief Executive Officer of Key Computer Systems, Inc. He was a co-founder of Immunex, and served as its Chief Executive Officer and as a director from its formation in 1981 until his retirement in September 1993. He also served as President of Immunex from 1981 through 1990. He currently serves as a consultant to Immunex and is on the board of directors of IBT, Ergo Science Corporation and a number of private companies and nonprofit organizations. JAMES D. GRANT has been a director of the Company since February 1993. He is a business consultant in addition to serving as the Chairman of the Board of T Cell Sciences, Inc., a biotechnology company ("T Cell"). Mr. Grant previously served as Chairman and Chief Executive Officer of T Cell from 1986 until his retirement in 1992. Previously, he was Vice President of CPC International, Inc., a multinational food and industrial products company, from 1972 to 1986. Mr. Grant served as Deputy Commissioner of the FDA from 1969 to 1972, and was Vice Chairman of the Advisory Committee of the FDA from 1990 to 1991. Mr. Grant currently serves on the board of directors of Biocompatibles, Ltd. (U.K.) and IBT. DONALD E. O'NEILL has been a director of the Company since November 1992. From March 1971 to March 1991, he held various positions at Warner-Lambert Company, a healthcare company, most recently as Executive Vice President, Chairman of International Operations and as a director. He currently serves on the board of directors of Alliance Pharmaceutical Corp., Cytogen Corporation, Immunogen, Inc., New Jersey Resources Corporation, Scios Nova, Inc., MDL Information Systems, Inc. and Fuisz Technologies. AUSTIN M. LONG, III will be nominated by the Board of Directors to become a director of the Company upon the closing of the RGene Acquisition. Mr. Long has been the Director of Private Investments at the University of Texas since 1987. MARTIN P. SUTTER will be nominated by the Board of Directors to become a director of the Company upon the closing of the RGene Acquisition. Mr. Sutter has been a General Partner of The Woodlands/Essex Management Partners, L.P., a venture capital firm, since September 1994. He has also been the Managing General Partner of The Woodlands Venture Partners, L.P. since October 1988. Mr. Sutter is currently a member of the Biomedical Advisory Board of the Houston Advanced Research Center, Chairman of the Board of Aronex and Zonagen, Inc. and a director of LifeCell Corporation. 48 50 SCIENTIFIC ADVISORY BOARD The Company has retained a group of scientific advisors to serve on its Scientific Advisory Board. The Scientific Advisory Board provides Targeted Genetics with specific expertise in areas of molecular biology, immunology, cell biology and clinical medicine relevant to the product and technology development efforts now underway at the Company. The Company's scientific advisors are Drs. David Cosman, Philip Greenberg, A. Dusty Miller, Richard Palmiter and George Stamatoyannopoulos. Upon completion of the RGene Acquisition, Drs. Leaf Huang and Mien-Chie Hung are expected to join the Company's Scientific Advisory Board. The Scientific Advisory Board meets bimonthly with the Company's scientific personnel and management to discuss the Company's present research and development activities and long-term strategies. The members of the Scientific Advisory Board are employed by entities other than Targeted Genetics and may have commitments to or consulting contracts with other entities that may limit their availability to the Company. With the exception of Dr. Cosman, who is a member of the Scientific Advisory Board in connection with the Company's relationship with Immunex, each member of the Scientific Advisory Board has agreed not to perform services for another person or entity that would create a conflict of interest with the services provided to the Company, although there can be no assurance that such a conflict will not arise. Under such agreements, inventions or processes discovered by members of the Scientific Advisory Board in their capacity as such will not, unless invented or discovered in the course of providing consulting services to Targeted Genetics, including pursuant to the collaborative agreements provided in this Prospectus, become the property of the Company, but will remain the property of such members or their employers. See "Business -- Research Collaborations and Licensing Agreements." DR. COSMAN has been a member of the Scientific Advisory Board since 1995. Since 1988, Dr. Cosman has been Vice President, Molecular Biology at Immunex. In 1980, Dr. Cosman received his Ph.D. in Microbiology from the Pennsylvania State University College of Medicine. DR. GREENBERG has been a member of the Scientific Advisory Board since February 1992. He joined the University of Washington School of Medicine in 1976, and since 1988 has been a Professor of Immunology and Oncology. He has been a member of the Hutchinson Center since 1976, where he has pioneered techniques for adoptive immunotherapy as a cancer treatment. He has served on various National Cancer Institute and NIH committees and study sections, including the Clinical Cancer Program Project Review Committee, the Special Study Section for the Biological Response Modifiers Program, the Immunobiology Study Section and the U.S.-Japan Cancer Research Cooperation Program. He has served as an editor for various journals, including Journal of Immunology, Journal of the National Cancer Institute, Journal of Gene Therapy, Human Gene Therapy and Therapeutic Immunology. Dr. Greenberg received his B.A. from Washington University and his M.D. from the State University of New York. DR. MILLER has been a member of the Scientific Advisory Board since February 1992. He is a leading researcher in the field of retroviral vectors, and has developed certain packaging cell lines utilized by the Company in its gene therapy systems. Dr. Miller joined the Hutchinson Center in 1984, where he is a full member of the Department of Molecular Medicine. He is also an Affiliate Professor of Pathology at the University of Washington. The Hutchinson Center has patented several of Dr. Miller's inventions. He currently serves on the editorial boards of several journals, including Somatic Cell and Molecular Genetics and Journal of Virology, and is an associate editor of Human Gene Therapy. He is also a former member of the NIH Recombinant DNA Advisory Committee. Dr. Miller received his B.S. from Brown University and his Ph.D. in pharmacology from Stanford University. DR. PALMITER has been a member of the Scientific Advisory Board since February 1992. Since 1981, he has been a Professor of Biochemistry at the University of Washington. Since 1976, Dr. Palmiter has also been an Investigator at the Howard Hughes Medical Institute. Dr. Palmiter is a leading researcher on gene regulation and expression. He is a Fellow of the American Association for the Advancement of 49 51 Science, a member of the National Academy of Sciences, and a member of the American Academy of Arts and Sciences. He received his A.B. from Duke University and his Ph.D. from Stanford University. DR. STAMATOYANNOPOULOS has been a member of the Scientific Advisory Board since February 1992. He is a leader in the field of hemoglobin gene regulation. He has been a Professor of Medicine and Genetics at the University of Washington since 1975 and has served as head of the Division of Medical Genetics, Department of Medicine of the University of Washington. Dr. Stamatoyannopoulos also currently serves as the Director of the Lucille P. Markey Molecular Medicine Center. He is the past-president of the American Society of Hematology. He has served on various NIH committees and international scientific panels. Dr. Stamatoyannopoulos received his M.D. from the University of Athens, Greece. DR. HUANG is currently a member of the RGene scientific advisory board and has agreed to join the Company's Scientific Advisory Board upon completion of the RGene Acquisition. He is a leader in the area of lipid-based gene delivery. Dr. Huang is a Professor in the Department of Pharmaceutical Sciences and Director of Liposome Vector Core, Pittsburgh Center for Human Gene Therapy at the University of Pittsburgh. Dr. Huang has been affiliated with the University of Pittsburgh since 1991. Dr. Huang was at the University of Tennessee from 1985 to 1991 and is a founder of RGene. DR. HUNG is currently a member of the RGene scientific advisory board and has agreed to join the Company's Scientific Advisory Board upon completion of the RGene Acquisition. He is a leader in the fields of tumor biology and oncogenes. Dr. Hung is Professor of Virology in the Department of Tumor Biology, Section of Virology, at M.D. Anderson and Director of Breast Cancer Basic Research. Dr. Hung has been affiliated with M.D. Anderson since 1986. He is one of the original scientists involved in cloning the Her-2/neu oncogene and is a founder of RGene. With the exception of Dr. Cosman, each existing member of the Scientific Advisory Board has been issued Common Stock in consideration for service to the Company. Drs. Greenberg and Miller also receive annual consulting fees pursuant to agreements with the Company. Upon completion of the RGene Acquisition, Drs. Huang and Hung will also receive fees in connection with consulting agreements that are to be entered into after completion of the RGene Acquisition. DIRECTOR COMPENSATION Directors who are employees of Targeted Genetics do not receive any fee for their services as directors. Directors who are not employees of Targeted Genetics are compensated pursuant to the Targeted Genetics Corporation Stock Option Plan for Nonemployee Directors (the "Directors Plan"). Additionally, nonemployee directors are reimbursed for travel expenses incurred in connection with attendance at meetings. See "-- Benefit Plans -- Directors Plan." COMMITTEES OF THE BOARD AND MEETINGS Targeted Genetics has established standing committees of the Board, including Audit and Compensation Committees. Each of these committees is responsible to the full Board, and its activities are therefore subject to approval of the Board. The functions performed by these committees can be summarized as follows: AUDIT COMMITTEE. The Audit Committee reviews the corporate accounting and reporting practices, internal accounting controls, audit plans and results, investment policies, and financial reports of Targeted Genetics in order to ensure that Targeted Genetics' assets are appropriately safeguarded and to ensure the quality and integrity of its financial records. Additionally, the Audit Committee recommends to the Board the independent auditors to be retained by Targeted Genetics. The original members of this committee during 1995 were James D. Grant and Donald L. Murfin. After Mr. Murfin's resignation from the Board, the Board appointed Donald E. O'Neill to fill the vacancy on the committee. On October 11, 1995, Jeremy Curnock Cook was appointed to be the third member of this committee. 50 52 COMPENSATION COMMITTEE. The Compensation Committee establishes salaries, incentives and other forms of compensation for directors, officers and other executives of Targeted Genetics. This committee also administers Targeted Genetics' various incentive compensation and benefit plans, including stock option plans, and recommends the establishment of policies relating to such incentive compensation and benefit plans. The members of this committee are Stephen A. Duzan, James D. Grant and Donald E. O'Neill. EXECUTIVE COMPENSATION COMPENSATION SUMMARY The following table sets forth certain information with respect to compensation paid by the Company for the fiscal year ended December 31, 1995 and for the two prior fiscal years to (i) the Company's Chief Executive Officer and (ii) the Company's most highly compensated executive officers whose salary and bonus exceeded $100,000 for services performed during the fiscal year ended December 31, 1995 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SHARES ---------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1) - ----------------------------------- ----- --------- -------- ------------ ------------------ H. Stewart Parker.................. 1995 $ 165,000 $ 41,250 39,186 $ 235 President and Chief Executive 1994 154,000 45,000 50,000 137 Officer 1993 140,000 -- -- 119 Barrie J. Carter, Ph.D............. 1995 140,000 28,000 26,982 6,018 Executive Vice President and 1994 132,550 30,000 40,000 5,975 Director of Research and 1993 120,500 -- -- 44,262 Development Richard Daifuku, M.D., Ph.D. (2)... 1995 150,974 -- 40,000 65,303 Vice President, Clinical Affairs 1994 -- -- -- -- 1993 -- -- -- -- James A. Johnson (3)............... 1995 128,000 19,200 25,038 103 Vice President, Finance, Chief 1994 102,500 -- 60,000 96 Financial Officer, Treasurer and 1993 -- -- -- -- Secretary
- ------------------ (1) For Ms. Parker and Mr. Johnson, consists of excess life insurance premiums; for Dr. Carter, consists of reimbursement for relocation expenses of $38,517 in 1993, extinguishment of debt associated with initial purchases of Common Stock of $5,500 in each of 1993, 1994 and 1995, and excess life insurance premiums of $245, $475 and $518 in 1993, 1994 and 1995, respectively; and for Dr. Daifuku, consists of reimbursement for relocation expenses of $53,079, extinguishment of debt associated with relocation costs of $12,000, and excess life insurance premiums of $224. (2) Dr. Daifuku began his employment with Targeted Genetics on January 23, 1995. (3) Mr. Johnson began his employment with Targeted Genetics on March 1, 1994. 51 53 OPTION GRANTS The following table sets forth certain information regarding stock options granted during the fiscal year ended December 31, 1995 to the Named Executive Officers. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL INDIVIDUAL GRANTS REALIZABLE VALUE AT ---------------------------------------------------------- ASSUMED ANNUAL NUMBER OF PERCENT OF RATES OF STOCK SHARES TOTAL OPTIONS PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3) OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------- NAME GRANTED(#)(1) FISCAL YEAR(1)(2) ($/SHARE) DATE 5%($) 10%($) - ---------------------------- ------------- ----------------- --------- ---------- -------- -------- H. Stewart Parker........... 39,186 17.6% $4.00 1/27/2005 $ 98,575 $249,810 Barrie J. Carter, Ph.D. .... 26,982 12.1% 4.00 1/27/2005 67,875 172,009 Richard Daifuku, M.D., Ph.D. .................... 40,000 17.9% 4.00 1/27/2005 100,623 254,999 James A. Johnson............ 25,038 11.2% 4.00 1/27/2005 62,985 159,616
- ------------------ (1) Options are granted at the fair market value on the date of grant and generally vest over five years with 20% of each grant becoming exercisable annually beginning on the first anniversary of the date of grant. Certain changes in control of Targeted Genetics can trigger accelerated vesting of stock options and rights to related payments. (2) Options to purchase 223,237 shares of Common Stock were granted by the Company to its employees during 1995. (3) The dollar amounts under these columns are the result of calculations at assumed rates of 5% and 10% and are not intended to forecast future appreciation. No value will be realized if the stock price does not exceed the exercise price of the options. OPTION EXERCISES AND YEAR-END VALUES The following table sets forth certain information as of December 31, 1995, regarding options held by the Named Executive Officers. None of such individuals exercised any options during the fiscal year ended December 31, 1995. AGGREGATED FISCAL 1995 YEAR-END OPTION VALUES
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------------------------- ----------- ------------- ----------- ------------- H. Stewart Parker.............................. 34,000 95,186 $ 128,220 $ 170,353 Barrie J. Carter, Ph.D......................... 8,000 58,982 5,040 64,141 Richard Daifuku, M.D., Ph.D.................... -- 40,000 -- 65,200 James A. Johnson............................... 12,000 73,038 27,560 151,052
- ------------------ (1) Represents the aggregate number of outstanding options multiplied by the difference between $5.63 (the closing price of the Common Stock as reported on the Nasdaq National Market on December 29, 1995) and the exercise price of such options. BENEFIT PLANS 1992 RESTATED STOCK OPTION PLAN The Company's 1992 Restated Stock Option Plan (the "1992 Option Plan"), which was amended and restated in March 1994, provides for the grant of options to acquire a maximum of 1,400,000 shares of Common Stock. The Company's Board of Directors has adopted a proposal, subject to approval by the Company's shareholders at the 1996 annual shareholders meeting, to increase such option pool to 2,000,000 shares of Common Stock. As of March 31, 1996, options to purchase 61,300 shares of 52 54 Common Stock granted under the 1992 Option Plan had been exercised, options to purchase 1,138,014 shares of Common Stock were outstanding and options to purchase 200,686 shares of Common Stock remained available for grant. The outstanding options were held by 77 individuals and were exercisable at a weighted average exercise price of $3.15 per share. Outstanding options to purchase an aggregate of 683,129 shares were held by employees who are not officers or directors of the Company. The 1992 Option Plan permits the granting of incentive stock options ("ISOs") to employees or nonqualified stock options ("NSOs") to employees, directors, officers, agents, consultants, advisors and independent contractors (any such person, an "Optionee") at the discretion of the administrator of the 1992 Option Plan (the "Plan Administrator"). The Compensation Committee of the Board of Directors is currently the Plan Administrator. Subject to the terms of the 1992 Option Plan, the Plan Administrator determines the terms and conditions of options granted under the 1992 Option Plan, including the exercise price. The maximum number of shares with respect to which an option or options may be granted to any Optionee in any taxable year may not exceed 200,000 shares. Additionally, the 1992 Option Plan provides that the Plan Administrator must establish an exercise price for ISOs that is not less than the fair market value per share at the date of grant. Each option must expire within ten years of the date of grant. However, if ISOs are granted to persons owning more than 10% of the voting stock of the Company, the 1992 Option Plan provides that the exercise price shall not be less than 110% of the fair market value per share on the date of grant and that the ISOs' term shall not exceed five years. NSOs generally expire ten years from the date of grant. Unless otherwise provided by the Plan Administrator, options granted under the 1992 Option Plan vest at a rate of 20% per year over a five-year period. During an Optionee's lifetime, an option is exercisable only by the Optionee and no option may be transferred by the Optionee other than by will or the laws of descent and distribution or, in the case of NSOs, pursuant to a qualified domestic relations order (as defined in the Internal Revenue Code of 1986, as amended); provided, however, that to the extent permitted by Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Plan Administrator may permit a recipient of an option to transfer such option or designate, by giving written notice to the Plan Administrator, a person who may exercise the option after such Optionee's death. An Optionee whose relationship with the Company or any related corporation ceases for any reason (other than termination for cause, death or total disability, as such terms are defined in the 1992 Option Plan) may exercise, in the three-month period following such cessation (unless such options terminate or expire sooner by their terms), or such longer period as determined by the Plan Administrator, that portion of the Optionee's options that is exercisable at the time of such cessation. In the event the Optionee is terminated for cause, the options terminate upon the Company's discovery of such cause. In the event the Optionee dies or becomes totally disabled, the options vested as of the date of death or total disability may be exercised prior to the earlier of the option's specified expiration date or one year from the date of the Optionee's death or disability. Unexercised options granted under the 1992 Option Plan terminate upon the occurrence of certain events, including certain mergers. In a stock merger, the options would convert into options to purchase shares of the other corporation involved in the merger, unless the Company and such other corporation, in their sole discretion, determine that such options shall terminate. The converted options would continue to vest in accordance with the vesting requirements of the 1992 Option Plan. Upon the occurrence of a consolidation, reorganization or sale of assets of the Company other than a stock merger, Optionees may exercise such options immediately prior to such transaction without regard to whether the vesting requirements have been satisfied. Shares subject to options granted under the 1992 Option Plan that have lapsed or terminated may again be subject to options granted under the 1992 Option Plan. Furthermore, the Plan Administrator may offer to exchange new options for existing options, with the shares subject to the existing options being again available for grant under the 1992 Option Plan. Unless sooner terminated by the Board of Directors, the 1992 Option Plan terminates on January 21, 2002. 53 55 DIRECTORS PLAN The Directors Plan was approved by the Board of Directors and by the Company's shareholders in March 1994. An aggregate of 120,000 shares of Common Stock may be issued under the Directors Plan. The Directors Plan provides for automatic grants of NSOs to nonemployee directors of Targeted Genetics at an exercise price equal to the fair market value per share on the date of grant. On June 1, 1994, the effective date of the Directors Plan, an option to purchase 3,000 shares of Common Stock was automatically awarded to each nonemployee director. In the future, each nonemployee director who is initially elected or appointed to the Board will, upon such election or appointment, be automatically granted an option to purchase 15,000 shares of Common Stock. In addition, the Directors Plan provides for the annual grant of options to purchase 5,000 shares of Common Stock to each continuing nonemployee director. Any options granted after the effective date of the Directors Plan vest in three equal annual installments beginning one year after the date of grant. The options that were granted on the effective date of the Directors Plan became fully exercisable on June 1, 1995, 12 months after such effective date. As of March 31, 1996, options to purchase 39,000 shares of Common Stock had been granted under the Directors Plan. Messrs. Duzan, Grant and O'Neill each received options in 1995 to purchase 5,000 shares of Common Stock. Mr. Cook received an option to purchase 15,000 shares of Common Stock upon his appointment to the Board in July 1995. During a nonemployee director's lifetime, an option granted under the Directors Plan may be exercised only by such optionee and is nontransferable other than by will or the laws of descent and distribution; provided, however, that to the extent permitted by Rule 16b-3 under the Exchange Act, the Plan Administrator, which is currently the Board of Directors, may permit a recipient of an NSO to designate, by giving written notice to the Plan Administrator, a person who may exercise the option after such optionee's death. Options expire within ten years of the date of grant or, if earlier, three months after a nonemployee director's termination of service as a director or 12 months after a nonemployee director's death. Unexercised options granted under the Directors Plan terminate upon the occurrence of certain events, including mergers. In a stock merger, the options would convert into options to purchase shares of the other corporation involved in the merger, unless Targeted Genetics and such other corporation, in their sole discretion, determine that such options shall terminate. Optionees may exercise options immediately prior to the occurrence of a consolidation, reorganization or sale of assets of Targeted Genetics other than a stock merger without regard to whether the vesting requirements have been satisfied. Unless sooner terminated by either the Board of Directors or the shareholders of Targeted Genetics, the Directors Plan will terminate on March 2, 2004. 54 56 CERTAIN TRANSACTIONS Targeted Genetics was formed in 1989 as a subsidiary of Immunex, a biotechnology company that develops immunoregulatory proteins as therapeutics. Immunex owns 2,613,122 shares of Targeted Genetics' Common Stock. Subject to availability of resources, Immunex has agreed to provide certain services to Targeted Genetics in areas such as immunology, clinical and regulatory affairs, quality control, administration and consulting by specific Immunex employees. Targeted Genetics reimburses Immunex for these services on a fully burdened cost basis. During the years ended December 31, 1994 and 1995, Targeted Genetics incurred expenses of $83,915 and $29,249, respectively, for such services. Between July 13, 1995 and July 17, 1995, Targeted Genetics issued an aggregate of 830,598 units (the "Units"), consisting of four shares of Common Stock and one warrant ("Warrant") to purchase one share of Common Stock, in a self-managed public offering at a price of $15 per Unit. The Warrants are convertible into shares of Common Stock. The purchasers of the Units included, among others, the following greater-than-5% shareholders of the Company:
NO. OF NAME UNITS ------------------------------------- ------ International Biotechnology Trust plc................................... 300,000 State of Wisconsin Investment Board..................................... 100,000 T. Rowe Price Associates, Inc........................................... 135,000 Oracle Partners, L.P. and affiliates.................................... 100,000
See "Description of Capital Stock -- Warrants -- 1995 Unit Offering." 55 57 PRINCIPAL SHAREHOLDERS The following table sets forth, as of March 31, 1996, certain information with respect to the beneficial ownership of shares of Common Stock by (i) each person known by Targeted Genetics to own beneficially more than 5% of the shares of Common Stock, (ii) each director and director nominee of Targeted Genetics, (iii) each of the Named Executive Officers, and (iv) all directors and executive officers of Targeted Genetics as a group. Except as otherwise noted, the information in the following table does not reflect the issuance of shares of Common Stock in connection with the RGene Acquisition. In addition, except as otherwise noted, Targeted Genetics believes that the beneficial owners of the shares of Common Stock listed below, based on information furnished by such owners, have sole voting and investment power with respect to such shares.
PERCENT BENEFICIALLY NUMBER OF OWNED SHARES ---------------------- BENEFICIALLY BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING(1) - ------------------------------------------------------------ ------------ -------- ----------- 5% OWNERS: Immunex Corporation....................................... 2,613,122 21.1% 13.4% 51 University Street Seattle, WA 98101 International Biotechnology Trust plc..................... 1,500,000(2) 11.8% 7.6% c/o Rothschild Asset Management Limited Five Arrows House St. Swithin's Lane London, EC4N 8NR England State of Wisconsin Investment Board....................... 1,112,500(3) 8.9% 5.7% 121 East Wilson Street P.O. Box 7842 Madison, WI 53707 T. Rowe Price Associates, Inc. ........................... 670,000(4) 5.3% 3.4% 100 East Pratt Street Baltimore, MD 21202 Oracle Partners, L.P. and affiliates...................... 651,000(5) 5.2% 3.3% 712 Fifth Avenue, 45th Floor New York, NY 10019 DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS: H. Stewart Parker......................................... 178,502(6) 1.4% * Barrie J. Carter, Ph.D. .................................. 140,061(7) 1.1% * Richard Daifuku, M.D., Ph.D. ............................. 8,000(8) * * James A. Johnson.......................................... 28,008(9) * * Jeremy Curnock Cook....................................... 1,500,000(2) 11.8% 7.6% Stephen A. Duzan.......................................... 16,130(10) * * James D. Grant............................................ 10,200(8) * * Donald E. O'Neill......................................... 20,200(11) * * Austin M. Long, III....................................... -- -- 1.1%(12) Martin P. Sutter.......................................... -- -- 8.1%(13) All Directors, Director Nominees and Executive Officers as a group (10 persons)................................... 1,901,101(14) 14.8% 18.5%(15)
- ------------------ * Less than 1%. (1) Assumes the issuance of 3,636,634 shares of Common Stock in the RGene Acquisition. (2) Represents 1,200,000 shares of Common Stock and warrants to purchase 300,000 shares of Common Stock owned by International Biotechnology Trust plc ("IBT"), an investment trust the shares of which are traded on the London Stock Exchange. Mr. Cook is a managing director of Rothschild Asset Management Limited, the investment manager and 56 58 secretary of IBT, and thereby has power to direct IBT's investments. Mr. Cook disclaims beneficial ownership of the securities owned by IBT. (3) Includes warrants to purchase 100,000 shares of Common Stock. (4) Represents 535,000 shares of Common Stock and warrants to purchase 135,000 shares of Common Stock owned by T. Rowe Price New Horizons Fund, Inc., for which T. Rowe Price Associates, Inc. ("Price Associates") serves as investment advisor with power to direct investments and/or sole power to vote the securities. Although for purposes of the Exchange Act Price Associates is deemed to be a beneficial owner of such securities, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities. (5) Represents 551,000 shares of Common Stock and warrants to purchase 100,000 shares of Common Stock owned by Oracle Partners, L.P. and affiliated investment limited partnerships, of which Larry N. Feinberg is the managing general partner and over which Mr. Feinberg has investment discretion. Mr. Feinberg has the power to vote, direct the vote of, dispose of or direct the disposition of all such securities. (6) Includes warrants to purchase 3,333 shares of Common Stock and 41,837 shares subject to options that may be exercised within 60 days. (7) Includes warrants to purchase 1,333 shares of Common Stock and 13,396 shares subject to options that may be exercised within 60 days. (8) Represents shares subject to options that may be exercised within 60 days. (9) Includes warrants to purchase 600 shares of Common Stock and 25,008 shares subject to options that may be exercised within 60 days. (10) Includes warrants to purchase 1,666 shares of Common Stock and 7,800 shares subject to options that may be exercised within 60 days. (11) Includes warrants to purchase 2,000 shares of Common Stock and 10,200 shares subject to options that may be exercised within 60 days. (12) Represents 208,557 shares of Common Stock to be issued to the University of Texas Board of Regents in the RGene Acquisition. Mr. Long is the Director of Private Investments at the University of Texas and thereby has power to vote the securities. Although for purposes of the Exchange Act Mr. Long is deemed to be the beneficial owner of such securities, Mr. Long expressly disclaims that he is, in fact, the beneficial owner of such securities. (13) Represents 444,421 shares of Common Stock to be issued to Aronex in the RGene Acquisition, 370,031 shares of Common Stock to be issued to The Woodlands Venture Fund, L.P. in the RGene Acquisition and 771,280 shares of Common Stock to be issued to The Woodlands/Essex Venture Partners III, L.P. in the RGene Acquisition. Mr. Sutter is Chairman of the Board of Aronex. In addition, he is (i) a General Partner of The Woodlands/Essex Management Partners, L.P., which is the General Partner of The Woodlands/Essex Venture Partners III, L.P., and (ii) the Managing General Partner of The Woodlands Venture Partners, L.P., which is the General Partner of The Woodlands Venture Fund, L.P., and thereby has the power to vote the securities. Although for purposes of the Exchange Act Mr. Sutter is deemed to be the beneficial owner of such securities, Mr. Sutter expressly disclaims that he is, in fact, the beneficial owner of such securities. (14) Includes 1,200,000 shares of Common Stock and warrants to purchase 300,000 shares of Common Stock owned by IBT, which are attributable to Mr. Cook; also includes additional warrants to purchase 8,932 shares of Common Stock and 116,441 shares subject to options that may be exercised within 60 days. (15) Includes, in addition to the 1,901,101 shares of Common Stock listed in the table, 208,557 shares of Common Stock to be issued to the University of Texas Board of Regents in the RGene Acquisition, which are attributable to Mr. Long, and 444,421 shares of Common Stock to be issued to Aronex in the RGene Acquisition, 370,031 shares of Common Stock to be issued to The Woodlands Venture Fund, L.P. in the RGene Acquisition and 771,280 shares of Common Stock to be issued to The Woodlands/Essex Venture Partners III, L.P. in the RGene Acquisition, all of which are attributable to Mr. Sutter. See footnotes (12) and (13) above. 57 59 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 40,000,000 shares of Common Stock, par value $.01 per share, and 6,000,000 shares of Preferred Stock, par value $.01 per share. The following summary description of the capital stock of the Company is qualified in its entirety by reference to the Articles of Incorporation and the Bylaws of the Company, copies of which are filed as exhibits to the Registration Statement of which this Prospectus forms a part. COMMON STOCK The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of shareholders and are not entitled to cumulative voting rights with respect to the election of directors. Holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor, subject to preferences that may be applicable to any outstanding Preferred Stock. In the event of liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any outstanding Preferred Stock. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. All the outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon completion of the Offering will be, fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority to issue up to 6,000,000 shares of Preferred Stock in one or more series and to fix the powers, designations, preferences and relative, participating, optional or other rights thereof, including dividend rights, conversion rights, voting rights, redemption terms, liquidation preferences and the number of shares constituting each such series, without any further vote or action by the Company's shareholders. The issuance of Preferred Stock could adversely affect the voting power of holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company. No shares of Preferred Stock are currently outstanding. The Company has no present plans to issue any shares of Preferred Stock. WARRANTS Equipment Financing Transactions In conjunction with equipment financing transactions completed in December 1993 through October 1995, the Company issued warrants (the "Equipment Financing Warrants") to purchase an aggregate of 62,016 shares of Common Stock at an average exercise price of $6.00 per share, expiring through December 2003. The Equipment Financing Warrants may be exercised for cash or on a cashless basis, whereby the holder tenders the number of shares necessary to satisfy the exercise price. Holders of the Equipment Financing Warrants are entitled to certain rights with respect to registration under the Securities Act of the shares of Common Stock issuable upon exercise of such warrants. See "-- Registration Rights." 1995 Unit Offering In July 1995, the Company completed a self-managed public offering of 830,598 Units, consisting of four shares of Common Stock and one Warrant. The Warrants were issued under a Warrant Agreement dated July 7, 1995 between Targeted Genetics and First Interstate Bank of Washington, N.A., as Warrant Agent. The Warrants were immediately exercisable upon issuance at an exercise price of $4.68 per share (the "Exercise Price") and will expire on July 31, 1997. From and after the sale and issuance of the Units, the Warrants and the shares of Common Stock traded separately. As of May 24, 1996, 769,598 of such Warrants were outstanding. 58 60 In case of any reclassification or capital reorganization, or in case of any consolidation or merger of Targeted Genetics with or into another corporation or any sale, lease or transfer to another corporation of all or substantially all the assets of Targeted Genetics, the holder of each outstanding Warrant will have the right, upon subsequent exercise of a Warrant, to purchase the kind and amount of shares of stock or other securities and property receivable upon such reclassification, capital reorganization, consolidation, merger, sale, lease or transfer by a holder of the number of shares of Common Stock that would have been received upon the exercise of such Warrant immediately prior thereto, and the Exercise Price will be appropriately adjusted. The Warrants do not confer upon the holder any voting or preemptive rights, or any other rights as a shareholder of Targeted Genetics. CERTAIN CHARTER PROVISIONS AND WASHINGTON LAW The Articles of Incorporation and Bylaws of the Company include provisions that may have the effect of impeding a hostile takeover of the Company. The Articles of Incorporation and Bylaws provide for a classified Board of Directors consisting of three classes of directors. The Company's directors may be removed only for cause by shareholders holding not less than two-thirds of the shares entitled to elect the director or directors whose removal is sought. The Articles of Incorporation and Bylaws direct that special meetings of the Company's shareholders may be called only by the Board of Directors, the Chairman of the Board or the President of the Company or at the direction of 30% of the Company's shareholders. The Bylaws require that shareholder nominations for directors to be elected to the Board of Directors be made pursuant to timely notice and in proper written form to the Secretary of the Company. To be timely, the shareholders' notice must be received by the Company not less than 60 or more than 90 days prior to an annual meeting (or within 10 days of the mailing by the Company of notice of the date of the annual meeting if such Company notice is made less than 60 days prior to the date of the annual meeting) and no more than seven days following the date on which notice is given to shareholders if the election is to take place at a special meeting. There are also specific content requirements for such notice. Requests to present matters to the shareholders at an annual meeting must also be received by the Company not less than 60 or more than 90 days prior to the meeting, and such requests must meet specific content requirements. These provisions, as well as the availability of Preferred Stock for issuance without shareholder approval, may have the effect of lengthening the time required for a person to acquire control of the Company through a proxy contest or the election of a majority of the Board of Directors, and may deter any potential unfriendly offers or other efforts to obtain control of the Company, thereby possibly depriving the Company's shareholders of opportunities to realize a premium for their Common Stock, and could make removal of incumbent directors more difficult. At the same time, these provisions may have the effect of inducing any persons seeking control of the Company to negotiate terms acceptable to the Board of Directors. Washington law imposes restrictions on certain transactions between a corporation and certain significant shareholders. First, subject to certain exceptions, including approval of the transaction by a majority of the corporation's disinterested directors or the satisfaction of a statutory "fair price" provision, a merger, sale of assets or liquidation of a corporation involving an "Interested Shareholder" (defined as a person who owns beneficially 20% or more of the corporation's outstanding voting securities) must be approved by the holders of two-thirds of the corporation's outstanding voting securities, other than those of the Interested Shareholder. A corporation may, in its articles of incorporation, exempt itself from coverage of this provision. The Company has not done so. Washington law also prohibits a corporation, with certain exceptions, from engaging in certain significant business transactions with a person or group of persons that holds 10% or more of the Company's outstanding voting securities for a period of five years after such acquisition. The prohibited transactions include, among others, a merger with, disposition of assets to, or issuance or redemption of stock to or from, such person or group of persons or allowing such person or group of persons to receive any disproportionate benefit as a shareholder. A corporation may not "opt out" of this statute. These 59 61 provisions may have the effect of delaying, deferring or preventing a change in control of the Company. See "Risk Factors -- Concentration of Ownership and Antitakeover Considerations." DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY The Company's Bylaws contain provisions indemnifying the Company's directors and officers to the fullest extent permitted by law. The Company has also entered into indemnity agreements pursuant to which it has agreed, among other things, to indemnify its directors and executive officers against certain liabilities. In addition, the Articles of Incorporation contain provisions limiting the personal liability of directors to the Company or its shareholders to the fullest extent permitted by law. REGISTRATION RIGHTS The holders of an aggregate of 7,505,155 shares of Common Stock are entitled to certain registration rights as set forth below: RGene Acquisition Under the terms of the Merger Agreement, the RGene stockholders are entitled to certain registration rights with respect to 3,636,364 shares of Common Stock issuable to such stockholders upon the closing of the merger, as well as up to $5 million of Common Stock issuable in connection with the achievement of certain milestones. Subject to certain limitations, the Company must register 50% of such shares under the Securities Act prior to the one-year anniversary of the closing of the RGene Acquisition. The Company has agreed to cause such registration to remain effective for a period ending 24 months after completion of the RGene Acquisition. See "RGene Acquisition." Registration Rights Agreement Pursuant to the terms of a Registration Rights Agreement, dated as of April 27, 1992 (the "Registration Rights Agreement"), between the Company and certain of the Company's shareholders, including Immunex, such shareholders are entitled to certain registration rights with respect to 3,806,775 shares of Common Stock (the "Registrable Securities"). Subject to certain limitations in the Registration Rights Agreement, the holders of at least 30% of the Registrable Securities, and their permitted transferees, may require that the Company, on two occasions, use its best efforts to register such securities for public resale. In addition, if the Company registers any shares of Common Stock either for its own account or for the accounts of other holders of Common Stock, the parties to the Registration Rights Agreement are entitled to include their Registrable Securities in such registration, subject to the ability of any underwriters to limit the number of shares included in the offering to no less than 20% of such offering. The parties to the Registration Rights Agreement also may require the Company, not more than once in any 12-month period, to register all or a portion of their Registrable Securities on Form S-3, provided, among other things, that the proposed aggregate selling price is at least $1 million. Of the Registrable Securities, 1,193,653 shares are available for immediate sale in the public market under Rule 144(k). The 2,613,122 shares of Common Stock held by Immunex will be available for sale in the public market 91 days after the date of this Prospectus, subject to the limitations provided in Rule 144. Equipment Financing Warrants The holders of the Equipment Financing Warrants are entitled to certain registration rights with respect to 62,016 shares issuable upon exercise of such warrants. Generally, such registration rights are comparable to the rights provided to holders of the Registrable Securities under the Registration Rights Agreement, provided that the holders of the Equipment Financing Warrants have no demand registration rights and are entitled to include their securities in a registration statement if and only to the extent that the inclusion of such securities would not reduce the amount of Registrable Securities included in such offering. As of May 24, 1996, Equipment Financing Warrants exercisable for the purchase of 40,016 shares of Common Stock had an exercise price at or below the closing sales price for the Common Stock as reported by Nasdaq on such date. 60 62 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters (the "Underwriters") named below, for whom Vector Securities International, Inc. ("Vector Securities") and Genesis Merchant Group Securities are acting as representatives (the "Representatives"), have severally agreed to purchase, subject to the terms and conditions of the Underwriting Agreement, and the Company has agreed to sell to the Underwriters, the following respective number of shares of Common Stock.
NUMBER OF UNDERWRITERS SHARES -------------------------------------------------------------------------- ---------- Vector Securities International, Inc...................................... Genesis Merchant Group Securities......................................... --------- Total..................................................................... 3,500,000 =========
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. 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 page 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 of Common Stock, the offering price and other selling terms may be changed by the Representatives. The Company has granted to the Underwriters an option, exercisable at any time during the 30-day period after the date of this Prospectus, to purchase up to an additional 525,000 shares of Common Stock at the public offering price set forth on the cover page of this Prospectus, less underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with the Offering. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares of Common Stock set forth next to such Underwriter's name in the preceding table bears to the total number of shares listed in the table. 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 thereto. Vector Securities was retained by the Company to render a fairness opinion to the Targeted Genetics Board of Directors in connection with the RGene Acquisition, for which it received customary fees. 61 63 The executive officers, directors and certain other shareholders of the Company have agreed that they will not, without the prior written consent of Vector Securities International, Inc., offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock owned by them for a period of 90 days after the date of this Prospectus. The Company has agreed that it will not, without the prior written consent of Vector Securities International, Inc., offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock for a period of 90 days after the date of this Prospectus, except that the Company may grant additional options under its stock option plans, or issue shares upon the exercise of outstanding stock options or warrants. In connection with the Offering, certain Underwriters and selling group members (if any) who are qualified registered market makers on the Nasdaq National Market may engage in passive market-making transactions in the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act during the two-business-day period before commencement of sales in the Offering. The passive market-making transactions must comply with applicable volume and price limits and be identified as such. In general, a passive market maker may display its bid at a price not in excess of the highest independent bid for the security. If all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. Net purchases by a passive market maker on each day are generally limited to a specified percentage of the passive market-making average daily trading volume in the Common Stock during a price period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail, and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the Common Stock being offered hereby will be passed upon for the Company by Perkins Coie, Seattle, Washington. Certain legal matters will be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, Chicago, Illinois. EXPERTS The financial statements of Targeted Genetics Corporation at December 31, 1993, 1994 and 1995 appearing in this Prospectus and the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of RGene Therapeutics, Inc. appearing in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. ADDITIONAL INFORMATION The Company is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy or information statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy or information statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: Seven World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of such materials can be obtained from the Public Reference Section of the Commission at 450 Fifth 62 64 Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy or information statements and other information concerning the Company may be inspected at the offices of Nasdaq, 1735 K Street, N.W., Washington, D.C. The Company has filed with the Commission a Registration Statement under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. Statements contained herein concerning certain provisions of documents are necessarily summaries of such documents and each such statement is qualified in its entirety by reference to the copy of the applicable document filed with the Commission. 63 65 INTENTIONALLY LEFT BLANK 66 INDEX TO FINANCIAL STATEMENTS
PAGE ----- TARGETED GENETICS CORPORATION Report of Ernst & Young LLP, Independent Auditors.................................... F-2 Balance Sheets....................................................................... F-3 Statements of Operations............................................................. F-4 Statements of Shareholders' Equity................................................... F-5 Statements of Cash Flows............................................................. F-6 Notes to Financial Statements........................................................ F-7 RGENE THERAPEUTICS, INC. Report of Independent Public Accountants............................................. F-13 Balance Sheets....................................................................... F-14 Statements of Operations............................................................. F-15 Statements of Stockholders' Equity................................................... F-16 Statements of Cash Flows............................................................. F-17 Notes to Financial Statements........................................................ F-18
F-1 67 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Targeted Genetics Corporation We have audited the accompanying balance sheets of Targeted Genetics Corporation (a development stage company) as of December 31, 1994 and 1995, and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995 and the period from March 9, 1989 (date of inception) through 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 the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Targeted Genetics Corporation (a development stage company) at December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 and the period from March 9, 1989 (date of inception) through December 31, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Seattle, Washington February 9, 1996, except for Note 9 as to which the date is April 16, 1996 F-2 68 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
ASSETS DECEMBER 31, --------------------------- MARCH 31, 1994 1995 1996 ------------ ------------ ------------ (UNAUDITED) Current assets: Cash and cash equivalents........................... $ 2,306,979 $ 2,154,814 $ 1,526,073 Securities available for sale....................... 9,167,808 12,287,748 10,352,493 Deposits, prepaid expenses and other................ 254,225 196,150 157,800 ------------ ------------ ------------ Total current assets............................. 11,729,012 14,638,712 12,036,366 Property, plant and equipment, net.................... 5,038,812 4,959,502 4,990,602 Other assets.......................................... 278,057 362,246 354,176 ------------ ------------ ------------ $ 17,045,881 $ 19,960,460 $ 17,381,144 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................... $ 704,804 $ 564,403 $ 402,510 Accrued payroll and other liabilities............... 261,562 336,713 229,447 Current portion of long-term obligations............ 584,371 881,210 995,919 ------------ ------------ ------------ Total current liabilities........................ 1,550,737 1,782,326 1,627,876 Long-term obligations................................. 2,252,999 2,405,298 2,633,765 Commitments Shareholders' equity: Preferred stock, $.01 par value, 6,000,000 shares authorized, none outstanding..................... -- -- -- Common stock, $.01 par value, 40,000,000 shares authorized, 8,958,831, 12,317,183 and 12,397,484 outstanding at December 31, 1994 and 1995, and March 31, 1996, respectively..................... 31,024,884 43,295,436 43,605,225 Unrealized gains (losses) on securities available for sale......................................... (116,104) 66,319 (5,064) Deficit accumulated during development stage........ (17,666,635) (27,588,919) (30,480,658) ------------ ------------ ------------ Total shareholders' equity....................... 13,242,145 15,772,836 13,119,503 ------------ ------------ ------------ $ 17,045,881 $ 19,960,460 $ 17,381,144 ============ ============ ============
See accompanying notes to financial statements. F-3 69 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
PERIOD FROM PERIOD FROM MARCH 9, MARCH 9, 1989 1989 (DATE OF (DATE OF INCEPTION) THREE MONTHS ENDED INCEPTION) YEAR ENDED DECEMBER 31, THROUGH MARCH 31, THROUGH ------------------------------------------- DECEMBER 31, --------------------------- MARCH 31, 1993 1994 1995 1995 1995 1996 1996 ----------- ----------- ----------- ------------ ----------- ----------- ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) Revenues: Investment income........ $ 412,076 $ 448,822 $ 667,835 $ 2,077,282 $ 132,537 $ 183,536 $ 2,260,818 Other........... -- -- 174,625 174,625 -- -- 174,625 ----------- ----------- ----------- ------------ ----------- ----------- ------------ Total revenues.... 412,076 448,822 842,460 2,251,907 132,537 183,536 2,435,443 ----------- ----------- ----------- ------------ ----------- ----------- ------------ Expenses: Research and development... 4,261,154 6,763,549 8,194,913 22,771,120 1,978,316 2,366,032 25,137,152 General and administrative... 1,216,434 1,891,947 2,267,516 6,574,720 701,013 616,862 7,191,582 Interest........ -- 192,671 302,315 494,986 74,840 92,381 587,367 ----------- ----------- ----------- ------------ ----------- ----------- ------------ Total expenses.... 5,477,588 8,848,167 10,764,744 29,840,826 2,754,169 3,075,275 32,916,101 ----------- ----------- ----------- ------------ ----------- ----------- ------------ Net loss.......... $(5,065,512) $(8,399,345) $(9,922,284) $(27,588,919) $(2,621,632) $(2,891,739) $(30,480,658) ========== ========== ========== =========== ========== ========== =========== Net loss per share........... $ (3.73) $ (1.40) $ (0.94) $ (0.29) $ (0.23) ========== ========== ========== ========== ========== Shares used in computation of net loss per share........... 1,359,840 6,005,141 10,532,950 8,966,194 12,342,748 ========== ========== ========== ========== ========== Pro forma, assuming conversion of preferred stock to common stock: Net loss per share......... $ (0.73) $ (1.03) $ (0.94) ========== ========== ========== Shares used in computation of net loss per share......... 6,955,826 8,151,547 10,532,950 ========== ========== ==========
See accompanying notes to financial statements. F-4 70 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF SHAREHOLDERS' EQUITY PERIOD FROM MARCH 9, 1989 (DATE OF INCEPTION) THROUGH MARCH 31, 1996
UNREALIZED GAINS DEFICIT (LOSSES) ON ACCUMULATED ADVANCES SECURITIES DURING TOTAL PREFERRED COMMON FROM AVAILABLE FOR DEVELOPMENT SHAREHOLDERS' STOCK STOCK IMMUNEX SALE STAGE EQUITY ------------ ----------- ----------- ------------- ------------ ------------ Net loss from March 9, 1989 (date of inception) through December 31, 1991................. $ -- $ -- $ 2,807,316 $ -- $(2,807,316) $ -- Sale of 1,080,000 shares of common stock........................... -- 27,600 -- -- -- 27,600 Issuance of 1,920,000 shares of Series A convertible preferred stock to Immunex in repayment of advances........................ 2,807,316 -- (2,807,316) -- -- -- Sale of 3,675,986 shares of Series B preferred stock, net of issuance costs of $772,415...... 16,597,399 -- -- -- -- 16,597,399 Issuance of 120,000 shares of common stock as compensation.... -- 66,000 -- -- -- 66,000 Net loss -- 1992.................. -- -- -- -- (1,394,462) (1,394,462) ------------ ----------- ----------- --------- ------------ ----------- Balance at December 31, 1992........ 19,404,715 93,600 -- -- (4,201,778) 15,296,537 Net loss -- 1993.................. -- -- -- -- (5,065,512) (5,065,512) ------------ ----------- ----------- --------- ------------ ----------- Balance at December 31, 1993........ 19,404,715 93,600 -- -- (9,267,290) 10,231,025 Sale of 2,154,345 shares of common stock in initial public offering, net of issuance costs of $1,404,056................... -- 11,522,014 -- -- -- 11,522,014 Conversion of Series A and B preferred stock to 5,595,986 shares of common stock.......... (19,404,715) 19,404,715 -- -- -- -- Exercise of stock options......... -- 4,555 -- -- -- 4,555 Unrealized losses on securities available for sale.............. -- -- -- (116,104) -- (116,104) Net loss -- 1994.................. -- -- -- -- (8,399,345) (8,399,345) ------------ ----------- ----------- --------- ------------ ----------- Balance at December 31, 1994........ -- 31,024,884 -- (116,104) (17,666,635) 13,242,145 Sale of 3,322,392 shares of common stock and 830,598 warrants, net of issuance costs of $214,509... -- 12,244,461 -- -- -- 12,244,461 Exercise of stock options......... -- 26,091 -- -- -- 26,091 Unrealized gains on securities available for sale.............. -- -- -- 182,423 -- 182,423 Net loss -- 1995.................. -- -- -- -- (9,922,284) (9,922,284) ------------ ----------- ----------- --------- ------------ ----------- Balance at December 31, 1995........ -- 43,295,436 -- 66,319 (27,588,919) 15,772,836 Exercise of stock options (unaudited)..................... -- 11,809 -- -- -- 11,809 Exercise of 61,000 warrants (unaudited)..................... -- 285,480 -- -- -- 285,480 Expenses paid with 2,461 shares of common stock (unaudited)........ -- 12,500 -- -- -- 12,500 Unrealized loss on securities available for sale (unaudited)..................... -- -- -- (71,383) -- (71,383) Net loss -- 1996 (unaudited)...... -- -- -- -- (2,891,739) (2,891,739) ------------ ----------- ----------- --------- ------------ ----------- Balance at March 31, 1996 (unaudited)....................... $ -- $43,605,225 $ -- $ (5,064) $(30,480,658) $13,119,503 ============ =========== =========== ========= ============ ===========
See accompanying notes to financial statements. F-5 71 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
PERIOD FROM MARCH 9, 1989 (DATE OF PERIOD FROM INCEPTION) MARCH 9, 1989 YEAR ENDED DECEMBER 31, THROUGH THREE MONTHS ENDED (DATE OF ----------------------------------------- DECEMBER 31, MARCH 31, INCEPTION) 1993 1994 1995 1995 ------------------------- THROUGH ----------- ------------ ------------ ------------- 1995 1996 MARCH 31, ----------- ----------- 1996 (UNAUDITED) (UNAUDITED) ------------- (UNAUDITED) Operating activities: Net loss................ $(5,065,512) $ (8,399,345) $ (9,922,284) $(27,588,919) $(2,621,632) $(2,891,739) $(30,480,658) Adjustments to reconcile net loss to net cash used in operating activities: Expenses paid with common stock........ -- -- -- 66,000 -- 12,500 78,500 Depreciation and amortization........ 411,652 1,264,848 1,484,549 3,162,881 340,023 446,855 3,609,736 (Increase) decrease in deposits, prepaid expenses and other............... (8,610) (161,827) (49,865) (295,290) (26,850) 3,350 (291,940) (Increase) decrease in accrued interest on securities available for sale............ 124,180 (29,750) (9,287) (82,928) (14,931) 11,038 (71,890) Increase (decrease) in current liabilities......... 133,735 88,493 (17,955) 769,991 (114,941) (184,562) 585,429 ----------- ------------ ------------ ------------ ------------ ------------ ------------ Net cash used in operating activities...... (4,404,555) (7,237,581) (8,514,842) (23,968,265) (2,438,331) (2,602,558) (26,570,823) Investing activities: Purchases of property, plant and equipment... (4,546,933) (885,604) (1,335,876) (7,170,597) (272,764) (519,482) (7,690,079) Purchases of securities available for sale.... (8,770,199) (12,990,428) (13,047,852) (55,090,522) (1,972,886) (1,513,869) (56,604,391) Sales of securities available for sale.... 14,049,110 9,369,127 10,119,622 42,952,020 2,838,299 3,366,703 46,318,723 Increase in other assets................ (199,749) (177,500) (76,500) (574,179) (30,000) -- (574,179) ----------- ------------ ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities...... 532,229 (4,684,405) (4,340,606) (19,883,278) 562,649 1,333,352 (18,549,926) Financing activities: Advances from Immunex... -- -- -- 2,807,316 -- -- 2,807,316 Net proceeds from sale of capital stock...... -- 11,526,569 12,270,552 40,422,120 8,295 297,289 40,719,409 Proceeds from equipment financing............. 806,114 1,950,391 1,089,789 3,846,294 237,459 554,063 4,400,357 Payments under capital leases and installment loans................. -- (412,315) (657,058) (1,069,373) (140,826) (210,887) (1,280,260) ----------- ------------ ------------ ------------ ------------ ------------ ------------ Net cash provided by financing activities...... 806,114 13,064,645 12,703,283 46,006,357 104,928 640,465 46,646,822 ----------- ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents............. (3,066,212) 1,142,659 (152,165) 2,154,814 (1,770,754) (628,741) 1,526,073 Cash and cash equivalents, beginning of period..... 4,230,532 1,164,320 2,306,979 -- 2,306,979 2,154,814 -- ----------- ------------ ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period........... $ 1,164,320 $ 2,306,979 $ 2,154,814 $ 2,154,814 $ 536,225 $ 1,526,073 $ 1,526,073 =========== ============ ============ ============ ============ ============ ============ Supplemental disclosures of noncash investing and financing activities: Deferred sales tax on leasehold improvements and equipment......... $ 363,933 $ 114,589 $ 16,407 $ 509,588 $ 9,256 $ -- $ 509,588 =========== ============ ============ ============ ============ ============ ============ Preferred stock issued to Immunex in payment of advances........... $ -- $ -- $ -- $ 2,807,316 $ -- $ -- $ 2,807,316 =========== ============ ============ ============ ============ ============ ============
See accompanying notes to financial statements. F-6 72 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 1. ORGANIZATION Targeted Genetics Corporation (the "Company") is developing gene therapy products for the treatment of certain acquired and inherited diseases. As a development stage company, the Company has devoted substantially all of its efforts to date to conducting research and development activities, recruiting personnel and raising capital. The Company was incorporated in the state of Washington in March 1989 as a wholly owned subsidiary of Immunex Corporation ("Immunex"). In February 1992, the Company issued 1,920,000 shares of Series A convertible preferred stock to Immunex in exchange for the grant of a license to certain technology, settlement of advances from Immunex and cancellation of 40,000 shares of common stock issued by the Company to Immunex on March 28, 1989. At December 31, 1995, Immunex held 21% of the outstanding stock of the Company. The Company estimates that, at its current rate of expenditures, its existing cash, cash equivalents and securities available for sale will be sufficient to meet operating requirements through the end of 1996. Accordingly, the Company is pursuing one or more collaborative arrangements with corporate partners, with the intent of generating both research and development funding and equity capital. The Company may also elect to seek additional equity capital via the public or private markets, depending on market conditions. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim Financial Information The financial information at March 31, 1996 and for the three months ended March 31, 1995 and 1996 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. Operating results for the March 31, 1996 period are not necessarily indicative of the results that may be expected for the entire year. Cash Equivalents The Company considers all short-term investments with a purchased maturity of three months or less to be cash equivalents. Cash equivalents, valued at cost which approximates market, consist principally of money market accounts and short-term government obligations. Securities Available for Sale Securities available for sale consist primarily of corporate debt securities and U.S. Government notes, all of which mature within two years. Management currently classifies the Company's entire investment portfolio, other than cash equivalents, as securities available for sale. Such securities are stated at market value, with the unrealized gains and losses included in shareholders' equity. The cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity, which are included in investment income. Realized gains and losses and declines in value judged to be other than temporary on securities available for sale are also included in investment income. The cost of securities sold is calculated using the specific identification method. F-7 73 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation of furniture and equipment is provided using the straight-line method over the assets' estimated useful lives, ranging from five to seven years. Furniture and equipment under capitalized leases are amortized over the life of the lease. Leasehold improvements are amortized over the life of the improvements or the term of the lease, whichever is shorter. Net Loss Per Share Net loss per share is computed based upon the weighted average number of common shares outstanding during the period. Common equivalent shares are not included in the computation because the effect of their inclusion would be antidilutive, except that, in accordance with Securities and Exchange Commission requirements, common equivalent shares issued during the twelve months prior to the Company's initial public offering have been included in the calculation as if they were outstanding for all periods through March 31, 1994. Upon completion of the Company's initial public offering, all 5,595,986 shares of preferred stock converted to common stock. Unaudited pro forma net loss per share reflects the assumption that all such shares had converted to common stock as of the beginning of the periods reported. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Statement No. 123 is effective for fiscal years beginning after December 15, 1995. Under Statement No. 123, stock-based compensation expense is measured using either the intrinsic value method, as prescribed by Accounting Principles Board Opinion No. 25, or the fair value method described in Statement No. 123. Companies choosing the intrinsic value method will be required to disclose the pro forma impact of the fair value method on net income and earnings per share. The Company plans to implement Statement No. 123 in 1996 using the intrinsic value method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. F-8 74 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 3. SECURITIES AVAILABLE FOR SALE Securities available for sale consist of the following:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ----------- ---------- ---------- ----------- December 31, 1994: U.S. corporate securities............ $ 3,349,999 $ 2,961 $ 34,653 $ 3,318,307 U.S. Government obligations.......... 5,933,913 -- 84,412 5,849,501 ---------- ------- -------- ----------- $ 9,283,912 $ 2,961 $119,065 $ 9,167,808 ========== ======= ======== =========== December 31, 1995: U.S. corporate securities............ $ 2,473,549 $ 8,803 $ -- $ 2,482,352 U.S. Government obligations.......... 9,747,880 57,516 -- 9,805,396 ---------- ------- -------- ----------- $12,221,429 $ 66,319 $ -- $12,287,748 ========== ======= ======== =========== March 31, 1996: U.S. corporate securities............ $ 2,398,777 $ 3,584 $ 191 $ 2,402,170 U.S. Government obligations.......... 7,958,780 7,714 16,171 7,950,323 ---------- ------- -------- ----------- $10,357,557 $ 11,298 $ 16,362 $10,352,493 ========== ======= ======== ===========
The gross realized gains on sales of securities available for sale totaled $15,901 and $25,047, and the gross realized losses totaled $55,576 and $48,013 in 1994 and 1995, respectively. For the three months ended March 31, 1995, the gross realized gains on sales of securities available for sale totaled $18,158 and there were no gross realized losses. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, ----------------------- MARCH 31, 1994 1995 1996 ---------- ---------- ---------- (UNAUDITED) Furniture and equipment............................ $2,835,223 $3,862,632 $4,241,598 Leasehold improvements............................. 3,608,599 3,948,678 4,004,597 ---------- ---------- ---------- 6,443,822 7,811,310 8,246,195 Less accumulated depreciation and amortization..... 1,405,010 2,851,808 3,255,593 ---------- ---------- ---------- $5,038,812 $4,959,502 $4,990,602 ========== ========== ==========
The Company has leased furniture and equipment, primarily laboratory equipment, under three capital leases. The total cost of furniture and equipment leased at December 31, 1994 and 1995 was $2,009,604 and $2,655,998, respectively, with related accumulated depreciation of $489,541 and $1,076,712 at December 31, 1994 and 1995, respectively. At March 31, 1996, the total cost of furniture and equipment leased was $3,298,545, and the related accumulated depreciation was $1,238,622. At December 31, 1994 and 1995, the Company had pledged furniture and equipment, having a total cost of $616,441 and $853,900, respectively, as collateral under an installment loan agreement. Accumulated depreciation related to these assets was $63,911 and $221,410 at December 31, 1994 and 1995, respectively. At March 31, 1996, the total cost of pledged furniture and equipment was $853,900, and the related accumulated depreciation was $260,924. F-9 75 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 5. LONG-TERM OBLIGATIONS Long-term obligations consist of the following:
DECEMBER 31, ------------------------ MARCH 31, 1994 1995 1996 ---------- ---------- ----------- (UNAUDITED) Deferred state sales tax.......................... $ 493,181 $ 509,588 $ 509,588 Installment note payable, effective rate of 16.73% due in monthly installments through 1999........ 741,004 822,214 778,190 Capitalized lease obligations (see note 7)........ 1,603,185 1,954,706 2,341,906 ---------- ---------- ---------- 2,837,370 3,286,508 3,629,684 Less current portion.............................. 584,371 881,210 995,919 ---------- ---------- ---------- $2,252,999 $2,405,298 $ 2,633,765 ========== ========== ==========
The state of Washington granted the Company a deferral of state sales tax on new construction and equipment used in research and development activities. The related obligation is payable over six years beginning in 1996. Principal payments related to long-term obligations for each of the five years ending December 31, 2000 are $881,210, $1,024,238, $658,800, $430,932 and $162,539, respectively. 6. SHAREHOLDERS' EQUITY Common Stock The Company sold 1,200,000 shares of common stock to its scientific advisors and founders in February and November 1992. The Company has the right to repurchase certain of these shares in the event the holder's relationship with the Company terminates. The repurchase rights expire in annual increments ending in 1996. The shares were sold at prices ranging from $0.03 to $0.55 per share. At December 31, 1995, 216,000 shares were subject to repurchase at the original sales price. At March 31, 1996, 24,000 shares were subject to repurchase at the original sales price. Stock Options The Company has adopted two stock option plans under which 1,520,000 shares of common stock were reserved for issuance. Generally, options vest in annual increments over a three- or five-year period. All options expire ten years from date of grant. Options have been granted at market value or, prior to the Company's initial public offering, at fair value at the date of grant as established by the Company's Board of Directors and, accordingly, no compensation expense has been recorded. As of December 31, 1995, options on 268,620 shares were exercisable and 443,123 shares were available for future grant. As of March 31, 1996, options on 312,126 shares were exercisable and 281,686 shares were available for future grant. F-10 76 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 6. SHAREHOLDERS' EQUITY (CONTINUED) A summary of activity related to the Company's stock option plans follows:
SHARES UNDER OPTION OPTION PRICE ------------ ------------ Balance, January 1, 1995.................................. 838,000 $0.50 - 6.25 Cancelled............................................... (22,860) 0.55 - 6.25 Granted................................................. 253,237 4.00 - 5.13 Exercised............................................... (35,960) 0.50 - 5.00 --------- ---------- Balance, December 31, 1995................................ 1,032,417 0.50 - 6.25 Cancelled............................................... (6,920) 0.55 - 5.00 Granted................................................. 168,357 5.00 Exercised............................................... (16,840) 0.50 - 5.00 ------------ ------------ Balance, March 31, 1996................................... 1,117,014 $0.50 - 6.25 ========== ===========
Warrants In July 1995, the Company issued warrants to purchase 830,598 shares of common stock in conjunction with an offering of its common stock. The warrants are immediately exercisable at a price of $4.68 per share, expiring July 1997. The Company has issued a total of 62,016 warrants related to equipment financing agreements. The warrants have a weighted average exercise price of $6.00 per share and expire from May 1999 to December 2003. At December 31, 1995 and March 31, 1996, 892,614 shares and 831,614 shares, respectively, of common stock were reserved for these warrants. 7. LEASE COMMITMENTS The Company leases its research and office facility under a noncancellable operating lease that expires April 1, 1999. The lease may be extended under three five-year renewal options at the then prevailing fair market value rental rate. Future minimum rental payments under noncancellable leases at December 31, 1995 are as follows:
OPERATING CAPITAL ---------- ---------- Year ending December 31: 1996....................................................... $ 433,880 $ 873,814 1997....................................................... 457,446 873,814 1998....................................................... 474,233 303,740 1999....................................................... 119,607 358,866 2000....................................................... -- -- ---------- ---------- Total minimum lease payments................................. $1,485,166 2,410,234 ========== Less amount representing interest............................ 455,528 ---------- Present value of minimum capitalized lease payments.......... $1,954,706 ==========
Rent expense under operating leases for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1996 was $256,354, $321,307, $396,220 and $101,923, respectively. F-11 77 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) 8. INCOME TAXES At December 31, 1995, the Company had net operating loss carryforwards of approximately $24.2 million and research and experimental credit carryforwards of approximately $817,000. The carryforwards are available to offset future federal income taxes and begin to expire in 2007. At December 31, 1994 and 1995, the Company recognized a valuation allowance to offset deferred tax assets due to the uncertainty of realizing the related benefits. Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31, ------------------------ 1994 1995 ---------- ---------- Deferred tax assets: Net operating loss carryforwards........................... $5,162,000 $8,223,000 Research and experimental credit carryforwards............. 654,000 817,000 Depreciation............................................... 29,000 156,000 Other...................................................... 55,000 54,000 ---------- ---------- Total deferred tax assets.................................... $5,900,000 $9,250,000 ========== ========== Valuation allowance for deferred tax assets.................. $5,900,000 $9,250,000 ========== ==========
9. SUBSEQUENT EVENTS On April 16, 1996, the Company entered into a definitive merger agreement with RGene Therapeutics, Inc. ("RGene") to acquire 100% of the outstanding stock of RGene. The Company will issue to the RGene stockholders 3,636,364 shares of its common stock. The RGene stockholders will have the right to receive an additional $5 million of the Company's common stock if certain milestones relating to RGene's potential products are achieved prior to December 31, 1998. Completion of the RGene acquisition is subject to customary conditions, including the approval of the shareholders of both companies. On April 16, 1996, the Board of Directors authorized management of the Company to file a registration statement with the Securities and Exchange Commission permitting the Company to sell up to 4,025,000 shares of common stock in a public offering. F-12 78 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To RGene Therapeutics, Inc.: We have audited the accompanying balance sheets of RGene Therapeutics, Inc. (a Delaware corporation in the development stage), as of December 31, 1994 and 1995, and the related statements of operations, stockholders' equity and cash flows for the years ended December 31, 1994 and 1995, and the period from inception (August 27, 1993) through December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of RGene Therapeutics, Inc., as of December 31, 1994 and 1995, and the results of its operations and its cash flows for the years ended December 31, 1994 and 1995, and the period from inception (August 27, 1993) through December 31, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has operated as a development stage enterprise since its inception, devoting substantially all of its efforts to financial planning, raising capital and performing research and development. Consequently, as shown in the accompanying financial statements, the Company has not realized any revenues from product sales and has a cumulative loss of $5,075,183 since its inception, all of which raises substantial doubt about its ability to continue as a going concern. Accordingly, the Company's continued existence is dependent upon its ability to obtain additional financing to develop, manufacture and market its products and to attain successful future operations. Management's plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts of other current assets and property and equipment or the amount of liabilities that might result should the Company be unable to continue as a going concern. ARTHUR ANDERSEN LLP The Woodlands, Texas April 10, 1996 F-13 79 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
ASSETS DECEMBER 31, --------------------------- MARCH 31, 1994 1995 1996 ----------- ----------- ----------- (UNAUDITED) Current assets: Cash and cash equivalents.......................... $ 2,300,235 $ 239,361 $ 1,677,083 Other current assets............................... 83,473 84,700 146,235 ----------- ----------- ----------- Total current assets............................ 2,383,708 324,061 1,823,318 Furniture, equipment and leasehold improvements, net of accumulated depreciation of $10,839, $56,828 and $70,263, respectively.............................. 174,332 176,370 176,179 ----------- ----------- ----------- Total assets.................................... $ 2,558,040 $ 500,431 $ 1,999,497 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities........... $ 36,458 $ 152,138 $ 149,028 Payable to contract manufacturer................... 74,057 154,997 115,131 Payable to related parties......................... -- 65,000 1,500,000 Notes payable to related parties................... -- 1,000,000 1,000,000 ----------- ----------- ----------- Total current liabilities....................... 110,515 1,372,135 2,764,159 Commitments and contingencies (Note 9) Stockholders' equity: Undesignated serial preferred stock, $.001 par value; 4,196,428 shares authorized; none issued and outstanding at December 31, 1994 and 1995 and March 31, 1996.............................. -- -- -- Series A convertible preferred stock, $.001 par value; 5,803,572 shares authorized; 3,571,430 issued and outstanding at December 31, 1994 and 1995 and March 31, 1996......................... 3,571 3,571 3,571 Common stock, $.001 par value; 15,000,000 shares authorized; 3,264,176, 3,394,176 and 3,394,176 issued and outstanding at December 31, 1994 and 1995 and March 31, 1996, respectively........... 3,264 3,394 3,394 Additional paid-in capital......................... 4,020,884 4,196,514 4,353,314 Deficit accumulated during the development stage... (1,580,194) (5,075,183) (5,124,941) ----------- ----------- ----------- Total stockholders' equity (deficit)............ 2,447,525 (871,704) (764,662) ----------- ----------- ----------- Total liabilities and stockholders' equity................................... $ 2,558,040 $ 500,431 $ 1,999,497 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-14 80 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (AUGUST 27, 1993) FOR THE PERIOD YEAR ENDED DECEMBER 31, THROUGH THREE MONTHS FROM INCEPTION ------------------------- DECEMBER 31, ENDED MARCH 31, (AUGUST 27, 1993) 1994 1995 1995 ------------------------- THROUGH ----------- ----------- ----------------- 1995 1996 MARCH 31, ----------- ----------- 1996 (UNAUDITED) (UNAUDITED) ----------------- (UNAUDITED) Revenues: License and other fees................ $ -- $ 300,000 $ 300,000 $ -- $ 2,500,000 $ 2,800,000 Interest income........ 56,266 53,277 109,543 26,092 23,048 132,591 ----------- ----------- ----------- ----------- ----------- ----------- Total revenues..... 56,266 353,277 409,543 26,092 2,523,048 2,932,591 Expenses: Research and development......... 976,786 3,073,268 4,050,054 447,902 2,269,934 6,319,988 General and administrative...... 659,674 752,943 1,412,617 194,708 270,772 1,683,389 Interest expense....... -- 22,055 22,055 -- 32,100 54,155 ----------- ----------- ----------- ----------- ----------- ----------- Total expenses..... 1,636,460 3,848,266 5,484,726 642,610 2,572,806 8,057,532 ----------- ----------- ----------- ----------- ----------- ----------- Net loss................. $(1,580,194) $(3,494,989) $(5,075,183) $ (616,518) $ (49,758) $(5,124,941) =========== =========== =========== =========== =========== =========== Loss per share........... $ (0.61) $ (1.06) $ (0.19) $ (0.01) =========== =========== =========== =========== Weighted average shares used in computing loss per share.............. 2,598,449 3,289,820 3,264,176 3,394,176 =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-15 81 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM INCEPTION (AUGUST 27, 1993) THROUGH MARCH 31, 1996
DEFICIT SERIES A ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL DURING TOTAL ------------------ ------------------ PAID-IN DEVELOPMENT STOCKHOLDERS' SHARES VALUE SHARES VALUE CAPITAL STAGE EQUITY --------- ------ --------- ------ ---------- ----------- ------------- Balance at inception, August 27, 1993..... -- $ -- -- $ -- $ -- $ -- $ -- Warrants issued to purchase shares of common stock in conjunction with bridge loan on September 27, 1993.............. -- -- -- -- -- -- -- Issuance of common stock for cash, February 14, 1994, through April 4, 1994 ($.001 per share)....................... -- -- 1,763,462 1,763 -- -- 1,763 Issuance of common stock for cash, February 24, 1994 ($.01 per share)...... -- -- 215,000 215 1,935 -- 2,150 Issuance of common stock for license agreement rights, April 6, 1994, through April 8, 1994 ($.001 per share)......... -- -- 1,284,614 1,285 -- -- 1,285 Issuance of Series A preferred stock for cash, April 8, 1994, through September 22, 1994 ($1.12 per share).............. 3,571,430 3,571 -- -- 3,996,429 -- 4,000,000 Issuance of common stock for services, August 17, 1994 ($.11 per share)........ -- -- 1,100 1 120 -- 121 Compensation expense related to stock purchase agreements..................... -- -- -- -- 22,400 -- 22,400 Net loss.................................. -- -- -- -- -- (1,580,194) (1,580,194) --------- ------- --------- ------- --------- ----------- ---------- Balance, December 31, 1994................ 3,571,430 3,571 3,264,176 3,264 4,020,884 (1,580,194) 2,447,525 Warrants issued to purchase shares of common stock in conjunction with bridge loan on September 29, 1995.............. -- -- -- -- -- -- -- Issuance of common stock for license agreement rights, October 20, 1995 ($.11 per share).............................. -- -- 130,000 130 14,170 -- 14,300 Compensation expense related to stock purchase agreements and stock options... -- -- -- -- 161,460 -- 161,460 Net loss.................................. -- -- -- -- -- (3,494,989) (3,494,989) --------- ------- --------- ------- --------- ----------- ---------- Balance, December 31, 1995................ 3,571,430 3,571 3,394,176 3,394 4,196,514 (5,075,183) (871,704) Compensation expense related to stock purchase agreements and stock options (unaudited)............................. -- -- -- -- 156,800 -- 156,800 Net loss (unaudited)...................... -- -- -- -- -- (49,758) (49,758) --------- ------- --------- ------- --------- ----------- ---------- Balance, March 31, 1996................... 3,571,430 $3,571 3,394,176 $3,394 $4,353,314 $(5,124,941) $ (764,662) ========= ======= ========= ======= ========= =========== ==========
The accompanying notes are an integral part of these financial statements. F-16 82 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (AUGUST 27, 1993) FOR THE PERIOD DECEMBER 31, THROUGH THREE MONTHS FROM INCEPTION ------------------------- DECEMBER 31, ENDED MARCH 31, (AUGUST 27, 1993) 1994 1995 1995 ------------------------ THROUGH ----------- ----------- ----------------- 1995 1996 MARCH 31, ---------- ----------- 1996 (UNAUDITED) (UNAUDITED) ----------------- (UNAUDITED) Cash flows from operating activities: Net loss..................... $(1,580,194) $(3,494,989) $(5,075,183) $ (616,518) $ (49,758) $(5,124,941) Adjustments to reconcile net loss to net cash used in operating activities -- Depreciation.............. 10,839 45,989 56,828 10,063 13,435 70,263 Issuance of common stock for license agreement rights.................. 1,285 14,300 15,585 -- -- 15,585 Compensation expense related to stock purchase agreements and stock options........... 22,400 161,460 183,860 -- 156,800 340,660 Changes in assets and liabilities -- (Increase) decrease in other current assets............... (83,473) (1,227) (84,700) 54,983 (61,536) (146,236) Increase (decrease) in accounts payable, accrued liabilities and payable to contract manufacturer......... 110,515 196,620 307,135 (776) (42,975) 264,161 Increase in payable to related parties...... -- 65,000 65,000 -- 1,435,000 1,500,000 ----------- ----------- ----------- ----------- ----------- ----------- Net cash used in operating activities......... (1,518,628) (3,012,847) (4,531,475) (552,248) 1,450,966 (3,080,508) ----------- ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Purchase of fixed assets..... (185,171) (48,027) (233,198) (18,347) (13,244) (246,443) ----------- ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities......... (185,171) (48,027) (233,198) (18,347) (13,244) (246,443) ----------- ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Issuance of common stock..... 4,034 -- 4,034 -- -- 4,034 Issuance of Series A preferred stock........... 4,000,000 -- 4,000,000 -- -- 4,000,000 Proceeds from notes payable................... -- 1,000,000 1,000,000 -- -- 1,000,000 ----------- ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities......... 4,004,034 1,000,000 5,004,034 -- -- 5,004,034 ----------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash......................... 2,300,235 (2,060,874) 239,361 (570,595) 1,437,722 1,677,083 Cash and cash equivalents, beginning of period.......... -- 2,300,235 -- 2,300,235 239,361 -- ----------- ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents, end of period.................... $ 2,300,235 $ 239,361 $ 239,361 $1,729,640 $ 1,677,083 $ 1,677,083 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-17 83 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.) 1. ORGANIZATION AND BUSINESS RGene Therapeutics, Inc. (the Company), a Delaware corporation in the development stage, was incorporated on August 27, 1993, and effectively commenced operations in 1994. The Company is developing gene therapy products to deliver genes that may provide unique clinical benefits in the treatment of a number of human diseases. The Company's initial research and drug discovery programs are based on inventions by leading scientists at The University of Texas M. D. Anderson Cancer Center (MDACC) and the University of Pittsburgh (UP). The Company is a development stage company and has not yet generated revenue from product sales or other sources, nor is there any assurance that the Company will generate significant revenue in the future. The research and development activities engaged in by the Company involve a high degree of risk and uncertainty. The ability of the Company to successfully develop, manufacture and market its proprietary products is dependent upon many factors. These factors include, but are not limited to, the need for additional financing, attracting and retaining key personnel and consultants, dependence on licenses, patents and know-how, and successfully developing manufacturing, sales and marketing operations. The Company's ability to develop these operations may be immensely impacted by uncertainties related to patents and proprietary technologies, technological change and obsolescence, product development, competition, government regulations and approvals, healthcare reform and product liability exposure. As a result of the aforementioned factors and the related uncertainties, there can be no assurance of the Company's future success. The Company believes that its current cash balance will be sufficient to satisfy its funding needs through mid-1996. The Company must raise additional funds during the next 12 months to maintain its research and development activities. The Company's future funding requirements will depend on many factors, including the progress of the Company's research and development and the establishment of other collaborative relationships. Accordingly, the Company is considering all of its financing alternatives, including corporate partnering relationships with pharmaceutical companies to license some of its technology and/or jointly develop products or the combination of the Company with another entity (see Note 10). As a result of the aforementioned factors and the related uncertainties, there is substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts of other current assets and furniture, equipment and leasehold improvements or the amount and classification of liabilities that might result from the outcome of this uncertainty. 2. SIGNIFICANT ACCOUNTING POLICIES Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Interim financial statements The interim financial statements as of March 31, 1996 and for the three months ended March 31, 1995 and 1996 are unaudited, and certain information and footnote disclosures, normally included in F-18 84 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) such financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the financial position, results of operations and cash flows for the interim periods then ended, have been included. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire year. Cash and cash equivalents All highly liquid investments purchased with a remaining maturity of three months or less are considered to be cash equivalents. Furniture, equipment and leasehold improvements Furniture, equipment and leasehold improvements are carried at cost and depreciated on a straight-line basis over the estimated useful economic lives of the assets involved. The estimated useful lives employed in computing depreciation are three to seven years. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income. Maintenance and repairs that do not extend the life of assets are charged to expense when incurred. Revenue recognition Option, license and milestone payments under collaborative agreements are recorded as earned based on the provisions of each agreement. Research and development costs Costs incurred in connection with research and development activities are expensed as incurred. These costs consist of direct and indirect costs associated with specific projects as well as fees paid to various entities that perform certain research on behalf of the Company. Payments related to the acquisition and patenting of technology rights, for which development work is in process, are expensed and considered a component of research and development costs. Loss per share Loss per share has been computed by dividing net loss by the weighted average number of shares of common stock outstanding during the periods. During the noted periods, all common stock equivalents were antidilutive. F-19 85 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.) 3. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Furniture, equipment and leasehold improvements consist of the following:
DECEMBER 31, --------------------- 1994 1995 -------- -------- MARCH 31, 1996 ----------- (UNAUDITED) Furniture and equipment........................... $ 31,094 $ 72,087 $ 85,331 Lab equipment..................................... 146,985 146,706 146,706 Leasehold improvements............................ 7,092 14,405 14,405 -------- -------- -------- 185,171 233,198 246,442 Less -- Accumulated depreciation and amortization.................................... 10,839 56,828 70,263 -------- -------- -------- $174,332 $176,370 $ 176,179 ======== ======== ========
4. NOTES PAYABLE On September 29, 1995, the Company executed $1,000,000 in promissory notes from certain stockholders of the Company. The promissory notes bear interest at prime (8.5 percent at December 31, 1995) and are secured by the Company's patents. The notes matured on December 31, 1995; the principal amount of $1,000,000 and accrued interest of $22,055 and $54,155 are included in current liabilities in the accompanying financial statements as of December 31, 1995 and March 31, 1996, respectively. Management believes that the principal and accrued interest on the notes will be converted into the Company's common stock in conjunction with the contemplated merger (see Note 10). 5. STOCKHOLDERS' EQUITY Series A convertible preferred stock For the period from April 1994 through September 1994, the Company issued 3,571,430 shares of Series A convertible preferred stock, at a price of $1.12 per share, for cash proceeds of $4,000,000. Series A convertible preferred shares are convertible at the option of the holder into common stock as determined by dividing $1.12 by the conversion price ($1.12 at December 31, 1995) in effect at the time of conversion. At December 31, 1995, the Company reserved 3,571,430 shares of common stock for the conversion of Series A convertible preferred stock. Series A convertible preferred stock shall automatically be converted into common stock upon the closing of a public offering with total proceeds of at least $7,500,000. The holders of Series A convertible preferred stock have the right to vote on all stockholder matters on an as-if-converted basis. Series A convertible preferred stockholders may receive dividends at the discretion of the Company's board of directors. To date, no dividends have been declared. In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A convertible preferred stock are entitled to receive preference over any distribution to the holders of common stock in the amount of $1.12 per share. The holders of Series A convertible preferred stock have registration rights as defined in the stock purchase agreement. F-20 86 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.) 5. STOCKHOLDERS' EQUITY (CONTINUED) Warrants In connection with the bridge loans provided by two stockholders of the Company, the Company issued each of the two stockholders warrants to purchase 50,000 shares of common stock at a price of $.10 per share. In April 1994, the bridge loans were converted to Series A preferred stock. At the date of issuance, the warrants were estimated to have a de minimis value and, accordingly, the warrants were recorded at zero in the financial statements. The warrants expire if not exercised before September 27, 1998. During 1995, the Company issued warrants to purchase $250,000 of common stock in conjunction with the $1,000,000 bridge loans provided by certain stockholders of the Company. The number of shares of common stock to be issued upon exercise of the warrants is to be determined by dividing $250,000 by the price of the next equity financing. According to their original terms, the warrants are exercisable at a price per share equal to the price of the next equity financing and expire on September 28, 2000. In connection with the contemplated merger (see Note 10), the Company and the warrant holders have agreed that the warrants to purchase $250,000 of common stock shall be exercised prior to completion of the merger at a price of $1.40 per share (unaudited) in exchange for 178,571 shares of the Company's common stock. At the date of issuance, the warrants were estimated to have a de minimis value and, accordingly, the warrants have been recorded at zero in the financial statements. Options During 1995, the board of directors approved the expansion of the incentive stock option pool to a total of the greater of (a) 750,000 shares of common stock or (b) 10 percent of the total common stock issued of the Company. The options under the 1994 Stock Option Plan (the Plan) have a term of 10 years. Options to purchase 388,000 shares of common stock vest upon the achievement of specific milestones. Options to purchase 168,000 shares of common stock vest over a period of five years for each year of employment with the Company. At December 31, 1995 and March 31, 1996, 144,216 and 152,566 options, respectively were exercisable. The Company has recorded $74,100 and $156,800 of compensation expense for the difference between the grant price and the deemed fair value, as of December 31, 1995 and March 31, 1996, respectively, for financial statement presentation purposes related to options which vest based upon the successful completion of milestones. F-21 87 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.) 5. STOCKHOLDERS' EQUITY (CONTINUED) A summary of stock option activity for the Plan follows:
OPTIONS PRICE OUTSTANDING PER SHARE ----------- ----------- Balance at inception (August 27, 1993)..................... -- $ -- Granted.................................................. 52,000 $ .10 ------- Balance at December 31, 1994............................... 52,000 $ .10 Granted.................................................. 505,000 $.10 to .11 Forfeited................................................ (1,000) $ .11 ------- Balance at December 31, 1995............................... 556,000 $.10 to .11 Granted (unaudited)...................................... -- $ -- Forfeited (unaudited).................................... -- $ -- ------- Balance at March 31, 1996 (unaudited)...................... 556,000 $.10 to .11 =======
Prior to completion of the contemplated merger (see Note 10), in accordance with the Plan, all outstanding stock options shall become immediately exercisable, and will be exercised prior to the merger. 6. FEDERAL INCOME TAXES The Company has had losses since inception and, therefore, has not been subject to federal income taxes. As of December 31, 1995, the Company has generated net operating loss (NOL) carryforwards of approximately $3.2 million and approximately $70,000 of research and development credits available to reduce future income taxes. These carryforwards begin to expire in 2008. The Tax Reform Act of 1986 provides for an annual limitation following certain ownership changes on the use of NOL and credit carryforwards that could significantly limit the Company's ability to utilize its carryforwards. The Company's ability to utilize its current and future NOLs to reduce future taxable income and tax liabilities may be limited. Additionally, because United States tax laws limit the time during which these carryforwards may be applied against future taxes, the Company may not be able to take full advantage of these attributes for federal income tax purposes. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), requires an asset and liability approach for financial accounting and reporting for income taxes. Under SFAS 109, an NOL requires the recognition of a deferred tax asset. As the Company has had cumulative losses and there is no assurance of future taxable income, a valuation allowance has been F-22 88 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.) 6. FEDERAL INCOME TAXES (CONTINUED) established to fully offset the deferred tax assets at December 31, 1994 and 1995. The components of the Company's deferred tax assets are as follows at December 31, 1994 and 1995:
1994 1995 --------- ----------- Net operating loss carryforwards............................ $ 306,000 $ 1,088,000 Research and development tax credits........................ 27,000 70,000 --------- ---------- Total deferred tax assets......................... 333,000 1,158,000 Less -- Valuation allowance................................. (333,000) (1,158,000) --------- ---------- Net deferred tax assets........................... $ -- $ -- ========= ==========
7. LICENSE AND RESEARCH AGREEMENTS In March 1994, the Company entered into a license agreement with the Board of Regents of The University of Texas System (the System) and MDACC, a component institution of the System, whereby the Company has an exclusive noncancelable worldwide license to certain technology rights. In exchange for the grant of this exclusive license, the Company issued 642,307 shares of its common stock pursuant to the stockholder agreement entered into in April 1994. The Company will pay MDACC for 15 years, beginning with the first commercial sale of a product incorporating the licensed technologies, a royalty based on net sales by the Company or its affiliates or by sublicense agreement of products incorporating any of such technologies. The Company is obligated by the agreement to reimburse any of MDACC's costs that may be incurred in connection with obtaining necessary patents. Failure by the Company to make all commercially reasonable efforts to commercialize a licensed product could result in termination of the license agreement rights. In April 1994, the Company entered into an assignment agreement and development agreement with Aronex Pharmaceuticals, Inc. (Aronex), formerly Argus Pharmaceuticals, Inc. The assignment agreement transfers to the Company all rights and obligations with respect to certain technology rights and related patent applications invented by a research scientist licensed under an exclusive license agreement between Aronex and the System. The development agreement provides that the Company bear all costs in funding the research and development of the technology and patent rights assigned above that is performed by Aronex. The development agreement has an initial term of three years. In connection with the above agreements and the sublicense agreement mentioned below, the Company issued 321,154 shares of its common stock at a price of $.001 per share to the research scientist referred to above. In addition, in exchange for the sublicense agreement and assignment agreement described below, the Company issued to Aronex 642,307 shares of its common stock pursuant to a stock purchase agreement. In April 1994, the Company entered into a sublicense agreement with Aronex, whereby the Company has an exclusive worldwide sublicense to the technology licensed under Aronex's license agreement with the University of Tennessee Research Corporation (UTRC) dated May 25, 1992. Under the original license agreement between Aronex and UTRC, any sales of licensed products by a sublicensee are subject to royalties based on net sales. F-23 89 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.) 7. LICENSE AND RESEARCH AGREEMENTS (CONTINUED) In October 1995, the Company entered into a license agreement with UTRC. In consideration for the license granted, the Company paid a license fee of $250,000 to UTRC. As additional consideration, the Company issued 130,000 shares of its common stock at a price of $.11 per share to UTRC, three research scientists and McMaster University. The Company has committed to pay royalties to UTRC in an amount based on net sales of the licensed technology and on any sublicense of the licensed technology. As of December 31, 1995, royalties of $65,000 are payable to UTRC. In addition, pursuant to the agreement, the Company has commitments to UTRC for annual license maintenance fees as follows: $30,000 per year for 1996 through 1999; $40,000 per year for 2000 through 2004; and $50,000 per year for 2005 and each year thereafter during the term of the agreement. As of March 31, 1996, the Company paid $30,000 pertaining to this annual license maintenance fee. In October 1994, the Company entered into a license agreement with UP whereby the Company has an exclusive worldwide license to certain technology rights. Upon execution of the agreement, the Company paid UP an initial license fee of $15,000. The Company has committed to pay an additional $35,000 immediately upon the filing of the first patent application with respect to the licensed technology. The Company has committed to pay royalties to UP in an amount based on net sales of the licensed technology. In August 1995, the Company entered into a nonexclusive license agreement with QIAGEN GmbH (Qiagen). Under the license agreement, the Company has the right to produce or sell a product made with Qiagen technology. As consideration for the license agreement, the Company is committed to pay a royalty on net sales. In December 1995, the Company entered into a license agreement with Pasteur Merieux Serums & Vaccins S.A. (PMSV). Under the terms of the agreement, the Company is to receive license and milestone fees upon the completion of certain performance milestones. In 1995, the Company received $300,000 in license and other fees in accordance with the agreement. In addition, as consideration of the license granted, the Company will receive royalties on net sales from PMSV. The Company has sponsored research agreements with MDACC and UP to fund research and clinical studies. During fiscal 1994 and 1995 and the three months ended March 31, 1996, the Company paid $375,741, $771,214 and $193,164, respectively, pursuant to those agreements and has committed to pay a minimum of approximately $900,000 through 1998 to continue funding research and clinical activities. The payments are recorded as research and development expense. 8. CONSULTING AND RELATED AGREEMENTS The Company has consulting agreements with research scientists associated with the System and UP, to provide technical know-how, expertise and other assistance. Pursuant to these agreements, the Company has commitments through 1998 with remaining payments through that date totaling $153,000. In connection with these two consulting agreements, the Company issued 1,121,154 shares of common stock for a purchase price of $.001 per share. Pursuant to these stockholder agreements, the Company has certain repurchase rights. The Company has stock purchase agreements with an officer of the Company. Under the stock purchase agreements, the Company issued 321,154 shares of common stock at a price of $.001 per F-24 90 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.) 8. CONSULTING AND RELATED AGREEMENTS (CONTINUED) share. In the event the officer is terminated, the Company can elect to repurchase a specified number of shares at a price of $.001 per share, based on the length of employment prior to termination. The Company also issued 215,000 shares of common stock at a price of $.01 per share, of which, 200,000 shares are subject to repurchase by the Company if certain performance milestones are not met by the officer. The Company recorded compensation expense of $20,000, $78,000, and $80,000 for fiscal 1994 and 1995 and for the three months ended March 31, 1996, respectively, in connection with these agreements. In addition, if the Company terminates the officer before the term of the employment agreement has expired, the officer shall have the option to require the Company to repurchase 24,000 shares at a price per share based on the fair value at the date of termination. The Company recorded compensation expense of $2,400, $9,360, and $9,600 in 1994, 1995 and the three months ended March 31, 1996, respectively, in connection with this aspect of the officer's employment agreement. 9. COMMITMENTS AND CONTINGENCIES The Company leases its principal office under a lease which expires on December 31, 1996. Monthly rental under the lease is $2,331. Lease expense totaled $4,662, $27,972 and $5,439 for 1994 and 1995 and the three months ended March 31, 1996, respectively. 10. SUBSEQUENT EVENTS License, research and marketing agreement On December 28, 1995, the Company granted a pharmaceutical company an exclusive option to enter into a license agreement. In connection with the execution of the option agreement, in January 1996 the pharmaceutical company paid the Company a nonrefundable fee of $2,000,000 to maintain the option until February 16, 1996. On February 22, 1996, the Company agreed to an outline of principal terms in contemplation of a license agreement with the pharmaceutical company. In consideration for the outline of principal terms and the extension of the option period to April 30, 1996, the pharmaceutical company paid an additional nonrefundable fee of $500,000 to the Company in March 1996. The $2.5 million received from the pharmaceutical company has been recorded as revenue as of March 31, 1996 and, as a result, $1.5 million has been recorded as a payable to related parties (see Note 7). An additional $2.5 million may be received upon execution of a definitive license agreement or, if such agreement is not executed, to extend the exclusive option. Such amounts received are nonrefundable and are creditable toward the license fee due upon execution of the license agreement. On April 30, 1996, the option was extended to May 17, 1996. Although the extension period has expired, the Company is continuing to negotiate with the pharmaceutical company. If the definitive license agreement is consummated, an additional $1.5 million may be payable to related parties (see Note 7). Merger (unaudited) On April 16, 1996, the Company entered into a definitive merger agreement (the Merger Agreement) with Targeted Genetics Corporation (Targeted). Pursuant to the Merger Agreement, Targeted will acquire the Company by merging the Company with and into TGC Acquisition Corporation (TGC), a wholly owned subsidiary of Targeted. Under the Merger Agreement, Targeted will issue 3,636,364 shares of common stock in exchange for 100 percent of the outstanding stock of the Com- F-25 91 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.) 10. SUBSEQUENT EVENTS (CONTINUED) pany. Prior to completion of the merger, in accordance with the Plan, all outstanding stock options will become immediately exercisable. All of the Company's outstanding stock options and warrants are expected to be exercised. Pursuant to the Merger Agreement and prior to the merger, an additional $550,000 shall be advanced under the promissory notes from certain stockholders of the Company (see Note 4). Such advances, together with the $1,000,000 in promissory notes from certain stockholders of the Company, shall be converted at or prior to the merger into common stock of the Company at a conversion price of $1.40 per share. The Company stockholders will have the right to receive up to an additional $5 million of Targeted's common stock if certain milestones are achieved. F-26 92 =============================================================================== No dealer, sales representative or any other person is authorized in connection with any offering made hereby to give any information or to make any representation not contained herein and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any security other than the securities offered hereby, nor does it constitute an offer to sell or a solicitation of an offer to buy any such securities to any person in any jurisdiction in which it is unlawful to make such an offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any date subsequent to the date hereof. ------------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................... 3 RGene Acquisition........................... 6 Risk Factors................................ 8 Use of Proceeds............................. 17 Price Range of Common Stock................. 18 Dividend Policy............................. 18 Dilution.................................... 19 Capitalization.............................. 20 Selected Financial Data..................... 21 Unaudited Pro Forma Consolidated Financial Statements................................ 22 Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 25 Business.................................... 29 Management.................................. 47 Certain Transactions........................ 55 Principal Shareholders...................... 56 Description of Capital Stock................ 58 Underwriting................................ 61 Legal Matters............................... 62 Experts..................................... 62 Additional Information...................... 62 Index to Financial Statements............... F-1
================================================================================ ================================================================================ 3,500,000 SHARES TARGETED GENETICS CORPORATION COMMON STOCK ------------------------------ PROSPECTUS ------------------------------ Vector Securities International, Inc. Genesis Merchant Group Securities , 1996 ================================================================================ 93 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Pursuant to a letter agreement dated as of November 28, 1995 between the Registrant and Lehman Brothers, Inc., the Registrant issued to Lehman Brothers, Inc. 2,461 shares of its Common Stock in payment of certain advisory fees in a transaction not involving a public offering and therefore exempt pursuant to Section 4(2) of the Securities Act of 1933, as amended. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------------------- 1.1** -- Form of Underwriting Agreement 2.1+ -- Form of Agreement and Plan of Merger dated as of April 16, 1996, by and among Targeted Genetics Corporation, TGC Acquisition Corporation and RGene Therapeutics, Inc. 3.1 -- Restated Articles of Incorporation (Exhibit 3.1)(B) 3.2 -- Amended and Restated Bylaws (Exhibit 3.2)(C) 4.1 -- Warrant to Purchase 11,000 shares of Series B Preferred Stock of Targeted Genetics Corporation issued to MMC/GATX Partnership No. 1 on December 27, 1993 (Exhibit 4.2)(A) 4.2 -- Warrant to Purchase 11,000 shares of Series B Preferred Stock of Targeted Genetics Corporation issued to LINC Capital Management Services, Ltd. on December 27, 1993 (Exhibit 4.3)(A) 4.3 -- Warrant to Purchase 18,701 shares of Common Stock of Targeted Genetics Corporation issued to MMC/GATX Partnership No. 1 on November 30, 1994 (Exhibit 4.3)(B) 4.4 -- Warrant Agreement between Targeted Genetics Corporation and First Interstate Bank of Washington, N.A., as Warrant Agent (Exhibit 4.4)(D) 4.5 -- Specimen Warrant Certificate (Exhibit 4.5)(C) 4.6 -- Warrant to Purchase 21,315 shares of Common Stock of Targeted Genetics Corporation issued to Financing for Science International, Inc. on November 30, 1995(D) 5.1+ -- Opinion of Perkins Coie regarding legality of shares 10.1* -- Scientific Advisory Board Agreement, dated February 15, 1992, between Targeted Genetics Corporation and Philip D. Greenberg (Exhibit 10.1)(A) 10.2* -- Scientific Advisory Board Agreement, dated February 15, 1992, between Targeted Genetics Corporation and A. Dusty Miller (Exhibit 10.2)(A) 10.3* -- Scientific Advisory Board Agreement, dated February 15, 1992, between Targeted Genetics Corporation and Richard D. Palmiter (Exhibit 10.3)(A) 10.4* -- Scientific Advisory Board Agreement, dated February 15, 1992, between Targeted Genetics Corporation and George Stamatoyannopoulos (Exhibit 10.4)(A) 10.5 -- Form of Indemnification Agreement between the registrant and its officers and directors (Exhibit 10.6)(A) 10.6* -- Non-exclusive License Agreement, dated as of November 19, 1991, between Fred Hutchinson Cancer Research Center and Immunex Corporation (Exhibit 10.7)(A)
II-1 94
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------------------- 10.7* -- Gene Transfer Technology License Agreement, dated as of February 18, 1992, between Immunex Corporation and Targeted Genetics Corporation (Exhibit 10.8)(A) 10.8* -- License Agreement, dated as of June 1, 1992, between Wisconsin Alumni Research Foundation and Targeted Genetics Corporation (Exhibit 10.9)(A) 10.9* -- License Agreement, dated as of August 14, 1992, between Leland Stanford Junior University and Targeted Genetics Corporation (Exhibit 10.10)(A) 10.10* -- PHS Patent License Agreement -- Non-exclusive, dated as of July 13, 1993, between National Institutes of Health Centers for Disease Control and Targeted Genetics Corporation (Exhibit 10.13)(A) 10.11* -- Non-exclusive Patent License Agreement, dated as of December 25, 1993, between The University of Florida Research Foundation, Inc. and Targeted Genetics Corporation (Exhibit 10.14)(A) 10.12* -- Research and Exclusive License Agreement, dated as of January 1, 1994, between Targeted Genetics Corporation and Fred Hutchinson Cancer Research Center (Exhibit 10.19)(A) 10.13* -- PHS Patent License Agreement -- Exclusive, dated as of March 10, 1994, between National Institutes of Health Centers for Disease Control and Targeted Genetics Corporation (Exhibit 10.15)(A) 10.14* -- Exclusive License Agreement, dated as of March 14, 1994, between Medical College of Ohio and Targeted Genetics Corporation (Exhibit 10.16)(A) 10.15* -- License Agreement, dated as of March 16, 1994, between The Johns Hopkins University and Targeted Genetics Corporation (Exhibit 10.17)(A) 10.16* -- License Agreement, dated as of March 28, 1994, between Targeted Genetics Corporation and the University of Michigan (Exhibit 10.18)(A) 10.17* -- Exclusive License Agreement, dated as of March 28, 1994, between Fred Hutchinson Cancer Research Center and Targeted Genetics Corporation (Exhibit 10.20)(A) 10.18* -- Exclusive License Agreement, dated as of August 25, 1994, between Targeted Genetics Corporation and Fred Hutchinson Cancer Research Center (Exhibit 10.20)(B) 10.19 -- Olive Way Building Lease, dated as of November 20, 1993, between Metropolitan Federal Savings and Loan Association and Targeted Genetics Corporation (Exhibit 10.21)(A) 10.20 -- First Amendment to Olive Way Building Lease, dated as of December 10, 1994, between Targeted Genetics Corporation and Metropolitan Federal Savings and Loan Association (Exhibit 10.22)(B) 10.21 -- MMC/GATX Partnership No. 1 Equipment Lease Agreement, dated as of December 27, 1993 (Exhibit 10.22)(A) 10.22 -- LINC Capital Management, Ltd. Equipment Lease Agreement, dated as of December 27, 1993 (Exhibit 10.23)(A) 10.23 -- Loan and Security Agreement, dated as of November 30, 1994, between MMC/GATX Partnership No. 1 and Targeted Genetics Corporation (Exhibit 10.25)(B) 10.24 -- Master Equipment Lease Agreement, dated as of October 17, 1995, between Financing for Science International, Inc. and Targeted Genetics Corporation (Exhibit 10.28)(D) 10.25 -- Registration Rights Agreement, dated as of April 27, 1992, among Targeted Genetics Corporation and the holders of the Series A and Series B Convertible Preferred Stock (Exhibit 10.26)(A) 10.26 -- 1992 Restated Stock Option Plan (Exhibit 10.26)(B)
II-2 95
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------------------- 10.27 -- Stock Option Plan for Nonemployee Directors (Exhibit 10.31)(D) 10.28* -- Development Agreement dated April 6, 1994, by and between Argus Pharmaceuticals, Inc. and RGene Therapeutics, Inc. 10.29* -- Patent and Technology License Agreement effective as of March 1, 1994, by and among the Board of Regents of the University of Texas M.D. Anderson Cancer Center and RGene Therapeutics, Inc. 10.30* -- First Amended and Restated License Agreement effective October 12, 1995, by and between The University of Tennessee Research Corporation and RGene Therapeutics, Inc. 10.31* -- License Agreement dated October 12, 1994, by and between The University of Pittsburgh -- of the Commonwealth System of Higher Education and RGene Therapeutics, Inc. 11.1 -- Computation of net loss per share (D) 23.1 -- Consent of Ernst & Young LLP (contained on page II-6) 23.2 -- Consent of Arthur Andersen LLP (contained on page II-7) 23.3+ -- Consent of Perkins Coie (contained in the opinion filed as Exhibit 5.1 hereto) 24.1+ -- Power of Attorney 99.1 -- Consent of Martin P. Sutter as Director Nominee 99.2 -- Consent of Austin M. Long, III as Director Nominee
- ------------------ + Previously filed. * Confidential treatment has been requested from the Securities and Exchange Commission for portions of these agreements. ** To be filed by amendment. (A) Incorporated by reference to the designated exhibit included with the registrant's Form S-1 Registration Statement (Registration No. 33-77054) filed March 30, 1994, as amended. (B) Incorporated by reference to the designated exhibit included with the registrant's Form 10-K for the year ended December 31, 1994. (C) Incorporated by reference to the designated exhibit included with the registrant's Form S-1 Registration Statement (No. 33-91500) filed April 24, 1995, as amended. (D) Incorporated by reference to the designated exhibit included with the registrant's Form 10-K for the year ended December 31, 1995. (b) Financial Statement Schedules All financial statement schedules have been omitted because the required information is either included in the financial statements or the notes thereto or is not applicable. II-3 96 ITEM 17. UNDERTAKINGS 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 foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the 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 Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 97 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on the 30th day of May, 1996. TARGETED GENETICS CORPORATION By: /s/ James A. Johnson ---------------------------------- James A. Johnson, Vice President, Finance, Chief Financial Officer, Treasurer and Secretary Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities indicated below on the 30th day of May, 1996.
SIGNATURE TITLE - --------------------------------------------- -------------------------------------------- *H. Stewart Parker President, Chief Executive Officer and - --------------------------------------------- Director (Principal Executive Officer) H. Stewart Parker /s/ James A. Johnson Vice President, Finance, Chief Financial - --------------------------------------------- Officer, Treasurer and Secretary James A. Johnson (Principal Financial Officer) *Stephen A. Duzan Director - --------------------------------------------- Stephen A. Duzan *James D. Grant Director - --------------------------------------------- James D. Grant *Donald E. O'Neill Director - --------------------------------------------- Donald E. O'Neill *Jeremy Curnock Cook Director - --------------------------------------------- Jeremy Curnock Cook *By: /s/ James A. Johnson - --------------------------------------------- James A. Johnson As Attorney-in-Fact
II-5 98 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report dated February 9, 1996, except for Note 9 as to which the date is April 16, 1996 in the Registration Statement (Form S-1) and related Prospectus of Targeted Genetics Corporation for the registration of its common stock. ERNST & YOUNG LLP Seattle, Washington May 28, 1996 II-6 99 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report and to all references to our firm included in or made a part of this Amendment No. 1 to Registration Statement. ARTHUR ANDERSEN LLP Houston, Texas May 28, 1996 II-7 100 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ------------------------------------------------------------------------ ------------ 1.1 ** Form of Underwriting Agreement 2.1+ Form of Agreement and Plan of Merger dated as of April 16, 1996, by and among Targeted Genetics Corporation, TGC Acquisition Corporation and RGene Therapeutics Inc. 3.1 Restated Articles of Incorporation (Exhibit 3.1) (B) 3.2 Amended and Restated Bylaws (Exhibit 3.2) (C) 4.1 Warrant to Purchase 11,000 shares of Series B Preferred Stock of (A) Targeted Genetics Corporation issued to MMC/GATX Partnership No. 1 on December 27, 1993 (Exhibit 4.2) 4.2 Warrant to Purchase 11,000 shares of Series B Preferred Stock of (A) Targeted Genetics Corporation issued to LINC Capital Management Services, Ltd. on December 27, 1993 (Exhibit 4.3) 4.3 Warrant to Purchase 18,701 shares of Common Stock of Targeted Genetics (B) Corporation issued to MMC/GATX Partnership No. 1 on November 30, 1994 (Exhibit 4.3) 4.4 Warrant Agreement between Targeted Genetics Corporation and First (D) Interstate Bank of Washington, N.A., as Warrant Agent (Exhibit 4.4) 4.5 Specimen Warrant Certificate (Exhibit 4.5) (C) 4.6 Warrant to Purchase 21,315 shares of Common Stock of Targeted Genetics (D) Corporation issued to Financing for Science International, Inc. on November 30, 1995 5.1+ Opinion of Perkins Coie regarding legality of shares 10.1 * Scientific Advisory Board Agreement, dated February 15, 1992, between (A) Targeted Genetics Corporation and Philip D. Greenberg (Exhibit 10.1) 10.2 * Scientific Advisory Board Agreement, dated February 15, 1992, between (A) Targeted Genetics Corporation and A. Dusty Miller (Exhibit 10.2) 10.3 * Scientific Advisory Board Agreement, dated February 15, 1992, between (A) Targeted Genetics Corporation and Richard D. Palmiter (Exhibit 10.3) 10.4 * Scientific Advisory Board Agreement, dated February 15, 1992, between (A) Targeted Genetics Corporation and George Samatoyannopoulos (Exhibit 10.4) 10.5 Form of Indemnification Agreement between the registrant and its (A) officers and directors (Exhibit 10.6) 10.6 * Non-exclusive License Agreement, dated as of November 19, 1991, between (A) Fred Hutchinson Cancer Research Center and Immunex Corporation (Exhibit 10.7) 10.7 * Gene Transfer Technology License Agreement, dated as of February 18, (A) 1992, between Immunex Corporation and Targeted Genetics Corporation (Exhibit 10.8) 10.8 * License Agreement, dated as of June 1, 1992, between Wisconsin Alumni (A) Research Foundation and Targeted Genetics Corporation (Exhibit 10.9) 10.9 * License Agreement, dated as of August 14, 1992, between Leland Stanford (A) Junior University and Targeted Genetics Corporation (Exhibit 10.10)
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SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ------------------------------------------------------------------------ ------------ 10.10* PHS Patent License Agreement -- Non-exclusive, dated as of July 13, (A) 1993, between National Institutes of Health Centers for Disease Control and Targeted Genetics Corporation (Exhibit 10.13) 10.11* Non-exclusive Patent License Agreement, dated as of December 25, 1993, (A) between The University of Florida Research Foundation, Inc. and Targeted Genetics Corporation (Exhibit 10.14) 10.12* Research and Exclusive License Agreement, dated as of January 1, 1994, (A) between Targeted Genetics Corporation and Fred Hutchinson Cancer Research Center (Exhibit 10.19) 10.13* PHS Patent License Agreement -- Exclusive, dated as of March 10, 1994, (A) between National Institutes of Health Centers for Disease Control and Targeted Genetics Corporation (Exhibit 10.15) 10.14* Exclusive License Agreement, dated as of March 14, 1994, between Medical (A) College of Ohio and Targeted Genetics Corporation (Exhibit 10.16) 10.15* License Agreement, dated as of March 16, 1994, between The Johns Hopkins (A) University and Targeted Genetics Corporation (Exhibit 10.17) 10.16* License Agreement, dated as of March 28, 1994, between Targeted Genetics (A) Corporation and the University of Michigan (Exhibit 10.18) 10.17* Exclusive License Agreement, dated as of March 28, 1994, between Fred (A) Hutchinson Cancer Research Center and Targeted Genetics Corporation (Exhibit 10.20) 10.18* Exclusive License Agreement, dated as of August 25, 1994, between (B) Targeted Genetics Corporation and Fred Hutchinson Cancer Research Center (Exhibit 10.20) 10.19 Olive Way Building Lease, dated as of November 20, 1993, between (A) Metropolitan Federal Savings and Loan Association and Targeted Genetics Corporation (Exhibit 10.21) 10.20 First Amendment to Olive Way Building Lease, dated as of December 10, (B) 1994, between Targeted Genetics Corporation and Metropolitan Federal Savings and Loan Association (Exhibit 10.22) 10.21 MMC/GATX Partnership No. 1 Equipment Lease Agreement, dated as of (A) December 27, 1993 (Exhibit 10.22) 10.22 LINC Capital Management, Ltd. Equipment Lease Agreement, dated as of (A) December 27, 1993 (Exhibit 10.23) 10.23 Loan and Security Agreement, dated as of November 30, 1994, between (B) MMC/GATX Partnership No. 1 and Targeted Genetics Corporation (Exhibit 10.25) 10.24 Master Equipment Lease Agreement, dated as of October 17, 1995, between (D) Financing for Science International, Inc. and Targeted Genetics Corporation (Exhibit 10.28) 10.25 Registration Rights Agreement, dated as of April 27, 1992, among (A) Targeted Genetics Corporation and the holders of the Series A and Series B Convertible Preferred Stock (Exhibit 10.26) 10.26 1992 Restated Stock Option Plan (Exhibit 10.26) (B) 10.27 Stock Option Plan for Nonemployee Directors (Exhibit 10.31) (D)
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SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------ ------------------------------------------------------------------------ ------------ 10.28* Development Agreement dated April 6, 1994, by and between Argus Pharmaceuticals, Inc. and RGene Therapeutics, Inc. 10.29* Patent and Technology License Agreement effective as of March 1, 1994, by and among the Board of Regents of the University of Texas M.D. Anderson Cancer Center and RGene Therapeutics, Inc. 10.30* First Amended and Restated License Agreement effective October 12, 1995, by and between The University of Tennessee Research Corporation and RGene Therapeutics, Inc. 10.31* License Agreement dated October 12, 1994, by and between The University of Pittsburgh -- of the Commonwealth System of Higher Education and RGene Therapeutics, Inc. 11.1 Computation of net loss per share (D) 23.1 Consent of Ernst & Young LLP (contained on page II-6) 23.2 Consent of Arthur Andersen LLP (contained on page II-7) 23.3 Consent of Perkins Coie (contained in the opinion filed as Exhibit 5.1 hereto) 24.1 Power of Attorney 99.1 Consent of Martin P. Sutter as Director Nominee 99.2 Consent of Austin M. Long, III as Director Nominee
- ------------------ + Previously filed. * Confidential treatment has been requested from the Securities and Exchange Commission for portions of these agreements. ** To be filed by amendment. (A) Incorporated by reference to the designated exhibits included with the registrant's Form S-1 Registration Statement (Registration No. 33-77054) filed March 30, 1994, as amended. (B) Incorporated by reference to the designated exhibit included with the registrant's Form 10-K for the year ended December 31, 1994. (C) Incorporated by reference to the designated exhibit included with the registrant's Form S-1 Registration Statement (No. 33-91500) filed April 24, 1995, as amended. (D) Incorporated by reference to the designated exhibit included with the registrant's Form 10-K for the year ended December 31, 1995. EX-10.28 2 REDACTED VERSION OF DEVELOPMENT AGRMT 1 REDACTED VERSION EXHIBIT 10.28 TO TARGETED GENETICS CORPORATION AMENDMENT NO.1 TO FORM S-1 TO BE FILED ON OR BEFORE MAY 30, 1996 "[*]" = confidential information omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 2 DEVELOPMENT AGREEMENT This Development Agreement ("Agreement") is entered into this 6th day of April, 1994, by and between Argus Pharmaceuticals, Inc., a Delaware corporation ("Argus"), and RGene Therapeutics, Inc., a Delaware corporation ("RGene"). WHEREAS, concurrently with the execution of this Agreement, Argus and RGene are entering into the Assignment Agreement and the Sublicense Agreement referenced in Sections 1.1 and 1.2 below, whereby Argus is transferring to RGene certain rights in the technology covered by the Assignment Agreement and the Sublicense Agreement (the "Argus Technology"); and WHEREAS, Argus and RGene desire to collaborate to conduct certain research and experiments and to further the development of products that may incorporate the Argus Technology, among others. NOW, THEREFORE, it is hereby agreed as follows: 1. ASSIGNMENT/SUBLICENSE BY ARGUS 1.1 ASSIGNMENT OF MDA/ARGUS LICENSE Concurrent with or prior to the execution of this Agreement, Argus agrees that it will execute the Assignment Agreement in the form attached hereto as Exhibit B (the "Assignment Agreement"), which Assignment Agreement transfers to RGene certain rights of Argus under that certain Exclusive License Agreement dated July 1, 1988 by and among Argus, The University of Texas System Board of Regents and the University of Texas M.D. Anderson Cancer Center ("MDACC"), as amended ("MDA/Argus License Agreement"), relating to certain technology rights and related patent applications invented by Dr. Gabriel Lopez-Berestein at MDACC. Argus agrees that it will obtain MDACC's consent and, if necessary, the consent of the Board of Regents of the University of Texas System to the assignment of such rights by Argus, prior to or concurrent with the other transactions contemplated by this Agreement. 1.2 SUBLICENSE OF UTRC LICENSE Concurrent with or prior to the execution of this Agreement, Argus agrees that it will execute that certain Sublicense Agreement in the form attached hereto as Exhibit C (the "Sublicense Agreement"), which Sublicense Agreement sublicenses to -1- 3 RGene all rights of Argus under that certain Agreement dated November 1, 1993 by and between the University of Tennessee Research Corporation and Argus (the "UTRC License Agreement"). Argus agrees that it will, if necessary, obtain the consent of the University of Tennessee Research Corporation to the sublicense of such rights by Argus, prior to or concurrent with the other transactions contemplated by this Agreement. 2. DEVELOPMENT PROGRAM 2.1 GOALS Commencing upon completion of the initial Work Plan and Budget as set forth in Section 2.2(c), Argus and RGene agree to conduct the research and development on products incorporating the Argus Technology ("Products"), initially including those Products more particularly described in Exhibit A hereto, according to the Work Plans and Budgets, with the goal of developing commercially marketable Products in the shortest feasible period of time consistent with the level of funding hereunder (the "Development Program"). Specifically, the initial goals of the Development Program will be to undertake preclinical pharmaceutical development of the Products (including animal testing and quality control testing to insure compliance with "good manufacturing practices") and to file an investigational new drug application ("IND") with the United States Food and Drug Administration ("FDA") regarding both Products; provided, that the development of other products, that do not involve or relate to the Argus Technology, will be negotiated by RGene and Argus in good faith on a case by case basis. While the parties agree to use reasonable efforts to achieve these goals, neither Argus nor RGene warrants or guarantees that their efforts will result in the filing of an IND or marketable or approved Products or that the goals specified in the Work Plan and Budget will be achieved within the periods set forth herein. 2.2 PROGRAM ADMINISTRATION (a) Project Representatives. The parties have each designated a Project Representative to facilitate liaison between it and the other party, oversee and review the progress of the Development Program, select indications to pursue, determine the allocation of responsibilities between the parties for conducting the Development Program, develop clinical trial protocols, manage the clinical/regulatory process and discuss potential competition and other relevant matters to assure rapid development and commercialization of the Products. (b) Disagreements. All decisions made hereunder relating to the Development Program shall require the approval of both Project Representatives. The -2- 4 Project Representatives shall attempt in good faith to reach consensus on all matters. In the event of a disagreement between the Project Representatives, the Project Representatives shall promptly present the disagreement to the chief executive officers of the parties, who shall attempt resolution of the matter. If such executives cannot promptly resolve such disagreement, then the dispute shall be resolved under the arbitration provisions of Section 13. (c) Work Plans and Budgets. Promptly after the date hereof, the Project Representatives shall prepare and recommend to each party an initial Work Plan and Budget for the remainder of 1994 which relates to the development of the Products consistent with the goals set forth in Section 2.1 above. The Work Plan and Budget shall be the plan and budget as approved by both parties in writing. It is contemplated that Argus will provide substantially all of the development services called for in the initial and any subsequent Work Plan and Budget. Prior to October 1, of each year, the Project Representatives shall prepare and recommend to each party a proposed Work Plan and Budget for the next year. Each Work Plan and Budget adopted shall be signed by both parties. The Project Representatives shall actively consult with one another throughout the term of the Development Program so as to adjust the specific work performed under the Work Plan and Budget to conform to evolving developments in technology and the results of the development work performed. While minor adjustments to the Work Plan and Budget may be made from time to time upon approval by the Project Representatives, significant changes to the scope or direction of the work and any changes in funding exceeding 15% of the total amount previously budgeted in the Work Plan and Budget must be agreed to in writing by each party, in the absence of which the most recently approved Work Plan and Budget shall remain in effect. (d) Progress Reports. Within 45 days following the end of each calendar quarter, each Project Representative shall deliver to the other a reasonably detailed written report which shall (i) describe the work performed by it during the quarter on the Development Program and (ii) if appropriate, recommend any revisions to the Work Plan and Budget that would improve the progress of the Development Program. (e) Meetings. The Project Representatives and other employees or consultants or the parties responsible for management of the Development Program shall meet at least once during each calendar quarter during the term of the Development Program for the purpose of reviewing the status of the Development Program including (i) relevant data, (ii) technical issues that have arisen, (iii) issues of priority, (iv) the design and conduct of clinical trails and anticipated regulatory filings, (v) budgets and expenditures, (vi) competition and (vii) any other matters relevant to -3- 5 the development of the Products. Such meetings shall be at such times as may be agreed to by the parties, and the location of such meetings shall alternate between Argus facilities and RGene facilities, unless otherwise agreed by the parties. The Project Representatives shall jointly prepare minutes summarizing the matters reviewed and any actions taken at such meetings and shall distribute such minutes to the parties within 14 days following each meeting. 2.3 PERFORMANCE OF SERVICES Each party shall use all commercially reasonable efforts to perform the development work assigned to it in a prudent and skillful manner in accordance, in all material respects, with the Work Plan and Budget then in effect and applicable laws. Each party shall furnish all labor, supervision, facilities, supplies and materials necessary to perform the development work assigned to it in accordance with the Work Plan and Budget then in effect. 2.4 REGULATORY FILINGS The party assigned responsibility for any regulatory filings with the FDA or any comparable foreign regulatory body shall make available to the other party any materials it proposes to file for such party's review and approval, which approval may not be unreasonably withheld or delayed. All responses by regulatory bodies shall also be promptly disclosed to the other party. In any case where responsibility for a regulatory filing is assigned to a sublicensee, the applicable sublicense shall require the sublicense to afford the parties hereto the same review, approval and comment rights with respect to such regulatory filing as are set forth in this Section 2.4. 2.5 RECORDS AND DATA Each party shall maintain records in sufficient detail and in good scientific manner appropriate for patent and FDA purposes and so as to properly reflect all work done and results achieved in the performance of the Development Program. Such records, shall include books, records, reports, research notes, charts, graphs, comments, computations, analyses, recordings, photographs, computer programs and documentation thereof, computer information storage means, samples of materials and other graphic or written data generated in connection with the Development Program, including any data required to be maintained pursuant to all applicable government regulations. Each party shall provide the other the right to inspect records, and shall provide copies of all requested records, to the extent reasonably related to the performance of the other's obligations under this Agreement. -4- 6 2.6 VISIT OF FACILITIES Representatives of each party may, upon reasonable notice and at times reasonably acceptable to the other party, (a) visit the facilities where the Development Program is being conducted and/or the facilities where the other party manufactures any Product or active compound contained therein (or has a Product or compound manufactured by a Third Party), (b) consult informally, during such visits and by telephone, with personnel of the other party performing work on the Development Program and (c) with the other party's prior approval, which approval shall not be unreasonably withheld, visit the sites of any Clinical Trials or other experiments being conducted by such other party in connection with the Development Program, but only to the extent in each case as such trials or other experiments relate to the Development Program. If requested by the other party, Argus and RGene shall cause appropriate individuals working on the Development Program to be available for meetings at the location of the facilities where such individuals are employed at times reasonably convenient to the party responding to such request. 2.7 EXCLUSIVITY During the term of this Agreement, Argus agrees that it will not engage in research and development relating to, and will not manufacture, use or sell, any products relating to or utilizing in any way the Argus Technology except as expressly provided herein. RGene acknowledges that Argus is actively engaged in the development of pharmaceuticals for the treatment of life-threatening infectious diseases and cancer. Except as set forth herein, this Agreement is not intended and should not be construed to prevent or limit Argus's ownership of or right to use its technology and patent rights in areas outside the Argus Technology including without limitation the development of pharmaceuticals involving gene therapy or antisense technology. Additionally, Argus acknowledges that RGene is not limited in any way, subject to the terms hereof, regarding the use of the Argus Technology, including without limitation the sublicensing thereof to third parties. 2.8 ARGUS PROPRIETARY TECHNOLOGY Argus and RGene recognize and agree that Argus has expertise and proprietary technology not licensed to or owned by RGene pursuant to the Assignment Agreement or Sublicense Agreement, including in the area of liposomal drug delivery and manufacturing, which may be useful or necessary in the development of the Products ("Argus Proprietary Technology"). RGene shall have a non-exclusive royalty-free license to the Argus Proprietary Technology to the extent useful or necessary (in RGene's good faith business judgment after consultation with Argus) for the manufacture, use or sale of the Products ("Licensed Argus Proprietary Technology"); -5- 7 provided that RGene shall not be entitled to sublicense any such Licensed Argus Proprietary Technology, directly or indirectly, without the express written consent of Argus, which shall not unreasonably be withheld. 2.9 SUBCONTRACTS Neither party may subcontract any portion of the development work to be performed by it hereunder unless such subcontract is contemplated by the Work Plan and Budget or otherwise approved in writing by the other party, which approval shall not be unreasonably withheld or delayed. In the case of any such approved subcontract, the payments to such subcontractor shall be included in the calculation of Development Costs hereunder. 3. PAYMENTS AND FUNDING 3.1 FUNDING RGene agrees that it shall bear all costs of funding the costs set forth in Work Plans and Budgets regarding the Development Program. The initial Work Plan and Budget is attached hereto as Exhibit 3.1. 3.2 ADDITIONAL CONSIDERATION FOR LICENSING In further consideration of the assignment and sublicense made by Argus to RGene as set forth in Article 1 hereof, RGene, effective as of the date hereof, has issued to Argus 642,307 shares of the common stock of RGene, all pursuant to the terms of that certain Stockholder Agreement by and between RGene and Argus of even date herewith attached hereto as Exhibit 3.2. 3.3 REIMBURSEMENT OF DEVELOPMENT COSTS Subject to the provisions of Section 2 and Section 3.1 hereof, RGene agrees to compensate Argus for all Development Costs (defined below) incurred by Argus in connection with the Development Program. For purposes hereof, the term "Development Costs" means (i) the direct costs, fees and out-of-pocket or other expenses incurred in the course of performing the work under the Development Program plus (ii) an allocation of overhead costs on internal research and development not to exceed 25% of the amounts set forth in subparagraph (i) above and which shall be consistent with Argus' internal cost accounting system. -6- 8 3.4 REPORTS AND PAYMENTS Within 60 days after the end of the first three calendar quarters and within 90 days after the end of each calendar year, Argus shall provide RGene with a reasonably detailed itemization of the Development Costs incurred during the previous quarter for which it is entitled to reimbursement from RGene. Within 30 days following receipt of such statements, RGene shall reimburse Argus for such Development Costs for which Argus is entitled reimbursement, subject to RGene's right to withhold reimbursement of any disputed amounts pending resolution by the parties. RGene and Argus agree to negotiate in good faith to resolve any such dispute. Argus shall keep and maintain proper and complete records and books of account documenting all of its Development Costs to be reimbursed or credited. 3.5 ROYALTIES No royalties shall be payable by RGene to Argus regarding the sale or commercial use of any Products or any other products developed from the Argus Technology. 3.6 AUDIT RIGHTS Each party shall permit the other party or its representatives to have access, at its own expense, no more than once in each calendar year during the term of this Agreement and twice during the three (3) calendar years following the termination hereof, during regular business hours and upon reasonable notice, to its records and books for the sole purpose of determining the appropriateness of any amounts charged by such party hereunder or verifying the amounts payable hereunder, if any. If such examination reveals that such amounts have been overstated or understated for any calendar year, such overpayment shall be promptly refunded or added to the remaining funding obligation of such party hereunder or in the case of an underpayment, the party shall promptly pay the amount of any underpayment; provided, that if such examination was not conducted by an independent accountant, the party whose records were examined shall have the right to engage an independent accountant reasonably acceptable to the examining party to verify the results of such examination. The fees and expenses of such accountant shall be paid by the party alleging that the amounts charged or paid were incorrect, unless the error is more than 10% of the actual amount due, in which case the party who made the error shall pay all reasonable costs and expenses incurred by the investigating party in the course of making such determination. -7- 9 4. OWNERSHIP; COMMERCIALIZATION 4.1 OWNERSHIP (a) In connection with the Development Program, RGene and Argus acknowledge and agree that new products or technology based on and/or incorporating the Argus Technology, and improvements or modifications thereof, may be developed (the "New Technology"), and that the New Technology will be owned by RGene. Argus agrees to execute any assignments or other agreements evidencing RGene's ownership of the New Technology as may be requested by RGene. (b) Nothing herein shall give Argus any ownership or commercialization rights with respect to any products, processes or other technology rights which are developed under this Development Program or otherwise owned by or licensed to RGene, except to the extent provided in Sections 4.2 and 4.3 below. (c) The terms of this Section 4.1 shall at all times be subject to the provisions of Section 2.8 hereof, to the extent applicable. 4.2 MANUFACTURING If RGene seeks to manufacture or contract with a third party to manufacture a Product incorporating or utilizing the Argus Technology, RGene hereby agrees to negotiate in good faith with Argus with respect to the manufacture of such Product. 4.3 MARKETING In the event that RGene desires to market or license to a third party marketing rights to any Product incorporating or utilizing the Argus Technology assigned to RGene under the Assignment Agreement, then RGene shall send Argus notice of said intention. For a period of thirty (30) days after said notice, Argus and RGene will enter into good faith negotiations regarding an agreement whereby Argus would undertake the marketing effort of said Product. Should the parties not execute an agreement prior to the conclusion of said thirty (30) day period, RGene shall be entitled, in its sole discretion, to market said Product or, within a twelve month period following the expiration of such thirty (30) day period, license to a third party marketing rights to any such Product; provided that the terms of any such license shall clearly be more favorable to RGene than were last offered in writing by Argus, provided that such offer by Argus remains outstanding during such twelve-month period. Upon expiration of such twelve-month period, if no license has been entered into by RGene with respect to said Product, RGene shall not license such Product -8- 10 without complying with this Section 4.3. Argus shall have no other marketing rights to any of RGene's products except as set forth in this Section 4.3. 4.4 OTHER CONSIDERATIONS Notwithstanding anything in Section 4.2 or 4.3 to the contrary, any discussions between the parties with respect to marketing and/or manufacturing of Products incorporating Argus Technology by Argus as opposed to a third party, and any judgment as to the relative favorability to RGene of any such transaction, shall take into account the terms of the proposed agreement and the relative strengths of Argus and such third party, including sales force, manufacturing capabilities, manufacturing capacity, marketing and economic considerations and other relevant information. 5. PATENT PROSECUTION; INFRINGEMENT 5.1 PATENT PROSECUTION AND MAINTENANCE RGene shall be responsible for filing, prosecuting and maintaining the patents in the United States and foreign countries on all Argus Technology licensed or transferred to RGene pursuant to the Assignment Agreement and the Sublicense Agreement and RGene shall bear all costs associated therewith. RGene shall have the sole right to file, prosecute and maintain the patents in the United States and foreign countries on the New Technology, and shall bear all costs associated therewith. Notwithstanding the foregoing, beyond reasonable efforts, neither party assumes liability to the other for the successful prosecution of any patent application. 5.2 THIRD PARTY CLAIM OF INFRINGEMENT Each party shall give the other prompt notice of each claim or allegation that the exercise of rights hereunder constitutes an infringement of one or more patents or other rights of a third party. Each party shall use all reasonable efforts to defend the parties against any such claim or allegation with counsel of its own choice reasonably acceptable to such party. The costs of such defense and any costs of settling or otherwise satisfying such claim shall be borne by such party. 6. COMPLIANCE WITH LAWS The parties acknowledge that the products and materials to be developed pursuant to this Agreement are experimental, biological materials and are not to be used in humans prior to appropriate regulatory approvals under any circumstances. Each party agrees to comply with all laws and regulations for handling and use thereof -9- 11 and, if applicable, all export and import regulations of the United States of America and to provide the other party with evidence thereof upon request. 7. INDEMNIFICATION 7.1 MUTUAL RIGHT TO INDEMNIFICATION Each party shall defend, indemnify and hold harmless the other and its directors, officers, employees and agents from and against any and all claims, liabilities, losses and expenses, including attorneys' fees, incurred by or asserted against it or any of the foregoing arising out of the development, testing, manufacture, handling or storage of any Product by such party, including without limitation (i) any actual or alleged bodily injury, death or property damage resulting from the use of any Product manufactured by such party, (ii) any actual or alleged violation of law applicable to the development, testing, manufacture, handling or storage of the Product by such party and (iii) any product recall of Product manufactured by such party that is ordered by a governmental agency or required by a confirmed Product failure as reasonably determined by the parties, except as otherwise provided herein and except to the extent that such liabilities, losses and expenses result from the negligence or willful misconduct of a party, in which case the party who engaged in such negligence or willful misconduct shall indemnify and hold harmless the other party and its directors, officers, employees and agents. 7.2 PROCEDURE Any person that intends to claim indemnification under this Section 7 (an "Indemnitee") shall promptly notify the other party (the "Indemnitor") of any claim, in respect of which the Indemnitee intends to claim such indemnification, and the Indemnitor shall assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitor, if representation of such Indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by such counsel in such proceedings. The indemnity agreement in this Section 7 shall not apply to amounts paid in settlement of any loss, claim, liability or action if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Section 7, but not any liability that it may have to any Indemnitee otherwise than under this Section 7. The Indemnitee and its employees and agents shall cooperate fully with the Indemnitor and its legal -10- 12 representatives in the investigation of any action, claim or liability covered by this indemnification. In the event that each party claims indemnity from the other and one party is finally held liable to indemnify the other, the Indemnitor shall additionally be liable to pay the reasonable legal costs and attorneys' fees incurred by the Indemnitee in establishing its claim for indemnity. 7.3 PRODUCT LIABILITY INSURANCE Each party shall use all commercially reasonable efforts to maintain product liability insurance with respect to its manufacture of the Product hereunder. Such insurance shall be in such amounts and subject to such deductibles as the parties may agree based upon standards prevailing in the industry at the time such manufacturing commences. 8. TERM 8.1 INITIAL TERM This Agreement shall have an initial term equal to three (3) years from the initial date set out at the outset of this Agreement, unless extended by the written consent of the parties or earlier terminated pursuant to the provisions hereof. 8.2 EARLY TERMINATION This Agreement may be terminated in advance of the expiration of the term set forth in Section 8.1 above in accordance with the following provisions: (a) This Agreement may be terminated immediately by either party in the event of bankruptcy, insolvency, receivership or compulsory liquidation of the other party. (b) In the event that any of the terms or conditions of this Agreement or any of the Exhibits hereto are materially breached or materially violated by one party (the "Defaulting Party") and are not corrected within forty-five (45) days after written notice hereof has been given by the nondefaulting party, the nondefaulting party shall have the right, in addition to any other rights or remedies of action, to terminate this Agreement immediately. (c) This Agreement may be terminated by Argus if RGene has not completed an equity financing with proceeds to RGene of at least $2.5 million by September 30, 1994. -11- 13 9. CONFIDENTIALITY 9.1 CONFIDENTIAL INFORMATION Each of the parties hereby agrees that it will hold each other's proprietary information, trade secrets, know-how, and related confidential information, limited, however, to such information as is in written form, or if disclosed orally, to a written memorandum delivered to the nondisclosing party summarizing such orally disclosed confidential information within 30 days of such disclosure ("Confidential Information"), in confidence and will not disclose such Confidential Information to any third party without the prior written consent of the other party, except as expressly provided in this Agreement or as may be otherwise provided in any agreement which is an Exhibit to this Agreement. Confidential Information shall not include any information to the extent that the receiving party can show: (a) that such information is publicly available or otherwise generally known through no fault of its own; (b) that such information was in its possession prior to the date of disclosure; (c) that it subsequently received such information from a third party without restriction as to its disclosure or use; (d) that it is authorized to disclose such information by any subsequent written agreement between the parties hereto; or (e) that it independently developed such information without the benefit of the Confidential Information from such party. 9.2 NON-USE Neither party shall use any of the Confidential Information disclosed to it by the other party pursuant to the terms of this Agreement for any purpose other than that which it has contemplated for herein, without the consent of the other party hereto. 9.3 TERM The confidentiality and non-use covenants contained in Sections 9.1 and 9.2 above shall continue during the term of this Agreement and for a period of five years thereafter. -12- 14 9.4 EMPLOYEES Each party agrees that it will require each of its employees who work on any Project contemplated by this Agreement to execute a confidentiality and non-use agreement containing the above terms directly with the other party to this Agreement, if requested. 10. SUCCESSORS AND ASSIGNS The provisions of this Agreement shall be binding upon and inure to the benefit of each of the parties hereto, their employees, officers, directors and consultants, if any, together with their successors and assigns; provided, however, that no right or obligation arising under this Agreement may be transferred or assigned by either party without the prior written consent of the other. 11. INDEPENDENT RELATIONSHIP The parties agree that Argus will act as an independent consultant or contractor to RGene and not as an employee, agent, partner or joint venturer. Under no circumstances shall Argus, its agents, employees and consultants, if any, be deemed to be agents or representatives of RGene, nor will any of them have the right to enter into any contracts or commitments in the name of RGene or otherwise bind or commit RGene. 12. PERSONS BOUND Argus agrees to require its employees, consultants, collaborators and agents, if any, that will be providing services under the terms of this Agreement to acknowledge and agree to abide by all the terms of Argus' obligations hereunder. 13. WARRANTY DISCLAIMERS Argus makes no warranty or representation, either express or implied, as to its findings, recommendations, specifications, or professional advice for the services to be rendered hereunder except as follows: (a) This Agreement does not conflict with any other agreement to which Argus is bound; (b) No other agreement exists which prevents Argus from entering into this Agreement or performing the services to be provided hereunder; and -13- 15 (c) Argus agrees that it will not during the term of this Agreement enter into any contract or agreement with any other party which would abrogate any of its duties or rights hereunder, or compete with the development efforts of RGene herein, without the prior written consent of RGene. 14. ARBITRATION The parties agree that any dispute arising out of this Agreement or its interpretation shall be submitted to binding arbitration to the authority of an arbitrator selected by the parties and sanctioned by the American Arbitration Association. If the parties cannot agree on an arbitrator, they shall each select an arbitrator and the two arbitrators will select a third arbitrator, with the decision of a majority of the arbitrators being binding. The parties agree that the decision of the arbitrator shall be final and binding and shall not be appealed. In the event of any litigation or arbitration between the parties arising out of this Agreement, the prevailing party shall be reimbursed for any and all reasonable attorneys' fees and court costs by the losing party. 15. MISCELLANEOUS 15.1 GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, unless otherwise specially agreed upon. 15.2 SEVERABILITY If any part of this Agreement or any part of the Exhibits hereto is deemed to be unlawful or invalid then that part shall be severed from this Agreement or Exhibits, but the remaining parts and the Agreement or Exhibit as a whole shall remain in effect and be binding upon both parties. 15.3 FORCE MAJEURE Neither party hereto shall be liable to the other party for the default of any obligation hereunder due to any cause which is beyond such party's reasonable control, including, but not limited to, acts of God, compliance with laws and orders, riot, fires, explosions, shipwrecks, epidemics, and the like. 15.4 WAIVER AND AMENDMENTS A breach of the terms or conditions of this Agreement may only be waived in writing. No waiver of any breach of the terms and conditions of this Agreement to be -14- 16 performed by the other party shall be construed as a waiver of any subsequent breach, whether of the same, or any other, terms and conditions hereof. No amendment to this Agreement shall be effective for any purpose unless in writing and signed by an authorized officer of each party. 15.5 ENTIRE AGREEMENT This Agreement and the Exhibits hereto constitute the entire agreement and understanding between the parties and supersede and cancel all previous negotiations, representations, undertakings, understandings and agreements which have previously been made between the parties with respect to the subject matter of this Agreement and the Exhibits. 15.6 NOTICES All notices required or contemplated by this Agreement from any party shall be in writing and shall be delivered either (a) by personal delivery, (b) by regular mail, postage prepaid, (c) by electronic transmission, confirmed by mail, postage prepaid, or (d) by overnight delivery service which takes receipt of delivery. All notices delivered by mail or electronic transmission shall be addressed to the party at its address set forth in this Agreement, which address may be changed from time to time by notice delivered in accordance with this Section 15.6. The effective date of any notice delivered in accordance with this Section 15.6 shall be (a) the date of personal delivery, (b) the third day after the date of mailing, or (c) the second business day after electronic transmission. 15.7 COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which, taken together, shall constitute one instrument. 15.8 EXPENSES Each party agrees that it shall be liable for its own legal fees and other expenses incurred by it in the negotiation of this Agreement, and shall not be entitled to reimbursement by the other for such expenses either directly or through the provisions of this Agreement. 15.9 RELATIONSHIP OF THE PARTIES The parties agree that each is acting as an independent contractor with respect to the other and nothing contained in this Agreement is intended, or is to be construed, -15- 17 to constitute RGene and Argus as partners or joint venturers or Argus as an agent of RGene. Neither party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other party or to bind the other party to any contract, agreement or undertaking. ARGUS PHARMACEUTICALS, INC. By: /s/ D.M. LEECH ------------------------------------ Name: D.M. LEECH ---------------------------------- Title: President/CEO --------------------------------- 3400 Research Forest Drive The Woodlands, Texas 77381 RGENE THERAPEUTICS, INC. By: /s/ MARTIN P. SUTTER ----------------------------------- Name: MARTIN P. SUTTER ---------------------------------- Title: Chairman --------------------------------- 2170 Buckthorne Place, Suite 170 The Woodlands, Texas 77380 -16- 18 EXHIBIT A "PRODUCTS" (a) An in vivo gene therapy product (EIA) treating ovarian and/or breast cancer relating to the technology covered by the UTRC License Agreement and the technology covered by the Patent and Technology License Agreement between MDACC and RGene effective March 1, 1994; and (b) An anti-sense product treating chronic myelogenous leukemia (CML) relating to the technology covered by the Assignment Agreement. 19 Exhibit B ASSIGNMENT AND ASSUMPTION THIS ASSIGNMENT AND ASSUMPTION AGREEMENT ("Agreement") is entered into this 6th day of April, 1994, by and between Argus Pharmaceuticals, Inc., a Delaware corporation ("Argus"), and RGene Therapeutics, Inc., a Delaware corporation ("RGene"). WHEREAS, Argus is the exclusive licensee of certain Technology under that certain Exclusive License Agreement, dated July 1, 1988 by and among Argus, the University of Texas Board of Regents and the University of Texas M.D. Anderson Cancer Center, as amended ("Exclusive License Agreement"); WHEREAS, in exchange for the issuance of shares in RGene under that certain Stockholder Agreement dated April 6, 1994 by and between Argus and RGene, Argus wishes to assign to RGene its rights and obligations with respect to the Technology licensed the Exclusive License Agreement; and WHEREAS, RGene is desirous of obtaining the entire right and interest of Argus in and to the Exclusive License Agreement as it relates to the Technology and assume the obligations of Argus therefor, all pursuant to the terms and conditions set forth below. NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: I. ASSIGNMENT 1.1 Argus hereby assigns to RGene, its successors and assigns, all of the right, title and interest of Argus in and to the Exclusive License Agreement to the extent and only to the extent that the Exclusive License Agreement relates to the Invention identified in Amendment No. 3 to the Exclusive License Agreement. 1.2 By its acceptance of this Assignment, RGene hereby accepts all of the benefits and assumes all of the obligations of Argus under the Exclusive License Agreement to the extent the Exclusive License Agreement relates to the Invention identified in Amendment No. 3 thereto, including but not limited to all costs and fees relating to the filing and prosecuting of patent applications on the Invention and the payment of royalties and other payments required by the Exclusive License Agreement to the extent the Exclusive License Agreement relates to the Invention identified in Amendment No. 3 thereto. 1.3 Argus agrees to execute such further instruments as RGene reasonably requests to secure or perfect in RGene the full benefit of the Assignment set forth herein. 20 II. NEGATION OF WARRANTIES 2.1 Argus makes no representation or warranty (a) that any patent application on the Technology will ultimately issue as a patent, (b) that any patent application which issues into a patent is valid and enforceable, (c) that the use of the Technology in the manufacture, use or sale of any product will be free from infringement of patents of third parties, or (d) as to the safety, reliability, or efficacy of the Technology which may ultimately be incorporated in any product. 2.2 Argus makes no representations, extends no warranties of any kind, either express or implied, and assumes no responsibilities whatever with respect to the manufacture, use, or sale, or other disposition of any products incorporating the Technology. III. MISCELLANEOUS 3.1 The execution of this Agreement by the University of Texas Board of Regents and the University of Texas M.D. Anderson Cancer Center, as the licensor of the Technology, is for the purpose of indicating their approval of the provisions of this Agreement. 3.2 It is understood that this Assignment contains the entire agreement between the parties relating to the subject matter of this Agreement. 3.3 This Assignment is deemed to have been made in the State of Texas and shall be interpreted and construed in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, signifying their acceptance of and agreement to be bound by the terms and conditions of this Agreement, the signatures of the parties are affixed hereto. RGENE THERAPEUTICS, INC. ARGUS PHARMACEUTICALS, INC. By: /s/ MARTIN P. SUTTER By: /s/ DAVID M. LEECH ---------------------------- -------------------------------- Name: Martin P. Sutter Name: David M. Leech -------------------------- ------------------------------ Title: Chairman Title: President and CEO ------------------------- ------------------------------ Date: 4-5-94 Date: -------------------------- ------------------------------ -2- 21 THE UNIVERSITY OF TEXAS BOARD OF REGENTS OF THE M.D. ANDERSON CANCER CENTER UNIVERSITY OF TEXAS SYSTEM By: /s/ DAVID J. BACHRACH By: /s/ THOMAS G. RICKS ---------------------------------- ------------------------------ Name: David J. Bachrach Name: Thomas G. Ricks Title: Executive Vice President for Title: Vice Chancellor for Asset Administration and Finance Management Date: 3-25-94 Date: -------------------------------- ---------------------------- APPROVED AS TO CONTENT APPROVED AS TO FORM By: /s/ WILLIAM J. DOTY By: /s/ DUDLEY R. DOBIE, JR. ---------------------------------- --------------------------------- Name: William J. Doty Name: Dudley R. Dobie, Jr. Title: Director, Technology Title: Manager, Intellectual Development Property Date: 3/22/94 Date: -------------------------------- ------------------------------ -3- 22 EXHIBIT C SUBLICENSE AGREEMENT This Sublicense Agreement ("Sublicense"), effective the 6th day of April, 1994, ("Effective Date") is entered into by and between Argus Pharmaceuticals, Inc., a Delaware corporation ("Argus"), and RGene Therapeutics, Inc., a Delaware corporation ("RGene"). WITNESSETH: WHEREAS, the University of Tennessee Research Corporation ("UTRC") and McMaster University ("McMaster") executed and entered into an agreement effective May 25, 1992 whereby UTRC received the exclusive right to commercialize certain Technology including the right to grant licenses to third parties; WHEREAS, Argus is the licensee of that certain Technology pursuant to an Agreement dated November 1, 1993 by and between UTRC and Argus (the "UTRC License Agreement"); WHEREAS, in exchange for the issuance of shares in RGene under that certain Stockholder Agreement dated April 6, 1994 by and between Argus and RGene ("Stockholder Agreement"), Argus is willing to grant RGene an exclusive sublicense to the Technology licensed under the UTRC License Agreement; and WHEREAS, RGene is desirous of obtaining an exclusive sublicense of the Technology pursuant to the terms and conditions set forth below. NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: I. DEFINITIONS 1.1 "Technology" shall mean the technology defined as Technology in the UTRC License Agreement. 1.2 "Licensed Patent Rights" shall mean the U.S. and foreign patents and applications defined as Licensed Patent Rights in the UTRC License Agreement. 1.3 "Licensed Product" shall mean the products or compositions defined as a Licensed Product in the UTRC License Agreement. 23 1.4 "Licensed Fields" shall mean the applications of the Technology and the Licensed Patent Rights defined as Licensed Fields in the UTRC License Agreement. 1.5 "Excluded Fields" shall mean those applications and fields excluded or reserved from the license defined as Excluded Fields in the UTRC License Agreement. 1.6 "Argus Licensed Rights" shall mean and only include those rights licensed to Argus under the UTRC License Agreement and shall specifically exclude (for purposes of this Sublicense only and without affecting any other agreement between Argus and RGene) any other proprietary rights owned or licensed by Argus. II. SUBLICENSE 2.1 Subject to all the terms and conditions of this Sublicense and the UTRC License Agreement, Argus hereby grants to RGene a worldwide, exclusive sublicense under all the Argus Licensed Rights to fully exploit and commercialize the Technology in the Licensed Fields granted to Argus under the UTRC License Agreement subject to the Excluded Fields and any other reservations or limitations set forth in the UTRC License Agreement. 2.2 RGene agrees that it will not utilize the Technology or practice under the Licensed Patent Rights for any purpose other than that encompassed by the Sublicense granted herein. 2.3 As the exclusive sublicensee of Argus, RGene hereby accepts all the benefits and assumes all of the obligations of Argus under the UTRC License Agreement and agrees to be bound by all terms and conditions of the UTRC License Agreement on behalf of Argus and as sublicensee under the UTRC License Agreement in each case subject to the terms and conditions set forth herein. 2.4 Argus agrees not to utilize the Technology or practice under the Licensed Patent Rights for any purpose other than with the prior written agreement of RGene. 2.5 RGene agrees that it will comply with the terms of Section 2.6 of the UTRC License Agreement. 2.6 RGene shall use its best efforts to bring one or more Licensed Products to market in each of the Licensed Fields. 2.7 Argus and RGene agree, and UTRC acknowledges, that RGene is an Associate Sublicensee under the UTRC License Agreement -2- 24 III. PAYMENTS 3.1 The rights and licenses granted by RGene pursuant to Article II shall be non royalty bearing to Argus and no payments shall be required by RGene to Argus other than those as a sublicensee under the UTRC License Agreement. 3.2 RGene agrees to pay the UTRC Running Royalties pursuant to Article 4.1 B. and C. set forth in the UTRC License Agreement. Further, RGene agrees to pay all UTRC Milestone Payments when due pursuant to Article 4.1 E. of the UTRC License Agreement. 3.3 RGene agrees to make payment of all UTRC Running Royalties and Milestone Payments directly to UTRC in accordance with Articles 4.2, 4.3, 4.4, 4.5 and 4.7 of the UTRC License Agreement. 3.4 Should RGene fail to make any payment or submit any report as required under this Sublicense or under the UTRC License Agreement, Argus shall have the option to terminate this Sublicense in accordance with the provisions of Article 7.3 herein. 3.5 RGene agrees to maintain all reports, records, and allow inspection as provided in Article 5 of the UTRC License Agreement and to submit the written reports of Article 5.2 of the UTRC License Agreement directly to UTRC. IV. PATENTS 4.1 Argus will provide RGene with any correspondence or election notices received from UTRC pursuant to Section 6.1 of the UTRC License Agreement immediately upon Argus' receipt thereof. RGene shall be entitled to exercise all rights of Argus under Section 6.1 of the UTRC License Agreement. 4.2 RGene agrees to assume the rights and obligations of Argus with respect to the patent related expenses set forth in Articles 6.2 and 6.3 of the UTRC License Agreement. 4.3 RGene agrees to mark all products covered by the Licensed Patent Rights with patent numbers in accordance with Article 6.5 of the UTRC License Agreement. 4.4 RGene shall be entitled at its own expense to participate in any lawsuit in which UTRC or Argus is a party that relates to the alleged infringement of the rights to any issued patent included within the Licensed Patent Rights, United States or foreign, by an unlicensed third party. Argus shall not grant its consent, pursuant to -3- 25 Section 7.1 of the UTRC Agreement, to the grant by UTRC of any license under the Licensed Patent Rights in the First Licensed Field without the prior written consent of RGene, which shall not unreasonably be withheld. V. DEFENSE OF LEGAL ACTIONS; INSURANCE 5.1 In the event that UTRC, the University of Tennessee or Argus, or any of their respective directors, officers, or employees, or any individual named as an inventor of the Licensed Patent Rights (hereinafter "Indemnified Party") is charged with infringement of a patent by a third party or is made a party in any lawsuit (including but not limited to products liability actions) as a result of the manufacture, use, or sale of any Licensed Product under this Sublicense or as a result of any obligation or activity of RGene under this Sublicense or the UTRC License Agreement, RGene shall: (a) defend or settle, at RGene's expense, any claim of infringement or lawsuit; (b) assume all costs, expenses, damages, and other obligations for payments incurred as a consequence of such charges of infringement or lawsuit; and (c) indemnify and hold such Indemnified Party harmless for any and all damages, losses, liability, and costs resulting from such charge of infringement or lawsuit. 5.2 At RGene's request, Argus and UTRC shall give RGene assistance in the defense any such infringement charge or lawsuit. 5.3 Any Indemnified Party shall have the right to participate in any defense, compromise or settlement to the extent that, in its judgment, it may be prejudiced thereby. 5.4 RGene shall not settle any suit naming an Indemnified Party without the prior written consent of each such Indemnified Party. 5.5 RGene shall not settle any claim or suit in any manner that shall adversely affect any Licensed Patent Rights, require any payment by any Indemnified Party, or reduce the royalty due to UTRC hereunder without the prior written consent of UTRC. The foregoing shall apply even with regard to a claim or suit in which UTRC is not a party. 5.6 RGene and Argus each agree to carry such liability insurance as shall be mutually agreed for companies of their size and activities operating in the -4- 26 pharmaceutical industry. At all times during the term of this Sublicense, UTRC and Argus shall be listed as an additional named insured on such liability insurance policy(ies) of RGene, and RGene shall be listed as an additional insured on such liability insurance policies of Argus. RGene and Argus each agree to provide written evidence of such insurance upon request by the other. VI. NEGATION OF WARRANTIES 6.1 NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS: (a) a warranty or representation by UTRC or Argus that any patent application included within the Licensed Patent Rights will ultimately issue as a patent; (b) a warranty or representation as to the validity or scope of any patent application or issued patent that may be included in the Licensed Patent Rights; (c) a warranty or representation that the use of the Technology or the practice of the invention(s) covered by the Licensed Patent Rights or the manufacture, use, or sale of the Licensed Products are or will be free from infringement of patents of third parties; (d) a requirement that UTRC or Argus shall be responsible for the expenses of filing or prosecuting any patent application or maintaining any patent in force; (e) an obligation on the part of UTRC or Argus to bring or prosecute actions or suits against third parties for infringement of the Licensed Patent Rights or for unauthorized use of the Technology; (f) an obligation on the part of UTRC or Argus to defend any action or suit brought by any third party; (g) a warranty or representation by UTRC or Argus as to the safety, reliability, or efficacy of the Technology, the invention(s) covered by the Licensed Patent Rights, or any product which incorporates or in its production employs such Technology or invention(s); (h) a warranty or representation by UTRC or Argus that any Technology is secret or confidential; or -5- 27 (i) a requirement that UTRC take any action to prevent the disclosure of the Technology by the University of Tennessee, or its employees, or any other third party. 6.2 UTRC and Argus make no representations, extend no warranties of any kind, either express or implied, and UTRC assumes no responsibilities whatever with respect to the manufacture, use, or sale, or other disposition of the Licensed Products, or any other activities hereunder by RGene, its customers, or any third parties. VII. TERM AND TERMINATION 7.1 This Agreement shall commence and become effective as of the Effective Date. 7.2 Unless earlier determined in accordance with the provisions set out herein, this Sublicense shall continue in full force and effect until the expiration or termination of the UTRC License Agreement. Argus agrees that it will not take any action to terminate the UTRC License Agreement (except pursuant to Section 10.2 thereof) without the prior written consent of RGene. 7.3 RGene shall be entitled to all rights of Argus under Sections 10.3 and 10.5 under the UTRC License Agreement. 7.4 Should RGene fail to pay UTRC royalties or Milestone Payments or any other payments due and payable hereunder, Argus shall have right to terminate this Sublicense on thirty (30) days' written notice to RGene, unless RGene shall within said thirty (30) day period pay UTRC all such amounts due and payable, this Sublicense shall terminate at midnight on the 30th day, all without prejudice to any rights or remedies otherwise available to Argus. 7.5 In the event that either party to this Sublicense defaults in the due performance of its obligations or covenants hereunder or in the event that any representation by either party proves to be false or incorrect in any material respect, the other party may give notice of same the defaulting party demanding that such default be cured within sixty (60) days. If the fault is not cured within the sixty (60) day grace period, this Sublicense shall terminate at midnight on the last day of such period, all without prejudice to any rights or remedies otherwise available to the terminating party. 7.6 Upon any termination of this Sublicense by either party, except pursuant to the provisions of Section 7.2 above; -6- 28 (a) All rights granted to RGene hereunder shall terminate automatically and shall revert to Argus; and (b) RGene shall not thereafter utilize the Technology for any purpose or manufacture, use, or sell Licensed Products under the Licensed Patent Rights. 7.7 Within thirty (30) days after the termination of this Sublicense for any reason, RGene shall duly account for and pay to UTRC all royalties and other payments accrued as of the date of termination. 7.8 In the event of adjudication of bankruptcy, appointment of a receiver by a court of competent jurisdiction, assignment for the benefit of creditors, or where levy or execution directly involves all the substantial assets of RGene or if RGene goes out of business, this Sublicense shall automatically terminate effective the date of such action; provided, however, that such termination shall not impair or prejudice any right or remedy that Argus may otherwise have. 7.9 Termination of this Sublicense for any cause shall not be construed to release RGene from any royalty or confidentiality obligation or any obligation under Article V (all of which shall survive the termination of this Sublicense) or from any other obligation matured prior to the effective date of such termination. VIII. CONFIDENTIALITY 8.1 RGene agrees that reasonable and prudent practices shall be followed to maintain the confidential nature of the Technology that is not public knowledge, including where necessary, obtaining written confidentiality agreements from employees not already bound by such agreements and all employees of same who have access to such Technology. Argus and RGene each agree that all information relating to this Sublicense and the Technology and improvements sublicensed hereunder contained in documents made "Confidential" which are forwarded to one by the other (or between UTRC and either party) shall be received in strict confidence, shall be used only for the purpose of this Sublicense, and shall not be disclosed by the receiving party (except as required by law), its agents or employees without the prior written consent of the forwarding party, unless such information (i) was in the public domain at the time of disclosure, (ii) later becomes part of the public domain through no act or omission of the receiving party, its employees, agents, successors or assigns, (iii) was lawfully disclosed to the receiving party by a third party having a right to disclose it, (iv) was already known to the receiving party at the time of disclosure, (v) was independently conceived, discovered or reduced to practice, (vi) is required to be submitted to a government agency pursuant to any obligation imposed or right granted hereunder, (vii) is required by law or court order -7- 29 to be disclosed, or (viii) is disclosed by the University of Tennessee, UTRC, or McMaster in the exercise of rights under Article 15.1 of the UTRC License Agreement. The foregoing obligation of confidentiality shall survive the termination of this Sublicense for any reason for a period of ten (10) years thereafter. In addition, RGene shall be entitled to the benefit of all rights of Argus pursuant to Section 11.1 of the UTRC License Agreement. IX. MISCELLANEOUS 9.1 It is understood that this Sublicense contains the entire agreement between the parties relating to the subject matter of this Sublicense. Neither party shall be bound by any agreement, covenants or warranties unless it shall be reduced to writing and signed by an officer of such party. The failure of either of the parties at any time or times to require the performance by the other of any provisions hereof shall in no matter affect the right of the first mentioned party thereafter to enforce the same. The waiver by either of the parties of any breach of any provision hereof shall never be construed to be a waiver of any succeeding breach of such provision or a waiver of the provision itself. 9.2 This Sublicensee shall be binding upon and shall enure to the benefit of Argus and its assigns and successors in interest and shall be binding upon and shall enure to the benefit of RGene and its assigns and successors in interest provided that such successor shall agree in writing to be bound in all respect thereby. This Sublicense shall not be assignable or assigned by RGene without the prior written approval of UTRC, as required by the UTRC License Agreement, which approval shall not be unreasonably withheld. 9.3 All payments, notices and other communications to the parties shall be deemed to be given and received two (2) days after the date of mailing when sent by certified or registered United States mail, return receipt requested, and addressed as set out below. Otherwise, a payment, notice, or other communication shall be deemed to be given and received on the date of actual receipt by the addressee. (a) If to RGene: RGENE THERAPEUTICS, INC. 2170 Buckthorne Place, Suite 170 The Woodlands, Texas 77381 -8- 30 (b) If to Argus: ARGUS PHARMACEUTICALS, INC. 3400 Research Forest Drive The Woodlands, Texas 77381 (c) If to UTRC: UNIVERSITY OF TENNESSEE RESEARCH CORPORATION 415 Communications Building Knoxville, Tennessee 37996-0344 9.4 Either party may change its address by written notice duly given to the other party. A post office receipt showing the date of deposit shall be prima facie evidence of mailing when sent by certified or registered United States mail. 9.5 RGene will comply with the terms of Section 15.1 of the UTRC License Agreement. 9.6 Each party shall be deemed to be an independent contractor and this Sublicense shall not constitute a partnership or a joint venture, and neither party shall be bound by the other to any contract, arrangement or understanding except as specifically stated herein. 9.7 Prior written approval must be obtained for the use of UTRC's, McMaster's, or the University of Tennessee's name, logo or associated symbols in any form of advertising. 9.8 RGene shall be solely responsible for the payment and discharge of any taxes or duties relating to any transactions of RGene, its employees, contractors, or agents in connection with the manufacture, use, or sale in any country of Licensed Products. 9.9 RGene shall, at its own expense, be responsible for applying for and obtaining any approvals, authorizations, or validations required under the laws of the United States or a foreign country that may be necessary for the manufacture, use, or sale of License Products or relative to the performance of any obligation under this Sublicense. 9.10 The failure of either party to enforce at any time any of the provisions of this Sublicense, or any rights in respect thereto, or to exercise any election herein provided, shall in no way be considered to be a waiver of such provisions, rights or -9- 31 elections, or in any way to affect the validity of this Sublicense. Exercise by either party of any of these rights herein or any of its elections under the terms or covenants herein shall not preclude either party from exercising the same or any other rights in this Sublicense irrespective of any previous action or proceeding taken by either party hereunder. 9.11 If any provision of this Sublicense is judicially or in an arbitration proceeding determined to be void or unenforceable, such provision shall be deemed to be severable from the other provisions of this Sublicense which shall remain in full force and effect. Either party may request that a provision otherwise void or unenforceable be reformed so as to be valid and enforceable to the maximum extent permitted by law. 9.12 No liability hereunder shall result to a party by reason of delay in performance caused by force majeure, that is, circumstances beyond reasonable control of the party, including, without limitation, acts of God, fire, flood, war, civil unrest, labor unrest, or shortage or inability to obtain material or equipment. 9.13 The signature on the part of UTRC appears below as the licensor of the Licensed Patent Rights and the Technology for the purpose of indicating its approval of the provisions of Sublicense and indicating its agreement not to take any action in derogation of the rights herein granted to RGene. It is understood and agreed by RGene that Argus shall have no responsibility or liability for any act or omission to act on the part of UTRC or McMaster and UTRC and McMaster shall have no responsibility or liability for any act or omission to act on part of Argus. 9.14 This Agreement shall have no force and effect unless and until duly executed by both parties. 9.15 This Sublicense is deemed to have been made in the State of Texas and shall be interpreted and construed and any legal relations created hereunder shall be determined in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, signifying their acceptance of and agreement to be bound by terms and conditions of this Agreement, the signature of the parties are affixed hereto. RGENE THERAPEUTICS, INC. ARGUS PHARMACEUTICALS, INC. By: /s/ MARTIN P. SUTTER By: /s/ DAVID M. LEECH -------------------------- ----------------------------- -10- 32 Name: Martin P. Sutter Name: David M. Leech ---------------------------- Title: Chairman Title: President & CEO --------------------------- Date: April 6, 1994 Date: April 6, 1994 ---------------------------- ------------------------------- APPROVED BY THE UNIVERSITY OF TENNESSEE RESEARCH CORPORATION By: /s/ ANN J. ROBERSON ---------------------------------- Name: Ann J. Roberson -------------------------------- Title: President -------------------------------- Date: April 7, 1994 -------------------------------- -11- 33 EXHIBIT 3.1
AR-GENE BUDGET GROUP BUDGET ITEM 1ST 6 MONTH 2ND 6 MONTH 3RD 6 MONTH 4TH 6 MONTH ----- ----------- ----------- ----------- ----------- ----------- ----------- ARGUS [*] L. HUANG [*] G. LOPEZ [*] M. HUNG [*] PASS THRU [*]
- -------------------- [*] Confidential Treatment Requested. 34 EXHIBIT 3.2 RGENE THERAPEUTICS, INC. STOCKHOLDER AGREEMENT This Stockholder Agreement (this "Agreement") dated April 6, 1994 is entered into by and between RGene Therapeutics, Inc., a Delaware corporation (the "Company"), and Argus Pharmaceuticals, Inc., a Delaware corporation ("Stockholder"). WITNESSETH: WHEREAS, the Company desires to issue certain shares of common stock, $.001 par value, of the Company (the "Common Stock") to the Stockholder; and WHEREAS, the Stockholder desires to acquire certain shares of Common Stock from the Company; and WHEREAS, the Stockholder and the Company desire that the Stockholder grant to the Company, and under certain circumstances to holders of the Company's Preferred Stock or other securities issued by the Company to investors (the "Investors"), options to repurchase certain shares of Common Stock purchased by the Stockholder on the terms and conditions set forth; NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations contained herein, the parties agree as follows: 1. ISSUANCE OF SHARES 1.1 PURCHASE AND SALE OF SHARES Subject to the terms and conditions of this Agreement and in consideration of the execution of (i) that certain Assignment Agreement between the Company and the Stockholder dated the date hereof relating to certain patent applications and technology currently licensed to Stockholder by The University of Texas M.D. Anderson Cancer Center and The University of Texas System Board of Regents pursuant to an Exclusive License Agreement dated July 1, 1988, and (ii) that certain Sublicense Agreement between the Company and the Stockholder dated the date hereof relating to certain patent applications and technology rights currently licensed to Stockholder by the University of Tennessee Research Corporation pursuant to an Agreement dated November 1, 1993, the Company agrees to issue to the Stockholder 642,307 shares of Common Stock (the "Shares") at the Closing (as defined below). 35 1.2 CLOSING The closing for the issuance of the Shares to the Stockholder shall occur on or before April 6, 1994, or at such other date and time as the parties may agree (the "Closing"). At the Closing, or within a reasonable time thereafter, the Company shall deliver to Stockholder a certificate or certificates representing the number of Shares as set forth in Section 1.1 hereof, in the name of the Stockholder. 2. REPRESENTATIONS AND WARRANTIES To induce the Company to deliver the Shares to the Stockholder, the Stockholder represents and warrants to the Company: (a) The Stockholder is acquiring the Shares for its own account as principal, for investment purposes only, and not with a view to, or for, resale or distribution, and no other person or entity has a direct or indirect beneficial interest in the Shares; (b) The Stockholder has not offered any of the Shares for resale and has no present intention of dividing its interest with others or of reserving or otherwise disposing of any of the Shares; (c) Any information the Stockholder has furnished to the Company with respect to the Stockholder's status as a sophisticated or accredited investor, its business experience or financial position is correct; (d) The financial capacity of the Stockholder is such that the investment in the Shares is not material to its total financial capacity; the Stockholder has the financial ability to bear the economic risk of its investment, has adequate means for providing for its current needs and personal contingencies and has no need for liquidity with respect to its investment in the Shares; (e) The Stockholder considers itself to be a sophisticated investor and has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment in the Shares; (f) The Stockholder has been furnished with all information concerning the Shares and the Company that it desires; (g) The Stockholder has been given the opportunity to ask questions of, and receive answers from, the Company with respect to the Shares, concerning the terms and conditions of the offering and other matters pertaining to this investment, and has been given the opportunity to obtain such additional information necessary to verify the accuracy of the information provided to him by the Company in order for him to evaluate -2- 36 the merits and risks of investment in the Shares to the extent that the Company possessed such information or could acquire it without unreasonable effort or expense; and (h) The Stockholder is not relying on the Company with respect to any economic considerations of the Stockholder related to this investment. In regard to the economic considerations related to this investment, the Stockholder has relied on the advice of, or has consulted with, only its own advisors. The Stockholder further represents, warrants and agrees that it will not sell or otherwise transfer the Shares without registration under the Securities Act of 1933, as amended (the "Act"), or an exemption therefrom, and fully understands and agrees that it must bear the economic risk of its purchase for an indefinite period of time because, among other reasons, the Shares have not been registered under the Act or under the securities laws of any state and, therefore, cannot be resold, pledged, assigned or otherwise disposed of unless they are subsequently registered under the Act and under the applicable securities laws of such states or an exemption from such registration is available. It also understands that the Company is under no obligation to register the Shares on its behalf or to assist him in complying with any exemption from registration under the Act. It further understands that any certificate evidencing the Shares will bear a legend restricting the transfer thereof consistent with the foregoing and that a notation may be made in the records of the Company restricting the transfer of any Shares in a manner consistent with the foregoing. 3. STOCKHOLDER AWARENESS The Stockholder acknowledges that it is aware that: (a) No federal or state agency has passed upon the Shares or made any finding or determination as to the fairness of this investment; (b) There are substantial risks of loss of investment incident to an investment in the Shares and such an investment is highly speculative; (c) The Company is only recently organized, has not conducted any substantial business to date and does not have any substantial working capital or financial resources. The business in which the Company proposes to engage is highly competitive and success in the Company's business may depend on, among other things, the Company's ability to obtain financing, to complete product development, to attract qualified employees and to obtain patent protection and governmental approvals, market acceptance of products and numerous other factors over which the Company does not have control. -3- 37 4. RESTRICTIONS ON TRANSFER; RIGHT OF FIRST REFUSAL 4.1 COMPANY'S PURCHASE OPTION Stockholder shall not sell, transfer, pledge, hypothecate or otherwise dispose of any Shares which are purchased hereunder without first complying with the terms of this Section 4. 4.2 RIGHT OF FIRST REFUSAL Before any of the Shares registered in the name of Stockholder may be sold or transferred (including transfer by operation of law), except as permitted in Section 5, such Shares shall first be offered to the Company and to the Investors, in accordance with the terms set out herein. (i) Stockholder shall deliver a notice ("Notice") to the Company and to the Investors stating (A) its bona fide intention to sell or transfer such Shares, (B) the number of such Shares to be sold or transferred, (C) the price for which it proposes to sell or transfer such Shares, and (D) the name of the proposed purchaser or transferee. (ii) Within thirty (30) days after receipt of the Notice, the Company and/or the Investors may elect to purchase all but not less than all of the Shares to which the Notice refers, at the price per share specified in the Notice. The closing for such purchase by the Company and/or the Investors shall occur, unless otherwise agreed by the Company, the Investors electing to purchase Shares, and the Stockholder, no later than 30 days after the election by the Company and/or the Investors to purchase same. In the event that the number of Shares which the Company and the Investors desire to purchase exceeds the number of Shares proposed for sale by Stockholder in the Notice, then in such instance the Company shall have full preference to acquire such Shares to the exclusion of the Investors, and, to the extent that there are Shares still available for purchase by the Investors, the Investors desiring to purchase Shares shall be entitled to purchase the remaining amount thereof on a pro rata basis based upon the number of shares of Common Stock and Preferred Stock, or securities convertible into shares of Common Stock and Preferred Stock, then held by each of them so electing to purchase bears to the total number of shares of Common Stock and Preferred Stock, or securities convertible into shares of Common Stock and Preferred Stock, held by all Investors desiring to acquire Shares, on a fully diluted as if converted to Common Stock basis. (iii) If the Shares to which the Notice refers are not purchased by the Company and the Investors, as provided in Section 4.2(ii) hereof, Stockholder may sell such Shares which the Company and the Investors elected not to purchase to -4- 38 any person or persons named in the Notice at the price specified in the Notice or at a higher price, provided that such sale or transfer is consummated within 120 days of the date of said Notice to the Company and the Investors, and provided, further, that any such sale is in accordance with all the terms and conditions hereof. (iv) Upon the closing of a firm commitment public offering pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended (the "Act"), covering the offering and sale of shares of Common Stock for the account of the Company in which the aggregate gross proceeds received by the Company equal or exceed $7,500,000 and in which the public offering price per share equals or exceeds $5.00 per share, the thirty (30) day period specified in Section 4.2(ii) above shall be reduced to a ten (10) day period; and the requirement to identify the name of the proposed purchaser and the proposed price shall be inapplicable if the Stockholder proposed to sell the Shares in an over-the-counter sale or on a national or regional exchange transaction. In such instance, any such sale to the Company and/or the Investors shall be at the average closing price of the Company's Common Stock on the date of notice of election to purchase such shares by the Company and/or the Investors. The average closing price is defined as the last closing price regular way on the exchange where the Common Stock is listed for trading or the average of the bid and ask prices if applicable. 4.3 STANDOFF AGREEMENT Stockholder agrees, in connection with each of the Company's public offerings of its equity securities, and upon request of the Company or the underwriters managing such offering, not to sell, make any short sale of, loan, grant any option for the purchase of or otherwise dispose of any of the Shares (other than those included in the registration, if any) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time from the effective date of such registration as may be requested by the Company or such underwriters; provided, that the officers and directors of the Company who own stock of the Company also agree to such restrictions. 4.4 OTHER RESTRICTIONS ON TRANSFER The Company shall not be required (i) to transfer on its books any of the Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (ii) to treat as owner of such Shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such Shares shall have been so transferred. -5- 39 5. EXEMPT TRANSACTIONS The prohibition in Section 4 against the sale of the Shares shall not apply to the exchange of Shares pursuant to a plan or merger, consolidation, recapitalization, reorganization, or sale of the Stockholder in which the Stockholder is the surviving entity, but any stock or securities received in exchange therefor shall also become subject to this Agreement. 6. ASSIGNMENT The Company may assign this Agreement or any of its rights and obligations hereunder. The Stockholder may not assign this Agreement or any of its rights and obligations hereunder. All covenants and agreements of, and benefits for, the Investors contained in this Agreement shall inure to the benefit of their respective successors and assigns and be binding on the Company and its successors and on the Stockholder and its successors and assigns. All such covenants and agreements are fully assignable by the Investors, provided, however, that any assignment of any of its rights under this Agreement by any Investor (other than to partners of such Investor or successors of such Investor or such partners by operation of law) shall be made only in connection with the sale or other transfer of all or any portion of the Preferred Stock, Common Stock, convertible notes, warrants, options or other securities of the Company which are exchangeable or convertible into shares of Common Stock or Preferred Stock of the Company held by such Investor and such assignee or transferee shall execute this Agreement. 7. ADJUSTMENTS If, from time to time during the term of this Agreement (i) there is any stock dividend or liquidating dividend of cash or property, stock split or other change in the character or amount of any of the outstanding securities of the Company, or (ii) there is any transaction involving the consolidation, merger or sale of all, or substantially all, of the assets of the Company, then, in such event, (x) any and all new, substituted or additional securities or other property to which the Stockholder is entitled by reason of its ownership of the Shares shall be immediately subject to right of first refusal provided to the Company and the Investors as described in Section 4 hereof and (y) all Shares purchased by Stockholder hereunder shall be treated on the same basis as all other outstanding shares of Common Stock of the Company so that Stockholder's Shares shall not be diluted by any such event any differently than any other holder of Common Stock of the Company. 8. LEGENDS All certificates representing any of the Shares subject to the provisions of this Agreement shall have endorsed thereon a legend substantially as follows: -6- 40 "ANY DISPOSITION, GRANT OR OTHER TRANSFER OF ANY INTEREST IN THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO CERTAIN RESTRICTIONS, AND THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL, CONTAINED IN A CERTAIN AGREEMENT BY THE RECORDHOLDER HEREOF AND THE CORPORATION, A COPY OF WHICH WILL BE MAILED TO ANY HOLDER OF THIS CERTIFICATE WITHOUT CHARGE AFTER RECEIPT BY THE CORPORATION OF A WRITTEN REQUEST THEREFOR." Upon presentation to the Company or any authorized transfer agent, the certificates representing the Shares or any appropriate portion thereof shall be exchanged for certificates not bearing such legend if the certificates are presented after the termination of this Agreement. 9. RIGHTS AS A STOCKHOLDER; VOTING AGREEMENT (a) Subject to the provisions of Section 4 above, the Stockholder shall, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Company with respect to the Shares, including the right to vote such Shares at any stockholder meeting. Notwithstanding anything herein to the contrary, Stockholder hereby agrees that it will, for a ninety-day period following the issuance of the Shares or until the closing of the first round financing by the Company in an amount at least equal to $2,000,000, whichever comes first, vote such Shares, at any stockholder meeting, in person, by proxy, by written consent, or otherwise, for the directors nominated for election to the Board of Directors of the Company by The Woodlands Venture Fund and no others, and, in any other matter coming before the stockholders of the Company, in accordance with the directive of The Woodlands Venture Fund. In order to secure the obligation to vote in accordance with the provisions hereof, the Stockholder hereby appoints Martin P. Sutter as its true and lawful proxy and attorney, with full power of substitution, to vote all of its Shares for the matters specified hereinabove. The irrevocable proxy granted by the Stockholder may be exercised at any time Stockholder fails to comply with the terms of this Section 9. The proxy and power granted by the Stockholder pursuant to this Section are coupled with an interest and are given to secure the duties of the Stockholder pursuant hereto. Such proxy will be irrevocable and will survive the bankruptcy, liquidation, dissolution, merger, consolidation or other reorganization of Stockholder, provided that it shall terminate upon the expiration of such ninety (90) day period following the issuance of the Shares or the closing of the above-referenced financing, whichever comes first. -7- 41 Stockholder hereby consents to the placement of an appropriate legend evidencing the voting restrictions provided for in this Agreement, on the certificates representing the Shares and any certificates issued in replacement or exchange therefor, and Stockholder will take all actions reasonably requested by the Company to effect such placement. (b) The Company agrees that it will provide Stockholder with "piggyback" registration rights, that is, rights to register the Shares purchased by Stockholder under this Agreement in a public offering of equity securities conducted by the Company by or on behalf of stockholders of the Company on terms which are identical to the piggyback registration rights provided to the holders of shares of Series A Preferred Stock of the Company, on a pari passu basis. 10. TERMINATION Except as may be otherwise provided herein, this Agreement shall terminate on the 91st calendar day immediately succeeding the third anniversary of the public offering referenced in Section 4.2. 11. MISCELLANEOUS 11.1 NOTICE For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: RGene Therapeutics, Inc. The Woodlands Venture Fund 2170 Buckthorne Place, Suite 170 The Woodlands, Texas 77380 Attention: Martin P. Sutter If to the Stockholder, at the address identified on the signature page hereof, and if to an Investor, at the address identified on the records of the Company hereto, or to such other address as either party or an Investor may furnish to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11.2 APPLICABLE LAW The substantive laws of the State of Texas, excluding any law, rule or principle which might refer to the substantive law of another jurisdiction, will govern the -8- 42 interpretation, validity and effect of this Agreement without regard to the place of execution or the place for performance thereof. This Agreement is to be at least partially negotiated, executed and performed in Harris County, Texas, and, as such, the Company and the Stockholder agree that personal jurisdiction and venue shall be proper with the state or federal courts situated in Harris County, Texas, to hear such disputes arising under this Agreement. 11.3 NO WAIVER No failure by either party hereto at any time to give notice of any breach by the other party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 11.4 SEVERABILITY If a court of competent jurisdiction determined that any provision of this Agreement, including any appendices attached hereto, is invalid or unenforceable, then the invalidity or unenforceability of that provision shall not affect the validity or enforceability of any other provision of this Agreement, and all other provisions shall remain in full force and effect. Further, such provision shall be reformed and construed to the extent permitted by law so that it may be valid, legal and enforceable to the maximum extent possible. 11.5 COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. 11.6 HEADINGS The section headings have been inserted for purposes of convenience and shall not be used for interpretive purposes. 11.7 SUCCESSORS; THIRD PARTY BENEFICIARY This Agreement shall inure to the benefit of the successors and assigns of the Company and the Investors and be binding upon the Stockholder and its successors and assigns. The Stockholder agrees that any and all Investors in the Company shall be treated as third party beneficiaries of this Agreement without the necessity of execution of this Agreement, and shall be entitled to all of the rights rendered to them herein. -9- 43 11.8 ENTIRE AGREEMENT This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof, and contains all the covenants, promises, representations, warranties and agreements between the parties with respect to the subject matter hereof. Each party to this Agreement acknowledges that no representation, inducement, promise or agreement, oral or written, with regard to the subject matter hereof, has been made by either party, or by anyone acting on behalf of either party, which is not embodied herein, and that no agreement, statement or promise relating to the subject matter hereof which is not contained in this Agreement or in such other agreements shall be valid and binding. 11.9 AMENDMENT No amendment or modification to this Agreement will be effective unless it is in writing and signed by the Company, the Stockholder and, if such amendment alters or amends any of the rights of the Investors, by Investors holding a majority of the outstanding shares of capital stock of the Company held by such Investors, if any. 11.10 INDEMNITY The Stockholder agrees to indemnify and hold harmless the Company and any person, if any, who controls the Company or such successor within the meaning of Section 15 of the Act against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever) arising out of or based upon any false representation or warranty or breach or failure by the Stockholder to comply with any covenant or agreement made by the Stockholder herein or in any other document furnished by the Stockholder in connection with this transaction. 11.11 INJUNCTIVE RELIEF In view of the inadequacy of money damages, and in view of the fact that the stock of the Company cannot be readily purchased or sold in the general market, if the Stockholder or any other person shall fail to comply with any provision of this Agreement, the Company shall be entitled, to the extent permissible by law, to injunctive relief in the case of the violation, or attempted or threatened violation, by Stockholder or other person of any such provision, or to a decree compelling specific performance by the Stockholder or other person, of any such provision, or to any other remedies legally available. -10- 44 11.12 VOID TRANSFERS If any Stock shall be sold or transferred otherwise than in accordance with the terms and conditions of this Agreement, such sale shall be void. Any such attempted sale or other transfer shall create a right in the Company to purchase the Stock which is the subject of such purported transfer at the applicable purchase price specified herein. Such right shall constitute an "adverse claim" within the meaning of such term as used within the meaning of the Uniform Commercial Code of any State. In addition to, and without prejudice to, any and all other rights or remedies which may be available to the Company, the Stockholder agrees that the Company may, but shall have no obligation to, hold and refuse to transfer any Stock, or any certificate therefor, tendered to it for transfer if the transfer violates the provisions of the Agreement. 11.13 TAX REPRESENTATIONS The Stockholder acknowledges that the Company has made no warranties or other representations to Stockholder with respect to the income tax consequences of the transactions contemplated by this Agreement and Stockholder is in no manner relying on the Company or its representatives for an account of such tax consequences. 11.14 FURTHER ASSURANCES The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first above written. Company RGENE THERAPEUTICS, INC. By: /s/ MARTIN P. SUTTER ----------------------------- Name: Martin P. Sutter -------------------------- Title: Chairman -------------------------- Stockholder -11- 45 ARGUS PHARMACEUTICALS, INC. By: /s/ D.M. LEECH ----------------------------- Name: D.M. Leech -------------------------- Title: President/CEO -------------------------- -12- EX-10.29 3 REDACTED VERSION PATENT & TECHNOLOGY LICENSE AGRMT 1 REDACTED VERSION EXHIBIT 10.29 TO TARGETED GENETICS CORPORATION AMENDMENT NO. 1 TO FORM S-1 TO BE FILED ON OR BEFORE MAY 30, 1996 "[*]" = confidential information omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 2 PATENT AND TECHNOLOGY LICENSE AGREEMENT THIS AGREEMENT ("AGREEMENT") is made by and between the BOARD OF REGENTS ("BOARD") of THE UNIVERSITY OF TEXAS SYSTEM ("SYSTEM"), an agency of the State of Texas, whose address is 201 West 7th Street, Austin, Texas 78701, THE UNIVERSITY OF TEXAS M.D. ANDERSON CANCER CENTER ("MDA"), a component institution of the SYSTEM, and RGENE THERAPEUTlCS, INC., a corporation having a principal place of business located at The Woodlands, Texas ("LICENSEE"). RECITALS A. BOARD owns certain PATENT RIGHTS and TECHNOLOGY RIGHTS related to LICENSED SUBJECT MATTER, which were developed at MDA, a component institution of SYSTEM. B. BOARD desires to have the LICENSED SUBJECT MATTER developed and used for the benefit of LICENSEE, the inventor, BOARD, and the public as outlined in the Intellectual Property Policy promulgated by the BOARD. C. The LICENSED SUBJECT MATTER is the subject of SPONSORED RESEARCH AGREEMENTS between MDA and LICENSEE, copies of which are attached hereto as Exhibits 1A and 1B for approval by BOARD, although certain LICENSED SUBJECT MATTER was developed with funding from, and is subject to the rights of, the Federal Government. D. LICENSEE is a company which was formed to develop and commercially exploit the inventions of LICENSED SUBJECT MATTER, and LICENSEE, therefore, wishes to obtain a license from BOARD to practice LICENSED SUBJECT MATTER. E. A copy of an executed Stock Purchase Agreement between LICENSEE and Gabriel Lopez-Berestein, M.D., an employee of MDA, which provides for, among other things, the circumstances and methods under which Gabriel Lopez-Berestein, M.D. shall be able to divest himself of stock in LICENSEE acquired under said Stock Purchase Agreement, is attached hereto as Exhibit 2 for approval by BOARD. F. A copy of an executed Stock Purchase Agreement between LICENSEE and Mien-Chie Hung, Ph.D., an employee of MDA, which provides for, among other things, the circumstances and methods under which Mien-Chie Hung, Ph.D. shall be able to divest himself of stock in LICENSEE acquired under said Stock Purchase Agreement, is attached hereto as Exhibit 3 for approval by BOARD. 3 G. A copy of an executed Stockholder Agreement between LICENSEE and BOARD is attached hereto as Exhibit 4 for approval by BOARD. NOW, THEREFORE, in consideration of the mutual covenants and premises herein contained, the parties hereto agree as follows: 1. EFFECTIVE DATE 1.1 This AGREEMENT shall be effective as of March 1, 1994 subject to approval by BOARD ("EFFECTIVE DATE"). 2. DEFINITIONS As used in this AGREEMENT, the following terms shall have the meanings indicated: 2.1 IMPROVEMENTS shall mean any inventions and discoveries which are within the scope of either pending patent applications or issued patents included within PATENT RIGHTS and which are developed in the laboratories of either Mien Chie Hung, Ph.D. or Gabriel Lopez-Berestein, M.D. at MDA. 2.2 LICENSED FIELD shall mean all compositions and fields of use of the LICENSED SUBJECT MATTER. 2.3 LICENSED PRODUCT shall mean any product SOLD by LICENSEE or its sublicensees comprising LICENSED SUBJECT MATTER pursuant to this AGREEMENT. 2.4 LICENSED SUBJECT MATTER shall mean inventions and discoveries covered by PATENT RIGHTS, TECHNOLOGY RIGHTS, LICENSEE SPONSORED TECHNOLOGY and/or IMPROVEMENTS. 2.5 LICENSED TERRITORY shall mean the entire world. 2.6 LICENSEE SPONSORED TECHNOLOGY shall have the meaning given to it under either of the SPONSORED RESEARCH AGREEMENTS, or any extension thereof. 2.7 NET SALES shall mean the gross revenues received by LICENSEE from the SALE of LICENSED PRODUCTS less sales and/or use taxes actually paid, import and/or export duties actually paid, outbound transportation prepaid or allowed, and amounts allowed or credited due to returns (not to exceed the original billing or invoice amount). -2- 4 2.8 PATENT RIGHTS shall mean BOARD's rights in information or discoveries covered by patents and/or patent applications, whether domestic or foreign, and all divisionals, continuations, continuations-in-part, reissues, reexaminations or extensions thereof, and any letters patent that issue thereon, for the inventions listed on Attachment A hereto and incorporated herein and for any inventions comprising LICENSEE SPONSORED TECHNOLOGY and/or IMPROVEMENTS, from time to time. 2.9 SALE or SOLD shall mean the transfer or disposition of a LICENSED PRODUCT for value to a party other than LICENSEE or an AFFILIATE. 2.10 SPONSORED RESEARCH AGREEMENT shall mean each of the SPONSORED RESEARCH AGREEMENTS of even date herewith between LICENSEE and MDA, copies of which are attached as Exhibit 1A and Exhibit 1B hereto. 2.11 AFFILIATE shall mean any business entity more than 50% owned by LICENSEE, any business entity which owns more than 50% of LICENSEE, or any business entity that is more than 50% owned by a business entity that owns more than 50% of LICENSEE. 2.12 TECHNOLOGY RIGHTS shall mean BOARD's rights in any technical information, know-how, process, procedure, composition, device, method, formula, protocol, technique, software, design, drawing or data relating to LICENSED SUBJECT MATTER, which is not covered by PATENT RIGHTS but which is necessary for practicing the invention at any time claimed in PATENT RIGHTS. 3. WARRANTY: SUPERIOR-RIGHTS 3.1 Except for the rights, if any, of the Government of the United States as set forth hereinbelow, BOARD represents and warrants that it is the owner of the entire right, title, and interest in and to LICENSED SUBJECT MATTER, and that it has the sole right to grant licenses thereunder, and that it has not granted licenses thereunder to any other entity that would restrict rights granted hereunder except as stated herein. 3.2 LICENSEE understands that the LICENSED SUBJECT MATTER may have been developed under a funding agreement with the Government of the United States of America and, if so, that the Government may have certain rights relative thereto. This AGREEMENT is explicitly made subject to the Government's rights under any such agreement and any applicable law or regulation, including P.L. 96-517 as amended by P.L. 98-620. To the extent that there is a conflict between any such agreement, applicable law or regulation and this AGREEMENT, the terms of such Government agreement, applicable law or regulation shall prevail. -3- 5 3.3 LICENSEE understands that BOARD can make no representations or guarantees as to the patentability or breadth of the inventions contained in the PATENT RIGHTS. LICENSEE also understands that BOARD can make no representations or guarantees as to whether or not there are any patents now held, or which will be held, by others or by BOARD in the LICENSED FIELD or whether or not the inventions contained in PATENT RIGHTS may infringe any other patents now held or that will be held by others or by BOARD. 4. LICENSE 4.1 BOARD hereby grants to LICENSEE a royalty-bearing, exclusive license under LICENSED SUBJECT MATTER to manufacture, have manufactured, use and/or sell LICENSED PRODUCT within LICENSED TERRITORY for use within LICENSED FIELD and shall extend to BOARD's undivided interest in any LICENSED SUBJECT MATTER developed during the term of this AGREEMENT and jointly owned by BOARD and LICENSEE. This grant shall also extend to LICENSEE SPONSORED TECHNOLOGY and IMPROVEMENTS. The grant shall be subject to Paragraph 3.2, hereinabove, the payment by LICENSEE to BOARD of all consideration as provided in this AGREEMENT (including the timely payment of all amounts due under the SPONSORED RESEARCH AGREEMENT as well as reimbursement of MDA's patent expenses), and shall be further subject to rights retained by BOARD and MDA to: (a) Publish the general scientific findings from research related to LICENSED SUBJECT MATTER, provided that LICENSEE shall be provided written notice of any such proposed publication at least sixty (60) days in advance thereof in order to determine whether BOARD should file a patent application with respect to such scientific findings, and no such publication shall occur until BOARD has adequately protected the patentability of such findings. (b) Use any information contained in LICENSED SUBJECT MATTER for research, teaching, unreimbursed experimental patient care, and other educationally related purposes. 4.2 LICENSEE shall have the right to extend the license granted herein to any AFFILIATE provided that such AFFILIATE consents to be bound by this AGREEMENT to the same extent as LICENSEE. 4.3 LICENSEE shall have the right to grant sublicenses consistent with this AGREEMENT provided that LICENSEE shall be responsible for the operations of its sublicensees relevant to this AGREEMENT as if such operations were carried out by LICENSEE. LICENSEE further agrees to deliver to BOARD a true and correct copy of each sublicense granted by LICENSEE, and any modification or termination thereof, within thirty (30) days after execution, modification, or termination. Upon termination of -4- 6 this AGREEMENT, any and all existing sublicenses granted by LICENSEE may, at BOARD's sole discretion, be assigned to BOARD. 4.4 BOARD shall have the right at any time after (i) three (3) years from the date of this Agreement or (ii) termination of both of the SPONSORED RESEARCH AGREEMENTS, whichever is later, to terminate the exclusivity of the license granted herein in any national political jurisdiction in which patent protection for the LICENSED SUBJECT MATTER is either being sought or is in effect within LICENSED TERRITORY if LICENSEE, within ninety (90) days after written notice from BOARD as to such intended termination, fails to provide written evidence that it has commercialized or is actively attempting to commercialize an invention hereunder. Evidence provided by LICENSEE that it has an ongoing and active research, development, manufacturing, marketing or licensing program as appropriate, directed toward production and sale of products based on the invention disclosed and claimed in PATENTS or incorporating TECHNOLOGY within such jurisdiction shall be deemed satisfactory evidence. BOARD agrees to negotiate in good faith with LICENSEE for adjusting terms under such a nonexclusive arrangement. 4.5 The parties hereto agree to annually update the schedule of patents and patent applications listed on Attachment A. 5. PAYMENTS AND REPORTS 5.1 In consideration of rights granted by BOARD to LICENSEE under this AGREEMENT, LICENSEE agrees to pay MDA the following: (a) A running royalty equal to [*] of NET SALES for LICENSED PRODUCTS SOLD by LICENSEE; (b) [*] of all royalties received by LICENSEE for SALES by a sublicensee, but in no event more than [*] of NET SALES for LICENSED PRODUCT SOLD by such sublicensee, received by LICENSEE from a sublicensee from SALES of LICENSED PRODUCT by such sublicensee; (c) [*] royalty on all cash considerations received by LICENSEE from a sublicensee as a result of a sublicense for Licensed Products in the form of licensing fees, marketing fees, milestone payments, bonus payments and the like, but excluding payments for equity and sponsored research; and (d) [*] royalty on all cash consideration received by LICENSEE from a sublicensee as a result of a sublicense for Licensed Products for sponsored research if, - --------------------- [*] Confidential Treatment Requested. -5- 7 and only if, the SPONSORED RESEARCH AGREEMENT for such Licensed Products is not in existence at the time any such payment is received. 5.2 During the Term of this AGREEMENT and for one (1) year thereafter, LICENSEE shall keep complete and accurate records of its and its sublicensees' SALES and NET SALES of LICENSED PRODUCTS to enable the royalties and other amounts payable hereunder to be determined. LICENSEE shall permit BOARD or its representatives, at BOARD's expense, to periodically examine its books, ledgers, and records during regular business hours for the purpose of and to the extent necessary to verify any report required under this AGREEMENT. In the event that the amounts due to BOARD are determined to have been underpaid by ten percent (10%) or more, LICENSEE shall pay the cost of such examination, and accrued interest at twelve percent (12%), or at the highest rate allowed by law, if lower, on which the amount which was deficient. 5.3 Within thirty (30) days after March 31, June 30, September 30, and December 31, LICENSEE shall deliver to BOARD and MDA a true and accurate report, giving such particulars of the business conducted by LICENSEE and its sublicensee, if any exist, during the preceding three (3) calendar months under this AGREEMENT as are pertinent to an account for payments hereunder. Such report shall include at least (a) the quantities of LICENSED SUBJECT MATTER that it has produced; (b) the total SALES, (c) the calculation of royalties thereon; and (d) the total royalties so computed and due BOARD. Simultaneously with the delivery of each such report, LICENSEE shall pay to BOARD the amount, if any, due for the period of such report. If no payments are due, it shall be so reported. 5.4 Upon the request of BOARD or MDA but not more often than once per calendar year, LICENSEE shall deliver to BOARD and MDA a written report as to LICENSEE's efforts and accomplishments during the preceding year in commercializing LICENSED SUBJECT MATTER in the LICENSED TERRITORY and its commercialization plans for the upcoming year. 5.5 All amounts payable hereunder by LICENSEE shall be payable in United States funds without deductions for taxes, assessments, fees, or charges of any kind. Checks shall be made payable to The University of Texas M.D. Anderson Cancer Center. 5.6 LICENSEE shall reimburse BOARD for all its out-of-pocket expenses thus far incurred in filing, prosecuting, enforcing and maintaining PATENT RIGHTS exclusively licensed hereunder, and shall pay all such future expenses so long as and in such countries as its license remains exclusive. LICENSEE shall reimburse all of BOARD's expenses thus far incurred upon execution of this AGREEMENT. To the extent such expenses are greater than $10,000, the excess over $10,000 shall be reimbursed within ninety (90) days after the EFFECTIVE DATE. Thereafter, MDA will -6- 8 invoice LICENSEE on a quarterly basis beginning July 1, 1994, with such invoices being due and payable within thirty (30) days thereafter. 5.7 No payments due or royalty rates under this AGREEMENT shall be reduced as the result of co-ownership of LICENSED SUBJECT MATTER by BOARD and LICENSEE. 5.8 Notwithstanding the above, MDA shall have the right, exercisable until such time as LICENSEE has completed a public offering of its equity securities under the Securities Act of 1933, as amended, pursuant to an effective registration statement filed with the Securities and Exchange Commission, to acquire shares of Common Stock of the LICENSEE in lieu of the payments due MDA under Section 5.1(c) above, in an amount determined by dividing the amount of payments otherwise due MDA under Section 5.1(c) by the sale price of the LICENSEE's equity securities stock determined by the Board of Directors of the LICENSEE in the most recent financing completed by LICENSEE prior to the date any such payments under Section 5.1(c) accrued. In the event that any payment under Section 5.1(c) shall be due and so long as MDA's right under this Section 5.8 shall exist, LICENSEE shall provide written notice to MDA of the amount of the payment due to MDA under Section 5.1(c) and the price of its most recent sale of preferred stock, together with the number of shares of Common Stock available to MDA hereunder. MDA shall have a period of thirty (30) days from the date of such notice to exercise its right hereunder, and shall provide written notice to LICENSEE prior to the expiration of such time period of its desire to exercise its rights hereunder. If MDA fails to provide such notice in such time period, or fails to exercise its rights hereunder, MDA shall receive such amounts owed under Section 5.1(c) in U.S. dollars, provided that such financing occurred within 12 months of the date such payments accrued. In the event that such financing occurred more than 12 months before the date such payments accrued, then in such event the fair market value of the LICENSEE's equity securities, as determined in the good faith opinion of the Board of Directors of the LICENSEE, shall be used instead of such sale price, provided, however, that if LICENSOR disagrees with such determination, LICENSOR shall be able to appoint an independent third party knowledgeable and experienced in such matters, reasonably acceptable to LICENSEE, to make its own determination of such fair market value, at the sole expense of LICENSOR, which determination shall govern and control for the purposes hereof. 5.9 LICENSEE agrees that it will not, during the term of this AGREEMENT, enter into a license agreement with another institution which license agreement licenses to the LICENSEE on an exclusive basis technology and/or patent rights on terms which are more favorable to such institution on an aggregate basis than the terms contained in this Agreement, taking into account all of the financial terms contained in any such license agreement, including but not limited to terms relating to the payment of royalties, -7- 9 sublicensee royalties, equity issued by LICENSEE to MDA or any such other institution as consideration for the license, milestone payments, annual license fees, minimum royalties and all other similar terms. 6. PATENTS AND INVENTIONS 6.1 LICENSEE shall reimburse BOARD for all reasonable future third party expenses incurred by BOARD in searching, filing, prosecuting and maintaining patent applications and patents relating to Patent Rights. If after consultation with LICENSEE it is agreed by BOARD and LICENSEE that a new patent application should be filed for LICENSED SUBJECT MATTER, BOARD will prepare and file appropriate patent applications, and LICENSEE will pay the reasonable third party cost of searching, preparing, filing, prosecuting and maintaining same. If LICENSEE notifies BOARD that it does not intend to pay the third party cost of an application, or if LICENSEE does not respond or make an effort to agree with BOARD on the disposition of rights of the subject invention, then BOARD may file such application at its own expense and LICENSEE shall have no rights to such invention other than TECHNOLOGY RIGHTS. BOARD shall provide LICENSEE with a copy of the application for which LICENSEE has paid the cost of filing, as well as copies of any documents received or filed during prosecution thereof. 6.2 The parties acknowledge that research in laboratories at MDA which are under the direct supervision of Mien Chie Hung, Ph.D. or Gabriel Lopez-Berestein, M.D. may result in discoveries and inventions which are in the field of the molecular biology of oncogenes and/or growth factors and lipid based gene, nucleic acid and/or oligonucleotide delivery technologies, are related to the LICENSED SUBJECT MATTER but not included therein, and did not result from the Sponsored Research Agreements attached hereto as Exhibit 1A and 1B (RELATED TECHNOLOGY). MDA hereby grants to the LICENSEE the right of first review with respect to the RELATED TECHNOLOGY (excluding, however, any RELATED TECHNOLOGY as to which any other commercial organization has rights therein) under the following terms: (a) MDA shall notify the LICENSEE in writing of the RELATED TECHNOLOGY and provide the LICENSEE with sufficient detail to evaluate the RELATED TECHNOLOGY. (b) The LICENSEE shall have ninety (90) days after such notification to evaluate the RELATED TECHNOLOGY and notify MDA in writing that the LICENSEE desires to license the RELATED TECHNOLOGY. (c) Upon notification by the LICENSEE of its desire to acquire rights in the RELATED TECHNOLOGY, the LICENSEE and MDA shall negotiate in good faith for a period not to exceed ninety (90) days, unless extended by mutual written agreement of MDA and the LICENSEE, in an effort to arrive at terms and conditions satisfactory to -8- 10 MDA and LICENSEE for the license by the LICENSEE of the RELATED TECHNOLOGY. (d) If MDA and the LICENSEE do not reach such agreement within said ninety (90) day period, MDA shall be free to deal with such RELATED TECHNOLOGY as it in its discretion may decide, and shall have no further obligations to the LICENSEE with respect to such RELATED TECHNOLOGY; provided that any subsequent license to a third party by MDA of such RELATED TECHNOLOGY shall be on terms no less favorable to MDA than were last offered by MDA to the LICENSEE in writing. 7. INFRINGEMENT BY THIRD PARTIES 7.1 LICENSEE shall have the obligation of enforcing at its expense any patent exclusively licensed hereunder against infringement by third parties and shall be entitled to retain recovery from such enforcement. LICENSEE shall pay MDA a royalty equal to the amount set out in Section 5.1(a) on any monetary recovery to the extent that such monetary recovery by LICENSEE is in excess of the cost thereof and to the extent held to be damages or a reasonable royalty in lieu thereof. In the event that LICENSEE does not file suit against a substantial infringer of such patents within six (6) months of knowledge thereof, then BOARD shall have the right to enforce any patent licensed hereunder on behalf of itself and LICENSEE (MDA retaining all recoveries from such enforcement). 7.2 In any suit or dispute involving an infringer, the parties shall cooperate fully, and upon the request and at the expense of the party bringing suit, the other party shall make available to the party bringing suit at reasonable times and under appropriate conditions all relevant personnel, records, papers, information, samples, specimens, and the like which are in its possession. 7.3 In the event of any infringement or likely infringement by any of the LICENSED SUBJECT MATTER or LICENSEE SPONSORED TECHNOLOGY of any third party's intellectual property (collectively, INFRINGING RIGHTS), BOARD, SYSTEM and MDA shall, together with LICENSEE, cooperate in good faith and on a mutual and reasonable basis, with each party responsible for its respective expenses: (a) To negotiate and settle any dispute with any such third party concerning the INFRINGING RIGHTS, and otherwise resolve any such infringement and secure LICENSEE's continued rights to the INFRINGING RIGHTS; and (b) To make a reasonable and equitable adjustment, if any, to the royalties paid or otherwise due under this AGREEMENT in respect of licenses or other rights obtained by LICENSEE from third parties under such INFRINGING RIGHTS in order for LICENSEE to continue to exercise rights granted under this AGREEMENT. -9- 11 8. PATENT MARKING 8.1 LICENSEE agrees that all packaging containing individual LICENSED PRODUCT(S), and documentation therefor, sold by LICENSEE, SUBSIDIARIES, and sublicensees of LICENSEE will be marked permanently and legibly with the number of the applicable patent(s) licensed hereunder in accordance with each country's patent laws, including Title 35, United States Code. 9. INDEMNIFICATION 9.1 LICENSEE shall hold harmless and indemnify BOARD, SYSTEM, MDA, its Regents, officers, employees, students, and agents from and against those damages finally awarded a third party in respect of any claims, demand, or causes of action whatsoever, including without limitation those arising on account of any injury or death of persons or damage to property caused by, or arising out of, or resulting from, the exercise or practice of the license granted hereunder by LICENSEE or its officers, employees, agents or representatives, except to the extent such claim, demand or cause of action arose from the negligence, recklessness or willful misconduct of BOARD, SYSTEM, MDA, its Regents, officers, employees and agents, for which BOARD, SYSTEM, MDA, to the extent authorized under the constitution and laws of the State of Texas, shall similarly hold harmless and indemnify LICENSEE, its officers, employees, agents or representatives. 9.2 In no event shall any party to this AGREEMENT be liable for indirect, consequential or similar damages, even if advised of the possibility of such liability. 10. USE OF BOARD AND COMPONENT'S NAME 10.1 LICENSEE shall not use the name of MDA, SYSTEM or BOARD without express written consent. Notwithstanding the above, LICENSEE may use the name of MDA, BOARD or SYSTEM when indicating, as a factual matter, that MDA is a licensor of LICENSEE under this AGREEMENT and only in connection with either or both of the following: (a) Communications associated with LICENSEE's financing activities; and (b) Communications (other than promotions and advertisements) directed to describing or responding to inquiries concerning the business, technology, products, services and associated activities of LICENSEE. LICENSEE may otherwise use the name of MDA, BOARD or SYSTEM when and as required by applicable law, rules and regulations or upon MDA's consent, which shall not be unreasonably withheld or delayed. -10- 12 11. CONFIDENTIAL INFORMATION 11.1 BOARD and LICENSEE each agree that all information contained in documents marked "confidential" which are forwarded to one by the other shall be received in strict confidence, used only for the purposes of this AGREEMENT, and not disclosed by the recipient party (except as required by law or court order), its agents or employees without the prior written consent of the other party, unless such information (a) was in the public domain at the time of disclosure, (b) later became part of the public domain through no act or omission of the recipient party, its employees, agents, successors or assigns, (c) was lawfully disclosed to the recipient party by a third party having the right to disclose it, (d) was already known by the recipient party at the time of disclosure, (e) was independently developed or (f) is required to be submitted to a government agency pursuant to any preexisting obligation. 11.2 Each party's obligation of confidence hereunder shall be fulfilled by using at least the same degree of care with the other party's confidential information as it uses to protect its own confidential information. This obligation shall exist while this AGREEMENT is in force and for a period of three (3) years thereafter. 12. ASSIGNMENT 12.1 Except in connection with sale of LICENSEE's business, this AGREEMENT may not be assigned by LICENSEE without the prior written consent of BOARD, which shall not be unreasonably withheld. 13. TERMS AND TERMINATION 13.1 The term of this AGREEMENT shall extend from the EFFECTIVE DATE set forth hereinabove to the full end of the term or terms for which PATENT RIGHTS have not expired and if only TECHNOLOGY RIGHTS are licensed and no PATENT RIGHTS are applicable, for a term of fifteen (15) years. 13.2 BOARD shall have the right at any time after (i) five (5) years from the date of this AGREEMENT or (ii) termination of both of the SPONSORED RESEARCH AGREEMENTS, whichever is later, to terminate the license in any national political jurisdiction if LICENSEE, within ninety days after written notice from BOARD of such intended termination, fails to provide written evidence that it has commercialized or is actively attempting to commercialize an invention licensed hereunder within such jurisdiction. Evidence provided by LICENSEE that it has an ongoing and active research, development, manufacturing, marketing or licensing program as appropriate, directed toward production and sale of products based on the invention disclosed and claimed in PATENTS or incorporating TECHNOLOGY within such jurisdiction shall be deemed satisfactory evidence. -11- 13 13.3 This AGREEMENT will earlier terminate in its entirety: (a) automatically if LICENSEE shall become bankrupt or insolvent and/or if the business of LICENSEE shall be placed in hand of a receiver, assignee, or trustee, whether by voluntary act of LICENSEE or otherwise; (b) (i) upon thirty (30) days' written notice from BOARD if LICENSEE shall breach or default on the payment obligations of Article V, or use of name obligations of Article X; or (ii) upon ninety (90) days' written notice if LICENSEE shall breach or default on any other obligation under this AGREEMENT; provided, however, LICENSEE may avoid such termination if before the end of such period LICENSEE notifies BOARD that such breach has been cured and states the manner of such cure; 13.4 Upon termination of this AGREEMENT for any cause, nothing herein shall be construed to release either party of any obligation matured prior to the effective date of such termination. LICENSEE may, after the effective date of such termination, sell all LICENSED PRODUCT that it may have on hand at the date of termination, provided that it pays earned royalty thereon as provided in this AGREEMENT. 13.5 Upon and effective as of the date of termination of this AGREEMENT pursuant to Paragraphs 13.2 and 13.3 above, LICENSEE agrees to grant to BOARD a royalty bearing license with the right to sublicense others with respect to improvements made solely by LICENSEE in the LICENSED SUBJECT MATTER on terms to be negotiated. 14. GENERAL 14.1 This AGREEMENT and the SPONSORED RESEARCH AGREEMENTS constitute the entire and only AGREEMENT between the parties for LICENSED SUBJECT MATTER and all other prior negotiations, representations, agreements and understandings are superseded hereby. No agreements altering or supplementing the terms hereof may be made except by means of a written document signed by the duly authorized representatives of the parties. 14.2 Any notice required by this AGREEMENT shall be given by prepaid, first class, certified mail, return receipt requested, addressed in the case of BOARD to: BOARD OF REGENTS The University of Texas System 201 West Seventh Street Austin, Texas 78701 ATTENTION: Office of General Counsel -12- 14 with copy to: The University of Texas M.D. Anderson Cancer Center Office of Technology Development 1020 Holcombe Boulevard, Suite 1405 Houston, Texas 77030 ATTENTION: William J. Doty or in the case of LICENSEE to: RGene Therapeutics, Inc. 2170 Buckthorne Place, Suite 170 The Woodlands, Texas 77350 ATTENTION: Martin P. Sutter or such other address as may be given from time to time under the terms of this notice provision. 14.3 LICENSEE shall comply with all applicable federal, state and local laws and regulations in connection with its activities pursuant to this AGREEMENT. 14.4 This AGREEMENT shall be construed and enforced in accordance with the laws of the United States of America and of the State of Texas. 14.5 Failure of a party to enforce a right under this AGREEMENT shall not act as a waiver of that right or the ability to later assert that right relative to the particular situation involved. 14.6 Headings included herein are for convenience only and shall not be used to construe this AGREEMENT. 14.7 If any provision of this AGREEMENT shall be found by a court to be void, invalid or unenforceable, the same shall be reformed to comply with applicable law or stricken if not so conformable, so as not to affect the validity or enforceability of this AGREEMENT. 14.8 This AGREEMENT may be executed in two counterparts, each of which shall be deemed an original but all of which, taken together, shall constitute one and the same instrument. -13- 15 IN WITNESS WHEREOF, parties hereto have caused their duly authorized representatives to execute this AGREEMENT. THE UNIVERSITY OF TEXAS BOARD OF REGENTS OF THE M.D. ANDERSON CANCER CENTER UNIVERSITY OF TEXAS SYSTEM By /s/ DAVID J. BACHRACH By /s/ THOMAS G. RICKS ----------------------------- ------------------- David J. Bachrach Thomas G. Ricks Executive Vice President Vice Chancellor for for Administration and Finance Asset Management APPROVED AS TO CONTENT: APPROVED AS TO FORM: By /s/ WILLIAM J. DOTY By /s/ DUDLEY R. DOBIE, JR. -------------------------- ---------------------------- William J. Doty Dudley R. Dobie, Jr. Director, Technology Development Manager, Intellectual Property RGENE THERAPEUTICS, INC. By /s/ MARTIN P. SUTTER ------------------------------ Martin P. Sutter Chairman of the Board -14- 16 ATTACHMENT A Patent and technology rights for U.S. Patent Application entitled: - Methods and Compositions for the Suppression of Neu Mediated Transformation Inventors: Mien-Chie Hung, Ph.D. and Di-hua Yu, M.D., Ph.D.; and - U.S. Serial No. 621,465, filed December 4, 1990, (MDA Ref: UTSC:203); and - Continuation-in-part Serial No. 070,410, filed June 4, 1993, (MDA Ref: UTSC:256); and - Continuation-in-part, Serial No. 162,406, filed December 3, 1993, (MDA Ref: UTSC:364) 17 EXHIBIT 1A SR94-02 SPONSORED RESEARCH AGREEMENT Agreement, made this 1st day of March, 1994, by and between The University of Texas M.D. Anderson Cancer Center (hereinafter referred to as "Cancer Center"), a component institution of The University of Texas System (hereinafter referred to as "System"), located in Houston, Texas, and RGene Therapeutics, Inc. (hereinafter referred to as "Sponsor"), located in The Woodlands, Texas. WITNESSETH: WHEREAS, Sponsor is the manufacturer or licensee of the lipid based gene and oligonucleotide delivery technologies which have potential utilization in patient care and treatment; and WHEREAS, Cancer Center has research facilities and situations which would allow investigation and study of "Targeting and Delivery of Oligonucleotides to Leukemic Cells" as described in Exhibit I (hereinafter referred to as "Research"), a copy of which is attached hereto and incorporated herein by reference; and WHEREAS, both Sponsor and Cancer Center consider it necessary and desirable to perform the Research; NOW, THEREFORE, the parties agree as follows: 1. EVALUATION Sponsor agrees to engage the services of Cancer Center as an independent contractor to perform the Research. The Research will be under the supervision of Gabriel Lopez-Berestein, M.D. (Principal Investigator) at Cancer Center, with the assistance of appropriate associates and colleagues at Cancer Center as may be required. 2. RESEARCH Cancer Center agrees as an independent contractor to conduct the Research. Such Research was originally approved by Cancer Center in accordance with Cancer Center policy and may be subsequently amended only in accordance with Cancer Center policy and the written agreement of Cancer Center and Sponsor as provided for in Article 16 hereinbelow. Cancer Center shall provide written report to Sponsor as requested, summarizing results of the Research, and all such reports, test data, information, etc. shall be the property of Sponsor. 18 3. INVENTION AND PATENTS (a) For all purposes herein, "Invention" shall mean any discovery, concept or idea whether or not patentable or copyrightable, which (i) arises out of work performed pursuant to the obligations of this Agreement; (ii) is conceived and reduced to practice during the term of the Agreement as defined in Article 14 hereinbelow and within the six (6) month period thereafter; and (iii) includes but is not limited to processes, methods, software, formulae, techniques, compositions of matter, devices, and improvements thereof and know-how relating thereto. Inventions made solely by the Principal Investigator and/or other Cancer Center personnel as identified in Article 1 hereinabove or agents of Cancer Center shall be the sole property of Cancer Center. Inventions made jointly by employees or agents of Cancer Center and Sponsor shall be jointly owned by Cancer Center and Sponsor. Inventions made solely by employees or agents of Sponsor shall be the sole property of Sponsor (b) In the event that an Invention is made, either solely by employees or agents of Cancer Center or jointly by employees or agents of Cancer Center and Sponsor, Cancer Center and Sponsor agree to give notice of such Invention to each other within thirty (30) days of the identification of such Invention. Within thirty (30) days of notice of Invention, Cancer Center and Sponsor will thereupon exert their best reasonable efforts in cooperation with each other to investigate, evaluate and determine to the mutual satisfaction of both parties, the disposition of rights to the Invention, including whether, by whom, and where any patent applications are to be filed, subject to the terms of this Article 3. (c) If, after consultation with Sponsor, it is agreed by the parties that a patent application should be filed, Cancer Center will prepare and file appropriate United States and foreign patent applications on Inventions made under this Agreement and owned by Cancer Center, in whole or in part, and Sponsor will pay the cost of preparing, filing and maintenance thereof. If Sponsor notifies Cancer Center that it does not intend to pay the costs of an application, or if Sponsor does not respond or make an effort to agree with Cancer Center on the disposition of rights to the Invention, then Cancer Center may file such application at its own expense, and Sponsor shall have no rights to such Invention. Cancer Center will provide Sponsor a copy of the application filed for which Sponsor has paid the cost of filing, as well as copies of any documents received or filed during prosecution thereof. Sponsor agrees to maintain any such application in confidence until it is published by Cancer Center or by the respective patent office. (d) Any Invention made hereunder which is in the field of the molecular biology of oncogenes and/or growth factors and/or nucleic acid, lipid based gene, and/or oligonucleotide delivery technology and which results from the research described in this Agreement ("Licensee Sponsored Technology") shall be automatically licensed to Sponsor pursuant to the terms of the Patent and Technology License Agreement dated -2- 19 March 1, 1994 between Cancer Center, the Board of Regents of The University of Texas System and Sponsor (the "Patent and Technology License Agreement"), a copy of which is attached hereto and incorporated herein as Exhibit II, without any further action. This shall apply with like result to any Invention which constitutes an Improvement (as defined in the Patent and Technology License Agreement). (e) Any Invention made hereunder which is outside of the field identified in Article 3(d) shall be subject to an option to Sponsor to negotiate and acquire an exclusive, worldwide, royalty-bearing license to commercialize such Invention (as well as patent applications, patents and copyrights thereon), provided that Sponsor shall pay all costs and expenses associated with patent and copyright filing, prosecution, issuance, and maintenance relating thereto. Sponsor shall have ninety (90) days from the date of notice of Invention from Cancer Center pursuant to Article 3(b) hereinabove, to give written notice to Cancer Center exercising said option. In the event that Sponsor elects to exercise its option to negotiate and acquire such a license in the time and manner provided hereinabove, the parties agree to enter into good faith negotiations regarding the terms and conditions of said license and further agree to negotiate license fee rates and other payments which are fair and reasonable to both parties. (f) In the event that parties fail to reach an agreement regarding the terms and conditions of said license, within ninety (90) days after Sponsor's notification to Cancer Center of Sponsor's exercise of said option pursuant to Article 3(e) hereinabove, Cancer Center shall have the right to enter into license agreements concerning the same Inventions with third parties on terms no less favorable to Cancer Center than were last offered in writing by Sponsor. 4. CONFIDENTIALITY Because Cancer Center and Sponsor will be cooperating with each other in this Research, and because each may reveal to the other in the course of this Research certain confidential information, Cancer Center and Sponsor agree to hold any confidential information which (a) is obtained during the course of and as a result of this work and (b) is related thereto and (c) is marked as "CONFIDENTIAL" in confidence, and each party will not disclose same to any third party without the express written consent of the other party to this Agreement. This requirement shall remain in force during the term of this Agreement and for a period of three (3) years following completion of work under this Agreement. Nothing in this paragraph shall in any way restrict the rights of either Cancer Center or Sponsor to use, disclose or otherwise deal with any information which: (a) Can be demonstrated to have been in public domain as of the effective date of this Agreement or comes into the public domain through the term of this Agreement through no act of the recipient; or -3- 20 (b) Can be demonstrated to have been known to the recipient prior to the execution of this Agreement; or (c) Can be demonstrated to have been rightfully received by the recipient after disclosure under this Agreement from a third party who did not require the recipient to hold it in confidence or limit its use and who did not acquire it, directly or indirectly, under obligation of confidentiality to the disclosing party; or (d) Shall be required for disclosure to federal regulatory agencies pursuant to approval for use; or (e) Is independently invented by researchers of the recipient, which in the case of Cancer Center includes System, who have not had access to the information provided to the recipient hereunder. Except as permitted under the Patent and Technology License Agreement, nothing herein is intended to give Sponsor the right to use for any purpose preexisting confidential information of Cancer Center. Notwithstanding the confidentiality obligations of this Agreement, nothing herein shall prevent Cancer Center and any other component of System from using any information generated hereunder for ordinary research and educational purposes of a university. 5. PUBLICATION RIGHTS Notwithstanding the provisions of Article 4 of this Agreement, Cancer Center may publish scientific papers relating to the collaborative research performed under this Agreement. In the event that Cancer Center wishes to publish, Cancer Center shall notify Sponsor of its desire to publish at least thirty (30) days in advance of publication and shall furnish to Sponsor a written description of the subject matter of the publication in order to permit Sponsor to review and comment thereon. Sponsor shall notify Cancer Center IN writing within thirty (30) days of receipt of such draft whether such draft contains information deemed to be confidential under the provisions of Article 4, or information that if published within thirty (30) days would have an adverse effect on a patent application in which Sponsor owns full or part interest, or intends to obtain an interest from Cancer Center pursuant to this Agreement. In the latter case Sponsor has the right to request a delay and Cancer Center agrees to delay said publication for a period not exceeding ninety (90) days. In any such notification, Sponsor shall indicate with specificity to what manner and degree Cancer Center may disclose said information. Cancer Center shall have the final authority to determine the scope and content of any publication, provided that such authority shall be exercised with reasonable regard for the commercial interests of Sponsor. -4- 21 6. PUBLICITY Cancer Center acknowledges Sponsor's intention to distribute periodically informational releases and announcements to the news media regarding the progress of research hereunder. Sponsor shall not release such materials containing the name of Cancer Center or any of its employees without prior written approval by an authorized representative of Cancer Center, and said approval shall not be unreasonably withheld. Should Cancer Center reject the news release, Cancer Center and Sponsor agree to discuss the reasons for Cancer Center's rejection, and every effort shall be made to develop an appropriate informational news release within the bounds of accepted academic practices. Sponsor reserves the same right in the event that Cancer Center desires to distribute a news release concerning the research program. Nothing herein shall be construed as prohibiting Cancer Center or Sponsor from reporting on this study to a governmental agency or as prohibiting Sponsor from using the name of Cancer Center or its employees, but only when indicating, as a factual matter, that Sponsor is sponsoring research at Cancer Center under this Agreement and only in connection with either or both of the following: (a) communications associated with Sponsor's financing activities; and (b) communications (other than promotions and advertisements) directed to describing or responding to inquiries concerning the business, technology products, services and associated activities of Sponsor. Sponsor may otherwise use the name of Cancer Center when and as required by applicable law, rules and regulations, or upon Cancer Center's consent, which shall not be unreasonably withheld or delayed. 7. RESPONSIBILITY The parties each agree to assume individual responsibility for the actions and omissions of their respective employees, agents and assigns in conjunction with this evaluation. 8. INDEPENDENT CONTRACTOR Sponsor will not have the right to direct or control the activities of Cancer Center in performing the services provided herein, and Cancer Center shall perform services hereunder only as an independent contractor, and nothing herein contained shall be construed to be inconsistent with this relationship or status. Under no circumstances shall Cancer Center be considered to be an employee or agent of Sponsor. This Agreement shall not constitute, create or in any way be interpreted as a joint venture, partnership or formal business organization of any kind. 9. TITLE TO EQUIPMENT Cancer Center shall retain title to all equipment purchased and/or fabricated by it with funds provided by Sponsor under this Agreement. -5- 22 10. SURVIVORSHIP The provisions of Articles 3, 4, 5, 6, and 12 shall survive any expiration or termination of this Agreement. 11. ASSIGNMENT This Agreement may not be assigned by either party without the prior written consent of the other party; provided, however, that Sponsor may assign this Agreement to any purchaser or transferee of all or substantially all of Sponsor's business upon prior written notice to Cancer Center. 12. INDEMNIFICATION Cancer Center shall, to the extent authorized under the Constitution and the laws of the State of Texas, indemnify and hold Sponsor and its officers, directors, employees, agents and stockholders harmless from any and all liability resulting from the negligent acts or omissions of Cancer Center, its agents or employees pertaining to the activities to be carried out pursuant to the obligations of this Agreement; provided, however, that Cancer Center shall not hold Sponsor harmless from claims arising out of the negligence of Sponsor, its officers, agents or any person or entity not subject to Cancer Center's supervision or control. Sponsor shall indemnify and hold harmless System, Cancer Center, their regents, officers, agents and employees from any liability or loss resulting from judgments or claims against them arising out of the activities to be carried out pursuant to the obligations of this Agreement or the use by Sponsor of the results of the Research, provided, however, that the following is excluded from Sponsor's obligation to indemnify and hold harmless: (a) the negligent failure of Cancer Center to comply with any applicable governmental requirements; or (b) the negligence or willful malfeasance by a regent, officer, agent or employee of Cancer Center or System. 13. AWARD Sponsor agrees to pay Cancer Center a fee of [*] for expenses and other related costs incurred in conjunction with the Research. This fee, as shown by approximate category of expense in the attached Exhibit I which is attached hereto and is incorporated - --------------- [*] Confidential Treatment Requested. -6- 23 herein by reference, for information only, shall be payable in equal installments of [*] each by Sponsor to Cancer Center. The first such installment shall be due within thirty (30) days of the date of execution of this Agreement. The subsequent installments shall be due and payable on a quarterly basis. 14. BASIC TERM This Agreement shall become effective as of the date first hereinabove written and unless earlier terminated as hereinafter provided, shall continue in force for a period of two (2) years after the same, except as otherwise provided herein. 15. DEFAULT AND TERMINATION In the event that either party to this Agreement shall be in default of any of its material obligations hereunder and shall fail to remedy such default within thirty (30) days after receipt of written notice thereof, the party not in default shall have the option of terminating this Agreement by giving written notice thereof, notwithstanding anything to the contrary contained in this Agreement. Termination of this Agreement shall not affect the rights and obligations of the parties which accrued prior to the effective date of termination. Sponsor shall pay Cancer Center for all reasonable expenses incurred or committed to be expended as of the effective termination date, subject to the maximum amount as specified in Article 13. 16. ENTIRE AGREEMENT The parties acknowledge that this Agreement and Exhibit I and Exhibit II (the Patent and Technology License Agreement) attached hereto represent the sole and entire Agreement between the parties hereto pertaining to the Research and that such supersedes all prior Agreements, understandings, negotiations and discussions between the parties regarding same, whether oral or written. There are no warranties, representations or other Agreements between the parties in connection with the subject matter hereof except as specifically set forth herein. No supplement, amendment, alteration, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the parties hereto. 17. REFORM OF AGREEMENT If any provision of this Agreement is, becomes or is deemed invalid, illegal or unenforceable in any United States jurisdiction, such provision shall be deemed amended to conform to applicable laws so as to be valid and enforceable; or if it cannot be so - --------------- [*] Confidential Treatment Requested. -7- 24 amended without materially altering the intention of the parties, it shall be stricken, and the remainder of this Agreement shall remain in full force and effect. 18. NOTICES Any notices, statements or reports required by this Agreement shall be considered given if sent by United States Certified Mail, postage prepaid and addressed as follows: If to Cancer Center: Michael J. Best Chief Financial Officer The University of Texas M.D. Anderson Cancer Center 1515 Holcombe Blvd. Houston, Texas 77030 If to Sponsor: Martin P. Sutter President RGene Therapeutics, Inc. 2170 Buckthorne Place, Suite 170 The Woodlands, Texas 77380 19. CAPTIONS The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement. 20. GOVERNING LAW This Agreement shall be governed and interpreted in accordance with the substantive laws of the State of Texas and with applicable laws of the United States of America. IN WITNESS WHEREOF, Cancer Center and Sponsor entered into this Agreement effective as of the date first hereinabove written and have executed two (2) originals each of which are of equal dignity. RGENE THERAPEUTICS, INC. THE UNIVERSITY OF TEXAS M.D. ANDERSON CANCER CENTER BY: /s/ MARTIN P. SUTTER BY: /s/ MICHAEL J. BEST ------------------------- ------------------------- -8- 25 TITLE: Chairman Michael J. Best Chief Financial Officer I have read this agreement and understand CONTENT APPROVED: my obligations hereunder: BY: /s/ GABRIEL LOPEZ-BERESTEIN, M.D. BY: /s/ DONNA S. GILBERG --------------------------------- --------------------------- Gabriel Lopez-Berestein, M.D. Donna S. Gilberg, CPA Principal Investigator Manager, Sponsored Programs FORM APPROVED: BY: /s/ MARTIN N. RABER, M.D. BY: /s/ MATTHEW E. BURR ------------------------- --------------------------- Martin N. Raber, M.D. Matthew E. Burr, J.D. Acting Head, Div. of Medicine Legal Services Officer Make Payment To: The University of Texas M.D. Anderson Cancer Center Attn: Manager, Sponsored Programs P.O. Box 297402 Houston, TX 77297 Tax I.D. 74 6001118 A1 -9- 26 EXHIBIT 1B SR94-03 SPONSORED RESEARCH AGREEMENT Agreement, made this 1st day of March, 1994, by and between The University of Texas M.D. Anderson Cancer Center (hereinafter referred to as "Cancer Center"), a component institution of The University of Texas System (hereinafter referred to as "System"), located in Houston, Texas, and RGene Therapeutics, Inc. (hereinafter referred to as "Sponsor"), located in The Woodlands, Texas. WITNESSETH: WHEREAS, Sponsor is the manufacturer or licensee of the HER-2/neu gene which has potential utilization in patient care and treatment; and WHEREAS, Cancer Center has research facilities and situations which would allow investigation and study of "HER-2/neu Targeting Cancer Therapy" as described in Exhibit I (hereinafter referred to as "Research"), a copy of which is attached hereto and incorporated herein by reference; and WHEREAS, both Sponsor and Cancer Center consider it necessary and desirable to perform the Research; NOW, THEREFORE, the parties agree as follows: 1. EVALUATION Sponsor agrees to engage the services of Cancer Center as an independent contractor to perform the Research. The Research will be under the supervision of Mien-Chie Hung, Ph.D. (Principal Investigator) at Cancer Center, with the assistance of appropriate associates and colleagues at Cancer Center as may be required. 2. RESEARCH Cancer Center agrees as an independent contractor to conduct the Research. Such Research was originally approved by Cancer Center in accordance with Cancer Center policy and may be subsequently amended only in accordance with Cancer Center policy and the written agreement of Cancer Center and sponsor as provided for in Article 16 herein below. Cancer Center shall provide written report to Sponsor as requested, summarizing results of the Research, and all such reports, test data, information, etc. shall be the property of Sponsor. 27 3. INVENTION AND PATENTS (a) For all purposes herein, "Invention" shall mean any discovery, concept or idea whether or not patentable or copyrightable, which (i) arises out of work performed pursuant to the obligations of this Agreement; (ii) is conceived and reduced to practice during the term of the Agreement as defined in Article 14 hereinbelow and within the six (6) month period thereafter; and (iii) includes but is not limited to processes, methods, software, formulae, techniques, compositions of matter, devices, and improvements thereof and know-how relating thereto. Inventions made solely by the Principal Investigator and/or other Cancer Center personnel as identified in Article 1 hereinabove or agents of Cancer Center shall be the sole property of Cancer Center. Inventions made jointly by employees or agents of Cancer Center and Sponsor shall be jointly owned by Cancer Center and Sponsor. Inventions made solely by employees or agents of Sponsor shall be the sole property of Sponsor. (b) In the event that an Invention is made, either solely by employees or agents of Cancer Center or jointly by employees or agents of Cancer Center and Sponsor, Cancer Center and Sponsor agree to give notice of such Invention to each other within thirty (30) days of the identification of such Invention. Within thirty (30) days of notice of Invention, Cancer Center and Sponsor will thereupon exert their best reasonable efforts in cooperation with each other to investigate, evaluate and determine to the mutual satisfaction of both parties, the disposition of rights to the invention, including whether, by whom, and where any patent applications are to be filed, subject to the terms of this Article 3. (c) If, after consultation with Sponsor, it is agreed by the parties that a patent application should be filed, Cancer Center will prepare and file appropriate United States and foreign patent applications on Inventions made under this Agreement and owned by Cancer Center, in whole or in part, and Sponsor will pay the cost of preparing, filing and maintenance thereof. If Sponsor notifies Cancer Center that it does not intend to pay the costs of an application, or if Sponsor does not respond or make an effort to agree with Cancer Center on the disposition of rights to the invention, then Cancer Center may file such application at its own expense, and Sponsor shall have no rights to such Invention. Cancer Center will provide Sponsor a copy of the application filed for which Sponsor has paid the cost of filing, as well as copies of any documents received or filed during prosecution thereof. Sponsor agrees to maintain any such application in confidence until it is published by Cancer Center or by the respective patent office. (d) Any Invention made hereunder which is in the field of the molecular biology of oncogenes and/or growth factors and/or nucleic acid, lipid based gene, and/or oligonucleotide delivery technology and which results from the research described in this Agreement ("Licensee Sponsored Technology") shall be automatically licensed to Sponsor pursuant to the terms of the Patent and Technology License Agreement dated -2- 28 March 1, 1994 between Cancer Center, the Board of Regents of The University of Texas System and Sponsor (the "Patent and Technology License Agreement"), a copy of which is attached hereto and incorporated herein as Exhibit II, without any further action. This shall apply with like result to any Invention which constitutes an Improvement (as defined in the Patent and Technology License Agreement). (e) Any Invention made hereunder which is outside of the field identified in Article 3(d) shall be subject to an option to Sponsor to negotiate and acquire an exclusive, worldwide, royalty-bearing license to commercialize such Invention (as well as patent applications, patents and copyrights thereon), provided that Sponsor shall pay all costs and expenses associated with patent and copyright filing, prosecution, issuance, and maintenance relating thereto. Sponsor shall have ninety (90) days from the date of notice of Invention from Cancer Center pursuant to Article 3(b) hereinabove, to give written notice to Cancer Center exercising said option. In the event that Sponsor elects to exercise its option to negotiate and acquire such a license in the time and manner provided hereinabove, the parties agree to enter into good faith negotiations regarding the terms and conditions of said license and further agree to negotiate license fee rates and other payments which are fair and reasonable to both parties. (f) In the event that parties fail to reach an agreement regarding the terms and conditions of said license, within ninety (90) days after Sponsor's notification to Cancer Center of Sponsor's exercise of said option pursuant to Article 3(e) hereinabove, Cancer Center shall have the right to enter into license agreements concerning the same Inventions with third parties on terms no less favorable to Cancer Center than were last offered in writing by Sponsor. 4. CONFIDENTIALITY Because Cancer Center and Sponsor will be cooperating with each other in this Research, and because each may reveal to the other in the course of this Research certain confidential information, Cancer Center and Sponsor agree to hold any confidential information which (a) is obtained during the course of and as a result of this work and (b) is related thereto and (c) is marked as "CONFIDENTIAL" in confidence, and each party will not disclose same to any third party without the express written consent of the other party to this Agreement. This requirement shall remain in force during the term of this Agreement and for a period of three (3) years following completion of work under this Agreement. Nothing in this paragraph shall in any way restrict the rights of either Cancer Center or Sponsor to use, disclose or otherwise deal with any information which: (a) Can be demonstrated to have been in public domain as of the effective date of this Agreement or comes into the public domain through the term of this Agreement through no act of the recipient; or -3- 29 (b) Can be demonstrated to have been known to the recipient prior to the execution of this Agreement; or (c) Can be demonstrated to have been rightfully received by the recipient after disclosure under this Agreement from a third party who did not require the recipient to hold it in confidence or limit its use and who did not acquire it, directly or indirectly, under obligation of confidentiality to the disclosing party; or (d) Shall be required for disclosure to federal regulatory agencies pursuant to approval for use; or (e) Is independently invented by researchers of the recipient, which in the case of Cancer Center includes System, who have not had access to the information provided to the recipient hereunder; or (f) Is disclosed pursuant to any research grant relating to technology included within the field from a noncommercial granting entity such as grants from the Department of Health and Human services and other governmental and private nonprofit agencies. Except as permitted under the Patent and Technology License Agreement, nothing herein is intended to give Sponsor the right to use for-any purpose pre-existing confidential information of Cancer Center. Notwithstanding the confidentiality obligations of this Agreement, nothing herein shall prevent Cancer Center and any other component of System from using any information generated hereunder for ordinary research and educational purposes of a university. 5. PUBLICATION RIGHTS Notwithstanding the provisions of Article 4 of this Agreement, Cancer Center may publish scientific papers relating to the collaborative research performed under this Agreement. In the event that Cancer Center wishes to publish, Cancer Center shall notify Sponsor of its desire to publish at least thirty (30) days in advance of publication and shall furnish to Sponsor a written description of the subject matter of the publication in order to permit Sponsor to review and comment thereon. Sponsor shall notify Cancer Center in writing within thirty (30) days of receipt of such draft whether such draft contains information deemed to be confidential under the provisions of Article 4, or information that if published within thirty (30) days would have an adverse effect on a patent application in which Sponsor owns full or part interest, or intends to obtain an interest from Cancer Center pursuant to this Agreement. In the latter case Sponsor has the right to request a delay and Cancer Center agrees to delay said publication for a period not exceeding ninety (90) days. In any such notification, Sponsor shall indicate with specificity to what manner and degree Cancer Center may disclose said information. Cancer Center shall have the final authority to determine the scope and content of any -4- 30 publication, provided that such authority shall be exercised with reasonable regard for the commercial interests of Sponsor. 6. PUBLICITY Cancer Center acknowledges Sponsor's intention to distribute periodically informational releases and announcements to the news media regarding the progress of research hereunder. Sponsor shall not release such materials containing the name of Cancer Center or any of its employees without prior written approval by an authorized representative of Cancer Center, and said approval shall not be unreasonably withheld. Should Cancer Center reject the news release, Cancer Center and Sponsor agree to discuss the reasons for Cancer Center's rejection, and every effort shall be made to develop an appropriate informational news release within the bounds of accepted academic practices. Sponsor reserves the same right in the event that Cancer Center desires to distribute a news release concerning the research program. Nothing herein shall be construed as prohibiting Cancer Center or Sponsor from reporting on this study to a governmental agency or as prohibiting Sponsor from using the name of Cancer Center or its employees, but only when indicating, as a factual matter, that Sponsor is sponsoring research at Cancer Center under this Agreement and only in connection with either or both of the following: (a) communications associated with Sponsor's financing activities; and (b) communications (other than promotions and advertisements) directed to describing or responding to inquiries concerning the business, technology products, services and associated activities of Sponsor. Sponsor may otherwise use the name of Cancer Center when and as required by applicable law, rules and regulations, or upon Cancer Center's consent, which shall not be unreasonably withheld or delayed. 7. RESPONSIBILITY The parties each agree to assume individual responsibility for the actions and omissions of their respective employees, agents and assigns in conjunction with this evaluation. 8. INDEPENDENT CONTRACTOR Sponsor will not have the right to direct or control the activities of Cancer Center in performing the services provided herein, and Cancer Center shall perform services hereunder only as an independent contractor, and nothing herein contained shall be construed to be inconsistent with this relationship or status. Under no circumstances shall Cancer Center be considered to be an employee or agent of Sponsor. This Agreement shall not constitute, create or in any way be interpreted as a joint venture, partnership or formal business organization of any kind. -5- 31 9. TITLE TO EQUIPMENT Cancer Center shall retain title to all equipment purchased and/or fabricated by it with funds provided by Sponsor under this Agreement. 10. SURVIVORSHIP The provisions of Articles 3, 4, 5, 6, and 12 shall survive any expiration or termination of this Agreement. 11. ASSIGNMENT This Agreement may not be assigned by either party without the prior written consent of the other party; provided, however, that Sponsor may assign this Agreement to any purchaser or transferee of all or substantially all of Sponsor's business upon prior written notice to Cancer Center. 12. INDEMNIFICATION Cancer Center shall, to the extent authorized under the Constitution and the laws of the State of Texas, indemnify and hold Sponsor and its officers, directors, employees, agents and stockholders harmless from any and all liability resulting from the negligent acts or omissions of Cancer Center, its agents or employees pertaining to the activities to be carried out pursuant to the obligations of this Agreement; provided, however, that Cancer Center shall not hold Sponsor harmless from claims arising out of the negligence of Sponsor, its officers, agents or any person or entity not subject to Cancer Center's supervision or control. Sponsor shall indemnify and hold harmless System, Cancer Center, their regents, officers, agents and employees from any liability or loss resulting from judgments or claims against them arising out of the activities to be carried out pursuant to the obligations of this Agreement or the use by Sponsor of the results of the Research, provided, however, that the following is excluded from Sponsor's obligation to indemnify and hold harmless: (a) the negligent failure of Cancer Center to comply with any applicable governmental requirements; or (b) the negligence or willful malfeasance by a regent, officer, agent or employee of Cancer Center or System. -6- 32 13. AWARD Sponsor agrees to pay Cancer Center a fee of [*] for expenses and other related costs incurred in conjunction with the Research. This fee, as shown by approximate category of expense in Exhibit I which is attached hereto and is incorporated herein by reference, for information only, shall be payable in equal installments of [*] each by Sponsor to Cancer Center. The first such installment shall be due within thirty (30) days of the date of execution of this Agreement. The subsequent installments shall be due and payable on a quarterly basis. 14. BASIC TERM This Agreement shall become effective as of the date first hereinabove written and unless earlier terminated as hereinafter provided, shall continue in force for a period of two (2) years after the same, except as otherwise provided herein. 15. DEFAULT AND TERMINATION In the event that either party to this Agreement shall be in default of any of its material obligations hereunder and shall fail to remedy such default within thirty (30) days after receipt of written notice thereof, the party not in default shall have the option of terminating this Agreement by giving written notice thereof, notwithstanding anything to the contrary contained in this Agreement. Termination of this Agreement shall not affect the rights and obligations of the parties which accrued prior to the effective date of termination. Sponsor shall pay Cancer Center for all reasonable expenses incurred or committed to be expended as of the effective termination date, subject to the maximum amount as specified in Article 13. 16. ENTIRE AGREEMENT The parties acknowledge that this Agreement, Exhibit I and Exhibit II (the patent and Technology License Agreement) attached hereto represent the sole and entire Agreement between the parties hereto pertaining to the Research and that such supersedes all prior Agreements, understandings, negotiations and discussions between the parties regarding same, whether oral or written. There are no warranties, representations or other Agreements between the parties in connection with the subject matter hereof except as specifically set forth herein. No supplement, amendment, alteration, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the parties hereto. - --------------- [*] Confidential Treatment Requested. -7- 33 17. REFORM OF AGREEMENT If any provision of this Agreement is, becomes or is deemed invalid, illegal or unenforceable in any United States jurisdiction, such provision shall be deemed amended to conform to applicable laws so as to be valid and enforceable; or if it cannot be so amended without materially altering the intention of the parties, it shall be stricken, and the remainder of this Agreement shall remain in full force and effect. 18. NOTICES Any notices, statements or reports required by this Agreement shall be considered given if sent by United States Certified Mail, postage prepaid and addressed as follows: If to Cancer Center: Michael J. Best Chief Financial Officer The University of Texas M.D. Anderson Cancer Center 1515 Holcombe Blvd. Houston, Texas 77030 If to Sponsor: Martin P. Sutter President RGene Therapeutics, Inc. 2170 Buckthorne Place, Suite 170 The Woodlands, Texas 77380 19. CAPTIONS The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement. 20. GOVERNING LAW This Agreement shall be governed and interpreted in accordance with the substantive laws of the State of Texas and with applicable laws of the United States of America. -8- 34 IN WITNESS WHEREOF, Cancer Center and Sponsor entered into this Agreement effective as of the date first hereinabove written and have executed two (2) originals each of which are of equal dignity. RGENE THERAPEUTICS, INC. THE UNIVERSITY OF TEXAS M.D. ANDERSON CANCER CENTER BY: /s/ MARTIN P. SUTTER BY: /s/ MICHAEL J. BEST --------------------------- --------------------------- TITLE: Chairman Michael J. Best Chief Financial Officer I have read this agreement and understand CONTENT APPROVED: my obligations hereunder: BY: /s/ MIEN-CHIE HUNG BY: /s/ DONNA S. GILBERG --------------------------- --------------------------- Mien-Chie Hung, Ph.D. Donna S. Gilberg, CPA Principal Investigator Manager, Sponsored Programs FORM APPROVED: BY: /s/ GARTH L. NICOLSON BY: /s/ MATTHEW E. BURR --------------------------- --------------------------- Garth L. Nicolson, Ph.D. Matthew E. Burr, J.D. Chairman, Dept. of Tumor Biology Legal Services Officer Make Payment To: The University of Texas M.D. Anderson Cancer Center Attn: Manager, Sponsored Programs P.O. Box 297402 Houston, TX 77297 Tax I.D. 74 6001118 A1 -9- 35 EXHIBIT 2 RGENE THERAPEUTICS, INC. GABRIEL LOPEZ-BERESTEIN STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this "Agreement") dated February 14, 1994 is entered into by and between RGene Therapeutics, Inc., a Delaware corporation (the "Company"), and Gabriel Lopez-Berestein (the "Buyer"). W I T N E S S E T H: WHEREAS, the Company desires to sell certain shares of common stock, $.001 par value, of the Company (the "Common Stock") to the Buyer; and WHEREAS, the Buyer desires to purchase certain shares of Common Stock from the Company; and WHEREAS, the Buyer and the Company desire that the Buyer grant to the Company, and under certain circumstances to holders of the Company's Preferred Stock or other securities issued by the Company to investors (the "Investors"), options to repurchase certain shares of Common Stock purchased by the Buyer on the terms and conditions set forth; NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations contained herein, the parties agree as follows: 1. PURCHASE AND SALE OF SHARES 1.1 PURCHASE AND SALE OF SHARES Subject to the terms and conditions of this Agreement and in consideration of the payment of the Purchase Price (as defined below) by the Buyer to the Company at the Closing (as defined below), the Company agrees to sell to the Buyer, and the Buyer agrees to purchase from the Company, [*] shares of Common Stock (the "Shares"). - --------------- [*] Confidential Treatment Requested. 36 1.2 PURCHASE PRICE The Purchase Price payable to the Company shall be $[*]per Share, payable in cash at the Closing. 1.3 CLOSING The closing for the sale of the Shares to the Buyer shall occur on or before February 15, 1994, or at such other date and time as the parties may agree (the "Closing"). Concurrent with the payment by Buyer of the Purchase Price, or within a reasonable time thereafter, the Company shall deliver to Buyer a certificate or certificates representing the number of Shares as set forth in Section 1.1 hereof, in the name of the Buyer. 2. REPRESENTATIONS AND WARRANTIES To induce the Company to deliver the Shares to the Buyer, the Buyer represents and warrants to the Company: (a) The Buyer is acquiring the Shares for his own account as principal, for investment purposes only, and not with a view to, or for, resale or distribution, and no other person has a direct or indirect beneficial interest in the Shares; (b) The Buyer has not offered any of the Shares for resale and has no present intention of dividing his interest with others or of reselling or otherwise disposing of any of the Shares; (c) Any information the Buyer has furnished to the Company with respect to the Buyer's status as a sophisticated or accredited investor, his business experience or financial position is correct; (d) The financial capacity of the Buyer is such that the investment in the Shares is not material to his total financial capacity; the Buyer has the financial ability to bear the economic risk of his investment, has adequate means for providing for his current needs and personal contingencies and has no need for liquidity with respect to his investment in the Shares; - --------------- [*] Confidential Treatment Requested. -2- 37 (e) The Buyer considers himself to be a sophisticated investor and has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment in the Shares; (f) The Buyer has been furnished with all information concerning the Shares and the Company that he desires; (g) The Buyer has been given the opportunity to ask questions of, and receive answers from, the Company with respect to the Shares, concerning the terms and conditions of the offering and other matters pertaining to this investment, and has been given the opportunity to obtain such additional information necessary to verify the accuracy of the information provided to him by the Company in order for him to evaluate the merits and risks of investment in the Shares to the extent that the Company possessed such information or could acquire it without unreasonable effort or expense; and (h) The Buyer is not relying on the Company with respect to any economic considerations of the Buyer related to this investment. In regard to the economic considerations related to this investment, the Buyer has relied on the advice of, or has consulted with, only his own advisors. The Buyer further represents, warrants and agrees that he will not sell or otherwise transfer the Shares without registration under the Securities Act of 1933, as amended (the "Act"), or an exemption therefrom, and fully understands and agrees that he must bear the economic risk of his purchase for an indefinite period of time because, among other reasons, the Shares have not been registered under the Act or under the securities laws of any state and, therefore, cannot be resold, pledged, assigned or otherwise disposed of unless they are subsequently registered under the Act and under the applicable securities laws of such states or an exemption from such registration is available. He also understands that the Company is under no obligation to register the Shares on his behalf or to assist him in complying with any exemption from registration under the Act. He further understands that any certificate evidencing the Shares will bear a legend restricting the transfer thereof consistent with the foregoing and that a notation may be made in the records of the Company restricting the transfer of any Shares in a manner consistent with the foregoing. 3. BUYER AWARENESS The Buyer acknowledges that he is aware that: (a) No federal or state agency has passed upon the Shares or made any finding or determination as to the fairness of this investment; -3- 38 (b) There are substantial risks of loss of investment incident to an investment in the Shares and such an investment is highly speculative; (c) The Company is only recently organized, has not conducted any substantial business to date and does not have any substantial working capital or financial resources. The business in which the Company proposes to engage is highly competitive and success in the Company's business may depend on, among other things, the Company's ability to obtain financing, to complete product development, to attract qualified employees and to obtain patent protection and governmental approvals, market acceptance of products and numerous other factors over which the Company does not have control. 4. RESTRICTIONS ON TRANSFER; RIGHT OF FIRST REFUSAL 4.1 COMPANY'S PURCHASE OPTION Buyer shall not sell, transfer, pledge, hypothecate or otherwise dispose of any Shares which are purchased hereunder without first complying with the terms of this Section 4. 4.2 RIGHT OF FIRST REFUSAL Before any of the Shares registered in the name of Buyer may be sold or transferred (including transfer by operation of law), except as permitted in Section 5, such Shares shall first be offered to the Company and to the Investors, in accordance with the terms set out herein, provided, however, that until the Company has completed a public offering of its equity securities pursuant to an effective registration statement filed with the Securities and Exchange Commission, no transfer of Shares may be made under any circumstances. (i) Buyer shall deliver a notice ("Notice") to the Company and to the Investors stating (A) his bona fide intention to sell or transfer such Shares, (B) the number of such Shares to be sold or transferred, (C) the price for which he proposes to sell or transfer such Shares, and (D) the name of the proposed purchaser or transferee. (ii) Within thirty (30) days after receipt of the Notice, the Company and/or the Investors may elect to purchase some or all of the Shares to which the Notice refers, at the price per share specified in the Notice. The closing for such purchase by the Company and/or the Investors shall occur, unless otherwise agreed by the Company, the Investors electing to purchase Shares, and the Buyer, no later than 30 days after the election by the Company and/or the Investors to purchase same. In -4- 39 the event that the number of Shares which the Company and the Investors desire to purchase exceeds the number of Shares proposed for sale by Buyer in the Notice, then in such instance the Company shall have full preference to acquire such Shares to the exclusion of the Investors, and, to the extent that there are Shares still available for purchase by the Investors, the Investors desiring to purchase Shares shall be entitled to purchase the remaining amount thereof on a pro rata basis based upon the number of shares of Common Stock and Preferred Stock, or securities convertible into shares of Common Stock and Preferred Stock, then held by each of them so electing to purchase bears to the total number of shares of Common Stock and Preferred Stock, or securities convertible into shares of Common Stock and Preferred Stock, held by all Investors desiring to acquire Shares, on a fully diluted as if converted to Common Stock basis. (iii) If all of the Shares to which the Notice refers are not purchased by the Company and the Investors, as provided in Section 4.2(ii) hereof, Buyer may sell such Shares which the Company and the Investors elected not to purchase to any person or persons named in the Notice at the price specified in the Notice or at a higher price, provided that such sale or transfer is consummated within 120 days of the date of said Notice to the Company and the investors, and provided, further, that any such sale is in accordance with all the terms and conditions hereof. (iv) Upon the closing of a firm commitment public offering pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended (the "Act"), covering the offering and sale of shares of Common Stock for the account of the Company in which the aggregate gross proceeds received by the Company equal or exceed $7,500,000 and in which the public offering price per share equals or exceeds $5.00 per share, the thirty (30) day period specified in Section 4.2(ii) above shall be reduced to a ten (10) day period; and the requirement to identify the name of the proposed purchaser and the proposed price shall be inapplicable if the Buyer proposed to sell the Shares in an over-the-counter sale or on a national or regional exchange transaction. In such instance, any such sale to the Company and/or the Investors shall be at the average closing price of the Company's Common Stock on the date of notice of election to purchase such shares by the Company and/or the Investors. The average closing price is defined as the last closing price regular way on the exchange where the Common Stock is listed for trading or the average of the bid and ask prices if applicable. 4.3 STANDOFF AGREEMENT Buyer agrees, in connection with each of the Company's public offerings of its equity securities, and upon request of the Company or the underwriters managing such offering, not to sell, make any short sale of, loan, grant any option for the -5- 40 purchase of or otherwise dispose of any of the Shares (other than those included in the registration, if any) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time from the effective date of such registration as may be requested by the Company or such underwriters; provided, that the officers and directors of the Company who own stock of the Company also agree to such restrictions. 4.4 OTHER RESTRICTIONS ON TRANSFER The Company shall not be required (i) to transfer on its books any of the Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (ii) to treat as owner of such Shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such Shares shall have been so transferred. 5. EXEMPT TRANSACTIONS 5.1 CERTAIN TRANSACTIONS The prohibition in Section 4 against the sale of the Shares shall not apply to the exchange of Shares pursuant to a plan or merger, consolidation, recapitalization, reorganization, or sale of the Company, in which the Company is the surviving entity, but any stock or securities received in exchange therefor shall also become subject to this Agreement. 5.2 PERMITTED TRANSFERS The prohibition in Section 4 against the sale of Shares shall not apply to a transfer by Buyer of all or part of his Shares during his lifetime or on death by will or by intestacy to or for the benefit of himself, his spouse, his ancestors or his lineal descendants, provided that any such transferee or transferees shall receive and hold the Shares subject to the terms of this Agreement, and there shall be no further transfer of such Shares except in accordance with the terms of this Agreement. 6. ASSIGNMENT The Company may assign this Agreement or any of its rights and obligations hereunder. The Buyer may not assign this Agreement or any of his rights and obligations hereunder. All covenants and agreements of, and benefits for, the Investors contained in this Agreement shall inure to the benefit of their respective successors and assigns and be binding on the Company and its successors and on the Buyer and his heirs, executors, administrators and successors. All such covenants and -6- 41 agreements are fully assignable by the Investors, provided, however, that any assignment of any of its rights under this Agreement by any Investor (other than to partners of such Investor or successors of such Investor or such partners by operation of law) shall be made only in connection with the sale or other transfer of all or any portion of the Preferred Stock, Common Stock, convertible notes, warrants, options or other securities of the Company which are exchangeable or convertible into shares of Common Stock or Preferred Stock of the Company held by such Investor and such assignee or transferee shall execute this Agreement. 7. ADJUSTMENTS If, from time to time during the term of this Agreement (i) there is any stock dividend or liquidating dividend of cash or property, stock split or other change in the character or amount of any of the outstanding securities of the Company, or (ii) there is any transaction involving the consolidation, merger or sale of all, or substantially all, of the assets of the Company, then, in such event, (x) any and all new, substituted or additional securities or other property to which the Buyer is entitled by reason of his ownership of the Shares shall be immediately subject to right of first refusal provided to the Company and the Investors as described in Section 4 hereof and (y) all Shares purchased by Buyer hereunder shall be treated on the same basis as all other outstanding shares of Common Stock of the Company so that Buyer's Shares shall not be diluted by any such event any differently than any other holder of Common Stock of the Company. 8. LEGENDS All certificates representing any of the Shares subject to the provisions of this Agreement shall have endorsed thereon a legend substantially as follows: "ANY DISPOSITION, GRANT OR OTHER TRANSFER OF ANY INTEREST IN THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO CERTAIN RESTRICTIONS, AND THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL, CONTAINED IN A CERTAIN AGREEMENT BY THE RECORDHOLDER HEREOF AND THE CORPORATION, A COPY OF WHICH WILL BE MAILED TO ANY HOLDER OF THIS CERTIFICATE WITHOUT CHARGE AFTER RECEIPT BY THE CORPORATION OF A WRITTEN REQUEST THEREFOR." -7- 42 Upon presentation to the Company or any authorized transfer agent, the certificates representing the Shares or any appropriate portion thereof shall be exchanged for certificates not bearing such legend if the certificates are presented after the termination of this Agreement. 9. RIGHTS AS A STOCKHOLDER; VOTING AGREEMENT Subject to the provisions of Section 4 above, the Buyer shall, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Company with respect to the Shares, including the right to vote such Shares at any stockholder meeting. Notwithstanding anything herein to the contrary, Buyer hereby agrees that he will, for a ninety-day period following the issuance of the Shares or until the closing of the first round financing by the Company in an amount at least equal to $2,000,000, whichever comes first, vote such Shares, at any stockholder meeting, in person, by proxy, by written consent, or otherwise, for the directors nominated for election to the Board of Directors of the Company by The Woodlands Venture Fund and no others, and, in any other matter coming before the stockholders of the Company, in accordance with the directive of The Woodlands Venture Fund. In order to secure the obligation to vote in accordance with the provisions hereof, the Buyer hereby appoints Martin P. Sutter as his true and lawful proxy and attorney, with full power of substitution, to vote all of his Shares for the matters specified hereinabove. The irrevocable proxy granted by the Buyer may be exercised at any time Buyer fails to comply with the terms of this Section 9. The proxy and power granted by the Buyer pursuant to this section are coupled with an interest and are given to secure the duties of the Buyer pursuant hereto. Such proxy will be irrevocable and will survive the death, incompetency, and disability of Buyer, provided that it shall terminate upon the expiration of twelve months following the issuance of the Shares. Buyer hereby consents to the placement of an appropriate legend evidencing the voting restrictions provided for in this Agreement, on the certificates representing the Shares and any certificates issued in replacement or exchange therefor, and Buyer will take all actions reasonably requested by the Company to effect such placement. 10. TERMINATION Except as may be otherwise provided herein, this Agreement shall terminate on the 91st calendar day immediately succeeding the third anniversary of the public offering referenced in Section 4.2. -8- 43 11. MISCELLANEOUS 11.1 NOTICE For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: RGene Therapeutics, Inc. c/o The Woodlands Venture Fund 2170 Buckthorne Place, Suite 170 The Woodlands, Texas 77380 Attention: Martin P. Sutter If to the Buyer, at the address identified on the signature page hereof, and if to an Investor, at the address identified on the records of the Company hereto, or to such other address as either party or an Investor may furnish to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11.2 APPLICABLE LAW The substantive laws of the State of Texas, excluding any law, rule or principle which might refer to the substantive law of another jurisdiction, will govern the interpretation, validity and effect of this Agreement without regard to the place of execution or the place for performance thereof. This Agreement is to be at least partially negotiated, executed and performed in Harris County, Texas, and, as such, the Company and the Buyer agree that personal jurisdiction and venue shall be proper with the state or federal courts situated in Harris County, Texas, to hear such disputes arising under this Agreement. 11.3 NO WAIVER No failure by either party hereto at any time to give notice of any breach by the other party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. -9- 44 11.4 SEVERABILITY If a court of competent jurisdiction determined that any provision of this Agreement, including any appendices attached hereto, is invalid or unenforceable, then the invalidity or unenforceability of that provision shall not affect the validity or enforceability of any other provision of this Agreement, and all other provisions shall remain in full force and effect. Further, such provision shall be reformed and construed to the extent permitted by law so that it may be valid, legal and enforceable to the maximum extent possible. 11.5 COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. 11.6 HEADINGS The section headings have been inserted for purposes of convenience and shall not be used for interpretive purposes. 11.7 SUCCESSORS; THIRD PARTY BENEFICIARY This Agreement shall inure to the benefit of the successors and assigns of the Company and the Investors and be binding upon the Buyer and his heirs, executors, administrators and successors. The Buyer agrees that any and all Investors in the Company shall be treated as third party beneficiaries of this Agreement without the necessity of execution of this Agreement, and shall be entitled to all of the rights rendered to them herein. 11.8 ENTIRE AGREEMENT This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof, and contains all the covenants, promises, representations, warranties and agreements between the parties with respect to the subject matter hereof. Each party to this Agreement acknowledges that no representation, inducement, promise or agreement, oral or written, with regard to the subject matter hereof, has been made by either party, or by anyone acting on behalf of either party, which is not embodied herein, and that no agreement, statement or promise relating to the subject matter hereof which is not contained in this Agreement or in such other agreements shall be valid and binding. -10- 45 11.9 AMENDMENTS No amendment or modification to this Agreement will be effective unless it is in writing and signed by the Company, the Buyer and, if such amendment alters or amends any of the rights of the Investors, by Investors holding a majority of the outstanding shares of capital stock of the Company held by such Investors, if any. 11.10 INDEMNITY The Buyer agrees to indemnify and hold harmless the Company and any person, if any, who controls the Company or such successor within the meaning of Section 15 of the Act against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever) arising out of or based upon any fuse representation or warranty or breach or failure by the Buyer to comply with any covenant or agreement made by the Buyer herein or in any other document furnished by the Buyer in connection with this transaction. 11.11 INJUNCTIVE RELIEF In view of the inadequacy of money damages, and in view of the fact that the stock of the Company cannot be readily purchased or sold in the general market, if the Buyer or any other person shall fail to comply with any provision of this Agreement, the Company shall be entitled, to the extent permissible by law, to injunctive relief in the case of the violation, or attempted or threatened violation, by Buyer or other person of any such provision, or to a decree compelling specific performance by the Buyer or other person, of any such provision, or to any other remedies legally available. 11.12 SPOUSES The spouse of the Buyer, if any, hereby represents and acknowledges that he or she is fully aware of, understands, and fully consents and agrees to the provisions of this Agreement and its binding effect upon any community property interest he or she may now or hereafter own. Said spouse agrees that the termination of their marital relationship with the Buyer for any reason or his or her death shall not have the effect of removing any stock of the Company otherwise subject to this Agreement from its coverage. Said spouse's awareness, understanding, consent and agreement is evidenced by the execution of this Agreement. All stock described in this Agreement shall include the community property interest of the spouse of Buyer. -11- 46 11.13 VOID TRANSFERS If any Stock shall be sold or transferred otherwise than in accordance with the terms and conditions of this Agreement, such sale shall be void. Any such attempted sale or other transfer shall create a right in the Company to purchase the Stock which is the subject of such purported transfer at the applicable purchase price specified herein. Such right shall constitute an "adverse claim" within the meaning of such term as used within the meaning of the Uniform Commercial Code of any State. In addition to, and without prejudice to, any and all other rights or remedies which may be available to the Company, the Buyer agrees that the Company may, but shall have no obligation to, hold and refuse to transfer any Stock, or any certificate therefor, tendered to it for transfer if the transfer violates the provisions of the Agreement. 11.14 TAX REPRESENTATIONS The Buyer acknowledges that the Company has made no warranties or other representations to Buyer with respect to the income tax consequences of the transactions contemplated by this Agreement and the Buyer is in no manner relying on the Company or its representatives for an account of such tax consequences. 11.15 FURTHER ASSURANCES The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. -12- 47 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first above written. Company RGENE THERAPEUTICS, INC. By: /s/ MARTIN P. SUTTER ----------------------------- Name: Martin P. Sutter ----------------------------- Title: Chairman ----------------------------- Buyer's Spouse Buyer Signed: /s/ SONIA LOPEZ Signed: /s/ G. LOPEZ-BERESTEIN ----------------------------- ------------------------ Print Name: Sonia Lopez Print Name: G. Lopez-Berestein ----------------------------- ------------------------ Address: Address: ----------------------------- ------------------------ ----------------------------- ------------------------ ----------------------------- ------------------------ ----------------------------- ------------------------ -13- 48 EXHIBIT 3 RGENE THERAPEUTICS, INC. MIEN CHIE HUNG, PH.D. STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this "Agreement") dated February 14, 1994 is entered into by and between RGene Therapeutics, Inc., a Delaware corporation (the "Company"), and Mien Chie Hung, Ph.D. (the "Buyer"). WITNESSETH: WHEREAS, the Company desires to sell certain shares of common stock, $.001 par value, of the Company (the "Common Stock") to the Buyer; and WHEREAS, the Buyer desires to purchase certain shares of Common Stock from the Company; and WHEREAS, the Buyer and the Company desire that the Buyer grant to the Company options to repurchase certain shares of Common Stock purchased by the Buyer on the terms and conditions set forth; NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations contained herein, the parties agree as follows: 1. PURCHASE AND SALE OF SHARES 1.1 PURCHASE AND SALE OF SHARES Subject to the terms and conditions of this Agreement and in consideration of the payment of the Purchase Price (as defined below) by the Buyer to the Company at the Closing (as defined below), the Company agrees to sell to the Buyer, and the Buyer agrees to purchase from the Company, [*] shares of Common Stock (the "Shares"). 1.2 PURCHASE PRICE The Purchase Price payable to the Company shall be $[*] per Share, payable as follows: the Company shall deduct the Purchase Price from the first month's consulting fee owed to Buyer under that certain Consulting Agreement between the Buyer and the Company dated the date hereof (the "Consulting Agreement"). - --------------- [*] Confidential Treatment Requested. 49 1.3 CLOSING The closing for the sale of the Shares to the Buyer shall occur on or before February 15, 1994, or at such other date and time as the parties may agree (the "Closing"). Concurrent with the payment by Buyer of the Purchase Price, or within a reasonable time thereafter, the Company shall deliver to Buyer a certificate or certificates representing the number of Shares as set forth in Section 1.1 hereof, in the name of the Buyer. 2. REPURCHASE OPTION (a) A total of [*] of the Shares purchased by Buyer pursuant to this Agreement (hereinafter, the "Option Shares") shall be subject to the option ("Repurchase Option") set forth in this Section 2. In the event the Buyer shall cease to be engaged by the Company (including a parent or subsidiary of the Company) as a Consultant for any reason, voluntarily or involuntarily, the Company shall have the right, at any time within 90 days after the date Buyer ceases to be so engaged, to exercise the Repurchase Option, which consists of the right to purchase from the Buyer at a purchase price of $[*] per share (the "Unvested Option Price"), up to but not exceeding the number of Option Shares specified in Section 2(b)(i) below, upon the terms hereinafter set forth. (b) (i) If the Buyer's engagement by the Company under the Consulting Agreement is terminated at any time prior to the second anniversary thereof, the Company may exercise the Repurchase Option at the Unvested Option Price as to all or any number of the Option Shares less the number of Option Shares equal to 1/24th of the balance of the Option Shares (rounded down to the nearest whole Option Share) for each and every full calendar month that the Buyer was engaged by the Company as a consultant pursuant to the Consulting Agreement. (ii) The Repurchase Option provided in this Section 2 is assignable by the Company in whole or in part to the holders of the Company's Preferred Stock or other securities issued by the Company to investors (herein the "Investors"). If the Company should decide not to exercise the Repurchase Option or not to exercise the Repurchase Option for all Option Shares, it shall give the Investors (or the Investor if at the time there is only one Investor) the right to purchase all of the Option Shares or all of the remaining Option Shares, as the case may be, then subject to the Repurchase Option or such lesser portion thereof as may be selected by the Investors. Within 30 days after the Section 2(b) Event, the Company shall notify each Investor in writing thereof and the number of Option Shares remaining subject to the Repurchase Option. If within 30 days after the Company gives its aforesaid notice, one or more of the Investors do not notify the Company that they desire to purchase all of such Option Shares, the Repurchase Option - --------------- [*] Confidential Treatment Requested. -2- 50 shall expire. If the Investors oversubscribe for such Option Shares, each Investor who notifies the Company that it desires to purchase Option Shares shall have a right to purchase a pro rata portion of such Option Shares based on the percentage of Common Stock and Preferred Stock then owned by it or which may be acquired upon exercise of any outstanding convertible notes, warrants, options or other securities, on a fully diluted as if converted to Common Stock basis, bears to the number of shares of Common Stock and Preferred Stock then owned by all Investors who notify the Company of their desire to purchase any of such Option Shares or which may be acquired upon exercise of any outstanding convertible notes, warrants, options or other securities, on a fully diluted as if converted to Common Stock basis. The Company shall promptly advise each Investor of the amount of such Option Shares it is entitled to purchase as a result of such allocation. (c) The Repurchase Option shall be exercised by written notice or notices signed by an officer of the Company or the purchasing Investors, as the case may be, and delivered or mailed as provided in Section 12.1 hereof. The Unvested Option Price shall be payable, at the option of the Company or the purchasing Investors, as the case may be, in cancellation of all or a portion of any outstanding indebtedness of the Company or the purchasing Investors, as the case may be, to the Buyer or in cash (by check) or both. The provisions of this Section 2(c) shall survive any termination of this Agreement. (d) Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a parent or subsidiary of the Company, to terminate the Buyer's engagement, for any reason, with or without cause. (e) The Buyer shall not sell, assign or otherwise transfer any of the Option Shares or any interest therein, or grant or otherwise allow to exist any lien, claim or other encumbrance on or with respect to any of the Option Shares then subject to the Repurchase Option. 3. REPRESENTATIONS AND WARRANTIES To induce the Company to deliver the Shares to the Buyer, the Buyer represents and warrants to the Company: (a) The Buyer is acquiring the Shares for his own account as principal, for investment purposes only, and not with a view to, or for, resale or distribution, and no other person has a direct or indirect beneficial interest in the Shares; (b) The Buyer has not offered any of the Shares for resale and has no present intention of dividing his interest with others or of reselling or otherwise disposing of any of the Shares; -3- 51 (c) Any information the Buyer has furnished to the Company with respect to the Buyer's status as a sophisticated or accredited investor, his business experience or financial position is correct; (d) The financial capacity of the Buyer is such that the investment in the Shares is not material to his total financial capacity; the Buyer has the financial ability to bear the economic risk of his investment, has adequate means for providing for his current needs and personal contingencies and has no need for liquidity with respect to his investment in the Shares; (e) The Buyer considers himself to be a sophisticated investor and has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment in the Shares; (f) The Buyer has been furnished with all information concerning the Shares and the Company that he desires; (g) The Buyer has been given the opportunity to ask questions of, and receive answers from, the Company with respect to the Shares, concerning the terms and conditions of the offering and other matters pertaining to this investment, and has been given the opportunity to obtain such additional information necessary to verify the accuracy of the information provided to him by the Company in order for him to evaluate the merits and risks of investment in the Shares to the extent that the Company possessed such information or could acquire it without unreasonable effort or expense; and (h) The Buyer is not relying on the Company with respect to any economic considerations of the Buyer related to this investment. In regard to the economic considerations related to this investment, the Buyer has relied on the advice of, or has consulted with, only his own advisors. The Buyer further represents, warrants and agrees that he will not sell or otherwise transfer the Shares without registration under the Securities Act of 1933, as amended (the "Act"), or an exemption therefrom, and fully understands and agrees that he must bear the economic risk of his purchase for an indefinite period of time because, among other reasons, the Shares have not been registered under the Act or under the securities laws of any state and, therefore, cannot be resold, pledged, assigned or otherwise disposed of unless they are subsequently registered under the Act and under the applicable securities laws of such states or an exemption from such registration is available. He also understands that the Company is under no obligation to register the Shares on his behalf or to assist him in complying with any exemption from registration under the Act. He further understands that any certificate evidencing the Shares will bear a legend restricting the transfer thereof consistent with the foregoing and that a notation may be made in the records of the Company restricting the transfer of any Shares in a manner consistent with the foregoing. -4- 52 4. BUYER AWARENESS The Buyer acknowledges that he is aware that: (a) No federal or state agency has passed upon the Shares or made any finding or determination as to the fairness of this investment; (b) There are substantial risks of loss of investment incident to an investment in the Shares and such an investment is highly speculative; (c) The Company is only recently organized, has not conducted any substantial business to date and does not have any substantial working capital or financial resources. The business in which the Company proposes to engage is highly competitive and success in the Company's business may depend on, among other things, the Company's ability to obtain financing, to complete product development, to attract qualified employees and to obtain patent protection and governmental approvals, market acceptance of products and numerous other factors over which the Company does not have control. 5. RESTRICTIONS ON TRANSFER; RIGHT OF FIRST REFUSAL 5.1 COMPANY'S PURCHASE OPTION Buyer shall not sell, transfer, pledge, hypothecate or otherwise dispose of any Shares which are purchased hereunder without first complying with the terms of this Section 5. 5.2 RIGHT OF FIRST REFUSAL Before any of the Shares registered in the name of Buyer that are not subject to the Repurchase Option may be sold or transferred (including transfer by operation of law), except as permitted in Section 6, such Shares shall first be offered to the Company and to the Investors, in accordance with the terms set out herein, provided, however, that until the Company has completed a public offering of its equity securities pursuant to an effective registration statement filed with the Securities and Exchange Commission, no transfer of the Shares may be made under any circumstances. (i) Buyer shall deliver a notice ("Notice") to the Company and to the Investors stating (A) his bona fide intention to sell or transfer such Shares, (B) the number of such Shares to be sold or transferred, (C) the price for which he proposes to sell or transfer such Shares, and (D) the name of the proposed purchaser or transferee. (ii) Within thirty (30) days after receipt of the Notice, the Company and/or the Investors may elect to purchase some or all of the Shares to which the Notice refers, at the price per share specified in the Notice. The closing for such purchase by the -5- 53 Company and/or the Investors shall occur, unless otherwise agreed by the Company, the Investors electing to purchase Shares, and the Buyer, no later than 30 days after the election by the Company and/or the Investors to purchase same. In the event that the number of Shares which the Company and the Investors desire to purchase exceeds the number of Shares proposed for sale by Buyer in the Notice, then in such instance the Company shall have full preference to acquire such Shares to the exclusion of the Investors, and, to the extent that there are Shares still available for purchase by the Investors, the Investors desiring to purchase Shares shall be entitled to purchase the remaining amount thereof on a pro rata basis based upon the number of shares of Common Stock and Preferred Stock, or securities convertible into shares of Common Stock and Preferred Stock, then held by each of them so electing to purchase bears to the total number of shares of Common Stock and Preferred Stock, or securities convertible into shares of Common Stock and Preferred Stock, held by all Investors desiring to acquire Shares, on a fully diluted as if converted to Common Stock basis. (iii) If all of the Shares to which the Notice refers are not purchased by the Company and the Investors, as provided in Section 5.2(ii) hereof, Buyer may sell such Shares which the Company and the Investors elected not to purchase to any person or persons named in the Notice at the price specified in the Notice or at a higher price, provided that such sale or transfer is consummated within 120 days of the date of said Notice to the Company and the Investors, and provided, further, that any such sale is in accordance with all the terms and conditions hereof. (iv) Upon the closing of a firm commitment public offering pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended (the "Act"), covering the offering and sale of shares of Common Stock for the account of the Company in which the aggregate gross proceeds received by the Company equal or exceed $7,500,000 and in which the public offering price per share equals or exceeds $5.00 per share, the thirty (30) day period specified in Section 5.2(ii) above shall be reduced to a ten (10) day period; and the requirement to identify the name of the proposed purchaser and the proposed price shall be inapplicable if the Buyer proposed to sell the Shares in an over-the-counter sale or on a national or regional exchange transaction. In such instance, any such sale to the Company and/or the Investors shall be at the average closing price of the Company's Common Stock on the date of notice of election to purchase such shares by the Company and/or the Investors. The average closing price is defined as the last closing price regular way on the exchange where the Common Stock is listed for trading or the average of the bid and ask prices if applicable. 5.3 STANDOFF AGREEMENT Buyer agrees, in connection with each of the Company's public offerings of its equity securities, and upon request of the Company or the underwriters managing such offering, not to sell, make any short sale of, loan, grant any option for the purchase of or -6- 54 otherwise dispose of any of the Shares (other than those included in the registration, if any) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time from the effective date of such registration as may be requested by the Company or such underwriters; provided, that the officers and directors of the Company who own stock of the Company also agree to such restrictions. 5.4 OTHER RESTRICTIONS ON TRANSFER The Company shall not be required (i) to transfer on its books any of the Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such Shares shall have been so transferred. 6. EXEMPT TRANSACTIONS 6.1 CERTAIN TRANSACTIONS The prohibition in Section 5 against the sale of the Shares shall not apply to the exchange of Shares pursuant to a plan or merger, consolidation, recapitalization, reorganization, or sale of the Company, in which the Company is the surviving entity, but any stock or securities received in exchange therefor shall also become subject to this Agreement. 6.2 PERMITTED TRANSFERS The prohibition in Section 5 against the sale of Shares shall not apply to a transfer by Buyer of all or part of his Shares during his lifetime or on death by will or by intestacy to or for the benefit of himself, his spouse, his ancestors or his lineal descendants, provided that any such transferee or transferees shall receive and hold the Shares subject to the terms of this Agreement, and there shall be no further transfer of such Shares except in accordance with the terms of this Agreement. 7. ASSIGNMENT The Company may assign this Agreement or any of its rights and obligations hereunder. The Buyer may not assign this Agreement or any of his rights and obligations hereunder. All covenants and agreements of, and benefits for, the Investors contained in this Agreement shall inure to the benefit of their respective successors and assigns and be binding on the Company and its successors and on the Buyer and his heirs, executors, administrators and successors. All such covenants and agreements are fully assignable by the Investors, provided, however, that any assignment of any of its rights under this Agreement by any Investor (other than to partners of such Investor or successors of such Investor or such partners by operation of law) shall be made only in connection with the -7- 55 sale or other transfer of all or any portion of the Preferred Stock, Common Stock, convertible notes, warrants, options or other securities of the Company which are exchangeable or convertible into shares of Common Stock or Preferred Stock of the Company held by such Investor and such assignee or transferee shall execute this Agreement. 8. ADJUSTMENTS If, from time to time during the term of this Agreement (i) there is any stock dividend or liquidating dividend of cash or property, stock split or other change in the character or amount of any of the outstanding securities of the Company, or (ii) there is any transaction involving the consolidation, merge or sale of all, or substantially all, of the assets of the Company, then, in such event, (x) any and all new, substituted or additional securities or other property to which the Buyer is entitled by reason of his ownership of the Shares shall be immediately subject to right of first refusal provided to the Company and the Investors as described in Section 5 hereof and to the Repurchase Option and be included in the term "Option Shares" for all purposes of the Repurchase Option with the same force and effect as the Option Shares subject to the Repurchase Option under the terms of Section 2 hereof and (y) all Shares purchased by Buyer hereunder shall be treated on the same basis as all other outstanding shares of Common Stock of the Company so that Buyer's Shares shall not be diluted by any such event any differently than any other holder of Common Stock of the Company. While the total Unvested Option Price shall remain the same after each such event, the Unvested Option Price per Option Share upon exercise of the Repurchase Option shall be appropriately adjusted. 9. LEGENDS All certificates representing any of the Shares subject to the provisions of this Agreement shall have endorsed thereon a legend substantially as follows: "ANY DISPOSITION, GRANT OR OTHER TRANSFER OF ANY INTEREST IN THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO CERTAIN RESTRICTIONS, AND THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF REPURCHASE AND RIGHT OF FIRST REFUSAL, CONTAINED IN A CERTAIN AGREEMENT BY THE RECORDHOLDER HEREOF AND THE CORPORATION, A COPY OF WHICH WILL BE MAILED TO ANY HOLDER OF THIS CERTIFICATE WITHOUT CHARGE AFTER RECEIPT BY THE CORPORATION OF A WRITTEN REQUEST THEREFOR." -8- 56 Upon presentation to the Company or any authorized transfer agent, the certificates representing the Shares or any appropriate portion thereof shall be exchanged for certificates not bearing such legend if the certificates are presented after the termination of this Agreement. 10. RIGHTS AS A STOCKHOLDER; VOTING AGREEMENT Subject to the provisions of Sections 2 and 5 above, the Buyer shall, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Company with respect to the Shares, including the right to vote such Shares at any stockholder meeting. Notwithstanding anything herein to the contrary, Buyer hereby agrees that he will, for a ninety-day period following the issuance of the Shares or until the closing of the first round financing by the Company in an amount at least equal to $2,000,000, whichever comes first, vote such Shares, at any stockholder meeting, in person, by proxy, by written consent, or otherwise, for the directors nominated for election to the Board of Directors of the Company by The Woodlands Venture Fund and no others, and, in any other matter coming before the stockholders of the Company, in accordance with the directive of The Woodlands Venture Fund. In order to secure the obligation to vote in accordance with the provisions hereof, the Buyer hereby appoints Martin P. Sutter as his true and lawful proxy and attorney, with full power of substitution, to vote all of his Shares for the matters specified hereinabove. The irrevocable proxy granted by the Buyer may be exercised at any time Buyer fails to comply with the terms of this Section 10. The proxy and power granted by the Buyer pursuant to this section are coupled with an interest and are given to secure the duties of the Buyer pursuant hereto. Such proxy will be irrevocable and will survive the death, incompetency, and disability of Buyer, provided that it shall terminate upon the expiration of twelve months following the issuance of the Shares. Buyer hereby consents to the placement of an appropriate legend evidencing the voting restrictions provided for in this Agreement, on the certificates representing the Shares and any certificates issued in replacement or exchange therefor, and Buyer will take all actions reasonably requested by the Company to effect such placement. 11. TERMINATION Except as may be otherwise provided herein, this Agreement shall terminate on the 91st calendar day immediately succeeding the third anniversary of the public offering referenced in Section 5.2. -9- 57 12. MISCELLANEOUS 12.1 NOTICE For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: RGene Therapeutics, Inc. c/o The Woodlands Venture Fund 2170 Buckthorne Place, Suite 170 The Woodlands, Texas 77380 Attention: Martin P. Sutter If to the Buyer, at the address identified on the signature page hereof, and if to an Investor, at the address identified on the records of the Company hereto, or to such other address as either party or an Investor may furnish to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 12.2 APPLICABLE LAW The substantive laws of the State of Texas, excluding any law, rule or principle which might refer to the substantive law of another jurisdiction, will govern the interpretation, validity and effect of this Agreement without regard to the place of execution or the place for performance thereof. This Agreement is to be at least partially negotiated, executed and performed in Harris County, Texas, and, as such, the Company and the Buyer agree that personal jurisdiction and venue shall be proper with the state or federal courts situated in Harris County, Texas, to hear such disputes arising under this Agreement. 12.3 NO WAIVER No failure by either party hereto at any time to give notice of any breach by the other party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 12.4 SEVERABILITY If a court of competent jurisdiction determined that any provision of this Agreement, including any appendices attached hereto, is invalid or unenforceable, then the invalidity or unenforceability of that provision shall not affect the validity or -10- 58 enforceability of any other provision of this Agreement, and all other provisions shall remain in full force and effect. Further, such provision shall be reformed and construed to the extent permitted by law so that it may be valid, legal and enforceable to the maximum extent possible. 12.5 COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. 12.6 HEADINGS The section headings have been inserted for purposes of convenience and shall not be used for interpretive purposes. 12.7 SUCCESSORS; THIRD PARTY BENEFICIARY This Agreement shall inure to the benefit of the successors and assigns of the Company and the Investors and be binding upon the Buyer and his heirs, executors, administrators and successors. The Buyer agrees that any and all Investors in the Company shall be treated as third party beneficiaries of this Agreement without the necessity of execution of this Agreement, and shall be entitled to all of the rights accorded to them herein. 12.8 ENTIRE AGREEMENT This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof, and contains all the covenants, promises, representations, warranties and agreements between the parties with respect to the subject matter hereof. Each party to this Agreement acknowledges that no representation, inducement, promise or agreement, oral or written, with regard to the subject matter hereof, has been made by either party, or by anyone acting on behalf of either party, which is not embodied herein, and that no agreement, statement or promise relating to the subject matter hereof which is not contained in this Agreement or in such other agreements shall be valid and binding. 12.9 AMENDMENTS No amendment or modification to this Agreement will be effective unless it is in writing and signed by the Company, the Buyer and, if such amendment alters or amends any of the rights of the Investors, by Investors holding a majority of the outstanding shares of capital stock of the Company held by such Investors, if any. -11- 59 12.10 INDEMNITY The Buyer agrees to indemnify and hold harmless the Company and any person, if any, who controls the Company or such successor within the meaning of Section 15 of the Act against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever) arising out of or based upon any false representation or warranty or breach or failure by the Buyer to comply with any covenant or agreement made by the Buyer herein or in any other document furnished by the Buyer in connection with this transaction. 12.11 INJUNCTIVE RELIEF In view of the inadequacy of money damages, and in view of the fact that the stock of the Company cannot be readily purchased or sold in the general market, if the Buyer or any other person shall fail to comply with any provision of this Agreement, the Company shall be entitled, to the extent permissible by law, to injunctive relief in the case of the violation, or attempted or threatened violation, by Buyer or other person of any such provision, or to a decree compelling specific performance by the Buyer or other person, of any such provision, or to any other remedies legally available. 12.12 SPOUSES The spouse of the Buyer, if any, hereby represents and acknowledges that he or she is fully aware of, understands, and fully consents and agrees to the provisions of this Agreement and its binding effect upon any community property interest he or she may now or hereafter own. Said spouse agrees that the termination of their marital relationship with the Buyer for any reason or his or her death shall not have the effect of removing any stock of the Company otherwise subject to this Agreement from its coverage. Said spouse's awareness, understanding, consent and agreement is evidenced by the execution of this Agreement. All stock described in this Agreement shall include the community property interest of the spouse of Buyer. 12.13 VOID TRANSFERS If any Stock shall be sold or transferred otherwise than in accordance with the terms and conditions of this Agreement, such sale shall be void. Any such attempted sale or other transfer shall create a right in the Company to purchase the Stock which is the subject of such purported transfer at the applicable purchase price specified herein. Such right shall constitute an "adverse claim" within the meaning of such term as used within the meaning of the Uniform Commercial Code of any State. In addition to, and without prejudice to, any and all other rights or remedies which may be available to the Company, the Buyer agrees that the Company may, but shall have no obligation to, hold and refuse -12- 60 to transfer any Stock, or any certificate therefor, tendered to it for transfer if the transfer violates the provisions of the Agreement. 12.14 TAX REPRESENTATIONS The Buyer acknowledges that the Company has made no warranties or other representations to Buyer with respect to the income tax consequences of the transactions contemplated by this Agreement and Buyer is in no manner relying on the Company or its representatives for an account of such tax consequences. 12.15 FURTHER ASSURANCES The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. -13- 61 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first above written. Company RGENE THERAPEUTICS, INC. By: /s/ MARTIN P. SUTTER ----------------------------- Name: Martin P. Sutter ----------------------------- Title: Chairman ----------------------------- Buyer's Spouse Buyer Signed: /s/ KING LAN C. HUNG Signed: /s/ HIEN-CHIE HUNG ------------------------ ------------------------ Print Name: King Lan C. Hung Print Name: Hien-Chie Hung ------------------------ ------------------------ Address: 5762 Birdwood R. Address: 5762 Birdwood Rd. ------------------------ ------------------------ Houston, Texas 77096 Houston, Texas 77096 - ------------------------------------ ------------------------------------ - ------------------------------------ ------------------------------------ - ------------------------------------ ------------------------------------ -14- 62 EXHIBIT 4 RGENE THERAPEUTICS, INC. STOCKHOLDER AGREEMENT This Stockholder Agreement (this "Agreement") dated March __, 1994 is entered into by and between RGene Therapeutics, Inc., a Delaware corporation (the "Company"), and Board of Regents of the University of Texas System, an agency of the State of Texas ("Stockholder"). WITNESSETH: WHEREAS, the Company desires to issue certain shares of common stock, $.001 par value, of the Company (the "Common Stock") to the Stockholder; and WHEREAS, the Stockholder desires to acquire certain shares of Common Stock from the Company; and WHEREAS, the Stockholder and the Company desire that the Stockholder grant to the Company, and under certain circumstances to holders of the Company's Preferred Stock or other securities issued by the Company to investors (the "Investors"), options to repurchase certain shares of Common Stock purchased by the Stockholder on the terms and conditions set forth; NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations contained herein, the parties agree as follows: 1. ISSUANCE OF SHARES 1.1 PURCHASE AND SALE OF SHARES Subject to the terms and conditions of this Agreement and in consideration of the execution of the Patent and Technology License Agreement between the Company and the Stockholder dated the date hereof relating to certain patent applications and technology owned by Stockholder and invented by Dr. Mien Chie Hung, Ph.D., the Company agrees to issue to the Stockholder [ * ] shares of Common Stock (the "Shares"). - ------------------------------ [*] Confidential Treatment Requested. 63 1.2 CLOSING The closing for the issuance of the Shares to the Stockholder shall occur on or before March __, 1994, or at such other date and time as the parties may agree (the "Closing"). At the Closing, or within a reasonable time thereafter, the Company shall deliver to Stockholder a certificate or certificates representing the number of Shares as set forth in Section 1.1 hereof, in the name of the Stockholder. 2. REPRESENTATIONS AND WARRANTIES To induce the Company to deliver the Shares to the Stockholder, the Stockholder represents and warrants to the Company: (a) The Stockholder is acquiring the Shares for its own account as principal, for investment purposes only, and not with a view to, or for, resale or distribution, and no other person or entity has a direct or indirect beneficial interest in the Shares; (b) The Stockholder has not offered any of the Shares for resale and has no present intention of dividing its interest with others or of reselling or otherwise disposing of any of the Shares; (c) Any information the Stockholder has furnished to the Company with respect to the Stockholder's status as a sophisticated or accredited investor, its business experience or financial position is correct; (d) The financial capacity of the Stockholder is such that the investment in the Shares is not material to its total financial capacity; the Stockholder has the financial ability to bear the economic risk of its investment, has adequate means for providing for its current needs and personal contingencies and has no need for liquidity with respect to its investment in the Shares; (e) The Stockholder considers itself to be a sophisticated investor and has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment in the Shares; (f) The Stockholder has been furnished with all information concerning the Shares and the Company that it desires; (g) The Stockholder has been given the opportunity to ask questions of, and receive answers from, the Company with respect to the Shares, concerning the terms and conditions of the offering and other matters pertaining to this investment, and has been given the opportunity to obtain such additional information necessary to verify the accuracy of the information provided to him by the Company in order for him to evaluate -2- 64 the merits and risks of investment in the Shares to the extent that the Company possessed such information or could acquire it without unreasonable effort or expense; and (h) The Stockholder is not relying on the Company with respect to any economic considerations of the Stockholder related to this investment. In regard to the economic considerations related to this investment, the Stockholder has relied on the advice of, or has consulted with, only its own advisors. The Stockholder further represents, warrants and agrees that it will not sell or otherwise transfer the Shares without registration under the Securities Act of 1933, as amended (the "Act"), or an exemption therefrom, and fully understands and agrees that it must bear the economic risk of its purchase for an indefinite period of time because, among other reasons, the Shares have not been registered under the Act or under the securities laws of any state and, therefore, cannot be resold, pledged, assigned or otherwise disposed of unless they are subsequently registered under the Act and under the applicable securities laws of such states or an exemption from such registration is available. It also understands that the Company is under no obligation to register the Shares on its behalf or to assist him in complying with any exemption from registration under the Act. It further understands that any certificate evidencing the Shares will bear a legend restricting the transfer thereof consistent with the foregoing and that a notation may be made in the records of the Company restricting the transfer of any Shares in a manner consistent with the foregoing. 3. STOCKHOLDER AWARENESS The Stockholder acknowledges that it is aware that: (a) No federal or state agency has passed upon the Shares or made any finding or determination as to the fairness of this investment; (b) There are substantial risks of loss of investment incident to an investment in the Shares and such an investment is highly speculative; (c) The Company is only recently organized, has not conducted any substantial business to date and does not have any substantial working capital or financial resources. The business in which the Company proposes to engage is highly competitive and success in the Company's business may depend on, among other things, the Company's ability to obtain financing, to complete product development, to attract qualified employees and to obtain patent protection and governmental approvals, market acceptance of products and numerous other factors over which the Company does not have control. -3- 65 4. RESTRICTIONS ON TRANSFER; RIGHT OF FIRST REFUSAL 4.1 COMPANY'S PURCHASE OPTION Stockholder shall not sell, transfer, pledge, hypothecate or otherwise dispose of any Shares which are purchased hereunder without first complying with the terms of this Section 4. 4.2 RIGHT OF FIRST REFUSAL Before any of the Shares registered in the name of Stockholder may be sold or transferred (including transfer by operation of law), except as permitted in Section 5, such Shares shall first be offered to the Company and to the Investors, in accordance with the terms set out herein. (i) Stockholder shall deliver a notice ("Notice") to the Company and to the Investors stating (A) its bona fide intention to sell or transfer such Shares, (B) the number of such Shares to be sold or transferred, (C) the price for which it proposes to sell or transfer such Shares, and (D) the name of the proposed purchaser or transferee. (ii) Within thirty (30) days after receipt of the Notice, the Company and/or the Investors may elect to purchase some or all of the Shares to which the Notice refers, at the price per share specified in the Notice. The closing for such purchase by the Company and/or the Investors shall occur, unless otherwise agreed by the Company, the Investors electing to purchase Shares, and the Stockholder, no later than 30 days after the election by the Company and/or the Investors to purchase same. In the event that the number of Shares which the Company and the Investors desire to purchase exceeds the number of Shares proposed for sale by Stockholder in the Notice, then in such instance the Company shall have full preference to acquire such Shares to the exclusion of the Investors, and, to the extent that there are Shares still available for purchase by the Investors, the Investors desiring to purchase Shares shall be entitled to purchase the remaining amount thereof on a pro rata basis based upon the number of shares of Common Stock and Preferred Stock, or securities convertible into shares of Common Stock and Preferred Stock, then held by each of them so electing to purchase bears to the total number of shares of Common Stock and Preferred Stock, or securities convertible into shares of Common Stock and Preferred Stock, held by all Investors desiring to acquire Shares, on a fully diluted as if converted to Common Stock basis. (iii) If all of the Shares to which the Notice refers are not purchased by the Company and the Investors, as provided in Section 4.2(ii) hereof, Stockholder may sell such Shares which the Company and the Investors elected not to purchase to any person or persons named in the Notice at the price specified in the Notice or at a higher price, provided that such sale or transfer is consummated within 120 days of the date of -4- 66 said Notice to the Company and the Investors, and provided, further, that any such sale is in accordance with all the terms and conditions hereof. (iv) Upon the closing of a firm commitment public offering pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended (the "Act"), covering the offering and sale of shares of Common Stock for the account of the Company in which the aggregate gross proceeds received by the Company equal or exceed $7,500,000 and in which the public offering price per share equals or exceeds $5.00 per share, the thirty (30) day period specified in Section 4.2(ii) above shall be reduced to a ten (10) day period; and the requirement to identify the name of the proposed purchaser and the proposed price shall be inapplicable if the Stockholder proposed to sell the Shares in an over-the-counter sale or on a national or regional exchange transaction. In such instance, any such sale to the Company and/or the Investors shall be at the average closing price of the Company's Common Stock on the date of notice of election to purchase such shares by the Company and/or the Investors. The average closing price is defined as the last closing price regular way on the exchange where the Common Stock is listed for trading or the average of the bid and ask prices if applicable. 4.3 STANDOFF AGREEMENT Stockholder agrees, in connection with each of the Company's public offerings of its equity securities, and upon request of the Company or the underwriters managing such offering, not to sell, make any short sale of, loan, grant any option for the purchase of or otherwise dispose of any of the Shares (other than those included in the registration, if any) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time from the effective date of such registration as may be requested by the Company or such underwriters; provided, that the officers and directors of the Company who own stock of the Company also agree to such restrictions. 4.4 OTHER RESTRICTIONS ON TRANSFER The Company shall not be required (i) to transfer on its books any of the Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such Shares shall have been so transferred. 5. EXEMPT TRANSACTIONS The prohibition in Section 4 against the sale of the Shares shall not apply to the exchange of Shares pursuant to a plan or merger, consolidation, recapitalization, reorganization, or sale of the Stockholder in which the Stockholder is the surviving entity, -5- 67 but any stock or securities received in exchange therefor shall also become subject to this Agreement. 6. ASSIGNMENT The Company may assign this Agreement or any of its rights and obligations hereunder. The Stockholder may not assign this Agreement or any of its rights and obligations hereunder. All covenants and agreements of, and benefits for, the Investors contained in this Agreement shall inure to the benefit of their respective successors and assigns and be binding on the Company and its successors and on the Stockholder and its successors and assigns. All such covenants and agreements are fully assignable by the investors, provided, however, that any assignment of any of its rights under this Agreement by any Investor (other than to partners of such Investor or successors of such Investor or such partners by operation of law) shall be made only in connection with the sale or other transfer of all or any portion of the Preferred Stock, Common Stock, convertible notes, warrants, options or other securities of the Company which are exchangeable or convertible into shares of Common Stock or Preferred Stock of the Company held by such Investor and such assignee or transferee shall execute this Agreement. 7. ADJUSTMENTS If, from time to time during the term of this Agreement (i) there is any stock dividend or liquidating dividend of cash or property, stock split or other change in the character or amount of any of the outstanding securities of the Company or (ii) there is any transaction involving the consolidation, merger or sale of all, or substantially all, of the assets of the Company, then, in such event, (x) any and all new, substituted or additional securities or other property to which the Stockholder is entitled by reason of its ownership of the Shares shall be immediately subject to right of first refusal provided to the Company and the Investors as described in Section 4 hereof and (y) all Shares purchased by Stockholder hereunder shall be treated on the same basis as all other outstanding shares of Common Stock of the Company so that Stockholder's Shares shall not be diluted by any such event any differently than any other holder of Common Stock of the Company. 8. LEGENDS All certificates representing any of the Shares subject to the provisions of this Agreement shall have endorsed thereon a legend substantially as follows: "ANY DISPOSITION, GRANT OR OTHER TRANSFER OF ANY INTEREST IN THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO CERTAIN RESTRICTIONS, AND THE SECURITIES REPRESENTED BY THIS -6- 68 CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL, CONTAINED IN A CERTAIN AGREEMENT BY THE RECORDHOLDER HEREOF AND THE CORPORATION, A COPY OF WHICH WILL BE MAILED TO ANY HOLDER OF THIS CERTIFICATE WITHOUT CHARGE AFTER RECEIPT BY THE CORPORATION OF A WRITTEN REQUEST THEREFOR." Upon presentation to the Company or any authorized transfer agent, the certificates representing the Shares or any appropriate portion thereof shall be exchanged for certificates not bearing such legend if the certificates are presented after the termination of this Agreement. 9. RIGHTS AS A STOCKHOLDER; VOTING AGREEMENT (a) Subject to the provisions of Section 4 above, the Stockholder shall, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Company with respect to the Shares, including the right to vote such Shares at any stockholder meeting. Notwithstanding anything herein to the contrary, Stockholder hereby agrees that it will, for a ninety-day period following the issuance of the Shares or until the closing of the first round financing by the Company in an amount at least equal to $2,000,000, whichever comes first, vote such Shares, at any stockholder meeting, in person, by proxy, by written consent, or otherwise, for the directors nominated for election to the Board of Directors of the Company by The Woodlands Venture Fund and no others, and, in any other matter coming before the stockholders of the Company, in accordance with the directive of The Woodlands Venture Fund. In order to secure the obligation to vote in accordance with the provisions hereof, the Stockholder hereby appoints Martin P. Sutter as its true and lawful proxy and attorney, with full power of substitution, to vote all of its Shares for the matters specified hereinabove. The irrevocable proxy granted by the Stockholder may be exercised at any time Stockholder fails to comply with the terms of this Section 9. The proxy and power granted by the Stockholder pursuant to this section are coupled with an interest and are given to secure the duties of the Stockholder pursuant hereto. Such proxy will be irrevocable and will survive the death, incompetency, and disability of Stockholder, provided that it shall terminate upon the expiration of ninety days following the issuance of the Shares or until the above-referenced closing, if earlier. Stockholder hereby consents to the placement of an appropriate legend evidencing the voting restrictions provided for in this Agreement, on the certificates representing the Shares and any certificates issued in replacement or exchange therefor, and Stockholder will take all actions reasonably requested by the Company to effect such placement. -7- 69 10. TERMINATION Except as may be otherwise provided herein, this Agreement shall terminate on the 91st calendar day immediately succeeding the third anniversary of the public offering referenced in Section 4.2. 11. MISCELLANEOUS 11.1 NOTICE For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: RGene Therapeutics, Inc. c/o The Woodlands Venture Fund 2170 Buckthorne Place, Suite 170 The Woodlands, Texas 77380 Attention: Martin P. Sutter If to the Stockholder, at the address identified on the signature page hereof, and if to an Investor, at the address identified on the records of the Company hereto, or to such other address as either party or an Investor may furnish to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11.2 APPLICABLE LAW The substantive laws of the State of Texas, excluding any law, rule or principle which might refer to the substantive law of another jurisdiction, will govern the interpretation, validity and effect of this Agreement without regard to the place of execution or the place for performance thereof. This Agreement is to be at least partially negotiated, executed and performed in Harris County, Texas, and, as such, the Company and the Stockholder agree that personal jurisdiction and venue shall be proper with the state or federal courts situated in Harris County, Texas, to hear such disputes arising under this Agreement. 11.3 NO WAIVER No failure by either party hereto at any time to give notice of any breach by the other party of, or to require compliance with, any condition or provision of this -8- 70 Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 11.4 SEVERABILITY If a court of competent jurisdiction determined that any provision of this Agreement, including any appendices attached hereto, is invalid or unenforceable, then the invalidity or unenforceability of that provision shall not affect the validity or enforceability of any other provision of this Agreement, and all other provisions shall remain in full force and effect. Further, such provision shall be reformed and construed to the extent permitted by law so that it may be valid, legal and enforceable to the maximum extent possible. 11.5 COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. 11.6 HEADINGS The section headings have been inserted for purposes of convenience and shall not be used for interpretive purposes. 11.7 SUCCESSORS; THIRD PARTY BENEFICIARY This Agreement shall inure to the benefit of the successors and assigns of the Company and the Investors and be binding upon the Stockholder and its successors and assigns. The Stockholder agrees that any and all Investors in the Company shall be treated as third party beneficiaries of this Agreement without the necessity of execution of this Agreement, and shall be entitled to all of the rights rendered to them herein. 11.8 ENTIRE AGREEMENT This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof, and contains all the covenants, promises, representations, warranties and agreements between the parties with respect to the subject matter hereof. Each party to this Agreement acknowledges that no representation, inducement, promise or agreement, oral or written, with regard to the subject matter hereof, has been made by either party, or by anyone acting on behalf of either party, which is not embodied herein, and that no agreement, statement or promise relating to the subject matter hereof which is not contained in this Agreement or in such other agreements shall be valid and binding. -9- 71 11.9 AMENDMENTS No amendment or modification to this Agreement will be effective unless it is in writing and signed by the Company, the Stockholder and, if such amendment alters or amends any of the rights of the Investors, by Investors holding a majority of the outstanding shares of capital stock of the Company held by such Investors, if any. 11.10 INDEMNITY The Stockholder agrees to indemnify and hold harmless the Company and any person, if any, who controls the Company or such successor within the meaning of Section 15 of the Act against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever) arising out of or based upon any false representation or warranty or breach or failure by the Stockholder to comply with any covenant or agreement made by the Stockholder herein or in any other document furnished by the Stockholder in connection with this transaction. 11.11 INJUNCTIVE RELIEF In view of the inadequacy of money damages, and in view of the fact that the stock of the Company cannot be readily purchased or sold in the general market, if the Stockholder or any other person shall fail to comply with any provision of this Agreement, the Company shall be entitled, to the extent permissible by law, to injunctive relief in the case of the violation, or attempted or threatened violation, by Stockholder or other person of any such provision, or to a decree compelling specific performance by the Stockholder or other person, of any such provision, or to any other remedies legally available. 11.12 VOID TRANSFERS If any Stock shall be sold or transferred otherwise than in accordance with the terms and conditions of this Agreement, such sale shall be void. Any such attempted sale or other transfer shall create a right in the Company to purchase the Stock which is the subject of such purported transfer at the applicable purchase price specified herein. Such right shall constitute an "adverse claim" within the meaning of such term as used within the meaning of the Uniform Commercial Code of any State. In addition to, and without prejudice to, any and all other rights or remedies which may be available to the Company, the Stockholder agrees that the Company may, but shall have no obligation to, hold and refuse to transfer any Stock, or any certificate therefor, tendered to it for transfer if the transfer violates the provisions of the Agreement. -10- 72 11.13 TAX REPRESENTATIONS The Stockholder acknowledges that the Company has made no warranties or other representations to Stockholder with respect to the income tax consequences of the transactions contemplated by this Agreement and Stockholder is in no manner relying on the Company or its representatives for an account of such tax consequences. 11.14 FURTHER ASSURANCES The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. -11- 73 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first above written. Company RGENE THERAPEUTICS, INC. By: /s/ MARTIN P. SUTTER ------------------------------------- Name: Martin P. Sutter ----------------------------------- Title: Chairman ---------------------------------- Stockholder BOARD OF REGENTS OF THE UNIVERSITY OF TEXAS SYSTEM By: /s/ THOMAS E. RICKS ------------------------------------- Name: Thomas E. Ricks ----------------------------------- Title: Vice Chairman for Asset Management ---------------------------------- -12- EX-10.30 4 REDACTED VERSION 1ST AMENDED & RESTATED LICENCE 1 REDACTED VERSION EXHIBIT 10.30 TO TARGETED GENETICS CORPORATION AMENDMENT NO. 1 TO FORM S-1 TO BE FILED ON OR BEFORE MAY 30, 1996 "[*]" = confidential information omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 2 FIRST AMENDED AND RESTATED LICENSE AGREEMENT BETWEEN THE UNIVERSITY OF TENNESSEE RESEARCH CORPORATION AND RGENE THERAPEUTICS, INC. This Agreement, effective the 12th day of October, 1995 ("Effective Date") is entered into by and between The University of Tennessee Research Corporation ("UTRC"), a Tennessee nonprofit corporation having an office at 415 Communications Building, Knoxville, TN 37996-0344, and RGene Therapeutics, Inc. ("RGENE"), a Delaware corporation having its principal office at 2170 Buckthorne Place, Suite 230, The Woodlands, TX 77381. WITNESSETH WHEREAS, UTRC and McMaster University (hereinafter "McMaster") are collectively the owners of United States Patent Application Serial Number 07/751,873 filed August 28, 1991 titled, "Method for Delivering Nucleic Acids into Cells" (hereinafter "Patent Application") and the subject matter disclosed and/or claimed therein. WHEREAS, UTRC and McMaster have executed and entered into that certain Agreement (hereinafter the "UTRC-McMaster Agreement") effective as of May 25, 1992 whereby it was agreed that UTRC shall have the exclusive right to commercialize the aforesaid subject matter, including the granting of license(s) to third parties. WHEREAS, UTRC and RGENE executed and entered into that certain license agreement (hereinafter the "Original Agreement") effective as of October 12, 1995, whereby RGENE was granted a license to the Technology and Licensed Patent Rights (as defined below). 3 WHEREAS, the parties now desire to amend and restate the Original Agreement to modify the scope of RGENE's license to a Fourth Licensed Field, and to make certain other changes regarding the rights and obligations of the parties pertaining to RGENE's license. NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto expressly agree as follows: 1. DEFINITIONS Except as otherwise defined herein, capitalized terms shall have the following meanings: 1.1 Affiliate" shall mean any company, partnership, or other entity, which directly or indirectly controls, is controlled by, or is under common control with the entity in question or with whom the entity in question has entered into a joint venture pertaining to the subject matter of this Agreement. "Control" means the ownership of more than fifty percent (50%) of the issued share capital or the legal power to cause the direction of the general management and policies of the entity in question. 1.2 "Agreement" and "First Amended License Agreement" shall mean this agreement. 1.3 "Technology" shall mean the subject matter disclosed and/or claimed in the Licensed Patent Rights. 1.4 "Licensed Patent Rights" shall mean: A. United States Patent Application Serial Number 07/751,873 titled, "Method for Delivering Nucleic Acids into Cells" (previously defined herein as the "Patent Application"); B. any application that is owned by UTRC and constitutes a continuation, continuation-in-part, divisional, re-issue, or a foreign counterpart of the Patent Application referenced in Article 1.3A; and C. any United States or foreign patent owned by UTRC that may issue on any application covered by Article 1.3A. or 1.3B. above. 1.5 "Licensed Product" shall mean a product or composition, any part of which incorporates or utilizes the Technology or any part thereof in its manufacture, use, or sale. -2- 4 1.6 "Net Sales" shall be defined as follows: A. Sales by RGENE to a third party other than an Affiliate. If any Licensed Products are sold by RGENE to other than an Affiliate for separate consideration payable wholly in money, "Net Sales" shall mean the aggregate gross selling price of such Licensed Products in the form in which such Licensed Products are sold, whether or not assembled (and without excluding therefrom any components or subassemblies thereof, whatever their origin), less the following items (but only insofar as they pertain to the sale of such Licensed Products and are included in such gross selling price): (a) usual and customary trade discounts actually granted; (b) credits allowed for Licensed Products returned or not accepted by customers; (c) packaging, transportation and prepaid insurance charges billed to customers that are separately itemized on the customer's invoice; and (d) taxes actually incurred and paid by RGENE in connection with the sale or delivery of Licensed Products to customers. B. Sales by RGENE to an Affiliate. If any Licensed Products are sold by RGENE for separate consideration payable wholly in money to an Affiliate, "Net Sales" shall mean the greater of the actual sales price or the usual and customary price at which such Licensed Products are normally offered for sale. C. Sales by RGENE for consideration other than money. If any Licensed Products are sold for other than separate consideration payable wholly in money, "Net Sales" shall be determined in good faith by RGENE by assuming that RGENE received the same Net Sales (as defined in subsection 1.5A. above) in the sale that would have been realized in a transaction with an unaffiliated buyer in an arm's length sale of such Licensed Products for money. D. Sales by any Affiliate Sublicensee or Associate Sublicensee. For the purposes of calculating "Net Sales" (but not for the purpose of calculating royalties under Article 4.1), sales of Licensed Products by any Affiliate Sublicensee or Associate Sublicensee shall be considered sales by RGENE. 1.7 "Licensed Fields" shall mean the applications of the Technology and the Licensed Patent Rights included within the definitions of the First Licensed Field, the Second Licensed Field, the Third Licensed Field, and the Fourth Licensed Field, as set out below. -3- 5 1.8 "First Licensed Field" shall mean and include therapeutic and prophylactic applications of the Technology and the Licensed Patent Rights for: A. all cancers except for Excluded Cancers (defined below); and B. traumatic brain injuries; and C. cardiac and cardiovascular diseases and disorders except for infectious diseases of the cardiovascular system; and D. all dystrophies or dystrophic diseases and disorders not specifically included in the Second Licensed Field, the Third Licensed Field, or the Excluded Fields; and E. all non-sepsis related infectious diseases other than pulmonary diseases; and F. all other immunologic and genetic diseases and disorders not specifically included in the Second Licensed Field, the Third Licensed Field, or the Excluded Fields and not previously licensed to others as indicated by Appendix A, consisting of excerpts from all licenses for the Licensed Patent Rights granted to third parties by UTRC (excluding the names of the licensees); and G. all other therapeutic, prophylactic, and diagnostic applications not specifically included in the Second Licensed Field, the Third Licensed Field, or the Excluded Fields and not previously licensed to others as indicated in Appendix A, consisting of excerpts from all licenses for the Licensed Patent Rights granted to third parties by UTRC (excluding the names of the licensees). For the purposes of this Article 1.8 only, the term "Excluded Cancers" shall be defined as hematological cancers and cancers of the lung, breast, ovaries, colon (i.e., large intestine and rectum), pancreas, stomach, small intestine, cervix uteri, mouth, head, neck, and central nervous system and brain. 1.9 "Second Licensed Field" shall mean and include therapeutic and prophylactic applications of the Technology and the Licensed Patent Rights for diseases and disorders of the lung except for lung cancer, cystic fibrosis in humans, pulmonary infections in cystic fibrosis patients, and infectious diseases of the lung (whether or not sepsis-related). 1.10 "Third Licensed Field" shall mean and include therapeutic and prophylactic applications of the Technology and the Licensed Patent Rights for: -4- 6 A. cancers of the pancreas, stomach, and small intestine; B. cancers of the mouth, head, and neck (excluding the central nervous system and brain); and C. cancers of the cervix uteri. 1.11 "Fourth Licensed Field" shall mean and include therapeutic and prophylactic applications of the Technology and the Licensed Patent Rights for infectious diseases (whether or not sepsis-related) of the pulmonary system (excluding pulmonary infections in cystic fibrosis patients). 1.12 "Excluded Fields" shall mean: A. the sale for research purposes of cationic lipid(s), reagent(s) and/or other products based on or incorporating the Technology or described/claimed in the Licensed Patent Rights; and B. all applications for: (1) the following classifications of rheumatic diseases as set forth in Table 105-1 ("Classification of the Rheumatic Diseases") of The Merck Manual, Sixteenth Edition (Robert Berkow, M.D., Editor-in-Chief; published by Merck Research Laboratories, Rahway, N.J.; 1992; pp. 1297-1300): I. Diffuse connective tissue diseases II. Arthritis associated with spondylitis III. Osteoarthritis, including osteoarthrosis and degenerative joint diseases IV. Arthritis, tenosynovitis, and bursitis associated with infectious agents, excluding treatment of the underlying infectious diseases themselves V. Metabolic and endocrine diseases with rheumatic states, including (a) crystal-induced conditions VII. Neuropathic disorders -5- 7 VIII. Bone and cartilage disorders associated with articular manifestations IX Nonarticular rheumatism; and (2) osteogenesis imperfecta; and (3) tendon, ligament, and cartilage repair and healing; and (4) diseases and disorders of the following types of connective tissues: white fibrous tissue in the form of tendons and ligaments; hyaline cartilage; interarticular fibro-cartilage; connecting fibro-cartilage; circumferential fibro-cartilage; stratiform fibro-cartilage; yellow or elastic fibro-cartilage; and (5) all other diseases and disorders of joints and connective tissues; and C. all applications for sepsis-related infectious diseases except sepsis-related infectious diseases of the pulmonary system other than bacterial pulmonary infections in cystic fibrosis patients; and D. all applications for cystic fibrosis and pulmonary diseases and disorders in cystic fibrosis patients; and E. all other applications previously licensed on an exclusive basis to others as indicated in Appendix A, being excerpts from all licenses for the Licensed Patent Rights granted to third parties by UTRC (excluding the names of the licensees other than Aronex Pharmaceuticals, Inc., RGENE's sublicensor). 1.13 "Affiliate Sublicense" shall mean a sublicense granted by RGENE under this Agreement to an Affiliate of RGENE. "Affiliate Sublicensee" shall mean any sublicensee of RGENE under this Agreement who is an Affiliate of RGENE. Notwithstanding the foregoing, if a sublicensee qualifies as both an Affiliate Sublicensee and an Associate Sublicensee, such sublicensee shall be considered an Affiliate Sublicensee for all purposes. 1.14 "Associate Sublicense" shall mean a sublicense granted by RGENE under this Agreement that provides for RGENE to receive as consideration anything of value in lieu of cash payments. "Associate Sublicensee" shall mean any sublicensee of RGENE under an Associate Sublicense. Notwithstanding the foregoing, if a sublicensee qualifies as both an Affiliate Sublicensee and an Associate Sublicensee, such sublicensee shall be considered an Affiliate Sublicensee for all -6- 8 purposes and the sublicense granted to such sublicensee shall be considered an Affiliate Sublicense. 1.15 "RGENE Licensing Group" shall mean RGENE, its Affiliate Sublicensees, and its Associate Sublicensees. 1.16 "Territory" shall mean the world, subject to modification pursuant to the terms of Article 6. 2. GRANT OF LICENSE 2.1 UTRC hereby grants to RGENE, and RGENE hereby accepts from UTRC, upon the terms and conditions herein specified and subject to the reservations set out below and further subject to the royalty-free nonexclusive and other rights held by the United States Government (as more fully set out in Article 2.3 below), A. a right and license in the Territory to utilize the Technology in the manufacture, use, and sale of Licensed Products for use in the First Licensed Field, with the right to sell such Licensed Products for use in the First Licensed Field being exclusive; and B. a right and license in the Territory to manufacture, use, and sell Licensed Products for use in the First Licensed Field under the issued patents included within the Licensed Patent Rights, with the right to sell such Licensed Products for use in the First Licensed Field being exclusive; and C. a nonexclusive right and license in the Territory to utilize the Technology in the manufacture, use and sale of Licensed Products for use in the Second Licensed Field; and D. a nonexclusive right and license in the Territory to manufacture, use, and sell Licensed Products for use in the Second Licensed Field under the issued patents included within the Licensed Patent Rights; and E. a right and license in the Territory to utilize the Technology in the manufacture, use, and sale of Licensed Products for use in the Third Licensed Field, with the right to sell such Licensed Products for use in the Third Licensed Field being co-exclusive; and F. a right and license in the Territory to manufacture, use, and sell Licensed Products for use in the Third Licensed Field under the issued patents -7- 9 included within Licensed Patent Rights, with the right to sell such Licensed Products for use in the Third Licensed Field being co-exclusive; and G. a right and license in the Territory to utilize the Technology in the manufacture, use, and sale of Licensed Products for use in the Fourth Licensed Field, with the right to sell such Licensed Products for use in the Fourth Licensed Field being co-exclusive; and H. a right and license in the Territory to manufacture, use, and sell Licensed Produces for use in the Fourth Licensed Field under the issued patents included within Licensed Patent Rights, with the right to sell such Licensed Products for use in the Fourth Licensed Field being co-exclusive. Notwithstanding the foregoing, the right to sell Licensed Products for use in the First Licensed Field as granted in 2.1A. and 2.1B. above shall be nonexclusive as to cancers other than Excluded Cancers until UTRC shall have entered into an agreement with [*] whereby [*] relinquishes its licensed rights with regard to such cancers. At such time as UTRC and [*] enter into such agreement, this paragraph shall no longer apply and the exclusivity provisions of Article 2.1A and 2.1B. shall control. The term "exclusive" as used in this Article 2.1 means that during the term of this Agreement UTRC shall not sell or otherwise distribute Licensed Products in the Territory for use in the First Licensed Field or license any third party to sell or otherwise distribute Licensed Products in the Territory for use in the First Licensed Field. The term "co-exclusive" as used in Article 2.1E. and Article 2.1F means that during the term of this Agreement (UTRC shall not sell or otherwise distribute Licensed Products in the Territory for use in the Third Licensed Field or license any third party (other than [*] or a successor or assignee of [*]) to sell or otherwise distribute Licensed Products in the Territory for use in the Third Licensed Field. The term "co-exclusive" as used in Article 2.1G. and Article 2.1H means that during the term of this Agreement UTRC shall not sell or otherwise distribute Licensed Products in the Territory for use in the Fourth Licensed Field or license any third party (other than [*] or a successor or assignee of [*]) to sell or otherwise distribute Licensed Products in the Territory for use in the Fourth Licensed Field. - ------------------------------ [*] Confidential Treatment Requested -8- 10 2.2 UTRC expressly reserves and does not license to RGENE any rights with respect to: A. the manufacture, use, or sale of Licensed Products in the Excluded Fields or otherwise outside the Licensed Fields; or B. the manufacture, use, or sale of reagents covered by Technology or described/claimed in Licensed Patent Rights in the Excluded Fields or otherwise outside the Licensed Fields, the express intent of the parties being to restrict the rights licensed to RGENE hereunder to the Licensed Fields; or C. the manufacture, use, or sale of Licensed Products outside the Territory. 2.3 UTRC further expressly reserves for itself and for McMaster: A. the nonexclusive right to utilize and to license third parties to utilize the Technology and the Licensed Patent Rights in the First Licensed Field and the Third Licensed Field for any research (including commercial research) and/or academic purpose, including but not limited to the manufacture, use, and sale of reagents; B. the nonexclusive right to utilize and to license third parties to utilize the Technology and the Licensed Patent Rights in the Second Licensed Field for any commercial or noncommercial purpose; and C. the nonexclusive right to manufacture, use, and sell Licensed Products for use in the Second Licensed Field under the issued patents included within Licensed Patent Rights and to license third parties to manufacture, use, and sell Licensed Products for use in the Second Licensed Field. 2.4 RGENE recognizes and accepts that not all aspects of the Technology and potential Licensed Products are covered by an issued patent within Licensed Patent Rights, and in the absence of such patent protection, it is possible for third parties without license from UTRC to sell product(s) identical or similar to Licensed Products for use in the Licensed Fields without the possibility of recourse on the part of UTRC or RGENE. Such occurrence shall not constitute a breach of this Agreement by UTRC, and in such case RGENE shall not have any claim for damages under this Agreement against UTRC. 2.5 To the extent of the license granted hereunder, RGENE shall have the right in the Territory to sublicense to third parties the right to make, use, and sell Licensed Products for use in the First Licensed Field, the Second Licensed Field, and -9- 11 the Fourth Licensed Field during the term of this Agreement. RGENE shall also have the right to sublicense to third parties the right to make, use, and sell Licensed Products for use in the Third Licensed Field during the term of this Agreement, but only with the prior written permission of [*] (in any country where [*] retains a license at that time). No sublicense shall be entered into by RGENE without the prior written approval of UTRC, which approval shall not be unreasonably withheld. In addition, all such sublicenses shall be subject to this Agreement in all respects and RGENE shall be responsible for the performance hereunder by any such sublicensee. RGENE shall give UTRC prompt notification of the identity and address of each potential sublicensee with whom it enters into sublicense negotiations and shall provide UTRC with a copy of each draft of a written sublicense. No sublicense shall relieve RGENE of any of its obligations under this Agreement. No sublicensee shall have the right to further sublicense third parties to make, use, or sell Licensed Products for use in any Licensed Field without prior written permission from RGENE and UTRC, which shall not be unreasonably withheld. 2.6 RGENE agrees that Licensed Products sold in the United States shall be manufactured substantially in the United States. 2.7 It is specifically acknowledged that RGENE is as of the Effective Date a sublicensee of Aronex Pharmaceuticals, Inc. under a license granted by UTRC to the Technology and the Licensed Patent Rights. 2.8 RGENE agrees that it will not utilize the Technology or practice under the Licensed Patent Rights for any purpose other than that encompassed by the license granted herein, except as may be allowed by its sublicense from Aronex Pharmaceuticals, Inc. 2.9 In interpreting this Agreement, in the event of a conflict between any of the Licensed Fields and the "Excluded Fields," "Excluded Fields" shall govern; in the event of a conflict between the "First Licensed Field" on the one hand and the "Second Licensed Field," the "Third Licensed Field," or the "Fourth Licensed Field" on the other hand, the "Second Licensed Field" the "Third Licensed Field," or the "Fourth Licensed Field," as the case may be, shall govern. Likewise, in the event of a conflict between the "Second Licensed Field" on the one hand and the "Third Licensed Field" or the "Fourth Licensed Field" on the other hand, the "Third Licensed Field" or the "Fourth Licensed Field," as the case may be, shall govern. 3. DUE DILIGENCE 3.1 RGENE shall use its best efforts to bring one or more Licensed Products to market in each of the Licensed Fields. -------------------------------- [*] Confidential Treatment Requested -10- 12 3.2 UTRC shall have no obligation to provide RGENE with technical information concerning the Technology. If RGENE desires technical assistance with regard to its activities under this Agreement, obtaining such assistance from third parties, including those individuals named as inventors on the Patent Application, shall be the responsibility of RGENE. 4. PAYMENTS 4.1 As consideration for the license hereby granted: A. ENE shall pay to UTRC a License Issue Fee in the amount of Two Hundred Fifty Thousand Dollars ($250,000), acknowledged to have been paid by RGENE and received by UTRC prior to the execution of this First Amended Agreement, with such payment being neither refundable nor chargeable against future fees or royalties of any type. B. Upon execution by the stock recipient of a Stockholders Agreement substantially the same in form and substance as the agreement attached hereto as Appendix B, RGENE shall transfer or have transferred 130,000 shares of RGENE Founders Stock in the amounts and to the recipients as set out below: UTRC [*] Dr. Leaf Huang [*] McMaster University [*] [*] [*] [*] [*] -------- TOTAL 130,000 shares ========
Said transfer of shares in the amounts specified above is acknowledged to have been completed by RGENE prior to the execution of this First Amended Agreement. C. RGENE shall pay to UTRC Running Royalties in an amount equal to [*] of all Net Sales by RGENE and Affiliate Sublicensees of Licensed Products that are covered by a claim of an issued and unexpired patent included within Licensed Patent Rights in the place of manufacture, use, or sale, and RGENE shall pay to UTRC Running Royalties in an amount equal to [*] of all Net Sales by Associate Sublicensees of Licensed Products that are covered by a claim of an issued and unexpired patent included within Licensed Patent Rights in the place of manufacture, use, or sale, provided: - ------------------------------ [*] Confidential Treatment Requested -11- 13 (1) If, in order to manufacture or sell any Licensed Product covered by this Article 4.1C, any member of the RGENE Licensing Group is required to obtain from one or more third parties who are not Affiliates or members of the RGENE Licensing Group other royalty-bearing license(s) for additional drug delivery technology, the Running Royalty rate payable hereunder on Net Sales of that Licensed Product shall be reduced by [*] for each such license actually entered into by a member of the RGENE Licensing Group, provided that in no event shall the Running Royalty rate be less than [*] of Net Sales and further provided that the reduced Running Royalty rate shall apply only to sales of that Licensed Product on which a member of the RGENE Licensing Group actually owes and pays a royalty to a non-Affiliate third party. (2) In order to establish such reduction in the Running Royalty rate for a particular Licensed Product, RGENE shall furnish to UTRC a copy of such executed agreement and any other written evidence in such form as may be required by UTRC along with a statement by an appropriate officer of RGENE that the third-party agreement was required for the manufacture or sale of that Licensed Product. (3) The reduction in the Running Royalty rate for a particular Licensed Product shall not operate to reduce the Running Royalty rate for any other Licensed Product. D. RGENE shall pay to UTRC Running Royalties in an amount equal to [*] of all Net Sales of Licensed Products that are not covered by the provisions of Article 4.1C above by members of the RGENE Licensing Group during each calendar quarter during the term of this Agreement, provided: (1) If, in order to manufacture or sell any Licensed Product covered by this Article 4.1D, a member of the RGENE Licensing Group is required to obtain from one or more non-Affiliate third parties other royalty-bearing license(s) for additional drug delivery technology, the Running Royalty rate payable hereunder on Net Sales of that Licensed Product shall be reduced by [*] for each such license actually entered into by a member of the RGENE Licensing Group, provided that in no event shall the Running Royalty rate be less than [*] of Net Sales and further provided that the reduced Running Royalty rate shall apply only to sales of that Licensed Product on which a member of the RGENE Licensing Group actually owes and pays a royalty to a non-Affiliate third party. - ------------------------------ [*] Confidential Treatment Requested -12- 14 (2) In order to establish such reduction in the Running Royalty rate for a particular Licensed Product, RGENE shall furnish to UTRC a copy of such executed agreement and any other written evidence in such form as may be required by UTRC along with a statement by an appropriate officer of RGENE that the third-party agreement was required for the manufacture or sale of that Licensed Product. (3) The reduction in the Running Royalty rate for a particular Licensed Product shall not operate to reduce the Running Royalty rate for any other Licensed Product. E. RGENE shall pay to UTRC Sublicense Royalties as follows: (1) Up-Front Payments. (a) For each sublicense granted hereunder which covers only one molecular entity (i.e., only one therapeutic or diagnostic agent), RGENE shall pay UTRC the greater of: (i) [*] to RGENE that is designated as an up-front payment for Licensed Patent Rights; or (ii) [*] (b) For each sublicense granted hereunder which covers more than one molecular entity (i.e., more than one therapeutic or diagnostic agent), RGENE shall pay UTRC the greater of: - ------------------------------ [*] Confidential Treatment Requested -13- 15 (i) [*] to RGENE that is designated as an up-front payment for any Licensed Patent Rights; or (ii) [*]. (2) RGENE shall pay UTRC [*] of running royalties and all remaining revenue received from RGENE's sublicensees other than up-front fees. (3) Notwithstanding the foregoing, in the event a sublicense is granted to Pasteur Merieux, UTRC will receive [*] of any revenue received by any member(s) of the RGENE Licensing Group as a result of such sublicense. F. RGENE shall pay to UTRC Annual License Maintenance Fees as follows: (1) [*] per year for each of the following years: 1995, 1996, 1997, 1998 and 1999 (2) [*] per year for each of the following years: 2000, 2001, 2002, 2003, and 2004 (3) [*] per year for 2005 and each year thereafter during the term of this Agreement. Annual License Maintenance Fees shall be paid by the last day of February of the year to which they apply. The Annual License Maintenance Fee paid for any year shall be creditable against the Running Royalties and Sublicense royalties accruing during that year. Annual License Maintenance Fees for any year paid in excess of Running Royalties and Sublicense Royalties for that year shall not be creditable to Running Royalties and Sublicense royalties for subsequent years. 4.2 Payment of the amounts due to UTRC for Running Royalties and Sublicense Royalties shall be made quarterly by RGENE to UTRC on or before the last day of February, May, August, and November of each year during the term of this Agreement based on sales which occurred during the immediately preceding calendar quarter. The last such payment shall be made within forty-five (45) days after termination of this Agreement. - ------------------------------ [*] Confidential Treatment Requested -14- 16 4.3 For purposes of determining when Running Royalties are earned, Licensed Products shall be considered to be sold when billed, or if not billed out, when delivered or shipped. The nonpayment by customers shall not affect the royalties due to UTRC. However, royalties paid (a) on Licensed Products that are returned or that are not accepted by customers or (b) on billings or shipments for which a member of the RGENE Licensing Group does not receive payment shall be credited against subsequent royalties due UTRC under this Agreement. In the case of a distribution other than sale, such distribution shall be considered to have been made on the earlier of the date of delivery, shipment, or installation. 4.4 All payments due hereunder are expressed in and shall be paid in United States of America currency, without deduction of exchange, collection or other charges, to UTRC in immediately available funds, or to the account of UTRC at such financial institution as UTRC may from time to time designate in writing. 4.5 Any amount owed by RGENE which is not received by UTRC on or before the date due shall bear interest at the prime rate quoted in the Wall Street Journal for a major New York bank on the date due (or if not quoted on the date due, the next date on which the prime rate is quoted) plus two percentage points. RGENE shall also pay all reasonable collection costs at any time incurred by UTRC in obtaining payment of amounts past due, including reasonable attorneys' fees. The payment of such interest by RGENE shall not foreclose UTRC from exercising any other rights it may have as a consequence of the lateness of any payment. 4.6 Should RGENE fail to make any payment or submit any report as required under this Agreement, UTRC shall have the option to terminate this Agreement in accordance with the provisions of Article 10.4 herein. 4.7 Notwithstanding any provision herein to the contrary, the obligation to pay royalties shall terminate as to each of the issued United States patents that may be included within Licensed Patent Rights upon expiration of the patent, except that royalties accrued but not paid prior to such expiration shall be payable with the next scheduled royalty payment under the provisions of this Article. 5. REPORTS, RECORDS AND INSPECTION 5.l RGENE shall maintain and shall require its sublicensees to maintain a true and correct set of records pertaining to performance under this Agreement or any sublicense, as the case may be. RGENE agrees to permit an auditor selected by UTRC to have access, during the term of this Agreement and for a period of three (3) years thereafter, and during ordinary business hours upon at least two (2) weeks' notice, to such records as may be necessary, in the opinion of such auditor, to -15- 17 determine the correctness of any report and/or payment made under this Agreement. Results of any such examination shall be made available to RGENE and UTRC. If any examination reveals a shortage in amounts paid to UTRC equal to or greater than five percent (5%) of the total amount due in the period under audit, RGENE shall reimburse UTRC for the cost of the examination as well as the shortage, together with interest thereon as provided in Article 4.5, within ten (10) days following completion of the examination. Any overage will be credited to future royalties. 5.2 On or before the last day of February, May, August, and November of each year during the term of this Agreement, RGENE shall furnish UTRC a written report of the activities of RGENE and its sublicensee(s) under this Agreement in such form as UTRC may reasonably request. Each such report shall reflect at a minimum the volume sold of all Licensed Products and all revenues received by RGENE and its sublicensee(s) pursuant to commercialization of Licensed Products during the immediately preceding calendar quarter. 5.3 On or before the one-hundred twentieth (120th) day following the close of RGENE's fiscal year, RGENE shall provide UTRC with a copy of RGENE's annual report for the preceding fiscal year. 6. PATENT PROSECUTION AND INFRINGEMENT 6.1 UTRC shall have the right, but not the obligation, to file, prosecute and/or maintain patent applications and patents included within Licensed Patent Rights. Upon request by RGENE, UTRC shall provide or request that its patent attorney(s) provide RGENE with copies of correspondence with patent offices concerning any patent applications and patents that may be included within Licensed Patent Rights. In the event that UTRC elects not to prosecute and/or maintain any patent applications or patents that may be included within Licensed Patent Rights, UTRC shall so notify RGENE (and other licensees of such Licensed Patent Rights) in writing of such election no later than thirty (30) days prior to any applicable statutory bar date or response date, as the case may be, to permit RGENE and such other licensees (at their own expense) to file, prosecute and/or maintain the patent application(s) and/or patent (s) that were the subject of such notice. 6.2 Within thirty (30) days after receipt of an invoice from UTRC, RGENE shall reimburse UTRC for: -16- 18 A. [*] of all out-of-pocket expenses incurred after the Effective Date by UTRC in the filing, prosecution, and maintenance of United States patent applications and patents included within Licensed Patent Rights; and B. [*] of all out-of-pocket expenses incurred after the Effective Date by UTRC in the filing, prosecution, and maintenance of foreign patent applications and patents included within Licensed Patent Rights. 6.3 Notwithstanding the provisions of Article 6.2, in the event that UTRC grants a license to one or more third parties under the Licensed Patent Rights outside the First Licensed Field, RGENE shall be responsible to UTRC from and after the effective date of such subsequent license(s) for only 1/x (where "x" is the total number of direct UTRC licensees, excluding sublicensees) of the out-of-pocket expenses incurred by UTRC in the filing, prosecution, and maintenance of patent applications and patents included in such license to a third party. Further, UTRC agrees that it will notify RGENE of UTRC's intention to file in a foreign country any patent application that would be covered by the definition of Licensed Patent Rights. In the event RGENE fails for any reason to pay its pro rata share of any such expenses within sixty (60) days following its receipt of an invoice from UTRC for such expenses, then (1) RGENE shall have no further license under the Licensed Patent Rights in the country(ies) to which such expenses pertain, and (2) RGENE shall not thereafter make, have made, sell or lease, or sublicense others to use Licensed Products in the country(ies) to which such expenses pertain; and (3) those country(ies) will be automatically deleted from the Territory. 6.4 All patent applications and issued patents within Licensed Patent Rights shall be owned by UTRC. 6.5 RGENE and all its sublicensees shall mark all products covered by Licensed Patent Rights with patent numbers in accordance with the statutory requirements in the country(ies) of manufacture, use, and sale, and pending the issue of any patents, RGENE and its sublicensees shall stamp the products, "Patent Applied For," or the foreign equivalent as appropriate. 7. INFRINGEMENT 7.1 If it is believed in good faith that the rights to any issued patent included within Licensed Patent Rights, United States or foreign, are infringed by an - ------------------------------ [*] Confidential Treatment Requested -17- 19 unlicensed third party, the party to this Agreement first having knowledge of such infringement shall promptly notify the other thereof in writing, which notice shall set forth the known facts of such infringement in reasonable detail. UTRC shall have the right but not the obligation to institute and prosecute at its own expense any such infringement of the Licensed Patent Rights or to enter into negotiations with the alleged infringer for the granting of a license under Licensed Patent Rights. In furtherance of such right, RGENE hereby agrees that UTRC may include RGENE as a party plaintiff in any such suit, without expense to RGENE. The total cost of any such infringement action commenced solely by UTRC shall be borne by UTRC. Any recovery or damages for past infringement during the term of this Agreement in the First Licensed Field in the Territory shall be applied first to reimburse UTRC for its out-of-pocket expenses and reasonable attorneys' fees incurred by UTRC in connection with such suit, and the balance remaining from any such recovery shall be divided equally between UTRC and RGENE. Any recovery or damages for past infringement during the term of this Agreement in the Third Licensed Field in the Territory shall be applied first to reimburse UTRC for its out-of-pocket expenses and reasonable attorneys' fees incurred by UTRC in connection with such suit, and the balance remaining from any such recovery shall be divided seventy-five percent (75%) to UTRC and twenty-five percent (25%) to RGENE. Any recovery or damages for past infringement during the term of this Agreement in the Second Licensed Field in the Territory shall be retained by UTRC. RGENE shall have the right at its own expense to participate in such lawsuit to the extent that, in its judgment, it may be prejudiced thereby. 7.2 If within six (6) months after having been notified of an alleged infringement in the First Licensed Field in the Territory, UTRC shall have been unsuccessful in persuading the alleged infringer to desist and shall not have brought an infringement action, or if UTRC shall notify RGENE at any time prior thereto of its intention not to bring suit against any alleged infringer in the First Licensed Field in the Territory, then, and in those events only, RGENE shall have the right, but shall not be obligated, to prosecute at its own expense any such infringement in the First Licensed Field in the Territory, and RGENE may, for such purposes, use the name of UTRC as party plaintiff. No settlement, consent judgment or other voluntary final disposition of the suit may be entered into without the consent of UTRC, which consent shall not be unreasonably withheld. In the event RGENE shall undertake the enforcement and/or defense of the Licensed Patent Rights by litigation, any recovery of damages by RGENE for each such suit shall be applied first to reimburse RGENE for out-of-pocket expenses and reasonable attorneys' fees incurred by RGENE in connection with such suit, and the balance remaining from any such recovery shall be divided equally between RGENE and UTRC. -18- 20 7.3 Nothing in this Agreement shall be construed in such a way as to obligate either party to institute suit against any alleged infringer. 7.4 In the event a declaratory judgment action alleging invalidity or noninfringement of any of the Licensed Patent Rights shall be brought by any third party against RGENE, UTRC, at its option, shall have the right, within thirty (30) days after commencement of such action, to intervene and take over the sole defense of such action at its own expense. 7.5 In any infringement suit that either party may institute to enforce the Licensed Patent Rights, the other party hereto shall, at the request and expense of the party initiating such suit, cooperate in all respects and, to the extent possible, have its employees testify when requested and make available relevant records, papers, information, samples, specimens, and the like. 7.6 Notwithstanding any of the foregoing, if, at any time during the term of this Agreement, UTRC shall be unable to uphold the validity of any granted patent within Licensed Patent Rights against any alleged infringer, RGENE shall not have a damage claim or a claim for refund or reimbursement against UTRC. 8. DEFENSE OF LEGAL ACTIONS; INSURANCE INDEMNIFICATION 8.1 In the event that UTRC, The University of Tennessee, any of their directors, officers, or employees, or any individual named as an inventor of Licensed Patent Rights (hereinafter "Indemnified Party") is charged with infringement of a patent by a third party or is made a party in any lawsuit (including but not limited to products liability actions) as a result of the manufacture, use, or sale of any Licensed Product under this Agreement or as a result of any obligation or activity of RGENE or its sublicensees under this Agreement or any sublicense, RGENE shall: A. defend or settle, at RGENE's expense, any such claim of infringement or lawsuit; B. assume all costs, expenses, damages, and other obligations for payments incurred as a consequence of such charges of infringement or lawsuit; and C. indemnify and hold such Indemnified Party harmless for any and all damages, losses, liability, and costs resulting from such charge of infringement or lawsuit. 8.2 At RGENE's request and expense, UTRC shall give RGENE assistance in the defense of any such infringement charge or lawsuit. -19- 21 8.3 Any Indemnified Party shall have the right to participate in any defense, compromise or settlement to the extent that, in its judgment, it may be prejudiced thereby. 8.4 RGENE shall not settle any suit naming an Indemnified Party without the prior consent of UTRC and each such Indemnified Party. 8.5 RGENE shall not settle any claim or suit in any manner that shall adversely affect any Licensed Patent Rights, require any payment by UTRC or any other Indemnified Party, or reduce the royalty due to UTRC hereunder without the prior written consent of UTRC. The foregoing shall apply even with regard to a claim or suit in which UTRC is not a party. 8.6 RGENE agrees to carry such liability insurance as would reasonably be expected of a company of RGENE's size and activities operating in the pharmaceutical industry. At all times during the term of this Agreement, UTRC shall be listed as an additional named insured on such liability insurance policy(ies). RGENE agrees to provide written evidence of such insurance upon request by UTRC. 9. NEGATION OF WARRANTIES 9.1 NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS: A. a warranty or representation by UTRC that any patent application included within Licensed Patent Rights will ultimately issue as a patent; B. a warranty or representation as to the validity or scope of any patent application or issued patent that may be included in Licensed Patent Rights; C. a warranty or representation that the use of the Technology or the practice of the invention(s) covered by Licensed Patent Rights or the manufacture, use, or sale of Licensed Products are or will be free from infringement of patents of third parties; D. a requirement that UTRC shall be responsible for the expenses of filing or prosecuting any patent application or maintaining any patent in force; E. an obligation on the part of UTRC to bring or prosecute actions or suits against third parties for infringement of Licensed Patent Rights or for unauthorized use of the Technology; F. an obligation on the part of UTRC to defend any action or suit brought by any third party; -20- 22 G. a warranty or representation by UTRC as to the safety, reliability, or efficacy of the Technology, the invention(s) covered by Licensed Patent Rights, or any product which incorporates or in its production employs such Technology or invention(s); H. a warranty or representation by UTRC that any Technology is secret or confidential; or I. a requirement that UTRC take any action to prevent the disclosure of the Technology by the University, its employees, or any other third party. 9.2 UTRC makes no representations, extends no warranties of any kind, either express or implied, and assumes no responsibilities whatever with respect to the manufacture, use, sale, or other disposition of Licensed Products or any other activities hereunder by RGENE, its sublicensee(s), their customers, or any third parties. 10. TERM AND TERMINATION 10.1 This Agreement shall commence and become effective as of the Effective Date. 10.2 Unless earlier terminated in accordance with the provisions set out herein, this Agreement shall continue in full force and effect until the expiration or termination of all Licensed Patent Rights. 10.3 Upon termination of this Agreement as a result of the expiration or termination of all Licensed Patent Rights, RGENE shall have no further royalty obligation to UTRC with regard to any Licensed Products manufactured, used, or sold for use in the Licensed Fields, and may thereafter utilize any inventions covered by expired Licensed Patent Rights without obligation to make any farther payment to UTRC. 10.4 Should RGENE fail to pay UTRC royalties or any other payments due and payable hereunder, UTRC shall have the right to terminate this Agreement on thirty (30) days' written notice to RGENE, and unless RGENE shall within said thirty-day period pay UTRC all such amounts due and payable, this Agreement shall terminate at midnight on the thirtieth day, all without prejudice to any rights or remedies otherwise available to UTRC. 10.5 Should RGENE's program of the exploitation of the Technology in the Licensed Fields fail at any time to yield satisfactory progress, in RGENE's reasonable -21- 23 business judgment, toward the introduction to market of one or more Licensed Products, RGENE shall have the right to terminate this Agreement upon ninety (90) days' written notice to UTRC and, concurrently with the giving of such notice, payment of a Termination Fee in the amount of the next Annual License Maintenance Fee; provided, however, that RGENE shall remain liable for all amounts due and payable under this Agreement through the date of termination. 10.6 In the event that either party to this Agreement defaults in the due performance of its obligations or covenants hereunder (other than a default by RGENE covered by Article 10.4 above) or in the event that any representation by either party proves to be false or incorrect in any material respect, the other party may give notice of same to the defaulting party demanding that such default be cured within sixty (60) days. If the default is not cured within the 60-day grace period, this Agreement shall terminate at midnight on the last day of such period, all without prejudice to any rights or remedies otherwise available to the terminating party. 10.7 Upon any termination of this Agreement by either party except pursuant to the expiration of termination of all Licensed Patent Rights: A. All rights granted to RGENE hereunder shall terminate automatically and shall revert to UTRC; B. RGENE shall not thereafter utilize the Technology for any purpose or manufacture, use, or sell Licensed Products under Licensed Patent Rights; and C. UTRC shall automatically assume the position of "sublicensor" in any sublicense granted by RGENE. 10.8 Within thirty (30) days after the termination of this Agreement for any reason, RGENE shall duly account for and pay to UTRC all royalties and other payments accrued as of the date of termination. 10.9 In the event of adjudication of bankruptcy, appointment of a receiver by a court of competent jurisdiction, assignment for the benefit of creditors, or where levy or execution directly involves all the substantial assets of RGENE or if RGENE goes out of business, this Agreement shall automatically terminate effective the date of such action, provided, however, that such termination shall not impair or prejudice any right or remedy that UTRC may otherwise have. 10.10 Termination of this Agreement for any cause shall not be construed to release RGENE from any royalty or confidentiality obligation or any obligation under -22- 24 Article 8 (all of which shall survive the termination of this Agreement) or from any other obligation matured prior to the effective date of such termination. 11. CONFIDENTIALITY 11.1 RGENE agrees that reasonable and prudent practices shall be followed to maintain the confidential nature of the Technology that is not public knowledge, including where necessary, obtaining written confidentiality agreements from employees not already bound by such agreements and all sublicensees and all employees of same who have access to such Technology. UTRC and RGENE each agree that all information relating to this Agreement and the Technology and improvements licensed hereunder contained in documents marked "Confidential" which are forwarded to one by the other shall be received in strict confidence, shall be used only for the purposes contemplated in this Agreement, and shall not be disclosed by the receiving party (except as required by law), its agents or employees without the prior written consent of the forwarding party, unless such information (i) was in the public domain at the time of disclosure, (ii) later became part of the public domain through no act or omission of the receiving party, its employees, agents, successors or assigns, (iii) was lawfully disclosed to the receiving party by a third party having the right to disclose it, (iv) was already known to the receiving party at the time of disclosure, (v) was independently conceived, discovered or reduced to practice, (vi) is required to be submitted to a government agency pursuant to any obligation imposed or right granted hereunder, (vii) is required by law or court order to be disclosed, or (viii) is disclosed by The University of Tennessee, UTRC, or McMaster in the exercise of rights under Article 15.1. The foregoing obligation of confidentiality shall survive the termination of this Agreement for any reason for a period of ten (10) years thereafter. 12. WAIVER AND MODIFICATIONS 12.1 It is understood that this Agreement and the previous confidentiality agreement executed by the parties contain the entire agreement between the parties relating to the subject matter of this Agreement. Neither party shall be bound by any agreement, covenants or warranties unless it shall be reduced to writing and signed by an officer of such party. The failure of either of the parties at any time or times to require the performance by the other of any provisions hereof shall in no manner affect the right of the first-mentioned party thereafter to enforce the same. The waiver by either of the parties of any breach of any provision hereof shall never be construed to be a waiver of any succeeding breach of such provision or a waiver of the provision itself. -23- 25 13. ASSIGNABILITY 13.1 This Agreement shall be binding upon and shall inure to the benefit of UTRC and its assigns and successors in interest and shall be binding upon and shall insure to the benefit of RGENE and the successor to its entire business, but shall not otherwise be assignable or assigned by RGENE without UTRC's prior written approval, which approval shall not be unreasonably withheld, provided that such successor shall agree in writing to be bound in all respects thereby. 14. NOTICES 14.1 All payments, notices, and other communications between the parties shall be deemed to be given and received two (2) days after the date of mailing when sent by certified or registered United States mail, return receipt requested, and addressed as set out below. Otherwise, a payment, notice, or other communication shall be deemed to be given and received on the date of actual receipt by the addressee. A. If to RGENE: RGene Therapeutics, Inc. 2170 Buckthorne Place, Suite 230 The Woodlands, TX 77381 B. If to UTRC: The University of Tennessee Research Corporation 415 Communications Building Knoxville, TN 37996-0344 14.2 Either party may change its address by written notice duly given to the other party. A post office receipt showing the date of deposit shall be prima facie evidence of mailing when sent by certified or registered United States mail. 15. ADDITIONAL PROVISIONS 15.1 During the term of this Agreement, RGENE shall, at its own expense and without remuneration from UTRC, fully disclose to UTRC all improvements and modifications to the Technology, the Licensed Products, and the invention(s) within Licensed Patent Rights which are developed wholly or partly by RGENE, employees, contractors, agents, and subsidiaries. The University of Tennessee, McMaster, and UTRC shall have during the term of this Agreement a nonexclusive nontransferable royalty-free license to utilize such improvements and modifications for research and -24- 26 academic purposes only. However, in the event that this Agreement is terminated by UTRC due to a default by RGENE, UTRC and McMaster shall have a royalty-free license (with the right to sublicense) to manufacture, use, and sell such improvements and modifications for any commercial or noncommercial purpose. The provisions of this paragraph shall not apply to any technology developed by a university or other academic institution under contract with RGENE. 15.2 Each party shall be deemed to be an independent contractor and this Agreement shall not constitute a partnership or a joint venture, and neither party may be bound by the other to any contract, arrangement or understanding except as specifically stated herein. 15.3 Prior written approval must be obtained for the use of UTRC's, McMaster's, or the University's name, logo or associated symbols in any form of advertising. 15.4 RGENE shall be solely responsible for the payment and discharge of any taxes or duties relating to any transactions of RGENE, its employees, contractors, agents, or sublicensees in connection with the manufacture, use, or sale in any country of Licensed Products. 15.5 RGENE shall, at its own expense, be responsible for applying for and obtaining any approvals, authorizations, or validations required under the laws of the United States or a foreign country that may be necessary for the manufacture, use, or sale of Licensed Products or relative to the performance of any obligation under this Agreement. 15.6 The failure of either party to enforce at any time any of the provisions of this Agreement, or any rights in respect thereto, or to exercise any election herein provided, shall in no way be considered to be a waiver of such provisions, rights or elections, or in any way to affect the validity of this Agreement. Exercise by either party of any of these rights herein or any of its elections under the terms or covenants herein shall not preclude either party from exercising the same or any other rights in this Agreement irrespective of any previous action or proceeding taken by either party hereunder. 15.7 If any provision of this Agreement is judicially or in an arbitration proceeding determined to be void or unenforceable, such provision shall be deemed to be severable from the other provisions of this Agreement which shall remain in full force and effect. Either party may request that a provision otherwise void or unenforceable be reformed so as to be valid and enforceable to the maximum extent permitted by law. -25- 27 15.8 No liability hereunder shall result to a party by reason of delay in performance caused by force majeure, that is, circumstances beyond reasonable control of the party, including, without limitation, acts of God, fire, flood, war, civil unrest, labor unrest, or shortage of or inability to obtain material or equipment. 15.9 This First Amended Agreement amends and restates the Original Agreement. From and after the execution of this First Amended Agreement, the Original Agreement shall have no further force and effect. 15.10 The signature on the part of McMaster appears below as co-owner of the Licensed Patent Rights and the Technology for the purpose of indicating its approval of the provisions of this Agreement and indicating its agreement not to take any action in derogation of the rights herein granted to RGENE. It is understood and agreed by RGENE that UTRC shall have no responsibility or liability for any act or omission to act on the part of McMaster, and McMaster shall take no responsibility or liability for any act or omission to act on the part of UTRC. 15.11 This Agreement shall have no force and effect unless and until duly executed by both parties. 15.12 This Agreement is deemed to have been made in the State of Tennessee and shall be interpreted and construed and any legal relations created hereunder shall be determined in accordance with the laws of the State of Tennessee. IN WITNESS WHEREOF, signifying their acceptance of and agreement to be bound by the terms and conditions of this Agreement, the signatures of the parties are affixed hereto. THE UNIVERSITY OF TENNESSEE RGENE, INC. RESEARCH CORPORATION By: /s/MARTIN LINDENBERG By: /s/ANN J. ROBERSON -------------------- ------------------ Name: Martin Lindenberg Name: Ann J. Roberson Title: President and CEO Title: President Date: 12/8/95 Date: 12-6-95 Approved by MCMASTER UNIVERSITY By: /s/DR. M.R. McDERMOTT --------------------- Name: Dr. M.R. McDermott Title: Director, Research Contracts & Intellectual Property Date: Dec. 7/95 -26- 28 Appendix A - p.1 ACTUAL GRANTS OF LICENSE AND FIELDS OF USE FOR DC-CHOL FOR UTRC'S LICENSEES AS OF 12/06/95 LICENSEE A - ARONEX 2.1 UTRC hereby grants to ARONEX, and ARONEX hereby accepts from UTRC, upon the terms and conditions herein specified and subject to the reservations set out below, (a) a world-wide exclusive License to utilize the Technology in the manufacture, use, and sale of Licensed Products for use in the Licensed Field and (b) a world-wide exclusive License to manufacture, use and sell Licensed Products for use in the Licensed Field under the issued patents included within Licensed Patent Rights. The term "exclusive" as used in this Article 2.1 means that UTRC shall not sell or otherwise distribute Licensed Products for use in the Licensed Field or license third parties to sell or otherwise distribute Licensed Products for use in the Licensed Field during the term of this Agreement. 1.7 "Licensed Field" shall mean and include therapeutic and prophylactic applications of the Technology and the Licensed Patent Rights for (a) sepsis-related infectious diseases other than pulmonary diseases and (b) lung, colon, breast, ovarian, and hematologic cancers. 1.8 "Excluded Fields" shall mean: (a) the sale for research purposes of products based on or incorporating the Technology or described/claimed in the Licensed Patent Rights; and (b) all applications for immunologic or genetic disorders; and (c) all applications for diseases and disorders of joints and connective tissues, including but not limited to (1) all forms of arthritis; (2) osteoporosis and other diseases of the bone; (3) tendon and ligament repair and healing; (4) cartilage repair and healing; (5) radicular and pseudoradicular syndromes; (6) systemic lupus erythematosus; (7) scleroderma; (8) Sjogren's syndrome; and (9) aseptic loosening and other causes of prosthetic orthopaedic failure; and (d) all applications for pulmonary diseases or disorders other than lung cancer; and (e) all applications for cardiac diseases or disorders other than hematologic cancer; and 29 (f) all applications for diseases and disorders of the skin except skin cancer; and (g) all applications for infectious diseases except sepsis-related infectious diseases other than pulmonary diseases; and (h) all other applications not specifically included in the Licensed Field. LICENSEE B - RGENE -2- 30 Appendix A - p.2 LICENSEE C 2.1 UTRC hereby grants to LICENSEE C, and LICENSEE C hereby accepts from UTRC, upon the terms and conditions herein specified and subject to the royalty-free nonexclusive license and other rights held by the United States Government and further subject to the reservations set out below, A. a world-wide right and license to utilize the Technology in the manufacture, use, and sale of Licensed Products for use in the First Licensed Field, with the right to sell such Licensed Products for use in the First Licensed Field being exclusive; and B. a world-wide right and license to manufacture, use, and sell Licensed Products for use in the First Licensed Field under the issued patents included within Licensed Patent Rights, with the right to sell such Licensed Products for use in the First Licensed Field being exclusive; and C. a world-wide nonexclusive right and license to utilize the Technology in the manufacture, use, and sale of Licensed Products for use in the Second Licensed Field; and D. a world-wide nonexclusive right and license to manufacture, use, and sell Licensed Products for use in the Second Licensed Field under the issued patents included within Licensed Patent Rights. The term "exclusive" as used in this Article 2.1 means that UTRC shall not sell or otherwise distribute Licensed Products for use in the First Licensed Field or license third parties to sell or otherwise distribute Licensed Products for use in the First Licensed Field during the term of this Agreement. 1.7 "Licensed Fields" shall be defined as the First Licensed Field (defined below) and the Second Licensed Field (defined below). 1.8 "First Licensed Field" shall mean and include Applications Group 1 and Applications Group 2. 1.9 "Second Licensed Field" shall mean and include Applications Group 3 and Applications Group 4. 31 1.10 "Applications Group 1" shall mean therapeutic and prophylactic applications for: (a) the following classifications of rheumatic diseases as set forth in Table 105-1 ("Classification of the Rheumatic Diseases") of The Merck Manual, Sixteenth Edition (Robert Berkow, M.D., Editor-in-Chief; published by Merck Research Laboratories, Rahway, N.J.; 1992; pp. 1297-1300.): I. Diffuse connective tissue diseases II. Arthritis associated with spondylitis III. Osteoarthritis, including osteoarthrosis and degenerative joint diseases IV. Arthritis, tenosynovitis, and bursitis associated with infectious agents, excluding treatment of the underlying infectious diseases themselves V. Metabolic and endocrine diseases with rheumatic states, including (a) crystal-induced conditions VI. VII. Neuropathic disorders VIII. Bone and cartilage disorders associated with articular manifestations IX. Nonarticular rheumatism; and (b) osteogenesis imperfecta; and (c) tendon, ligament, and cartilage repair and healing; and -2- 32 Appendix A - p.3 (d) diseases and disorders of the following types of connective tissues: white fibrous tissue in the form of tendons and ligaments; hyaline cartilage; interarticular fibro-cartilage; connecting fibro-cartilage; circumferential fibro-cartilage; stratiform fibro-cartilage; yellow or elastic fibro-cartilage. 1.11 "Applications Group 2" shall mean therapeutic and prophylactic applications for diseases and disorders of the central nervous system. 1.12 "Applications Group 3" shall mean diseases and disorders of the lung except for (a) lung cancer; (b) the treatment or prevention of cystic fibrosis in humans; and (c) the treatment or prevention of pulmonary infections in cystic fibrosis patients. 1.13 "Applications Group 4" shall mean cancer other than lung, breast, ovarian, hematological, and colon cancers. 1.14 "Excluded Fields" shall mean: A. the sale for research purposes of reagents based on the Technology or described/claimed in the Licensed Patent Rights; and B. any applications for immunologic or genetic diseases or disorders other than those included in the Licensed Field; and C. any applications for infectious diseases; and D. any applications for all forms of cancer except cancers of the central nervous system, pancreas, stomach, small intestine, cervix uteri, mouth, head and neck; and E. any applications for cystic fibrosis; and F. any applications for all cardiac and cardiovascular diseases and disorders; and G. any applications for skin diseases and disorders not included in Table 105-1 of The Merck Manual, Sixteenth Edition, as referenced in Section 1.6 above; and H. any applications for areolar tissue, outside of rheumatoid conditions and conditions where areolar tissue is connected to synovial cells, in which it comprises or is found throughout the various organs of the body; and 33 I. any applications for dystrophies or other diseases and conditions not included in Table 105-1 of The Merck Manual, Sixteenth Edition as referenced in Section 1.6 above; and J. any other applications not included in the Licensed Fields. LICENSEE D 2.1 UTRC hereby grants to LICENSEE D, and LICENSEE D hereby accepts from UTRC, upon the terms and conditions herein specified and subject to the reservations set out below and further subject to the royalty-free nonexclusive license and other rights held by the United States Government (as more fully set out in Article 2.3 below), A. a world-wide license under the Patent Rights to manufacture, use, and sell Licensed Products for use in the First Licensed Field with the license to sell being exclusive; and B. a world-wide nonexclusive License under the Patent Rights to manufacture, use, and sell Licensed Products for use in the Second Licensed Field; The term "exclusive" as used in Article 2.1(a) above means that UTRC shall not sell or otherwise distribute Licensed Products for use in the First Licensed Field or license third parties to sell or otherwise distribute Licensed Products for use in the First Licensed Field during the term of this Agreement, subject to the provisions of Article 2.2 below. -2- 34 Appendix A - p.4 1.6 "Licensed Fields" shall be defined as the First Licensed Field (defined below) and the Second Licensed Field (defined below). 1.7 "First Licensed Field" shall mean and include therapeutic and prophylactic applications for treating and/or preventing cystic fibrosis in humans, including applications for treating and/or preventing bacterial pulmonary infections in cystic fibrosis patients. 1.8 "Second Licensed Field" shall mean and include: A. therapeutic and prophylactic applications for treating and/or preventing all diseases and disorders of the pulmonary system except for lung cancer and disease(s)/disorder(s) included in the First Licensed Field; and B. therapeutic and prophylactic applications for treating and/or preventing sepsis-related and nonsepsis-related infectious diseases of the lungs. 1.9 "Excluded Fields" shall mean: A. the sale for research purposes of active cationic lipid(s) and/or reagent(s) based on the Technology or described/claimed in the Patent Rights; and C. any applications for immunologic or genetic disorders other than those which may be specifically included in the First or Second Licensed Fields; and D. any applications for: (1) the following classifications of rheumatic diseases as set forth in Table 105-1 ("Classification of the Rheumatic Diseases") of The Merck Manual, Sixteenth Edition (Robert Berkow, M.D., Editor-in-Chief; published by Merck Research Laboratories, Rahway, N.J.; 1992; pp. 1297-1300.): I. Diffuse connective tissue diseases II. Arthritis associated with spondylitis III. Osteoarthritis, including osteoarthrosis and degenerative joint diseases 35 IV. Arthritis, tenosynovitis and bursitis associated with infectious agents, excluding treatment of the underlying infectious diseases themselves V. Metabolic and endocrine diseases with rheumatic states, including a.) crystal induced conditions VI. -- VII. Neuropathic disorders VIII. Bone and cartilage disorders associated with articular manifestations IX. Nonarticular rheumatism; and (2) osteogenesis imperfecta; and (3) tendon, ligament, and cartilage repair and healing; and (4) diseases and disorders of the following types of connective tissues: white fibrous tissue in the form of tendons and ligaments; hyaline cartilage; interarticular fibro-cartilage; connecting fibro-cartilage; circumferential fibro-cartilage; stratiform fibro-cartilage; yellow or elastic fibro-cartilage; and (5) any other diseases and disorders of joints and connective tissues; and D. any applications for all cardiac and cardiovascular diseases and disorders; and -2- 36 Appendix A - p.5 E. any applications for sepsis-related infectious diseases other than those which may be specifically included in the First or Second Licensed Fields; and F. any applications for non-sepsis related infectious diseases other than those which may be specifically included in the First or Second Licensed Fields; and G. any applications for skin diseases or disorders; and H. any applications for cancer; and I. any applications for diseases of the central nervous system; and J. any applications for any dystrophic diseases or disorders; and K. any other applications not specifically included in the Licensed Fields. LICENSEE E 2.1 UTRC hereby grants to LICENSEE E, and LICENSEE E hereby accepts from UTRC, upon the terms and conditions herein specified, subject to the license and other rights held by the United States Government and further subject to the other reservations set out below, during the term of this Agreement: A. a license to manufacture and to sublicense third parties to manufacture Licensed Products for the Licensed Field in any country (including the United States) where the manufacture of such Licensed Products is covered in whole or in part by a pending or issued claim of Licensed Patent Rights (sublicensees under this Article 2.1A. being hereinafter referred to as "Manufacturing Sublicensees"); B. a worldwide license to use and to sublicense third parties to use Licensed Products in the Licensed Field (sublicensees under this Article 2.1B. being hereinafter referred to as "Use Sublicensees"); C. a worldwide license to sell and to sublicense third parties to sell Licensed Products to Use Sublicensees for the Licensed Field (sublicensees under this Article 2.1.C. being hereinafter referred to as "Distributors"). 37 2.2 Subject to the reserved rights, UTRC hereby agrees that it shall not grant any other license to sell Licensed Products for the Licensed Field during the active term of this Agreement. 1.6 "Licensed Field" shall mean the use of Licensed Products for non-clinical research purposes. 1.7 "Excluded Fields" shall mean: A. the manufacture, use, or sale of products for any therapeutic or clinical purpose or any other purpose except non-clinical research use; and B. all applications and uses of the Technology other than the manufacture and sale of products for non-clinical research use. -2- 38 EXHIBIT A RGENE THERAPEUTICS, INC. Stockholder Agreement This Stockholder Agreement (this "Agreement"), dated and effective as of 20 October, 1995, is entered into by and between RGene Therapeutics, Inc., a Delaware corporation (the "Company"), and McMaster University ("Stockholder"). RECITALS A. The Company desires to issue certain shares of common Stock, $.001 par value, of the Company (the "Common Stock") to the Stockholder. B. The Stockholder desires to acquire certain shares of Common Stock from the Company. C. The Stockholder and the Company desire that the Stockholder grant to the Company and under certain circumstances to holders of the Company's capital stock listed on Schedule A (the "Investors") options to repurchase certain shares of Common Stock purchased by the Stockholder. NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. ISSUANCE OF SHARES 1.1 Purchase and Sale of Shares. Subject to the terms and conditions of this Agreement and in consideration of the execution of the License Agreement between the Company and The University of Tennessee Research Corporation dated the date hereof, the Company agrees to issue to the Stockholder [*] shares of Common Stock (the "Shares"). 1.2 Closing. The closing for the issuance of the Shares by the Company to the Stockholder shall occur on or before 20 October, 1995, or at such other date and time as the parties may agree (the "Closing"). At the Closing or within a reasonable - ------------------------------ [*] Confidential Treatment Requested 39 time thereafter, the Company shall deliver to Stockholder a certificate or certificates representing the number of Shares as set forth in Section 1.1 hereof, in the name of the Stockholder. 2. REPRESENTATIONS AND WARRANTIES To induce the Company to deliver the Shares to the Stockholder, the Stockholder represents and warrants to the Company as follows: (a) The Stockholder is acquiring the Shares for its own account as principal, for investment purposes only, and not with a view to, or for, resale or distribution, and no other person or entity has a direct or indirect beneficial interest in the Shares; (b) The Stockholder has not offered any of the Shares for resale and has no present intention of dividing its interest with others or of reselling or otherwise disposing of any of the Shares; (c) Any information the Stockholder has furnished to the Company with respect to the Stockholder's status as a sophisticated or accredited investor, its business experience or financial position is correct; (d) The financial capacity of the Stockholder is such that the investment in the Shares is not material to its total financial capacity; the Stockholder has the financial ability to bear the economic risk of its investment, has adequate means for providing for its current needs and personal contingencies and has no need for liquidity with respect to its investment in the shares; (e) The Stockholder is an "accredited investor" within the meaning of Regulation D under the Securities Act of 1933, as amended (the "Act"), and is a sophisticated investor and has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment in the Shares; (f) The Stockholder has been furnished with all information concerning the Shares and the Company that it desires; (g) The Stockholder has been given the opportunity to ask questions of, and receive answers from, the Company with respect to the Shares, concerning the terms and conditions of the offering and other matters pertaining to this investment, and has been given the opportunity to obtain such additional information necessary to verify the accuracy of the information provided to him by the Company in order for him to evaluate the merits and risks of investment in the Shares; and -2- 40 (h) The Stockholder is not relying on the Company with respect to any economic considerations of the Stockholder related to this investment. In regard to the economic considerations related to this investment, the stockholder has relied on the advice of, or has consulted with, only its own advisors. The Stockholder further represents, warrants and agrees that it will not sell or otherwise transfer the Shares without registration under the Act, or an exemption therefrom, and fully understands and agrees that it must bear the economic risk of its purchase for an indefinite period of time because among other reasons, the Shares have not been registered under the Act or under the securities laws of any state and, therefore, cannot be resold, pledged, assigned or otherwise disposed of unless the offer and sale of the Shares are subsequently registered under the Act and under the applicable securities laws of such states or an exemption from such registration is available. It also understands that the Company is under no obligation to register the Shares or to assist the Stockholder in complying with any exemption from registration under the Act. It further understands that any certificate evidencing the Shares will bear a legend restricting the transfer thereof consistent with the foregoing and that a notation may be made in the records of the Company restricting the transfer of any Shares in a manner consistent with the foregoing. 3. STOCKHOLDER AWARENESS The Stockholder acknowledges that it is aware that: (a) No federal or state agency has passed upon the Shares or made any finding or determination as to the fairness of this investment; (b) There are substantial risks of loss of investment incident to an investment in the Shares and such an investment is highly speculative; and (c) The business in which the Company proposes to engage is highly competitive and success in the company's business may depend on, among other things, the Company's ability to obtain financing, to complete product development, to attract qualified employees and to obtain patent protection and governmental approvals, market acceptance of products and numerous other factors over which the Company does not have control. 4. RESTRICTIONS ON TRANSFER; RIGHT OF FIRST REFUSAL 4.1 Restrictions on Transfer of Shares. None of the Shares, or any interest therein, may be sold, assigned, pledged or otherwise transferred or hypothecated, nor any security interest granted therein, by gift, operation of law or otherwise except in -3- 41 accordance with the terms and conditions set forth in this Section 4; provided that this Agreement shall not prohibit the transfer of any Shares from The University of Tennessee Research Corporation to The University of Tennessee. 4.2 Definitions. "Assigned Value," as used in this Section 4, shall be defined as that value per share of the Common Stock determined as follows: (a) In the event of a proposed sale of any or all of the Shares by the Stockholder pursuant to a bona fide written offer for cash for the purchase thereof ("Purchase Offer"), the Assigned Value shall be the price per share set forth in the Purchase Offer. (b) As to all other Purchase Events (as defined in Section 4.3), the Assigned Value shall be the fair market value per share of Common Stock of the Company as of the end of the most recent fiscal quarter of the Company preceding the applicable closing under this Section 4, less the fair market value per share of any dividends distributed with respect to such shares after the end of such quarter and before such closing. The fair market value per share of Common Stock and the fair market value of any dividends thereon shall be determined in accordance with such methodology as shall be determined by [RGene's independent accountants]. "Stockholder," as used in this Section 4, shall be defined to mean and include, in addition to the Stockholder signatory or expressly subject hereto, the estate, administrator, executor, guardian or other personal representative, successor, trustee, referee, receiver, donee, beneficiary, assignee or transferee of a Stockholder, as appropriate. 4.3 Purchase Events. The Stockholder shall sell, convey, transfer and deliver the Shares owned by the Stockholder to the Company pursuant hereto upon the occurrence of any of the following events (the "Purchase Events"): (a) the proposed or attempted gift, sale, assignment, pledge or other transfer, hypothecation or grant of any security or other interest in any of the Shares or any interest therein; (b) the transfer of the Shares or any interest therein by operation of law or otherwise, including without limitation the adjudication of bankruptcy or the appointment of a receiver, guardian, executor or trustee of the assets or estate of the Stockholder, the entry of any order, judgment or decree by a court of competent jurisdiction approving a petition appointing a trustee in bankruptcy, receiver or liquidator, any assignment or attempt to make an assignment by the Stockholder for the benefit of creditors, the institution of voluntary bankruptcy or equivalent -4- 42 proceedings by the Stockholder or the dissolution, winding up or liquidation or other reorganization of the Stockholder, as applicable; or (c) if the Stockholder is an individual, upon the death or incompetency of the Stockholder. 4.4 Notice of Purchase Event. (a) The Stockholder shall, upon the occurrence of a Purchase Event, immediately give written notice (the "Purchase Event Notice") to the Company and the Investors, citing (i) the appropriate provision of Section 4.3 and (ii) giving the name and address of any proposed transferee or donee and the proposed terms and conditions of such transfer and (iii) in the case where the Purchase Event is pursuant to a Purchase Offer, including a written declaration of the Stockholders intention, subject to the terms of this Agreement, to accept the Purchase Offer. (b) In the event of failure by the Stockholder to give the Purchase Event Notice when and as required, the Purchase Event Notice may be given by the Company and shall be effective as if given by the Stockholder; and in such event, the information required to be given by the Stockholder pursuant to Section 4.4(a) shall be given by the Company giving such notice to its best knowledge and as so given shall be binding upon the Stockholder. 4.5 Purchase of Shares. Within sixty (60) days after receipt of the Purchase Event Notice, the Company and/or the Investors may elect to purchase some or all of the Shares to which the Purchase Event Notice refers, at the Assigned Value. The closing for such purchase by the Company and/or the Investors shall occur, unless otherwise agreed by the Company, the Investors electing to purchase Shares, and the Stockholder, no later than thirty (30) days after the election by the Company and/or the Investors to purchase same. In the event that the number of Shares that the Company and the Investors desire to purchase exceeds the number of Shares proposed for transfer by Stockholder in the Purchase Event Notice, then in such instance the Company shall have full preference to acquire such Shares to the exclusion of the Investors, and, to the extent that there are Shares still available for purchase by the Investors, the Investors desiring to purchase Shares shall be entitled to purchase the remaining amount thereof on a pro rata basis based upon the number of shares of Common Stock and Preferred Stock, or securities convertible into shares of Common Stock and Preferred Stock, then held by each of them so electing to purchase bears to the total number of shares of Common Stock and Preferred Stock, or securities convertible into shares of Common Stock and Preferred Stock, held by all Investors desiring to acquire Shares, on a fully diluted as if converted to Common Stock basis. -5- 43 4.6 Transfer to Other Persons. If all of the Shares to which the Purchase Event Notice refers are not purchased by the Company and the Investors, as provided in Section 4.5 hereof, the Stockholder may transfer such Shares that the Company and the Investors elected not to purchase to any person or persons named in the Purchase Event Notice, provided that such sale or transfer is consummated within 120 days of the date of said Purchase Event Notice to the Company and the Investors, and provided, further, that any such transfer is in accordance with all the terms and conditions hereof. 4.7 Standoff Agreement. Stockholder agrees, in connection with each of the Company's public offerings of its equity securities, and upon request of the Company or the underwriters managing such offering, not to sell, make any short sale of, loan, grant any option for the purchase of or otherwise dispose of any of the Shares (other than those included in the registration, if any) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time from the effective date of such registration as may be requested by the Company or such underwriters; provided, that the officers and directors of the Company who own stock of the Company also agree to such restrictions and provided further that such restriction shall not be for a period longer than 180 days. 4.8 Other Restrictions on Transfer. The Company shall not be required (i) to transfer on its books any of the shares which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (ii) to treat as owner of such Shares or to accord the right to vote as such owner or to pay dividends to any transferee to which such Shares shall have been so transferred. 5. EXEMPT TRANSACTIONS The prohibition in Section 4 against the sale of the Shares shall not apply to the exchange of Shares pursuant to a plan or merger, consolidation, recapitalization, reorganization, or sale of the Company in which the Company is the surviving entity, but any stock or securities received in exchange therefor shall also become subject to this Agreement. 6. ASSIGNMENT The Company may assign this Agreement or any of its rights and obligations hereunder. The Stockholder may not assign this Agreement or any of its rights and obligations hereunder. All covenants and agreements of, and benefits for, the Investors contained in this Agreement shall inure to the benefit of their respective successors and assigns and be binding on the Company and its successors and on the Stockholder and its successors and assigns. All such covenants and agreements are -6- 44 fully assignable by the Investors, provided, however, that any assignment of any of its rights under this Agreement by any Investor (other than to partners of such Investor or successors of such Investor or such partners by operation of law) shall be made only in connection with the sale or other transfer of all or any portion of the Preferred Stock, Common Stock, convertible notes, warrants, options or other securities of the Company which are exchangeable or convertible into shares of Common Stock or Preferred Stock of the Company held by such Investor and such assignee or transferee shall execute this Agreement. 7. ADJUSTMENTS If, from time to time during the term of this Agreement (i) there is any stock dividend or liquidating dividend of cash or property, stock split or other change in the character or amount of any of the outstanding securities of the Company, or (ii) there is any transaction involving the consolidation, merger or sale of all, or substantially all, of the assets of the Company, then, in such event, (x) any and all new, substituted or additional securities or other property to which the Stockholder is entitled by reason of its ownership of the Shares shall be immediately subject to right of first refusal provided to the Company and the Investors as described in Section 4 hereof and (y) all Shares purchased by Stockholder hereunder shall be treated on the same basis as all other outstanding shares of Common Stock of the Company so that Stockholder's Shares shall not be diluted by any such event any differently than any other holder of Common Stock of the Company. 8. LEGEND All certificates representing any of the Shares subject to the provisions of this Agreement shall have endorsed thereon a legend substantially as follows: "ANY DISPOSITION, GRANT OR OTHER TRANSFER OF ANY INTEREST IN THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO CERTAIN RESTRICTIONS, AND THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL, CONTAINED IN A CERTAIN AGREEMENT BY THE RECORDHOLDER HEREOF AND THE CORPORATION, A COPY OF WHICH WILL BE MAILED TO ANY HOLDER OF THIS CERTIFICATE WITHOUT CHARGE AFTER RECEIPT BY THE CORPORATION OF A WRITTEN REQUEST THEREFOR." Upon presentation to the Company or any authorized transfer agent, the certificates representing the Shares or any appropriate portion thereof shall be -7- 45 exchanged for certificates not bearing such legend if the certificates are presented after the termination of this Agreement. 9. RIGHTS AS A STOCKHOLDER Subject to the provisions of Section 4 above, the Stockholder shall, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Company with respect to the Shares, including the right to vote such Shares at any stockholder meeting. 10. TERMINATION Except as may be otherwise provided herein, this Agreement shall terminate on the 180th calendar day immediately succeeding the Company's initial public offering. 11. MISCELLANEOUS 11.1 Notice. For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: RGene Therapeutics, Inc. 2170 Buckthorne Place, Suite 230 The Woodlands, Texas 77380 Attention: Martin H. Lindenberg, M.D. If to the Stockholder, at the address identified on the signature page hereof, and if to an Investor, at the address identified on the records of the Company hereto, or to such other address as either party or an Investor may furnish to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11.2 Applicable Law. The substantive laws of the State of Texas, excluding any law, rule or principle that might refer to the substantive law of another jurisdiction, will govern the interpretation, validity and effect of this Agreement without regard to the place of execution or the place for performance thereof. This Agreement is to be at least partially negotiated, executed and performed in Harris County, Texas, and, as such, the Company and the Stockholder agree that personal jurisdiction and venue shall be proper with the state or federal courts situated in Harris County, Texas, to hear such disputes arising under this Agreement. -8- 46 11.3 No Waiver. No failure by either party hereto at any time to give notice of any breach by the other party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 11.4 Severability. If a court of competent jurisdiction determined that any provision of this Agreement, including any appendices attached hereto, is invalid or unenforceable, then the invalidity or enforceability of that provision shall not affect the validity or enforceability of any other provision of this Agreement, and all other provisions shall remain in full force and effect. Further, such provision shall be reformed and construed to the extent permitted by law so that it may be valid, legal and enforceable to the maximum extent possible. 11.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. 11.6 Headings. The section headings have been inserted for purposes of convenience and shall not be used for interpretive purposes. 11.7 Successors; Third Party Beneficiary. This Agreement shall inure to the benefit of the successors and assigns of the Company and the Investors and be binding upon the Stockholder and its successors and assigns. The Stockholder agrees that any and all Investors in the Company shall be treated as third party beneficiaries of this Agreement without the necessity of execution of this Agreement, and shall be entitled to all of the rights rendered to them herein. 11.8 Entire Agreement. This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof, and contains all the covenants, promises, representations, warranties and agreements between the parties with respect to the subject matter hereof. Each party to this Agreement acknowledges that no representation, inducement, promise or agreement, oral or written, with regard to the subject matter hereof, has been made by either party, or by anyone acting on behalf of either party, which is not embodied herein, and that no agreement, statement or promise relating to the subject matter hereof which is not contained in this Agreement or in such other agreements shall be valid and binding. 11.9 Amendments. No amendment or modification to this Agreement will be effective unless it is in writing and signed by the Company, the Stockholder and, if such amendment alters or amends any of the rights of the Investors, by Investors holding a majority of the outstanding shares of capital stock of the Company held by such Investors, if any. -9- 47 11.10 Indemnity. (a) The Stockholder agrees to indemnify and hold harmless the Company and any person, if any, who controls the Company or such successor within the meaning of Section 15 of the Act against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever) arising out of or based upon any false representation or warranty or breach or failure by the Stockholder to comply with any covenant or agreement made by the Stockholder herein or in any other document furnished by the Stockholder in connection with this transaction. (b) The Company agrees to indemnify and hold harmless the Stockholder and any person, if any, who controls the Stockholder or such successor within the meaning of Section 15 of the Act against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever) arising out of or based upon any false representation or warranty or breach or failure by the Company to comply with any covenant or agreement made by the Company herein or in any other document furnished by the Company in connection with this transaction. 11.11 Injunctive Relief. In view of the inadequacy of money damages, and in view of the fact that the stock of the Company cannot be readily purchased or sold in the general market, if the Stockholder or any other person shall fail to comply with any provision of this Agreement, the Company shall be entitled, to the extent permissible by law, to injunctive relief in the case of the violation, or attempted or threatened violation, by Stockholder or other person of any such provision, or to a decree compelling specific performance by the Stockholder or other person, of any such provision, or to any other remedies legally available. 11.12 Void Transfers. If any Stock shall be sold or transferred otherwise than in accordance with the terms and conditions of this Agreement, such sale shall be void. Any such attempted sale or other transfer shall create a right in the Company to purchase the Stock which is the subject of such purported transfer at the applicable purchase price specified herein. Such right shall constitute an "adverse claim" within the meaning of such term as used within the meaning of the Uniform Commercial Code of any state. In addition to, and without prejudice to, any and all other rights or remedies which may be available to the Company, the Stockholder agrees that the Company may, but shall have no obligation to, hold and refuse to transfer any Stock, or any certificate therefor, tendered to it for transfer if the transfer violates the provisions of the Agreement. -10- 48 11.13 Tax Representations. The Stockholder acknowledges that the Company has made no warranties or other representations to Stockholder with respect to the income tax consequences of the transactions contemplated by this Agreement and Stockholder is in no manner relying on the Company or its representatives for an account of such tax consequences. 11.14 Further Assurances. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out of the intent of this Agreement. -11- 49 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first above written. Company RGENE THERAPEUTICS, INC. By: /s/MARTIN LINDENBERG -------------------- Name: Martin Lindenberg Title: President & CEO Stockholder McMASTER UNIVERSITY By: /s/M.R. McDERMOTT ----------------- Name: Dr. M.R. McDermott Title: Research Contracts and Intellectual Property Address: 1200 Main Street West Hamilton, Ontario L8N 325 -12- EX-10.31 5 REDACTED VERSION LICENSE AGREEMENT 1 REDACTED VERSION EXHIBIT 10.31 TO TARGETED GENETICS CORPORATION AMENDMENT NO. 1 TO FORM S-1 TO BE FILED ON OR BEFORE MAY 30, 1996 "[*]" = confidential information omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 2 LICENSE AGREEMENT This Agreement is made and entered into this 12th day of October, 1994 ("Effective Date"), by and between the UNIVERSITY OF PITTSBURGH - OF THE COMMONWEALTH SYSTEM OF HIGHER EDUCATION, a nonprofit corporation, organized and existing under the laws of the Commonwealth of Pennsylvania, having its principal office at 4200 Fifth Avenue, Pittsburgh, PA 15260 ("UNIVERSITY") and RGENE THERAPEUTICS, INC., Suite 170, 2170 Buckthorne Place, The Woodlands, TX 77380 ("LICENSEE"). WHEREAS, UNIVERSITY is the owner of certain intellectual property relating to liposome-based cancer and sepsis treatment developed by Leaf Huang, Ph.D. ("Dr. Huang"), a member of the faculty at UNIVERSITY, and has the right as specified herein to grant licenses to such intellectual property; WHEREAS, UNIVERSITY desires to have the LICENSED TECHNOLOGY utilized in the public interest; WHEREAS, LICENSEE has represented to UNIVERSITY, to induce UNIVERSITY to enter into this Agreement, that LICENSEE is experienced in the development, production, manufacture, marketing and sale of products and/or the use of similar products to the LICENSED TECHNOLOGY (as defined below) and that LICENSEE shall commit itself to a thorough, vigorous and diligent program of exploiting the LICENSED TECHNOLOGY so that public utilization results therefrom; WHEREAS, the LICENSED TECHNOLOGY is the subject matter of a Sponsored Research Agreement between UNIVERSITY and LICENSEE; and WHEREAS, LICENSEE desires to obtain a license under the PATENT RIGHTS and/or LICENSED TECHNOLOGY upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto agree as follows: ARTICLE 1 - DEFINITIONS For purposes of this Agreement, the following words and phrases shall have the following meanings: 3 1.1 AFFILIATE shall mean, with respect to UNIVERSITY, any clinical or research entity in Pittsburgh which is operated or managed as a facility under the University of Pittsburgh Medical Center, whether or not owned by UNIVERSITY. 1.2 LICENSEE shall mean RGene Therapeutics, Inc. and all entities at least fifty percent (50%) owned or controlled by RGene Therapeutics, Inc., an entity which directly or indirectly owns or controls more than fifty percent (50%) of the voting stock of RGene Therapeutics, Inc. and any entity, the majority ownership of which is directly or indirectly common to the ownership of RGene Therapeutics, Inc. 1.3 LICENSED TECHNOLOGY shall mean any product or part thereof or process which is within the FIELD OF USE and is: (a) covered in whole or in part by an issued, unexpired or pending claim contained in the PATENT RIGHTS in the country in which any such product or part thereof is made, used or sold or in which any such process is used or sold; (b) manufactured by using a process or is employed to practice a process which is covered in whole or in part by an issued, unexpired claim or a pending claim contained in the PATENT RIGHTS in the country in which any process that is included in LICENSED TECHNOLOGY is used or in which such product or part thereof is used or sold; (c) developed, manufactured or employing any part of the TECHNOLOGY or the NEW TECHNOLOGY. Notwithstanding the foregoing, LICENSED TECHNOLOGY shall not include any discovery or invention in the field of HIV transfection to the extent (and only to the extent) such discovery or invention (i) resulted from the use of materials provided under, and (ii) [*] Company ([*]) pursuant to that certain [*]. 1.4 NET SALES shall mean LICENSEE's and its sublicensees' gross sales revenue for products or processes included in LICENSED TECHNOLOGY and produced hereunder less the sum of the following: (a) actual cost of freight charges or freight absorption, separately stated in such invoice; (b) actual trade, quantity or cash discounts allowed, if any; - ------------------------------ [*] Confidential Treatment Requested. -2- 4 (c) sales, tariff duties and/or use taxes separately stated on each invoice. 1.5 PATENT RIGHTS shall mean all UNIVERSITY United States and foreign patents, patent applications and any patents filed or issued with respect to the LICENSED TECHNOLOGY from time to time during the term of this Agreement, and any and all divisions, reissues, re-examinations, renewals, continuations, continuations-in-part, extensions and patents issued thereon. 1.6 TECHNOLOGY shall mean any and all know-how, information, processes, formulae, patterns, compilations, programs, devices, methods, techniques, compounds, products, data, preparations and usage information or materials and sources thereof, whether patentable or unpatentable, in each case that relates to the PATENT RIGHTS and which have been developed in a laboratory at UNIVERSITY under the direct supervision of Dr. Huang as of the date hereof or during the term of the Sponsored Research Agreement referenced below, including that described in the invention disclosures listed on Exhibit A hereto. 1.7 NEW TECHNOLOGY shall mean any technology within the Field of Use, that is developed after the Effective Date and prior to the expiration of the Sponsored Research Agreement in a laboratory at UNIVERSITY under supervision of Dr. Huang. 1.8 SPONSORED RESEARCH AGREEMENT shall mean that certain Sponsored Research Agreement dated the date hereof and attached hereto as Exhibit B by and between LICENSEE and UNIVERSITY relating to certain research to be conducted under the supervision of Dr. Huang. 1.9 FIELD OF USE shall mean the fields of cancer and sepsis related infectious diseases. ARTICLE 2 - GRANT 2.1 UNIVERSITY hereby grants, to the extent it may lawfully do so, the right to practice under the PATENT RIGHTS, within the FIELD OF USE only, the right and exclusive license throughout the entire world to make, have made, use and sell the LICENSED TECHNOLOGY to the end of the term for which the PATENT RIGHTS are issued, or, if no PATENT RIGHTS are issued, for ten (10) years from the date hereof, unless this Agreement is terminated sooner as provided herein. The license granted hereby is subject to the rights of the United States government, if any, as set forth in 35 U.S.C. Article 200 et seq. -3- 5 2.2 UNIVERSITY reserves the royalty-free, nonexclusive right to practice under the PATENT RIGHTS to use the LICENSED TECHNOLOGY for its own noncommercial education and research purposes. 2.3 At the end of the exclusive period hereof, the license granted hereunder shall become nonexclusive. 2.4 LICENSEE shall have the right to enter into sublicensing arrangements for the rights, privileges and licenses granted hereunder only during the exclusive period of this Agreement upon prior written notice to UNIVERSITY. Such sublicenses may extend past the expiration date of the exclusive period of this Agreement, but any exclusivity of such sublicenses shall expire upon the expiration of LICENSEE's exclusivity. Rights of any sublicensees shall terminate upon termination of this Agreement. 2.5 LICENSEE agrees that any sublicense granted by it shall provide that the obligations to UNIVERSITY of Articles 2, 7, 8, 9, 10, 11 and 15 of this Agreement shall be binding upon the sublicensee as if it were party to this Agreement. 2.6 LICENSEE agrees to forward to UNIVERSITY a copy of any and all sublicense agreements promptly upon execution thereof. LICENSEE further agrees to attach copies of the Articles set forth in 2.5, above, to each sublicense agreement. 2.7 The license granted hereunder shall not be construed to confer any rights upon LICENSEE by implication, estoppel or otherwise as to any technology not specifically set forth herein. ARTICLE 3 - DUE DILIGENCE 3.1 LICENSEE shall use its best efforts to bring the LICENSED TECHNOLOGY to market through a thorough, diligent program for the exploitation of LICENSED TECHNOLOGY and PATENT RIGHTS and to continue active, diligent marketing efforts for the LICENSED TECHNOLOGY throughout the life of this Agreement. 3.2 LICENSEE shall be deemed to have met the requirements contained in Article 3.1 so long as LICENSEE is conducting sales of the LICENSED TECHNOLOGY or is conducting an active clinical development program of the LICENSED TECHNOLOGY and at all times during the duration of the Sponsored Research Agreement of even date herewith by and between UNIVERSITY and LICENSEE, provided, however, that prior to the expiration of the Sponsored Research Agreement, LICENSEE and UNIVERSITY shall agree upon specific performance -4- 6 milestones relating to the clinical development of the LICENSED TECHNOLOGY in accordance with a proposed development schedule submitted by LICENSEE. 3.3 LICENSEE's failure to perform in accordance with 3.1 and 3.2 hereof shall be grounds for UNIVERSITY to terminate this Agreement pursuant to the terms of Article 11.1(a) hereof, and upon termination, all rights to and interest in the LICENSED TECHNOLOGY and PATENT RIGHTS shall revert to UNIVERSITY. ARTICLE 4 - ROYALTIES AND OTHER LICENSE CONSIDERATION 4.1 In consideration of the rights, privileges and license granted by UNIVERSITY hereunder, LICENSEE shall pay royalties and other monetary consideration as follows: (a) Initial license fee, nonrefundable and not credited against royalties, of $[*] payable as follows: (i) [*] immediately upon execution of this Agreement; and (ii) $[*] immediately upon filing of the first patent application with respect to the LICENSED TECHNOLOGY; (b) Royalties in an amount equal to [*] of NET SALES of the LICENSED TECHNOLOGY in any country for which PATENT RIGHTS have issued, per calendar quarter; or royalties in an amount equal to [*] of NET SALES in any country where no patent issues; (c) Minimum royalty in the amount of $[*] per calendar year if such minimum royalty is greater than the aggregate annual royalty computed in accordance with 4.1(b), above, provided that no minimum royalty shall be required for any year in which LICENSEE is contributing to the Sponsored Research Agreement in any year unless a PATENT RIGHT is pending or issued with respect to the LICENSED TECHNOLOGY and provided further, that all royalty payments made under Article 4.1(b) shall be credited against such minimum royalty amount. However, to the extent that the LICENSEE is commercially pursuing multiple products or processes incorporating the LICENSED TECHNOLOGY, then the minimum royalty specified above shall be $[*] per product or process incorporating the LICENSED TECHNOLOGY which are being commercially pursued by LICENSEE, on the same terms as above. - ------------------------------ [*] Confidential Treatment Requested. -5- 7 4.2 Royalty payments, pursuant to Article 4.1(b), above, shall be paid to UNIVERSITY in United States dollars and directed to the address set forth in Article 12 hereof within sixty (60) days after the end of each March 31, June 30, September 30 and December 31. The minimum royalty, pursuant to Article 4.1(c), above, shall be paid to UNIVERSITY in like manner by December 15 of the calendar year in which the minimum royalty is due. 4.3 Royalty payments which are overdue shall bear interest at the rate of 8% per annum. 4.4 To the extent permissible under then applicable laws and regulations, LICENSEE shall sell products and/or processes resulting from LICENSED TECHNOLOGY to UNIVERSITY and its AFFILIATES upon request at such price(s) and on such terms and conditions as such products and/or processes are made available to LICENSEE's most favored customer. LICENSEE agrees that it will provide UNIVERSITY and its AFFILIATES the opportunity to purchase such products or processes at the same time as any other United States clinical institution. Notwithstanding the above, the parties agree that a failure by LICENSEE to comply with the terms of this Section 4.4 shall not be deemed to be a default for purposes of Section 11.1 hereof. ARTICLE 5 - REPORTS 5.1 Within thirty (30) days after each March 31, June 30, September 30 and December 31 of each year during the term of this Agreement, LICENSEE shall deliver to UNIVERSITY true and accurate reports of the following information in a form acceptable to UNIVERSITY: (a) number of LICENSED TECHNOLOGY products manufactured and sold by LICENSEE and all sublicensees; (b) total billings for such products; (c) Accounting for all LICENSED TECHNOLOGY processes used or sold by LICENSEE and all sublicensees; (d) deductions set forth in Article 1.4; (e) total royalties due; and (f) name and addresses of sublicensees. -6- 8 5.2 If no royalties shall be due hereunder, LICENSEE shall so advise UNIVERSITY in writing within thirty (30) days after the end of any calendar quarter for which no royalties are due. 5.3 LICENSEE shall keep full true and accurate books of account, in accordance with generally accepted accounting principles, containing all information that may be necessary for the purpose of showing the amounts payable to UNIVERSITY hereunder. Said books of account shall be kept at LICENSEE's principal place of business. Said books and the supporting data shall be open at all reasonable times for three (3) years following the end of the calendar year to which they pertain, to the inspection of UNIVERSITY or its agents for the purpose of verifying LICENSEE's royalty statement or compliance in other respects with this Agreement. ARTICLE 6 - PATENT PROSECUTION 6.1 UNIVERSITY has or shall apply for, seek prompt issuance of and maintain during the term of this Agreement the PATENT RIGHTS in the United States and in such foreign countries as may be designated by LICENSEE within a reasonable time in advance of the required foreign filing dates. LICENSEE shall have the opportunity to advise and cooperate with UNIVERSITY in the prosecution, filing and maintenance of such patents. 6.2 All fees and costs, including attorneys' fees, relating to the filing, prosecution and maintenance of the PATENT RIGHTS shall be the responsibility of LICENSEE, whether incurred prior to or after the date of this Agreement and payments by LICENSEE therefore shall not be creditable against royalties. Such fees and costs incurred by UNIVERSITY prior to the date hereof will be payable by LICENSEE to UNIVERSITY within five (5) business days of the execution of this Agreement by LICENSEE. ARTICLE 7 - INFRINGEMENT ACTIONS 7.1 Each party shall inform the other promptly in writing of any alleged infringement of the PATENT RIGHTS by a third party and of any available evidence thereof. 7.2 During the term of this Agreement, LICENSEE shall have the right, but shall not be obligated, to prosecute at its own expense all infringements of the PATENT RIGHTS and, in furtherance of such right, UNIVERSITY hereby agrees that LICENSEE may include UNIVERSITY as a party plaintiff in any such suit, without expense to UNIVERSITY. The total cost of any such infringement action -7- 9 commenced or defended solely by LICENSEE shall be borne by LICENSEE and LICENSEE shall keep any recovery or damages for past infringement derived therefrom subject to payment of royalties thereon at the rate established in Article 4.1(b), after application of the costs incurred by LICENSEE in prosecuting such infringement actions, including legal fees. LICENSEE may, for such purposes, use the name of UNIVERSITY as party plaintiff. Notwithstanding the above, LICENSEE's right to bring such an infringement action shall remain in effect only for so long as the license granted herein remains exclusive. 7.3 If within six (6) months after having been notified of any alleged infringement, LICENSEE shall have been unsuccessful in persuading the alleged infringer to desist and shall not have brought and shall not be diligently prosecuting an infringement action, or if LICENSEE shall notify UNIVERSITY at any time prior thereto of its intention not to bring suit against any alleged infringer, then, and in those events only, UNIVERSITY shall have the right, but shall not be obligated, to prosecute at its own expense any infringement of the PATENT RIGHTS, and UNIVERSITY may, for such purposes, use the name of LICENSEE as party plaintiff. No settlement, consent judgment or other voluntary final disposition of the suit may be entered into by either party without the consent of the other, which consent shall not unreasonably be withheld. In any settlement or other conclusion, by litigation or otherwise, UNIVERSITY shall be entitled to share in the monetary award therefrom in at least an amount proportional to the royalty rate established in Article 4.1(b), above, and LICENSEE shall be entitled to offset against royalties due hereunder all costs incurred by LICENSEE in prosecution of any such infringement, including legal fees. LICENSEE shall indemnify UNIVERSITY against any order for costs that may be made against UNIVERSITY in such proceedings. 7.4 In the event that a declaratory judgment action alleging invalidity or noninfringement of any of the PATENT RIGHTS shall be brought against UNIVERSITY, LICENSEE, at its option, shall have the right, within thirty (30) days after commencement of such action, to intervene and take over the sole defense of the action at its own expense. 7.5 In any infringement suit either party may institute to enforce the PATENT RIGHTS pursuant to this Agreement, the other party hereto shall, at the request and expense of the party initiating such suit, cooperate in all respects and, to the extent possible, have its employees testify when requested and make available relevant records, papers, information, samples, specimens, and the like. -8- 10 ARTICLE 8 - INDEMNIFICATION/INSURANCE/LIMITATION OF LIABILITY 8.1 LICENSEE shall at all times during the term of this Agreement and thereafter, indemnify, defend and hold UNIVERSITY, its trustees, officers, employees and affiliates, harmless against all claims and expenses, including legal expenses and reasonable attorneys' fees, arising out of the death of or injury to any person or persons or out of any damage to property or the environment, and against any other claim, proceeding, demand, expense and liability of any kind whatsoever resulting from the production, manufacture, sale, use, lease, consumption or advertisement of the LICENSED TECHNOLOGY or arising from any obligation of LICENSEE hereunder, except to the extent caused by the negligence, recklessness or willful misconduct of UNIVERSITY or its personnel and agents, for which UNIVERSITY shall similarly hold harmless and indemnify LICENSEE, its officers, employees, agents or representatives. 8.2 Prior to such time as LICENSEE or its sublicensees commence human clinical trials for LICENSED TECHNOLOGY or otherwise commence marketing such LICENSED TECHNOLOGY, LICENSEE shall maintain in force such liability insurance policies and coverages as are required under applicable laws and regulations. At such time as LICENSEE commences marketing the LICENSED TECHNOLOGY, LICENSEE shall maintain in force such liability insurance in such amounts and for such coverages as is customarily taken by similar companies in its industry, to the extent such coverages are reasonably available. LICENSEE shall use its best efforts to have such policies provide that the insurer will give UNIVERSITY not less than 30 days' advance notice of any material changes in or cancellation of coverage, and to have UNIVERSITY named as an additional insured thereunder. ARTICLE 9 - ASSIGNMENT 9.1 Except as provided in Article 2.4, this Agreement is not assignable and any attempt to do so shall be null and void. ARTICLE 10 - ARBITRATION 10.1 Except as to issues relating to the validity, enforceability or final determination of infringement of any patent contained in the PATENT RIGHTS licensed hereunder, any and all claims, disputes or controversies arising under, out of, or in connection with this License Agreement which has not been resolved in good faith negotiations between the parties, shall be resolved by a board of three (3) arbitrators in accordance with the rules, then in effect, of the American Arbitration Association. Such independent board shall be composed of three panelists, of -9- 11 sufficient education, scientific experience and national reputation to address such issues. The board shall be composed of one scientist selected by UNIVERSITY, one selected by LICENSEE and one selected by LICENSEE and UNIVERSITY. The decision of such panel shall be final and binding upon the parties and enforceable in any court of competent jurisdiction. ARTICLE 11 - TERMINATION 11.1 UNIVERSITY shall have the right to terminate this Agreement if: (a) LICENSEE shall default in the performance of any of the obligations herein contained and such default has not been cured within thirty (30) days after receiving written notice thereof from UNIVERSITY; (b) LICENSEE shall cease to carry out its business, become bankrupt or insolvent, apply for or consent to the appointment of a trustee, receiver or liquidator of its assets or seek relief under any law for the aid of debtors; or (c) LICENSEE shall terminate the Sponsored Research Agreement with UNIVERSITY for further work on the LICENSED TECHNOLOGY for any reason, except breach thereof by UNIVERSITY, termination by mutual consent, termination for Dr. Huang's departure from UNIVERSITY as described in Section 2.03 of the Sponsored Research Agreement, or expiration of the term of Sponsored Research Agreement. 11.2 LICENSEE may terminate this Agreement upon six (6) months' prior written notice to UNIVERSITY and upon payment of all amounts due UNIVERSITY through the effective date of the termination. 11.3 Upon termination of this Agreement neither party shall be released from any obligation that matured prior to the effective date of such termination. LICENSEE and any sublicensee may, however, after the effective date of such termination, sell all products under the LICENSED TECHNOLOGY, provided that LICENSEE shall pay to UNIVERSITY the royalties thereon as required by Article 4 hereof and submit the reports required by Article 5 hereof. ARTICLE 12 - NOTICES 12.1 Any notice or communication pursuant to this Agreement shall be sufficiently made or given if sent by certified, first-class mail, postage prepaid, addressed to the address below or as either party shall designate by written notice to the other party. -10- 12 In the case of UNIVERSITY: Office of Technology Transfer and Intellectual Property 911 William Pitt Union University of Pittsburgh Pittsburgh, PA 15260 In the case of LICENSEE: RGene Therapeutics, Inc. Suite 170 2170 Buckthorne Place The Woodlands, TX 77380 ARTICLE 13 - AMENDMENT, MODIFICATION 13.1 This Agreement may not be amended or modified except by the execution of a written instrument signed by the parties hereto. ARTICLE 14 - REPRESENTATIONS, WARRANTIES AND LIMITATIONS OF LIABILITY 14.1 UNIVERSITY (a) UNIVERSITY is validly existing and in good standing under the laws of the State of Pennsylvania. (b) The execution, delivery and authority to execute and deliver this Agreement have been duly authorized by all necessary action on the part of the UNIVERSITY. (c) UNIVERSITY has the power and authority to execute and deliver this Agreement and to perform its obligations under this Agreement. (d) UNIVERSITY hereby represents and warrants that, other than the grant set forth herein, including, without limitations, any nonexclusive license that UNIVERSITY may be required by law to grant to the United States of America or to a foreign state pursuant to an existing or future treaty with the United States of America, it has not encumbered, restricted, transferred or otherwise burdened the Technology except that UNIVERSITY makes no such representations and warranties as to the invention disclosure of Dr. Huang and Dr. R. Jude Samulski described on Exhibit A hereto. -11- 13 (e) UNIVERSITY hereby represents and warrants that on the date hereof, it is not aware of any infringement of or by the PATENT RIGHTS or any claims by any other party in and to the TECHNOLOGY except that University makes no such representations and warranties as to the invention disclosure of Dr. Huang and Dr. R. Jude Samulski described on Exhibit A hereto. (f) EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, UNIVERSITY MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND VALIDITY OF TECHNOLOGY CLAIMS, ISSUED OR PENDING. NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS A REPRESENTATION MADE OR WARRANTY GIVEN BY UNIVERSITY THAT THE PRACTICE BY LICENSEE OF THE LICENSE GRANTED HEREUNDER SHALL NOT INFRINGE THE TECHNOLOGY OF ANY THIRD PARTY. 14.2 LICENSEE The LICENSEE represents and warrants that: (a) It is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the LICENSEE. (c) It has the corporate power and authority to execute and deliver this Agreement and to perform its obligations under this Agreement. (d) It has received copies of both invention disclosures identified on Exhibit A hereto. ARTICLE 15 - MISCELLANEOUS 15.1 This Agreement shall be construed and interpreted in accordance with the laws of the Commonwealth of Pennsylvania. 15.2 The parties acknowledge that this Agreement together with the SPONSORED RESEARCH AGREEMENT, sets forth the entire understanding and agreement of the parties hereto as to the subject matter hereof and supersedes all previous understandings between the parties, written or oral, regarding such subject matter. -12- 14 15.3 Nothing contained in this Agreement shall be construed as conferring any right to use in advertising, publicity or other promotional activities any name, trade name, trademark, or other designation (including any contraction, abbreviation, or simulation of any of the foregoing). Without the express written approval of the other party, neither party shall use any designation of the other party in any promotional activity associated with this Agreement or the LICENSED TECHNOLOGY. Neither party shall issue any press release or make any similar written public statement in regard to this Agreement without the prior written approval of the other party which approval shall not be unreasonably withheld. 15.4 If one or more of the provisions of this Agreement shall be held invalid, illegal or unenforceable, the remaining provisions shall not in any way be affected or impaired thereby. In the event any provision is held illegal or unenforceable, the parties shall use reasonable efforts to substitute a valid, legal and enforceable provision which, insofar as is practical, implements purposes of the section held invalid, illegal and unenforceable. 15.5 Failure at any time to require performance of any of the provisions herein shall not waive or diminish a party's right thereafter to demand compliance therewith or with any other provision. Waiver of any default shall not waive any other default. A party shall not be deemed to have waived any rights hereunder unless such waiver is in writing and signed by a duly authorized officer of the party making such waiver. ARTICLE 16 - CLINICAL TRIALS 16.1 LICENSEE agrees that Phase I clinical trials will be performed at UNIVERSITY and its AFFILIATES. LICENSEE further agrees to give preferential consideration to UNIVERSITY and its AFFILIATES for the conduct of Phase II and III clinical trials, subject to the understanding that LICENSEE may be obligated or deem it advisable to conduct Phase II and III clinical trials incorporating technology licensed by LICENSEE from other institutions, at such other institutions or their affiliates. Additional medical centers may be involved in Phase II and III clinical trials, as may be necessary. -13- 15 IN WITNESS WHEREOF, the parties have set their hands and seals this 12th day of October, 1994. UNIVERSITY OF PITTSBURGH - OF THE COMMONWEALTH SYSTEM OF HIGHER EDUCATION WITNESS: By /s/ BEN J. TUCHI - ------------------------------------ ---------------- Ben J. Tuchi, Ph.D. Senior Vice Chancellor Business and Finance WITNESS: RGENE THERAPEUTICS, INC. By /s/ MARTIN H. LINDENBERG - ------------------------------------ ------------------------ Martin H. Lindenberg, M.D. President & CEO -14- 16 EXHIBIT A Invention Disclosures 1. [*] 2. [*] - ------------------------------ [*] Confidential Treatment Requested. 17 EXHIBIT B SPONSORED RESEARCH AGREEMENT This Sponsored Research Agreement ("Agreement") entered into this 12th day of October, 1994 between RGene Therapeutics, Inc., a corporation organized under the laws of the State of Delaware and having an office at 2170 Buckthorne Place, Suite 170, The Woodlands, Texas 77380, hereinafter referred to as "Sponsor"; and University of Pittsburgh of the Commonwealth System of Higher Education, a nonprofit Pennsylvania corporation having an office at Office of Research, 350 Thackeray Hall, Pittsburgh, Pennsylvania 15260, hereinafter referred to as "University." W I T N E S S E T H: WHEREAS, Sponsor desires the research services of University and University desires and agrees to provide such services to Sponsor; WHEREAS, Sponsor and University have entered into that certain License Agreement of even date herewith (the "License Agreement") which provides for an exclusive worldwide license to Sponsor of certain patent rights and technology invented and to be invented by Leaf Huang, Ph.D. (the "Principal Investigator"), an employee of University; NOW, THEREFORE, in consideration of the mutual promises and undertakings set forth herein, the parties agree as follows: 1. SCOPE OF WORK 1.01 University agrees to use its best efforts to perform services for Sponsor as described in the Statement of Work in proposal attached hereto as Appendix A ("Project"), as it may be modified by agreement from time to time. 1.02 University shall use its best efforts to cause Principal Investigator and persons on his staff or under his direct supervision ("Research Associates") to use their best efforts to perform the Project, as it may be modified from time to time by consent of Sponsor and University, and to meet from time to time with Sponsor to discuss the planning and progress of the Project. 18 1.03 All studies done in connection with the Project shall be carried out in compliance with any applicable federal, state or local laws, regulations or guidelines governing the conduct of such research. 2. TERM 2.01 The Term of this Agreement is four years, commencing on execution, subject to early termination as provided in Section 2.03 or Section 10 hereof. 2.02 Any extension must be in writing upon terms mutually agreeable to the parties hereto. 2.03 If, for any reason, the Principal Investigator ceases to be associated with University or otherwise becomes unavailable to work on the Project, a qualified replacement scientist at University shall be mutually appointed by Sponsor and University or, in the event that a mutually acceptable scientist is not identified and agreed upon, at Sponsor's sole option, this Agreement shall be terminated on 30 days written notice, and any remaining financial obligations of Sponsor, including the payment of the Project Funds as set forth in Section 3, shall be cancelled. 3. PAYMENT 3.01 Subject to early termination of this Agreement in accordance with the terms of Section 2.03, 10.01 and 10.03, Sponsor agrees to pay the sum of $[*] to University ("Project Funds") for the services, payment to be made as follows: in eight equal semi-annual installments over the Term, with the first payment due within thirty (30) days of execution of this Agreement and the remaining payments due each six months thereafter. 3.02 University costs shall follow the proposed budget as contained in Appendix A. 3.03 The Project Funds specified shall be inclusive of any and all direct and indirect costs associated with the Project. 4. REPORTS 4.01 University shall provide Sponsor with periodic verbal reports on request and with semi-annual written reports of the results of the Project. University shall throughout the Term of this Agreement provide to Sponsor copies of all data and other - ------------------------------ [*] Confidential Treatment Requested. -2- 19 information generated by or on behalf of the Principal Investigator or Research Associates pursuant to this Agreement, including without limitation, all raw data obtained as a result of studies conducted in the course of the Project and all experimental procedures developed under the Project in sufficient written detail to permit Sponsor's personnel to employ such procedures in their own research. 4.02 Upon completion of the services by University, or earlier termination of this Agreement, University shall provide a final written report to Sponsor, which final report shall include: (i) a complete summary of the services performed, (ii) a good faith evaluation by the Principal Investigator of the relationship of the research to the discovery of new modalities of therapy in the field of the Project, and (iii) detailed experimental protocols of the assays performed in the course of the Project, and such other information or data as may be specified in Appendix A. University shall also, at Sponsor's option, meet with Sponsor to discuss the services or the content of the final report. 5. INSURANCE 5.01 University shall provide the necessary Workman's Compensation and Employer's Liability insurance to meet statutory liability limits of the Commonwealth of Pennsylvania for the employees of University involved in this Project. 6. LIABILITY 6.01 University shall not be responsible or liable for any injuries or losses which may result from the implementation or use by Sponsor or others of the results from the Project or research data generated by University. 6.02 Sponsor agrees to indemnify, defend and hold harmless University, its trustees, officers, agents and employees with respect to any expense, claim, liability, loss, damage, or costs (including attorney's fees) in connection with or in any way arising out of the use of the data or results from the Project, except for such expenses, claims, liabilities, losses, damages, or costs (including attorneys' fees) which relate to injuries or death of persons which occur on University premises and which result from the negligence of any of University's personnel. University shall notify Sponsor if it learns of the institution or threatened institution of any such claims or lawsuit and University shall cooperate with Sponsor in every proper way in the defense or settlement thereof at Sponsor's request and expense. -3- 20 7. DISCLAIMER OF WARRANTY 7.01 Any information, materials or services furnished by University pursuant to this Agreement are on an "as is" basis. UNIVERSITY MAKES NO WARRANTIES OF ANY KIND EITHER EXPRESS OR IMPLIED AS TO ANY MATTER, INCLUDING BUT NOT LIMITED TO WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY, PATENTABILITY, OR THAT USE BY SPONSOR OF THE RESULTS OBTAINED WILL BE FREE FROM INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADEMARKS OR OTHER RIGHTS OF THIRD PARTIES. In no event shall University be liable to Sponsor for indirect, special, or consequential damages, such as loss of profits or inability to use the results obtained or any applications and derivations thereof. 8. INTELLECTUAL PROPERTY RIGHTS 8.01 Under University policy, all rights and title to any inventions and/or discoveries ("Inventions") developed under Project which were made either solely by University personnel or jointly by University and Sponsor personnel shall belong to University, subject to the terms set out in Section 8.02 and 8.03 below. 8.02 If the Project results in an Invention, whether patentable or unpatentable, which may be commercially useful and which is within the Field of Research identified in the Project attached hereto as Appendix A, such Invention shall be automatically licensed to Sponsor under the terms of the License Agreement attached hereto without any further act by Sponsor or University, except payment of the licensing fee, if any, required by Section 4.1(a) of such License Agreement. University shall, in cooperation with the Principal Investigator, promptly supply Sponsor with a copy of the disclosure of any such Invention in confidence for Sponsor's evaluation purposes. 8.03 University hereby grants to Sponsor a right of first refusal to an exclusive royalty-bearing license to Inventions developed under this Agreement which are not within the Field of Research to the extent it is legally able to do so, subject to Public Law 96-517 and to the constraints set forth herein. Such option must be exercised within ninety (90) days from the date of disclosure to Sponsor, unless such time is extended by written agreement of the parties. If Sponsor exercises its right of first refusal as provided in this Section 8.03, and provided that Sponsor agrees to reimburse University for the costs of patent prosecution and maintenance in the United States and foreign countries upon execution of such exclusive license, the University and Sponsor shall negotiate a license agreement in good faith to include reasonable royalty rates and other customary terms and conditions, including but not limited to, a royalty free, nonexclusive license in favor of the University to use such -4- 21 Inventions for noncommercial education and research purposes, within three (3) months of the date Sponsor exercises its right of first refusal. If a mutually acceptable agreement is not executed and delivered by the end of such three (3) months, Sponsor's rights described in Section 8.03 hereof shall terminate, provided, however, that University agrees that it will not enter into a license agreement with a third party on terms which are less favorable to University than were last offered by University to Sponsor. 8.04 Rights to Inventions, whether patentable or copyrightable or not, relating to Project made solely by employees of Sponsor shall belong to Sponsor. Provided, University shall retain, at a minimum, a nonexclusive, royalty free non-transferable right to use such Inventions developed under this Agreement for educational and research activities on a non-commercial basis for University. 8.05 In the event that any Invention which is subject to the right of first refusal provided in Section 8.03 is the result of a sponsored research agreement with another commercial entity other than Sponsor and such entity has rights thereto with respect to the commercialization of such Invention, then in such event Sponsor agrees that it will in good faith negotiate with such other entity to arrive at a mutually beneficial agreement with respect to the commercialization of such Invention. 9. PUBLICATIONS; CONFIDENTIALITY 9.01 University and Sponsor agree to maintain as confidential and proprietary all confidential information which was provided by the other party during the Term hereof. Except as provided in subparagraph 9.02 below, University and Sponsor agree not to use except in furtherance of this Agreement and not to disclose orally, by written publication or otherwise any Project results, except that such information may be disclosed insofar as such disclosure is necessary to allow either University or Sponsor, as the case may be, to defend itself against litigation, to file and prosecute patent applications on any invention conceived or reduced to practice under the Project, to comply with judicial decree or governmental action, or as may be otherwise required in order to commercialize the Project results pursuant to the License Agreement. Notwithstanding the above, such obligation of confidentiality shall not apply to information that at the time of disclosure: (i) is in the public domain; (ii) has come into the public domain through no fault of University; (iii) was known to the receiving party prior to its disclosure by the disclosing party, or -5- 22 (iv) was disclosed by the disclosing party to a third party not under an obligation of confidence. 9.02 In the exercise of the rights of academic freedom of an educational institution and its faculty, University, the Principal Investigator and the Research Associates shall have the right to publish in scientific or other journals or to present at professional conferences or other meetings the results of the research conducted under this Agreement. In order to permit Sponsor the opportunity to properly protect patent and proprietary rights relating to the Project, a copy of each proposed publication shall be provided to Sponsor thirty (30) days in advance of submission for publication to permit Sponsor time in which to prepare application(s) for letters patent regarding the subject matter of such publication. Any final proposed publication provided to Sponsor shall be considered as acceptable for submission for publication unless Sponsor notifies University and the Principal Investigator within thirty (30) days of receipt of the proposed publication that it requires additional time to secure patents on such Project in which case Sponsor shall have an additional sixty (60) days to undertake such action before publication. Sponsor shall also receive final drafts of any proposed publication, and Sponsor shall be named in the publication as the sponsor of the Project or, as the case may be, licensee of such technology. The right to review publications as set forth herein shall extend only to the work product of the Principal Investigator and the Research Associates pursuant to the Project and not to the work product of other research conducted in the laboratories of the Principal Investigator or Research Associates or in the laboratories of other researchers at University. 10. TERMINATION 10.01 Sponsor may terminate this Agreement with or without cause, at any time prior to the expiration of the designated term by giving sixty (60) days written notice to University. 10.02 Upon early termination of this Agreement, Sponsor shall pay all costs accrued by University as of the date of termination including non-cancelable obligations for the Term of the Agreement, which shall include all appointments of research staff incurred prior to the effective date of the termination. 10.03 In the event that either party shall be in default of any of its obligations under this Agreement, and shall fail to remedy such default within 60 days after receipt of written notice thereof, the party not in default shall have the option of cancelling this Agreement by giving written notice of termination to the other party. -6- 23 10.04 Termination of this Agreement shall not affect the rights and obligations of the parties which shall have accrued prior to termination including, without limitation the confidentiality obligations set forth in Section 9.01. 11. PUBLICITY 11.01 Sponsor will not use the name of University nor of any member of University personnel, in any publicity, advertising, or news release without the prior written approval of University. 12. GOVERNING LAW 12.01 This Agreement shall be deemed to be a contract under, and shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. 13. MISCELLANEOUS 13.01 Nothing contained in this Agreement is to be construed to constitute University and Sponsor as partners or joint venturers of each other, or to constitute the employees, agents or representatives of either party as the employees, agents or representatives of the other party, it being intended that the relationship between University and Sponsor shall at all times be that of independent contractors. Neither party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of, or in the name of, the other party; or to bind the other party to any contract, agreement or undertaking with any third party. Sponsor agrees, warrants and represents to University, with the intention that University may rely thereon, that Sponsor does not now exercise, and will not be permitted during the terms of this Agreement to exercise any significant degree of control over University's method of operation. 13.02 University agrees that it is responsible for withholding and paying to appropriate taxing bodies, all statutory payroll taxes that are applicable to University personnel to be supported under the Project. 13.03 Failure of either party hereto to enforce any of the provisions of this Agreement, or of any rights with respect thereto, or failure to exercise any election provided for herein, shall in no way be considered a waiver of such provisions, rights or elections, or in any way affect the validity of this Agreement. The failure by any party hereto to enforce any of such provisions, rights or elections shall not prejudice such party from later enforcing or exercising the same or any other provisions, rights or elections which it may have under this Agreement. -7- 24 13.04 Should a court of competent jurisdiction later consider any provision of this Agreement to be invalid, illegal or unenforceable, it shall be considered severed from the Agreement. All other provisions, rights and obligations shall continue without regard to the severed provision, provided that the remaining provisions of the Agreement are in accordance with the intention of the parties. It is the further intention of the parties that in lieu of any provision which is invalid, illegal or unenforceable, there be substituted or added as part of this Agreement a provision which shall be as similar as possible in economic and business objectives as intended by the parties to this Agreement. 13.05 This Agreement may not be and shall not be construed to have been modified, amended, rescinded, cancelled or waived, in whole or in part, except in writing signed by the parties hereto and making specific reference to this Agreement. This Agreement, together with the License Agreement, constitutes the entire agreement of the parties with respect to the subject matter hereof. 13.06 Any notice or communication required or permitted to be given or made under this Agreement by one of the parties hereto to the other shall be in writing and shall be deemed to have been sufficiently given or made for all purposes if mailed by certified mail, postage prepaid, addressed to such other party at its respective address as follows: If to University: University of Pittsburgh of the Commonwealth System of Higher Education 350 Thackeray Hall Pittsburgh, Pennsylvania 15260 Attention: Michael M. Crouch Director, Office of Research With a copy to: Frances Connell, Director Office of Technology Transfer and Intellectual Property 911 William Pitt Union Pittsburgh, Pennsylvania 15260 If to Sponsor: -8- 25 RGene Therapeutics, Inc. 2170 Buckthorne Place, Suite 170 The Woodlands, Texas 77388 Attention: President With a copy to: Andrews & Kurth L.L.P. 2170 Buckthorne Place, Suite 150 The Woodlands, Texas 77380 Attention: Jeffrey R. Harder 13.07 The headings used herein are included solely for the purpose of convenience, and shall not be used in any way to construe, modify, explain, enlarge or restrict any of the provisions hereof. IN WITNESS WHEREOF the parties have caused this Agreement to be executed by their respective duly authorized representatives. WITNESS: UNIVERSITY OF PITTSBURGH - OF THE COMMONWEALTH SYSTEM OF HIGHER EDUCATION By: /S/ MICHAEL M. COUCH - ------------------------------ ----------------------------------- Typed Name: Michael M. Crouch --------------------------- Title: Director, Office of Research -------------------------------- Date: 9-29-94 --------------------------------- WITNESS: RGENE THERAPEUTICS, INC. By: /S/ MARTIN H. LINDENBERG - ------------------------------ ----------------------------------- Typed Name: Martin H. Lindenberg, M.D. --------------------------- Title: President & CEO -------------------------------- Date: 10-12-94 --------------------------------- -9- EX-99.1 6 CONSENT OF DIRECTOR NOMINEE BY MARTIN P. SUTTER 1 EXHIBIT 99.1 CONSENT OF DIRECTOR NOMINEE I hereby consent to the reference to me as a prospective director of Targeted Genetics Corporation (the "Company") where it appears in the Company's Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-3592) and related prospectus and any amendment thereto, including any and all post-effective amendments and any registration statement relating to the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"). This consent may be incorporated by reference into any such registration statement filed pursuant to Rule 462(b) under the Act. /s/ MARTIN P. SUTTER -------------------------------------- Martin P. Sutter May 28, 1996 EX-99.2 7 CONSENT OF DIRECTOR NOMINEE BY AUSTIN M. LONG,III 1 EXHIBIT 99.2 CONSENT OF DIRECTOR NOMINEE I hereby consent to the reference to me as a prospective director of Targeted Genetics Corporation (the "Company") where it appears in the Company's Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-3592) and related prospectus and any amendment thereto, including any and all post-effective amendments and any registration statement relating to the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"). This consent may be incorporated by reference into any such registration statement filed pursuant to Rule 462(b) under the Act. /s/ AUSTIN M. LONG, III -------------------------------------- Austin M. Long, III May 28, 1996 -----END PRIVACY-ENHANCED MESSAGE-----