-----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, AtNRKiU8nbkVnT0MgantdrwK8G5fxnLqpOhXk2Rup6XvW4O//zmk5VdXfnoSTKeH Sywirbj8/Tgl5tFLYm2Iuw== 0000891020-96-000679.txt : 19960621 0000891020-96-000679.hdr.sgml : 19960621 ACCESSION NUMBER: 0000891020-96-000679 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960620 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: 96583233 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 AMENDMENT NO. 4 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1996. REGISTRATION NO. 333-03592 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 4 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 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 June 19, 1996, the last reported sale price for the Common Stock was $4.94 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.................................... $4.00 $.25 $3.75 - ------------------------------------------------------------------------------------------------------------------ Total(3)..................................... $14,000,000 $875,000 $13,125,000 ==================================================================================================================
(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 $16,100,000, $1,006,250 and $15,093,750, 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 June 25, 1996. --------------------------- Vector Securities International, Inc. Genesis Merchant Group Securities June 20, 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, on June 19, 1996, the Company acquired RGene Therapeutics, Inc. ("RGene"), a 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 acquisition of RGene (the "RGene Acquisition"), the Company acquired 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 also acquired 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 and a non-viral gene delivery system acquired in the RGene Acquisition. 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 3 5 ("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. Effective May 1996, RGene and Laboratoires Fournier S.C.A. ("Fournier") entered into a license, research and marketing agreement under which Fournier received exclusive rights to develop and commercialize in Europe the E1A tumor suppressor product candidate and any other product candidates based on the E1A tumor suppressor gene and developed pursuant to the agreement. Under the agreement, the parties will undertake a joint clinical program to coordinate product development and clinical trials in the United States and Europe. Fournier has paid RGene a $5 million upfront license fee, $2.5 million of which was paid as an option fee prior to execution of the agreement. RGene may receive additional payments if the parties achieve certain development milestones and royalties on sales of resulting products, if any. In addition, if the parties are able to negotiate a mutually acceptable supply agreement, RGene will be entitled to manufacture products for Fournier in return for manufacturing fees. 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. All references to the Company after the date of the RGene Acquisition include RGene as a wholly owned subsidiary. 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 as a result 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 $ 26,880 Working capital....................................................... 10,408 11,017 23,792 Total assets.......................................................... 17,381 19,930 32,705 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 26,679
- ------------------ (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 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 agreed to acquire RGene by merging a wholly owned subsidiary of the Company formed to facilitate the transaction with and into RGene. The Company completed the RGene Acquisition on June 19, 1996. RGene's operations will be integrated into the operations of the Company. Pursuant to the Merger Agreement, 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 former RGene stockholders. The Merger Agreement also provides that the former RGene stockholders 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 the 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 $4.94 (the closing sale price per share of Common Stock as reported on the Nasdaq National Market on June 19, 1996), achievement of both 6 8 milestones would result in the issuance of a maximum of 1,012,146 shares of Common Stock. Such shares representing the additional consideration would represent approximately 6% of the outstanding Common Stock immediately after the Offering. The shares of Common Stock issued to the former 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." Until June 18, 1997, 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. 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. 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 existing and future 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 the third quarter of 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 9 11 be available on terms favorable to 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. Through the RGene Acquisition, the Company acquired rights to technology relating to certain novel cholesterol derivatives ("DC Chol"), which rights were granted to RGene through a license agreement with the University of Tennessee Research Corporation ("UTRC"). UTRC is responding in Europe, Japan and Australia to third-party observations based on prior-art publications that question the patentability of the pending claims in the respective patent applications relating to DC Chol. The possibility of an adverse decision in these proceedings, or in a subsequent opposition proceeding if the respective patents issue, cannot be excluded. In addition, the Company may become involved in further proceedings before the USPTO concerning the 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. 10 12 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 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 11 13 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 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 12 14 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. 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 13 15 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 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. In addition, the terms of the collaborative arrangement between RGene and Laboratoires Fournier S.C.A. ("Fournier") contemplate that, upon the negotiation and execution of a definitive supply agreement, RGene will have the right, subject to certain conditions, to manufacture and supply to Fournier its requirements for RGene's E1A tumor suppressor product candidate, for which RGene would receive manufacturing fees. There can be no assurance that RGene, either independently or with third parties, will be able to manufacture such product in compliance with applicable regulatory requirements and in sufficient quantities on a timely and cost-effective basis, if at all, or that any manufacturing fees will be received. If the Company engages in commercial-scale manufacturing and marketing of its or its collaborative partners' potential products, it will require substantial additional funds, personnel and production facilities. See "-- Need for Additional Capital," "-- Dependence on Corporate Collaborators" and "Business -- Research Collaborations and Licensing Agreements -- RGene Agreements." UNCERTAINTY ASSOCIATED WITH INTEGRATION. Integration of the operations of RGene into the operations of Targeted Genetics will require dedication of significant management resources. Successful integration of RGene with Targeted Genetics will distract Targeted Genetics' management from the 14 16 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 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. Effective May 1996, RGene entered into a collaborative arrangement with Fournier under which Fournier received exclusive rights to develop and commercialize in Europe the E1A tumor suppressor product candidate and any other product candidates based on the E1A tumor suppressor gene and developed pursuant to the agreement. Fournier has agreed to coordinate development of the E1A tumor suppressor product candidate in Europe by conducting clinical trials, preparing and filing submissions for regulatory approval in its territory and paying all associated costs, while RGene has corresponding responsibilities with respect to development and commercialization in the United States. The agreement provides that Fournier will make milestone payments to RGene upon the achievement of specified goals by Fournier or RGene and also will pay to RGene manufacturing fees if RGene manufactures products for Fournier and royalties on sales of resulting products, if any. Because Fournier has been granted exclusive development and commercialization rights with respect to the E1A tumor suppressor product candidate in Europe, the success of the E1A tumor suppressor product candidate and related products in Europe depends upon the efforts of Fournier. There can be no assurance that Fournier will perform its obligations under the agreement, that it or RGene will successfully develop or market any products under the agreement, or that RGene will ever receive any milestone payments, royalties or manufacturing fees under the agreement, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, there can be no assurance that present or future collaborators will not pursue existing or alternative technologies in preference to potential products being developed in collaboration with the Company. 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. In addition, pursuant to the terms of certain of its collaborative arrangements, including RGene's agreement 15 17 with Fournier, RGene has agreed to indemnify certain of its collaborative partners with respect to certain losses incurred as a result of the manufacture, supply or sale of potential product candidates. A product liability claim or product recall could inhibit or prevent commercialization of products being developed by the Company. Any product liability claim, including an indemnification claim under the Fournier agreement or any other collaborative agreement, 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 June 19, 1996, after giving effect to the issuance of 3,636,364 shares of Common Stock issuable in connection with the RGene Acquisition, the Company's directors, director nominees, executive officers and principal shareholders owned beneficially approximately 45% of the outstanding shares of Common Stock. In particular, Immunex owned beneficially approximately 16% 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 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 19,538,848 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 June 19, 1996, approximately 8,311,173 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 16 18 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 the issuance of shares of Common Stock to the former RGene stockholders that such 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 the period ending 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 former 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 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." 17 19 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) are estimated to be approximately $12.8 million (approximately $14.7 million 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 the third quarter of 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 late 1997. 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. 18 20 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 June 19, 1996, the last reported sale price for the Common Stock on the Nasdaq National Market was $4.94 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 June 19, 1996)................... 6.25 3.88
As of June 19, 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. 19 21 DILUTION At March 31, 1996, the Company had a pro forma net tangible book value of approximately $13.7 million, 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, the pro forma net tangible book value of the Company at March 31, 1996 would have been approximately $26.5 million, or $1.35 per share. This represents an immediate increase in pro forma net tangible book value of $0.50 per share to existing shareholders and an immediate dilution of $2.65 per share to purchasers of shares of Common Stock in the Offering. The following table illustrates this per share dilution: Offering price per share............................................. $4.00 Pro forma net tangible book value per share at March 31, 1996...... $0.85 Increase per share attributable to new investors................... 0.50 ----- Pro forma net tangible book value per share after the Offering....... 1.35 ----- Dilution per share to new investors.................................. $2.65 =====
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 former 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. 20 22 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. 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 71,234 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 26,679 -------- -------- -------- Total capitalization........................... $ 15,753 $ 16,538 $ 29,313 ======== ======== ========
- ------------------ (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 and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds." 21 23 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." 22 24 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). 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 $ 12,775(6) $ 16,528 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 12,775 27,184 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 $ 12,775 $ 32,705 ======== ======= ======= ======== ======== ======== 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 12,775(6) 71,234 (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 12,775 26,679 -------- ------- ------- -------- -------- -------- $17,381 $1,999 $ 550 $ 19,930 $ 12,775 $ 32,705 ======== ======= ======= ======== ======== ========
23 25 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) ======= ========
24 26 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 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 was required to negotiate changes to a license agreement such that this liability and future payments under the agreement will be substantially reduced. As a result of an amendment to such license agreement completed in the second quarter of 1996, the aforementioned $1.5 million payable to related parties was reduced to $500,000. The total consideration does not reflect the additional $5 million of Common Stock which may be issuable to former 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 former 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 former stockholders of RGene. 25 27 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 June 1996, the Company acquired RGene pursuant to the Merger Agreement. 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 26 28 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, 27 29 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 will be substantially less as a result of an amendment to an existing license agreement completed in the second quarter of 1996. In addition, this amendment reduces the aforementioned $1.5 million payable to related parties to $500,000. 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 the third quarter of 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 late 1997. 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 period during which the aforementioned resources would fund the Company's 28 30 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." 29 31 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 acquired 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 acquisition of RGene (the "RGene Acquisition"), the Company has acquired 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 has also acquired 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, its CTL immunotherapy technology and a non-viral gene delivery system acquired in the RGene Acquisition. 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 tested will prove safe and effective, meet applicable regulatory standards or be 30 32 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)
- ------------------ * 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 31 33 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. 32 34 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 was acquired by the Company through the RGene Acquisition, utilizes a 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 1997. Effective May 1996, RGene entered into a license, research and marketing agreement with Fournier under which Fournier received exclusive rights to develop and commercialize in Europe RGene's E1A tumor suppressor product candidate. See "-- Research Collaborations and Licensing Agreements" and "Risk Factors -- Dependence on Corporate Collaborators." 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." 33 35 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 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 34 36 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. 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, as a result of the RGene Acquisition, the Company expects to begin investigating the treatment of cancer using antisense molecules to inhibit the activity of certain oncogenes. 35 37 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 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 has been significantly enhanced as a result of the RGene Acquisition. 36 38 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. 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 37 39 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. 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 acquired 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 has acquired 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 38 40 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 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. 39 41 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 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 Programs -- 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 has 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 40 42 variety of other cellular tumor suppressor genes to treat certain cancers. See "-- Development Programs -- Cancer -- E1A Tumor Suppressor Gene Therapy." 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 licensing agreements with Pasteur Merieux Serums & Vaccins S.A. ("Pasteur Merieux") and Fournier in which RGene has received upfront payments comprised of license and other fees and is entitled to receive payments upon the achievement of certain development milestones and royalties on sales of resulting products, if any. 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. 41 43 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. 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 In connection with the RGene Acquisition, the Company has assumed all the rights and obligations of the following agreements previously entered into by RGene. LABORATOIRES FOURNIER S.C.A. Effective May 1996, RGene and Fournier entered into a license, research and marketing agreement under which Fournier received exclusive rights to develop and commercialize in Europe RGene's E1A tumor suppressor product candidate and any other product candidates based on the E1A tumor suppressor gene and developed pursuant to the agreement. Fournier has agreed to coordinate development of RGene's E1A tumor suppressor product candidate in Europe by conducting clinical trials, preparing and filing submissions for regulatory approval in its territory and paying all associated costs, while RGene has corresponding responsibilities with respect to development and commercialization in the United States. Fournier has paid RGene a $5 million upfront license fee, $2.5 million of which was paid as an option fee prior to completion of the agreement. The agreement provides that Fournier will make milestone payments to RGene upon the achievement of specified goals by Fournier or RGene and royalties on sales of resulting products, if any. In addition, if the parties are able to negotiate a mutually acceptable supply agreement, RGene will be entitled to manufacture products for Fournier in return for manufacturing fees. Pursuant to the agreement, RGene has agreed to indemnify Fournier with respect to claims incurred as a result of the manufacture, supply or sale of the E1A tumor suppressor product candidate. The agreement may be terminated if the parties mutually agree on or about the second anniversary of the agreement that the results of the collaboration are unsatisfactory. There can be no assurance that RGene and Fournier will be successful in developing or commercializing any products using RGene's E1A tumor suppressor product candidate or that such agreement will not terminate prior to its expiration. As such, there can be no assurance that any milestones will be achieved or that any royalties or other payments contemplated by the agreement will ever be made. See "Risk Factors -- Dependence on Corporate Collaborators." 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 42 44 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, as amended in June 1996, pursuant to which RGene obtained an exclusive worldwide license to develop and market products utilizing technology relating to delivery of genes into cells using certain novel cholesterol derivatives. 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 43 45 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. Through the RGene Acquisition, Targeted Genetics acquired 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. With respect to the patent applications relating to DC Chol in Europe, Australia and Japan, prior art has been brought to the attention of UTRC, the party from whom RGene licenses the technology. UTRC is presently responding to such prior art in the foreign patent offices. With respect to the two U.S. pending patent applications, that and other prior art has been brought by UTRC to the attention of the USPTO. There can be no assurance that such prior art will not result in further proceedings in the USPTO with respect to one of the issued patents. 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 44 46 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 Company'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 45 47 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." 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. 46 48 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 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 recently amended its regulations to eliminate the ELA requirement for therapeutic DNA plasmid products, therapeutic synthetic peptide products of 40 or fewer amino acids, monoclonal antibody products for in vivo use, and therapeutic recombinant DNA-derived products. Manufacturers of these products will instead be required to submit a biologics license application, which will include, among other information, nonclinical and clinical data demonstrating that the manufactured product meets prescribed standards for safety, purity and potency, and information pertaining to manufacturing methods. It is unclear whether any of the Company's products will fall within the category of products for which the ELA requirement has been eliminated, or what effect such elimination may have on product development and FDA review. 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 47 49 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 79 employees; 63 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. 48 50 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. 49 51 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 in connection with 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 in connection with 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. 50 52 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. In connection with the RGene Acquisition, Dr. Leaf Huang has joined, and, upon receiving the consent of the University of Texas, Dr. Mien-Chie Hung is 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 51 53 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 has joined the Company's Scientific Advisory Board in connection with the RGene Acquisition. Prior to the RGene Acquisition, Dr. Huang served as a member of the RGene scientific advisory board. 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 expected to join the Company's Scientific Advisory Board upon receiving the consent of the University of Texas. Prior to the RGene Acquisition, Dr. Hung served as a member of the RGene scientific advisory board. 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 Drs. Cosman and Huang, each existing member of the Scientific Advisory Board has been issued Common Stock in consideration for service to the Company. Drs. Huang and Hung received shares of common stock of RGene in consideration for service to RGene. Drs. Greenberg and Miller also receive annual consulting fees pursuant to agreements with the Company. Dr. Huang will also receive fees in connection with a consulting agreement entered into in connection with the RGene Acquisition. Dr. Hung will receive fees in connection with a consulting agreement to be entered into upon receiving the consent of the University of Texas. There can be no assurance, however, that such consent will be given. 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 52 54 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. 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 $224. (2) Dr. Daifuku began his employment with Targeted Genetics on January 23, 1995. (3) Mr. Johnson began his employment with Targeted Genetics on March 1, 1994. 53 55 OPTION GRANTS The following table sets forth certain information regarding stock options granted during the fiscal year ended December 31, 1995 to the Named Executive Officers. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL INDIVIDUAL GRANTS REALIZABLE VALUE AT ---------------------------------------------------------- ASSUMED ANNUAL NUMBER OF PERCENT OF RATES OF STOCK SHARES TOTAL OPTIONS PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3) OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------- NAME GRANTED(#)(1) FISCAL YEAR(1)(2) ($/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 54 56 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. 55 57 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. 56 58 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:
NAME NO. OF UNITS ------------------------------------------------------------------------ ------------ International Biotechnology Trust plc................................... 300,000 State of Wisconsin Investment Board..................................... 100,000
See "Description of Capital Stock -- Warrants -- 1995 Unit Offering." 57 59 PRINCIPAL SHAREHOLDERS The following table sets forth, as of June 19, 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. The information in the following table reflects the issuance of 3,636,364 shares of Common Stock to be issued 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 - ------------------------------------------------------ ------------ -------- ----------- 5% OWNERS: Immunex Corporation................................. 2,613,122 16.3% 13.4% 51 University Street Seattle, WA 98101 International Biotechnology Trust plc............... 1,500,000(1) 9.2% 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(2) 6.9% 5.7% 121 East Wilson Street P.O. Box 7842 Madison, WI 53707 DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS: H. Stewart Parker................................... 188,502(3) 1.2% * Barrie J. Carter, Ph.D. ............................ 148,061(4) * * Richard Daifuku, M.D., Ph.D. ....................... 8,000(5) * * James A. Johnson.................................... 32,008(6) * * Jeremy Curnock Cook................................. 1,505,000(1)(7) 9.2% 7.6% Stephen A. Duzan.................................... 17,797(8) * * James D. Grant...................................... 11,867(5) * * Donald E. O'Neill................................... 21,867(9) * * Austin M. Long, III................................. 206,255(10) 1.3% 1.1% Martin P. Sutter.................................... 1,573,248(11) 9.8% 8.1% All directors, director nominees and executive officers as a group (10 persons)................. 3,712,605 22.5% 18.6%
- ------------------ * Less than 1%. (1) Includes 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 secretary of IBT, and thereby has power to direct IBT's investments. Mr. Cook disclaims beneficial ownership of the securities owned by IBT. (2) Includes warrants to purchase 100,000 shares of Common Stock. (3) Includes warrants to purchase 3,333 shares of Common Stock and 51,837 shares subject to options that may be exercised within 60 days. 58 60 (4) Includes warrants to purchase 1,333 shares of Common Stock and 21,396 shares subject to options that may be exercised within 60 days. (5) Represents shares subject to options that may be exercised within 60 days. (6) Includes warrants to purchase 600 shares of Common Stock and 29,008 shares subject to options that may be exercised within 60 days. (7) Includes 5,000 shares subject to options that may be exercised within 60 days. (8) Includes warrants to purchase 1,666 shares of Common Stock and 9,467 shares subject to options that may be exercised within 60 days. (9) Includes warrants to purchase 2,000 shares of Common Stock and 11,867 shares subject to options that may be exercised within 60 days. (10) Represents 206,255 shares of Common Stock issuable to the University of Texas Board of Regents as a result of 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. (11) Represents 440,520 shares of Common Stock issuable to Aronex as a result of the RGene Acquisition, 367,452 shares of Common Stock to be issued to The Woodlands Venture Fund, L.P. in the RGene Acquisition and 765,276 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. 59 61 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 June 19, 1996, 769,598 of such Warrants were outstanding. 60 62 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 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." 61 63 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 former RGene stockholders are entitled to certain registration rights with respect to 3,636,364 shares of Common Stock issued to such stockholders in connection with the RGene Acquisition, 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 June 19, 1996, Equipment Financing Warrants exercisable for the purchase of 18,701 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. 62 64 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...................................... 1,170,000 Genesis Merchant Group Securities......................................... 1,170,000 Alex. Brown & Sons Incorporated........................................... 80,000 CS First Boston Corporation............................................... 80,000 Donaldson, Lufkin & Jenrette Securities Corporation....................... 80,000 A.G. Edwards & Sons, Inc. ................................................ 80,000 PaineWebber Incorporated.................................................. 80,000 Salomon Brothers Inc ..................................................... 80,000 UBS Securities Inc. ...................................................... 80,000 Brean Murray, Foster Securities Inc. ..................................... 40,000 Cowen & Company........................................................... 40,000 Crowell, Weedon & Co...................................................... 40,000 Cruttenden Roth Incorporated.............................................. 40,000 Howe Barnes Investments, Inc. ............................................ 40,000 Legg Mason Wood Walker, Incorporated...................................... 40,000 McDonald & Company Securities, Inc. ...................................... 40,000 Mesirow Financial, Inc. .................................................. 40,000 Pacific Crest Securities.................................................. 40,000 Punk, Ziegel & Knoell, L.P. .............................................. 40,000 Rauscher Pierce Refsnes, Inc. ............................................ 40,000 Sands Brothers & Co., Ltd. ............................................... 40,000 Starr Securities, Inc. ................................................... 40,000 Sutro & Co. Incorporated.................................................. 40,000 Van Kasper & Company...................................................... 40,000 ---------- 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 $.14 per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $.10 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 63 65 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. 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, 64 66 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 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. 65 67 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 68 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 69 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 70 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 71 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 72 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 73 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 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) 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 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) 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 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) 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 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) 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................................... 1,177,014 $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 78 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 79 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 80 RGENE THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS ASSETS
DECEMBER 31, --------------------------- 1994 1995 ----------- ----------- MARCH 31, 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 81 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 82 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 83 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 84 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 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.) 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 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.) 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 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) 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 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.) 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 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.) 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 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.) 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 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.) 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). 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. Effective May 1996, the Company and the pharmaceutical company entered into a license, research and marketing agreement under which the pharmaceutical company received exclusive rights to develop and commercialize in Europe the Company's E1A tumor suppressor product candidate and other product candidates based on the E1A tumor suppressor gene and developed pursuant to the agreement. An additional $2.5 million (unaudited) has been received in June 1996 as an upfront license fee. The Company may receive additional payments if the parties achieve certain development milestones and royalties on sales of resulting products, if any. An additional $1.5 million may be payable to related parties (see Note 7). In addition, if the parties are able to negotiate a mutually acceptable supply agreement, the Company will be entitled to manufacture products for the pharmaceutical company in return for manufacturing fees. As a result of an amendment to an existing license agreement completed in the second quarter of 1996, each of the $1.5 million payables to related parties will be reduced to $500,000 (unaudited). F-25 92 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) 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 Company. 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 93 - ------------------------------------------------------- - ------------------------------------------------------- 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............................. 18 Price Range of Common Stock................. 19 Dividend Policy............................. 19 Dilution.................................... 20 Capitalization.............................. 21 Selected Financial Data..................... 22 Unaudited Pro Forma Consolidated Financial Statements................................ 23 Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 26 Business.................................... 30 Management.................................. 49 Certain Transactions........................ 57 Principal Shareholders...................... 58 Description of Capital Stock................ 60 Underwriting................................ 63 Legal Matters............................... 64 Experts..................................... 64 Additional Information...................... 65 Index to Financial Statements............... F-1
------------------------------ - ------------------------------------------------------- - ------------------------------------------------------- - ------------------------------------------------------- - ------------------------------------------------------- 3,500,000 SHARES TARGETED GENETICS CORPORATION COMMON STOCK ------------------------------ PROSPECTUS ------------------------------ Vector Securities International, Inc. Genesis Merchant Group Securities June 20, 1996 ------------------------------------------------------- ------------------------------------------------------- 94 PART II INFORMATION NOT REQUIRED IN PROSPECTUS 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) 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)
II-1 95
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------------------- 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) 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.
II-2 96
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------------------- 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. 10.32*+ -- Agreement dated as of May 28, 1996 by and between RGene Therapeutics, Inc. and Laboratoires Fournier S.C.A. 11.1 -- Computation of net loss per share (D) 21.1 -- Subsidiaries of Registrant 23.1 -- Consent of Ernst & Young LLP (contained on page II-5) 23.2 -- Consent of Arthur Andersen LLP (contained on page II-6) 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. (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 97 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment No. 4 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 19th day of June, 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. 4 to Registration Statement has been signed by the following persons in the capacities indicated below on the 19th day of June, 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-4 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 June 19, 1996 II-5 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 Registration Statement. ARTHUR ANDERSEN LLP The Woodlands, Texas June 19, 1996 II-6 100 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)
101
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)
102
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. 10.32*+ Agreement dated as of May 28, 1996 by and between RGene Therapeutics, Inc. and Laboratoires Fournier S.C.A. 11.1 Computation of net loss per share(D) 21.1 Subsidiaries of Registrant 23.1 Consent of Ernst & Young LLP (contained on page II-5) 23.2 Consent of Arthur Andersen LLP (contained on page II-6) 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. (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-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 3,500,000 Shares TARGETED GENETICS CORPORATION Common Stock UNDERWRITING AGREEMENT June 19, 1996 VECTOR SECURITIES INTERNATIONAL, INC. GENESIS MERCHANT GROUP SECURITIES As Representatives of the Several Underwriters c/o VECTOR SECURITIES INTERNATIONAL, INC. 1751 Lake Cook Road, Suite 350 Deerfield, Illinois 60015 Ladies and Gentlemen: Targeted Genetics Corporation, a Washington corporation (the "Company"), proposes to issue and sell an aggregate of 3,500,000 shares of its common stock, par value $0.01 per share, (the "Initial Securities") to the several Underwriters named in Schedule I hereto (the "Underwriters") for whom Vector Securities International, Inc. ("Vector") and Genesis Merchant Group Securities are acting as representatives (collectively, the "Representatives"). In addition, solely for the purpose of covering over-allotments, the Company proposes to grant to the several Underwriters, upon the terms and conditions set forth in Section 2 hereof, an option to purchase up to an additional 525,000 shares of Common Stock of the Company (the "Option Securities"). The Initial Securities and the Option Securities are hereinafter collectively referred to as the "Securities." The Company's common stock, par value $0.01 per share, including the Securities, is hereinafter referred to as the "Common Stock." The Company wishes to confirm as follows its agreements with you and the other Underwriters on 2 whose behalf you are acting in connection with the several purchases by the Underwriters of the Securities: 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-3592) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus, or prospectuses, and either (A) has prepared and filed, prior to the effective date of such registration statement, an amendment to such registration statement, including a final prospectus or (B) if the Company has elected to rely upon Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations"), will prepare and file a prospectus, in accordance with the provisions of Rule 430A and Rule 424(b) ("Rule 424(b)") of the 1933 Act Regulations, promptly after execution and delivery of this Agreement. Additionally, if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, the Company will prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b), promptly after execution and delivery of this Agreement. The information, if any, included in such prospectus or in such Term Sheet, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it becomes effective (a) pursuant to paragraph (b) of Rule 430A, is referred to herein as the "Rule 430A Information," or (b) pursuant to paragraph (d) of Rule 434, is referred to herein as the "Rule 434 Information." Each prospectus used before the time such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information that was used after effectiveness and prior to the execution and delivery of this Agreement is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto, at the time it became effective and including, if applicable, the Rule 430A Information or the Rule 434 Information, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term Registration Statement shall include the Rule 462(b) Registration Statement. The final prospectus in the form first furnished to the Underwriters for use in connection with the offering of the Securities 2 3 is herein referred to as the "Prospectus." If Rule 434 is relied upon, the term "Prospectus" shall refer to the preliminary prospectus last furnished to the Underwriters in connection with the offering of the Securities, together with the Term Sheet, and all references to the date of the Prospectus shall mean the date of the Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy, if any, filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). 2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the representations, warranties and agreements contained herein and subject to all the terms and conditions set forth herein, the Company hereby agrees to issue and sell to each Underwriter and each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $ per share (the "Purchase Price Per Share"), the number of Initial Securities set forth in Schedule I opposite the name of such Underwriter under the column "Number of Initial Securities to be Purchased from the Company" (or such number of Initial Securities increased as set forth in Section 10 hereof). Upon the basis of the representations, warranties and agreements contained herein and subject to all the terms and conditions set forth herein, the Company hereby grants an option (the "Over-Allotment Option") to the Underwriters to purchase from the Company, at the Purchase Price Per Share, up to an aggregate of 525,000 Option Securities. Option Securities may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Securities. Such option shall expire at 5:00 P.M., Chicago time, on the 30th day after the date of this Agreement (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading). Such over-allotment option may be exercised at any time or from time to time until its expiration. Upon any exercise of the Over-Allotment Option, each Underwriter, severally and not jointly, agrees to purchase from the Company that proportion of the total number of Option Securities as is equal to the percentage of Initial Securities that such Underwriter is purchasing from the Company (or such number of Initial Securities increased as set forth in Section 10 hereof), 3 4 subject to such adjustments as you may determine to avoid fractional shares. 3. TERMS OF PUBLIC OFFERING. The Company has been advised by you that the Underwriters propose to make a public offering of the Securities as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Securities upon the terms set forth in the Prospectus. 4. DELIVERY OF THE SECURITIES AND PAYMENT THEREFOR. Delivery to the Underwriters of and payment for the Initial Securities shall be made at the office of Perkins Coie, 1201 Third Avenue, 40th Floor, Seattle, Washington 98101, at 7:00 A.M., Seattle time, on the third (fourth, if the pricing occurs after 4:30 p.m. (Eastern Time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10 hereof) (the "Closing Date"). The place of closing for the Initial Securities and the Closing Date may be varied by agreement among you and the Company. Delivery to the Underwriters of and payment for any Option Securities to be purchased by the Underwriters shall be made at the aforementioned office of Perkins Coie at such time on such date (an "Option Closing Date"), which may be the same as the Closing Date but shall in no event be earlier than the Closing Date nor earlier than two nor later than ten business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from you on behalf of the Underwriters to the Company of the Underwriters' determination to purchase a number, specified in such notice, of Option Securities. The place of closing for any Option Securities and the Option Closing Date for such Option Securities may be varied by agreement between you and the Company. Certificates for the Initial Securities and for any Option Securities to be purchased hereunder shall be registered in such names and in such denominations as you shall request by written notice (it being understood that a facsimile transmission shall be deemed written notice) prior to 9:30 A.M., Chicago time, on the second business day preceding the Closing Date or any Option Closing Date, as the case may be. Such certificates shall be made available to you in Chicago, Illinois or New York, New York, as 4 5 requested by you in the aforesaid notice, for inspection and packaging not later than 9:30 A.M., Chicago time, on the business day next preceding the Closing Date or any Option Closing Date, as the case may be. The certificates evidencing the Initial Securities and any Option Securities to be purchased hereunder shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, against payment of the purchase price therefor by certified or official bank check or checks payable in New York Clearing House (next day) funds to the order of the Company. It is understood that each Underwriter has authorized you, for its account, to accept delivery of, acknowledge receipt of, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. Vector, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose check has not been received by the Closing Date or the Option Closing Date, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder. 5. AGREEMENTS OF THE COMPANY. The Company covenants and agrees with the several Underwriters as follows: a. The Company will notify the Representatives immediately, and confirm the notice in writing, (i) of the effectiveness of the Registration Statement and any amendment thereto, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the suspension of qualification of the Securities for offering or sale in any jurisdiction or the initiation of any proceedings for such purpose and (v) during the period when the Prospectus is required to be delivered under the 1933 Act or Securities Exchange Act of 1934, as amended (the "1934 Act"), of any change, or any event or occurrence which could result in such a change, in the Company's condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company or the happening of any event, including the filing of any information, documents or reports pursuant to the 1934 Act, that makes any statement of a material fact made in the Registra- 5 6 tion Statement or the Prospectus (as then amended or supplemented) untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus in order to state a material fact required by the 1933 Act or the 1933 Act Regulations to be stated therein or necessary in order to make the statements therein not misleading, or of the necessity to amend or supplement the Prospectus to comply with the 1933 Act, the 1933 Act Regulations or any other law. The Company shall use its best efforts to prevent the issuance of any stop order or order suspending the qualification or exemption of the Securities under any state securities or Blue Sky laws, and, if at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption of the Securities under any state securities or Blue Sky laws, the Company shall use every reasonable effort to obtain the withdrawal or lifting of such order at the earliest possible time. b. The Company will give the Underwriters notice of its intention to prepare or file any amendment to the Registration Statement (including any post-effective amendment), any Rule 462(b) Registration Statement, any Term Sheet or any amendment or supplement to the Prospectus (including any revised prospectus or Term Sheet and preliminary prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Securities which differs from the prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus or Term Sheet and preliminary prospectus is required to be filed pursuant to Rule 424(b)), whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the Underwriters with copies of any Rule 462(b) Registration Statement, Term Sheet, amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such Rule 462(b) Registration Statement, Term Sheet, amendment or supplement or use any such prospectus to which the Underwriters or counsel for the Underwriters shall object. c. The Company has furnished or will deliver to the Underwriters and their counsel, without charge, as many signed and conformed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith 6 7 or incorporated by reference therein) as the Underwriters may reasonably request. If applicable, the copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. d. The Company will furnish to each Underwriter, without charge, from time to time during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request for the purposes contemplated by the 1933 Act, the 1934 Act, the 1933 Act Regulations or the rules and regulations of the Commission under the 1934 Act (the "1934 Act Regulations"). If applicable, the Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. e. The Company will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and in the Prospectus. If at any time when a prospectus is required by the 1933 Act, the 1934 Act, the 1933 Act Regulations or the 1934 Act Regulations to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to amend the Registration Statement or amend or supplement the Prospectus in order that the Prospectus will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 5(b) of the 1933 Act, such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectus comply with such requirements and the Company will 7 8 furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. f. During the period of five years hereafter, the Company will furnish to you (i) as soon as available, a copy of each report of the Company mailed to shareholders or filed with the Commission or the Nasdaq National Market ("NASDAQ"), and (ii) from time to time such other information concerning the Company as you may request, subject to appropriate confidentiality provisions with respect to any material nonpublic information so furnished. g. The Company will use its best efforts, in cooperation with counsel to the Underwriters, to qualify the Securities for offering and sale under the applicable securities or Blue Sky laws of such states and other jurisdictions of the United States as the Representatives may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement. h. The Company will make generally available to its security holders as soon as practicable, but not later than 45 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 of the 1933 Act Regulations) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the "effective date" (as defined in said Rule 158) of the Registration Statement. i. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectus under "Use of Proceeds." j. If, at the time that the Registration Statement becomes effective, any Rule 430A Information or Rule 434 Informa- 8 9 tion shall have been omitted therefrom, then immediately following the execution of this Agreement, the Company will prepare, and file or transmit for filing with the Commission in accordance with Rule 430A or Rule 434 and Rule 424(b), copies of a Prospectus or Term Sheet containing such Rule 430A Information and Rule 434 Information, respectively, or, if required by Rule 430A, a post-effective amendment to the Registration Statement (including an amended Prospectus), containing such Rule 430A Information. k. If the Company elects to rely upon Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 of the 1933 Act Regulations by the earlier of (i) 10:00 P.M. Eastern Time on the date hereof and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2). l. The Company, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to Section 13, 14 or 15 of the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. m. During a period of 90 days from the date of the Prospectus, the Company will not, without the prior written consent of Vector, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of any security outstanding on the date hereof and referred to in the Prospectus, (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant 9 10 to existing employee benefit plans of the Company referred to in the Prospectus or (D) any shares of Common Stock issued pursuant to any non-employee director stock plan. n. The Company has furnished or will furnish to you "lock-up" letters, in form and substance satisfactory to you, signed by each of its current officers, directors, Immunex Corporation and International Biotechnology Trust plc. o. The Company will supply the Underwriters with copies of all correspondence to and from, and all documents issued to and by, the Commission in connection with the registration of the Securities under the 1933 Act. p. Prior to the Closing Date, the Company shall furnish to the Underwriters, as soon as they have been prepared, copies of any unaudited interim consolidated financial statements of the Company and its sole subsidiary set forth on Exhibit 21 to Item 16(a) of the Registration Statement (the "Subsidiary"), for any periods subsequent to the periods covered by the financial statements appearing in the Registration Statement and the Prospectus. q. Prior to the Closing Date, the Company will issue no press release or other communications directly or indirectly and hold no press conference with respect to the Company or its Subsidiary, the condition, financial or otherwise, or the earnings, business affairs or business prospects of any of them, or the offering of the Securities, without the prior written consent of the Representatives unless in the judgment of the Company and its counsel, and after notification to the Representatives, such press release or communication is required by law. r. The Company will comply with all provisions of Florida H.B. 1771, codified as Section 517.075 of the Florida statutes, and all regulations promulgated thereunder relating to issuers doing business with Cuba. s. The Company has not taken, nor will it take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Securities. 10 11 t. The Company will use its best efforts to maintain the quotation of the Common Stock (including the Securities) on NASDAQ and will file with NASDAQ all documents and notices required by NASDAQ of companies that have securities that are traded in the over-the-counter market and quotations for which are reported by NASDAQ. 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Underwriter that: a. When the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto becomes effective, at the date of the Prospectus, if different, and at the Closing Date and the Option Closing Date, as the case may be, (i) the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied or will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any supplements or amendments thereto will not at the date of the Prospectus, at the date of any such supplements or amendments, or at the Closing Date or the Option Closing Date, if any, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434 and the Prospectus shall not be "materially different," as such term is used in Rule 434, from the Prospectus included in the Registration Statement at the time it became effective. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or Prospectus relating to any Underwriter made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter, through Vector expressly for use in the Registration Statement or Prospectus. The Company has not distributed any offering materials in connection with the offering or sale of the Securities other than the Registration Statement, the preliminary prospectus, the Prospectus, the Term Sheet, if applicable, or any other materials, if any, permitted by the 1933 Act or the 1933 Act Regulations. 11 12 b. Each preliminary prospectus and the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and, if applicable, each preliminary prospectus and the Prospectus delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. c. The accountants who certified the financial statements included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. d. The financial statements included in the Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries as of the dates indicated and the results of their operations for the periods specified; except as otherwise stated in the Registration Statement, said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis; and no supporting schedules are required to be included in the Registration Statement. The summary financial and statistical data set forth in the Prospectus are prepared on an accounting basis consistent with such financial statements. e. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (i) there has been no material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise, whether or not arising in the ordinary course of business, (ii) except with respect to the Merger (as defined below), there have been no transactions entered into by the Company or its Subsidiary, other than those in the ordinary course of business, which are material with respect to the Company, and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. The Company has no material contingent obligations which are not specifically 12 13 disclosed in the Company's financial statements that are included in the Registration Statement. f. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Washington with corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not, singly or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. g. The Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify would not have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise; all of the issued and outstanding capital stock of the Subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Company free and clear of any security interest, mortgage, pledge, lien, charge, encumbrance, claim or equity. There are no outstanding subscriptions, options, warrants, commitments, convertible or exchangeable securities or other rights granted by the Company or its Subsidiary to acquire any shares of capital stock of or ownership interests in any subsidiary of the Company and there are no commitments, plans or arrangements to do so. Except as described in the Prospectus, the Company does not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any 13 14 corporation or have any equity interest in any firm, partnership, joint venture, association or other entity. h. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement or pursuant to reservations, agreements, employee or director benefit plans or the exercise of convertible securities referred to in the Prospectus); the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable and have not been issued in violation of or are not otherwise subject to any preemptive or other rights to subscribe for or purchase securities; the Securities have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued and fully paid and nonassessable; the certificates evidencing the Securities are in due and proper form under Washington law; the authorized capital stock of the Company, including the Securities, conforms to all statements relating thereto contained in the Prospectus; and the issuance of the Securities is not subject to preemptive or other rights to subscribe for or purchase securities. There are no outstanding subscriptions, options, warrants, convertible or exchangeable securities or other rights granted to or by the Company to purchase shares of Common Stock or other securities of the Company and there are no commitments, plans or arrangements to issue any shares of Common Stock or any security convertible into or exchangeable for Common Stock, in each case other than as described in the Prospectus. i. Except as disclosed in the Registration Statement and except as would not, singly or in the aggregate, reasonably be expected to have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise, (A) the Company and its Subsidiary are each in compliance with all applicable Environmental Laws (as defined below), (B) the Company and its Subsidiary have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with the requirements of such permits authorizations and approvals, (C) there are no pending or, to the best knowledge of the Company, threatened 14 15 Environmental Claims against the Company or its Subsidiary and (D) under applicable law, there are no circumstances with respect to any property or operations of the Company or its Subsidiary that are reasonably likely to form the basis of an Environmental Claim against the Company or its Subsidiary. For purposes of this Agreement, the following terms shall have the following meanings: "Environmental Law" means any United States (or other applicable jurisdiction's) Federal, state, local or municipal statute, law, rule, regulation, ordinance, code, policy or rule of common law and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgement, relating to the environment, health, safety or any chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority. "Environmental Claims" means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law. j. Neither the Company nor its Subsidiary is in violation of its charter or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any material contract, indenture, mortgage, loan agreement, deed, trust, note, lease, sublease, voting agreement, voting trust, or other instrument or agreement to which the Company or its Subsidiary is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or its Subsidiary is subject; and the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein and the fulfillment of the terms hereof have been duly authorized by all necessary corporate action and will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or its Subsidiary pursuant to, any contract, indenture, mortgage, loan agreement, deed, trust, note, lease, sublease, voting agreement, voting trust or other instrument or agreement to which the Company or its Subsidiary is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or its Subsidiary is subject, nor will such action result in any violation of the provisions of the charter or bylaws of the Company or its 15 16 Subsidiary or any applicable statute, law, rule, regulation, ordinance, decision, directive or order. k. No labor dispute with the employees of the Company or its Subsidiary exists or, to the best knowledge of the Company, is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors which might, singly or in the aggregate, be expected to result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. l. There is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or its Subsidiary, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which, singly or in the aggregate, might result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise, or which, singly or in the aggregate, might materially and adversely affect the properties or assets thereof or which might materially and adversely affect the consummation of this Agreement; all pending legal or governmental proceedings to which the Company or its Subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, are, considered in the aggregate, not material; and there are no contracts or documents of the Company or its Subsidiary which are required to be filed as exhibits to the Registration Statement by the 1933 Act or by the 1933 Act Regulations which have not been so filed. m. Except as otherwise specifically disclosed in the Prospectus, the Company and its Subsidiary own or are licensed to use all patents, patent applications, inventions, trademarks, trade names, applications for registration of trademarks, service marks, service mark applications, copyrights, know-how, manufacturing processes, formulae, trade secrets, licenses and rights in any thereof and any other intangible property and assets (herein called the "Proprietary Rights") which are material to the business of the 16 17 Company and its Subsidiary considered as one enterprise as now conducted and as proposed to be conducted, in each case as described in the Prospectus. The description of the Proprietary Rights in the Prospectus is correct in all material respects and fairly and correctly describes the Company's and its Subsidiary's rights with respect thereto. The Company does not have any knowledge of, and the Company has not given or received any notice of, any pending conflicts with or infringement of the rights of others with respect to any Proprietary Rights or with respect to any license of Proprietary Rights which are material to the business of the Company and its Subsidiary considered as one enterprise. No action, suit, arbitration, or legal, administrative or other proceeding, or investigation is pending, or, to the best knowledge of the Company, threatened, which involves any Proprietary Rights. Neither the Company nor its Subsidiary is subject to any judgment, order, writ, injunction or decree of any court or any Federal, state, local, foreign or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any arbitrator, or has entered into or is a party to any contract which restricts or impairs the use of any such Proprietary Rights in a manner which would have a material adverse effect on the use of any of the Proprietary Rights. Except as otherwise specifically disclosed in the Prospectus, to the best knowledge of the Company, no Proprietary Rights used by the Company or its Subsidiary, and no services or products sold by the Company or its Subsidiary, conflict with or infringe upon any proprietary rights of any third party. Neither the Company nor its Subsidiary has received written notice of any pending conflict with or infringement upon such third-party proprietary rights. Neither the Company nor its Subsidiary has entered into any consent, indemnification, forbearance to sue or settlement agreement with respect to Proprietary Rights other than in the ordinary course of business. No claims have been asserted by any person with respect to the validity of the Company's or its Subsidiary's ownership or right to use the Proprietary Rights and, to the best knowledge of the Company, there is no reasonable basis for any such claim to be successful. The Proprietary Rights which are material to the business of the Company and its Subsidiary considered as one enterprise are valid and enforceable and no registration relating thereto has lapsed, expired or been abandoned or cancelled or is the subject of cancellation or other adversarial proceedings, and all applications therefore are pending and are in good standing. The Company and its Subsidiary have complied, in all material respects, with their 17 18 respective contractual obligations relating to the protection of the Proprietary Rights which are material to the business of the Company and its Subsidiary considered as one enterprise used pursuant to licenses. To the best knowledge of the Company, no person is infringing on or violating the Proprietary Rights which are material to the business of the Company and its Subsidiary considered as one enterprise owned or used by the Company or its Subsidiary. n. No registration, authorization, approval, qualification or consent of any court or governmental authority or agency is necessary in connection with the offering, issuance or sale of the Securities hereunder, except such as may be required under the 1933 Act or the 1933 Act Regulations or state securities or Blue Sky laws (or such as may be required by the National Association of Securities Dealers, Inc. ("NASD")). o. The Company and its Subsidiary possess and are operating in compliance with all material licenses, certificates, consents, authorities, approvals and permits (collectively, "permits") from all state, Federal, foreign and other regulatory agencies or bodies necessary to conduct the businesses now operated by them, and neither the Company nor its Subsidiary has received any notice of proceedings relating to the revocation or modification of any such permit or any circumstance which would lead it to believe that such proceedings are reasonably likely which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. p. This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general principles of equity and except as rights to indemnity and contribution hereunder may be limited by Federal or state securities laws or the public policy underlying such laws. 18 19 q. Except as described in the Prospectus, there are no persons with registration or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. r. No order preventing or suspending the use of any preliminary prospectus has been issued and no proceedings for that purpose are pending or, to the knowledge of the Company, threatened by the Commission; and to the best knowledge of the Company, no order suspending the offering of the Securities in any jurisdiction designated by the Underwriters pursuant to Section 5(g) of this Agreement has been issued and, to the best knowledge of the Company, no proceedings for that purpose have been instituted or threatened or are contemplated. s. The Company and its Subsidiary have good and marketable title to their respective properties, free and clear of all material security interests, mortgages, pledges, liens, charges, encumbrances and claims of record. The properties of the Company and its Subsidiary are, in the aggregate, in good repair (reasonable wear and tear excepted), and suitable for their respective uses. Any real properties held under lease by the Company and its Subsidiary are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the conduct of the business of the Company and its Subsidiary considered as one enterprise. t. The Company and its Subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. u. The Company and its Subsidiary have conducted and are conducting their respective businesses in compliance with all applicable Federal, state, local and foreign statutes, laws, rules, regulations, ordinances, codes, decisions, decrees, direc- 19 20 tives and orders, except where the failure to do so would not, singly or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or on the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. v. To the best of the Company's knowledge, the Company and its Subsidiary take security measures adequate to assert trade secret protection in their non-patented technology. w. To the best of the Company's knowledge, neither the Company nor its Subsidiary nor any employee or agent of the Company or its Subsidiary has made any payment of funds of the Company or its Subsidiary or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. x. The Company is not now, and after sale of the Securities to be sold by it hereunder and application of the net proceeds from such sale as described in the Prospectus under the caption "Use of Proceeds" will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. y. All offers and sales of capital stock of the Company prior to the date hereof were at all relevant times duly registered or exempt from the registration requirements of the 1933 Act and were duly registered or subject to an available exemption from the registration requirements of the applicable state securities or Blue Sky laws. z. The Company has complied with all provisions of Florida H.B. 1771, codified as Section 517.075 of the Florida statutes, and all regulations promulgated thereunder relating to issuers doing business with Cuba. aa. The Common Stock is registered pursuant to Section 12(g) of the 1934 Act. The Securities have been duly authorized for quotation on NASDAQ. The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the 1934 Act or delisting the Common Stock from NASDAQ, nor has the Company 20 21 received any notification that the Commission or NASDAQ is contemplating terminating such registration or listing. bb. Neither the Company nor, to its knowledge, any of its officers, directors or affiliates has taken, and at the Closing Date and at any later Option Closing Date, neither the Company nor, to its knowledge, any of its officers, directors or affiliates will have taken, directly or indirectly, any action which has constituted, or might reasonably be expected to constitute, the stabilization or manipulation of the price of sale or resale of the Securities. cc. The Company and its Subsidiary maintain insurance of the types and in amounts adequate for its and its Subsidiary's business and consistent with insurance coverage maintained by similar companies in similar business, including but not limited to, insurance covering clinical trial liability, product liability and real and personal property owned or leased against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. dd. The Company and its Subsidiary have filed all material tax returns required to be filed, which returns are true and correct in all material respects, and neither the Company nor its Subsidiary is in default in the payment of any taxes, including penalties and interest, assessments, fees and other charges, shown thereon due or otherwise assessed, other than those being contested in good faith and for which adequate reserves have been provided or those currently payable without interest which were payable pursuant to said returns or any assessments with respect thereto. ee. Except as described in the Prospectus, to the best of the Company's knowledge, there are no rulemaking or similar proceedings before The United States Food and Drug Administration or comparable Federal, state, local or foreign government bodies which involve or affect the Company or its Subsidiary, which, if the subject of an action unfavorable to the Company or its Subsidiary, could involve a prospective material adverse change in or effect on the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. 21 22 ff. The Company has not received any communication (whether written or oral) relating to the termination or threatened termination or modification or threatened modification of any material, consulting, licensing, marketing, research and development, cooperative or any similar agreement, including, without limitation, the collaborative research and license agreements listed under the section of the Prospectus entitled, "Collaborative and Licensing Agreements." Each such collaborative and licensing agreement is in effect substantially as described in such section of the Prospectus. gg. To the knowledge of the Company, if any full-time employee identified in the Prospectus has entered into any non-competition, non-disclosure, confidentiality or other similar agreement with any party other than the Company or its Subsidiary, such employee is neither in violation thereof nor is expected to be in violation thereof as a result of the business conducted or expected to be conducted by the Company or its Subsidiary as described in the Prospectus or such person's performance of his obligations to the Company or its Subsidiary; and neither the Company nor its Subsidiary has received written notice that any consultant or scientific advisor of the Company or its Subsidiary is in violation of any non-competition, non-disclosure, confidentiality or similar agreement. hh. On or prior to the date hereof, the Company and RGene Therapeutics, Inc. ("RGene") have received the requisite approval or approvals of that certain Agreement and Plan of Merger, dated as of April 16, 1996 (the "Merger Agreement"), by and among the Company, TGC Acquisition Corporation and RGene, pursuant to which TGC Acquisition Corporation will be merged with and into RGene (the "Merger"). Except as set forth in the Prospectus, no such approval or approvals imposes on the Company or any affiliate thereof any condition that adversely affects the ability of the Company and its affiliates to conduct their business as the same is described in the Prospectus or adversely affects the ability of the Underwriters to market the Securities on the terms and in the manner contemplated by the Prospectus. ii. The Certificate of Merger with respect to the Merger has been filed with the Secretary of State of the State of Delaware and has become effective, the Merger has occurred and all other transactions contemplated by the Merger Agreement to be 22 23 consummated on or prior to the Closing Date have been consummated without waiver or modification thereto. 7. INDEMNIFICATION AND CONTRIBUTION. a. The Company agrees to indemnify and hold harmless (i) each Underwriter and (ii) each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act (any of the persons referred to in this clause (ii) being hereinafter referred to as a "controlling person") and (iii) the respective directors, officers, partners and employees of any of the Underwriters or any controlling person (any person referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an "Indemnified Person") to the fullest extent lawful, from and against any and all losses, claims, damages, liabilities and expenses whatsoever (including, without limitation, all reasonable costs of pursuing, investigating and defending any claim, suit or action or any investigation or proceeding by any governmental agency or body, commenced or threatened, including the reasonable fees and expenses of counsel to any Indemnified Person), directly or indirectly, caused by, related to, based upon or arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information, if applicable, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or caused by, related to, based upon, arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph a. with respect to any preliminary 23 24 prospectus shall not inure to the benefit of any Underwriter (or related Indemnified Person) on account of any such loss, claim, damage, liability or expense arising from the sale of the Securities by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the 1933 Act or the 1933 Act Regulations, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such preliminary prospectus was corrected in the Prospectus (or any amendment or supplement thereto), provided that the Company has delivered the Prospectus to the several Underwriters in requisite quantity on a timely basis to permit such delivery or sending. b. If any action, suit or proceeding shall be brought against any Indemnified Person in respect of which indemnity may be sought against the Company, such Indemnified Person shall promptly notify in writing the parties against whom indemnification is being sought (the "indemnifying parties"), and such indemnifying parties shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Such Indemnified Person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the indemnifying parties have agreed in writing to pay such fees and expenses, (ii) the indemnifying parties have failed to assume the defense and employ counsel or (iii) the named parties to any such action, suit, investigation or proceeding (including any impleaded parties) include both such Indemnified Person and the indemnifying parties and representation of such Indemnified Person and any indemnifying party by the same counsel would, in the reasonable judgment of the Indemnified Person, be inappropriate due to actual or potential differing interests between them (in which case the indemnifying party shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Indemnified Person). It is understood, however, that the indemnifying parties shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Persons not having actual or potential differing 24 25 interests with you or among themselves, which firm shall be designated in writing by Vector, and that all such fees and expenses shall be reimbursed as they are incurred. The indemnifying parties shall not be liable for any settlement of any such action, suit or proceeding effected without their written consent, which consent shall not be unreasonably withheld, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the indemnifying parties agree to indemnify and hold harmless any Indemnified Person, to the extent provided in the preceding paragraph, from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. c. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, any person who controls the Company within the meaning of Section 15 of the 1933 Act, to the same extent as the foregoing indemnity from the Company to each Indemnified Person, but only with respect to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter through Vector expressly for use in the Registration Statement, the Prospectus or any preliminary prospectus, or any amendment or supplement thereto. If any action, suit, investigation or proceeding shall be brought against the Company, any of its directors, any such officer or any such controlling person based on the Registration Statement, the Prospectus or any preliminary prospectus, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Company by paragraph (b) above, and the Company, its directors, any such officer and any such controlling person shall have the rights and duties given to the Indemnified Persons by paragraph (a) above. d. If the indemnification provided for in this Section 7 is unavailable to, or insufficient to hold harmless, an indemnified party under paragraphs (a) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the 25 26 Company on the one hand and the Underwriters on the other hand from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law or judicial determination, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other hand, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus or, if Rule 434 is used, the corresponding location on the Term Sheet. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The indemnity and contribution obligations of the Company set forth herein shall be in addition to any liability or obligation the Company may otherwise have to any Indemnified Person. e. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating any claim or defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 7, no Underwriter (or any of its related Indemnified Persons) shall be required to contribute (whether pursuant to subsection (a) or (c) or otherwise) any amount in excess of the 26 27 underwriting discount applicable to the Securities underwritten by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7 are several in proportion to the respective numbers of Securities set forth opposite their names in Schedule I hereto (or such numbers of Securities increased as set forth in Section 10 hereof) and not joint. f. No indemnifying party shall, without the prior written consent of the Indemnified Person, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any Indemnified Person is or could have been a party and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement includes an unconditional release of such Indemnified Person from all liability on claims that are the subject matter of such action, suit or proceeding. g. Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Indemnified Person, the Company, its directors or officers or any person controlling the Company, (ii) acceptance of any Securities and payment therefor hereunder and (iii) any termination of this Agreement. 8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase the Initial Securities hereunder are subject to the following conditions: a. The Registration Statement, including any Rule 462(b) Registration Statement, shall have become effective on the date hereof, or with the consent of the Representatives, at a later date and time; no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission. If 27 28 the Company has elected to rely upon Rule 430A, Rule 430A Information previously omitted from the effective Registration Statement pursuant to Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 424(b) within the prescribed time period and the Company shall have provided evidence satisfactory to the Underwriters of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A. If the Company has elected to rely upon Rule 434, a Term Sheet shall have been transmitted to the Commission for filing pursuant to Rule 424(b) within the prescribed time period. b. The Underwriters shall have received: (i) The favorable opinion, dated as of the Closing Date, of Perkins Coie, counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, to the effect that: A. The Company has been duly incorporated and is validly existing as a corporation under the laws of the State of Washington. B. The Company has corporate power and authority to own or lease its properties and to conduct its business as described in the Registration Statement and the Prospectus and to enter into and perform its obligations under this Agreement. C. To their knowledge, the Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, except where the failure to qualify would not have a material adverse effect on the Company. D. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under "Capitalization" (except for subsequent 28 29 issuances, if any, pursuant to reservations, agreements, employee or director benefit plans or the exercise of convertible securities referred to in the Prospectus), and the shares of issued and outstanding capital stock of the Company, including the Securities, have been duly authorized and validly issued and are fully paid and nonassessable and, to their knowledge, have not been issued in violation of or are not otherwise subject to any preemptive rights or, to such counsel's knowledge, other rights to subscribe for or purchase securities. E. The Securities have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued and fully paid and nonassessable; and the issuance of the Securities is not subject to preemptive or, to such counsel's knowledge, other rights to subscribe for or purchase securities. F. The Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own and lease its properties and to conduct its business as described in the Registration Statement and, to their knowledge, is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, except where the failure to qualify would not have a material adverse effect on the Company; all of the issued and outstanding capital stock of the Subsidiary has been duly authorized and 29 30 validly issued, is fully paid and nonassessable and, to their knowledge, is owned by the Company free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. G. To their knowledge, except as described in the Prospectus, there are no outstanding options, warrants or other rights granted to or by the Company to purchase shares of Common Stock or other securities of the Company and there are no commitments, plans or arrangements to issue any shares of Common Stock or other securities. H. This Agreement has been duly authorized, executed and delivered by the Company. I. At the time the Registration Statement became effective and at the Closing Date, the Registration Statement (other than the financial statements, as to which no opinion need be rendered) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. J. The form of certificate used to evidence each of the Securities is in due and proper form. K. To their knowledge, there are no legal or governmental proceedings pending or threatened to which the Company or its Subsidiary is a party or to which any property of the Company or its Subsidiary is subject which are required to be disclosed in the Registration Statement other than those disclosed therein, and all pending legal or governmental proceedings to which the Company or its Subsidiary is a party or to which any of their property is subject 30 31 which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, are, considered in the aggregate, not material. L. The information in the Prospectus under "Risk Factors--Shares Eligible for Future Sale; Registration Rights," "Business--Research Collaborations and Licensing Agreements," "--Benefit Plans," "Limitation of Liability and Indemnification Matters" and "Description of Capital Stock," to the extent that it constitutes matters of law, summaries of legal matters, documents or proceedings, or legal conclusions, has been reviewed by them and fairly summarizes in all material respects the information called for with respect thereto. M. The Merger Agreement conforms in all material respects to the description thereof con- tained in the Prospectus. N. The Merger has been duly authorized by all requisite corporate action on the part of the Company and RGene. On June 19, 1996, a duly authorized and executed Certificate of Merger with respect to the Merger was filed with the Secretary of State of the State of Delaware and on such date the Merger became effective pursuant to the Delaware General Corporation Law with the effect set forth in Section 259(a) thereof. O. Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as required and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. 31 32 To their knowledge, neither the Company nor its Subsidiary is in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material contract, indenture, mortgage, loan agreement, deed, trust, note, lease, sublease, voting trust, voting agreement or other instrument or agreement to which it is a party or by which it or any of its properties may be bound, except for defaults which neither individually nor in the aggregate are material to the condition, financial or otherwise, of the Company and its Subsidiary, taken as one enterprise. P. The form of the agreements executed by the Company's employees, consultants and other advisors respecting trade secrets, confidentiality or intellectual property rights is valid, binding and enforceable in accordance with its express terms (it being understood that such counsel will attach to such opinion a certificate executed by an appropriate officer of the Company to the effect that the Company uses all reasonable efforts to cause its employees, consultants and other advisors to execute such agreements). Q. The Company is the non-exclusive licensee of the United States and foreign patents and patent applications listed on Schedule I hereto and is the exclusive licensee of the United States and foreign patents and patent applications listed on Schedule II hereto. All such licenses are duly executed, validly binding and enforceable in accordance with their terms and, to the best of their knowledge, the Company is not in default (declared or undeclared) of any material provision of any such license. 32 33 R. No authorization, approval, consent or order of any court or governmental authority or agency is required in connection with the offering, issuance or sale of the Securities to the Underwriters, except such as may be required under the 1933 Act or the 1933 Act Regulations or state securities or Blue Sky laws or such as may be required by the NASD; and, to such counsel's knowledge, the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein and the compliance by the Company with its obligations hereunder will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or its Subsidiary pursuant to, any material contract, indenture, mortgage, loan agreement, note, deed, trust, lease, sublease, voting trust, voting agreement or other instrument or agreement to which the Company or its Subsidiary is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or its Subsidiary is subject, nor will such action result in any violation of the provisions of the charter or bylaws of the Company or its Subsidiary, or any applicable statute, law, rule, regulation, ordinance, code, decision, directive or order. S. To their knowledge, except as set forth in the Prospectus, there are no legal or governmental proceedings, pending or threatened, to which the Company or its Subsidiary is a party or by which any property of the Company or its Subsidiary is subject which are required to be disclosed in the Registration Statement which could reasonably be expected to have a material adverse effect on the business or condition, 33 34 financial or otherwise, of the Company and its Subsidiary considered as one enterprise. T. Except as described in the Prospectus, to their knowledge, there are no persons with registration or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. U. The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. V. Based on the representations and warranties made by the respective investors contained in each respective purchase agreement and the responses (if any) of such investors to the Company's inquiries and the facts and circumstances contemplated by each respective purchase agreement, and except that such counsel expresses no opinion as to whether information provided to the investors was sufficient and assuming that each offer and sale was a discrete transaction and not integrated with any offer or sale of securities by the Company, the sales of the Company's Common Stock during the three years immediately before the date hereof were at all relevant times duly registered or exempt from registration under Section 5 of the 1933 Act. W. Although they have made no independent investigation, in the course of their representation of the Company in connection with the offering of the Securities, nothing has come to their attention that leads them to believe that either the Company or its Subsidiary is not in 34 35 compliance with, or is not conducting its business in conformity with, all applicable laws and regulations relating to the operation of its business as described in the Registration Statement, except to the extent that any failure so to comply or conform would not have a material adverse effect upon the business or condition, financial or otherwise, of the Company and its Subsidiary considered as one enterprise. X. The Registration Statement has become effective under the 1933 Act; any required filing of the Prospectus, and any supplements thereto or the Term Sheet, pursuant to Rule 424(b) and if applicable, Rule 434, has been made in the manner and within the time period required; and to their knowledge, no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued and no proceedings therefor have been instituted or are pending or contemplated under the 1933 Act. In giving their opinions with respect to matters involving the Merger required by subsection b(i) of this Section 8, Perkins Coie shall be entitled to rely upon opinions of local counsel and certificates of officers of the Company or its Subsidiary as to matters of fact. (ii) The favorable opinion, dated as of the Closing Date, of Morrison & Foerster LLP, patent counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, to the effect that: A. To the best of their knowledge, the statements set forth on Schedule I to this opinion, which are contained in the Prospectus under the captions "Risk Factors--Uncertainty of Patent Position and Proprietary Rights; Access to Proprietary Genes" and "-- 35 36 Patents and Proprietary Rights" (the "Patent Paragraphs"), are accurate and complete statements or summaries of the matters set forth therein. B. To the best of their knowledge, there are no pending or threatened legal or governmental proceedings (other than patent applications and the patent interference proceeding described in the Prospectus) relating to patent rights of the Company to which the Company is a party and, to the best of their knowledge, no such proceedings are threatened or contemplated. C. Based solely upon the Officer's Certificate attached as Exhibit A to this opinion (the "Officer's Certificate"), to the best of their knowledge, the Company is not infringing or otherwise violating any patents of any persons that the Company believes would be held valid and, to the best of their knowledge, no person is infringing or otherwise violating any of the Company's patents. D. Based solely upon the Officer's Certificate, to the best of their knowledge, the Company owns or possesses sufficient licenses or other rights to use all patents necessary to conduct the business now being conducted by the Company as described in the Prospectus. E. Assignment documents listing the Company as the sole assignee of each of the patent applications listed on Schedule II to this opinion (the "Solely Assigned Applications") have been filed with the United States Patent and Trademark Office (the "PTO"), and corresponding Notices of Recordation of Assignment Documents have been received from the PTO. Such counsel is 36 37 not aware of any communications to the Company in which it is alleged that the Company is not the sole assignee of the Solely Assigned Applications. Assignment documents listing the Company as an assignee of each of the patent applications listed on Schedule III to this opinion (the "Jointly Assigned Applications") have been filed with the PTO, and corresponding Notices of Recordation of Assignment Documents have been received from the PTO. Such counsel is not aware of any communications to the Company in which it is alleged that the Company is not an assignee of the Jointly Assigned Applications. F. Each of the United States patent applications listed in Schedule IV to this opinion was prepared and filed in a form sufficient to obtain a filing date and serial number from the PTO. G. To the best of their knowledge, each of the foreign patent applications listed on Schedule IV hereto was prepared and filed in a form sufficient to obtain a serial number and filing date from the applicable foreign patent office. H. Each of the United States patent applications listed as "Pending" in Schedule IV to this opinion is being prosecuted in a manner sufficient to avoid abandonment of the applications (other than an abandonment in favor of a continuing application). To the best of their knowledge, each of the foreign patent applications listed as "Pending" in Schedule IV to this opinion is being prosecuted in a manner sufficient to avoid abandonment. I. Such counsel believes that it has complied with its obligations to disclose 37 38 information material to patentability pursuant to 37 C.F.R. 1.56 in connection with the filing of the United States patent applications listed on Schedule IV to this opinion. In giving their opinions required by subsections (b)(ii) of this Section 8, Morrison & Foerster LLP shall additionally state that nothing has come to their attention that leads them to believe that the Patent Paragraphs at the time the Registration Statement became effective contained an untrue statement of a material fact with respect to patent rights of the Company or omitted to state a material fact with respect to patent rights of the Company required to be stated therein or necessary to make the statements therein not misleading or that the Patent Paragraphs as of the date of the Prospectus or at the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact with respect to patent rights of the Company or omitted to state a material fact with respect to patent rights of the Company necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (iii) The favorable opinion, dated as of the Closing Date, of Morgan & Finnegan, L.L.P., patent counsel for RGene, in form and substance satisfactory to counsel for the Underwriters, to the effect that: A. To their knowledge, the information in the Prospectus under "Risk Factors--Uncertainty of Patent Position and Proprietary Rights; Access to Proprietary Genes" and "--Patents and Proprietary Rights," as it relates solely to matters for which Morgan & Finnegan, L.L.P. is identified under the column "LAW FIRM CONTACT DOCKET NO." as being responsible in Schedule 2.11 and Schedule 2.14 (collectively, the "Schedules") attached to that certain Merger Agreement, dated as of April 16, 1996 (the "Merger Agreement"), by and between Targeted Genetics Corporation, TGC Acquisition Corporation and RGene Therapeutics, Inc., to the extent that it constitutes matters of 38 39 law, summaries of legal matters, documents or proceedings, or legal conclusions, has been reviewed by them and is correct in all material respects and fairly and correctly presents the information called for with respect thereto. B. To their knowledge, other than as set forth in the Schedules, there are no pending or threatened legal or governmental proceedings, nor allegations on the part of any person of infringement, relating to patent rights of RGene and, to their knowledge, no such proceedings are threatened or contemplated. C. To their knowledge, RGene is not infringing or otherwise violating any patents, trade secrets, trademarks, service marks, copyrights or other proprietary information or know-how of any persons and, to their knowledge, no person is infringing or otherwise violating any of RGene's patents, trade secrets, trademarks, service marks, copyrights or other proprietary information or know-how of RGene in a way in which could materially affect the use thereof by RGene. D. To their knowledge, there are no asserted or unasserted claims of any persons relating to the scope or ownership of any of the patent applications listed on Schedule I to this opinion (herein called the "Applications") (which include and are limited to all United States patent applications for which Morgan & Finnegan, L.L.P. is identified under the column "LAW FIRM CONTACT DOCKET NO." as being responsible on the Schedules), there are no liens which have been filed against any of the Applications, there are no material defects of form in the preparation or filing of such Applications, 39 40 the Applications are being diligently prosecuted, and none of the Applications has been finally rejected or abandoned. E. To their knowledge, there are no asserted or unasserted claims of any persons relating to the scope or ownership of any of the foreign patent applications listed on Schedule II to this opinion (herein called the "Foreign Applications") (which include and are limited to all foreign patent applications for which Morgan & Finnegan, L.L.P. is identified under the column "LAW FIRM CONTACT DOCKET NO." as being responsible on the Schedules), there are no liens which have been filed against any of the Foreign Applications, there are no material defects of form in the preparation or filing of such Foreign Applications, the Foreign Applications are being diligently prosecuted, and none of the Foreign Applications has been finally rejected or abandoned. F. Nothing has come to their attention that leads them to believe that the Applications and the corresponding Foreign Applications will not eventuate in issued patents, or that any patents issued in respect of any such Applications or Foreign Applications will not be valid or will not afford RGene reasonable patent protection relative to the subject matter thereof. G. With respect to each of the licenses listed on Schedule III to this opinion (which include and are limited to all agreements pursuant to which RGene licenses the patents and patent applications set forth on the Schedules), such counsel has no knowledge of any default (declared or undeclared) by RGene of any material provision of any such license. 40 41 H. To their knowledge, all material prior art references known to RGene or its counsel during the prosecution of the Applications were disclosed to the United States Patent and Trademark Office (the "PTO") and, to their knowledge, neither such counsel nor RGene made any misrepresentation to, or concealed any material fact from, the PTO during such prosecution. In giving their opinions required by subsections (b)(iii) of this Section 8, Morgan & Finnegan, L.L.P. shall additionally state that nothing has come to their attention that leads them to believe that, with respect to licenses, patents or other proprietary information or know-how owned or used by RGene which are the subject of the foregoing opinions, the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriters by RGene for use in connection with the offering of the Securities which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective, in which case at the time it is first provided to the Underwriters for such use) or at the Closing Date or the Option Closing Date, as the case may be, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. For purposes of the opinion, "RGene" shall mean RGene Therapeutics, Inc. and its successors and assigns, including through the Merger of a wholly-owned subsidiary of the Company with and into RGene. (iv) The favorable opinion, dated as of the Closing Date, of the firm of Weiser & Associates, patent counsel for the University of Tennessee Research Corporation ("UTRC") and McMaster University, Ontario, Canada ("McMaster"), with respect to patent rights in certain novel cholesterol 41 42 derivatives (the "DC cholesterol technology"), in form and substance satisfactory to counsel for the Underwriters, to the effect that: A. To the best of its knowledge, the information in the Prospectus under "Risk Factors--Uncertainty of Patent Position and Proprietary Rights; Access to Proprietary Genes," "Business--Research Collaborations and Licensing Agreements" and "--Patents and Proprietary Rights," as it relates solely to UTRC's patent rights (as defined below) in the DC cholesterol technology, to the extent that it constitutes matters of law, summaries of legal matters, documents or proceedings, or legal conclusions, has been reviewed by it and is correct in all material respects and does not include any untrue statement of a material fact or omit to state a material fact with respect thereto or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. With respect to the DC cholesterol technology, the United States of America has certain rights under the provisions of 35 U.S.C. 200 et seq., Chapter 18, applicable to patent rights and inventions made with federal assistance, and with respect to said technology, UTRC owns an undivided one-half interest (the other undivided one-half interest being owned by McMaster, for which McMaster, by virtue of an agreement, dated as of May 25, 1992, by and between UTRC and McMaster, has granted to UTRC a worldwide exclusive right and license to commercialize the DC cholesterol technology, including the right to grant exclusive and nonexclusive licenses therefor). The patent rights described in this paragraph are hereinafter referred to as "UTRC's patent rights." B. To the best of its knowledge, there are no pending or threatened legal or governmental proceedings, nor allegations on the part of any person of infringement, relating to UTRC's patent rights, and, to 42 43 the best of its knowledge, no such proceedings are threatened or contemplated. C. To the best of its knowledge, neither UTRC nor McMaster is infringing or otherwise violating any patents of any persons and no such proceedings are threatened by others, and no person is infringing or otherwise violating any of UTRC's patent rights in a way which could materially affect the use thereof by UTRC or McMaster. D. UTRC (together with McMaster) is listed in the records of the United States Patent and Trademark Office (the "PTO") as the assignee of record of the patent related to the DC cholesterol technology listed on Schedule I to this opinion (herein called the "UTRC Patent") and each of the applications related to the DC cholesterol technology listed on Schedule II to this opinion (herein called the "UTRC Applications"). To the best of its knowledge, there are no asserted claims of any persons relating to the scope, except with respect to assertions thereto submitted by one or more parties with respect to the European, the Japanese and the Australian patent applications which circumstances are described in the Prospectus, or ownership of the UTRC Patent or the UTRC Applications; there are no liens which have been filed against the UTRC Patent or the UTRC Applications; there are no material defects of form in the preparation or filing of the UTRC Applications; the UTRC Applications are being diligently prosecuted; and none of the UTRC Applications has been finally rejected with no right to further prosecute or has been abandoned. To the best of its knowledge, the UTRC Patent is entitled to a statutory presumption of validity under 35 U.S.C. 282 or the analogous foreign law and, 43 44 to the best of its knowledge, there is no legal basis to rebut the statutory presumption of validity of the UTRC Patent. E. UTRC (together with McMaster) is listed in the records of the appropriate foreign patent offices as the assignee of record of each of the foreign applications related to the DC cholesterol technology listed on Schedule III to this opinion (herein called the "UTRC Foreign Applications"). To the best of its knowledge, there are no asserted or unasserted claims of any persons relating to the scope, other than as described in paragraph D hereinabove, or ownership of the UTRC Foreign Applications; there are no liens which have been filed against any of the UTRC Foreign Applications; there are no material defects of form in the preparation or filing of the UTRC Foreign Applications; the UTRC Foreign Applications are being diligently prosecuted; and none of the UTRC Foreign Applications has been finally rejected without right to further prosecute or abandoned. F. Nothing has come to its attention, other than as described in paragraph D hereinabove, that leads it to believe that the UTRC Applications and the UTRC Foreign Applications will not eventuate in issued patents, or that any patents issued in respect of any such UTRC Applications or UTRC Foreign Applications will not be valid or will not afford UTRC and McMaster reasonable patent protection relative to the subject matter thereof. G. To the best of its knowledge, all pertinent prior art references known to UTRC, McMaster or its counsel during the prosecution of the UTRC Patents and the UTRC Applications were disclosed to the PTO and 44 45 other relevant patent offices and, to the best of its knowledge, neither such counsel, UTRC nor McMaster made any misrepresentation to, or concealed any material fact from, the PTO during such prosecution and, to the best of its knowledge, all information submitted to the PTO and such other relevant patent offices was accurate. In giving its opinions required by subsections (b)(iv) of this Section 8, Weiser & Associates shall additionally state that nothing has come to its attention that leads it to believe that, with respect to UTRC's patent rights, the UTRC Patents, the UTRC Applications or the UTRC Foreign Applications owned or used by UTRC and McMaster which are the subject of the foregoing opinions, the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriters for use in connection with the offering of the Securities which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective, in which case at the time it is first provided to the Underwriters for such use) or at the Closing Date or the Option Closing Date, as the case may be, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. For purposes of the opinion, "UTRC" shall mean the University of Tennessee Research Corporation and its successors and assigns and "McMaster" shall mean McMaster University, Ontario, Canada and its successors and assigns. (v) The favorable opinion, dated as of the Closing Date, of the firm of Covington & Burling, regulatory counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, to the effect that: 45 46 A. The statements in the Registration Statement under the captions "Risk Factors--Uncertainty of Governmental Regulatory Requirements; Lengthy Approval Process" and "Business--Governmental Regulation," to the best of such counsel's knowledge and belief, are accurate and complete statements or summaries of the United States Food and Drug Administration matters therein set forth and nothing has come to such counsel's attention that causes them to believe that the above-referenced portions of the Registration Statement and the Prospectus contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. B. Such counsel is not aware of any adverse legal or governmental proceedings pending relating to products or potential products of the Company, or any such proceedings threatened or contemplated by governmental authorities or others. (vi) The favorable opinion, dated as of the Closing Date, of Skadden, Arps, Slate, Meagher & Flom, counsel for the Underwriters with respect to the issuance and sale of the Securities, the Registration Statement and the Prospectus and such other related matters as the Underwriters shall reasonably request. (vii) In giving their opinions required by subsections (b)(i) and (b)(vi), respectively, of this Section 8, Perkins Coie and Skadden, Arps, Slate, Meagher & Flom shall each additionally state that nothing has come to their attention that leads them to believe that the Registration Statement (except for financial statements and other financial information included therein, as to which counsel 46 47 need make no statement), at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus (except for financial statements and other financial information included therein, as to which counsel need make no statement), as of its date (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriters by the Company for use in connection with the offering of the Securities which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective, in which case at the time it is first provided to the Underwriters for such use) or at the Closing Date or the Option Closing Date, as the case may be, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. c. (i) There shall not have been, since the date hereof or since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise, whether or not arising in the ordinary course of business, (ii) the representations and warranties of the Company in Section 6 hereof shall be true and correct with the same force and effect as though expressly made at and as of the Closing Date, except to the extent that any such representation or warranty relates to a specific date, (iii) the Company shall have complied in all material respects with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Date, (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or threatened by the Commission and (v) 47 48 the Representatives shall have received a certificate, dated the Closing Date and signed by the President or any Vice President and the chief financial or accounting officer of the Company to the effect set forth in clauses (i), (ii), (iii) and (iv) above. d. At the time of the execution of this Agreement, the Underwriters shall have received from Ernst & Young LLP a letter dated such date, in form and substance satisfactory to the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. e. At the time of the execution of this Agreement, the Underwriters shall have received from Arthur Andersen LLP a letter dated such date, in form and substance satisfactory to the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. f. The Underwriters shall have received from Ernst & Young LLP a letter, dated as of the Closing Date, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (d) of this Section, except that the specified date referred to shall be a date not more than three business days prior to the Closing Date. g. The Underwriters shall have received from Arthur Andersen LLP a letter, dated as of the Closing Date, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to the Closing Date. h. The Securities shall have been approved for quotation on NASDAQ. 48 49 i. In the event that the Underwriters exercise their option provided in Section 2 hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company hereunder shall be true and correct as of the Option Closing Date and, at the relevant Option Closing Date, the Underwriters shall have received: (1) A certificate, dated such Option Closing Date, of the President or any Vice President of the Company and of the chief financial or accounting officer of the Company confirming that the certificate delivered at the Closing Date pursuant to Section 8 (c) hereof remains true and correct as of such Option Closing Date. (2) The favorable opinion of Perkins Coie, in form and substance satisfactory to counsel for the Underwriters, dated such Option Closing Date, relating to the Option Securities to be purchased on such Option Closing Date and otherwise to the same effect as the opinion required by Sections 8 (b)(i) and 8 (b)(vii) hereof. (3) The favorable opinion of Morrison & Foerster, LLP, in form and substance satisfactory to counsel for the Underwriters, dated such Option Closing Date to the same effect as the opinion required by Section 8(b)(ii) hereof. (4) The favorable opinion of Morgan & Finnegan, L.L.P., in form and substance satisfactory to counsel for the Underwriters, dated such Option Closing Date, to the same effect as the opinion required by Section (b)(iii) hereof. 49 50 (5) The favorable opinion of Weiser & Associates, in form and substance satisfactory to counsel for the Underwriters, dated such Option Closing Date, to the same effect as the opinion required by Section (b)(iv) hereof. (6) The favorable opinion of Covington & Burling, in form and substance satisfactory to counsel for the Underwriters, dated such Option Closing Date, to the same effect as the opinion required by Section (b)(v) hereof. (7) The favorable opinion of Skadden, Arps, Slate, Meagher & Flom, counsel for the Underwriters, dated such Option Closing Date, relating to the Option Securities to be purchased on such Option Closing Date and otherwise to the same effect as the opinion required by Sections 8 (b)(vi) and 8 (b)(vii) hereof. (8) A letter from Ernst & Young LLP in form and substance satisfactory to the Underwriters and dated such Option Closing Date, substantially the same in form and substance as the letter furnished to the Underwriters pursuant to Section 8(f) hereof, except that the "specified date" in the letter furnished pursuant to this Section 8(i)(8) shall be a date not more than three business days prior to such Option Closing Date. (9) A letter from Arthur Andersen LLP in form and substance satisfactory to the Underwriters and dated such Option Closing Date, substantially the same in form and substance as the letter furnished to the Underwriters pursuant to Section 8(g) hereof, except that the "specified date" in the letter furnished pursuant to this Section 8(i)(9) shall be a date not more than three business days prior to such Option Closing Date. 50 51 j. At the date of this Agreement, the Underwriters shall have received lock-up agreements in form and substance satisfactory to the Underwriters by the persons listed on Schedule B hereto. k. Counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated and related proceedings, or in order to evidence the accuracy of any of the representations or warranties or the fulfillment of any of the conditions herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Underwriters and counsel for the Underwriters. l. The NASD shall not have raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. m. Any certificate or document signed by any officer of the Company and delivered to you, as Representatives of the Underwriters, or to counsel for the Underwriters, shall be deemed a representation and warranty by the Company to each Underwriter as to the statements made therein. n. If any condition specified in this Section 8 shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of Option Securities, on an Option Closing Date which is after the Closing Date, the obligations of the several Underwriters to purchase the relevant Option Securities, may be terminated by the Representatives by notice to the Company at any time at or prior to Closing Date or such an Option Closing Date as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 9 and except that Sections 6 and 7 shall survive any such termination and remain in full force and effect. 9. EXPENSES. The Company agrees to pay the following costs and expenses and all other costs and expenses incident to the performance by it of its obligations hereunder: (i) the prepara- 51 52 tion, printing or reproduction, and filing with the Commission of the Registration Statement (including financial statements and exhibits thereto), each preliminary prospectus, the Prospectus, and each amendment or supplement to any of them; (ii) the printing (or reproduction) and delivery (including postage, air freight and charges for counting and packaging) of such copies of the Registration Statement, each preliminary prospectus, the Prospectus, and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering and sale of the Securities; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Securities, including any stamp taxes in connection with the original issuance and sale of the Securities; (iv) the printing (or reproduction) and delivery of this Agreement, the preliminary and supplemental Blue Sky Memoranda and all other agreements or documents printed (or reproduced) and delivered in connection with the original issuance and sale of the Securities; (v) the quotation of the Securities on NASDAQ; (vi) the registration or qualification of the Securities for offer and sale under the securities or Blue Sky laws of the several states as provided in Section 5(g) hereof (including the reasonable fees, expenses and disbursements of counsel for the Underwriters relating to the preparation, printing or reproduction, and delivery of the preliminary and supplemental Blue Sky Memoranda and such registration and qualification); (vii) the filing fees and the reasonable fees and expenses of counsel for the Underwriters incident to securing any required review by the NASD; and (viii) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company. If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 10 or pursuant to clauses (ii), (iii), (iv) and (v) of Section 11 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company to comply, in any material respect, with the terms or fulfill, in any material respect, any of the conditions of this Agreement, the Company agrees to reimburse the Representatives for all reasonable out-of-pocket expenses (including reasonable fees and expenses of counsel for the Underwriters) incurred by you in connection herewith. 52 53 10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective: (i) upon the execution and delivery hereof by or on behalf of the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective before the offering of the Securities may commence, when notification of the effectiveness of the Registration Statement or such post-effective amendment has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Company, by notifying you, or by you, as Representatives of the several Underwriters, by notifying the Company. If one or more of the Underwriters shall fail on the Closing Date to purchase the Initial Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representatives shall not have completed such arrangements within such 24-hour period, then: a. if the number of Defaulted Securities does not exceed 10% of the number of Initial Securities, the non-defaulting Underwriters shall be obligated to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or b. if the number of Defaulted Securities exceeds 10% of the number of Initial Securities, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter. No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default. 53 54 In the event of any such default which does not result in a termination of this Agreement, either the Representatives or the Company shall have the right to postpone the Closing Date for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "Underwriter" includes any person substituted for an Underwriter under this Section 10. Any notice under this Section 10 may be given by telegram, telecopy or telephone but shall be subsequently confirmed by letter. 11. TERMINATION OF AGREEMENT. a. The Underwriters may terminate this Agreement, by notice to the Company, at any time at or prior to the Closing Date or Option Closing Date, as the case may be, (i) if there has been, since the date of this Agreement or since the respective dates as of which information is given in the Registration Statement, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise, whether or not arising in the ordinary course of business, (ii) if there has occurred any change in the financial markets in the United States or elsewhere or any outbreak of hostilities or escalation thereof or other calamity or crisis the effect of which is such as to make it, in your judgement, impracticable or inadvisable to market the Securities or to enforce contracts for the sale of the Securities, (iii) if trading in the Common Stock has been suspended by the Commission, or if trading generally on the American Stock Exchange, the New York Stock Exchange or in the over-the-counter markets has been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by such exchange or markets or by order of the Commission or any other governmental authority, or if a banking moratorium has been declared by either Federal, New York or Illinois authorities, (iv) the enactment, publication, decree or other promulgation of any Federal or state statute, regulation, rule or order of any court or other governmental authority which in your judgement materially and adversely affects or may materially or adversely affect the business or operations of the Company and its Subsidiary or (v) the taking of any action by any Federal, state or local 54 55 government or agency in respect of its monetary or fiscal affairs which in your judgement has a material adverse effect on the securities markets in the United States, and would in your judgement make it impracticable or inadvisable to market the Securities or to enforce any contract for the sale thereof. Notice of such termination may be given by telegram, telecopy or telephone and shall be subsequently confirmed by letter. b. If this Agreement is terminated pursuant to this Section 11, such termination shall be without liability of any party to any other party except as provided in Section 9 and provided further that Sections 6 and 7 shall survive such termination and remain in full force and effect. 12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set forth in the last paragraph on the cover page, the stabilization legend on the inside front cover page, and the statements under the caption "Underwriting" in any preliminary prospectus and in the Prospectus constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 5(a) and 7 hereof. 13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10 and 11 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (i) if to the Company at the office of the Company, at 1100 Olive Way, Suite 100, Seattle, Washington 98101, Attention: H. Stewart Parker, President and Chief Executive Officer; or (ii) if to you, as Representatives of the several Underwriters, care of Vector Securities International, Inc., 1751 Lake Cook Road, Suite 350, Deerfield, Illinois 60015, Attention: Syndicate Department. 14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois applicable to contracts made and to be performed within the State of Illinois. This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. 15. SUCCESSORS. This Agreement has been and is made solely for the benefit of the several Underwriters, the Company, 55 56 its directors and officers, the other persons referred to in Section 7 hereof and their respective successors and assigns, to the extent provided herein, and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Securities in his status as such purchaser. 56 57 Please confirm that the foregoing correctly sets forth the agreement among the Company and the several Underwriters. Very truly yours, TARGETED GENETICS CORPORATION By:_____________________________ President and Chief Executive Officer Confirmed as of the date first above mentioned on behalf of themselves and the other several Underwriters named in Schedule I hereto. VECTOR SECURITIES INTERNATIONAL, INC. GENESIS MERCHANT GROUP SECURITIES As Representatives of the Several Underwriters By VECTOR SECURITIES INTERNATIONAL, INC. By:________________________________ Vice President 57 58 SCHEDULE I TARGETED GENETICS CORPORATION Number of Initial Securities Purchased Underwriter from the Company - ----------- ---------------- Vector Securities International, Inc................................ Genesis Merchant Group Securities.................................. Total ---------------- 58 EX-21.1 3 SUBSIDIARIES OF REGISTRANT 1 Exhibit 21.1 Subsidiaries RGene Therapeutics, Inc., a Delaware Corporation -----END PRIVACY-ENHANCED MESSAGE-----