-----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, US2FhbRlfRzXBMU7/woUTx3DZo9hCV4Pl1DByTML6b89lbWykTmfkWmcTSgipmIw OsIXNx/q+4s6kbYqMEYLiA== 0001032210-02-000427.txt : 20020415 0001032210-02-000427.hdr.sgml : 20020415 ACCESSION NUMBER: 0001032210-02-000427 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020321 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: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-23930 FILM NUMBER: 02581528 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 10-K405 1 d10k405.txt FORM 10-K FOR FISCAL YEAR ENDED 12/31/2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to
Commission File Number No. 0-23930 ----------------- TARGETED GENETICS CORPORATION (Exact name of Registrant as specified in its charter) Washington 91-1549568 (State of Incorporation) (IRS Employer Identification No.) 1100 Olive Way, Suite 100 Seattle, WA 98101 (Address of principal executive offices, including, zip code) (206) 623-7612 (Registrant's telephone number, including area code) ----------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value ----------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate the aggregate market value of voting stock held by nonaffiliates of the Registrant as of March 5, 2002: $88,958,861 Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of March 5, 2002: Title of Class Number of shares Common Stock, $0.01 par value 44,140,145 ================================================================================ DOCUMENTS INCORPORATED BY REFERENCE (1) The information required by PART III of this report, to the extent not set forth in this report, is incorporated by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 2002. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after December 31, 2001, the end of the fiscal year to which this report relates. TARGETED GENETICS CORPORATION ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Page No. ---- PART I Item 1. Business.................................................................. 1 Item 2. Properties................................................................ 21 Item 3. Legal Proceedings......................................................... 21 Item 4. Submission of Matters to a Vote of Security Holders....................... 21 PART II Item 5. Market for Registrant's Equity and Related Shareholder Matters............ 22 Item 6. Selected Financial Data................................................... 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 41 Item 8. Financial Statements and Supplementary Data............................... 42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................ 64 PART III Item 10. Directors and Executive Officers of the Registrant........................ 65 Item 11. Executive Compensation.................................................... 65 Item 12. Security Ownership of Certain Beneficial Owners and Management............ 65 Item 13. Certain Relationships and Related Transactions............................ 65 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 66 SIGNATURES.......................................................................... 70
PART I Item 1. Business This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Forward-looking statements include statements about our product development and commercialization goals and expectations, potential market opportunities, our plans for and anticipated results of our clinical development activities and the potential advantage of our product candidates, and other statements that are not historical facts. Words such as "believes," "expects," "anticipates," "intends" and other words of similar meaning may identify forward-looking statements, but the absence of these words does not mean that the statement is not forward-looking. In making these statements, we rely on a number of assumptions and make predictions about the future. Our actual results could differ materially from those stated in or implied by forward-looking statements for a number of reasons, including the risks described in the section entitled "Factors Affecting Our Operating Results, Our Business and Our Stock Price" in Part II, Item 7 of this annual report. You should not unduly rely on these forward-looking statements, which speak only as of the date of this annual report. We undertake no obligation to publicly revise any forward-looking statement after the date of this annual report to reflect circumstances or events occurring after the date of this annual report or to conform the statement to actual results or changes in our expectations. You should, however, review the factors, risks and other information we provide in the reports we file from time to time with the Securities and Exchange Commission, or SEC. Overview Targeted Genetics Corporation was incorporated in the State of Washington in 1989 and develops gene therapy products and technologies for treating both acquired and inherited diseases. Our gene therapy product candidates are designed to treat disease by regulating cellular function at a genetic level. This involves inserting genes into target cells and activating the inserted gene in a manner that provides the desired effect. We have assembled a broad base of proprietary intellectual property that we believe gives us the potential to address the significant diseases that are the primary focus of our business. Our proprietary intellectual property includes genes, methods of transferring genes into cells, processes to manufacture gene delivery product candidates and other proprietary technologies and processes. In addition, we have established expertise and development capabilities focused in the areas of preclinical research and biology, manufacturing and manufacturing process scale-up, quality control, quality assurance, regulatory affairs and clinical trial design and implementation. We believe that our focus and expertise will enable us to develop products based on our proprietary intellectual property. Gene therapy products involve the use of delivery vehicles, called vectors, to insert genetic material into target cells. Our proprietary vector technologies include both viral vector technologies and synthetic vector technologies. Our viral vector development activities, which use modified viruses to deliver genes into cells, focus primarily on adeno-associated virus, or AAV, a common human virus that has not been associated with any human disease or illness. We believe that AAV provides a number of safety and gene delivery advantages over other viruses for several of our potential gene therapy products. Our synthetic vectors deliver genes using lipids, which are fatty, water-insoluble organic substances that can be absorbed through cell membranes. We believe that synthetic vectors may provide a number of gene delivery advantages for repeated, efficient delivery of therapeutic genes into rapidly dividing cells, such as certain types of tumor cells. We believe that using both viral and synthetic approaches provides advantages in our corporate partnering efforts and increases the probability of our potential products reaching the market. We have two lead product candidates under development, one for treating cystic fibrosis and another for treating cancer. We also have a pipeline of product candidates focused on treating hemophilia, arthritis and cancer, as well as lysosomal storage disorders, which are a class of genetic diseases in which missing enzymes 1 cause a buildup of metabolic byproducts in tissue. We are also developing a vaccine candidate for the prevention of AIDS. We have entered into six partnering relationships with pharmaceutical and biotechnology companies and a public health organization to develop these product candidates. In each of our partnerships, we have retained a substantial financial interest in the sales of any commercial products that result from our work. Through our partnership activities and other internally funded efforts, we have successfully advanced our product candidates into clinical development, including Phase II clinical trials for our lead cystic fibrosis and cancer product candidates. In addition, we have developed processes to manufacture our potential products at a scale amenable to clinical development and expandable to large-scale production for commercialization, pending successful completion of clinical trials and regulatory approval. We believe that these successes in assembling a broad platform of proprietary intellectual property for developing and manufacturing potential products and in establishing collaborative relationships and advancing our potential products to clinical evaluation serve to demonstrate the value of our intellectual property and our potential to develop gene therapy product candidates to treat a range of diseases. Our business strategy reflects the following five key elements: Develop multiple gene delivery systems to maximize product opportunities. We believe that different disease targets will require different methods of gene delivery. The best gene delivery method for a particular disease will depend on the gene to be delivered, the type of cell to be modified, the duration of gene expression desired and the need for in vivo (inside the body) or ex vivo (outside the body) delivery. Accordingly, we are developing both viral and synthetic vector technologies. Our primary viral vector development activities focus on AAV vectors, which we and others have shown to be efficient in transferring genes to a wide variety of target cells. Because AAV vectors can deliver genes in a way that allows for expression of genetic information for long periods of time, we believe that these vectors may have particular utility in treating chronic diseases, such as cystic fibrosis, hemophilia and arthritis, which require long-term expression of the gene that is delivered to the cell. Additionally, the long-term expression profile of AAV vectors may support the development of vaccines capable of conferring long-term protection against a number of infectious diseases. Our synthetic vectors deliver genes using lipids. Lipid-based vectors may have advantages in certain applications, such as some types of cancer, in which insertion of genetic material into rapidly dividing cells and shorter-term gene expression may be desired. We believe that we are the only company that has advanced product candidates using both viral and synthetic vectors into Phase II clinical trials. We believe that using both types of vectors gives us one of the broadest technology platforms in the field, and ultimately will give us the flexibility to develop products addressing a much broader range of diseases than we could develop using any single gene delivery system. We also have rights to certain intellectual property for two other viruses, retroviruses and adenoviruses, that can be used to deliver genes into cells. Build a strong product development infrastructure. Although a great deal of research has been focused on gene discovery, much less research has been focused on gene delivery techniques and on creating the product development infrastructure that is necessary to convert gene discovery into products that can be evaluated in clinical trials and applied to patient care. We have therefore focused significant efforts on establishing product development expertise in the areas of preclinical research and biology, manufacturing process development and scale-up, quality control, quality assurance, regulatory affairs and clinical trials. We believe that our product development focus provides advantages in our corporate partnering efforts and increases our probability of reaching the market with products having a higher likelihood of becoming commercially successful. Demonstrate clinical proof of concept. We believe that by providing strong evidence of the clinical benefit of our products, we can significantly enhance shareholder value. We have two lead product candidates that we believe could potentially demonstrate clinical proof of concept in the near term: tgAAVCF for treating cystic fibrosis and tgDCC-E1A for treating cancer. Both of these products entered Phase II clinical trials in late 2000 and we expect to have data available to us in 2002. We believe that clinical proof of concept data in our cystic fibrosis and cancer programs would demonstrate both the value of these two lead product candidates and the broader value of our AAV and synthetic gene delivery technologies. 2 Build a strong pipeline of product candidates with significant market potential. We believe that there is significant long-term potential for using our gene delivery systems to treat additional diseases. The infrastructure we have built to support the development of our tgAAVCF and tgDCC-E1A product candidates is available to support the development of new products based on our viral and synthetic gene delivery systems. We believe that we may derive significant future value by applying this infrastructure and the knowledge and expertise we gain in developing our two initial product candidates to our additional product candidates under development. Currently, we have ongoing preclinical product development activities in the areas of cancer, arthritis, hemophilia, lysosomal storage disorders and AIDS prophylaxis. Establish product development partnerships that allow for long-term value retention. We believe that our products under development have significant long-term potential. We now have collaborative programs underway with six large pharmaceutical and biotechnology companies and a public health organization. In all of these partnerships, we have retained a substantial financial interest in the sales of any commercial products that may result from our work. For products based on our AAV delivery system, we have retained manufacturing rights to any product candidates we develop. We have retained worldwide commercial rights to our tgDCC-E1A product candidate and plan to develop the product internally or through a collaborative relationship that will allow us to achieve substantial long-term participation in tgDCC-E1A's potential downstream commercial revenue. The following table summarizes our product development programs:
Program/Product Research Preclinical Phase I Phase II Phase III Collaborator --------------- -------- ----------- ------- -------- --------- ------------------------ AAV Vectors: Cystic Fibrosis......... -- -- -- -- Celltech Group Arthritis............... -- -- -- Hemophilia A............ -- -- Wyeth/Genetics Institute Lysosomal Storage Disorders.............. -- -- Genzyme AIDS Prophylaxis........ -- -- IAVI Hyperlipidemia.......... -- -- Synthetic Vectors: Head and Neck Cancer.... -- -- -- -- -- Ovarian Cancer.......... -- -- -- -- Metastatic Cancer....... -- -- -- Adenoviral Vectors: Glioma.................. -- -- -- Biogen
Clinical Product Development Programs tgAAVCF for Cystic Fibrosis Cystic fibrosis is one of the most common single-gene deficiencies affecting the Caucasian population, afflicting approximately 30,000 people in the United States and 60,000 people worldwide. The disease is caused by a defective cystic fibrosis transmembrane regulator, or CFTR gene, which interferes with normal lung function and results in a buildup of mucus in the lungs, leading to chronic infections, loss of lung function and early death. Current treatments for cystic fibrosis relieve only the symptoms of the disease, and cannot cure the disease or stop its progression. Our cystic fibrosis product candidate, designated tgAAVCF, is comprised of a complete functional CFTR human gene delivered in an AAV vector. The objective of this gene therapy is to deliver a functional copy of the CFTR gene that can then produce the protein that is missing in cystic fibrosis patients. Based on our research and development activities to date, we believe that tgAAVCF may be superior to other gene-based approaches for 3 treating cystic fibrosis, because the drug appears to have a good safety profile and an ability to deliver the CFTR gene to the appropriate cells in the lung and support production of the missing protein over an extended period. In preclinical studies, we have observed delivery of the CFTR gene in up to 50% of the targeted airway cells and expression of the CFTR gene in the lung for periods of up to six months with no side effects. Our early clinical trials involved the administration of tgAAVCF to the lung, nose or sinus of over 60 patients. The results of the trials indicated that the product was safe and well-tolerated with no significant inflammatory response or other side effects, even after repeat delivery. Additionally, in a clinical trial involving administration of the product to the maxillary sinus, we observed: . dose-dependent gene transfer; . persistence of the gene for up to 70 days after treatment; . improvements in lung function measurements of chloride transport in biopsied cells after treatment; and . reduction of sinus inflammation, as assessed by changes in levels of certain cytokines and immunoregulatory substances secreted by cells of the immune system. In 1998, we entered into a license and collaboration agreement related to tgAAVCF with Medeva Pharmaceuticals, Inc., now a wholly owned subsidiary of Celltech Group plc. Under these agreements, Celltech owns exclusive worldwide marketing rights to tgAAVCF and provides significant funding to us. The section below entitled "Research and Development Collaborations" provides a detailed description of this relationship. In 2000, we completed a Phase I clinical trial to test the safety of aerosol delivery of tgAAVCF to the lungs of cystic fibrosis patients. We treated 12 cystic fibrosis patients with a single dose of tgAAVCF in a dose escalation study. Data from this trial suggest that tgAAVCF delivered via a nebulizer was well tolerated and had a good safety profile at all doses evaluated. Additionally, we observed delivery of the CFTR gene to target cells in all patients at the highest dose and indications that tgAAVCF was well distributed throughout the upper airways of the patients. We also observed vector gene transfer in some patients 90 days after the single administration of aerosolized tgAAVCF. tgAAVCF has been granted orphan drug status by the United States Food and Drug Administration, or FDA, which provides for seven years of market exclusivity. In November 2000, we began a Phase II clinical trial to explore the safety and clinical impact of repeated doses of aerosolized tgAAVCF delivered to the lungs of adult and adolescent cystic fibrosis patients. This double-blind, placebo-controlled trial will also evaluate the impact of tgAAVCF on lung function, lung inflammatory proteins and lung bacteria in patients with cystic fibrosis. We are conducting this trial in connection with the Cystic Fibrosis Foundation, the largest cystic fibrosis patient advocacy organization in the world. During 2001, an independent data and safety monitoring board that periodically reviews the safety profile of tgAAVCF for this trial allowed us to reduce the entry age criteria for patients that may be enrolled into this trial from 18 years of age to 15 years of age, and then subsequently reduce the entry age to 12 years of age. Because cystic fibrosis is a progressive disease, reducing the age criteria for patients in this trial will allow us to treat patients at an earlier stage of the disease, which we believe may better enable us to halt or significantly slow the development of lung damage. We plan to complete enrollment of patients into this trial and evaluate the trial results during 2002. tgDCC-E1A for Cancer Cancer is the second leading cause of death in the United States, with over one million new cases diagnosed each year. Cancer arises from the disruption of normal cell growth and division, which are regulated by cellular proteins and genes. Cancer can result from the structural alteration or abnormal expression of these genes or from mutation, or deletion, of tumor inhibitor genes. 4 In 1996, we acquired the rights to the E1A gene, which is derived from a common virus. E1A regulates the expression of viral and cellular genes within cells infected by the virus. We recognized that if E1A could be delivered into cancerous cells, its ability to influence gene expression might be useful in slowing the growth of tumors and sensitizing them to chemotherapeutic drugs and radiation. To deliver the E1A gene into human cells, we have combined E1A with two of our proprietary lipid-based vectors, DCC-Cholesterol and LPD (lipids, which are fats, polycations, which are compounds with multiple positive charges and DNA) to create two potential delivery systems for the E1A gene. We believe these delivery systems may have the necessary characteristics for repeated and efficient delivery of the E1A gene into rapidly dividing cells, such as tumor cells. Our product candidate for treating cancer is based on the E1A gene. We have exclusive worldwide rights to issued patents covering the use of the E1A gene in cancer therapy. Research data indicate that E1A can function as an inhibitor of the HER-2/neu oncogene, which is known to be over expressed in many cancers. Research also indicates that E1A has anti-tumor effects unrelated to the inhibition of HER-2/neu expression. For example, our preclinical studies of our tgDCC-E1A product candidate in mice with tumors indicate that tgDCC-E1A inhibits expression of the HER-2/neu oncogene, inhibits growth and metastasis of the tumor cells and increases significantly the long-term survival of the mice. Other preclinical studies indicate that tgDCC-E1A sensitizes tumor cells to certain chemotherapeutic agents or radiation used to destroy the tumor cell. We completed a series of Phase I and Phase II clinical trials of our tgDCC-E1A product candidate as a single agent in several different cancers before testing the product candidate in combination with chemotherapy and radiation treatments. In these trials, we delivered tgDCC-E1A into the peritoneal cavity of ovarian cancer patients and into the pleural cavity of breast cancer patients. The results indicated that clinicians could safely administer the drug in biologically active amounts and that the E1A gene was present and active in tumor cells. Additionally, in some patients, we observed decreased levels of HER-2/neu expression and decreased numbers of tumor cells. In Phase I and Phase II clinical trials in head and neck cancer patients who had failed to respond to previous chemotherapy and radiation treatments, we delivered tgDCC-E1A as a single agent by direct injection into their tumors. The results of these trials also indicated that clinicians could safely administer the drug in biologically active amounts and that the E1A gene was present and active in tumor cells. In late 1999, we began the first clinical trial of tgDCC-E1A administered in combination with chemotherapeutic drugs. In this Phase I clinical trial, we are treating advanced-stage ovarian cancer patients with a combination of tgDCC-E1A and two chemotherapy products, Taxol(R) and Cisplatin, at increasing dosage levels. tgDCC-E1A and Cisplatin are administered directly to the peritoneal cavity and Taxol(R) is administered intravenously. This trial is designed to evaluate drug safety and to assess maximum tolerable dose levels, as well as measure the biologic activity of E1A. We anticipate presenting preliminary data from this clinical trial in mid-2002. In late 2000, we began a multi-center Phase II clinical trial of tgDCC-E1A administered together with radiation therapy to patients with recurrent or inoperable head and neck cancer. We are treating patients with twice-weekly injections of tgDCC-E1A throughout six to seven weeks of radiation therapy. Primary endpoints of this trial include tumor response, as measured by CT scan 12 weeks following completion of therapy, and safety and tolerability of tgDCC-E1A in combination with radiation. Other endpoints include time-to-progression of treated tumors, length of relapse-free periods, overall survival rates and comparison of responses of tumor sites treated with both tgDCC-E1A and radiation to tumors treated with radiation alone. We plan to perform an interim data analysis for this trial upon completing treatment of several patients in this trial. For a description of research and development expenses related to our clinical development programs, see the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Results of Operations" in Part II, Item 7 of this annual report. 5 Preclinical Product Development Programs Rheumatoid Arthritis Rheumatoid arthritis, or RA, is a chronic disease that causes pain, stiffness, swelling and loss of function in the joints and inflammation in other organs. According to the Arthritis Foundation, RA affects more than two million people in the United States, with disease onset occurring most frequently in people between the ages of 20 and 45. Direct and indirect costs associated with RA cost the U.S. economy nearly $65 billion per year. While the exact cause of the disease remains unknown, autoimmune and inflammatory processes lead to chronic and progressive joint damage. Researchers have found that the cytokine TNF(a) plays a pivotal role in this disease process and have validated anti-TNF(a) therapies as a valuable strategy to treat RA. RA is currently treated with protein therapies such as Immunex Corporation's Enbrel(R), a variety of systemic treatments, including steroid and nonsteroid anti-inflammatory drugs, and other drugs such as methotrexate, cyclosporine, and other monoclonal antibody therapies such as Remicade(R). We believe that local administration of DNA sequence encoding anti-TNF(a) proteins may be a potentially useful alternative to systemic administration of anti-TNF(a) proteins for treating RA and other inflammatory diseases. The characteristics of AAV vectors make them well suited for delivery of genes to joints and other local environments. We are developing an AAV-based product as a potential alternative or supplement to systemic protein therapy in patients with RA symptoms limited to one or several joints, or in situations where systemic delivery of the protein therapy may not be possible. We have administered AAV-ratTNFR:Fc, a vector carrying the DNA sequence that expresses a soluble form of protein that binds TNF(a), to the muscle or the joint of rats with experimentally induced RA. Data from these studies show that a single administration of AAV-ratTNFR:Fc to one ankle joint suppressed joint inflammation, pannus formation (inflammatory cells) and cartilage and bone damage in the treated ankle. Hemophilia A Hemophilia A is a hereditary disorder caused by the absence or severe deficiency of Factor VIII, a blood protein that is essential for proper coagulation. According to the National Hemophilia Foundation, approximately 14,000 people in the United States suffer from hemophilia A. Hemophilia A patients face spontaneous, uncontrolled bleeding that can lead to restricted mobility, pain and, if left untreated, death. Serious, acute bleeding incidents are generally treated by administering either manufactured or naturally-derived Factor VIII protein. If slow, chronic bleeding is not treated, progressive, irreparable physical damage may result. Because both manufactured and naturally-derived Factor VIII proteins are expensive, protein therapy is generally limited to treating bleeding episodes in patients with hemophilia. Further, proteins derived from human serum may carry blood-borne pathogens such as HIV, Epstein Barr virus and hepatitis C. We believe that there is strong rationale for developing a gene therapy product that could be administered prophylactically to hemophilia A patients to prevent spontaneous bleeding incidents, for the following reasons: . hemophilia A results from a single gene defect that is well understood, and replacement of the missing protein has been used as an effective therapy for the disease; . overproduction of the Factor VIII protein has not been shown to be harmful, which reduces the need for precise regulation of gene expression; . researchers believe that production of as little as 5% of normal levels of the Factor VIII protein could effectively prevent chronic bleeding incidents in hemophilia A patients; . the high cost of protein therapy generally limits its use to treating bleeding incidents, which may provide a significant market opportunity for gene-based prophylactic products that address the underlying disease; and . the current global market for Factor VIII protein products, which is estimated at $1.2 billion, not including hospitalization costs, represents a significant market opportunity. 6 We also believe that AAV vectors represent a promising means of delivering a gene to trigger production of the Factor VIII protein for treating hemophilia A. The characteristics of AAV vectors, including their good safety profile and ability to persist in cells and express genes for extended periods of time, should provide important advantages compared to other gene delivery methods. We have invested in significant infrastructure to support the development of tgAAVCF, our AAV-based product candidate for treating cystic fibrosis, and we believe this infrastructure can be efficiently adapted to developing an AAV-based gene therapy product for treating hemophilia A. In November 2000, we entered into a collaboration with Wyeth/Genetics Institute, a unit of Wyeth Pharmaceuticals, to develop gene therapy products for treating hemophilia. Under the terms of the collaboration agreement Wyeth/Genetics Institute provides us with significant funding and owns exclusive worldwide marketing rights to any products resulting from the collaboration. The section below entitled "Research and Development Collaborations" provides a detailed description of this relationship. Lysosomal Storage Disorders Lysosomal storage disorders are a family of diseases caused by the absence of enzymes that are essential for removing certain metabolic byproducts from cellular tissues. The buildup, or storage, of these substances causes a loss of function in many crucial areas of the body, which may result in mental and physical disability and, in most cases, shortened lifespan. While each of these diseases typically affects fewer than 5,000 to 20,000 people worldwide, according to the National Tay Sachs & Allied Diseases Association, there are more than 40 different lysosomal storage disorders, including Tay Sachs, Pompe, Gaucher, Fabry and Batten disease. We began collaborating with Genzyme Corporation in the area of lysosomal storage disorders after completing our acquisition of Genovo, Inc. in September 2000. Genzyme and Genovo had initiated a research and development collaboration in this area in 1999. In November 2000, following our acquisition of Genovo, we amended the research and development agreement previously entered into between Genovo and Genzyme to define the scope and level of work that we would perform for Genzyme in developing products for treating lysosomal storage disorders. Under the terms of the amended agreement, we will work with Genzyme to develop potential gene therapies for lysosomal storage disorders and Genzyme will be responsible for clinical development and commercialization of any products resulting from the collaboration. The section below entitled "Research and Development Collaborations" provides a detailed description of this relationship. HIV Vaccine According to the International AIDS Vaccine Initiative, or IAVI, more than 40 million people worldwide suffer from AIDS or are infected with HIV, the virus that causes AIDS. An additional 14,000 men, women and children worldwide are infected daily. While current drug therapies such as protease inhibitors and reverse transcriptase inhibitors have helped many patients with AIDS to manage their disease, these therapies have not been shown to be curative, have significant, and often treatment-limiting, side effects and are costly. We believe that a prophylactic vaccine to protect against infection by HIV could have significant market potential. To date, no company has applied for regulatory approval of a prophylactic AIDS vaccine, although several vaccines are under development. We are collaborating with IAVI and Children's Research Institute, or CRI, on the campus of Children's Hospital in Columbus, Ohio to develop a vaccine to protect against HIV infection. The vaccine will utilize our AAV vectors to deliver HIV genes that express viral proteins that can be detected by the immune system to elicit a protective immune response against HIV. We believe that a single dose of an AAV-based vaccine containing HIV genes could allow for a sustained and high level of gene expression of HIV proteins in vivo, thereby eliciting a robust and sustained immune response without exposing the patient to HIV. Data from studies in nonhuman primates suggest that AAV vector vaccines may hold significant promise. Monkeys immunized with AAV vectors carrying SIV genes, the primate equivalent of HIV, develop immune responses that are very similar to those induced by the human form of HIV. These data provide the basis for moving 7 forward with further preclinical development that we believe will support Phase I clinical trials in humans. Under the terms of the public-private collaboration, IAVI will fund work at Targeted Genetics and at CRI focused on development and preclinical and Phase I studies of a vaccine candidate. We have the right to commercialize in industrialized countries any vaccine that may result from this development collaboration, and we have the option to manufacture the vaccine for nonindustrialized nations. The section below entitled "Research and Development Collaborations" provides a detailed description of this collaboration. Metastatic Cancer We believe that our clinical testing of tgDCC-E1A, our synthetic vector-based product candidate for treating cancer, has demonstrated the potential of E1A as a tumor inhibitor. We therefore believe that if we are able to deliver E1A systemically to reach tumor sites throughout the body, we could significantly expand the utility of E1A as a potential cancer treatment. We are therefore developing new formulations of E1A, which we believe have the potential to target cancer cells when administered systemically. One of these formulations, tgLPD-E1A is based on a non-viral gene delivery vehicle called LPD, which contains lipids, polycations and DNA, and results in the formation of small, stable DNA particles encapsulated in a lipid shell. We believe that this condensed DNA delivery platform provides the basis for developing a systemic delivery system for administering E1A or other genes to tumors. Several preclinical studies of tgLPD-E1A indicate promising results. In a mouse model of human breast cancer tumors, we administered tgLPD-E1A systemically to evaluate its ability to inhibit tumor growth. The results indicated that the impact of tgLPD-E1A on tumor growth was comparable to the impact observed when administrating Taxol(R), a chemotherapeutic drug. Additionally, administering both Taxol(R) and tgLPD-E1A inhibited tumor growth in mice significantly better than administering either agent alone. Furthermore, additional studies at Targeted Genetics and Emerald Gene Systems, our joint venture with Elan Corporation, suggest that the LPD platform could be modified to provide an enhanced efficacy and safety profile. Consequently, we plan to perform evaluations of these alternate formulations before deciding which formulation, if any, will advance into a clinical development phase. Glioma Glioma is a type of brain cancer that affects 17,000 people in the United States each year. Current treatment options for glioma include surgery, radiation therapy, chemotherapy or a combination of these treatments. Our collaboration with Biogen expanded upon a collaboration that Biogen had with Genovo prior to the acquisition. As part of this collaboration, we provided Biogen with limited manufacturing process development support for its product development program directed at treating glioma using an adenoviral vector to deliver the gene for interferon beta. Interferon beta is a potent stimulator of the immune system, and sustained expression of this protein at the site of brain tumors may help the body rid itself of cancer cells. Localized, sustained production of interferon beta may result in superior anti-tumor efficacy with little or no systemic toxicity. We believe that preclinical studies in several animal cancer models validate this approach. Biogen owns worldwide rights to product candidates resulting from this research and has initiated a Phase I clinical trial for this product candidate. We are entitled to receive a royalty on any future sales resulting from this product candidate. Hyperlipidemia We are exploring gene therapies for cardiovascular disease by applying our AAV vector technology to treating hyperlipidemia, the elevation of lipids (fats) such as cholesterol in the bloodstream. Approximately four million people in the United States have a genetic predisposition to some form of hyperlipidemia, such as familial hypercholesterolemia, familial combined hyperlipidemia and polygenic hypercholesterolemia. Approximately 10% of these patients have severe forms of the disease and do not respond to standard drug therapy, such as statins. If untreated, disease progression can lead to morbidity and death from heart attack or stroke. As part of our acquisition of Genovo, we acquired a product development program aimed at assessing the delivery of genes to treat dyslipidemia, a condition of increased levels of vLDL-type cholesterol. We are conducting further research studies to assess the potential clinical utility of our AAV-VLDLR product candidate 8 for treating hyperlipidemia. We have exclusive rights to certain intellectual property related to the use of AAV-based gene therapy for treating hypercholesterolemia. For a description of research and development expenses related to our clinical development programs, see the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations" in Part II, Item 7 of this annual report. Core Technology Platform We have assembled a broad base of core proprietary technologies that we believe will allow us to address a number of different diseases. We believe that different disease targets will require different methods of gene delivery. The best gene delivery method for a particular disease will depend on the targeted gene, the type of cell to be modified, the duration of effect desired and the need for in vivo or ex vivo delivery. Accordingly, our strategy has been to develop multiple gene delivery systems based on both AAV vector and synthetic vector technologies. We also have capabilities and intellectual property in two other types of viral vectors, adenoviruses and retroviruses. In addition, through our Emerald Gene Systems joint venture, we are working to create enhanced lipid-based delivery systems that would further extend the applicability of our technology base. We believe that our broad base of proprietary gene-delivery technologies will give us the flexibility to develop gene therapies for a wider range of diseases than we could develop using any single gene delivery system. Gene Therapy Overview. Gene therapy is an approach to treating or preventing genetic and acquired diseases that involves inserting a functional gene into target cells to modulate disease conditions. To be transferred into cells, a gene is incorporated into a delivery system called a vector, which may be either viral or synthetic. The process of gene transfer can be accomplished ex vivo, whereby cells are genetically modified outside of the body and infused into the patient, or in vivo, whereby vectors are introduced directly into the patient's body. Once delivered into the cell, the gene can express, or produce, the specific proteins encoded by the gene. Proteins are fundamental components of all living cells and are essential to controlling cellular structure, growth and function. Cells produce proteins 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 a protein. When genes are expressed, the sequence of DNA is transcribed into RNA, which is then translated into a sequence of amino acids that constitutes the resulting protein. An alteration in the function or an absence of specific genes causes proteins to be overproduced, underproduced, or produced incorrectly, any of which can cause disease. These diseases include cystic fibrosis, in which a defective protein is produced, and hemophilia, in which a protein is underproduced. Deficient or absent genes can also cause cells to incorrectly regulate gene expression which can cause diseases such as certain types of cancer. Gene therapy may be used to treat disease by replacing the missing or defective gene to facilitate the normal protein production or gene regulation capabilities of cells. In addition, gene delivery may be used to enable cells to perform additional roles in the body. For example, by delivering DNA sequences that encode proteins that are usually not expressed in the target cell, thus conferring new function to these cells, gene therapy could enhance the ability of the immune system to fight infectious diseases or cancer. Gene therapy may also be used to inhibit production of undesirable proteins or viruses that cause disease, by suppressing expression of their related genes within cells. A key factor in the progress of gene therapy has been the development of safer and more efficient methods of transferring genes into cells. A common gene delivery approach to date uses modified viruses to transfer the desired genetic material into a target cell. The use of viruses takes advantage of their natural ability to introduce genes into cells and, once inserted into the target cell, to use the cell's metabolic machinery to produce the desired protein. In some gene therapy applications, viruses are genetically modified to inhibit the ability of the 9 virus to reproduce. Successful viral gene transfer for diseases requiring long-term gene expression involves meeting a number of essential technical requirements, including the ability of the vector to carry the desired genes, transfer the genes into a sufficient number of target cells and enable the delivered genes to persist in the host cell and produce proteins for long duration. We and others are using a variety of viral vectors, including AAV and retroviral vectors, for potential gene therapy applications requiring long-term gene expression. Our AAV Viral Vectors. With our scientific collaborators, we have developed significant expertise in designing and using AAV vectors in gene therapy. We believe that our AAV vectors are particularly well suited for treating a number of diseases for the following reasons: . AAV does not appear to cause human disease; . Our AAV vectors contain no viral genes that could produce unwanted cellular immune responses leading to side effects or reduced efficacy; . AAV vectors can introduce genes into nondividing or slowly dividing cells; . AAV vectors can persist in the host cell to provide relatively long-term gene expression; and . Our AAV vectors can be manufactured using methods utilized in the manufacture of other biopharmaceutical products. We are building our proprietary position in AAV-based technology through our development or acquisition of exclusive rights to inventions that: . provide important enhancements to AAV vectors . demonstrate novel approaches to the use of AAV vectors for gene therapy; and . establish new and improved methods for large-scale production of AAV vectors. In addition to our tgAAVCF clinical development program for treating cystic fibrosis, we are conducting preclinical experiments to assess the potential for using AAV vectors to deliver genes to other target cells for treating other diseases. Currently, we are evaluating the use of AAV vectors to deliver genes to joints, muscles, the lung, the liver and the cardiovascular system (heart and blood vessels). Upon receiving additional financial and scientific resources, we intend to examine, both internally and through collaborators, the use of AAV vectors in additional cell types. Our Synthetic Vectors. Synthetic vector systems generally consist of DNA incorporating the desired gene, combined with various compounds designed to enable the DNA to be taken up by the host cell. Synthetic in vivo gene delivery approaches include: . encapsulating genes into lipid carriers such as liposomes, which facilitate the entry of DNA into cells; . combining negatively charged DNA with positively charged cationic lipids; . injecting pure plasmid, or "naked," DNA in an aqueous solution; and . directing DNA to receptors on target cells by combining the gene with molecules (ligands) that bind to the receptors. We have exclusive rights to a significant body of synthetic gene delivery technology based on cationic lipids. These synthetic vectors, such as DCC-Cholesterol, are formulated by mixing negatively charged DNA with positively charged cationic lipids, which promotes uptake of genes by cells. These vectors appear to have a good safety profile for use in vivo. We believe that synthetic vectors have several characteristics that make them particularly well-suited for treating certain diseases, including: . ability to transfer relatively large segments of DNA; . ability to deliver genes in rapidly dividing or non-dividing cells; and 10 . ability to target to specific cell receptors. We are working to expand our synthetic vector capabilities by developing enhancements to cationic lipid-based systems that will expand the potential uses of synthetic vectors. In one enhancement, which we call LPD, DNA is condensed and then combined with cationic lipids and polycations to generate stable particles of defined size that have significantly enhanced gene transfer efficiency and stability in the bloodstream. We believe that LPD-based formulations may be useful for delivering genes by intravenous administration. Our Enhanced Vector Systems. Emerald Gene Systems, our joint venture with Elan, was formed to develop enhanced gene delivery systems that combine our AAV and synthetic gene delivery technologies with Elan's drug delivery technologies. Elan's licensed technologies include targeting ligands and polymers. We plan to develop enhanced gene delivery systems that can be systemically or orally administered to target the desired cells within the body. Cell Therapy In November 2000, we established CellExSys, Inc., a majority-owned subsidiary, to further develop our ex vivo cell therapy capabilities. CellExSys' portfolio of intellectual property includes patents and patent applications relating to modification of T-cells with chimeric receptors, the use of T-cells as gene delivery vehicles and other proprietary technologies related to cell therapy. Through our ownership of CellExSys, we own or have rights to over 75 issued patents and patent applications in the area of cell therapy and other applications of T-cell technology. Cell therapy involves transplanting living cells into a patient to treat disease, either in place of, or in combination with, other pharmaceuticals. One type of cell therapy involves the use of cytotoxic T lymphocytes, also known as CTLs, which are a type of immune system cell. The function of CTLs is to destroy foreign or diseased cells in the body. CellExSys is developing technology and expertise that enables the isolation of potent, disease-specific CTLs from small samples of patient blood, which can then be grown into a larger number of cells and used to treat disease. Key to this technology is a proprietary rapid expansion method, or REM. We have exclusive rights to a patent on REM that was issued to the Fred Hutchinson Cancer Research Center in October 1998. Using the REM process, CellExSys can grow billions of CTLs from small quantities of starting cells over several weeks, while preserving the cells' specific disease-fighting capabilities. We believe that CellExSys' technology and expertise could support development of a series of cell-based therapies to treat infectious diseases and cancer. In addition to the potential therapeutic uses of the REM technology, we believe that REM also has utility in new drug discovery and vaccine development. The applications of the REM technology, an ex vivo therapeutic approach, are quite distinct from our in vivo gene delivery technologies and product development programs. As a result, we transferred our interests in our cell therapy and ex vivo therapy-related patents and patent applications to CellExSys. As a separate subsidiary focused on patient-specific cell therapy and other applications of REM technology, we believe that CellExSys is well-positioned to identify and take advantage of desirable product, partnership and financial opportunities that fall outside the field of in vivo gene therapy. CellExSys intends to fund further development of these cell therapy technologies by selling its equity securities to third party investors. Upon completion of these funding activities, we expect that we would no longer be the majority equity owner of CellExSys. Research and Development Collaborations Medeva Pharmaceuticals, Inc./Celltech Group plc In 1998, we entered into a collaboration with Medeva Pharmaceuticals, Inc., now a wholly owned subsidiary of Celltech Group plc, to develop and commercialize tgAAVCF, our gene therapy product candidate for treating cystic fibrosis. Medeva committed to provide annual funding of up to $5 million for up to three years, to support our tgAAVCF research and development activities, including: 11 . scale-up and validation of manufacturing processes; . development and validation of analytical methods; . conduct of Phase I clinical trials; and . other activities in support of product testing and commercialization. In addition, Medeva agreed to pay the costs of Phase II and subsequent clinical trials of our tgAAVCF product candidate. Although we are currently managing a Phase II clinical trial in the United States, the agreements provide that Medeva will conduct all other trials and assume responsibility for securing worldwide registration of tgAAVCF. Under the terms of the Medeva/Celltech collaboration, we granted Medeva/Celltech an exclusive worldwide license to sell any tgAAVCF products resulting from the collaboration but retained rights for manufacturing and supplying bulk tgAAVCF product to support clinical trials and product commercialization. Our supply rights survive for the term of the patents covering tgAAVCF. Medeva loaned us $2 million to partially fund the construction of a pilot-scale tgAAVCF manufacturing facility and agreed to loan us, under specified conditions, up to an additional $10 million toward building a Good Manufacturing Practices compliant manufacturing facility for higher-volume production of tgAAVCF. To date, we have received approximately $28 million in funding from Celltech out of a potential $54 million in license fees, development funding, milestone payments, loans and equity investments connected with the Medeva/Celltech agreements. Assuming successful commercialization, we will also receive proceeds from sales of tgAAVCF products, based on a pricing formula intended to provide us with a significant percentage of Celltech's net revenue from tgAAVCF product sales. In November 2000, we initiated a Phase II, double-blind, placebo-controlled clinical trial to evaluate our tgAAVCF product candidate. In the fourth quarter of 2001, we completed the initial three-year term of our tgAAVCF product research and development efforts with Medeva. Depending on the results of the current Phase II clinical trial, we will either: . work with Celltech toward supporting the design and execution of one or more pivotal clinical trials required for product registration and approval; . work with Celltech to design and execute additional clinical trials to further evaluate the therapeutic potential of tgAAVCF; or . discontinue our work with Celltech and evaluate our strategic options for continuing the development of a gene therapy-based cystic fibrosis product. Celltech may terminate the collaboration at will with 180 days' notice. If Celltech exercises its termination right, all rights related to tgAAVCF that we have granted or otherwise extended to Celltech would return to us. Emerald Gene Systems, Ltd. In July 1999, we formed Emerald Gene Systems, Ltd., our joint venture with Elan International Services, Ltd., a wholly owned subsidiary of Elan Corporation plc. Emerald was formed to develop enhanced gene delivery systems, based on a combination of our gene delivery technologies and Elan's drug delivery technologies. These gene delivery systems could potentially be systemically or orally administered to deliver genes targeting the desired cells within the body. We own 80.1% of Emerald's common and preferred stock and Elan owns the remaining 19.9% of Emerald's common and preferred stock. Although we own 100% of Emerald's voting stock, Elan and its subsidiaries have retained significant minority investor rights that prevent us from exercising control over Emerald. Accordingly, we do not consolidate Emerald's financial statements but instead account for our investment in Emerald under the equity method of accounting. 12 We and Elan fund the expenses of Emerald in proportion to our respective ownership interests. A joint operating committee determines the nature and scope of activities to be performed by the joint venture on a periodic basis and at least annually. To date, we and Elan have jointly conducted Emerald's research and development activities. Emerald reimburses each company for the costs of research and development and related expenses, plus a profit percentage. As part of our agreements related to Emerald, Elan has provided us funding as follows: . Elan purchased $5 million of our common stock in 1999 at the closing of the joint venture agreements and an additional $5 million of our common stock in 2000. . In September 2001, we drew $2 million under a $12 million convertible note commitment by Elan to fund a portion of our investment in Emerald; and . Elan purchased $12 million of our Series B convertible exchangeable preferred stock at the closing of the joint venture agreements, in exchange for our initial investment in Emerald. At Elan's option, its Series B convertible exchangeable preferred stock can be converted into shares of our common stock. The Series B preferred stock will automatically convert into common stock upon the occurrence of specified transactions involving a change of control of Targeted Genetics. Alternatively, Elan can exchange its Series B preferred stock for the preferred shares we hold in Emerald, which would bring Elan's ownership in Emerald to 50%. If Elan elects to exchange its Series B preferred stock for our Emerald preferred stock, Elan must pay us an amount equal to 30.1% of the total funding that we have provided to Emerald after its formation. Elan, as a holder of Series B preferred stock, is not entitled to vote together with the holders of our common stock, including with respect to the election of directors, or as a separate class, except as otherwise provided by the Washington Business Corporation Act. We may borrow up to $12 million from Elan in the form of a convertible note, to fund our ongoing investment in Emerald. We can draw on this note on a quarterly basis until July 21, 2002 or through the end of the initial development period, which is September 30, 2002. Total draws cannot exceed our cumulative investment in Emerald. Borrowings under the loan facility are subject to the following terms: . the outstanding principal balance bears interest at 12% per year, compounded semi-annually; . interest is payable semi-annually in cash or can be capitalized and added to the principal amount outstanding; and . principal and interest outstanding under the loan facility is due July 21, 2005, payable in cash or shares of our common stock. As of December 31, 2001, we had borrowed $2 million against this facility. Elan has the option to convert principal and interest outstanding under the loan facility, on a per-draw basis, into shares of our common stock. If Elan elects to convert outstanding amounts into our common stock, the conversion price will be 150% of the average closing price of our common stock for a specified period of time before the date of each applicable draw under the loan facility. We have the option to prepay the principal and interest outstanding under the loan facility, in whole or on a per-draw basis, in either cash or shares of our common stock. If we elect to prepay amounts outstanding with our common stock, the conversion price will be the lower of 150% of the average closing price of our common stock for a specified period of time before the date of the applicable draw and the average closing price of our common stock for a specified period of time before the date of prepayment. If we elect to prepay outstanding amounts in cash, we will pay an amount equal to the higher of the amount of principal and interest outstanding under the applicable draw and the fair market value of our common stock into which the outstanding amount is convertible, based on a price per share equal to the average closing price of our common stock for a specified period of time before the date of prepayment. 13 As of December 31, 2001, we had provided $6.2 million of funding to the Emerald joint venture, $4.2 million of which remain under the loan facility. Biogen, Inc. In September 2000, in connection with our acquisition of Genovo, we established a three-year, multiple-product development and commercialization collaboration with Biogen, Inc. Under the terms of a development agreement, Biogen has the option to collaborate with us to develop up to four new gene therapy product candidates. The specific genes to be delivered will be determined by Biogen and us over the initial three-year development period. Two of these genes have been identified, one for treating an infectious disease and the other for treating a genetic disorder. We are responsible for manufacturing and supplying bulk vector supplies to Biogen to support product development, clinical trials and product commercialization. Upon initiation of the collaboration Biogen paid us $8 million in research funding and milestone payments. Under a related funding agreement, Biogen will provide us with a minimum of $1 million per year in research and development funding over the initial three-year development period. Minimum annual funding could be increased by mutual agreement between Biogen and us. Biogen also agreed to provide us with loans of up to $10 million and to purchase up to $10 million of our common stock, each at our discretion. During 2001, we borrowed $10 million from Biogen under this commitment. The loan is due in September 2006 and bears interest at market rates. We can elect to have Biogen purchase the common stock in one or more tranches through September 2003. The price per share for any share purchase will equal the average of the daily closing prices of a share of our common stock for a specified period of time before and after the applicable exercise date. Assuming successful commercialization of products under the Biogen collaboration, we could receive an aggregate of up to $125 million in license fees, development funding, milestone payments, loans and equity investments connected to the Biogen agreements. We granted Biogen an exclusive worldwide license to sell any products developed in the collaboration. We will either receive royalties on sales of any products developed under the collaboration, or alternatively, we will sell products developed under the collaboration to Biogen at transfer prices that include sales-based and cost-based components, under a pricing formula specified in the developing and marketing agreement. The product manufacturing and supply provisions of the agreements are effective for the term of the patents covering our technology used to develop the product. Although Biogen may terminate the development and marketing agreement at any time after September 2001, its obligation under the related funding agreement to pay $1 million in annual research funding payments continues through September 2003. Wyeth/Genetics Institute In November 2000, we entered into a collaboration with Wyeth/Genetics Institute, a unit of Wyeth Pharmaceuticals, to develop AAV vector-based gene therapy products for treating hemophilia A and, potentially, hemophilia B. Under the terms of the collaboration agreements, Wyeth/Genetics Institute agreed to pay us $5.6 million in up-front payments and up to $15 million over the initial three-year development period for developing a hemophilia A product candidate. We also granted Wyeth/Genetics Institute an option to collaborate on the development of a hemophilia B product candidate, which if exercised, could provide us with additional development and milestone payments. Assuming successful commercialization of both products under this collaboration, we could receive an aggregate of up to approximately $80 million in license fees, development funding and milestone payments. Wyeth/Genetics Institute will manage and fund the costs of clinical trials and related regulatory filings required for product approval and marketing and will have global marketing rights for any products resulting from the collaboration. Wyeth/Genetics Institute also has agreed to loan us up to $10 million to finance manufacturing facility expansions if specified conditions are met. In addition, Wyeth/Genetics Institute has agreed to pay us to manufacture product for clinical trials and, upon approval, for commercial use, according to a sales-based formula. 14 The research and development funding agreement is effective until October 2003, with an option to extend the term if both parties agree. The supply agreement is effective for the term of the initial product development period and can be extended should regulatory agencies approve a product for commercial use. Wyeth/Genetics Institute has the right to terminate both agreements at will, with 180 days' notice. If Wyeth/Genetics Institute exercises this right to terminate, all rights related to the hemophilia technology that we have granted or otherwise extended to Wyeth/Genetics Institute will return to us. If Wyeth/Genetics Institute exercises their right to terminate both agreements at will or if we exercise our right to terminate for cause, we would have an option to acquire a right and license to certain hemophilia patent rights controlled by Wyeth/Genetics Institute. Genzyme Corporation In 1999, Genovo entered into a research and development collaboration with Genzyme Corporation to develop potential products for treating lysosomal storage disorders. Under the terms of the development agreement, Genovo was committed to perform, for up to three years and at its own cost, up to $2.9 million per year of research and development activities. A related option agreement gave Genzyme the option to purchase up to $11.4 million of Genovo equity during the three-year research and development period, of which $3.4 million had been purchased before our acquisition of Genovo in 2000. We assumed the Genzyme agreements when we acquired Genovo. In 2000, we amended the 1999 development agreement to expand its technological scope and financial terms and establish a development plan for the second year of the three-year collaboration. Under the amended agreement, Genzyme will be required to pay milestone payments upon our achievement of specified regulatory milestones and to pay royalties on sales of any products developed under the collaboration. The development program under our agreement with Genzyme is effective through August 2002 and includes an option to extend the term if both parties agree. Genzyme has the right to terminate the development program at will, with 90 days' notice. If Genzyme exercises this right to terminate the development program, or upon its expiration, all rights that we have granted or otherwise extended to Genzyme will return to us, except that Genzyme will retain an exclusive license to certain Genovo-related manufacturing technology for use in the field of lysosomal storage disorders. After executing the amended agreement, Genzyme exercised its option to purchase 311,295 shares of our common stock (as successor company to Genovo) at a purchase price of $12.8495 per share, resulting in proceeds to us of $4 million. Genzyme has not exercised a second option to acquire up to an additional 311,295 shares of our common stock also at a price of $12.8495 per share. We are in negotiations with Genzyme to define the scope of ongoing development activities and the parameters around which Genzyme would make a further investment in us. If Genzyme elects not to make an additional investment or to provide less than the $4 million we would receive if Genzyme exercised the second stock purchase option, the former Genovo shareholders and option holders will receive up to 155,648 additional shares of our common stock. International AIDS Vaccine Initiative In February 2000, we entered into a three-year collaboration with the International AIDS Vaccine Initiative and Children's Research Institute to develop a vaccine to prevent AIDS. The vaccine, which will utilize our AAV vectors to deliver selected HIV genes as a vaccine, is designed to elicit a protective immune response against HIV. Under this collaboration, vaccine candidates will be constructed based on subtypes of the virus most prevalent in Southern and Eastern Africa, and are expected to be evaluated in those regions. Under the terms of this public-private collaboration, IAVI will fund development, preclinical studies and Phase I clinical trials performed by us and by CRI. IAVI has also agreed to invest up to $6 million in research funding during the initial three years of the collaboration. Assuming successful development, we expect to manufacture the vaccine and will retain exclusive worldwide commercialization rights to any product that may stem from the collaboration. Under the terms of the collaboration, IAVI has retained rights to ensure that any successful vaccine will be distributed in developing 15 countries at a reasonable price to be determined by IAVI. If we decline to produce the vaccine for developing countries in reasonable quantities and at a reasonable price, IAVI will have rights to obtain licenses from us that will allow IAVI to contract with other manufacturers to make the vaccine available at a reasonable price in those countries. In any event, however, we will retain exclusive rights to commercialize in industrialized countries any vaccine resulting from the collaboration. The initial development periods of our collaborations with Genzyme and Elan will conclude in 2002 and the initial development periods of our other collaborations will conclude in 2003, unless we and our collaborators agree to extend the agreements. Substantially all of our revenue, and substantially all of our expected revenue for the next several years, is derived from our product development collaborations. If we were to lose the product development and other funding that our collaborative partners provide and are unable to obtain alternative funding, we may be unable to commercialize the product candidate covered by the affected collaborations. For a more detailed description of the risk, see the section entitled "Factors Affecting Our Operating Results, Our Business and Our Stock Price--If we lose significant collaborative funding or we are unable to raise additional capital when needed, we may be unable to develop our potential products and conduct our operations" in Part II, Item 7 of this annual report. Alkermes, Inc. In June 1999, we entered into a license agreement with Alkermes, Inc. in which we received exclusive rights to an issued patent and other pending patent applications related to AAV vector manufacturing. The issued patent broadly covers a manufacturing method that we believe is key to making AAV-based products in a commercially viable, cost-effective manner. The license to this technology, first developed by Children's Hospital in Columbus, Ohio, covers the use of cell lines for manufacturing AAV vectors and expands a limited field license to these rights that we previously acquired. Under the terms of the license agreement, we issued to Alkermes 500,000 shares of common stock and two warrants, each to purchase 1,000,000 additional shares of common stock. The warrants expire in June 2007 and June 2009 and have an exercise price of $2.50 and $4.16 per share, respectively. Alkermes will also receive milestone payments and royalties on the sale of any products manufactured using the licensed technology and is entitled to a portion of any sub-licensing payments that we may receive. Relationship With Immunex Corporation Targeted Genetics was formed in 1989 as a subsidiary of Immunex, a biopharmaceutical company developing recombinant proteins as therapeutics. In connection with our formation, we issued Immunex shares of our preferred stock that were subsequently converted into 1,920,000 shares of common stock, in exchange for Immunex granting us an exclusive worldwide license to certain Immunex proprietary technology specifically applicable to gene therapy applications. The licensed technology relates to gene identification and cloning, panels of retroviral vectors, packaging cell technology, recombinant cytokines, DNA constructs, cell lines, promoter/enhancer elements and immunological assays. Patents and Proprietary Rights Patents and licenses are important to our business. Our strategy is to file or license patent applications to protect technology, inventions and improvements to inventions that we consider important to developing our business. To date, we have filed or exclusively licensed over 400 patent or patent applications with the United States Patent and Trademark Office, or USPTO, as well as foreign counterparts of some of these applications in Europe, Japan and other countries. Of these patent applications, over 100 patents have been issued or allowed by the USPTO and foreign counterparts. We also rely on unpatented proprietary technology such as trade secrets, know-how and continuing technological innovations to develop and maintain our competitive position. The patent positions of pharmaceutical and biotechnology firms, including our patent positions, are uncertain and involve complex legal and factual questions for which important legal principles are largely 16 unresolved, particularly with regard to human therapeutic uses. Patent applications may not result in the issuance of patents, and the coverage claimed in a patent application may be significantly reduced before a patent is issued. If any patents are issued, the patents may be subjected to further proceedings limiting their scope, may not provide significant proprietary protection and may be circumvented or invalidated. Patent applications in the United States and 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, we cannot be sure that we were, or our licensor was, the first creator of inventions covered by pending patent applications or the first to file patent applications for these inventions. We have licensed technology underlying several issued and pending patents. Among these are two key patents that relate to the use of AAV vectors for gene delivery, which we licensed from the National Institutes of Health, or NIH, and the University of Florida Research Foundation. In addition, we have acquired nonexclusive rights to the CFTR gene being delivered in our tgAAVCF product candidate for cystic fibrosis, which uses our proprietary AAV delivery technology to deliver a copy of the CFTR gene. Licensing of intellectual property critical to our business involves complex legal, business and scientific issues. If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop or commercialize the affected product candidates. For example, in July 1997 the licensor of our licensed CFTR gene was notified that the USPTO had declared an interference proceeding to determine whether our licensor or an opposing party has the right to the patent application on the CFTR gene and related vector. Although we are not a party to the interference proceeding, its outcome could affect our license to the CFTR gene and related vector. If the USPTO or Court of Appeals ultimately determines that our licensor does not have rights to both the CFTR gene and the vector, we believe that we will be subject to one of several outcomes: . our licensor could agree to a settlement arrangement under which we continue to have rights to the gene and the vector at our current license royalties; . the prevailing party could require us to pay increased license royalties to maintain our access to the gene, the vector or both, as applicable, which licensing royalties could be substantial; or . we could lose our license to the gene, the vector or both. If our licensor does not retain its right to the CFTR gene and the vector, and we cannot obtain access at a reasonable cost or develop or license a replacement gene and vector at a reasonable cost, we will be unable to commercialize our potential tgAAVCF product candidate. For a more detailed description of this risk, see the section entitled "Factors Affecting Our Operating Results, Our Business and Our Stock Price--Intellectual property disputes regarding third-party technology that we license may prevent or impair our ability to develop and commercialize our product candidates" in Part II, Item 7 of this annual report. In addition to patent protection, we rely on trade secret protection for our confidential and proprietary information and technology. To protect our trade secrets, we generally require our employees, consultants, scientific advisors and parties to collaborative agreements to execute confidentiality agreements. In the case of employees and consultants, the agreements also provide that all inventions resulting from work performed by them while employed by us will be our exclusive property. Despite these agreements, and other precautions we take to protect our trade secrets and other proprietary unpatented intellectual property, however, we may be unable to meaningfully protect our trade secrets and other intellectual property from unauthorized use or misappropriation by a third party. These agreements may not provide adequate remedies in the event of unauthorized use or disclosure of our confidential information. In addition, our competitors could obtain rights to our nonexclusively licensed proprietary technology or may independently develop substantially equivalent proprietary information and technology. If our competitors develop and market competing products using our unpatented or nonexclusively licensed intellectual property or substantially similar technology or processes, our products could suffer a reduction in sales or be forced out of the market. A number of pharmaceutical and biotechnology companies and research and academic institutions have developed technologies, filed patent applications or received patents for technologies that may be related to our 17 business. Some of these technologies, applications or patents may conflict with our technologies or patent applications. This conflict could limit the scope of any patents that we may obtain for our technologies or result in denial of our patent applications. In addition, if patents or patent applications that cover our activities are or have been issued to other companies, we may be required to either obtain a license from the owner or develop or obtain alternative technology. A license may not be available on acceptable terms, if at all, and we may be unable to develop or obtain alternative technology. As the biotechnology industry expands and more patents are issued, the risk increases that our processes and potential products may give rise to claims that they infringe on the patents of others. These other parties could bring legal actions against us claiming damages and seeking to stop clinical testing, manufacturing and marketing of the affected product or use of the affected process. If we are found by a court to have infringed on the proprietary rights of others, we could also face potential liability for significant damages and be required to obtain a license to the proprietary technology at issue if we continue to commercialize. A required license may not be available on acceptable terms, if at all, which could impair our ability to commercialize our product candidates. Similarly, administrative proceedings, litigation or both may be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us or to determine the enforceability, scope and validity of the proprietary rights of others. This type of litigation, regardless of its merit, could result in substantial expense to us and significantly divert the efforts of our technical and management personnel. An adverse outcome could adversely affect our business. Competition A number of companies and institutions are developing or considering the development of potential gene therapy and cell therapy treatments, including other gene delivery companies, biotechnology companies, pharmaceutical companies, universities, research institutions, governmental agencies and other healthcare providers. In addition to competition from these sources, our potential products will compete with more traditional therapies for the diseases on which we focus, including pharmaceutical products, medical devices and surgery. We also compete with others to acquire products or technology from research institutions or universities. Many of our competitors have substantially more financial and other resources, larger research and development staffs and more experience and capabilities in researching, developing and testing product in clinical trials, obtaining FDA and other regulatory approvals and manufacturing, marketing and distributing products. In addition, the competitive positions of other companies may be strengthened through collaborative relationships, such as those with large pharmaceutical companies or academic institutions. As a result, our competitors may develop, obtain patent protection for, receive FDA and other regulatory approvals for or commercialize products more rapidly than we do or may manufacture and market their products more successfully than we do. Our competitors' technologies and products may be more effective or economically feasible than our potential products. If we are successful in commercializing our products, we will be required to compete with respect to manufacturing efficiency and marketing capabilities, areas in which we have no experience. These developments could limit the prices we are able to charge for any products we are able to commercialize or render our products less competitive or obsolete. Governmental Regulation All of our potential products must receive regulatory approval before they can be marketed. Human therapeutic products are subject to rigorous preclinical and clinical testing and other premarket approval procedures administered by the Food and Drug Administration, or FDA, and similar authorities in foreign countries. In accordance with the federal Food, Drug and Cosmetics Act, the FDA exercises regulatory authority over the development, testing, formulation, manufacture, labeling, storage, record keeping, reporting, quality control, advertising, promotion, export and sale of our potential products. Similar requirements are imposed by foreign regulatory agencies. In some cases, state regulation may also apply. Gene therapy and cell therapy are both relatively new technologies that have not been extensively tested in humans. The FDA reviews all product candidates for safety and efficacy at each stage of clinical testing. Both 18 safety and efficacy standards must be met before the FDA permits clinical testing to proceed to the next stage or grants product approval. Obtaining approval from the FDA and other regulatory authorities for a new therapeutic product candidate, if approval is ever obtained, is likely to take several years. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or prevent the marketing of our product candidates. In addition, the regulatory requirements governing gene and cell therapy product candidates and commercialized products frequently change. The approval process, and ongoing compliance with applicable regulations after approval, involves substantial expenditures of financial and other resources. Preclinical studies generally require studies in the laboratory or in animals to assess the potential product's safety and effectiveness. Preclinical studies include laboratory evaluation of toxicity, pharmacokinetics, or how the body processes and reacts to the drug, and pharmacodynamics, or whether the drug is actually having the expected effect on the body. Preclinical studies must be conducted in accordance with the FDA's Good Laboratory Practice regulations and, before any proposed clinical testing in humans can begin, the FDA must review the results of these preclinical studies as part of an Investigational New Drug application. If preclinical studies of a product candidate, including animal studies, demonstrate safety, and laboratory test results are acceptable, then the potential product will undergo clinical trials to test the therapeutic agent in humans. Human clinical trials are subject to numerous governmental regulations that provide detailed procedural and administrative requirements designed to protect the trial participants. Each institution that conducts human clinical trials has an Institution Review Board charged with evaluating each trial and any trial amendments to ensure that the trial is ethical, patients are protected and the trial meets the institutional requirements. These evaluations include reviews of how the institution will communicate the risks inherent in the clinical trial to potential participants, so that the patients may give their informed consent. Clinical trials must be conducted in accordance with the FDA's Good Clinical Practices regulations and the protocols the company establishes to govern the trial objectives, the parameters to be used for monitoring safety, the criteria for evaluating the efficacy of the potential product and the rights of each trial participant with respect to safety. FDA regulations require us to submit these protocols as part of the application. A FDA review or approval of the protocols, however, does not necessarily mean that the trial will successfully demonstrate safety and/or efficacy of the potential product. Institutions that receive NIH funding for gene therapy clinical trials must also comply with the NIH Guidelines, and the clinical trials are subject to a review by the NIH's Office of Biotechnology Activities Recombinant DNA Advisory Committee, or RAC. The outcome of this review can be either an approval to initiate the trial without a public review or a requirement that the proposed trial be reviewed at a quarterly committee meeting. A clinical trial will be publicly reviewed when at least three of the committee members or the Director of the Office of Biotechnology Activities recommends a public review. Should the RAC require a public hearing, the start of the trial must be delayed until after the hearing date. Although the NIH guidelines do not have regulatory status, the RAC review process can impede the initiation of the trial, even if the FDA has reviewed the trial and approved its initiation. Additionally, before any NIH-funded clinical trial can begin, the Institutional Biosafety Committee must perform a review of the proposed clinical trial and ensure there are no safety issues associated with the trial. Clinical trials are typically conducted in three phases. In Phase I, clinical trials generally involve a small number of patients, who may or may not be afflicted with the target disease, to determine the preliminary safety profile. In Phase II, clinical trials are conducted with larger groups of patients afflicted with the target disease in order to establish preliminary effectiveness and optimal dosages and to obtain additional evidence of safety. In Phase III, large-scale, multi-center, comparative clinical trials are conducted with patients afflicted with the target disease in order to provide enough data for the statistical proof of efficacy and safety required by the FDA and other regulatory agencies for market approval. We report our progress in each phase of clinical testing to the FDA, which may require modification, suspension or termination of the clinical trial if it deems patient risk too high. The length of the clinical trial period, the number of trials conducted and the number of enrolled patients per trial vary, depending on our results and FDA requirements for the particular clinical trial. Although we and 19 other companies in our industry have made progress in the field of gene therapy, we cannot predict what the FDA or the RAC will require in any of these areas to establish to its satisfaction the safety and effectiveness of the product candidate. If we successfully complete clinical trials for a product candidate, we must obtain FDA approval, as well as the approval of several other governmental and nongovernmental agencies, before we can market the product in the United States. Current FDA regulations relating to biologic therapeutics require us to submit an acceptable Biologics License Application, or BLA, to the FDA and receive approval before the FDA will permit commercial marketing. The BLA includes a description of our product development activities, the results of preclinical studies and clinical trials and detailed manufacturing information. Unless the FDA gives expedited review status, this stage of the review process generally takes at least one year. Should the FDA have concerns with respect to the potential product's safety and efficacy, it may request additional data, which could delay product review or approval. The FDA may ultimately decide that the BLA does not satisfy its criteria for approval and might require us to do any or all of the following: . modify the scope of our desired product claims; . add warnings or other safety-related information; and/or . perform additional testing. Because the FDA has not yet approved any gene therapy products, it is not clear what, if any, unforeseen issues may arise during the approval process. While we expect this regulatory structure to continue, we also expect the FDA's regulatory approach to product approval, and its requirements with respect to product testing, to become more predictable as its scientific knowledge and experience in the field of gene therapy increase. Adverse events in the field of gene therapy or other biotechnology-related fields, however, could result in greater governmental regulation, stricter labeling requirements and potential regulatory delays in the testing or approval of gene therapy products. Once approved by the FDA, marketed products are subject to continual FDA review. Later discovery of previously unknown problems or failure to comply with applicable regulatory requirements may result in restrictions on marketing a product or in its withdrawal from the market, as well as potential criminal penalties or sanctions. In addition, the FDA requires that manufacturers of a product comply with current Good Manufacturing Practices requirements, both as a condition to product approval and on a continuing basis. In complying with these requirements, we expend significant amounts of time, money and effort in production, record keeping and quality control. Our manufacturing facilities are subject to periodic inspections by the FDA. If major problems are identified during these inspections that could impact patient safety, the FDA could subject us to possible action, such as the suspension of product manufacturing, product seizure, withdrawal of approval or other regulatory sanctions. The FDA could also require us to recall a product. We are also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other federal, state and local regulations. For example, our controlled use of hazardous materials in our research and development activities must comply with standards prescribed by state and federal law. Employees At December 31, 2001, we had 173 full-time-equivalent employees, of which 151 are directly involved in research and development, or support our research and development efforts. 31 of these employees have Ph.D. or M.D. degrees and a significant number of our management and professional employees have prior experience with other biotechnology or pharmaceutical companies. Competition among biotechnology and pharmaceutical companies for highly skilled scientific and management personnel is intense. We believe that we have compensation and benefit programs in place that will allow us to be competitive in this environment. If we are ineffective, however, in retaining our existing 20 workforce and scientific advisors or in attracting additional qualified employees and advisors, our business will not succeed. None of our employees are covered by a collective bargaining agreement. Item 2. Properties We currently occupy an aggregate of approximately 90,000 square feet of laboratory and office space in Seattle, Washington and Sharon Hill, Pennsylvania. The leases on our Seattle laboratory and office facilities expire in March 2004 and contain options for us to extend the terms for two additional five-year periods. The average annual rent payment during the current terms of the Seattle leases total approximately $1.4 million, including amounts related to landlord financing of leasehold improvement costs. The lease on our laboratory and office facilities in Sharon Hill expires in November 2005 and contains options for us to extend its term for two additional five-year periods. The annual rent payment during the current term of the Sharon Hill lease is approximately $353,000. In July 2000, we leased approximately 76,000 square feet of space in Bothell, Washington for future large-scale manufacturing of our products. The lease on this facility expires in September 2015 and contains an option for us to extend its term for one additional five-year period. The average annual rent payment during the current term of the Bothell lease is approximately $1.3 million. We believe that our current facilities in Seattle and Sharon Hill, together with additional expansion space available in our Bothell facility and the office complex adjoining our main Seattle building, will be adequate to meet our projected needs for the next several years. Within that time frame, however, we could be required to locate alternative facilities, depending on the extent of our growth and development. Item 3. Legal Proceedings We are not a party to any material legal proceedings, although from time to time we may become involved in disputes in connection with the operation of our business. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of our security holders during the fourth quarter of 2001. 21 PART II Item 5. Market for the Registrant's Equity and Related Shareholder Matters Our common stock trades on the Nasdaq National Market under the symbol TGEN. As of March 5, 2002, we had approximately 263 shareholders of record and approximately 19,700 beneficial holders of our common stock. We have never paid cash dividends and do not anticipate paying them in the foreseeable future. In addition, our loan agreements with Biogen, Inc. and Celltech Group plc restricts the amount of cash dividends we can pay. The following table lists, for each calendar quarter indicated, the high and low bid quotations for our common stock, as quoted on the Nasdaq National Market. These quotes reflect inter-dealer prices, without retail mark-up or commission, and may not necessarily represent actual transactions.
High Low ------ ----- 2001: 4th Quarter................................... $ 3.50 $1.71 3rd Quarter................................... 5.87 1.45 2nd Quarter................................... 6.60 3.00 1st Quarter................................... 9.25 2.38 2000: 4th Quarter................................... 12.81 6.38 3rd Quarter................................... 17.00 9.00 2nd Quarter................................... 15.00 5.31 1st Quarter................................... 28.00 3.63
In connection with a private placement of common stock in 1998, we issued warrants to purchase a total of 4,333,333 shares of common stock at an exercise price of $2.00 per share. On January 18, 2001, The Equitable Life Assurance Company exercised warrants to purchase 1,000,000 shares of common stock. The transaction was exempt from registration under Section 4(2) of the Securities Act, on the basis that the transaction did not involve a public offering. 22 Item 6. Selected Financial Data
Year Ended December 31, -------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------ ------------ ------------ ------------ ------------ Statement of Operations Data Revenue.......................... $ 18,880,000 $ 11,403,000 $ 6,848,000 $ 7,510,000 $ 1,328,000 Operating expenses............... 47,484,000 57,208,000 33,694,000 16,373,000 15,828,000 Loss from operations............. (28,604,000) (45,805,000) (26,846,000) (8,863,000) (14,501,000) Loss before cumulative effect of change in accounting principle...................... (27,170,000) (43,973,000) (26,655,000) (8,687,000) (14,188,000) Cumulative effect of change in accounting principle........ -- (3,682,000) -- -- -- Net loss......................... (27,170,000) (47,655,000) (26,655,000) (8,687,000) (14,188,000) Basic and diluted net loss per share: Loss before cumulative effect of change in accounting principle....... $ (0.64) $ (1.19) $ (0.84) $ (0.33) $ (0.70) Cumulative effect of change in accounting principle.................. -- (0.10) -- -- -- Net loss per basic and diluted common share (1)........ (0.64) (1.29) (0.84) (0.33) (0.70) Shares used in computing basic and diluted net loss per common share............... 43,927,822 37,752,164 32,173,756 26,637,823 20,196,325 Proforma amounts assuming the accounting change is applied retroactively: Net loss....................... (24,555,000) (14,468,000) Net loss per common share........................ $ (0.77) $ (0.54) December 31, -------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------ ------------ ------------ ------------ ------------ Balance Sheet Data Cash and cash equivalents........ $ 25,186,000 $ 38,630,000 $ 7,153,000 $ 11,957,000 $ 5,038,000 Total assets..................... 71,038,000 87,974,000 13,692,000 16,204,000 9,767,000 Long-term obligations............ 16,403,000 2,447,000 2,088,000 900,000 1,517,000 Total shareholders' equity....... 37,401,000 63,432,000 6,966,000 11,982,000 5,592,000
- -------- (1) Effective January 1, 2000, we changed our method of accounting for nonrefundable up-front license fees. See Note 1 to the consolidated financial statements. 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview We develop gene therapy products and technologies to treat acquired and inherited diseases on our own and through various research and development collaborations with others. We have historically funded our product development efforts primarily through the sale of equity securities and through funding received from our product development partners. We have six major collaborations that provide ongoing funding for our research and development programs: . a cystic fibrosis product development collaboration with Medeva Pharmaceuticals, Inc., now a wholly owned subsidiary of Celltech Group plc; . an AAV-based AIDS vaccine development collaboration with the International Aids Vaccine Initiative; . a multiple-product gene therapy product development collaboration with Biogen, Inc.; . a lysosomal storage disorder product development collaboration with Genzyme Corporation; . an AAV-based hemophilia product development collaboration with Wyeth/Genetics Institute, a unit of Wyeth Pharmaceuticals; and . Emerald Gene Systems, Ltd., our joint venture with Elan International Services, Ltd., a wholly owned subsidiary of Elan Corporation plc, for the development of enhanced gene delivery technology. Our development collaborations with other entities typically provide us with funding, including one or more purchases of our equity securities, loans, payments for reimbursement of research and development costs and milestone fees and payments. We and our partner will typically agree on a development plan for the product candidate, which often extends for multiple years. The product candidate's progress is periodically reviewed with the partner. Our development partners often coordinate clinical evaluation of product candidates and marketing rights for product candidates that are successfully developed. We generally maintain manufacturing and royalty-based interests in successfully developed product candidates. We have two lead product candidates in clinical trials, tgAAVCF for treating cystic fibrosis and tgDCC-E1A for treating cancer. tgAAVCF is currently in a Phase II clinical trial. tgDCC-E1A is currently in a Phase I clinical trial for treating ovarian cancer and a Phase II clinical trial for treating head and neck cancer. We are pursuing tgDCC-E1A initially as a company-funded program but anticipate entering into a strategic collaboration later in the development process. Our product candidates for treating hemophilia and lysosomal storage disorders, our potential vaccine to prevent HIV infection and the products we are developing with Elan and Biogen are all in preclinical development. Developing pharmaceutical products involves extensive preclinical development, followed by human clinical trials that take several years or more to complete. The length of time required to completely develop any product candidate varies substantially according to the type, complexity and novelty of the product candidate, the degree of involvement by a development partner and the intended use of the product candidate. Our commencement and rate of completion of clinical trials may vary or be delayed for many reasons, including those discussed in the section of this Item 7 entitled "Factors Affecting Our Operating Results, Our Business and Our Stock Price--Risks Related to Product Development and Regulatory Approval" and elsewhere in this annual report. As a result, we are unable to predict whether we will be able to successfully develop any of our product candidates or the time or cost successful development will require. Although we believe that our technology appears promising, we do not know whether any commercially viable products will result from our research and development efforts or those of our collaborators. We anticipate that we will not generate revenue from the sale of commercial products for at least the next several years. Unless and until we successfully commercialize one or more product candidates, we expect to generate revenue primarily through research funding, milestone payments and licensing fees from current and potential future corporate collaborators. The timing and amount of our future revenue, will be subject to significant fluctuations, 24 based in part on the success of our research activities, the receipt of necessary regulatory approvals, the timing of achievement of milestones and the extent to which associated costs are reimbursed under our collaborative arrangements. Each of our product candidates combines different licensed technology from several licensors. We will have an obligation to our licensors to pay royalties on products that utilize their technologies. Because each product may require a different set of technologies, third-party royalties will be determined and paid on a product-by-product basis. Royalty payment rates may also vary between products depending on the extent of licensed technology or because some technology licenses provide for lower royalties when the licensed technologies are combined with other royalty-bearing technologies. The royalty payment rates that we owe to our licensors will significantly influence the price and viability of our potential products. Our research and development expenses may fluctuate due to the timing of expenditures for the varying stages of our research, product development and clinical development programs and the availability of capital resources. Because a significant portion of our revenue is directly tied to our research and development activities, our revenue will fluctuate with the level of future research and development activities. We expect that our revenue will continue to fluctuate as we proceed with our current development collaborations, enter into potential new development collaborations and licensing agreements and earn milestone payments. As of December 31, 2001, our accumulated deficit totaled $178.0 million. We expect to generate substantial additional losses for the foreseeable future, primarily due to the costs associated with our preclinical and clinical development programs, developing our manufacturing capabilities and preparing our products under development for commercialization. Our expenses are driven by our staffing levels, outside costs for supplies and materials and clinical trial activities. We increased our staffing, outside costs and clinical trial activities in 2001 and 2000 as a result of the greater number, complexity and advancing development stages of our collaborations. We anticipate 2002 staffing and outside costs for supplies, materials and clinical trial activities will continue at levels similar to those in 2001. As described in the section of this Item 7 entitled "Liquidity and Capital Resources," the initial development periods of three of our collaborations conclude in 2002 and 2003. If we and the collaborators do not agree to extend these collaborations, they will terminate. Absent new collaborative partnerships or extensions to our existing collaborative partnerships, we anticipate that both our research and development costs and our revenue will decrease in 2003. We will need to scale our research and development activities to match the levels of funding provided by our collaborators and other sources of capital available to us, which may be subject to fluctuation in the future. We may be unable to achieve profitability on a sustained basis, if at all. Further, successful development of our product candidates will require that we access significantly higher amounts of capital than we currently have. We may be unable to obtain required funding when needed and on acceptable terms, obtain and maintain corporate partnerships or complete acquisition transactions necessary or desirable to complete the development of our product candidates. In September 2000, we acquired Genovo, Inc., a privately held biotechnology company focused on developing therapeutic products based on AAV vectors. The purchase price totalled $66.4 million, which consisted of 5,250,805 shares of our common stock, valued at $58.4 million, assumed Genovo options valued at $7.7 million and transaction costs of $600,000 less $300,000 allocated to the intrinsic value of unvested stock options that we assumed. In connection with the acquisition of Genovo, we recorded acquired in-process research and development, or IPR&D, expenses of $28.0 million and acquisition-related intangibles of $39.5 million, consisting of AAV vector know-how of $12.7 million, workforce in place of $1.6 million and goodwill of $25.2 million. Significant Accounting Policies There are several accounting policies that we believe are critical to the presentation of our consolidated financial statements. Note 1 to our consolidated financial statements "Description of Business and Summary of Significant Accounting Policies" summarizes each of our significant accounting policies. The most critical accounting policies include those related to revenue recognition, specifically as these policies relate to our 25 collaborative development relationships with other companies, the accounting and presentation for our unconsolidated joint venture interest in Emerald, the application of assumptions and estimates in accounting for acquired IPR&D costs and the valuation of our intangible assets. We generate revenue from technology licenses, collaborative research arrangements and cost reimbursement agreements. Revenue under technology licenses and collaborative agreements typically consist of nonrefundable, up-front license fees, collaborative research funding, technology access fees and various other payments. Revenue from nonrefundable, up-front license fees and technology access payments is recognized ratably over the development period in the collaborative agreement. Revenue associated with performance milestones is recognized as earned, based upon the achievement of the milestones defined in the applicable agreements. Revenue under research and development cost-reimbursement contracts is recognized as the related costs are incurred. Advance payments received in excess of amounts earned are classified as deferred revenue. We own 80.1% of Emerald's common and preferred stock and 100% of its voting shares and Elan owns the remaining 19.9% of Emerald's common and preferred stock. Although we own a controlling interest in Emerald, Elan and its subsidiaries have retained significant minority investor rights that are considered "participating rights" under the FASB's Emerging Issues Task Force Bulletin 96-16, "Investors' Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder Has Certain Approval or Veto Rights." Because Elan's participating rights prevent us from exercising control over Emerald, we do not consolidate Emerald's financial statements but instead account for our investment in Emerald under the equity method of accounting. Our estimates are based on assumptions we believe to be reasonable at the time we perform these estimates. Changes in the underlying assumptions may result in substantially different accounting estimates. For example, when we acquired Genovo in September 2000, we assigned value to the acquired assets on the basis of several estimates and assumptions. Changes in these underlying estimates may result in substantially different allocation of the overall purchase price and the amount of expenses recorded on our balance sheet as acquired IPR&D and intangible assets. In addition, we will make assumptions and estimates on a periodic basis when we evaluate the carrying value of goodwill for evidence of impairment. The summary of significant accounting policies should be read in conjunction with our consolidated financial statements and related notes and this discussion of our results of operations and liquidity and capital resources. Results of Operations Revenue Revenue in 2001 totaled $18.9 million, compared to $11.4 million in 2000. This increase primarily resulted from our hemophilia product development collaboration with Wyeth/Genetics Institute and our multiple-product development collaboration with Biogen, both of which were established in late 2000. The increase also reflects growth in revenue earned from the Emerald joint venture and revenue earned under our AIDS vaccine collaboration with IAVI. The increase in revenue for 2001 was partially offset by a decrease in revenue earned under our development program with Celltech for a cystic fibrosis product candidate, under which we earned a $2 million milestone payment in 2000. Revenue increased to $11.4 million in 2000 from $6.8 million in 1999, reflecting amounts generated under our collaboration agreement with Celltech, a full year of providing research and development services to Emerald and, to a lesser degree, revenue generated from a partial year of product development efforts in our collaborations with Wyeth/Genetics Institute, Biogen and IAVI. We generated $2.8 million in revenue in 2001, $1.9 million in revenue in 2000 and $446,000 in revenue in 1999 from research and development activities performed for Emerald. 26 Operating Expenses Research and Development. We incurred research and development expenses of $31.5 million in 2001, compared to $19.3 million in 2000. This increase resulted from increased research and development efforts in our hemophilia and AIDS vaccine product development collaborations, design costs associated with our large-scale manufacturing facility expansion and the addition of Genovo's research and development operations. The increase also reflects increased research and development activities to support our collaborations with Elan, as well as additional clinical and regulatory activities associated with the development for our cancer programs. Research and development expenses increased to $19.3 million in 2000 from $14.3 million in 1999, reflecting increased expenses related to our acquisition of Genovo's research and development operations, additional activities related to our collaborations with Wyeth/Genetics Institute and IAVI and, to a lesser extent, costs incurred to support the Emerald joint venture. The increase in total expenses in 2001 was partially offset by decreases in our tgDCC-E1A development expenses as tgDCC-E1A moved into clinical development. Our research and development expenses for the years ended December 31, 2001, 2000 and 1999 were as follows:
Year Ended December 31, ----------------------------------- 2001 2000 1999 ----------- ----------- ----------- Preclinical programs.................. $18,693,000 $ 6,321,000 $ 1,440,000 Clinical programs: Cystic fibrosis.................... 2,521,000 3,959,000 5,440,000 Cancer products.................... 2,630,000 2,251,000 770,000 Indirect costs..................... 7,702,000 6,781,000 6,641,000 ----------- ----------- ----------- Total.......................... 12,853,000 12,991,000 12,851,000 ----------- ----------- ----------- Total research and development expense $31,546,000 $19,312,000 $14,291,000 =========== =========== ===========
Indirect costs include facility and occupancy costs, intellectual property-related expenses, including patent prosecution and maintenance, and license and royalty payments. Direct costs include specifically identifiable costs of salaries, benefits, clinical trial sites, outside services, materials and supplies. Costs associated with our preclinical program activities increased each year, reflecting the addition of the AIDS vaccine collaboration with IAVI in early 2000, the hemophilia collaboration with Wyeth/Genetics Institute and the lysosomal storge disorder collaboration with Genzyme in late 2000 and increased activity in our self-funded RA and gene delivery technology development programs. Costs associated with our clinical program activities were relatively stable as increases in costs attributable to our cancer research and development programs were offset by decreases in costs attributable to our cystic fibrosis research and development costs. Equity in Loss of Unconsolidated, Majority-Owned Research and Development Joint Venture. Our equity in the net loss of the Emerald joint venture increased to $3.7 million in 2001 from $2.5 million in 2000. Losses in both years reflect our 80.1% equity share in the loss generated by Emerald's research and development and licensing activities performed by Elan and us. In 1999, our equity in the net loss of Emerald was $12.6 million, which included our 80.1% share of a $15.0 million charge for an exclusive license to Elan's drug delivery technology and our 80.1% share of Emerald's 1999 collaboration costs. In-Process Research and Development. In 2000, we recorded $28.0 million in IPR&D expenses, which reflects the portion of the purchase price paid to acquire Genovo that was allocated to acquired IPR&D. In 1999, we incurred an expense of $3.2 million to acquire from Alkermes, Inc. an exclusive sublicense to a patent and patent applications related to the manufacture of AAV vectors. We acquired this license in exchange for shares of our common stock and warrants to purchase shares of our common stock. 27 We acquired ongoing IPR&D projects from Genovo in the fields of AAV manufacturing platforms, lysosomal storage disorders, glioma, hemophilia and hyperlipidemia. The amount recorded as IPR&D expense for the Genovo acquisition represents the present value of the estimated after-tax cash flows that we believe may be generated by the purchased technology that, as of the acquisition date, had not yet reached technological feasibility. We based the cash flow projections for revenue on estimates of growth rates and the aggregate size of the markets for each product, the probability of technical success given the stage of development at the time of acquisition, royalty rates based on prior licensing agreements, product sales cycles and the estimated life of the product's underlying technology. We deducted our estimated operating expenses and income taxes from our estimated revenue projections to arrive at our estimated after-tax cash flows. The rate that we used to discount projected cash flows for in-process technologies ranged from 30% to 45%, depending on the relative risk of each in-process technology, and were based primarily on internal rates of return, cost of capital, rates of return for research and development and our weighted average cost of capital at the time of acquisition. The acquired IPR&D projects consisted of the following: . AAV manufacturing platform projects related to hyperlipidemia, hemophilia, lysosomal storage disorders, and glioma, which pursue manufacture of AAV as a stable gene therapy vector capable of delivering genes to a variety of dividing and nondividing cells. Genovo estimated that the additional research and development costs to complete the AAV manufacturing platform projects in 2007 would be approximately $23.8 million. Since the acquisition of Genovo, we have continued to perform preclinical development of the AAV manufacturing platform program we acquired from Genovo. . Technology in the area of lysosomal storage disorders, which is a family of approximately 40 genetic diseases, are normally single-gene defects that prevent the production of one or more lysosomal enzymes, which leads to abnormal deposits of substrates within lysosomal vacuoles. Genovo estimated the additional costs to complete these technologies at approximately $9.0 million, with a targeted completion date in 2007. Since the acquisition of Genovo, we have been developing with Genzyme Corporation a product candidate for treating Fabry disease, which is currently in preclinical development. . Glioma technology, intended to treat brain tumors in adults. These tumors, which are highly malignant, are nearly always fatal and currently have no known curative treatment. Genovo had been developing a gene therapy product to treat glioma with Biogen. Genovo estimated that the additional costs to complete its glioma technology at approximately $750,000, with a targeted completion date in 2006. Since our acquisition of Genovo, Biogen has begun a Phase I clinical trial of its gene therapy product candidate to treat glioma. . Technologies for treating hemophilia, which is a genetic disorder that results in prolonged external and/or internal bleeding. Genovo estimated the additional costs to complete its hemophilia technologies at approximately $12.0 million, with a targeted completion date in 2009. We are working with Wyeth/Genetics Institute to develop a gene therapy product candidate to treat hemophilia A, which is currently in preclinical development. . Technologies for treating hyperlipidemia, which is an elevation of lipids in the bloodstream that are transported as part of large molecules called lipoproteins. Genovo estimated that its hyperlipidemia technology would be completed in 2007, at an additional cost of approximately $16.0 million. We currently have limited preclinical development activities focused on hyperlipidemia. Genovo based all of these estimates and projections on assumptions believed to be reasonable at the time of the acquisition, but that are inherently uncertain and unpredictable. If we do not successfully develop these projects, our business, operating results and financial condition may be adversely affected. As of the date of the acquisition, we concluded that Genovo's technologies under development, once completed, can be economically used only for their specifically intended purposes and that these in-process technologies have no alternative future use after taking into consideration the overall objectives of the project, progress toward the objectives and uniqueness of developments to these objectives. Given the uncertainties involved in developing these product candidates, we are unable to predict whether we will be able to successfully develop any of these product 28 candidates or the time or costs involved in doing so. The risk of untimely completion includes the risk that competitors will develop alternative products. General and Administrative. We incurred general and administrative expenses of $6.2 million in 2001 as compared to $5.7 million in 2000. This increase is attributable to higher business development and legal costs, including expenses related to the spin-out of our majority-owned cell therapy subsidiary, CellExSys, Inc., and increased administrative support for our growing number of collaborative partnerships. General and administrative expenses increased to $5.7 million in 2000 from $3.6 million in 1999. This increase reflected the addition of Genovo administrative costs, costs associated with integrating Genovo's operations into our own and greater business-development and legal costs related to establishing new development collaborations. Amortization of Acquisition-Related Intangibles. We recorded amortization expenses of $6.1 million in 2001, compared to $1.7 million in 2000, for goodwill, noncompetition agreements and assembled workforce that we acquired when we purchased Genovo. We recorded no expenses related to amortization of acquired intangibles in 1999. In July 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and Other Intangible Assets," which requires use of a nonamortization approach to account for purchased goodwill and certain intangibles, effective January 1, 2002. Under this nonamortization approach, goodwill and certain intangibles will not be amortized into operating results, but instead will be reviewed for impairment and written down and charged to operating results only in the periods in which the carrying value of goodwill and certain intangibles is more than its fair value. Assembled workforce will be reclassified into goodwill in accordance with SFAS No. 142 and will be evaluated accordingly. We will continue to amortize noncompetition agreements over each agreement's estimated remaining useful life. We expect adoption of SFAS No. 142 to substantially reduce our amortization of goodwill and intangibles commencing January 1, 2002. Other Income and Expense Investment Income. Our investment income from marketable securities, all of which are cash equivalents, was $1.9 million in 2001, compared to $2.1 million in 2000 and $426,000 in 1999. These fluctuations result from fluctuations in the level of our cash and investments during the periods and, to a lesser degree, from fluctuations in interest rates. Most of our cash is invested in a short-term bond mutual fund. Interest Expense. Interest expense relates to interest on outstanding loans from our collaborative partners, notes and obligations under equipment financing arrangements and installment loans we use to finance purchases of laboratory and computer equipment, furniture and leasehold improvements. Interest expense increased to $452,000 in 2001 from $265,000 in 2000 and $235,000 in 1999. The increase in 2001 is primarily due to higher average outstanding principal balances during the second half of the year, when we drew $13.0 million on available loans and notes. We expect our interest expense to increase in 2002, to reflect our increased level of borrowings during 2001. Accounting Change In the fourth quarter of 2000, we adopted the provisions of the SEC's Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial Statements." SAB 101 generally provides that nonrefundable up-front fees for licenses and rights to product candidates must be deferred and recognized as revenue over the product development period in which we are providing continuing services related to product development. Previously, we recognized revenue from nonrefundable up-front license fees when the technology was transferred and we had fulfilled all of our significant contractual obligations relating to the fees. The cumulative effect on prior years of implementing SAB 101 resulted in a noncash charge of $3.7 million and a corresponding increase in deferred revenue. This cumulative effect adjustment was calculated as of January 1, 2000 and included in our financial results for 2000. We recognized $1.6 million of revenue in 2001 and $2.1 million in 2000 related to this change in accounting. 29 Liquidity and Capital Resources In the last three years, we have financed our operations primarily through proceeds from public and private sales of our equity securities, which have totaled approximately $47.5 million and through cash payments received from our development partners to fund the development of our product candidates, which totaled approximately $60.2 million. To a lesser degree, we have also financed our operations through grant funding, interest earned on cash, cash equivalents and short-term investments and funding under equipment leasing agreements. These financing sources have historically allowed us to maintain adequate levels of cash and investments. Our combined cash and cash equivalents totaled $25.2 million at December 31, 2001 compared with $38.6 million at December 31, 2000. During 2001, we used $23.5 million to fund our operations, $4.4 million to purchase capital equipment, $2.8 million to fund our share of the operations of the Emerald joint venture and $1.1 million to repay scheduled debt payments. The primary financing sources of our cash and cash equivalents in 2001 were $13.0 million borrowed under debt financing commitments from our corporate partners, $3.1 million in proceeds from the sale of common stock and $2.4 million received under equipment financing agreements. Our future cash requirements will depend on many factors, including the rate and extent of scientific progress in our research and development programs, the scope and results of clinical trials, the time and costs involved in obtaining regulatory approvals, the costs of our success in filing, prosecuting and enforcing patents, competing technological and market developments and the cost and success of product commercialization. We do not expect to generate positive cash flow from our operations for at least the next several years, because all of our product candidates are in pre-clinical and clinical development and we expect to continue incurring significant expense in advancing our research and development programs and commercializing our product candidates. Assuming our research efforts for existing collaborations are continued for the full research term, as of December 31, 2001 we have total committed funding of approximately $65 million. This amount consists of i) $25 million of cash on hand, ii) $17 million expected to be received in 2002 under loan and equity commitments from our strategic partners, of which approximately $4 million must be spent on the project sponsored by the partner providing the commitment, and iii) $23 million in collaborative funding that we expect to receive from our development partners primarily in 2002 and 2003 to help fund costs associated with the development programs that they sponsor. In general, the obligation of our corporate collaborators to provide research funding can be terminated by our partners with notice. In the case of such an event, the collaboration agreements specify the rights, if any, that each party will retain. We also have warrants outstanding to purchase 3.3 million shares of our common stock at $2.00 per share, which expire in April 2003. These warrants, if exercised would provide us with proceeds of up to $6.7 million. The holder of these warrants, however, may not elect to exercise the warrant to purchase shares of our common stock. Because internally generated cash flow will not be sufficient to fund development and commercialization of our product candidates, grow our business and expand research and development of our product candidates for treating additional diseases, we will require substantial additional financial resources. We may be unable to obtain funding when needed on acceptable terms, if at all. A significant portion of our operating expenses are funded through our collaborative development agreements with third parties. The initial development periods of our collaborations with Genzyme and Elan will conclude in 2002 and the initial development periods of our other collaborations will conclude in 2003. These development collaborations typically provide for extension options to continue development of product candidates. Absent new collaborative partnerships or extensions to our existing collaborative partnerships, our research and development revenue and funding will decrease in 2003. We may also need to scale a large portion of our future research and development activities to match the levels of funding provided by our collaborators or from other funding that may be available to us. Assuming that we conduct our currently planned operating activities and receive the funding anticipated from our collaborative partners, and that we are able to scale our operations to reflect any lesser amount of funding, we expect that our available cash, anticipated interest income and collaborative funding will be sufficient to finance our operations to 2004. We may require additional capital before that time, however, as a result of unanticipated loss of funding 30 from collaborative partners, the implementation of additional research and development programs or other factors discussed in the section of this Item 7 entitled "Factors Affecting Our Operating Results, Our Business and Our Stock Price." We may be unable to obtain financing when needed on acceptable terms, if at all. We intend to take advantage of additional funding opportunities as they arise. If we fail to receive substantial amounts of our currently anticipated collaborative funding or fail to secure additional collaborative agreements, or if we fail to obtain alternative financing when needed, we will need to substantially reduce the scope and size of our operations. We may also need to reduce or terminate business development or other operating activities, or delay, curtail or terminate research and development of one or more of our product candidates. The following are our contractual commitments associated with our debt and lease obligations:
Payments Due by Period ---------------------------------------------------------- Contractual Obligations Total 2002 2003-2005 2006-2007 After 2007 - ----------------------- ----------- ---------- ----------- ----------- ----------- Lease commitments..... $23,853,000 $2,903,000 $ 6,300,000 $ 2,725,000 $11,925,000 Long term obligations. 17,711,000 1,308,000 5,876,000 10,527,000 -- ----------- ---------- ----------- ----------- ----------- Total.............. $41,564,000 $4,211,000 $12,176,000 $13,252,000 $11,925,000 =========== ========== =========== =========== ===========
Impact of New Accounting Pronouncements In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangibles." SFAS No. 141 requires that business combinations be accounted for using the purchase method of accounting, effective July 1, 2001. SFAS No. 142 requires the use of a nonamortization approach to account for goodwill and certain intangibles, effective January 1, 2002. Under this nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead will be reviewed for impairment and written down through a charge to operations only in the periods in which the carrying value of goodwill and certain intangibles is more than its fair value. As of January 1, 2002, of the $31.8 million of net goodwill and other purchased intangibles, $31.4 million will be classified as goodwill and will no longer be amortized. The remaining $0.4 million will be classified apart from goodwill and will continue to be amortized over its estimated remaining useful life. We expect adoption of this accounting standard to substantially reduce our amortization of purchased goodwill and intangibles commencing January 1, 2002. The amount of goodwill amortization that would have been recorded in 2002 is approximately $5.6 million. Since future impairment reviews will be based on events and estimations in the future, we are currently unable to estimate the effect that such review may have on our consolidated financial statements. The FASB also recently issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is applicable to financial statements issued for fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of Accounting Principles Bulletin Opinion No. 30, "Reporting the Results of Operations." SFAS No. 144 provides a single accounting model for disposal of long-lived assets and significantly changes the criteria for classification of an asset as held-for-sale. If assets are classified as held-for-sale, they are not depreciated and are stated at the lower of fair value and carrying amount. SFAS No. 144 also requires us to display expected future operating losses from discontinued operations in the period or periods in which the losses are incurred, rather than as of the measurement date, as presently required. We do not expect the provisions of SFAS No. 144 to have a significant effect on our financial position or operating results as we currently do not hold any of our assets as held-for sale and we have no indication that an impairment of any of our long-lived assets exists. 31 Factors Affecting Our Operating Results, Our Business and Our Stock Price In addition to the other information contained in this annual report, you should carefully read and consider the following risk factors. If any of these risks actually occur, our business, operating results or financial condition could be harmed. This could cause the trading price of our stock to decline, and you could lose all or part of your investment. Risks Related to Product Development and Regulatory Approval If we are unable to successfully complete preclinical and clinical development of our product candidates, we will be unable to generate sufficient capital to maintain our business. All of our potential products are either in research and development or in early-stage clinical trials. Our ability to apply for and obtain regulatory approval of our potential products depends upon successful completion of additional research and development and testing, in both preclinical and clinical trials. A product candidate that appears promising at an early stage of research or development may not result in a commercially successful product. Our trials may fail to demonstrate the safety and efficacy of a prospective product, for example, or we may encounter unacceptable side effects or other problems during or after clinical trials. Should this occur, we may have to delay or discontinue development of the potential product, and corporate partners that support development of that product candidate may terminate their support. If we are unable to successfully complete preclinical and clinical development of some or all of our product candidates, we may be unable to generate sufficient product revenue to maintain our business. Completion of clinical trials may take several years or more. The number and cost of clinical trials and the length of time necessary to complete trials generally varies substantially according to the type, complexity, novelty and intended use of the product candidate. The commencement, cost and rate of completion of our clinical trials may vary or be delayed for many reasons, including the risks discussed under the subheading below entitled "Risks Related to Our Industry and Clinical Trials" and elsewhere in this "Factors Affecting Our Operating Results, Our Business and Our Stock Price" section. Failure to timely obtain regulatory approval for our product candidates could prevent or impair our ability to commercialize our products. Even if our clinical trials are successful, commercializing any product in the United States or abroad requires regulatory approval from the Food and Drug Administration, or FDA, and applicable state and foreign regulators. Moreover, the FDA and other applicable regulatory bodies must conclude at each stage of clinical testing that our clinical data suggest acceptable levels of safety and efficacy in order for us to proceed to the next stage of clinical trials. In addition, gene therapy clinical trials that receive funding from the National Institutes of Health, or NIH, are subject to review by the NIH's Office of Biotechnology Activities Recombinant DNA Advisory Committee, or RAC. Although NIH guidelines do not have regulatory status, the RAC review process can impede the initiation of the trial, even if the FDA has reviewed the trial and approved its initiation. Moreover, before an NIH-funded clinical trial can begin, the NIH's Institution Biosafety Committee must review the proposed clinical trial to ensure that there are no safety issues associated with the trial. The regulatory process in the gene therapy industry is costly, time consuming and subject to unpredictable delays, and regulatory requirements governing gene and cell therapy products frequently change. In addition, the clinical trial requirements of the FDA, NIH and other agencies and the criteria these regulators use to determine the safety and efficacy of a product candidate vary among trials and potential products. Accordingly, we cannot predict how long it will take or how much it will cost to obtain regulatory approvals for clinical trials or for manufacturing or marketing our potential products. To our knowledge, no gene therapy products have received regulatory approval in the United States or in other countries. Because our product candidates involve new and unproven technologies, we believe that regulatory approval may proceed more slowly than clinical trials involving traditional drugs. We do not expect any of our product candidates to be approved for commercial sale for at least several years. Some or all of our product candidates may never receive regulatory approval or may not receive approval for all of the clinical applications for which we seek approval. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a potential product to market could decrease our ability to generate product sales or royalty revenue. 32 Post-approval manufacturing or product problems or failure to satisfy applicable regulatory requirements could prevent or limit our ability to market our products. Our manufacturing operations are subject to the current Good Manufacturing Practices requirements of the FDA, as well as to other federal, state and local regulations such as the Occupational Health and Safety Act and the Environmental Protection Act. While we currently anticipate that we will be able to manufacture products that meet applicable regulatory requirements, we may be unable to attain or maintain compliance with current or future regulations. If we discover previously unknown manufacturing, contamination, product side effect or other problems after we receive regulatory approval for a potential product or fail to comply with applicable requirements, we may suffer restrictions on our ability to market the product or be required to withdraw the product from the market. Either of these, or an unexpected increase in the cost of compliance, could make it more difficult to maintain or improve our financial condition. Risks Related to Our Business Operations If we lose significant collaborative funding or we are unable to raise additional capital when needed, we may be unable to develop our potential products and conduct our operations. Because internally generated cash flow will not fund development and commercialization of our products, we will require substantial additional financial resources to develop and commercialize our potential products. A significant portion of our operating expenses are funded through our collaborative development agreements with third parties. If a current or future collaborator were to terminate its financial or scientific support of a potential product, we may be unable to complete development and commercialization of that product candidate. We currently have collaborations with five pharmaceutical and biotechnology companies and a public health organization that provide expertise and funding to develop our product candidates. The initial development periods of three of these collaborations--Emerald Gene Systems for enhanced gene delivery systems, Genzyme Corporation for lysosomal storage disorders and IAVI for AIDS vaccines--will conclude in 2002 or early 2003. Each of these agreements will terminate unless we and the collaborator agree to extend the agreement. Substantially all of our revenue and substantially all of our expected revenue for the next several years, are derived from our collaborations to develop product candidates. If we were to lose this revenue, or other sources of funding that our corporate partners provide, we may be unable to continue our research and development program for the potential product covered by the collaboration and our business would suffer. Assuming that we conduct our currently planned operating activities and receive the funding anticipated from existing corporate partners, and that we are able to scale our operations to reflect any lesser amount of funding, we expect that our available cash, anticipated interest income and collaborative funding will be sufficient to finance our operations to 2004. We may require additional capital before that time, however, as a result of unanticipated loss of funding from collaborative partners, the implementation of additional research and development programs or other factors discussed in this "Factors Affecting Our Operating Results, Our Business and Our Stock Price" section or elsewhere in this annual report. We may be unable to obtain financing when needed on acceptable terms, if at all. We intend to take advantage of additional funding opportunities as they arise. Sources of additional funding could include one or more of the following: . product development and funding collaborations; . technology sales; . technology licenses; . issuing debt; or . issuing equity. If we lose significant amounts of collaborative funding or we are unable to obtain additional financing when needed, we will be forced to make substantial reductions in the scope and size of our operations. We may be 33 forced to delay or terminate one or more research and development programs, curtail capital expenditures or reduce or terminate business development and other operating activities. We have a history of losses and may never become profitable, which could result in a decline in the value of our common stock and a loss of your investment. We have generated small amounts of revenue and incurred significant net losses since inception. As of December 31, 2001, we had an accumulated deficit of $178.0 million. We expect to continue to incur substantial additional losses in the future, primarily due to the following factors: . we will not generate any product revenue for at least several years because all of our product candidates are in preclinical and clinical development and have not received regulatory approval for commercial sale; and . we will continue to incur significant expense for the foreseeable future to develop our research and development programs, conduct preclinical and clinical trials, seek regulatory approval for our product candidates and provide general and administrative support for these activities. We may never generate profits and, if we do become profitable, we may be unable to sustain or increase profitability. If we are unable to obtain and maintain licenses for necessary third-party technology on acceptable terms or to develop alternative technology, we may be unable to successfully develop and commercialize our potential products. We have entered into various license agreements, both exclusive and nonexclusive, that give us and our partners rights to use technologies owned or licensed by commercial and academic organizations in the research, development and commercialization of our potential products and those of our partners. If we are unable to maintain our current licenses or obtain additional licenses on acceptable terms for technology used in our potential products, we and our corporate partners may be required to expend significant time and resources to develop or in-license replacement technology. If we are unable to do so, we may be unable to develop or commercialize some or all of our potential products. In addition, the license agreements for technology for which we hold exclusive licenses typically contain provisions requiring us to meet minimum development milestones in order to maintain the license on an exclusive basis. If we do not meet these requirements, our licensors may convert the license to a nonexclusive license or terminate the license. We may be unable to develop and commercialize some of our potential products if our relationships with scientific consultants and corporate collaborators are not successful. Our success depends on the continued availability of outside scientific consultants and corporate collaborators to perform research and to provide or develop technology and processes to advance and augment our internal efforts. Competition for scientific consultants and corporate collaborators in gene therapy is intense. If we are unsuccessful in establishing additional and maintaining existing relationships with individual and corporate collaborators, we could experience delays in our research and development or loss of access to important enabling technology. We may be unable to enter into additional collaborations on acceptable terms, if at all. Even if we maintain our current scientific collaborations or establish new relationships, they may never result in the successful development of product candidates. The development and commercialization of many of our potential products, and therefore, the success of our business, substantially depends on the performance of these scientific consultants and corporate collaborators. Because they are not our employees, we have limited control over their activities and the amount of time they devote to our business. If our scientific consultants do not dedicate sufficient time, or if our corporate partners do not commit sufficient financial and technical resources, to our research and development programs or the 34 commercialization of our potential products, the preclinical or clinical development related to the collaboration could be delayed or terminated. Even if substantial time and resources are dedicated to developing our product candidates, we may be unable to successfully complete development and commercialization of our product candidates. Our current or future collaborators may provide scientific expertise, technology or funding for, or develop or market, competing products or alternative technologies. Any rights in inventions or processes discovered by a scientific consultant may be contractually subject to the rights of his or her research institution in that work. Some consultants may have obligations to other entities under consulting or other agreements that may potentially conflict with their obligations to us. Disputes, and potentially litigation, may arise with respect to ownership of technology invented or discovered by a scientific consultant or with respect to a product candidate developed under corporate collaborations. We may be unable to secure our rights with respect to these technology or product candidates. Risks Related to Our Industry and Clinical Trials Adverse events in the field of gene therapy could damage public perception of our prospective products and negatively affect governmental approval and regulation. Public perception of our product candidates could be harmed by negative events in the field of gene therapy. For example, in November 1999, a patient with a rare metabolic disorder died in a gene therapy trial using an adenoviral vector to deliver a therapeutic gene. Genovo, a company we later acquired, was providing partial funding for this investigator-sponsored trial conducted at the University of Pennsylvania. Other patient deaths, though unrelated to gene therapy, have occurred in other clinical trials. These deaths and the resulting publicity, as well as any other adverse events in the field of gene therapy that may occur in the future, could result in a decrease in demand for any products that we may develop. The commercial success of our product candidates will depend in part on public acceptance of the use of gene therapy for preventing or treating human diseases. If public perception is influenced by claims that gene therapy is unsafe, our product candidates may not be accepted by the general public or the medical community. For example, there has been concern in the past regarding the potential safety and efficacy of gene therapy products derived from pathogenic viruses like adenoviruses. While our product candidates use AAV vectors, which are nonpathogenic, and nonviral vectors, the public and the medical community nonetheless may conclude that our technology is unsafe. Moreover, to the extent that unfavorable publicity or negative public perception arising from other biotechnology-related fields such as human cloning and stem-cell research are linked in the public mind to gene therapy, our industry will be harmed. Future adverse events in or negative public perception regarding gene therapy or the biotechnology industry could also result in greater governmental regulation, stricter labeling requirements and potential regulatory delays in the testing or approval of our potential products. Any increased scrutiny could delay or increase the costs of our product development efforts or clinical trials. The success of our early clinical trials are based on small numbers of patients over the short term and may not be indicative of results in a large number of patients or long-term efficacy. Results in early-stage clinical testing are based on limited numbers of patients. Our reported progress and results from our early phases of clinical testing may not be indicative of progress or results that will be achieved from larger populations, which could be less favorable. Moreover, we do not know if the favorable results we have achieved will have a lasting effect. If a larger group of patients does not experience positive results, or any favorable results do not demonstrate a lasting effect, the product candidate may not receive approval from the FDA for further studies or commercialization. In addition, any report of clinical trial results that are below the expectations of financial analysts or investors could result in a decline in our stock price. 35 Failure to recruit patients could delay or prevent clinical trials of our potential products, which could cause a delay or inability to develop those potential products. Identifying and qualifying patients to participate in testing our potential products is critical to our near-term success. The timing of our clinical trials depends on the speed at which we can recruit patients to participate in testing our products. We have experienced delays in our previous and current clinical trials, and we may experience similar delays in the future. If negative publicity as a result of adverse events in the biotechnology industry affects the willingness of patients to participate in our gene therapy trials, the timeline for recruiting patients, conducting trials and obtaining regulatory approval of potential products will be delayed. Delays in recruiting or enrolling patients to test our products result in increased costs, delays in advancing our product development and delays in proving the effectiveness of our technology, and could result in termination of the clinical trials altogether. Any of these events could delay or prevent the development of our product candidates. The success of our technology in animal models does not guarantee that the same results will be replicated in humans. Because animals are different from humans, the successful results of our technology in animal models may not be predictive of the results that we will see in our clinical trials with humans. If successful results for a potential product in animal models are not replicated in human clinical trials, we may have to expend greater resources to pass the clinical trial stage and obtain regulatory approval of the product candidate or abandon its development. Risks Related to Our Intellectual Property We may be unable to adequately protect our proprietary rights, which may limit our ability to successfully market any products. Our success substantially depends on our ability to protect our proprietary rights and operate without infringing on the proprietary rights of others. We own or license patents and patent applications for genes, processes, practices and techniques critical to our present and potential product candidates. If we fail to obtain and maintain patent or other intellectual-property protection for this technology, our competitors could market competing products using those genes, processes, practices and techniques. The patent process takes several years and involves considerable expense. In addition, patent applications and patent positions in the field of biotechnology are highly uncertain and involve complex legal, scientific and factual questions. Our patent applications may not result in issued patents and the scope of any patent may be reduced both before and after the patent is issued. Even if we secure a patent, the patent may not provide significant protection and may be circumvented or invalidated. We also rely on unpatented proprietary technology and technology that we have licensed on a nonexclusive basis. While we take precautions to protect our proprietary unpatented technology, we may be unable to meaningfully protect this technology from unauthorized use or misappropriation by a third party. Our competitors could also obtain rights to our nonexclusively licensed proprietary technology. In any event, other companies may independently develop substantially equivalent proprietary information and techniques. If our competitors develop and market competing products using our unpatented or nonexclusively licensed proprietary technology or substantially similar technology, our products could suffer a reduction in sales or be forced out of the market. Intellectual property disputes regarding third-party technology that we license may prevent or impair our ability to develop and commercialize our product candidates. We have licensed technology underlying several issued and pending patents, and have acquired rights to the gene delivered in our product candidate for cystic fibrosis. If our licensors fail to obtain and maintain patent or other protection for the proprietary intellectual property we license from them, we could lose our rights to the 36 intellectual property or our competitors could market competing products using the intellectual property. Licensing of intellectual property critical to our business involves complex legal, business and scientific issues and is complicated by the rapid pace of scientific discovery in our industry. Disputes may arise regarding intellectual property subject to a licensing agreement, including: . the scope of rights granted under the license agreement and other interpretation-related issues; . the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement; . the sublicensing of patent and other rights under our collaborative development relationships; . the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our scientific collaborators; and . the priority of invention of patented technology. If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates. For example, in 1997 the licensor of our licensed CFTR gene and related vector was notified that the USPTO had declared an interference proceeding to determine whether our licensor or an opposing party has the right to the patent application on the CFTR gene and related vector. Our tgAAVCF product candidate for treating cystic fibrosis uses our proprietary AAV delivery technology to deliver a normal copy of the CFTR gene. Interference proceedings before the USPTO are confidential, involving the opposing parties only, and can take several years to complete. Although we are not a party to the interference proceeding, its outcome could affect our license to the CFTR gene and related vector. The USPTO could rule that our licensor has priority of invention on both the CFTR gene and vector that we license, that our licensor has priority of invention on neither the gene nor the vector, or that our licensor has priority of invention on only the gene or only the vector. If the USPTO or Court of Appeals ultimately determines that our licensor does not have rights to both the CFTR gene and the vector, we believe that we will be subject to one of several outcomes: . our licensor could agree to a settlement arrangement under which we continue to have rights to the gene and the vector at our current license royalties; . the prevailing party could require us to pay increased license royalties to maintain our access to the gene, the vector or both, as applicable, which licensing royalties could be substantial; or . we could lose our license to the gene, the vector or both. If our licensor does not retain its rights to the CFTR gene and the vector, and we cannot maintain access at a reasonable cost or develop or license a replacement gene and vector at a reasonable cost, we will be unable to commercialize our potential tgAAVCF product. Intellectual property claims and litigation could strain our resources and subject us to significant liability for damages and invalidation of our proprietary rights. As the biotechnology industry expands, the risk increases that other companies may claim that our processes and potential products infringe on their patents. In addition, administrative proceedings, litigation or both may be necessary to enforce our intellectual property rights or determine the rights of others. Defending or pursuing these claims, regardless of their merit, would be costly and would likely divert management's attention and resources away from our operations. If there were to be an adverse outcome in a litigation or interference proceeding, we could face potential liability for significant damages or be required to obtain a license to the patented process or technology at issue, or both. If we are unable to obtain a license on acceptable terms, or to develop or obtain alternative technology or processes, we may be unable to manufacture or market any product or potential product that uses the affected process or technology. 37 Risks Related to the Capital Markets and Dilution Market fluctuations or volatility could cause the market price of our common stock to decline and limit our ability to raise capital. In recent years, the stock market in general and the market for biotechnology-related companies in particular have experienced extreme price and volume fluctuations, often unrelated to the operating performance of the affected companies. Our common stock has experienced, and is likely to continue to experience, price fluctuations that cause the market price of our common stock to decline. In addition, the trading price of our common stock could decline significantly as a result of sales of a substantial number of shares of our common stock, or the perception that significant sales could occur. Market fluctuations in the price of our common stock could adversely affect our collaborative opportunities and our future ability to sell equity securities at a price we deem appropriate, and you could lose all or part of your investment. Our future capital-raising activities could involve the issuance of equity securities, which would dilute your investment and could result in a decline in the trading price of our common stock. To meet our long-term funding requirements, we may sell securities in the public or private equity markets if and when conditions are favorable, even if we do not have an immediate need for additional capital at that time. Furthermore, we may enter into financing transactions at prices that represent a substantial discount to market price. Raising funds through the issuance of equity securities will dilute the ownership of our existing shareholders. A negative reaction by investors and securities analysts to any discounted sale of our equity securities could result in a decline in the trading price of our common stock. Additional Risks Related to Our Industry Our use of hazardous materials exposes us to liability risks and regulatory limitations on their use, either of which could reduce our ability to generate product revenue. Our research and development activities involve the controlled use of hazardous materials, including chemicals, biological materials and radioactive compounds. Although we believe that our safety procedures for handling, storing and disposing of these materials comply with applicable laws and regulations, we cannot eliminate the risk of accidental contamination or injury from hazardous materials. If a hazardous material accident occurred, we could be held liable for any resulting damages. This liability could exceed our financial resources. These hazardous materials are subject to federal, state and local regulations. We may be required to incur significant costs to comply with future environmental or other laws. Accidents unrelated to our operations could cause federal, state or local regulatory agencies to restrict our access to hazardous materials needed in our research and development efforts. If our access to these materials is limited, we could experience delays in our research and development programs. Paying damages or experiencing delays caused by restricted access could reduce our ability to generate revenue and make it more difficult to fund our operations. The intense competition and rapid technological change in our market may result in pricing pressures and failure of our potential products to achieve market acceptance. We face increasingly intense competition from a number of commercial entities and institutions that are developing gene therapy and cell therapy technologies. Our competitors include early-stage and established gene delivery companies, other biotechnology companies, pharmaceutical companies, universities, research institutions and government agencies developing gene therapy products or other biotechnology-based therapies designed to treat the diseases on which we focus. We also face competition from companies using more traditional approaches to treating human diseases, such as surgery, drugs and other pharmaceutical products. In addition, we compete with other companies to acquire products or technology from research institutions or universities. Many of our competitors have substantially more financial and infrastructure resources and larger 38 research and development staffs than we do. Many of our competitors also have greater experience and capabilities than we do in: . research and development; . clinical trials; . obtaining FDA and other regulatory approvals; . manufacturing; and . marketing and distribution. In addition, the competitive positions of other companies, institutions and organizations, including smaller competitors, may be strengthened through collaborative relationships. Consequently, our competitors may be able to develop, obtain patent protection for, obtain regulatory approval for or commercialize new products more rapidly than we do, or manufacture and market competitive products more successfully than we do. This could limit the prices we could charge for the products we are able to market or result in our products failing to achieve market acceptance. Gene therapy is a new and rapidly evolving field and is expected to continue to undergo significant and rapid technological change and competition. Our competitors may develop new technologies and products that are available for sale before our potential products or that may be more effective than our potential products. Rapid technological development by our competitors, including development of technologies, products or processes that are more effective or more economically feasible than those we have developed, could result in our actual and proposed technologies, products or processes losing market share or becoming obsolete. Healthcare reform measures could impair our ability to successfully commercialize our potential products and become profitable. Increasing efforts by governmental and third-party payors, such as Medicare, private insurance plans and managed care organizations, to cap or reduce healthcare costs will affect our ability to commercialize our product candidates and become profitable. We believe that third-party payors will attempt to reduce healthcare costs by limiting both coverage and level of reimbursement for new products approved by the FDA. There have been and will continue to be a number of federal and state proposals to implement government controls on pricing. The adoption of these proposals could affect our ability to successfully commercialize our product candidates. Even if the government does not adopt any such proposals or reforms, their announcement could impair our ability to raise capital. Our ability to successfully commercialize our product candidates will substantially depend on the willingness of third-party payors to provide adequate reimbursement for the cost of our products. Sales of medical products and treatments substantially depend, both domestically and abroad, on the availability of reimbursement to the consumer from third-party payors. Considerable pressure to reduce healthcare costs may cause reimbursement to become more restricted in the future. Our potential products may not be considered cost-effective by third-party payors, who may not provide coverage at the price set for our products, if at all. If purchasers or users of our products are unable to obtain adequate reimbursement, they may forego or reduce their use of our products. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize a sufficient return on our investment. 39 Additional Risks Related to Our Business Operations Our business will not succeed if our product candidates fail to achieve market acceptance. Even if our potential products succeed in clinical trials and are approved for marketing, these products may never achieve market acceptance. If marketing our products is unsuccessful for any reason, including greater effectiveness or economic feasibility of competing products or treatments, the failure of the medical community or the public to accept or use any products based on gene delivery, inadequate marketing and distribution capabilities or other reasons discussed in this section or elsewhere in this annual report, we will be unable to generate sufficient product revenues to maintain our business. Our limited manufacturing capability may limit our ability to successfully introduce our potential products. We currently do not have the capacity to manufacture large-scale commercial quantities of our potential products. To do so, we will need to expand our current facilities and staff or supplement them through the use of contract providers. Our current manufacturing facility, which is designed for manufacturing our AAV vectors for clinical and development purposes, is subject to initial and ongoing regulation by the FDA and other government agencies, and any future manufacturing facilities that we may construct for large-scale commercial production will also be subject to regulation. We may be unable to obtain regulatory approval for or maintain in operation this or any other manufacturing facility. If we are unable to obtain and maintain the necessary manufacturing capabilities, either alone or through third parties, we will be unable to manufacture sufficient product to sustain our business. In addition, we are unlikely to become profitable if we or our contract providers are unable to manufacture our products in a cost-effective manner. If we do not attract and retain qualified personnel, we will be unable to successfully develop our potential products. Our future success depends in large part on our ability to attract and retain key technical and management employees and scientific advisors. We have programs in place to retain personnel, including competitive compensation packages and programs to create a positive work environment. Because other companies, research and academic institutions and other organizations in our field compete intensely for employees, however, we may be unable to retain our existing personnel or attract additional qualified employees and advisors. If we experience excessive turnover or difficulties in recruiting new personnel, our research and development could be delayed and we could experience difficulties in generating sufficient revenue to maintain our business. If we do not develop adequate sales, marketing and distribution capabilities, either alone or with our business partners, we will be unable to generate sufficient product revenue to maintain our business. We have no experience in sales, marketing and distribution. To successfully commercialize any products that may result from our development programs, we will need to develop these capabilities, either on our own or with others. We intend to enter into collaborations with corporate partners to utilize their mature marketing and distribution capabilities. However, we may be unable to enter into marketing and distribution agreements on favorable terms, if at all. While we believe that our corporate partners will be motivated to market and distribute our potential products, our current and potential future partners may not commit sufficient resources to commercializing our products and technology on a timely basis. If our corporate partners do not adequately market and distribute our products and we are unable to develop the necessary marketing and distribution capabilities on our own, we will be unable to generate sufficient product revenue to sustain our business. Product liability and other claims and product recalls could exceed our insurance coverage and damage our reputation, which could significantly harm our financial condition. Clinical trials and the marketing of any potential products may expose us to liability claims resulting from the testing or use of our products. Gene therapy treatments are new and unproven. Potential known and unknown 40 side effects of gene therapy may be serious and potentially life-threatening. Product liability claims may be made by clinical trial participants, consumers, health care providers or other sellers or users of our products. We may also face product recalls and adverse publicity resulting from a product recall or a liability claim against us or a collaborative partner. Although we currently maintain liability insurance, the costs of product liability and other claims against us may exceed our insurance coverage. In addition, we may require increased liability coverage as additional product candidates are used in clinical trials and commercialized. Liability insurance is expensive and may not continue to be available on acceptable terms. A product liability or other claim or product recall not covered by or exceeding our insurance coverage could significantly harm our financial condition. In addition, a product recall or a liability claim against us, one of our partners or another gene therapy company could significantly harm our reputation and make it more difficult to obtain the funding and collaborative partnerships necessary to maintain our business. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Because of the short-term nature of our investments, we believe that our exposure to market rate fluctuations on those investments is minimal. Currently, we neither employ any derivative or other financial instruments or derivative commodity instruments to hedge any market risks nor plan to employ these instruments in the future. At December 31, 2001, we held $25.2 million in cash and cash equivalents, which are primarily invested in a short-term bond fund invested in securities that, on the average, mature in less than 12 months. An analysis of the impact on these instruments of a hypothetical 10% change in short-term interest rates compared to interest rates at December 31, 2001, indicates that such change would not have a significant impact on expected fiscal year 2002 earnings. 41 Item 8. Financial Statements and Supplementary Data
Page ---- Report of Ernst & Young LLP, Independent Auditors.......................................... 43 Consolidated Balance Sheets as of December 31, 2001 and 2000............................... 44 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999. 45 Consolidated Statements of Shareholders' Equity for the period from January 1, 1999 through December 31, 2001........................................................................ 46 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999. 47 Notes to Consolidated Financial Statements................................................. 48
42 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Targeted Genetics Corporation We have audited the accompanying consolidated balance sheets of Targeted Genetics Corporation as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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 consolidated financial position of Targeted Genetics Corporation at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, in 2000 the Company changed its method of accounting for revenue recognition. ERNST & YOUNG LLP Seattle, Washington February 14, 2002 43 TARGETED GENETICS CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------- 2001 2000 ------------- ------------- ASSETS Current assets: Cash and cash equivalents.................................................... $ 25,186,000 $ 38,630,000 Accounts receivable.......................................................... 2,475,000 3,087,000 Receivable from unconsolidated, majority-owned research and development joint venture.................................................. 893,000 177,000 Prepaid expenses and other................................................... 935,000 292,000 ------------- ------------- Total current assets.................................................. 29,489,000 42,186,000 Property and equipment, net..................................................... 8,308,000 6,206,000 Goodwill and other purchased intangibles, net................................... 31,752,000 37,821,000 Other assets.................................................................... 1,489,000 1,761,000 ------------- ------------- $ 71,038,000 $ 87,974,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses........................................ $ 3,452,000 $ 3,579,000 Payable to unconsolidated, majority-owned research and development joint venture.............................................................. 1,123,000 262,000 Accrued employee expenses.................................................... 1,114,000 696,000 Deferred revenue............................................................. 4,631,000 6,906,000 Current portion of long-term obligations..................................... 1,308,000 838,000 ------------- ------------- Total current liabilities............................................. 11,628,000 12,281,000 Deferred rent................................................................... 640,000 404,000 Long-term obligations........................................................... 16,403,000 2,447,000 Deferred revenue................................................................ 4,966,000 9,410,000 Commitments Shareholders' equity: Preferred stock, $0.01 par value, 6,000,000 shares authorized: Series A preferred stock, 800,000 shares designated, none issued and outstanding............................................................ -- -- Series B convertible exchangeable preferred stock, 12,015 shares designated, issued and outstanding at December 31, 2001 and 2000, liquidation preference of $12,015,000............................ -- -- Common stock, $0.01 par value, 80,000,000 shares authorized, 44,125,677 shares issued and outstanding at December 31, 2001 and 42,608,943 shares at December 31, 2000..................................... 441,000 426,000 Additional paid-in capital................................................... 214,942,000 213,818,000 Accumulated deficit.......................................................... (177,982,000) (150,812,000) ------------- ------------- Total shareholders' equity............................................ 37,401,000 63,432,000 ------------- ------------- $ 71,038,000 $ 87,974,000 ============= =============
See accompanying notes to the consolidated financial statements. 44 TARGETED GENETICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ---------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Revenue: Collaborative agreements.................................... $ 16,117,000 $ 9,553,000 $ 6,402,000 Collaborative agreement with unconsolidated, majority- owned research and development joint venture.............. 2,763,000 1,850,000 446,000 ------------ ------------ ------------ Total revenue........................................... 18,880,000 11,403,000 6,848,000 ------------ ------------ ------------ Operating expenses: Research and development.................................... 31,546,000 19,312,000 14,291,000 Equity in net loss of unconsolidated, majority-owned research and development joint venture.................... 3,666,000 2,474,000 12,610,000 Acquired in-process research and development................ -- 28,029,000 3,200,000 Amortization of acquisition-related intangibles............. 6,069,000 1,686,000 -- General and administrative.................................. 6,203,000 5,707,000 3,593,000 ------------ ------------ ------------ Total operating expenses................................ 47,484,000 57,208,000 33,694,000 ------------ ------------ ------------ Loss from operations........................................... (28,604,000) (45,805,000) (26,846,000) Investment income.............................................. 1,886,000 2,097,000 426,000 Interest expense............................................... (452,000) (265,000) (235,000) ------------ ------------ ------------ Loss before cumulative effect of change in accounting principle (27,170,000) (43,973,000) (26,655,000) Cumulative effect of change in accounting principle............ -- (3,682,000) -- ------------ ------------ ------------ Net loss....................................................... $(27,170,000) $(47,655,000) $(26,655,000) ============ ============ ============ Net loss applicable to common shareholders: Net loss.................................................... $(27,170,000) $(47,655,000) $(26,655,000) Accretion of dividend on preferred stock.................... (945,000) (885,000) (376,000) ------------ ------------ ------------ Net loss applicable to common shareholders..................... $(28,115,000) $(48,540,000) $(27,031,000) ============ ============ ============ Computation of net loss per common share: Loss before cumulative effect of change in accounting principle................................................. $ (0.64) $ (1.19) $ (0.84) Cumulative effect of change in accounting principle......... -- (0.10) -- ------------ ------------ ------------ Net loss per common share (basic and diluted)............... $ (0.64) $ (1.29) $ (0.84) ============ ============ ============ Shares used in computation of net loss per common share........ 43,927,822 37,752,164 32,173,756 ============ ============ ============
See accompanying notes to the consolidated financial statements. 45 TARGETED GENETICS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Preferred Stock Common Stock Additional Other --------------- -------------------- Paid-In Accumulated Comprehensive Shares Amount Shares Amount Capital Deficit Income ------ ------ ---------- -------- ------------ ------------- ------------- Balance at January 1, 1999........... -- $ -- 30,652,375 $307,000 $ 88,149,000 $ (76,502,000) $ 28,000 Net loss--1999.................... -- -- -- (26,655,000) Unrealized gains on securities available for sale............... -- -- -- -- (44,000) Comprehensive loss................ Issuance of Series B convertible exchangeable preferred stock for interest in unconsolidated, majority-owned research and development joint venture........ 12,015 -- -- -- 12,015,000 -- -- Sale of common stock to Celltech for cash, net of issuance costs of $14,000........ -- -- 677,392 7,000 1,480,000 -- -- Sale of common stock to Elan, net of issuance costs of $57,000.......................... -- -- 2,148,899 21,000 4,921,000 -- -- Issuance of common stock and warrants to Alkermes for technology rights, net of issuance costs of $18,000........ -- -- 500,000 5,000 3,177,000 -- -- Exercise of stock options......... -- -- 40,509 -- 56,000 -- -- ------ ----- ---------- -------- ------------ ------------- -------- Balance at December 31, 1999......... 12,015 -- 34,019,175 340,000 109,798,000 (103,157,000) (16,000) Net loss--2000.................... -- -- -- (47,655,000) Unrealized losses on securities available for sale............... -- -- -- -- 16,000 Comprehensive loss................ Sale of common stock for cash, net of issuance costs of $2,181,000....................... -- -- 2,164,285 22,000 28,097,000 -- -- Issuance of common stock to Elan for cash, net of issuance costs of $4,000.................. -- -- 382,739 4,000 4,992,000 -- -- Issuance of common stock in Genovo acquisition............... -- -- 5,250,805 53,000 66,077,000 -- -- Exercise of stock options......... -- -- 730,765 7,000 4,600,000 -- -- Exercise of warrants.............. -- -- 61,174 -- 254,000 -- -- ------ ----- ---------- -------- ------------ ------------- -------- Balance at December 31, 2000......... 12,015 -- 42,608,943 426,000 213,818,000 (150,812,000) -- Net loss and comprehensive loss--2001....................... -- -- -- -- -- (27,170,000) -- Cancellation of shares held in escrow related to Genovo acquisition...................... -- -- (155,649) (2,000) (1,998,000) -- -- Exercise of stock options......... -- -- 672,383 7,000 1,052,000 -- -- Exercise of warrants.............. -- -- 1,000,000 10,000 1,990,000 -- -- Stock based compensation.......... -- -- -- -- 80,000 -- -- ------ ----- ---------- -------- ------------ ------------- -------- Balance at December 31, 2001......... 12,015 $ -- 44,125,677 $441,000 $214,942,000 $(177,982,000) $ -- ====== ===== ========== ======== ============ ============= ========
Total Shareholders' Equity ------------- Balance at January 1, 1999........... $ 11,982,000 Net loss--1999.................... (26,655,000) Unrealized gains on securities available for sale............... (44,000) ------------ Comprehensive loss................ (26,699,000) Issuance of Series B convertible exchangeable preferred stock for interest in unconsolidated, majority-owned research and development joint venture........ 12,015,000 Sale of common stock to Celltech for cash, net of issuance costs of $14,000........ 1,487,000 Sale of common stock to Elan, net of issuance costs of $57,000.......................... 4,942,000 Issuance of common stock and warrants to Alkermes for technology rights, net of issuance costs of $18,000........ 3,182,000 Exercise of stock options......... 56,000 ------------ Balance at December 31, 1999......... 6,965,000 Net loss--2000.................... (47,655,000) Unrealized losses on securities available for sale............... 16,000 ------------ Comprehensive loss................ (47,639,000) Sale of common stock for cash, net of issuance costs of $2,181,000....................... 28,119,000 Issuance of common stock to Elan for cash, net of issuance costs of $4,000.................. 4,996,000 Issuance of common stock in Genovo acquisition............... 66,130,000 Exercise of stock options......... 4,607,000 Exercise of warrants.............. 254,000 ------------ Balance at December 31, 2000......... 63,432,000 Net loss and comprehensive loss--2001....................... (27,170,000) Cancellation of shares held in escrow related to Genovo acquisition...................... (2,000,000) Exercise of stock options......... 1,059,000 Exercise of warrants.............. 2,000,000 Stock based compensation.......... 80,000 ------------ Balance at December 31, 2001......... $ 37,401,000 ============
See accompanying notes to the consolidated financial statements. 46 TARGETED GENETICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Operating activities: Net loss........................................................ $(27,170,000) $(47,655,000) $(26,655,000) Adjustments to reconcile net loss to net cash used in operating activities: Cumulative effect of change in accounting principle adjustment................................................ -- 3,682,000 -- Equity in net loss of unconsolidated, majority-owned research and development joint venture.................... 3,666,000 2,474,000 12,610,000 Acquired in-process research and development................ -- 28,029,000 3,200,000 Depreciation and amortization............................... 2,623,000 1,473,000 1,614,000 Amortization of acquisition-related intangibles............. 6,069,000 1,686,000 -- Stock-based compensation expense............................ 80,000 301,000 -- Changes in assets and liabilities: Increase (decrease) in deferred revenue.................. (6,719,000) 12,635,000 -- Increase in accounts receivable.......................... (1,388,000) (1,695,000) (1,289,000) Decrease (increase) in accounts receivable from unconsolidated, majority-owned research and development joint venture.............................. (716,000) 269,000 (446,000) Decrease (increase) in prepaid expenses and other........ (643,000) (396,000) 62,000 Increase (decrease) in current liabilities............... 241,000 (972,000) 1,221,000 Increase in deferred rent................................ 236,000 364,000 40,000 Increase (decrease) in other assets...................... 178,000 (800,000) -- ------------ ------------ ------------ Net cash used in operating activities.............................. (23,543,000) (605,000) (9,643,000) ------------ ------------ ------------ Investing activities: Purchases of property and equipment............................. (4,411,000) (2,797,000) (1,856,000) Investment in unconsolidated, majority-owned research and development joint venture..................................... (2,805,000) (2,807,000) (595,000) Maturities and sales of securities available for sale........... -- 3,024,000 7,393,000 Purchases of securities available for sale...................... -- -- (483,000) Net cash acquired in acquisition................................ -- 359,000 -- ------------ ------------ ------------ Net cash provided by (used in) investing activities............. (7,216,000) (2,221,000) 4,459,000 ------------ ------------ ------------ Financing activities: Loan proceeds from collaborative partners....................... 13,000,000 -- 1,000,000 Net proceeds from sales of capital stock........................ 3,059,000 37,976,000 6,468,000 Proceeds from leasehold improvements and equipment financing arrangements........................................ 2,401,000 671,000 1,294,000 Payments under leasehold improvements and equipment financing arrangements........................................ (1,145,000) (1,292,000) (1,348,000) ------------ ------------ ------------ Net cash provided by financing activities....................... 17,315,000 37,355,000 7,414,000 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents............... (13,444,000) 34,529,000 2,230,000 Cash and cash equivalents, beginning of year....................... 38,630,000 4,101,000 1,871,000 ------------ ------------ ------------ Cash and cash equivalents, end of year............................. $ 25,186,000 $ 38,630,000 $ 4,101,000 ============ ============ ============ Supplemental information: Cash paid for interest.......................................... $ 269,000 $ 245,000 $ 203,000 Acquisition-related common stock issued (recovered)............. (2,000,000) 66,130,000 -- Preferred stock dividend........................................ 945,000 885,000 376,000 Preferred stock issuance in exchange for interest in unconsolidated, majority-owned research and development joint venture..................................... -- -- 12,015,000
See accompanying notes to the consolidated financial statements 47 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Business and Summary of Significant Accounting Policies Description of Business Targeted Genetics was incorporated in the state of Washington in March 1989. We operate our business in one reportable segment, research and product development. On both our own behalf and in connection with various collaborative agreements with others, we conduct research and development of gene therapy products and technologies for treating acquired and inherited diseases. Basis of Presentation Our consolidated financial statements include the accounts of Targeted Genetics, our wholly owned subsidiaries Genovo, Inc. and TGCF Manufacturing Corporation, and our majority owned subsidiary, CellExSys, Inc. The consolidated financial statements do not include Emerald Gene Systems, Ltd. our unconsolidated, majority-owned research and development joint venture with Elan International Services Ltd., a wholly owned subsidiary of Elan Corporation plc, because we do not have operating control of the joint venture. All significant inter-company transactions have been eliminated in consolidation. Cash Equivalents We consider to be cash equivalents all short-term investments that have a maturity at the time of purchase of three months or less, are readily convertible into cash and have insignificant interest rate risk. Our cash equivalents, recorded at cost, which approximates fair market value, consist principally of money market accounts and shares of a short-term, limited-maturity mutual fund. Fair Value of Financial Instruments We believe that the carrying amounts of financial instruments such as cash and cash equivalents, accounts receivable and accounts payable approximate fair value, because of the short-term nature of these items. We believe that the carrying amounts of the notes payable and equipment financing obligations approximate fair value because the interest rates on these instruments change with, or approximate, market interest rates. Property and Equipment Our financial statements present property and equipment at cost less accumulated depreciation, which includes the amortization of assets recorded under equipment financing leases. We compute depreciation of property and equipment using the straight-line method over the asset's estimated useful life, which ranges from three to seven years. Leasehold improvements are amortized over the asset's estimated useful life or the lease term, whichever is shorter. Purchased Intangible Assets Purchased intangible assets consist of acquired technology that is core to our development programs and goodwill. We amortize our purchased intangibles on the straight-line method over periods ranging from two to seven years. Long-Lived Assets In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," we review the carrying value of 48 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) intangible assets and other long-lived assets on a regular basis for the existence of facts or circumstances, both internal and external, that may indicate impairment. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. To date, we have no indication that an impairment of our intangible and other long-lived assets exists. Stock Compensation As permitted by the provisions of Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based Compensation," we have elected to follow Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for employee stock option grants, and we apply the disclosure-only provisions to account for our stock option plans. We do not recognize any compensation expense for options granted to employees because we grant all options at fair market value on the date of grant. Options granted to consultants are recorded as an expense over their vesting term based on their fair value, which is determined using the Black-Scholes method. Revenue Recognition under Collaborative Agreements We generate revenue from technology licenses, collaborative research arrangements and cost reimbursement contracts. Revenue under technology licenses and collaborative agreements typically consists of nonrefundable, up-front license fees, collaborative research funding, technology access fees and various other payments. Revenue from nonrefundable, up-front license fees and technology access payments is recognized ratably over the development period in the collaborative agreement. Revenue associated with performance milestones is recognized as earned, based upon the achievement of the milestones defined in the applicable agreements. Revenue under research and development cost-reimbursement contracts is recognized as the related costs are incurred. Payments received in excess of amounts earned are classified as deferred revenue. We previously recognized nonrefundable, up-front license fees as revenue when the technology was transferred and when all of its significant contractual obligations relating to the fees had been fulfilled. Effective January 1, 2000, we changed our method of accounting for nonrefundable up-front license fees to recognize such fees over the term of the related research and development collaboration arrangement on a straight-line basis, as this method best matches the effort provided. We believe that this change in accounting principle is preferable, based on guidance provided in the SEC's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The $3.7 million cumulative effect of the change in accounting principle, calculated as of January 1, 2000, was reported as a charge for the year 2000. The cumulative effect was recorded as deferred revenue that was recognized as revenue over the remaining term of the research and development collaboration agreements. $2.1 million ($0.06 per share) of the $3.7 million cumulative effect was amortized as deferred revenue in 2000 and $1.6 million ($0.04 per share) was amortized in 2001. Had the change in accounting been in effect retroactively to January 1, 1999, net loss for 1999 would have decreased by $2.1 million ($0.07 per share). Relationships with Strategic Partners In connection with our collaborations with Biogen, Inc., Celltech Group plc and Genzyme Corporation and our joint venture with Elan, each strategic partner purchased shares of our common stock. The number of shares of our common stock that we issued to each of our strategic partners represented less than 10% of our total shares then outstanding. We cannot control or monitor shares of our stock that these partners may buy or sell in open market transactions. Although each of our collaborative partners influence the activities specific to their collaborations with us, our partners do not influence our management or operating policies generally or otherwise significantly influence our operating activities. 49 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Significant Revenue Relationships and Concentration of Risk Four companies accounted for 100% of the revenue we recorded from collaborative agreements in 2001 and 2000. One company accounted for 100% of our revenue from collaborative agreements in 1999. Emerald Gene Systems, our 80.1% unconsolidated, majority-owned research and development joint venture with Elan, accounted for all of our revenue from collaborative agreements with unconsolidated joint ventures. A change in the level of work or funding received from any one of these collaborative partners could disrupt our business and adversely affect our cash flow and results of operations. Research and Development Costs Research and development costs are expensed as incurred. Costs and expenses related to programs conducted under collaborative agreements that result in collaborative revenue totaled $11.4 million in 2001, $6.6 million in 2000 and $6.7 million in 1999. See Notes 6 and 7 for more detailed information. Net Loss Per Common Share Net loss per common share is based on net loss after giving effect to preferred stock dividends, divided by the weighted average number of common shares outstanding during the period. Preferred stock dividends are not included in our net loss amount and are reflected only in the computation of net loss applicable to common shareholders. Our diluted net loss per share is the same as our basic net loss per share because all stock options, warrants and other potentially dilutive securities are antidilutive and therefore excluded from the calculation of diluted net loss per share. The total number of shares that we excluded from the calculations of net loss per share were 13,535,778 shares in 2001, 14,028,623 shares in 2000 and 12,632,797 shares in 1999. 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. Our actual results may differ from those estimates. Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangibles." SFAS No. 141 requires that business combinations be accounted for using the purchase method of accounting, effective July 1, 2001. SFAS No. 142 requires the use of a nonamortization approach to account for goodwill and certain intangibles, effective January 1, 2002. Under this nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead will be reviewed for impairment and written down through a charge to operations only in the periods in which the carrying value of goodwill and certain intangibles is more than its fair value. As of January 1, 2002, of the $31.8 million of net goodwill and other purchased intangibles, $31.4 million will be classified as goodwill and will no longer be amortized. The remaining $0.4 million will be classified apart from goodwill and will continue to be amortized over its estimated remaining useful life. We expect adoption of this accounting standard to substantially reduce our amortization of purchased goodwill and intangibles commencing January 1, 2002. The amount of goodwill amortization that would have been recorded in 2002 is approximately $5.6 million. Since future impairment reviews will be based on events and estimations in the future, we are currently unable to estimate the effect that such review may have on our consolidated financial statements. The FASB also recently issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is applicable to financial statements issued for fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of APB Opinion No. 30, "Reporting the Results of Operations." 50 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) SFAS No. 144 provides a single accounting model for disposal of long-lived assets and significantly changes the criteria for classification of an asset as held-for-sale. If assets are classified as held-for-sale, they are not depreciated and are stated at the lower of fair value and carrying amount. SFAS No. 144 also requires us to display expected future operating losses from discontinued operations in the period or periods in which the losses are incurred, rather than as of the measurement date, as presently required. We do not expect the provisions of SFAS No. 144 to have a significant effect on our financial position or operating results as we currently do not hold any of our assets as held-for sale and we have no indication that an impairment of any of our long-lived assets exists. Reclassifications Certain reclassifications have been made to conform prior year results to the current year presentation. 2. Long-Lived Assets Property and equipment consisted of the following:
December 31, ------------------------- 2001 2000 ------------ ----------- Furniture and equipment....................... $ 9,848,000 $ 7,288,000 Leasehold improvements........................ 9,433,000 7,389,000 ------------ ----------- 19,281,000 14,677,000 Less accumulated depreciation and amortization (10,973,000) (8,471,000) ------------ ----------- $ 8,308,000 $ 6,206,000 ============ ===========
We finance some of our equipment through equipment financing arrangements and pledge the equipment as security for the financing. The cost of equipment that has been pledged under financing arrangements totaled $3.7 million at December 31, 2001 and $2.4 million at December 31, 2000, with related accumulated depreciation of $1.3 million for each period. Goodwill and other purchased intangibles consisted of the following:
December 31, ------------------------ 2001 2000 ----------- ----------- Goodwill...................................... $37,892,000 $37,892,000 Other purchased intangibles................... 1,615,000 1,615,000 ----------- ----------- 39,507,000 39,507,000 Less accumulated depreciation and amortization (7,755,000) (1,686,000) ----------- ----------- $31,752,000 $37,821,000 =========== ===========
51 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. Long-Term Obligations Long-term obligations consisted of the following:
December 31, ----------------------- 2001 2000 ----------- ---------- Loan payable to Biogen.......... $10,000,000 $ -- Loan payable to Celltech........ 2,000,000 1,000,000 Convertible loan payable to Elan 2,000,000 -- Equipment financing obligations. 3,153,000 1,732,000 Other long-term obligations..... 558,000 553,000 ----------- ---------- 17,711,000 3,285,000 Less current portion............ (1,308,000) (838,000) ----------- ---------- $16,403,000 $2,447,000 =========== ==========
Future aggregate principal payments related to long-term obligations are $1.3 million in 2002, $3.0 million in 2003, $0.7 million in 2004, $2.2 million in 2005 and $10.5 million in 2006. During 2001, we drew $10.0 million against a $10.0 million unsecured loan agreement from Biogen. Outstanding borrowings under this loan bear interest at the one-year LIBOR rate plus 100 basis points reset annually. At December 31, 2001, the interest rate was 3.4%. The loan agreement contains financial covenants establishing limits on our ability to declare or pay cash dividends. The loan is due in August 2006 and we may repay it at anytime without penalty. Under our agreements with Celltech, we have drawn $2.0 million under a $2.0 million unsecured loan facility to partially fund the cost of establishing our tgAAVCF manufacturing facilities for clinical trials. This loan is due in November 2003. Interest accrues at a rate that is 150 basis points over the one-month LIBOR rate, but neither less than 5% nor more than 7% per year. At December 31, 2001, the interest rate was 5.0%. This loan agreement limits our ability to declare or pay cash dividends. We can, at our option and with Celltech's consent, repay the loan with our common stock at any time during the loan term, at a conversion price equal to the average closing price of the common stock over a specified period preceding the repayment date. In connection with the formation of Emerald (see Note 7), Elan has committed to loan us up to $12.0 million, in one or more draws, to support our share of Emerald's operating costs. Interest on borrowings under this loan facility accrue at a rate of 12.0% per annum, compounded semi-annually. Principal and interest outstanding under this loan facility are due in July 2005, payable either in cash or shares of our common stock. Interest is payable semi-annually and, if we elect not to pay, the interest is capitalized to principal and treated as a new borrowing from Elan. As of December 31, 2001, we had borrowed $2.0 million under this facility. Elan has the option to convert principal and interest outstanding under the loan facility, on a per-draw basis, into shares of our common stock. If Elan elects to convert outstanding amounts into shares of our common stock, the conversion price will be 150% of the average closing price of our common stock for a specified period of time before the date of the applicable draw on the note. As of December 31, 2001, if Elan had elected to convert the outstanding principal under the loan facility, it would have received 335,570 shares of our common stock. We have the option to prepay principal and interest outstanding under the loan facility, in whole or on a per-draw basis, in either cash or shares of our common stock. If we elect to prepay outstanding amounts with our common stock, the conversion price will equal 150% of the average closing price of our common stock for a specified period of time before the date of the applicable draw and the average closing price of our common 52 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) stock for a specified period of time before the date of prepayment. If we elect to prepay the outstanding amounts in cash, we will pay an amount equal to the higher of the amount of principal and interest outstanding under the applicable draw and the fair market value of our common stock into which the outstanding amount is convertible, based on a price per share equal to the average closing price of our common stock for a specified period of time before the date of prepayment. If the issuance of shares to Elan upon conversion of amounts outstanding under the loan facility would result in Elan owning more than 19.9% of our total shares outstanding and we are unable to obtain shareholder approval of such issuance, we may be unable to issue shares of our common stock to repay amounts outstanding under the loan facility. Equipment financing obligations relate to secured financing for the purchase of capital equipment and leasehold improvements. These obligations bear interest at rates ranging from 7.75% to 14.97% and mature from January 2002 to October 2005. Other long-term obligations include a promissory note payable to Biogen, which we assumed in September 2000 as part of our acquisition of Genovo. This promissory note has an outstanding principal amount of $650,000 and bears no interest. At the time of the acquisition, we discounted the note to reflect market interest rates, using an imputed interest rate of 5.6%. The note is due in September 2005. 4. Shareholders' Equity Series B Preferred Stock In July 1999, Elan purchased $12,015,000 of our Series B preferred stock in conjunction with the formation of Emerald (see Note 7). The Series B preferred stock is convertible at the holder's option and bears an annual dividend of 7%, which accrues semi-annually and is added to the carrying amount of the stock. The Series B preferred stock had accrued dividends of $2.2 million as of December 31, 2001 and $1.3 million as of December 31, 2000. The Series B preferred stock is convertible until July 2005, at Elan's option, into shares of our common stock, at a conversion price of $3.32 per share. As of December 31, 2001, the Series B preferred stock and accrued dividends were convertible into 4,283,471 shares of our common stock. If Elan were to elect to convert the Series B preferred stock into our common stock in July 2005, the expiration of the conversion option, we would issue 5,470,546 shares of our common stock, assuming all dividends were accumulated and unpaid. In addition, the Series B preferred stock will automatically convert into common stock in the event of specified transactions involving a change of control of Targeted Genetics. In the event that the issuance of common stock to Elan upon the conversion of the Series B preferred stock would result in Elan owning more than 19.9% of our then-outstanding shares and we were unable to obtain shareholder approval for such issuance, we have the right, at our option, to redeem that number of shares that would exceed 19.9% of our then-outstanding shares. Alternatively, Elan has the option to exchange the Series B preferred stock and accrued dividends for our shares of Emerald preferred stock, which would bring Elan's ownership in Emerald to 50%. This exchange option is exercisable anytime through the earlier of April 2003 and six months after the completion of Emerald's initial research and development program, which is currently September 30, 2002, but is subject to extension. In the event that Elan elects to exchange the Series B preferred stock for our Emerald preferred shares, Elan must pay us an amount equal to 30.1% of the total funding that we have provided to Emerald after its formation. This exchange right will terminate if the Series B preferred stock is converted into common stock. If the conversion occurs as a result of a specified transaction involving a change in control at Targeted Genetics, the exchange right will survive but, in order to exercise this exchange right, Elan will be required to tender the consideration it received upon the automatic conversion of the preferred stock in the transaction. 53 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Elan, as a holder of Series B preferred stock, is not entitled to vote together with holders of common stock, including with respect to election of directors, or as a separate class, except as otherwise provided by the Washington Business Corporation Act. Stock Purchase Warrants In 1999, in connection with a technology license agreement, we issued to Alkermes, Inc. warrants to purchase 1,000,000 shares of our common stock at an exercise price of $2.50, expiring in June 2007, and 1,000,000 shares at an exercise price of $4.16 per share, expiring in June 2009. All of these warrants remain outstanding at December 31, 2001. In connection with a private placement of common stock in 1998, we issued warrants to purchase a total of 4,333,333 shares of common stock at an exercise price of $2.00 per share. In 2001 a warrant holder exercised warrants to purchase 1,000,000 shares of our common stock, resulting in $2.0 million of proceeds. The remaining warrants issued in connection with the 1998 private placement expire in April 2003. We have outstanding warrants to purchase a total of 35,141 shares related to equipment financing and consulting agreements. These warrants have a weighted average price of $4.80 per share and expire between May 2002 and March 2004. Shareholder Rights Plan In 1996, our board of directors adopted a shareholder rights plan. Under our rights plan, each outstanding share of our common stock also represents one preferred stock purchase right. We adopted the rights plan to guard against partial tender offers and other abusive tactics that might be used in an attempt to gain control of Targeted Genetics without paying all shareholders a fair price for their shares. The rights plan will not prevent a change of control, but it designed to deter coercive takeover tactics and to encourage anyone attempting to acquire us to first negotiate with our board. Generally, if any person or group becomes the beneficial owner of more than 15% of our outstanding common stock (an acquiring person), then each right not owned by the acquiring person or its affiliates would entitle its holder to purchase shares of our common stock at a 50% discount, which would result in a significant dilution of the acquiring persons interest in Targeted Genetics. If we or 50% or more of our assets or earnings are thereafter acquired, each right will entitle its holder to purchase shares of common stock of the acquiring entity for a 50% discount. The rights plan expires in October 2006. Our board of directors will generally be entitled to redeem the rights for $0.01 per right at any time before a person or group acquires more than 15% of our common stock. In addition, at any time after an acquiring person crosses the 15% threshold but before it acquires us or 50% of our assets or earnings, the board may exchange all or part of the rights (other than those held by the acquiring person) for one share of common stock per right. Stock Options We have granted non-qualified and incentive stock options to purchase up to 6,979,444 shares of common stock under our stock option plans. Beginning in 1999, we began granting all options under our 1999 Stock Option Plan (the 1999 Plan), and discontinued granting options under our two other plans. In connection with our acquisition of Genovo, we established the 2000 Genovo, Inc. Roll-over Stock Option Plan (the Genovo Plan). In 2001, our shareholders approved both the Genovo Plan and an increase in the number of shares available for grant under the 1999 Plan from 1.5 million shares to 3.5 million shares. 54 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The 1999 Plan, as amended, provides for option grants to our employees, directors and officers and to consultants, agents, advisors and independent contractors who provide services to us, or our subsidiaries. The exercise price of incentive stock options shall not be less than the fair market value of the shares on the date of grant. Options granted under the 1999 Plan expire no later than ten years from the date of grant and generally vest and become exercisable over a three or four-year period following the date of grant. As of December 31, 2001, 1,288,697 shares of our common stock were available for future grant under the 1999 Plan. The Genovo Plan was established to convert Genovo employees' options to purchase shares of Genovo common stock into options to purchase our common stock. In 2000, we granted options to purchase 679,444 shares of our common stock at a weighted average exercise price of $1.30 per share under the Genovo Plan to the former employees of Genovo. The size of the grant to each former Genovo employee was based on the number of shares subject to that employee's Genovo options at the effective time of the acquisition. Options granted under the Genovo Plan are fully vested and expire ten years from the date that the underlying Genovo stock options were granted. No additional options will be granted under the Genovo Plan. The following table summarizes activity related to our stock option plans:
Weighted Average Exercise Options Shares Price Exercisable --------- -------- ----------- Balance, January 1, 1999.. 1,860,586 $2.42 Granted................ 835,265 1.94 Exercised.............. (40,509) 1.39 Canceled............... (214,000) 2.51 --------- Balance, December 31, 1999 2,441,342 2.26 1,094,420 Granted................ 1,373,716 5.65 Exercised.............. (419,470) 1.45 Canceled............... (74,810) 6.13 --------- Balance, December 31, 2000 3,320,778 3.66 1,782,082 Granted................ 1,510,075 5.27 Exercised.............. (672,383) 1.57 Canceled............... (274,637) 5.05 --------- Balance, December 31, 2001 3,883,833 4.55 1,861,093 =========
55 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes information regarding our outstanding and exercisable options at December 31, 2001:
Outstanding Exercisable ----------------------------------------------- ------------------------------ Weighted Average Range of Number of Weighted Average Remaining Number of Weighted Average Exercise Prices Option Shares Exercise Price Contractual Life Option Shares Exercise Price - --------------- ------------- ---------------- ---------------- ------------- ---------------- $0.50-$ 1.22 421,179 $ 1.07 6.05 405,554 $ 1.07 1.38- 1.99 699,339 1.72 6.93 439,354 1.71 2.02- 3.00 646,064 2.27 8.09 302,412 2.32 3.09- 6.50 905,172 5.08 7.27 374,255 4.80 6.66- 8.56 883,367 7.21 8.77 232,272 7.59 8.88- 21.38 328,712 10.86 8.53 107,246 11.01 ----- ----- 3,883,833 4.55 7.66 1,861,093 3.56 ========= =========
As allowed by SFAS 123, we do not recognize compensation expense on stock options granted to employees and directors. If we had elected to recognize compensation expense based on the fair market value at the grant dates for stock options granted, the pro forma net loss and net loss per common share would have been as follows:
2001 2000 1999 ------------ ------------ ------------ Net loss: as reported............... $(27,170,000) $(47,655,000) $(26,655,000) pro forma................. (32,278,000) (53,693,000) (27,610,000) Basic net loss per share: as reported............... $ (0.64) $ (1.29) $ (0.84) pro forma................. (0.76) (1.45) (0.87)
We estimated the fair value of each option on the date of grant using the Black-Scholes pricing model with the following weighted average assumptions:
2001 2000 1999 ------- ------- ------- Expected dividend rate............................................... Nil Nil Nil Expected stock price volatility...................................... 1.590 1.661 0.908 Risk-free interest rate.............................................. 4.90% 6.47% 5.05% Expected life of options............................................. 4 years 4 years 4 years Weighted (per share) average fair value of options granted........... $5.27 $9.90 $1.94
Compensation expense included in the pro forma amounts above may not be representative of the effects on pro forma earnings for future years. 56 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Reserved Shares As of December 31, 2001, we had reserved shares of our common stock for future issuance as follows: Stock options granted...................................... 3,883,833 Available for future grant................................. 1,288,697 Stock purchase warrants.................................... 5,368,474 Conversion of Series B preferred stock and note............ 4,619,041 ---------- Total................................................... 15,160,045 ==========
5. Acquisition of Genovo, Inc. The purchase price for our acquisition of Genovo, Inc. was approximately $66.4 million, which consisted of the following: Issuance of 5,250,805 shares of common stock...................... $58,461,000 Fair value of options to purchase 1,302,034 shares of common stock 7,668,000 Transaction costs................................................. 584,000 ----------- Total consideration............................................... 66,713,000 Less: intrinsic value of unvested stock options................... (301,000) ----------- Purchase price.................................................... $66,412,000 ===========
Of the $66.4 million purchase price, $28.0 million consisted of acquired in-process research and development (IPR&D) expenses, $39.5 million consisted of intangibles, consisting of AAV vector know-how of $12.7 million, assembled workforce of $1.6 million, goodwill of $25.2 million, $1.9 million of tangible assets and $3.0 of liabilities assumed. We evaluated acquired IPR&D connected with our acquisition of Genovo by utilizing the present value of the estimated after-tax cash flows expected to be generated by the purchased technology, which had not reached technological feasibility at the effective time of the acquisition. We based the cash flow projections for revenue on estimates of growth rates and the aggregate size of the markets for each product or technology; the probability of technical success given the stage of development at the time of acquisition; royalty rates, based on prior licensing agreements; product sales cycles; and the estimated life of the product's underlying technology. We deducted estimated operating expenses and income taxes from estimated revenue projections to arrive at estimated after-tax cash flows. We utilized discount rates of 30% to 45% to discount projected cash flows for in-process technologies, depending on the relative risk of each in-process technology. We computed these rates based primarily on our internal rates of return, cost of capital, rates of return for research and development and the weighted average cost of capital at the time of acquisition. Projected operating expenses include general and administrative expenses and research and development costs. We based all of the foregoing estimates and projections regarding the Genovo acquisition on assumptions that we believed to be reasonable at the time of the acquisition but that are inherently uncertain and unpredictable. If we do not successfully develop the projects and technologies considered in these estimates, its business, operating results and financial condition may be adversely affected. As of the date of the acquisition, we concluded that the technologies under development, once completed, could be economically used only for their specifically intended purposes and that the in-process technology had no alternative future use after taking into consideration the overall objectives of the project, progress toward the objectives and uniqueness of developments to these objectives. If we fail in these development efforts, no alternative economic value will 57 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) result from these technologies and the economic contribution that we projected from the IPR&D will not materialize. The risk of unsuccessful or untimely completion includes the risk that our competitors will develop alternative gene delivery technologies or will develop more effective or economically feasible technologies using more traditional approaches to treating human diseases. In connection with our acquisition of Genovo, we established an escrow of 550,872 shares of our common stock held for the benefit of former Genovo stockholders, pending resolution of specified pre-acquisition contingencies related to Genovo. During 2001, a party associated with a pre-acquisition contractual matter notified us that it would dispute reimbursing us for a $2.0 million settlement payment we made. Based on our review of the facts, we determined that the $2.0 million receivable we had recorded in anticipation of reimbursement was not collectable. As a result, and in accordance with the terms of the Genovo merger agreement, we cancelled 155,649 shares held in escrow, valued at $2.0 million. We reflected the $2.0 million as a reduction of equity during 2001 and retired the shares. Under the following circumstances, we may issue additional shares of our common stock as merger consideration, as follows: . Because specified Genovo licensing arrangements were unresolved at the time of the merger, we established an escrow of 700,000 shares of our common stock potentially issuable as additional merger consideration. Pending completion of negotiations, we may issue a portion of these shares in exchange for additional license rights. The escrow period ends in March 2002, but may be extended. . In connection with the Genovo merger and a collaborative research agreement previously entered into between Genzyme Corporation and Genovo, we assumed two outstanding options for Genzyme to purchase Genovo capital stock. After the merger, Genzyme exercised the first option to purchase 311,295 shares of our common stock (as successor company to Genovo) at a price of $12.8495 per share. Genzyme has not exercised the second option to acquire up to an additional 311,295 shares of our common stock, also at a price of $12.8495 per share. We are in negotiations with Genzyme to define the scope of ongoing development activities and the parameters around which Genzyme would make a further investment in us. Should Genzyme elect not to make an additional investment, or to provide us with less than $4.0 million through exercise of the option agreement, the former Genovo shareholders and option holders could receive up to 155,648 additional shares of our common stock. In each of these circumstances, the fair value of the shares issued to the former Genovo stockholders, if any, will be determined on the date the additional shares may be issued and will be reflected as additional purchase price. No amounts related to these contingencies have been included in the purchase price for the acquisition to date. 6. Collaborative and Other Agreements Celltech Group Agreement In October 1998, we entered into a series of agreements with Medeva Pharmaceuticals, Inc. to collaborate on the development of our tgAAVCF gene therapy product for treating cystic fibrosis. In January 2000, Medeva merged with Celltech/Chiroscience to become part of Celltech Group plc and Celltech assumed Medeva's rights and responsibilities under these agreements. Under a research and development funding agreement, we granted Medeva an exclusive worldwide license to sell tgAAVCF, but retained rights for supplying bulk tgAAVCF product to support clinical trials and commercialization. In 1998, we received a license and technology access fee of $5.0 million from Medeva at the time of signing and milestone payments of $1.0 million at the initiation of Phase I clinical trials of the tgAAVCF product. In 2000, we received $2.0 million at the initiation of Phase II clinical trials of the tgAAVCF product. We received no milestone payments from Celltech in 2001. In addition, Celltech agreed to pay up to $5.0 million per year from October 1998 through October 2001 to support research 58 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and development activities for tgAAVCF and to reimburse us for certain clinical trial expenses. Celltech also agreed to fund the costs of the Phase II clinical trial, which was initiated in November 2000. Assuming successful development and regulatory approval, Celltech will have the exclusive right to market the product on a worldwide basis. Under a long-term supply agreement, we will manufacture and supply bulk product to Celltech under a specific pricing formula. Celltech has the option to terminate the agreements with 180 days' notice. Should Celltech exercise this right to terminate, all rights related to tgAAVCF technology we have granted or otherwise extended to Celltech would return to us. We recognized revenue of $5.0 million in 2001, $8.6 million in 2000 and $6.4 million in 1999 under the Celltech collaboration and we have recognized total revenue of $23.4 million since the inception of the collaboration. Revenue recognized since inception include $6.0 million of deferred revenue amortization resulting from our adoption of SAB 101, as follows: $1.6 million in 2001, $2.1 million in 2000 and 1999 and $200,000 in 1998. Under related agreements, Celltech purchased 1,427,392 shares of our common stock for $2.8 million and loaned us $2.0 million. Biogen Agreement In September 2000, we established a multiple-product development and commercialization collaboration with Biogen, Inc. Under the terms of the collaborative agreement, we granted Biogen an exclusive worldwide license to sell any products developed in the collaboration and assumed responsibility for manufacturing and supplying any developed products to Biogen to support product development, clinical trials and product commercialization. We will receive royalties on sales of any products that result from the collaborative product development efforts or, alternatively, we will sell product to Biogen at specified transfer prices. Upon initiation of the collaboration, Biogen paid us $8.0 million, which included an up-front technology license of $5.0 million and up-front prepaid research and development funding of $3.0 million. Under a related three-year research and development funding agreement, Biogen agreed to provide a minimum of $3.0 million of additional research and development funding, paid at a rate of a minimum of $1.0 million per year. Although Biogen may terminate the development and marketing agreement at any time, its obligation under the related funding agreement to pay the minimum annual project funding would continue through September 2003. We are amortizing the $8.0 million up-front fee paid by Biogen over the initial three-year research and development period. We will recognize revenue on the $1.0 million minimum annual project funding as we perform specified research and development efforts. We recognized revenue of $2.6 million in 2001 and $429,000 in 2000 related to the Biogen collaboration. These amounts include amortization of up-front payments and research funding earned during each period. Under the related funding agreement, Biogen also agreed to provide us with loans of up to $10.0 million, which amount we borrowed in 2001, and to purchase up to $10.0 million of our common stock, none of which has been purchased, each at our discretion. Until September 2003, we can elect to have Biogen purchase the $10.0 million of our common stock, subject to limitations on Biogen's percentage ownership of our stock, in one or more pieces, at a price per share equal to the average of the daily closing prices of a share of our common stock for a specified period of time before and after the applicable exercise date. Wyeth/Genetics Institute Agreement In November 2000, we entered into a collaboration to develop gene therapy products for treating hemophilia with Wyeth/Genetics Institute, a unit of Wyeth Pharmaceuticals. Under the terms of a research and development funding agreement, Wyeth/Genetics Institute paid us up-front payments of $5.6 million and will pay us up to $15.0 million to develop a product candidate for hemophilia A over a three-year research and development collaboration period ending in November 2003. We granted Wyeth/Genetics Institute an option to collaborate on 59 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the development of a hemophilia B product candidate under similar terms. Under a related supply agreement, Wyeth/Genetics Institute agreed to pay us to manufacture product for clinical trials and for commercial supply according to a sales-based formula assuming regulatory approval of products successfully developed. In addition, Wyeth/Genetics Institute agreed to manage and fund the costs of clinical trials and related regulatory filings required for product approval and marketing. Wyeth/Genetics Institute will retain global marketing rights for any products resulting from the collaboration. Wyeth/Genetics Institute has also agreed, upon the occurrence of specified future events, to loan us up to $10 million to finance manufacturing facility expansions if certain conditions are met. No amounts have been borrowed under this commitment. Wyeth/Genetics Institute has the right to terminate both agreements at will, with 180 days' notice. Should Wyeth/Genetics Institute terminate the collaboration, all rights that were granted or otherwise extended to Wyeth/Genetics Institute related to the hemophilia technology that we have granted or otherwise extended to Wyeth/Genetics Institute would return to us. If Wyeth/Genetics Institute exercises their right to terminate both agreements at will or if we exercise our right to terminate for cause, we would have an option to acquire a right and license to certain hemophilia patent rights controlled by Wyeth/Genetics Institute. We recognized revenue of $6.5 million in 2001 and $454,000 in 2000 under this collaboration. These revenue amounts include amortization in each period of the $5.6 million of up-front payments and the collaborative research funding earned during the period. Genzyme Agreement In connection with the acquisition of Genovo in September 2000, we assumed a three-year development and license agreement with Genzyme Corporation that Genovo had entered into in August 1999. Under that agreement Genovo was committed to perform up to $2.9 million per year of research and development activities related to product candidates for treating lysosomal storage disorders. In November 2000, we amended the development agreement to expand the collaboration's technological scope and modify financial terms. Under the terms of the amended agreement, should we achieve specified regulatory milestones, Genzyme would be required to make milestone payments and pay royalties to us on sales of any products developed under the agreement. The development program under our agreement with Genzyme is effective through August 2002 and includes an option to extend the term if both parties agree. Genzyme has the right to terminate the development program at will, with 90 days' notice. Should Genzyme exercise this right to terminate the development program, or upon its expiration, all rights that we granted or otherwise extended to Genzyme would return to us, except that Genzyme will retain an exclusive license to certain Genovo-related manufacturing technology for use in the field of lysosomal storage disorders. We do not recognize revenue on the research that we perform in connection with this collaboration because to date we have funded this project through the proceeds received from the sale of equity securities to Genzyme. In connection with our acquisition of Genovo, we also assumed a separate agreement that granted Genzyme an option to purchase up to $11.4 million of Genovo equity, of which $3.4 million had been purchased as of the Genovo acquisition date. After the execution of the amended agreement, Genzyme exercised its option to purchase 311,295 shares of our common stock for a total of $4.0 million. Genzyme has not exercised the second option to acquire up to an additional 311,295 shares of our common stock also at a price of $12.8495 per share. We are in negotiations with Genzyme to define the terms by which Genzyme would exercise its option or other means by which Genzyme would make an additional investment in us. Should Genzyme elect not to make an 60 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) additional investment, or to provide less than the $4.0 million through exercise of the option agreement, the former Genovo shareholders and option holders could receive up to 155,648 additional shares of our common stock. International AIDS Vaccine Initiative Agreement In February 2000, we entered into a three-year development collaboration with the International AIDS Vaccine Initiative (IAVI) and Children's Research Institute on the campus of Children's Hospital in Columbus, Ohio, to develop a vaccine to prevent AIDS. Under the terms of the collaboration, IAVI provides funding to support development, preclinical studies and manufacturing of product for clinical trial studies. The collaboration provides for up to $6.0 million in cost reimbursable research funding from IAVI. Under the terms of the IAVI agreement, we have rights to manufacture any vaccines developed under the collaboration and will retain worldwide exclusive commercialization rights, in developed countries, to any product that results from the collaboration. If we decline to produce the vaccine for developing countries in reasonable quantity and at a reasonable price, IAVI will have rights to obtain the necessary licenses from us that will allow IAVI to contract with other manufacturers to make the vaccine for use in those countries. We recognized $1.9 million in revenue from IAVI in 2001 and $23,000 of revenue in 2000, which is based on the research and development costs incurred during those periods. Alkermes License In June 1999, we entered into an agreement with Alkermes, Inc. to acquire the exclusive rights to a patent and other pending patent applications for manufacturing AAV vectors. The license to this technology, first developed by Children's Hospital in Columbus, Ohio, covers the use of cell lines for the manufacture of AAV vectors and expands a previously acquired limited field license to these rights. In exchange for this technology license, we issued 500,000 shares of our common stock, a warrant to purchase 1.0 million shares of our common stock at an exercise price of $2.50 per share, which expires in June 2007, and a warrant to purchase another 1.0 million shares of our common stock at an exercise price of $4.16 per share, which expires in June 2009. Both warrants were outstanding at December 31, 2001. During 1999, we recorded a $3.2 million non-cash charge based on the fair value of the warrants and shares of common stock issued to Alkermes. The charge was recorded because the underlying technology is not complete and we will have to invest significant resources to develop and improve its commercial feasibility. The Alkermes license agreement requires us to satisfy specified development requirements in order to maintain the exclusivity of the license. We are obligated to make clinical and regulatory development milestone payments for any product candidates using this technology, to pay royalties upon the sale of any products using the licensed technology and to make payments to Alkermes if we sublicense the technology covered by the license agreement. 7. Emerald Gene Systems Joint Venture In July 1999, we formed Emerald Gene Systems, Ltd. our joint venture with Elan Corporation plc, a wholly owned subsidiary of Elan International Services, Ltd. Emerald was formed to develop product candidates based on our expertise in gene delivery and Elan's expertise in drug delivery. Both we and Elan licensed intellectual property to Emerald. Emerald recorded a $15.0 million charge to expense related to the intellectual property rights it acquired from Elan. We assigned no value and recorded no revenue associated with the license of our technology to the joint venture. In connection with the formation of Emerald, we issued to Elan shares of our Series B convertible exchangeable preferred stock valued at $12.0 million. We used the proceeds from the sale of the Series B 61 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) preferred stock to acquire our 80.1% interest in Emerald. The Series B preferred stock is convertible, at Elan's option, into shares our common stock, at a conversion price of $3.32 per share. In addition, the Series B preferred stock will automatically convert into common stock in the event of specified transactions involving a change of control of Targeted Genetics. Alternatively, Elan has the option to exchange the Series B preferred stock for the preferred shares we hold in Emerald, which would increase Elan's ownership in Emerald to 50%. This exchange option is exercisable at any time through the earlier of April 2003 and six months after the completion of Emerald's initial research and development program, which is currently September 30, 2002, but is subject to extension. In the event that Elan elects to exchange the Series B preferred stock for our Emerald preferred stock, Elan must pay us an amount equal to 30.1% of the total funding that we have provided to Emerald after its formation. We provided $3.5 million of funding to Emerald in 2001, $2.5 million of funding in 2000 and no funding in 1999. We and Elan fund the expenses of Emerald in proportion to our respective ownership interests. A joint operating committee determines the nature and scope of activities to be performed by the joint venture on a periodic basis and at least annually. We and Elan conduct Emerald's research and development and Emerald reimburses each company for the costs of research and development and related expenses plus a profit percentage. Our share of anticipated funding for 2002 is $3.1 million. Reimbursement that we receive from Emerald is reflected as revenue from collaborative agreement with unconsolidated, majority-owned joint venture in the accompanying statements of operations and related expenses are included in research and development expense. Under a loan facility provided to us from Elan, we have the option to borrow up to $12.0 million from Elan to fund our share of Emerald's expenses. In September 2001, we borrowed $2.0 million against this loan facility. We currently own 80.1% of Emerald's common and preferred stock and 100% of the voting shares and Elan owns the remaining 19.9% of Emerald's common and preferred stock. Although we own 100% of the voting stock, Elan and its subsidiaries have retained significant minority investor rights that prevent us from exercising control over Emerald. Accordingly, we do not consolidate the financial statements of Emerald but instead account for our investment in Emerald under the equity method of accounting. We record our share of Emerald's net loss from operations as equity in net loss of unconsolidated, majority-owned research and development joint venture in the accompanying statements of operations. The condensed financial statements of Emerald are as follows:
December 31, ---------------------- 2001 2000 ----------- --------- Total assets, current..................... $ 6,000 $ 6,000 =========== ========= Current liabilities....................... 1,393,000 331,000 Total shareholders' equity................ (1,387,000) (325,000) ----------- --------- Total liabilities and shareholders' equity $ 6,000 $ 6,000 =========== =========
Year Ended December 31, July 21, 1999 ------------------------ (Inception) to 2001 2000 Dec. 31, 1999 ----------- ----------- -------------- Revenue $ -- $ -- $ -- Expenses: Research and development... 4,563,000 3,073,000 723,000 Technology access fee...... -- -- 15,000,000 General and administrative. 14,000 14,000 19,000 ----------- ----------- ------------ Net loss............... $(4,577,000) $(3,087,000) $(15,742,000) =========== =========== ============
62 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Commitments We lease our research and office facilities in Seattle, Washington under two non-cancelable operating leases that expire in March 2004. We lease a facility in Bothell, Washington under a non-cancelable operating lease that expires on October 2015, which facility is intended to accommodate future manufacturing of our product candidates. The research and office facility leases may be extended under two additional five-year renewal options. The manufacturing facility lease may be extended for an additional five-year period. We also lease research and office facilities in Sharon Hill, Pennsylvania, under a non-cancelable operating lease that expires in November 2005. This lease may be extended for two additional five-year periods. Future minimum payments under non-cancelable operating leases at December 31, 2001 were as follows: Year ending December 31, 2002................................. $ 2,903,000 2003................................. 2,920,000 2004................................. 1,842,000 2005................................. 1,538,000 2006................................. 1,362,000 Thereafter........................... 13,288,000 ----------- Total minimum lease payments..... $23,853,000 ===========
Rent expense under operating leases was $2.9 million for 2001, $1.1 million for 2000 and $587,000 for 1999. 9. Employee Retirement Plan We sponsor an employee retirement plan under Section 401(k) of the Internal Revenue Code. All of our employees and those of our subsidiaries who are 21 years old or older are eligible to participate in the plan. Our contributions to the 401(k) plan are made at the discretion of the board of directors and were $192,000 in 2001, $144,000 in 2000 and $90,000 in 1999. 10. Income Taxes At December 31, 2001, we had net operating loss carryforwards of $103.0 million and research and tax credit carryforwards of $4.3 million. The carryforwards, which are available to offset future federal income taxes, begin to expire in 2008 if not utilized. We have provided a valuation allowance to offset the excess of deferred tax assets over the deferred tax liabilities, due to the uncertainty of realizing the benefits of the net deferred tax asset. Significant components of our deferred tax assets and liabilities were as follows:
December 31, -------------------------- 2001 2000 ------------ ------------ Deferred tax assets:.............................. Net operating loss carryforwards............... $ 39,150,000 $ 33,210,000 Deferred revenue............................... 400,000 640,000 Research and experimental credit carryforwards. 4,300,000 3,430,000 Depreciation and amortization.................. 1,340,000 1,060,000 Other.......................................... 420,000 260,000 ------------ ------------ Gross deferred tax assets......................... 45,610,000 38,600,000 Valuation allowance for deferred tax assets....... (45,610,000) (38,600,000) ------------ ------------ Net deferred tax asset............................ $ -- $ -- ============ ============
63 TARGETED GENETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Our utilization of federal income tax carryforwards is subject to limitation under Section 382 of the Internal Revenue Code. Our past sales and issuances of common stock have resulted in "ownership changes," as defined under Section 382, and may result in limitations on our future use of some portion of the net operating loss carryforwards. 11. Condensed Quarterly Financial Information (unaudited) The following tables present our unaudited quarterly results for 2001 and 2000. We believe that the following information reflects all normal recurring adjustments for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarter Ended --------------------------------------------------- March 31, June 30, September 30, December 31, 2001 2001 2001 2001 ----------- ----------- ------------- ------------ Revenue.................................... $ 3,805,000 $ 4,339,000 $ 5,538,000 $ 5,198,000 Net loss................................... (6,132,000) (5,258,000) (6,347,000) (8,053,000) Net loss attributable to common shares..... (6,471,000) (6,098,000) (7,233,000) (8,313,000) Basic and diluted net loss per common share (0.15) (0.14) (0.16) (0.19)
Quarter Ended --------------------------------------------------- March 31, June 30, September 30, December 31, 2000 2000 2000 2000 ----------- ----------- ------------- ------------ Revenue.................................... $ 2,700,000 $ 2,277,000 $ 1,914,000 $ 4,512,000 Operating loss............................. (2,125,000) (3,352,000) (31,891,000) (6,644,000) Loss before cumulative effect of change in accounting principle..................... (2,537,000) (3,561,000) (32,005,000) (5,871,000) Cumulative effect of change in accounting principle................................ (3,682,000) -- -- -- Net loss................................... (6,219,000) (3,561,000) (32,005,000) (5,871,000) Net loss attributable to common shares..... (6,435,000) (3,777,000) (32,229,000) (6,100,000) Basic and diluted net loss per common share (0.18) (0.10) (0.86) (0.14)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 64 PART III Item 10. Directors and Executive Officers of Registrant The information required by this Item with respect to our directors is incorporated by reference to the section captioned "Election of Directors" in the proxy statement for our annual meeting of shareholders to be held on May 9, 2002. The information required by this Item with respect to our executive officers is incorporated by reference to the section captioned "Executive Officers" in the proxy statement for our annual meeting of shareholders to be held on May 9, 2002. Item 11. Executive Compensation The information required by this Item with respect to executive compensation is incorporated by reference to the section captioned "Executive Compensation" in the proxy statement for our annual meeting of shareholders to be held on May 9, 2002. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item with respect to beneficial ownership is incorporated by reference from the section captioned "Principal Shareholders" in the proxy statement for our annual meeting of shareholders to be held on May 9, 2002. Item 13. Certain Relationships and Related Transactions The information required by this Item with respect to certain relationships and related-party transactions is incorporated by reference to the sections captioned "Executive Compensation--Change of Control Arrangements" and "Executive Compensation--Arrangements with Management" in the proxy statement for our annual meeting of shareholders to be held on May 9, 2002. 65 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements The following consolidated financial statements are submitted in Item 8 of this report:
Page(s) in 10-K ---------- Report of Ernst & Young LLP, Independent Auditors.......................................... 43 Consolidated Balance Sheets at December 31, 2001 and 2000.................................. 44 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999. 45 Consolidated Statements of Shareholders' Equity for the period from January 1, 1999 through December 31, 2001........................................................................ 46 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999. 47 Notes to Consolidated Financial Statements................................................. 48
66 2. Financial Statement Schedules All financial statement schedules have been omitted because the required information is either included in the consolidated financial statements or the notes thereto or is not applicable. 3. Exhibits 3.1 Restated Articles of Incorporation (Exhibit 3.1) (L) 3.2 Amended and Restated Bylaws (Exhibit 3.2) (D) 4.1 Rights Agreement, dated as of October 17, 1996, between Targeted Genetics and ChaseMellon (C) Shareholder Services (Exhibit 2.1) 4.2 First Amendment of Rights Agreement, dated July 21, 1999, between Targeted Genetics and (J) ChaseMellon Shareholder Services (Exhibit 1.9) 10.1 Form of Indemnification Agreement between Targeted Genetics and its officers and directors (K) (Exhibit 10.1) 10.2 Form of Senior Management Employment Agreement between the registrant and its executive (D) officers (Exhibit 10.2) 10.3 Gene Transfer Technology License Agreement, dated as of February 18, 1992, between (K) Immunex Corporation and Targeted Genetics* (Exhibit 10.3) 10.4 PHS Patent License Agreement--Non-Exclusive, dated as of July 13, 1993, between National (K) Institutes of Health Centers for Disease Control and Targeted Genetics* (Exhibit 10.4) 10.5 Patent License Agreement, dated as of December 25, 1993, between The University of Florida (K) Research Foundation, Inc. and Targeted Genetics* (Exhibit 10.5) 10.6 PHS Patent License Agreement--Exclusive, dated as of March 10, 1994, between National (E) Institutes of Health Centers for Disease Control and Targeted Genetics* (Exhibit 10.10) 10.7 License Agreement, dated as of March 28, 1994, between Targeted Genetics and the University (E) of Michigan* (Exhibit 10.13) 10.8 Patent and Technology License Agreement, effective as of March 1, 1994, between the Board of (A) Regents of the University of Texas M.D. Anderson Cancer Center and RGene Therapeutics, Inc.* (Exhibit 10.29) 10.9 First Amended and Restated License Agreement, effective as of October 12, 1995, between The (A) University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.30) 10.10 Amendment to First Amended and Restated License Agreement, dated as of June 19, 1996, (B) between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.1) 10.11 Second Amendment to First Amended and Restated License Agreement, dated as of April 17, (G) 1998, between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.16) 10.12 License Agreement, dated as of March 15, 1997, between the Burnham Institute and Targeted (E) Genetics* (Exhibit 10.23) 10.13 Exclusive Sublicense Agreement, dated June 9, 1999, between Targeted Genetics and Alkermes, (I) Inc. (Exhibit 10.36) 10.14 Master Agreement, dated as of November 23, 1998, between Targeted Genetics and Medeva (H) Pharmaceuticals, Inc.* (Exhibit 1.1) 10.15 License and Collaboration Agreement, dated as of November 23, 1998, between Targeted (H) Genetics and Medeva Pharmaceuticals, Inc.* (Exhibit 1.2)
67 10.16 Supply Agreement, dated as of November 23, 1998, between Targeted Genetics and Medeva (H) Pharmaceuticals, Inc.* (Exhibit 1.3) 10.17 Credit Agreement, dated as of November 23, 1998, between Targeted Genetics, Medeva (H) Pharmaceuticals, Inc. and Medeva PLC* (Exhibit 1.5) 10.18 Funding Agreement, dated as of July 21, 1999, among Targeted Genetics, Elan International (J) Services, Ltd., and Elan Corporation, plc (Exhibit 1.3) 10.19 Subscription, Joint Development and Operating Agreement, dated as of July 21, 1999, among (J) Elan Corporation, plc, Elan International Services, Ltd., Targeted Genetics and Targeted Genetics Newco, Ltd. * (Exhibit 1.4) 10.20 Convertible Promissory Note, dated July 21, 1999, issued by Targeted Genetics to Elan (J) International Services, Ltd. (Exhibit 1.5) 10.21 License Agreement dated July 21, 1999, between Targeted Genetics Newco, Ltd. and Targeted (J) Genetics * (Exhibit 1.6) 10.22 License Agreement, dated July 21, 1999, between Targeted Genetics Newco, Ltd. and Elan (J) Pharmaceutical Technologies, a division of Elan Corporation, plc * (Exhibit 1.7) 10.23 Office Lease, dated as of October 7, 1996, between Benaroya Capital Company, LLC and (D) Targeted Genetics (Exhibit 10.26) 10.24 Canyon Park Building Lease, dated as of June 30, 2000, between Targeted Genetics and (L) CarrAmerica Corporation (Exhibit 10.1) 10.25 Olive Way Building Lease, dated as of November 20, 1993, as amended, between Targeted (K) Genetics and Ironwood Apartments, Inc. (successor in interest to Metropolitan Federal Savings and Loan Association) (Exhibit 10.29) 10.26 First Lease Amendment, dated May 12, 1997, between Targeted Genetics and Benaroya Capital (Q) Company, LLC (Exhibit 10.1) 10.27 Second Lease Amendment, dated February 25, 2000, between Targeted Genetics and Benaroya (Q) Capital Company, LLC (Exhibit 10.2) 10.28 Third Lease Amendment, dated April 19, 2000, between Targeted Genetics and Benaroya (Q) Capital Company, LLC (Exhibit 10.3) 10.29 Fourth Lease Amendment, dated March 28, 2001, between Targeted Genetics and Benaroya (Q) Capital Company, LLC (Exhibit 10.4) 10.30 1992 Restated Stock Option Plan (Exhibit 99.1) (F) 10.31 Stock Option Plan for Nonemployee Directors (Exhibit 10.34) (E) 10.32 1999 Restated Stock Option Plan, as amended January 23, 2001 (Exhibit 10.2) (P) 10.33 2000 Genovo Inc. Roll-Over Stock Option Plan (Exhibit 99.1) (N) 10.34 Agreement and Plan of Merger dated as of August 8, 2000, among Targeted Genetics, Inc., TGC Acquisition Corporation and Biogen, Inc.* 10.35 Development and Marketing Agreement, dated as of August 8, 2000, between Targeted (M) Genetics and Biogen, Inc.* (Exhibit 10.1) 10.36 Funding Agreement dated as of August 8, 2000, between Targeted Genetics and Biogen, Inc. (M) (Exhibit 10.2) 10.37 Product Development Agreement, dated as of November 9, 2000, between Targeted Genetics (O) and Genetics Institute, Inc. * (Exhibit 10.1) 10.38 Supply Agreement, dated as of November 9, 2000, between Targeted Genetics and Genetics (O) Institute, Inc.* (Exhibit 10.2)
68 21.1 Subsidiaries of Targeted Genetics 23.1 Consent of Ernst & Young LLP, Independent Auditors
- -------- * Portions of these exhibits have been omitted based on a grant of confidential treatment from the SEC. The omitted portions of these exhibits have been filed separately with the SEC. (A) Incorporated by reference to the designated exhibit included with Targeted Genetics' Registration Statement on Form S-1 (No. 333-03592) filed on April 16, 1996, as amended. (B) Incorporated by reference to the designated exhibit included with Targeted Genetics' Quarterly Report on Form 10-Q (No. 0-23930) for the period ended June 30, 1996, filed on August 12, 1996. (C) Incorporated by reference to Targeted Genetics' Registration Statement on Form 8-A, filed on October 22, 1996. (D) Incorporated by reference to the designated exhibit included with Targeted Genetics' Annual Report on Form 10-K (No. 0-23930) for the year ended December 31, 1996, filed on March 12, 1997. (E) Incorporated by reference to the designated exhibit included with Targeted Genetics' Annual Report on Form 10-K (No. 0-23930) for the year ended December 31, 1997, filed on March 31, 1998. (F) Incorporated by reference to the designated exhibit included with Targeted Genetics' Registration Statement on Form S-8 (No. 333-58907), filed on July 10, 1998. (G) Incorporated by reference to the designated exhibit included with Targeted Genetics' Annual Report on Form 10-K (No. 0-23930) for the year ended December 31, 1998, filed on March 10, 1999. (H) Incorporated by reference to the designated exhibit included with Targeted Genetics' Current Report on Form 8-K (No. 0-23930), filed on January 6, 1999. (I) Incorporated by reference to the designated exhibit included with Targeted Genetics' Quarterly Report on Form 10-Q (No. 0-23930) for the period ended June 30, 1999, filed on August 5, 1999. (J) Incorporated by reference to the designated exhibit included with Targeted Genetics' Current Report on Form 8-K (No. 0-23930), filed August 4, 1999. (K) Incorporated by reference to the designated exhibit included with Targeted Genetics' Annual Report on Form 10-K (No. 0-23930) for the year ended December 31, 1999, filed on March 23, 2000. (L) Incorporated by reference to Targeted Genetics' Quarterly Report on Form 10-Q (No. 0-23930) for the period ended June 30, 2000, filed on August 11, 2000. (M) Incorporated by reference to the designated exhibit included with Targeted Genetics Current Report on Form 8-K (No. 0-23930), filed on September 13, 2000. (N) Incorporated by reference to the designated exhibit included with Targeted Genetics' Registration Statement on Form S-8 (No. 333-48220), filed on October 19, 2000. (O) Incorporated by reference to the designated exhibit included with Targeted Genetics Current Report on Form 8-K (No. 0-23930), filed on February 21, 2001. (P) Incorporated by reference to Targeted Genetics' Quarterly Report on Form 10-Q (No. 0-23930) for the period ended March 31, 2001, filed on May 11, 2001. (Q) Incorporated by reference to Targeted Genetics' Quarterly Report on Form 10-Q (No. 0-23930) for the period ended June 30, 2001, filed on August 14, 2001. (c) Reports on Form 8-K On October 29, 2001, Targeted Genetics filed a Current Report on Form 8-K to announce the appointment of Todd E. Simpson to the position of Vice President, Finance and Administration, and Chief Financial Officer. 69 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the city of Seattle, state of Washington, on March 18, 2002. TARGETED GENETICS CORPORATION By: /s/ H. STEWART PARKER ----------------------------- President and Chief Executive Officer POWER OF ATTORNEY Each person whose individual signature appears below hereby authorizes and appoints H. Stewart Parker and Todd E. Simpson, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ H. STEWART PARKER President, Chief Executive March 18, 2002 - ----------------------------- Officer and Director H. Stewart Parker (Principal Executive Officer) /S/ TODD E. SIMPSON Vice President, Finance and March 18, 2002 - ----------------------------- Administration and Chief Todd E. Simpson Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) /s/ JEREMY L. CURNOCK COOK Chairman of the Board March 18, 2002 - ----------------------------- Jeremy L. Curnock Cook /s/ JACK L. BOWMAN Director March 18, 2002 - ----------------------------- Jack L. Bowman /s/ JOSEPH M. DAVIE, PH.D., Director March 18, 2002 M.D. - ----------------------------- Joseph M. Davie, Ph.D., M.D. /s/ JAMES D. GRANT Director March 18, 2002 - ----------------------------- James D. Grant 70 Signature Title Date --------- ----- ---- /s/ LOUIS P. LACASSE Director March 18, 2002 - ----------------------------- Louis P. Lacasse /s/ NELSON L. LEVY, PH.D., Director March 18, 2002 M.D. - ----------------------------- Nelson L. Levy, Ph.D., M.D. /s/ MARK RICHMOND, PH.D. Director March 18, 2002 - ----------------------------- Mark Richmond, Ph.D. 71 EXHIBIT INDEX 3.1 Restated Articles of Incorporation (Exhibit 3.1) (L) 3.2 Amended and Restated Bylaws (Exhibit 3.2) (D) 4.1 Rights Agreement, dated as of October 17, 1996, between Targeted Genetics and ChaseMellon (C) Shareholder Services (Exhibit 2.1) 4.2 First Amendment of Rights Agreement, dated July 21, 1999, between Targeted Genetics and (J) ChaseMellon Shareholder Services (Exhibit 1.9) 10.1 Form of Indemnification Agreement between Targeted Genetics and its officers and directors (K) (Exhibit 10.1) 10.2 Form of Senior Management Employment Agreement between the registrant and its executive (D) officers (Exhibit 10.2) 10.3 Gene Transfer Technology License Agreement, dated as of February 18, 1992, between (K) Immunex Corporation and Targeted Genetics* (Exhibit 10.3) 10.4 PHS Patent License Agreement--Non-Exclusive, dated as of July 13, 1993, between National (K) Institutes of Health Centers for Disease Control and Targeted Genetics* (Exhibit 10.4) 10.5 Patent License Agreement, dated as of December 25, 1993, between The University of Florida (K) Research Foundation, Inc. and Targeted Genetics* (Exhibit 10.5) 10.6 PHS Patent License Agreement--Exclusive, dated as of March 10, 1994, between National (E) Institutes of Health Centers for Disease Control and Targeted Genetics* (Exhibit 10.10) 10.7 License Agreement, dated as of March 28, 1994, between Targeted Genetics and the University (E) of Michigan* (Exhibit 10.13) 10.8 Patent and Technology License Agreement, effective as of March 1, 1994, between the Board of (A) Regents of the University of Texas M.D. Anderson Cancer Center and RGene Therapeutics, Inc.* (Exhibit 10.29) 10.9 First Amended and Restated License Agreement, effective as of October 12, 1995, between The (A) University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.30) 10.10 Amendment to First Amended and Restated License Agreement, dated as of June 19, 1996, (B) between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.1) 10.11 Second Amendment to First Amended and Restated License Agreement, dated as of April 17, (G) 1998, between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.16) 10.12 License Agreement, dated as of March 15, 1997, between the Burnham Institute and Targeted (E) Genetics* (Exhibit 10.23) 10.13 Exclusive Sublicense Agreement, dated June 9, 1999, between Targeted Genetics and Alkermes, (I) Inc. (Exhibit 10.36) 10.14 Master Agreement, dated as of November 23, 1998, between Targeted Genetics and Medeva (H) Pharmaceuticals, Inc.* (Exhibit 1.1) 10.15 License and Collaboration Agreement, dated as of November 23, 1998, between Targeted (H) Genetics and Medeva Pharmaceuticals, Inc.* (Exhibit 1.2) 10.16 Supply Agreement, dated as of November 23, 1998, between Targeted Genetics and Medeva (H) Pharmaceuticals, Inc.* (Exhibit 1.3) 10.17 Credit Agreement, dated as of November 23, 1998, between Targeted Genetics, Medeva (H) Pharmaceuticals, Inc. and Medeva PLC* (Exhibit 1.5)
10.18 Funding Agreement, dated as of July 21, 1999, among Targeted Genetics, Elan International (J) Services, Ltd., and Elan Corporation, plc (Exhibit 1.3) 10.19 Subscription, Joint Development and Operating Agreement, dated as of July 21, 1999, among (J) Elan Corporation, plc, Elan International Services, Ltd., Targeted Genetics and Targeted Genetics Newco, Ltd. * (Exhibit 1.4) 10.20 Convertible Promissory Note, dated July 21, 1999, issued by Targeted Genetics to Elan (J) International Services, Ltd. (Exhibit 1.5) 10.21 License Agreement dated July 21, 1999, between Targeted Genetics Newco, Ltd. and Targeted (J) Genetics * (Exhibit 1.6) 10.22 License Agreement, dated July 21, 1999, between Targeted Genetics Newco, Ltd. and Elan (J) Pharmaceutical Technologies, a division of Elan Corporation, plc * (Exhibit 1.7) 10.23 Office Lease, dated as of October 7, 1996, between Benaroya Capital Company, LLC and (D) Targeted Genetics (Exhibit 10.26) 10.24 Canyon Park Building Lease, dated as of June 30, 2000, between Targeted Genetics and (L) CarrAmerica Corporation (Exhibit 10.1) 10.25 Olive Way Building Lease, dated as of November 20, 1993, as amended, between Targeted (K) Genetics and Ironwood Apartments, Inc. (successor in interest to Metropolitan Federal Savings and Loan Association) (Exhibit 10.29) 10.26 First Lease Amendment, dated May 12, 1997, between Targeted Genetics and Benaroya Capital (Q) Company, LLC (Exhibit 10.1) 10.27 Second Lease Amendment, dated February 25, 2000, between Targeted Genetics and Benaroya (Q) Capital Company, LLC (Exhibit 10.2) 10.28 Third Lease Amendment, dated April 19, 2000, between Targeted Genetics and Benaroya (Q) Capital Company, LLC (Exhibit 10.3) 10.29 Fourth Lease Amendment, dated March 28, 2001, between Targeted Genetics and Benaroya (Q) Capital Company, LLC (Exhibit 10.4) 10.30 1992 Restated Stock Option Plan (Exhibit 99.1) (F) 10.31 Stock Option Plan for Nonemployee Directors (Exhibit 10.34) (E) 10.32 1999 Restated Stock Option Plan, as amended January 23, 2001 (Exhibit 10.2) (P) 10.33 2000 Genovo Inc. Roll-Over Stock Option Plan (Exhibit 99.1) (N) 10.34 Agreement and Plan of Merger dated as of August 8, 2000, among Targeted Genetics, Inc., TGC Acquisition Corporation and Biogen, Inc.* 10.35 Development and Marketing Agreement, dated as of August 8, 2000, between Targeted (M) Genetics and Biogen, Inc.* (Exhibit 10.1) 10.36 Funding Agreement dated as of August 8, 2000, between Targeted Genetics and Biogen, Inc. (M) (Exhibit 10.2) 10.37 Product Development Agreement, dated as of November 9, 2000, between Targeted Genetics (O) and Genetics Institute, Inc. * (Exhibit 10.1) 10.38 Supply Agreement, dated as of November 9, 2000, between Targeted Genetics and Genetics (O) Institute, Inc.* (Exhibit 10.2) 21.1 Subsidiaries of Targeted Genetics 23.1 Consent of Ernst & Young LLP, Independent Auditors
- -------- * Portions of these exhibits have been omitted based on a grant of confidential treatment from the SEC. The omitted portions of these exhibits have been filed separately with the SEC. (A) Incorporated by reference to the designated exhibit included with Targeted Genetics' Registration Statement on Form S-1 (No. 333-03592) filed on April 16, 1996, as amended. (B) Incorporated by reference to the designated exhibit included with Targeted Genetics' Quarterly Report on Form 10-Q (No. 0-23930) for the period ended June 30, 1996, filed on August 12, 1996. (C) Incorporated by reference to Targeted Genetics' Registration Statement on Form 8-A, filed on October 22, 1996. (D) Incorporated by reference to the designated exhibit included with Targeted Genetics' Annual Report on Form 10-K (No. 0-23930) for the year ended December 31, 1996, filed on March 12, 1997. (E) Incorporated by reference to the designated exhibit included with Targeted Genetics' Annual Report on Form 10-K (No. 0-23930) for the year ended December 31, 1997, filed on March 31, 1998. (F) Incorporated by reference to the designated exhibit included with Targeted Genetics' Registration Statement on Form S-8 (No. 333-58907), filed on July 10, 1998. (G) Incorporated by reference to the designated exhibit included with Targeted Genetics' Annual Report on Form 10-K (No. 0-23930) for the year ended December 31, 1998, filed on March 10, 1999. (H) Incorporated by reference to the designated exhibit included with Targeted Genetics' Current Report on Form 8-K (No. 0-23930), filed on January 6, 1999. (I) Incorporated by reference to the designated exhibit included with Targeted Genetics' Quarterly Report on Form 10-Q (No. 0-23930) for the period ended June 30, 1999, filed on August 5, 1999. (J) Incorporated by reference to the designated exhibit included with Targeted Genetics' Current Report on Form 8-K (No. 0-23930), filed August 4, 1999. (K) Incorporated by reference to the designated exhibit included with Targeted Genetics' Annual Report on Form 10-K (No. 0-23930) for the year ended December 31, 1999, filed on March 23, 2000. (L) Incorporated by reference to Targeted Genetics' Quarterly Report on Form 10-Q (No. 0-23930) for the period ended June 30, 2000, filed on August 11, 2000. (M) Incorporated by reference to the designated exhibit included with Targeted Genetics Current Report on Form 8-K (No. 0-23930), filed on September 13, 2000. (N) Incorporated by reference to the designated exhibit included with Targeted Genetics' Registration Statement on Form S-8 (No. 333-48220), filed on October 19, 2000. (O) Incorporated by reference to the designated exhibit included with Targeted Genetics Current Report on Form 8-K (No. 0-23930), filed on February 21, 2001. (P) Incorporated by reference to Targeted Genetics' Quarterly Report on Form 10-Q (No. 0-23930) for the period ended March 31, 2001, filed on May 11, 2001. (Q) Incorporated by reference to Targeted Genetics' Quarterly Report on Form 10-Q (No. 0-23930) for the period ended June 30, 2001, filed on August 14, 2001. EX-10.34 3 dex1034.txt AGREEMENT AND PLAN OF MERGER EXHIBIT 10.34 AGREEMENT AND PLAN OF MERGER among TARGETED GENETICS CORPORATION, GENOVO, INC., TGC ACQUISITION CORPORATION and BIOGEN, INC. August 8, 2000 TABLE OF CONTENTS
Page ARTICLE ONE..................................................................................................... 1 1. The Merger............................................................................................. 1 1.1 The Merger.................................................................................... 1 1.2 Closing; Effective Time....................................................................... 2 1.3 Effect of the Merger.......................................................................... 2 1.4 Certificate of Incorporation; Bylaws.......................................................... 2 1.5 Directors and Officers........................................................................ 2 1.6 Effect on Capital Stock....................................................................... 2 1.7 Surrender of Certificates..................................................................... 8 1.8 No Further Ownership Rights in Genovo Capital Stock........................................... 10 1.9 Tax and Accounting Consequences............................................................... 10 1.10 Taking of Necessary Action; Further Action.................................................... 10 1.11 Withholding................................................................................... 10 1.12 Lost, Stolen or Destroyed Certificates........................................................ 11 1.13 Stock Transfer Books.......................................................................... 11 ARTICLE TWO..................................................................................................... 11 2. Representations and Warranties of Genovo............................................................... 11 2.1 Organization; Subsidiaries or Affiliates...................................................... 12 2.2 Certificate of Incorporation and Bylaws....................................................... 12 2.3 Capital Structure............................................................................. 12 2.4 Authority..................................................................................... 13 2.5 No Conflicts; Required Filings and Consents................................................... 14 2.6 Financial Statements.......................................................................... 14 2.7 Absence of Undisclosed Liabilities............................................................ 15 2.8 Absence of Certain Changes.................................................................... 15 2.9 Litigation.................................................................................... 16 2.10 Permits; No Default; Company Products; Regulation............................................. 17 2.11 Title to Property............................................................................. 17 2.12 Intellectual Property......................................................................... 18 2.13 Environmental Matters......................................................................... 20 2.14 Taxes......................................................................................... 21
-i- TABLE OF CONTENTS (continued)
Page 2.15 Employee Benefit Plans........................................................................ 23 2.16 Certain Agreements Affected by the Merger..................................................... 25 2.17 Employee Matters.............................................................................. 25 2.18 Material Contracts............................................................................ 25 2.19 Interested Party Transactions................................................................. 27 2.20 Insurance..................................................................................... 27 2.21 Minute Books.................................................................................. 27 2.22 Brokers' and Finders' Fees.................................................................... 27 2.23 Vote Required................................................................................. 27 2.24 Board Approval................................................................................ 28 2.25 Opinion of Financial Advisor.................................................................. 28 ARTICLE 2A...................................................................................................... 28 2A. Representations and Warranties of Biogen............................................................... 28 2A.1 Organization; Authority....................................................................... 28 2A.2 Biogen Shares................................................................................. 28 2A.3 No Conflicts; Required Filings and Consents................................................... 29 2A.4 Brokers or Agents............................................................................. 29 2A.5 Voting Agreement; Lockup Agreement............................................................ 29 ARTICLE THREE................................................................................................... 29 3. Representations and Warranties of Targeted and Merger Sub.............................................. 29 3.1 Organization, Standing and Power.............................................................. 29 3.2 Capital Structure............................................................................. 30 3.3 Authority..................................................................................... 31 3.4 No Conflict; Required Filings and Consents.................................................... 32 3.5 SEC Documents; Financial Statements........................................................... 32 3.6 Absence of Undisclosed Liabilities............................................................ 33 3.7 Absence of Certain Changes.................................................................... 33 3.8 Absence of Litigation......................................................................... 34 3.9 Governmental Authorization.................................................................... 34 3.10 Compliance With Laws.......................................................................... 34 3.11 Broker's and Finders' Fees.................................................................... 34
-ii- TABLE OF CONTENTS (continued)
Page 3.12 Tax Matters................................................................................... 35 3.13 Intellectual Property......................................................................... 35 3.14 Merger Subsidiary............................................................................. 36 3.15 Sufficient Funds.............................................................................. 36 3.16 No Vote Required.............................................................................. 36 3.17 Board Approval................................................................................ 36 ARTICLE FOUR.................................................................................................... 36 4. Conduct Before the Effective Time...................................................................... 36 4.1 Conduct of Genovo............................................................................. 36 4.2 Conduct of Business of Targeted............................................................... 39 4.3 No Solicitation............................................................................... 40 4.4 Notices....................................................................................... 41 ARTICLE FIVE.................................................................................................... 41 5. Additional Agreements.................................................................................. 41 5.1 Efforts and Further Assurances................................................................ 41 5.2 Consents; Cooperation......................................................................... 42 5.3 Access to Information......................................................................... 44 5.4 Confidentiality............................................................................... 44 5.5 Public Disclosure............................................................................. 44 5.6 FIRPTA........................................................................................ 45 5.7 State Statutes................................................................................ 45 5.8 Blue Sky Laws................................................................................. 45 5.9 Listing of Additional Shares.................................................................. 45 5.10 Information Statement; Stockholder Approval................................................... 45 5.11 Special Meeting of Stockholders............................................................... 46 5.12 Voting Agreements; Lockup Agreements.......................................................... 46 5.13 Maintenance of Genovo Indemnification Obligations............................................. 47 5.14 Reorganization Treatment...................................................................... 48 5.15 Board of Directors............................................................................ 48 5.16 Obligations of Merger Sub..................................................................... 49 5.17 Biogen Demand Notes........................................................................... 49
-iii- TABLE OF CONTENTS (continued)
Page 5.18 Escrow Agreement.............................................................................. 49 5.19 Registration of Shares........................................................................ 49 ARTICLE SIX..................................................................................................... 54 6. Conditions to the Merger............................................................................... 54 6.1 Conditions to Obligations of Each Party to Effect the Merger.................................. 54 6.2 Conditions to Obligations of Genovo........................................................... 55 6.3 Conditions to the Obligations of Targeted and Merger Sub...................................... 56 ARTICLE SEVEN................................................................................................... 58 7. Termination, Amendment and Waiver...................................................................... 58 7.1 Termination................................................................................... 58 7.2 Effect of Termination......................................................................... 60 7.3 Expenses and Termination Fees................................................................. 60 7.4 Amendment..................................................................................... 61 7.5 Extension; Waiver............................................................................. 62 ARTICLE EIGHT................................................................................................... 62 8. Escrow and Indemnification............................................................................. 62 8.1 Survival of Representations and Warranties.................................................... 62 8.2 Indemnification by Genovo Stockholders........................................................ 62 8.3 Damages Threshold............................................................................. 63 8.4 Escrow Fund; Escrow Agreement................................................................. 63 8.5 Escrow Period................................................................................. 64 8.6 Distributions; Voting......................................................................... 65 8.7 Method of Asserting Claims; Resolution of Conflicts........................................... 65 8.8 Stockholders' Representative; Power of Attorney............................................... 65 8.9 Adjustment to Escrow.......................................................................... 66 8.10 Third-Party Claims............................................................................ 66 8.11 University of Pennsylvania Amendment.......................................................... 67 ARTICLE NINE.................................................................................................... 68 9. General Provisions..................................................................................... 68 9.1 Expenses...................................................................................... 68 9.2 Notices....................................................................................... 68
-iv- TABLE OF CONTENTS (continued)
Page 9.3 Headings...................................................................................... 70 9.4 Counterparts.................................................................................. 70 9.5 Entire Agreement; Nonassignability; Parties in Interest....................................... 70 9.6 Severability.................................................................................. 71 9.7 Remedies Cumulative........................................................................... 71 9.8 Governing Law................................................................................. 71 9.9 Rules of Construction......................................................................... 71 9.10 Amendments and Waivers........................................................................ 71 9.11 Specific Performance.......................................................................... 71 9.12 Joint and Several Liability................................................................... 72 9.13 Interpretation................................................................................ 72
Exhibit A Distribution Schedule Exhibit B Form of Notice of Exercise Exhibit C Genzyme Assumption Agreement Exhibit D Genovo Disclosure Memorandum Exhibit E Targeted Disclosure Memorandum Exhibit F Biogen Agreements Exhibit G Form of Voting Agreement Exhibit H Form of Lockup Agreement Exhibit I Form of Genovo Tax Certificates Exhibit J Form of Escrow Agreement Exhibit K Wilson Letter Agreement Exhibit L Form of Aguiar Employment and Consulting Agreement Exhibit M Form of Key Employee Agreements Exhibit N Escrow Fund Allocation Exhibit O University of Pennsylvania License Agreements -v- AGREEMENT AND PLAN OF MERGER ---------------------------- This Agreement and Plan of Merger (this "Agreement") is made and entered --------- into as of August 8, 2000, by and among Targeted Genetics Corporation, a Washington corporation ("Targeted"), TGC Acquisition Corporation, a Delaware -------- corporation and a direct wholly owned subsidiary of Targeted ("Merger Sub"), ---------- Genovo, Inc., a Delaware corporation ("Genovo"), and Biogen, Inc., a ------ Massachusetts corporation ("Biogen"). ------ RECITALS -------- A. The Boards of Directors of Genovo, Targeted, Merger Sub and Biogen believe it is in the best interests of their respective companies and their respective shareholders that Merger Sub be merged with and into Genovo (the "Merger") in accordance with the Delaware General Corporation Law (the "DGCL") ------ ---- and in accordance with the terms and subject to the conditions set forth in this Agreement. Pursuant to the Merger, each share of Genovo Capital Stock (as defined in Section 1.6(a) of this Agreement) outstanding at the Effective Time (as defined in Section 1.2 of this Agreement) shall be converted into the right to receive shares of common stock, par value $0.01 per share, of Targeted (the "Targeted Common Stock") and each option to purchase Genovo Capital Stock --------------------- outstanding at the Effective Time shall be converted into the right to receive options to purchase Targeted Common Stock, on the terms and conditions set forth in this Agreement. B. Each of Genovo, Targeted, Merger Sub and Biogen desires to make certain representations and warranties and other agreements in connection with the Merger. C. For United States federal income tax purposes, the parties intend that the Merger contemplated by this Agreement qualify as a tax-free "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and the rules and regulations promulgated under Section ---- 368(a). AGREEMENT --------- In consideration of the foregoing premises and the mutual representations, warranties and covenants of the parties set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties to this Agreement agree as follows: ARTICLE ONE 1. The Merger. ---------- 1.1 The Merger. At the Effective Time (as defined in Section 1.2 of ---------- this Agreement) and subject to and upon the terms and conditions of this Agreement and the applicable provisions of the DGCL, Merger Sub shall be merged with and into Genovo, at which time the separate corporate existence of Merger Sub shall cease and Genovo shall continue as the surviving corporation of the Merger (the "Surviving Corporation"). --------------------- 1 1.2 Closing; Effective Time. Upon the terms and subject to the ----------------------- conditions of this Agreement, the closing of the Merger (the "Closing") shall ------- take place at 10:00 a.m. on a date (the "Closing Date") that shall be the fifth ------------ business day after the satisfaction or waiver (subject to applicable Law (as defined in Section 1.11 of this Agreement)) of each of the conditions set forth in Article Six of this Agreement, other than those conditions that by their nature are to be satisfied at the Closing (but subject to the fulfillment or waiver of those conditions), at the offices of Orrick, Herrington & Sutcliffe LLP, 701 Fifth Avenue, Suite 6500, Seattle, Washington 98104, or at such other time, date or place as agreed to in writing by the parties to this Agreement. In connection with the Closing, subject to the conditions of this Agreement, the parties to this Agreement shall cause the Merger to be consummated by filing a certificate of merger complying with the DGCL with the Secretary of State of the state of Delaware (the "Certificate of Merger") on the Closing Date. The Merger --------------------- shall become effective upon the filing of the Certificate of Merger with the Secretary of State or at such later time as is agreed by Targeted and Genovo and specified in the Certificate of Merger (the "Effective Time," and such date, the -------------- "Effective Date"). -------------- 1.3 Effect of the Merger. At the Effective Time, the effect of the -------------------- Merger shall be as provided in this Agreement, the Certificate of Merger and the DGCL. At the Effective Time, all the property, rights, privileges, powers, immunities and franchises of Genovo and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities, obligations and duties of Genovo and Merger Sub shall become the debts, liabilities, obligations and duties of the Surviving Corporation. 1.4 Certificate of Incorporation; Bylaws. ------------------------------------ (a) At the Effective Time, the certificate of incorporation of Genovo, as in effect immediately before the Effective Time, shall be the certificate of incorporation of the Surviving Corporation until thereafter amended as provided by the DGCL and such certificate of incorporation, provided that such certificate of incorporation shall be amended as soon as practicable after the Effective Time to be substantially equivalent to the certificate of incorporation of Merger Sub in effect immediately before the Effective Time. (b) At the Effective Time, the bylaws of Merger Sub, as in effect immediately before the Effective Time, shall be the bylaws of the Surviving Corporation until thereafter amended as provided by the DGCL, the certificate of incorporation of the Surviving Corporation and such bylaws. 1.5 Directors and Officers. From and after the Effective Time, the ---------------------- directors and officers of Merger Sub immediately before the Effective Time shall be the directors and officers of the Surviving Corporation, in each case until their successors are duly elected or appointed and qualified in accordance with the DGCL and the certificate of incorporation and bylaws of the Surviving Corporation. 1.6 Effect on Capital Stock. As of the Effective Time, by virtue of ----------------------- the Merger and without any action on the part of Merger Sub, Genovo or any of their respective stockholders, the following shall occur: 2 (a) Conversion of Genovo Capital Stock. All shares of each class of ---------------------------------- common stock, par value $0.001 per share (the "Genovo Common Stock"), and each ------------------- series of preferred stock, par value $0.001 per share (the "Genovo Preferred ---------------- Stock," and together with the Genovo Common Stock, the "Genovo Capital Stock"), - ----- -------------------- of Genovo issued and outstanding at the Effective Time (other than any shares to be cancelled pursuant to Section 1.6(b) and any Dissenting Shares (as defined in subsection (f) of this Section 1.6)) shall be converted and exchanged for that number of duly authorized, validly issued, fully paid and nonassessable shares of Targeted Common Stock set forth in the distribution schedule attached to this Agreement as Exhibit A (the "Distribution Schedule"), which Distribution --------- --------------------- Schedule shall be amended as of the second business day preceding the Closing as provided in subsection (c)(iv)(B) of this Section 1.6; provided, however, that neither (i) the aggregate number of shares of Targeted Common Stock that (A) the holders of Genovo Capital Stock immediately before the Effective Time (the "Genovo Stockholders") are entitled to receive in the Merger, (B) the holders of ------------------- options to purchase Genovo Capital Stock immediately before the Effective Time (the "Genovo Optionholders") are entitled to receive upon the exercise of -------------------- options to purchase Targeted Common Stock received in the Merger and (C) the holders of each series of Genovo Preferred Stock not electing to be subject to the Common Stock Exchange Ratio (as defined below) are entitled to receive in the Merger (such aggregate number of shares of Targeted Common Stock, the "Merger Consideration") nor (ii) the Common Stock Exchange Ratio shall be -------------------- affected. The Merger Consideration shall be distributed among (x) the holders of each class of Genovo Common Stock, in the amounts set forth opposite such holders' names and at the conversion ratio applicable to Genovo Common Stock set forth in the Distribution Schedule (the "Common Stock Exchange Ratio"), (y) the --------------------------- holders of each series of Genovo Preferred Stock, in the amounts set forth opposite such holders' names on the Distribution Schedule and (z) the Genovo Optionholders, in the amounts set forth opposite such holders' names on the Distribution Schedule and at the Common Stock Exchange Ratio. In addition to the Merger Consideration, at the Effective Time, by virtue of the Merger and without any action by the parties to this Agreement, the holders of Genovo Common Stock and the Genovo Optionholders shall receive the nontransferable, uncertificated contractual right to receive, as additional Merger Consideration, additional shares of Targeted Common Stock or additional shares of Targeted Common Stock subject to Roll-Over Options (as defined in Section 1.6(c) (i) of this Agreement), respectively, contingent upon the occurrence of the conditions set forth in Section 1.6(h) of this Agreement (the "Contingent Merger ----------------- Consideration"). All shares of Genovo Capital Stock, when so converted, shall no - ------------- longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such shares of Genovo Capital Stock shall cease to have any rights with respect to those shares, except the right to receive for such shares, upon the surrender of such certificate, the shares of Targeted Common Stock and cash in lieu of any fractional share of Targeted Common Stock, in accordance with subsection (g) of this Section 1.6, without interest. (b) Cancellation of Genovo Capital Stock Owned by Targeted or Genovo. ---------------------------------------------------------------- At the Effective Time, all shares of Genovo Capital Stock that are owned by Genovo as treasury stock and each share of Genovo Capital Stock owned by Targeted or any direct or indirect wholly owned subsidiary of Targeted at the Effective Time shall automatically be cancelled and extinguished and shall cease to exist, and no shares of Targeted Common Stock or other consideration shall be paid or delivered in exchange for such Genovo Capital Stock. 3 (c) Treatment of Genovo Stock Options. --------------------------------- (i) Effective immediately before the Effective Time, each option to purchase Genovo Common Stock (a "Genovo Stock Option") that has been ------------------- issued under Genovo's 1998 Stock Option Plan, as amended (the "Genovo Stock ------------ Option Plan"), before the Effective Time and that remains outstanding - ----------- immediately before the Effective Time, whether or not vested, shall automatically become fully vested and exercisable (an "Accelerated Option"), ------------------ without any action on the part of the holder of such Genovo Stock Option, Targeted, Genovo or the Surviving Corporation, unless the holder of such Genovo Stock Option, Targeted and Genovo shall agree in writing that such Genovo Stock Option shall not so accelerate. Each Accelerated Option held by any holder (a "Continuing Employee") other than James M. Wilson and Robert K. Dresing (each, a ------------------- "Consultant") shall, to the extent not exercised before the Effective Time, be ---------- converted at the Effective Time into the right to receive an option to purchase Targeted Common Stock in accordance with subsection (iii) of this Section 1.6(c) (a "Roll-Over Option"), without any action on the part of such Continuing ---------------- Employee, Targeted, Genovo or the Surviving Corporation. Any Accelerated Options held by a Consultant shall not be converted into the right to receive options to purchase Targeted Common Stock and, to the extent not exercised by such Consultant before the Effective Time, shall be cancelled at the Effective Time in accordance with Section 1.6(c)(ii) of this Agreement. (ii) Genovo shall provide to each holder of a Genovo Stock Option, together with a copy of the Information Statement described in Section 5.10 of this Agreement, a notice of the proposed Merger and a form of Notice of Exercise, substantially in the form attached to this Agreement as Exhibit B (the --------- "Notice of Exercise"). Each holder of a Genovo Stock Option who desires to ------------------ exercise Accelerated Options in whole or in part before the Merger shall deliver to Genovo, and Genovo shall deliver to Targeted, on or before the fourth business day before the Closing, a completed Notice of Exercise with respect to those Accelerated Options such holder elects to exercise before the Merger together with payment, either in cash (or check) or in shares of Genovo Common Stock as provided in the Genovo Stock Option Plan, in the amount of the exercise price for such Accelerated Options. At the Effective Time, all Accelerated Options held by Continuing Employees for which Genovo has not timely received a Notice of Exercise and payment of the exercise price shall become Roll-Over Options, and all Accelerated Options held by Consultants for which Genovo has not timely received a Notice of Exercise and payment of the exercise price shall be cancelled and extinguished by virtue of the Merger, without any action on the part of any holder of such Accelerated Options, Targeted, Genovo or the Surviving Corporation. (iii) Each Roll-Over Option shall be fully vested and shall have the expiration date applicable to such Genovo Stock Option immediately before the Effective Time, except as otherwise agreed in writing by the holder of such Roll-Over Option. Subject to subsection (v) of this Section 1.6(c), such Roll- Over Option shall be exercisable for that number of whole shares of Targeted Common Stock equal to the product of (A) the number of shares of Genovo Common Stock that were issuable upon exercise of the corresponding Genovo Stock Option immediately before the Effective Time multiplied by (B) the Common Stock Exchange Ratio (rounded down to the nearest whole share), and the per-share exercise price for the shares of Targeted Common Stock issuable upon exercise of such Roll-Over Option shall be equal to the quotient obtained by dividing (Y) the exercise price of the corresponding Genovo Stock 4 Option in effect immediately before the Effective Time by (Z) the Common Stock Exchange Ratio (rounded up to the nearest whole cent). All other terms and conditions to which such Roll-Over Option shall be subject, including any provisions relating to the effect on such Roll-Over Option of termination of the holder's employment relationship with Targeted, shall be as provided in a new stock option plan to be created by Targeted pursuant to Section 5.20 of this Agreement governing the terms of all Roll-Over Options (the "Roll-Over Stock --------------- Option Plan"), which terms and conditions shall be substantially similar to - ----------- those of the Targeted Stock Option Plan, as currently in effect (subject to the adjustments required by Section 1.6(c) after giving effect to the Merger and the terms of the Genovo Stock Option Plan). (iv) Genovo shall provide to Targeted on the second business day immediately preceding the Closing: (A) an amended Schedule 1.6(c) to the Genovo Disclosure Memorandum (as defined below), which shall set forth as of such date a true and complete list of all holders of outstanding Genovo Stock Options, including for each holder (1) the total number of shares of Genovo Common Stock subject to Genovo Stock Options held by such holder, (2) the number of shares subject to Accelerated Options that such holder has elected to exercise and (3) if such holder is a Continuing Employee, the number of shares of Targeted Common Stock subject to Genovo Stock Options that will become Roll-Over Options and the exercise price per share and term of each such Genovo Stock Option; and (B) an amended Distribution Schedule, which shall set forth as of such date (1) the number of shares of Targeted Common Stock to be distributed as of the Effective Time to each Genovo Stockholder (including Consultants and Continuing Employees who have elected to exercise all or a portion of their Accelerated Options before the Merger) and (2) the number of shares of Targeted Common Stock that will be issuable to each Continuing Employee pursuant to the exercise of Roll-Over Options by such Continuing Employee after the Effective Time. (v) The parties intend that each Roll-Over Option qualify after the Effective Time as an incentive stock option (as defined in Section 422 of the Code) to the extent such Roll-Over Option qualified as an incentive stock option before the Effective Time and, provided that the Targeted shareholders approve the Roll-Over Stock Option Plan in accordance with applicable law, the provisions of this Section 1.6(c) shall be applied consistent with such intent. The number of shares subject to, the exercise price of or the terms and conditions of exercise of such Roll-Over Option shall be adjusted, if necessary, to comply with Section 424(a) of the Code. (vi) As soon as practicable after the Effective Time, but in no event more than 30 days after the Effective Time, Targeted shall deliver to each holder of a Roll-Over Option a letter agreement evidencing the conversion of such holder's Accelerated Option into a Roll-Over Option and setting forth the terms and conditions of such Roll-Over Option. (d) Capital Stock of Merger Sub. At the Effective Time, each share --------------------------- of Common Stock of Merger Sub issued and outstanding immediately before the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share 5 of Common Stock of the Surviving Corporation. Each stock certificate of Merger Sub evidencing ownership of any such shares shall continue to evidence ownership of the share of common stock of the Surviving Corporation. (e) Adjustments. The number of shares that each Genovo Stockholder ----------- is entitled to receive in the Merger, as set forth in the Distribution Schedule, shall be equitably adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Targeted Common Stock), reorganization, recapitalization or other like change with respect to Genovo Capital Stock or Targeted Common Stock occurring after the date of this Agreement and having a record or effective date before the Effective Time. (f) Dissenters' Rights. ------------------ (i) Notwithstanding any provision of this Agreement to the contrary, any issued and outstanding shares of Genovo Capital Stock ("Dissenting ---------- Shares") held by a Genovo Stockholder who has demanded appraisal of such shares - ------ in accordance with Section 262 of the DGCL and as of the Effective Time has neither effectively withdrawn nor lost his, her or its right to appraisal of such shares (each such Genovo Stockholder, a "Dissenting Holder"), shall not be ----------------- converted into or represent a right to receive Targeted Common Stock (and cash in lieu of any fractional share) pursuant to Section 1.6(a) of this Agreement, and such Dissenting Holder shall be entitled to only such rights with respect to the Dissenting Shares as are granted under Section 262 of the DGCL. (ii) Each Dissenting Holder who, pursuant to the provisions of the DGCL, becomes entitled to payment of the fair value for his, her or its Dissenting Shares shall receive payment for such shares ("Paid Dissenting --------------- Shares"), but only after such value shall have been agreed upon or finally - ------ determined by a court of competent jurisdiction pursuant to the DGCL. (iii) In the event the Paid Dissenting Shares represent in the aggregate more than 5% of the number of shares of Genovo Capital Stock (calculated on an as-converted and fully diluted basis) issued and outstanding immediately before the Effective Time, any amount paid by Targeted or the Surviving Corporation to any Dissenting Holder or Holders for Paid Dissenting Shares in excess of the value (as determined below) such Dissenting Holder(s) would have received in the Merger for such Paid Dissenting Shares shall constitute "Excess Payments"; provided, however, that in the event the Paid --------------- Dissenting Shares represent in the aggregate more than 7% of the number of shares of outstanding Genovo Capital Stock (calculated on an as-converted and fully diluted basis), any amount paid for Paid Dissenting Shares in excess of such 7% shall not constitute Excess Payments, and neither Targeted nor the Surviving Corporation shall have any recourse to the Escrow Fund (as defined in Section 8.4(a) of this Agreement) or otherwise to the Genovo Stockholders pursuant to this Agreement for such amount. Each of Targeted and Genovo agree that an amount equal to one-half of the Excess Payments shall constitute Damages (as defined in Section 8.2 of this Agreement) and, subject to Section 8.3 of this Agreement, Targeted shall be entitled to recover from the Escrow Fund that number of Indemnification Escrow Shares (as defined in Section 8.4(a) of this Agreement) with a value equal to such amount, as provided in Article Eight of this Agreement. For purposes of 6 this subsection (iii), the value a Dissenting Holder would have received in the Merger for his, her or its Paid Dissenting Shares shall be deemed to be the product obtained by multiplying (A) the aggregate number of shares of Targeted Common Stock such Dissenting Holder would have been entitled to receive in the Merger, as set forth on the Distribution Schedule, if she, he or it were not a Dissenting Holder by (B) the Merger Price (as defined in subsection (g) of this Section 1.6). Each of Targeted and Genovo acknowledges and agrees that the portion of the Excess Payments constituting Damages for purposes of the indemnification provisions of Article Eight of this Agreement constitute an adjustment to the total consideration payable to the Genovo Stockholders in connection with the Merger. (iv) Notwithstanding the provision of subsection (i) of this Section 1.6(f), if any Dissenting Holder who demands appraisal of his, her or its shares of Genovo Capital Stock under Section 262 of the DGCL shall effectively withdraw or lose his, her or its right to appraisal, then as of the later of the Effective Time and the occurrence of such withdrawal or loss of such rights to appraisal, Targeted shall issue and deliver, upon surrender by such holder of certificate or certificates representing shares of Genovo Capital Stock, the number of shares of Targeted Common Stock to which such holder would have otherwise been entitled to receive in the Merger, as set forth in the Distribution Schedule, less the number of shares issuable to such Dissenting Holder that shall be deposited in the Escrow Fund pursuant to Article Eight of this Agreement. (g) Fractional Shares. No certificate representing a fraction of a ----------------- share of Targeted Common Stock shall be issued upon the surrender of any Certificate (as defined in Section 1.7(c)(i) of this Agreement). Each holder of shares of Genovo Capital Stock exchanged pursuant to the Merger who would otherwise be entitled to receive a fraction of a share of Targeted Common Stock (after aggregating all fractional shares of Targeted Common Stock to be received by that holder) shall receive from Targeted, in lieu of such fractional share, an amount of cash (rounded up to the nearest whole cent), without interest, equal to the product obtained by multiplying (i) such fractional portion of a share of Targeted Common Stock by (ii) the average of the last reported sales prices of Targeted Common Stock on the Nasdaq National Market for the 30 consecutive trading days immediately preceding and including the date that is two trading days immediately preceding this Agreement ($12.8495, the "Merger ------ Price"). - ----- (h) Contingent Merger Consideration Related to Genzyme Option --------------------------------------------------------- Exercise. - -------- (i) In the event that Genzyme Corporation ("Genzyme") exercises ------- its First Assumed Option (as defined in Section 1 of the Genzyme Assumption Agreement, in the form attached to this Agreement as Exhibit C (the "Genzyme --------- ------- Assumption Agreement"), pursuant to which Targeted shall assume, on the terms - -------------------- and conditions set forth in the Genzyme Assumption Agreement, the obligations of Genovo under the Stock Purchase Agreement between Genzyme and Genovo, dated as of August 30, 1999 (the "Genzyme Stock Purchase Agreement"), with respect to -------------------------------- certain options granted by Genovo to Genzyme), for a number of shares greater than or equal to the quotient obtained by dividing $3,000,000 by the exercise price of the options to purchase Targeted Common Stock granted to Genzyme pursuant to the Genzyme Assumption Agreement (the "Genzyme Options"), Targeted --------------- shall, as additional 7 Merger Consideration under this Agreement, issue to each holder of Genovo Common Stock and increase the number of shares of Targeted Common Stock subject to Roll-Over Options held by each Genovo Optionholder, on a pro rata basis according to the aggregate number of shares of Genovo Common Stock either held by such holder as of the Effective Time or subject to Genovo Stock Options held by such holder as of the Effective Time, that number of shares of Targeted Common Stock equal to one-half of the difference obtained by subtracting (A) the number of shares purchased by Genzyme pursuant to the First Assumed Option from (B) the number of shares purchasable by Genzyme pursuant to the First Assumed Option. (ii) In the event that Genzyme does not exercise or exercises less than all of its Second Assumed Option (as defined in Section 1 of the Genzyme Assumption Agreement), Targeted shall, as additional Merger Consideration, issue to each holder of Genovo Common Stock and increase the number of shares of Targeted Common Stock subject to Roll-Over Options held by each Genovo Optionholder, on a pro rata basis according to the aggregate number of shares of Genovo Common Stock either held by such holder as of the Effective Time or subject to Genovo Stock Options held by such holder as of the Effective Time, that number of shares equal to one-half of the difference obtained by subtracting (A) the number of shares purchased by Genzyme pursuant to the Second Assumed Option from (B) the number of shares of Common Stock purchasable by Genzyme pursuant to the Second Assumed Option. (iii) Neither Genzyme nor any other Genovo Stockholder or Genovo Optionholder shall have any further right with respect to or any interest in any shares subject to the unexercised portion of the First Assumed Option or the Second Assumed Option, as applicable, that are not issued to the holders of Genovo Common Stock or subject to Roll-Over Options held by Genovo Optionholders pursuant to subsection (i) or (ii) of this Section 1.6(h). 1.7 Surrender of Certificates. ------------------------- (a) Exchange Agent. ChaseMellon Shareholder Services, LLC shall act -------------- as the exchange agent (the "Exchange Agent") in the Merger. -------------- (b) Targeted to Provide Common Stock and Cash in Lieu of Fractional --------------------------------------------------------------- Shares. Promptly after the Effective Time, but in no event more than 10 days - ------ thereafter, Targeted shall make available to the Exchange Agent for exchange in accordance with this Article One, through such reasonable procedures as Targeted may adopt, (i) the shares of Targeted Common Stock issuable pursuant to Section 1.6(a) less the number of shares of Targeted Common Stock to be deposited into the Escrow Fund pursuant to Article Eight of this Agreement and (ii) cash in an amount sufficient to permit the payment of cash in lieu of fractional shares of Targeted Common Stock pursuant to Section 1.6(g) of this Agreement. (c) Exchange Procedures. ------------------- (i) Promptly after the Effective Time, but in no event more than 10 days after the Effective Time, the Surviving Corporation shall cause to be mailed to each holder of record of a certificate or certificates (the "Certificates") that immediately before the Effective Time represented ------------ outstanding shares of Genovo Capital Stock that were converted into the right 8 to receive shares of Targeted Common Stock (and any cash in lieu of fractional shares of Targeted Common Stock) pursuant to Section 1.6(a) of this Agreement: (A) a letter of transmittal, which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon receipt of the Certificates by the Exchange Agent, and which shall be in such form and have such other provisions as Targeted may reasonably specify, and (B) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Targeted Common Stock (and cash in lieu of any fractional shares of Targeted Common Stock and any dividends or distributions payable pursuant to Section 1.7(f) of this Agreement). (ii) Upon surrender of a Certificate for cancellation to the Exchange Agent (or to such other agent or agents as may be appointed by Targeted), together with the letter of transmittal, duly completed and validly executed, the holder of such Certificate shall be entitled to receive in exchange for such Certificate (A) a certificate representing the number of whole shares of Targeted Common Stock the holder is entitled to receive in the Merger, as set forth in the Distribution Schedule, less the number of shares of Targeted Common Stock to be issued to such holder and deposited in the Escrow Fund on such holder's behalf pursuant to Article Eight of this Agreement, (B) payment in lieu of any fractional share of Targeted Common Stock that such holder has the right to receive pursuant to Section 1.6(g) of this Agreement and (C) any dividends or distributions payable pursuant to Section 1.7(f) of this Agreement, and the Certificate so surrendered shall be cancelled. Until so surrendered, from and after the Effective Time each outstanding Certificate will be deemed, for all corporate purposes (subject to Section 1.7(f)), to evidence the ownership of the number of whole shares of Targeted Common Stock into which such shares of Genovo Capital Stock shall have been so converted and the right to receive an amount in cash in lieu of any fractional share of Targeted Common Stock. (d) No Liability. Notwithstanding anything to the contrary in this ------------ Section 1.7, none of the Exchange Agent, the Surviving Corporation or any party to this Agreement shall be liable to any individual, corporation, limited liability company, partnership, association, trust, unincorporated organization, other entity or group (each, a "Person") for any amount properly paid to any ------ court, administrative agency or commission or other governmental authority or instrumentality (each, a "Governmental Entity") pursuant to any applicable ------------------- abandoned property, escheat or similar law. (e) Dissenting Shares. The provisions of this Section 1.7 shall also ----------------- apply to Dissenting Shares that lose their status as such, except that the obligations of Targeted under this Section 1.7 shall commence on the date of loss of such status and such former Dissenting Holder shall be entitled to receive in exchange for his, her or its Dissenting Shares the number of shares of Targeted Common Stock to which such former Dissenting Holder is entitled pursuant to Section 1.6(a) of this Agreement. (f) Distributions With Respect to Unexchanged Shares. No dividends or ------------------------------------------------ other distributions with respect to Targeted Common Stock having a record date on or after the 9 Effective Time will be paid to the holder of any unsurrendered Certificate with respect to the shares of Targeted Common Stock represented by such Certificate until the holder of record of such Certificate shall surrender such Certificate. Following surrender of any such Certificate, Targeted shall cause to be paid to the record holder of the certificate representing whole shares of Targeted Common Stock issued in exchange for such Certificate, without interest, at the time of such surrender, the amount of any such dividends or other distributions with a record date on or after the Effective Time payable (but for the provisions of this Section 1.7(f)) with respect to such shares of Targeted Common Stock. (g) Transfers of Ownership. If any certificate for shares of Targeted ---------------------- Common Stock is to be issued in a name other than that in which the Certificate surrendered in exchange for the Targeted Common Stock is registered, it will be a condition of such issuance that the Certificate so surrendered will be properly endorsed and otherwise in proper form for transfer and that the Genovo Stockholder requesting such exchange will have paid to Targeted, or any agent designated by it, any transfer or other taxes required by reason of the issuance of a certificate for shares of Targeted Common Stock in any name other than that of the registered holder of the Certificate surrendered, or established to the satisfaction of Targeted, or any agent designated by it, that such tax has been paid or is not payable. 1.8 No Further Ownership Rights in Genovo Capital Stock. All shares --------------------------------------------------- of Targeted Common Stock issued in exchange for shares of Genovo Capital Stock in accordance with the terms of this Agreement (including any cash paid in lieu of fractional shares of Targeted Common Stock) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Genovo Capital Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Genovo Capital Stock that were outstanding immediately before the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as provided in this Article One. 1.9 Tax and Accounting Consequences. The parties intend that the ------------------------------- Merger shall constitute a tax-free reorganization within the meaning of Section 368(a) of the Code. 1.10 Taking of Necessary Action; Further Action. If at any time after ------------------------------------------ the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers, immunities and franchises of Genovo and Merger Sub, the officers and directors of Genovo and Merger Sub are fully authorized in the name of their respective corporations to take, and shall take, all such lawful and necessary action, so long as such action is not inconsistent with this Agreement or the DGCL. 1.11 Withholding. Each of the Exchange Agent, Targeted and the ----------- Surviving Corporation shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable pursuant to this Agreement to any Genovo Stockholder such amounts as may be required to be deducted or withheld from such consideration under the Code or any provision of any applicable state, local or foreign order, writ, injunction, decree, law, statute, rule, ordinance or regulation (any of these, a "Law") relating to taxes. To the extent such --- amounts are so deducted or withheld, such amounts shall be treated for all purposes under this Agreement as 10 having been paid to the Genovo Stockholder to whom such amounts would otherwise have been paid. 1.12 Lost, Stolen or Destroyed Certificates. In the event any -------------------------------------- Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact (in form and substance reasonably satisfactory to Targeted) by the holder of such Certificate, such shares of Targeted Common Stock (and shall pay cash in lieu of any fractional shares) as may be issuable pursuant to Section 1.6(a); provided, however, that Targeted may, in its discretion and as a condition precedent to such issuance (and payment), require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as Targeted may reasonably direct as indemnity against any claim that may be made against Targeted, the Surviving Corporation or the Exchange Agent with respect to the Certificates alleged to have been lost, stolen or destroyed. 1.13 Stock Transfer Books. The stock transfer books of Genovo shall be -------------------- closed immediately upon the Effective Time and there shall be no further registration of transfer of Genovo Capital Stock on the records of Genovo after the Effective Time. ARTICLE TWO In this Agreement, any reference to a "Material Adverse Effect" with ----------------------- respect to any Person means any event, change or effect that, when taken individually or together with all other adverse changes and effects, is or would reasonably be expected to be materially adverse to the financial condition, assets, business or results of operations of such Person and its subsidiaries, taken as a whole, or to prevent or materially delay consummation of the Merger or otherwise to prevent such Person and its subsidiaries from performing their obligations under this Agreement, provided that none of the following shall constitute a Material Adverse Effect: (a) any event, change or occurrence affecting Genovo's or Targeted's or any of Targeted's subsidiaries' businesses as a result of the announcement of the execution of this Agreement; (b) changes in general economic conditions; (c) any event, change or occurrence generally affecting the industries in which Genovo or Targeted and Targeted's subsidiaries operate; (d) in the case of Genovo or Biogen, any event, change or occurrence in Genovo's business after the date of this Agreement attributable solely to actions taken by Targeted; or (e) in the case of Targeted, any event, change or occurrence in Targeted's business after the date of this Agreement attributable solely to actions taken by Genovo or Biogen before the Effective Time. In this Agreement, any reference to Biogen's "knowledge" with respect to --------- Genovo means the actual knowledge of any representative of Biogen serving as a director on Genovo's board of directors. Subject to the foregoing, any reference to the "knowledge" of any other party means such party's actual --------- knowledge after due inquiry of officers, directors and other employees of such party reasonably believed to have knowledge of the matter in question. 2. Representations and Warranties of Genovo. ---------------------------------------- Genovo represents and warrants to Targeted and Merger Sub as follows: 11 2.1 Organization; Subsidiaries or Affiliates. ---------------------------------------- (a) Genovo is a corporation duly organized, validly existing and in good standing under the Laws of the state of Delaware. Genovo has the requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted and as proposed to be conducted, except where the failure to have such power, authority and governmental approvals would not, individually or in the aggregate, have a Material Adverse Effect. Genovo is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing that would not, individually or in the aggregate, have a Material Adverse Effect on Genovo. (b) Except as set forth in Schedule 2.1(b) of the disclosure document dated as of the date of this Agreement, attached to this Agreement as Exhibit D (the "Genovo Disclosure Memorandum"), Genovo does not directly or - --------- ---------------------------- indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, or otherwise control, any Person, and has no agreement or commitment to purchase any such interest. 2.2 Certificate of Incorporation and Bylaws. Before the date of --------------------------------------- this Agreement, Genovo has delivered a true and correct copy of its certificate of incorporation and bylaws, each as amended to date, to Targeted. Genovo is not in violation of any of the material provisions of its certificate of incorporation or bylaws. 2.3 Capital Structure. ----------------- (a) The authorized Genovo Capital Stock, all of which has a par value of $0.001 per share, consists of 5,770,989 shares of Class A Common Stock, of which 229,010.47 shares are issued and outstanding; 1,000,000 shares of Class B Common Stock, of which 93,000 shares are issued and outstanding; 1,000,000 shares of Class C Common Stock, of which 297,989.53 shares are issued and outstanding; 229,011 shares of Class D Common Stock, of which no shares are issued and outstanding; 2,000,000 shares of Series A Preferred Stock (the "Series A Preferred"), of which 408,254 shares are issued and outstanding; ------------------ 300,000 shares of Series E Preferred Stock (the "Series E Preferred"), of which ------------------ 175,000 shares are issued and outstanding; and 519,861 shares of Series F Preferred Stock (the "Series F Preferred"), of which 122,750 shares are issued ------------------ and outstanding. Schedule 2.3(a) of the Genovo Disclosure Memorandum sets forth as of the date of this Agreement a list of all of the holders of Genovo Capital Stock, the number and class of shares owned by each such holder and, if applicable, the number of shares of Genovo Common Stock into which each such holder's shares of Genovo Capital Stock are convertible. There are no other outstanding shares of Genovo Capital Stock or voting securities and no outstanding commitments to issue any shares of Genovo Capital Stock or voting securities, other than (i) pursuant to the exercise of Genovo Stock Options, (ii) pursuant to the exercise by Genzyme of options granted pursuant to the Genzyme Stock Purchase Agreement and (iii) the issuance of Class B Genovo Common Stock pursuant to the letter of intent dated as of April 21, 1999, between Genovo and the Trustees of the University of Pennsylvania (the "Penn Letter"). ----------- 12 (b) All outstanding shares of Genovo Capital Stock are duly authorized, validly issued, fully paid and nonassessable and are free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders of such shares, and are not subject to preemptive rights or rights of first refusal created by statute, Genovo's certificate of incorporation or bylaws or, except as set forth in Schedule 2.3(b) of the Genovo Disclosure Memorandum, any agreement to which Genovo is a party or by which it is bound. All outstanding shares of Genovo Capital Stock were issued in compliance with all applicable federal and state securities Laws. (c) As of the date of this Agreement, Genovo has reserved 940,447 shares of Genovo Common Stock for issuance to employees and consultants pursuant to the Genovo Stock Option Plan, of which no shares have been issued pursuant to exercises of Genovo Stock Options, 917,441 shares are subject to outstanding Genovo Stock Options, and 23,006 shares remain available for issuance. Since May 31, 2000, Genovo has not issued or granted additional Genovo Stock Options. Schedule 2.3(c) of the Genovo Disclosure Memorandum sets forth as of the date of this Agreement the number and class of shares of Genovo Common Stock subject to each outstanding Genovo Stock Option, the name of the holder of such Genovo Stock Option and the applicable exercise price. The Genovo Stock Option Plan has been duly authorized and approved by Genovo's board of directors and duly approved by the requisite number of Genovo Stockholders, all in accordance with the provisions of the DGCL, Genovo's certificate of incorporation and the Genovo Stock Option Plan. True and complete copies of all agreements and instruments relating to or issued under the Genovo Stock Option Plan have been made available to Targeted and such agreements and instruments have not since been amended, modified or supplemented. Other than the amendments to the option letter agreements of Consultants described in Section 5.22 of this Agreement, there are no agreements or proposals to amend, modify or supplement any such agreement or instrument from the form made available to Targeted. (d) Except as disclosed in Schedule 2.3 of the Genovo Disclosure Memorandum and except for rights created pursuant to this Agreement, the options granted to Genzyme pursuant to the Genzyme Stock Purchase Agreement, the Genovo Stock Options disclosed in Schedule 2.3(c) and the Penn Letter, there are no other options, warrants, calls, rights, commitments, agreements or arrangements of any character to which Genovo is a party or by which Genovo is bound relating to the issued or unissued Genovo Capital Stock or obligating Genovo to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of Genovo Capital Stock or obligating Genovo to grant, extend, accelerate the vesting of, change the price of or otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. Except as set forth in Schedule 2.3(d) of the Genovo Disclosure Memorandum and except for the Voting Agreement (as defined in Section 5.12(a) of this Agreement), there are no contracts, commitments or agreements relating to voting, purchase or sale of Genovo Capital Stock (i) between or among Genovo and any of the Genovo Stockholders and (ii) to Genovo's knowledge, between or among any of the Genovo Stockholders. 2.4 Authority. Genovo has all requisite corporate power and --------- authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions 13 contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of Genovo, subject only to the approval of the Merger by the Genovo Stockholders as contemplated by Section 6.1(a) of this Agreement and the filing of the Certificate of Merger pursuant to the DGCL. This Agreement has been duly executed and delivered by Genovo and, assuming due authorization, execution and delivery by Targeted, Merger Sub and Biogen, constitutes the valid and binding obligation of Genovo, enforceable against Genovo in accordance with its terms (subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar Laws affecting creditors' rights generally from time to time in effect and to general principles of equity, including concepts of materiality, reasonableness, good faith and fair dealing, regardless of whether in a proceeding at equity or at law). 2.5 No Conflicts; Required Filings and Consents. ------------------------------------------- (a) The execution, delivery and performance of this Agreement by Genovo does not, and the consummation of the transactions contemplated by this Agreement will not, conflict with or result in any violation of or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under, (i) assuming compliance with or satisfaction of the conditions to the Merger set forth in Section 6.1(a) of this Agreement, any provision of Genovo's certificate of incorporation or bylaws, as amended; (ii) assuming compliance with the matters referred to in Section 2.5(b) of this Agreement, any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment or Law applicable to Genovo or any of its properties or assets; or (iii) assuming compliance with the matters referred to in Section 2.5(b) of this Agreement, any license, sublicense or agreement described in Schedule 2.12 of the Genovo Disclosure Memorandum, except in the case of clause (ii) or (iii) as would not, individually or in the aggregate, have a Material Adverse Effect on Genovo. (b) No consent, approval, order or authorization of, or registration, declaration or filing with, any Person or Governmental Entity is required by or with respect to Genovo in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated by this Agreement, except for (i) the filing of the Certificate of Merger, as provided in Section 1.2 of this Agreement; (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Securities Act of 1933, as amended (the "Securities ------------ ---------- Act"), and applicable state securities Laws; (iii) such filings, if any, as may - --- be required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"); (iv) such consents or approvals as are set forth in ------- Schedule 2.5(b) of the Genovo Disclosure Memorandum; (v) such other consents, authorizations, filings, approvals and registrations that, if not obtained or made, would not have a Material Adverse Effect on Genovo; (vi) such consents, approvals, orders, authorizations, registrations, declarations and filings that may be required solely by reason of Targeted's, Biogen's or Merger Sub's (as opposed to any other Person's) participation in the transactions contemplated by this Agreement; and (vii) filings and notices not required to be made or given until after the Effective Time. 2.6 Financial Statements. Schedule 2.6 of the Genovo Disclosure -------------------- Memorandum includes a true, correct and complete copy of Genovo's audited financial 14 statements for each of the fiscal years ended June 30, 1999, 1998 and 1997, and its unaudited financial statements (balance sheet, statement of operations and statement of cash flows) at, as of and for the 12-month period ended June 30, 2000 (collectively, the "Financial Statements"). The Financial Statements have -------------------- been prepared in accordance with United States generally accepted accounting principles ("GAAP") (except that the unaudited financial statements do not have ---- related notes) applied on a consistent basis throughout the periods indicated. The Financial Statements fairly present, in all material respects, the financial condition and operating results of Genovo as of the dates, and for the periods, indicated in the Financial Statements, subject to normal year-end audit adjustments. Genovo maintains and will maintain through the Closing a standard system of accounting established and administered in accordance with GAAP. 2.7 Absence of Undisclosed Liabilities. Except as set forth in ---------------------------------- Schedule 2.7 of the Genovo Disclosure Memorandum, Genovo has no material obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (i) those set forth in the Balance Sheet as of June 30, 2000 (the "Genovo Balance Sheet"), (ii) those incurred in the ordinary course of -------------------- business and not required to be set forth in the Genovo Balance Sheet under GAAP, (iii) those incurred in the ordinary course of business since the date of the Genovo Balance Sheet and consistent with past practice and (iv) those incurred in connection with the execution of this Agreement or the consummation of the transactions contemplated by this Agreement. 2.8 Absence of Certain Changes. Except as set forth in Schedule -------------------------- 2.8 of the Genovo Disclosure Memorandum or as expressly contemplated by this Agreement, since June 30, 2000 (the "Genovo Balance Sheet Date") Genovo has, in ------------------------- all material respects, conducted its business in the ordinary course consistent with past practice and there has not been any: (a) amendment or change to Genovo's certificate of incorporation or bylaws; (b) capital expenditure or commitment by Genovo, in any individual amount exceeding $25,000, or in the aggregate, exceeding $100,000; (c) destruction of, damage to, or loss of any assets (including, without limitation, intangible assets), business or customer of Genovo (whether or not covered by insurance) that would constitute, individually or in the aggregate, a Material Adverse Effect on Genovo; (d) material change in accounting methods or practices (including any change in depreciation or amortization policies or rates, any change in policies in making or reversing accruals) or any revaluation by Genovo of any of its assets, except for any such change required by reason of a change in GAAP; (e) declaration, setting aside or payment of a dividend or other distribution in respect to Genovo Capital Stock, or any direct or indirect redemption, purchase or other acquisition by Genovo of Genovo Capital Stock, except for repurchases of Genovo Common Stock from terminated Genovo employees at the original per share purchase price of such shares; (f) (i) increase in the salary or other compensation payable or to become payable by Genovo to any of its officers, directors, employees or advisors, except in the ordinary course of business and consistent with past practice and except for merit increases in salaries of 15 employees at regularly scheduled times and in customary amounts consistent with past practice; (ii) except as contemplated by this Agreement, the declaration, payment or commitment or obligation by Genovo for the payment by Genovo of a bonus or other additional salary or compensation to any such person; or (iii) the establishment of any bonus, insurance, deferred compensation, pension, retirement, profit sharing, stock option (including without limitation, the granting of stock options, stock appreciation rights or performance awards), stock purchase or other employee benefit plan; (g) sale, lease, license or other disposition of any of Genovo's assets or properties, except in the ordinary course of business and not in excess of $25,000 in the aggregate; (h) termination or material amendment of any Material Contract (as defined below), to which Genovo is a party or by which it is bound; (i) loan by Genovo to any person or entity, or guaranty by Genovo of any loan, except for (i) travel or similar advances made to employees in connection with their employment duties in the ordinary course of business, consistent with past practices and (ii) trade payables not in excess of $25,000 in the aggregate and in the ordinary course of business and consistent with past practices; (j) waiver or release of any right or claim of Genovo, including any write-off or other compromise of any account receivable, in excess of $25,000 in the aggregate; (k) issuance or sale by Genovo of any shares of Genovo Capital Stock, or securities exchangeable, convertible or exercisable for Genovo Capital Stock, or of any other securities of Genovo; (l) material change in pricing or royalties set or charged by Genovo to its customers or licensees or in pricing or royalties set or charged by persons who have licensed Intellectual Property to Genovo; (m) event or condition of any character that, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect on Genovo; or (n) agreement by Genovo or any officer or employee of Genovo on behalf of Genovo to do any of the things described in the preceding clauses (a) through (m), other than with respect to the transactions contemplated by this Agreement. 2.9 Litigation. Except as set forth in Schedule 2.9 of the ---------- Genovo Disclosure Memorandum, there is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any Governmental Entity, or, to Genovo's knowledge, threatened against Genovo or its officers or directors (in their capacities as such) that, if determined in a manner adverse to Genovo, would, individually or in the aggregate, have a Material Adverse Effect on Genovo. There is no judgment, decree or order against Genovo or, to the knowledge of Genovo, any of its directors or officers (in their capacities as such), that seeks to or would reasonably be expected to prevent, enjoin or materially alter or delay any of the transactions 16 contemplated by this Agreement, or that would, individually or in the aggregate, have a Material Adverse Effect on Genovo. 2.10 Permits; No Default; Company Products; Regulation. ------------------------------------------------- (a) Genovo has obtained all franchises, grants, authorizations, licenses, permits, easements, variances, exceptions, consents, certificates, approvals and orders necessary for Genovo to own, lease and operate its properties or to carry on its business as it is now being conducted (the "Genovo ------ Authorizations") and no suspension or cancellation of any Genovo Authorization - -------------- is pending or, to Genovo's knowledge, threatened, except where the failure to have any Genovo Authorization, or the suspension or cancellation of any Genovo Authorization, would not have a Material Adverse Effect on Genovo. Except as set forth in Schedule 2.10(a) of the Genovo Disclosure Memorandum, Genovo is not in conflict with, or in default or violation of, (i) any Laws applicable to Genovo or by which any property or asset of Genovo is bound or affected, (ii) any Genovo Authorization or (iii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Genovo is a party or by which Genovo or any property or asset of Genovo is bound or affected, except for any such conflict, default or violation that would not, individually or in the aggregate, have a Material Adverse Effect on Genovo. (b) Except as would not have a Material Adverse Effect on Genovo, since the Genovo Balance Sheet Date, Genovo has not received any written notices, citations or decisions by any Governmental Entity that any product currently under development or being produced or manufactured by Genovo (a "Product") is defective or fails to meet any applicable standards promulgated by ------- any such Governmental Entity. To its knowledge, Genovo has complied in all material respects with the Laws, policies, procedures and specifications promulgated by the United States Food and Drug Administration ("FDA") with --- respect to the design, development, manufacture, labeling, testing and inspection of the Products and the operation of manufacturing facilities. Genovo has not received a warning letter or Section 305 notice from the FDA. (c) Schedule 2.10(c) of the Genovo Disclosure Memorandum accurately sets forth a complete list of all Products. 2.11 Title to Property. ----------------- (a) Genovo has good and marketable title to all properties, interests in properties and assets owned by Genovo, real and personal, reflected in the Genovo Balance Sheet or acquired after the Genovo Balance Sheet Date (except properties, interests in properties and assets sold or otherwise disposed of since the Genovo Balance Sheet Date in the ordinary course of business), and has valid leasehold interests in all properties and assets leased by Genovo, free and clear of all mortgages, liens, pledges, charges or encumbrances of any kind or character, except (i) the lien of current Taxes (as defined in Section 2.14(a)(i) of this Agreement) not yet due and payable and Taxes that Genovo is contesting in good faith through appropriate proceedings, which proceedings are described in Schedule 2.14(e) of the Genovo Disclosure Memorandum, (ii) such imperfections of title, liens and easements as do not and will not materially detract from or interfere with the use of the properties subject to or affected by such title, liens or easements, or otherwise materially impair business operations involving such 17 properties, and (iii) liens securing debt reflected on the Genovo Balance Sheet. Genovo's plants, property and equipment used in the operations of its business are in good operating condition and repair. All properties used in Genovo's operations are reflected in the Genovo Balance Sheet to the extent GAAP require the same to be reflected. Schedule 2.11(a) of the Genovo Disclosure Memorandum sets forth a true, correct and complete list of all real property owned or leased by Genovo, the name of the lessor, the date of the lease and each amendment to the lease and the aggregate annual rental and other fees payable under the lease. Such leases are in good standing, are valid and effective in accordance with their respective terms, and there is not under any such leases any existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default) . (b) Schedule 2.11(b) of the Genovo Disclosure Memorandum sets forth a true, correct and complete list of all material equipment (the "Equipment") owned or leased by Genovo, and such Equipment is, taken as a whole, --------- (i) adequate in all material respects for the conduct of Genovo's business, consistent with its past practice, and (ii) in good operating condition (except for ordinary wear and tear). 2.12 Intellectual Property. --------------------- (a) To Genovo's knowledge, Genovo owns, is licensed or otherwise possesses legally enforceable rights to make, use, sell, reproduce, modify and sublicense under all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, copyrights, and any applications for any of the foregoing, schematics, industrial models, inventions, technology, know-how, trade secrets, inventory, ideas, algorithms, processes, computer software programs or applications (in both source code and object code form) and associated intellectual property rights and tangible or intangible proprietary information or material ("Intellectual Property") that --------------------- are used or proposed to be used in Genovo's business as currently conducted (the "Genovo Intellectual Property"), except to the extent that the failure to have ---------------------------- such rights would not reasonably be expected to have a Material Adverse Effect on Genovo. (b) Schedule 2.12(b) of the Genovo Disclosure Memorandum lists (i) all patents and patent applications and all registered and material unregistered trademarks, trade names and service marks and registered and material unregistered copyrights included in the Genovo Intellectual Property, including the jurisdictions in which each such Genovo Intellectual Property right has been issued or registered or in which any application for such issuance and registration has been filed, (ii) all licenses, sublicenses and other agreements as to which Genovo is a party and pursuant to which any Person is authorized to use any Genovo Intellectual Property and (iii) all licenses, sublicenses and other agreements as to which Genovo is a party and pursuant to which Genovo is authorized to use any third-party patents, trademarks or copyrights, including software that are incorporated in, are or form a part of any Product or any potential product, or are otherwise relied upon by Genovo in conducting its business, except for Intellectual Property disclosed under the Sponsored Research Agreement, effective as of June 30, 1995, between Genovo and the University of Pennsylvania, but not optioned in Genovo's good faith business judgment. Except as set forth in Schedule 2.12(b), Genovo, to its knowledge, is the sole and exclusive owner, with all right, title and interest in and to (free and clear of any liens), or is exclusive or nonexclusive licensee of, the Genovo Intellectual Property, and has 18 legally enforceable rights (and is not contractually obligated to pay any compensation to any Person with respect to such rights) to the use of such Genovo Intellectual Property or the material covered by such Genovo Intellectual Property in connection with Genovo's business, services or Products with respect to which the Genovo Intellectual Property is being used. (c) To Genovo's knowledge, there is no unauthorized use, disclosure, infringement or misappropriation of any Genovo Intellectual Property. Genovo has not brought against any Person any action, suit or proceeding for infringement of the Genovo Intellectual Property or breach of any license or agreement involving the Genovo Intellectual Property. Genovo has not entered into any agreement to indemnify any other Person against any charge of infringement of the Genovo Intellectual Property, other than indemnification provisions contained in agreements arising in the ordinary course of business or listed in Schedule 2.12(c). To Genovo's knowledge, all patents, trademarks, service marks and copyrights held by Genovo are valid and existing and, except as set forth in Schedule 2.12(c) of the Genovo Disclosure Memorandum, there is no assertion, threat or claim by any Person (or, to Genovo's knowledge, any basis for such an assertion, threat or claim) challenging the ownership, validity or effectiveness of any Genovo Intellectual Property. Genovo has not been sued in any suit, action or proceeding that involves a claim of infringement of any patents, trademarks, service marks, copyrights or violation of any trade secret or other proprietary right of any Person. To Genovo's knowledge, neither the conduct of Genovo's business as currently conducted or contemplated nor the manufacture, sale, licensing or use of any Product as now manufactured, sold or licensed or used, nor the use in any way of the Genovo Intellectual Property in the manufacture, use, sale or licensing by Genovo of any Product currently proposed, infringes on or will infringe or conflict with, in any way, any license or Intellectual Property of any Person in a way that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. There are no pending or, to Genovo's knowledge, threatened interference, re-examinations, oppositions or nullities involving any patents, patent rights or applications for patents of Genovo, except such as may have been commenced by Genovo. Except as set forth in Schedule 2.12(c), to Genovo's knowledge, there is no breach or violation of or threatened or actual loss of rights under any license agreement to which Genovo is a party. (d) To Genovo's knowledge, all employees and consultants who contributed to the discovery or development of any Genovo Intellectual Property purported to be owned by Genovo did so either (i) within the scope of his or her employment relationship such that, in accordance with applicable Law, all Intellectual Property arising from such employment relationship became the exclusive property of Genovo or (ii) pursuant to valid written agreements assigning to Genovo all Intellectual Property arising from his or her employment or consulting relationship. (e) Genovo has taken all commercially reasonable and appropriate steps to protect and preserve the confidentiality of all Genovo Intellectual Property not otherwise protected by patents, patent applications or copyright (the "Genovo Confidential Information") except as would not have a ------------------------------- Material Adverse Effect on Genovo. Genovo has a policy requiring each employee, consultant and independent contractor to execute proprietary information and confidentiality agreements substantially as set forth in Genovo's standard forms. All current (and, to the knowledge of Genovo and except as set forth in Schedule 2.12(e) of the Genovo Disclosure Memorandum, all former) employees, consultants and independent contractors of 19 Genovo have executed such an agreement. All use, disclosure or appropriation by or to another Person of the Genovo Confidential Information owned by Genovo has been pursuant to the terms of a written agreement between Genovo and such other Person, except as would not, individually or in the aggregate, have a Material Adverse Effect on Genovo. To Genovo's knowledge, all use, disclosure or appropriation of the Genovo Confidential Information not owned by Genovo has been pursuant to the terms of a written agreement between Genovo and the owner of such Genovo Confidential Information, or is otherwise lawful. 2.13 Environmental Matters. --------------------- (a) The following terms shall be defined as follows: (i) "Environmental and Safety Laws" shall mean any ----------------------------- federal, state or local Laws and policies that are intended to assure the protection of the environment, or that classify, regulate, call for the remediation of, require reporting with respect to, or list or define air, water, groundwater, solid waste, hazardous or toxic substances, materials, wastes, pollutants or contaminants; that regulate the manufacture, handling, transport, use, treatment, storage or disposal of Hazardous Materials or materials containing Hazardous Materials; or that are intended to assure the protection, safety and good health of employees, workers or other Persons, including the public. (ii) "Hazardous Materials" shall mean any toxic or ------------------- hazardous substance, material or waste or any pollutant or contaminant, or infectious or radioactive substance or material, including those substances, materials and wastes defined in or regulated under any Environmental and Safety Laws; petroleum and petroleum products, including crude oil and any fractions thereof; natural gas, synthetic gas, and any mixtures thereof; radon; and asbestos. (iii) "Property" shall mean all real property currently -------- leased or owned by Genovo. (iv) "Facilities" shall mean all buildings and improvements ---------- on the Property of Genovo. (b) Genovo represents and warrants as follows: (i) no methylene chloride or asbestos is contained in or has been used at or released from the Facilities; (ii) all Hazardous Materials and wastes used or generated at the Facilities have been disposed of in accordance with all Environmental and Safety Laws; (iii) Genovo has received no written notice or, to its knowledge, verbal notice, of any noncompliance of the Facilities or of its past or present operations with Environmental and Safety Laws; (iv) no written notices, administrative actions or suits are pending or threatened relating to Hazardous Materials or a violation of any Environmental and Safety Laws; (v) to Genovo's knowledge, it is not a potentially responsible party under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), ------ or any state analog statute, arising out of events occurring before the Closing Date; (vi) there has not been for so long as Genovo has leased the Facilities, there is not now and, to Genovo's knowledge, there was not before Genovo leased the Facilities, any contamination, disposal, spilling, dumping, incineration, discharge, storage, treatment or 20 handling of Hazardous Materials on, under or migrating to or from the Facilities or Property (including soils and surface and ground waters); (vii) to Genovo's knowledge, there have not been in the past, and are not now, any underground tanks or underground improvements at, on or under the Property (including treatment or storage tanks, sumps, or water, gas or oil wells); (viii) to Genovo's knowledge, there are no polychlorinated biphenyls ("PCBs") deposited, ---- stored, disposed of or located on the Property or Facilities or any equipment on the Property containing PCBs at levels in excess of 50 parts per million; (ix) to Genovo's knowledge, there is neither formaldehyde on the Property or in the Facilities nor any insulating material containing urea formaldehyde in the Facilities; (x) to Genovo's knowledge, the Facilities and Genovo's uses and activities in the Facilities have at all times been in material compliance with all Environmental and Safety Laws as then in effect; and (xi) to Genovo's knowledge, Genovo is not liable under any Environmental and Safety Laws for any off-site contamination. 2.14 Taxes. ----- (a) For purposes of this Section 2.14 and other provisions of this Agreement relating to Taxes, the following definitions shall apply: (i) The term "Taxes" shall mean all taxes, charges, fees, ----- levies or other similar assessments, including any interest, penalties or other additions to tax that may become payable with respect to such tax, imposed by any federal, territorial, state, local or foreign taxing authority. (ii) The term "Returns" shall mean all reports, estimates, ------- declarations, information statements, returns or other documents or information required to be filed with any taxing authority in connection with any Taxes. (b) Genovo has timely filed all material Returns required by applicable Law to be filed by or on behalf of Genovo before the date of this Agreement, and such Returns are true, complete and correct in all material respects. All Taxes shown to be payable on such Returns or on subsequent assessments with respect to such Returns have been paid in full on a timely basis, and no other Taxes that are material in amount are payable by Genovo with respect to items or periods covered by such Returns (whether or not shown on or reportable on such Returns). (c) The amount of Genovo's liabilities for unpaid Taxes for all periods through the date of the Financial Statements do not, in the aggregate, exceed the amount of the current liability accruals for Taxes reflected on the Financial Statements, and the Financial Statements properly accrue in accordance with GAAP all liabilities for Taxes of Genovo payable after the date of the Financial Statements attributable to transactions and events occurring before such date. No liability for Taxes of Genovo has been incurred (or before Closing will be incurred) since such date other than in the ordinary course of business. (d) Genovo has withheld and paid over all Taxes that are material in amount that required to have been withheld and paid over, and complied in all material respects with all information reporting and backup withholding in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. 21 (e) Genovo has not been at any time a member of an affiliated group of corporations filing consolidated, combined or unitary income or franchise tax returns for a period for which the statute of limitations for any Tax potentially applicable as a result of such membership has not expired, other than an affiliated group of which Genovo is the common parent. (f) Genovo has provided to Targeted true and complete copies of (i) relevant portions of income tax audit reports, statements of deficiencies, closing or other agreements received by or on behalf of Genovo relating to Taxes, and (ii) all federal, state and foreign income or franchise tax returns and any state sales and use tax Returns for or including Genovo, each for all periods since January 1, 1997. (g) No audit of the Returns of or including Genovo by a taxing authority is in process or, to Genovo's knowledge, pending or threatened in writing. No deficiencies exist or have been asserted in writing with respect to Taxes of Genovo, and Genovo has not received notice in writing that it has not filed a Return or paid Taxes required to be filed or paid. Genovo is not a party to any action or proceeding for assessment or collection of Taxes and, to Genovo's knowledge, no such event been asserted or, to Genovo's knowledge, threatened in writing against Genovo or any of its assets. No waiver or extension of any statute of limitations is in effect with respect to Taxes or Returns of Genovo. (h) Genovo is not (nor has it ever been) a party to any tax sharing, tax allocation, tax indemnity or similar agreement, written or oral. Since April 16, 1997, Genovo has not been a distributing corporation or a controlled corporation in a transaction described in Section 355(a) of the Code. (i) Genovo is not, nor has it been, a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. Genovo is not a "consenting corporation" under Section 341(f) of the Code. ---------------------- (j) Except as set forth in Schedule 2.14(j) of the Genovo Disclosure Memorandum, Genovo has not entered into any compensatory agreements with respect to the performance of services for which payment under such compensatory agreement in connection with the transactions contemplated by this Agreement would result in a nondeductible expense to Genovo pursuant to Section 280G of the Code or an excise tax to the recipient of such payment pursuant to Section 4999 of the Code. (k) Genovo has not agreed to, nor is it required to make, other than by reason of the Merger, any adjustment under Section 481(a) of the Code. Genovo has not reported the sale of any asset on the installment method under Section 453 of the Code or under the "open transaction" method of accounting. Genovo is not, nor has it been, a "reporting corporation" subject to the --------------------- information reporting and record maintenance requirements of Section 6038A of the Code and the regulations under Section 6038A. 22 2.15 Employee Benefit Plans. ---------------------- (a) Schedule 2.15 of the Genovo Disclosure Memorandum lists, with respect to Genovo and any trade or business (whether or not incorporated) that is treated as a single employer with Genovo (an "ERISA Affiliate") within --------------- the meaning of Section 414(b), (c), (m) or (o) of the Code, (i) all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), (ii) each loan to a nonofficer ----- employee in excess of $10,000, loans to officers and directors and any stock option, stock purchase, phantom stock, stock appreciation right, supplemental retirement, severance, sabbatical, medical, dental, vision care, disability, employee relocation, cafeteria benefit (Section 125 of the Code) or dependent care (Section 129 of the Code), life insurance or accident insurance plans, programs or arrangements, (iii) all contracts and agreements relating to employment that provide for annual compensation in excess of $100,000 and all severance agreements, with any of the directors, officers or employees of Genovo (other than, in each case, any such contract or agreement that is terminable by Genovo at will or without penalty or other adverse consequence), (iv) all bonus, pension, profit sharing, savings, deferred compensation or incentive plans, programs or arrangements, (v) other fringe or employee benefit plans, programs or arrangements that apply to Genovo's senior management and that do not generally apply to all employees, and (vi) any current or former employment or executive compensation or severance agreements, written or otherwise, as to which Genovo's unsatisfied obligations of greater than $25,000 remain for the benefit of, or relating to, any present or former employee, consultant or director of Genovo (together, the "Genovo Employee Plans"). --------------------- (b) Genovo has furnished to Targeted a copy of each of the Genovo Employee Plans and related plan documents (including the most recent trust documents, insurance policies or contracts, employee booklets, summary plan descriptions and other authorizing documents, and, to the extent still in its possession, any material employee communications relating to the Genovo Employee Plans) and has, with respect to each Genovo Employee Plan that is subject to ERISA reporting requirements, provided copies of the Form 5500 reports filed for the last three plan years. Any Genovo Employee Plan intended to be qualified under Section 401(a) of the Code has either obtained from the Internal Revenue Service a favorable determination letter as to its qualified status under the Code, including all amendments to the Code effected by the Tax Reform Act of 1986 and subsequent legislation, or has applied to the Internal Revenue Service for such a determination letter before the expiration of the requisite period under applicable Treasury Regulations or Internal Revenue Service pronouncements in which to apply for such determination letter and to make any amendments necessary to obtain a favorable determination. Genovo has also furnished Targeted with the most recent Internal Revenue Service determination letter issued with respect to each such Genovo Employee Plan, and nothing has occurred since the issuance of each such letter which would reasonably be expected to cause the loss of the tax-qualified status of any Genovo Employee Plan subject to Section 401(a) of the Code. (c) Except as set forth in Schedule 2.15(c) of the Genovo Disclosure Memorandum, (i) none of the Genovo Employee Plans promises or provides retiree medical or other retiree welfare or life insurance benefits to any person; (ii) there has been no "prohibited transaction," as such term is ---------------------- defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any Genovo Employee Plan, which would reasonably be expected to have, in the aggregate, a Material Adverse Effect; (iii) each Genovo Employee Plan has been administered in 23 accordance with its terms and in compliance with the requirements prescribed by any and all Laws (including ERISA and the Code), except as would not have, in the aggregate, a Material Adverse Effect, and Genovo and each ERISA Affiliate have performed all obligations required to be performed by them under, are not in default under or violation of, and have no knowledge of any default or violation by any other party to, any of the Genovo Employee Plans; (iv) neither Genovo nor any ERISA Affiliate is subject to any liability or penalty under Sections 4976 through 4980 of the Code or Title I of ERISA with respect to any of the Genovo Employee Plans; (v) all contributions required to be made by Genovo or any ERISA Affiliate to any Genovo Employee Plan have been made on or before their due dates and a reasonable amount has been accrued in the Financial Statements for contributions to each Genovo Employee Plan for the applicable periods; (vi) with respect to each Genovo Employee Plan, no "reportable event" ---------------- within the meaning of Section 4043 of ERISA (excluding any such event for which the thirty (30) day notice requirement has been waived under the regulations to Section 4043 of ERISA) nor any event described in Sections 4062, 4063 or 4041 or ERISA has occurred; (vii) no Genovo Employee Plan is covered by, and neither Genovo nor any ERISA Affiliate has incurred or expects to incur any direct or indirect liability under, arising out of or by operation of Title IV of ERISA in connection with the termination of, or an employee's withdrawal from, any Genovo Employee Plan or other retirement plan or arrangement, and no fact or event exists that could give rise to any such liability, or under Section 412 of the Code; (viii) Genovo has not incurred any liability under, and have complied in all respects with, the Worker Adjustment Retraining Notification Act (the "WARN ---- Act"), and no fact or event exists that could give rise to liability under the - --- WARN Act; and (ix) no compensation paid or payable to any employee of Genovo has been, or will be, nondeductible by reason of application of Section 162(m) of the Code. With respect to each Genovo Employee Plan subject to ERISA as either an employee pension plan within the meaning of Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of Section 3(1) of ERISA, Genovo has prepared in good faith and timely filed all requisite governmental reports (all of which were true and correct as of the date filed) and has properly and timely filed and distributed or posted all notices and reports to employees required to be filed, distributed or posted with respect to each such Genovo Employee Plan. No suit, administrative proceeding, action or other litigation has been brought or, to the knowledge of Genovo, is threatened, against or with respect to any such Genovo Employee Plan, including any audit or inquiry by the IRS or United States Department of Labor. Neither Genovo nor any ERISA Affiliate is a party to, or has made any contribution to or otherwise incurred any obligation under, any "multiemployer plan" as defined in Section ------------------ 3(37) of ERISA. (d) With respect to each Genovo Employee Plan, Genovo has complied with (i) the applicable health care continuation and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the ----- proposed regulations thereunder and (ii) the applicable requirements of the Family Leave Act of 1993 and the regulations thereunder, except to the extent that such failure to comply would not, in the aggregate, have a Material Adverse Effect on Genovo. (e) Except as set forth in Schedule 2.15(e) of the Genovo Disclosure Memorandum, the consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee, director, other service provider of Genovo or any ERISA Affiliate to severance benefits or any other payment, except as expressly provided in this 24 Agreement, or (ii) accelerate the time of payment or vesting of any such benefits, or increase the amount of compensation due any such employee or service provider. (f) There has been no amendment to, written interpretation or announcement (whether or not written) by Genovo or any ERISA Affiliate relating to, or change in participation or coverage under, any Genovo Employee Plan that would materially increase the expense of maintaining such Plan above the level of expense incurred with respect to that Plan for the most recent fiscal year included in Genovo's financial statements. 2.16 Certain Agreements Affected by the Merger. Except as set ----------------------------------------- forth in Schedule 2.16 of the Genovo Disclosure Memorandum or as expressly contemplated by this Agreement, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated by this Agreement will (a) result in any payment (including severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any employee or director of Genovo or (b) materially increase any benefits otherwise payable by Genovo to any employee or director of Genovo. 2.17 Employee Matters. Genovo is in compliance in all material ---------------- respects with all currently applicable federal, state and local Laws respecting employment, discrimination in employment, terms and conditions of employment, wages, hours and occupational safety and health and employment practices, and is not engaged in any unfair labor practice. There are no pending claims against Genovo under any workers compensation plan or policy or for long term disability. Genovo does not have any obligations under COBRA with respect to any former employees or qualifying beneficiaries under COBRA. Except as set forth in Schedule 2.17 of the Genovo Disclosure Memorandum, there are no actions or proceedings pending or, to Genovo's knowledge, threatened, between Genovo and any of its employees, which actions or proceedings have or would reasonably be expected to have a Material Adverse Effect. Genovo is not a party to any collective bargaining agreement or other labor unions contract and Genovo has no knowledge of any activities or proceedings of any labor union or other group to organize any such employees. 2.18 Material Contracts. ------------------ (a) Schedule 2.18 of the Genovo Disclosure Memorandum contains a list of all contracts and agreements to which Genovo is a party and that are material to Genovo's business, results of operations or condition, financial or otherwise (collectively, the "Material Contracts"). Material Contracts shall ------------------ include, without limitation, the following: (i) each contract and agreement (other than routine purchase orders and pricing quotes in the ordinary course of business covering a period of one year or less) for the purchase of inventory, spare parts, other materials or personal property with any supplier or for the furnishing of services to Genovo under the terms of which Genovo: (A) paid or otherwise gave consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 1999, (B) has agreed to or is likely to pay or otherwise give consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 2000, (C) is likely to pay or otherwise give consideration of more than $25,000 in the aggregate over the 25 remaining term of such contract or (D) cannot cancel without penalty or further payment or with less than 90 days' notice; (ii) each customer contract and agreement (other than routine purchase orders, pricing quotes with open acceptance and other tender bids, in each case, entered into in the ordinary course of business and covering a period of one year or less) to which Genovo is a party that: (A) involved consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 1999, (B) is likely to involve consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 2000 (C) is likely to involve consideration of more than $25,000 in the aggregate over the remaining term of the contract, or (D) cannot be cancelled by Genovo without penalty or further payment or with less than 90 days' notice; (iii) all management contracts with independent contractors or consultants (or similar arrangements) to which Genovo is a party that: (A) involved consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 1999, (B) are likely to involve consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 2000, or (C) are likely to involve consideration of more than $25,000 in the aggregate over the remaining term of the contract; (iv) all contracts and agreements (excluding routine checking account overdraft agreements involving petty cash amounts) under which (A) Genovo has created, incurred, assumed or guaranteed (or may create, incur, assume or guarantee) indebtedness or (B) Genovo has imposed (or may impose) a security interest or lien on any of its assets, whether tangible or intangible, to secure indebtedness, in the case of either of clause (A) or (B) involve or are likely to involve consideration of or the creation of a security interest with a value of $25,000 or more individually or $50,000 or more in the aggregate; (v) all contracts and agreements that limit the ability of Genovo to (A) compete in any line of business, with any person or class of customers, in any geographic area or segment of the market, during any period of time or with respect to any Product, or (B) solicit any customer or client; (vi) all contracts and agreements to which Genovo is a party under which it has agreed to supply Products to a customer at specified prices, whether directly or through a specific distributor, manufacturer's representative or dealer; (vii) all contracts and agreements between or among Genovo, on the one hand, and any affiliate of Genovo (other than a wholly owned subsidiary), on the other hand; (viii) all licenses, sublicenses and other agreements to which Genovo is a party and pursuant to which any person is authorized to use any Genovo Intellectual Property, and all licenses, sublicenses and other agreements to which Genovo is a party and pursuant to which Genovo is authorized to use any third-party Intellectual Property; and (ix) all other contracts or agreements (i) that are material to Genovo or the conduct of its business as currently conducted or proposed to be conducted or (ii) the absence or termination of which would have a Material Adverse Effect on Genovo. 26 (b) Except as would not, individually or in the aggregate, have a Material Adverse Effect on Genovo, each Material Contract is a legal, valid and binding agreement of the parties. Except as set forth in Schedule 2.18(b) of the Genovo Disclosure Memorandum, none of the Material Contracts is in default by its terms or has been cancelled by the other party. Genovo is not in receipt of any claim of default under any Material Contract. Genovo has no knowledge of any proposed or pending termination or change to any Material Contract as a result of the Merger or otherwise. Genovo has furnished or made available to Targeted true and complete copies of all Material Contracts, together with all amendments, waivers or other material changes to such agreements. 2.19 Interested Party Transactions. Except as set forth in ----------------------------- Schedule 2.19 of the Genovo Disclosure Memorandum, Genovo is not indebted to any of its directors, officers, employees or agents (except for amounts due as normal salaries and bonuses and in reimbursement of ordinary expenses), and no such person is indebted to Genovo. 2.20 Insurance. Genovo has the policies of insurance and bonds --------- set forth in Schedule 2.20 of the Genovo Disclosure Memorandum. Except as set forth in Schedule 2.20 of the Genovo Disclosure Memorandum, to Genovo's knowledge, there is no material claim pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and Genovo is otherwise in compliance in all material respects with the terms of such policies and bonds. Genovo has no knowledge of any threatened termination of, or material premium increase with respect to, any of such insurance policies. 2.21 Minute Books. Except as set forth in Schedule 2.21 of the ------------ Genovo Disclosure Memorandum, the minute books of Genovo made available to Targeted contain a complete summary in all material respects of all meetings of directors and stockholders or actions by written consent since Genovo's incorporation through the date of this Agreement, and reflect all transactions referred to in such minutes accurately in all material respects. 2.22 Brokers' and Finders' Fees. Genovo has not incurred, nor -------------------------- will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or investment bankers' fees or any similar charges in connection with this Agreement or any transaction contemplated by this Agreement, other than to the Genovo Financial Advisor (as defined in Section 2.25 of this Agreement). Genovo has previously furnished to Targeted a complete and correct copy of all agreements between Genovo and the Genovo Financial Advisor pursuant to which such firm would be entitled to any payment with respect to the Merger. 2.23 Vote Required. Only the following votes of the Genovo ------------- Stockholders are necessary to approve this Agreement and the transactions contemplated by this Agreement: (a) pursuant to the provisions of the Second Amended and Restated Certificate of Incorporation of Genovo, the affirmative vote of the holders of a majority of the shares of Genovo Capital Stock entitled to vote outstanding on the record date set for Genovo's Special Meeting (as defined in Section 5.11 of this Agreement); and 27 (b) pursuant to the provisions of the Second Amended and Restated Certificate of Incorporation of Genovo and the Second Amended and Restated Stockholders Agreement dated August 30, 1999, among Genovo, Biogen, and certain other Genovo Stockholders, the affirmative vote or written consent of Biogen, Genzyme and Dompe Farmaceutici S.P.A. ("Dompe"). ----- 2.24 Board Approval. Genovo's board of directors, as of the date -------------- of this Agreement, by unanimous vote of those directors present (who constitute all of the directors then in office) has duly and validly authorized the execution and delivery of this Agreement and approved and adopted the consummation of the transactions contemplated by this Agreement, has taken all corporate actions required to be taken by the board of directors for consummation of the Merger and all transactions contemplated by this Agreement and has determined (a) that this Agreement and the transactions contemplated by this Agreement, including the Merger, taken together, are fair to, and in the best interests of, Genovo and the Genovo Stockholders and (b) to recommend that the Genovo Stockholders approve this Agreement. As of the date of this Agreement, Genovo's board of directors has directed that this Agreement be submitted to the Genovo Stockholders for their approval. 2.25 Opinion of Financial Advisor. Genovo's board of directors ---------------------------- has received the opinion of CIBC World Markets Corp. (the "Genovo Financial ---------------- Advisor") to the effect that, as of the date of such opinion, the Merger - ------- Consideration is fair from a financial point of view to the Genovo Stockholders. Genovo will, as promptly as is practicable, after the date of this Agreement, deliver a copy of such opinion to Targeted for informational purposes only. ARTICLE 2A 2A. Representations and Warranties of Biogen. ---------------------------------------- Biogen represents and warrants to Targeted and Merger Sub as follows: 2A.1 Organization; Authority. Biogen is a corporation duly ----------------------------- organized, validly existing and in good standing under the Laws of its jurisdiction of organization. Biogen has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. Biogen has taken all necessary corporate action to duly authorize the execution and delivery of the Merger Agreement, and has all necessary power, right and authority to enter into Merger Agreement and to consummate the transactions of Biogen contemplated by the Merger Agreement. This Agreement has been duly executed and delivered by Biogen and, assuming due authorization, execution and delivery by Targeted, Merger Sub and Genovo, constitutes the valid and binding obligation of Biogen, enforceable against Biogen in accordance with its terms (subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar Laws affecting creditors' rights generally from time to time in effect and to general principles of equity, including concepts of materiality, reasonableness, good faith and fair dealing, regardless of whether in a proceeding at equity or at law). 2A.2 Biogen Shares. Biogen owns, beneficially and of record, the ------------------- number of shares of Series A Preferred set forth in Schedule 2.3(a) of the Genovo Disclosure Memorandum 28 (the "Biogen Shares") and does not own any other shares of Genovo Capital Stock. ------------- Biogen has good title to, and there are no liens, encumbrances, adverse claims, mortgages, pledges, deeds of trust, security interests, or other adverse claim or interest of any kind on, the Biogen Shares. The Biogen Shares are not subject to any restrictions on sale or transfer (other than restrictions imposed by applicable securities Laws), including options, preemptive rights or rights of first refusal. 2A.3 No Conflicts; Required Filings and Consents. ------------------------------------------------- (a) The execution, delivery and performance of this Agreement by Biogen does not, and the consummation of the transactions contemplated by this Agreement will not, conflict with or result in any violation of or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under, any provision of Biogen's articles of incorporation or bylaws or (ii) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment or Law applicable to Biogen or any of its properties or assets, except in the case of either (i) or (ii) as would not reasonably be expected to prevent or materially delay consummation of the Merger or otherwise to prevent any party from performing their obligations under this Agreement. (b) No consent, approval, order or authorization of, or registration, declaration or filing with, any Person or Governmental Entity is required by or with respect to Biogen in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated by this Agreement, except for (i) such filings, if any, as may be required under the HSR Act, (ii) such other consents, authorizations, filings, approvals and registrations that, if not obtained or made, would not reasonably be expected to prevent or materially delay consummation of the Merger or otherwise to prevent any party from performing their obligations under this Agreement, and (iii) filings and notices not required to be made or given until after the Effective Time. 2A.4 Brokers or Agents. Biogen has not employed any broker or ----------------------- agent in connection with the transactions contemplated by this Agreement and agrees to indemnify Targeted against all Damages (as defined in Section 8.2(a) of this Agreement) relating to or arising out of claims for fees or commission of any broker or agent employed by Biogen. 2A.5 Voting Agreement; Lockup Agreement. Biogen has executed and ---------------------------------------- delivered a Voting Agreement and a Lockup Agreement (each term as defined in Section 5.12 of this Agreement). ARTICLE THREE 3. Representations and Warranties of Targeted and Merger Sub. --------------------------------------------------------- Targeted and Merger Sub by this Agreement jointly and severally represent and warrant to Genovo as follows: 3.1 Organization, Standing and Power. Targeted is a corporation -------------------------------- duly organized and validly existing under the Laws of the state of Washington. Each of Targeted's 29 subsidiaries (including Merger Sub) is a corporation, partnership or other entity duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization or incorporation. Each of Targeted and Merger Sub has the corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would, individually or in the aggregate, have a Material Adverse Effect on Targeted. Targeted has delivered to Genovo a true and correct copy of the articles or certificate of incorporation, as applicable, and bylaws of Targeted and Merger Sub, each as amended to date. Neither Targeted nor any of its subsidiaries is in violation of any material provision of its articles or certificate of incorporation or bylaws or equivalent organizational documents. Schedule 3.1 of the disclosure document attached to this Agreement as Exhibit E, dated as of the date of this Agreement --------- (the "Targeted Disclosure Memorandum") sets forth a complete list of Targeted's ------------------------------ subsidiaries. 3.2 Capital Structure. ----------------- (a) (i) The authorized capital stock of Targeted consists of 80,000,000 shares of Targeted Common Stock, par value $0.01 per share, and 6,000,000 shares of preferred stock, par value $0.01 per share. As of July 25, 2000, the issued and outstanding capital stock of Targeted consisted of 36,446,578 shares of Targeted Common Stock and the shares of Series B convertible exchangeable preferred stock described in subsection (ii) below. (ii) Shares of Series B convertible exchangeable preferred stock of Targeted held by Elan International Services were convertible into 3,732,106 shares of Targeted Common Stock as of December 31, 1999. If Elan were to elect to convert these shares of preferred stock on July 21, 2005 (the expiration of the conversion option), these shares of preferred stock would convert into 5,740,548 shares of Targeted Common Stock. Alternatively, Elan has the option to exchange this preferred stock and any accumulated dividends for a 30.1% interest in Emerald Gene Systems, Ltd., of which Targeted currently owns 80.1%. (iii) As of July 25, 2000, Targeted has reserved 3,419,544 shares of Targeted Common Stock for issuance upon the exercise of stock options granted or available for grant under Targeted's Restated 1992 Stock Option Plan and 1999 Stock Option Plan (collectively, the "Targeted Stock Option Plan"), of -------------------------- which options to purchase 2,730,241 shares have been issued and are outstanding and options to purchase 689,303 shares are available for grant. Targeted has reserved 6,398,175 shares of Targeted Common Stock for issuance upon the exercise of outstanding warrants to purchase Targeted Common Stock. (iv) As of the date of this Agreement, there are no other outstanding shares of capital stock or voting securities of Targeted other than shares of Targeted Common Stock issued after July 25, 2000 (i) upon the exercise of options issued under the Targeted Stock Option Plan or upon the exercise of warrants described above and (ii) to Elan International Services, Ltd. ("Elan") ---- pursuant to the Securities Purchase Agreement dated as of July 21, 1999 and amended August 8, 2000, between Targeted and Elan (the "Elan Stock Purchase ------------------- Agreement"). - --------- 30 (v) The authorized capital stock of Merger Sub consists of 100 shares of common stock, par value $0.001 per share, all of which are issued and outstanding and are held by Targeted. (b) The shares of issued and outstanding capital stock of Targeted and Merger Sub have been duly authorized and validly issued, are fully paid and nonassessable and are free and clear of any security interests, liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders of such shares. Such shares have not been issued in violation of, and except for the preemptive right granted by Targeted to Elan (which allows Elan to participate in any future equity financing of Targeted on the same terms and conditions as the investors in such financing, such that Elan maintains its pro rata interest in Targeted), are not otherwise subject to any preemptive or other similar rights or rights of first refusal created by statute, the articles or certificate of incorporation or bylaws of Targeted or Merger Sub or any agreement to which Targeted or Merger Sub is a party or by which it is bound. (c) Except (i) as contemplated by this Agreement, (ii) as provided in the Rights Agreement dated as of October 17, 1996, between Targeted and ChaseMellon Shareholder Services, LLC, as rights agent, (iii) as provided in the Elan Stock Purchase Agreement and (iv) as contemplated by the Biogen Funding Agreement (as defined in Section 3.7(e) of this Agreement), there are no other options, warrants, calls, rights, commitments, arrangements or agreements of any character to which Targeted or Merger Sub is a party or by which either of them is bound obligating Targeted or Merger Sub to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of the capital stock of Targeted or obligating Targeted or Merger Sub to grant, extend or enter into any such option, warrant, call, right, commitment, arrangement or agreement. The shares of Targeted Common Stock to be issued to the Genovo Stockholders pursuant to the Merger will be duly authorized, validly issued, fully paid and nonassessable. (d) There are no voting trusts or other agreements or understandings to which Targeted or any of its subsidiaries is a party with respect to the voting of the capital stock of Targeted or any of its subsidiaries. 3.3 Authority. Targeted and Merger Sub have all requisite --------- corporate power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of Targeted and Merger Sub (other than, with respect to the Merger, the filing and recordation of appropriate merger documents as required by the DGCL). This Agreement has been duly executed and delivered by Targeted and Merger Sub and constitutes the valid and binding obligations of Targeted and Merger Sub (subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar Laws affecting creditors' rights generally from time to time in effect and to general principles of equity, including concepts of materiality, reasonableness, good faith and fair dealing, regardless of whether in a proceeding at equity or at law). 31 3.4 No Conflict; Required Filings and Consents. ------------------------------------------ (a) The execution, delivery and performance of this Agreement by each of Targeted and Merger Sub do not, and the consummation by each of Targeted and Merger Sub of the transactions contemplated by this Agreement will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a benefit under (i) any provision of the articles of incorporation or bylaws of Targeted or the certificate of incorporation or bylaws of Merger Sub, each as amended, or (ii) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment or Law applicable to Targeted or Merger Sub or their properties or assets, except in the case of clause (ii) as would not, individually or in the aggregate, have a Material Adverse Effect on Targeted. (b) No consent, approval, order or authorization of, or registration, declaration or filing with, any Person or Governmental Entity is required by or with respect to Targeted or Merger Sub in connection with the execution, delivery and performance of this Agreement by Targeted and Merger Sub or the consummation by Targeted and Merger Sub of the transactions contemplated by this Agreement, except for (i) the filing of appropriate merger documents as required by the DGCL; (ii) the filing of a Form 8-K with the Securities and Exchange Commission ("SEC") and National Association of Securities Dealers --- within 15 days after the Closing Date; (iii) any filings as may be required under applicable state securities Laws, (iv) such filings, if any, as may be required to be made by Targeted under the HSR Act; (v) the filing with the Nasdaq National Market of a Notification Form for Listing of Additional Shares with respect to the shares of Targeted Common Stock issuable upon the conversion of the Genovo Capital Stock in the Merger and upon the exercise of the Genzyme Options; (vi) such other consents, authorizations, filings, approvals and registrations that, if not obtained or made, would not have a Material Adverse Effect on Targeted and would not prevent, materially alter or delay any the transactions contemplated by this Agreement; (vii) such other consents, approvals, orders, authorizations, registrations or filings that may be required solely by reason of Genovo's (as opposed to any other Person's) participation in the transactions contemplated by this Agreement; and (viii) filings and notices not required to be made or given until after the Effective Time. 3.5 SEC Documents; Financial Statements. ----------------------------------- (a) Targeted has filed with the SEC all reports, forms, registration statements, definitive proxy statements and documents required to be filed with the SEC since December 31, 1999, and has furnished to Genovo true and complete copies, in the form filed with the SEC, of (i) its Annual Report on Form 10-K for the fiscal year ended December 31, 1999, (ii) the proxy statement relating to its 2000 annual meeting of shareholders, (iii) its annual report to shareholders for the fiscal year ended December 31, 1999 and (iv) its Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, and Targeted will make available to Genovo true, correct and complete copies of any additional documents filed with the SEC by Targeted after the date of this Agreement and before the Effective Time, including, without limitation, any amendment to any such documents (collectively, the "Targeted SEC Documents"). As of their ---------------------- respective filing dates, the Targeted SEC Documents (including all financial statements, exhibits 32 and schedules to and documents incorporated by reference in the Targeted SEC Documents) (i) complied or, with respect to those not yet filed, will comply in all material respects with the requirements of the Exchange Act and (ii) did not, or, with respect to those not yet filed, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated or necessary to make the statements made in the Targeted SEC Documents, in light of the circumstances in which they were made, not misleading, except to the extent corrected by a subsequently filed Targeted SEC Document. (b) The financial statements of Targeted, including the notes to the financial statements, included or incorporated by reference in the Targeted SEC Documents (the "Targeted Financial Statements") were complete and ----------------------------- correct in all material respects as of their respective filing dates, complied as to form in all material respects with applicable accounting requirements and with the applicable published rules and regulations of the SEC as of their respective dates, and have been prepared in accordance with GAAP applied on a basis consistent throughout the periods indicated (except as may be indicated in the related notes or, in the case of unaudited statements, included in Quarterly Reports on Forms 10-Q). The Targeted Financial Statements fairly present the consolidated financial condition and operating results of Targeted and its subsidiaries at the dates and during the periods indicated in the Targeted Financial Statements (subject, in the case of unaudited statements, to normal, recurring year-end adjustments). There has been no change in Targeted accounting policies except in response to SEC Staff Accounting Bulletin No. 101 and as described in the Targeted SEC Documents. 3.6 Absence of Undisclosed Liabilities. Targeted has no ---------------------------------- material obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (a) those recorded or otherwise disclosed in the Targeted Financial Statements, (b) those incurred in the ordinary course of business and not required to be set forth in the Targeted Financial Statements in material compliance with GAAP, (c) those incurred in the ordinary course of business since the date of the most recent Targeted Financial Statements filed as part of the Targeted SEC Documents and consistent with past practice and (d) those incurred in connection with the execution of this Agreement or incurred in connection with the transactions contemplated by this Agreement. 3.7 Absence of Certain Changes. Except as set forth in Schedule -------------------------- 3.7 of the Targeted Disclosure Memorandum or as expressly contemplated by this Agreement, since December 31, 1999 (the "Targeted Balance Sheet Date"), Targeted --------------------------- has, in all material respects, conducted its business in the ordinary course consistent with past practice and there has not been any: (a) material amendments or changes to Targeted's articles of incorporation or bylaws; (b) declaration, setting aside, or payment of a dividend or other distribution in respect to the capital stock of Targeted, or any direct or indirect redemption, purchase or other acquisition by Targeted of any of its capital stock; 33 (c) issuance or sale by Targeted of any of its shares of capital stock, or securities exchangeable, convertible or exercisable for its capital stock, or of any other of its securities; (d) event or condition of any character that, individually or in the aggregate, had a Material Adverse Effect on Targeted; or (e) agreement by Targeted, or any officer or employee of Targeted on behalf of Targeted, to do any of the things described in the preceding clauses (a) through (d), other than (i) with respect to the transactions contemplated by this Agreement and (ii) the Development and Marketing Agreement among Targeted, Biogen and Genovo, substantially in the form attached to this Agreement as Exhibit F-1, the Return of Rights Agreement among Targeted, Genovo and Biogen, - ----------- substantially in the form attached to this Agreement as Exhibit F-2, and the ----------- Funding Agreement between Targeted and Biogen, substantially in the form attached to this Agreement as Exhibit F-3 (the "Biogen Funding Agreement"), each ----------- ------------------------- dated as of the date of this Agreement (collectively, the "Biogen Agreements"). ----------------- 3.8 Absence of Litigation. Except as set forth in Schedule 3.8 of --------------------- the Targeted Disclosure Memorandum, there is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before or, to the knowledge of Targeted or any of its subsidiaries, threatened by, any Governmental Entity against Targeted or any of its subsidiaries or any of their respective properties or any of their respective officers or directors (in their capacities as such) that, if determined in a manner adverse to Targeted or its subsidiaries would, individually or in the aggregate, have a Material Adverse Effect on Targeted. There is no judgment, decree or order against Targeted or any of its subsidiaries or, to the knowledge of Targeted or any of its subsidiaries, any of their respective directors or officers (in their capacities as such) that seeks to prevent, enjoin, or materially alter or delay any of the transactions contemplated by this Agreement, or has, individually or in the aggregate, a Material Adverse Effect on Targeted. 3.9 Governmental Authorization. Each of Targeted and its -------------------------- subsidiaries has obtained each governmental consent, license, permit, grant, or other authorization of a Governmental Entity that is required for the operation of Targeted's or any of its subsidiaries' business ("Targeted Authorizations"). ----------------------- All of such Targeted Authorizations are in full force and effect, except where the failure to obtain or have any of such Targeted Authorizations would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on Targeted. 3.10 Compliance With Laws. Each of Targeted and its subsidiaries has -------------------- complied in all material respects with, is not in violation of, and has not received any notices of violation with respect to, any federal, state or local Law with respect to the conduct of its business, or the ownership or operation of its business, except for such violations or failures to comply as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on Targeted. 3.11 Broker's and Finders' Fees. Neither Targeted nor any of its -------------------------- subsidiaries has incurred or will incur, directly or indirectly, any liability for brokerage or finders' fees or 34 agents' commissions or investment bankers' fees or any similar charges in connection with this Agreement or any transaction contemplated by this Agreement. 3.12 Tax Matters. Neither Targeted nor any of its subsidiaries nor, ----------- to the knowledge of Targeted, any of their respective affiliates or agents is aware of any agreement, plan or other circumstance that would prevent the Merger from constituting a tax-free reorganization under Section 368(a) of the Code. 3.13 Intellectual Property. --------------------- (a) To Targeted's knowledge, Targeted owns, or licenses or otherwise possesses legally enforceable rights to use all Intellectual Property that is used in the business of Targeted as currently conducted by Targeted (the "Targeted Intellectual Property"), except to the extent that the failure to have ------------------------------ such rights would not have, individually or in the aggregate, a Material Adverse Effect on Targeted. To Targeted's knowledge and except as set forth in Schedule 3.13 of the Targeted Disclosure Memorandum, Targeted is the sole and exclusive owner, with all right, title and interest in and to (free and clear of any liens), or the exclusive or nonexclusive licensee, of such Targeted Intellectual Property, and has legally enforceable rights (and is not contractually obligated to pay any compensation to any Person with respect to such rights) to the use of such Targeted Intellectual Property or the material covered by such Targeted Intellectual Property in connection with the services or products with respect to which such Targeted Intellectual Property is being used. (b) To Targeted's knowledge, all employees and consultants who contributed to the discovery or development of any of the Targeted Intellectual Property owned by Targeted did so either (i) within the scope of his or her employment or consulting relationship such that, in accordance with applicable Law, all Intellectual Property arising from such employment or consulting relationship became the exclusive property of Targeted or (ii) pursuant to written agreements assigning to Targeted all Intellectual Property arising from such employment or consulting relationship. (c) Targeted has taken all commercially reasonable and appropriate steps to protect and preserve the confidentiality of all Targeted Intellectual Property not otherwise protected by patents, patent applications or copyright (the "Targeted Confidential Information"). Targeted has a policy requiring each --------------------------------- employee, consultant and independent contractor to execute proprietary information and confidentiality agreements substantially in Targeted's standard forms and all current employees, consultant and independent contractors of Targeted have executed such an agreement. To Targeted's knowledge, all use, disclosure or appropriation of the Targeted Confidential Information owned by Targeted by or to another Person has been pursuant to the terms of a written agreement between Targeted and such other Person. To Targeted's knowledge, all use, disclosure or appropriation of the Targeted Confidential Information not owned by Targeted has been pursuant to the terms of a written agreement between Targeted and the owner of such Targeted Confidential Information, or is otherwise lawful. 35 3.14 Merger Subsidiary. Merger Sub is a newly formed, direct wholly ----------------- owned subsidiary of Targeted that has engaged in no business activities other than as specifically contemplated by this Agreement. 3.15 Sufficient Funds. Targeted has as of the date of this ---------------- Agreement, and will have as of the Effective Time, sufficient funds to make the cash payments required pursuant to Section 1.6(g) of this Agreement. 3.16 No Vote Required. No vote of the holders of any class or series ---------------- of capital stock of Targeted is necessary to approve this Agreement and the transactions contemplated by this Agreement. 3.17 Board Approval. The board of directors of each of Targeted and -------------- Merger Sub have unanimously approved this Agreement and the Merger. ARTICLE FOUR 4. Conduct Before the Effective Time. --------------------------------- 4.1 Conduct of Genovo. During the period from the date of this ----------------- Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, Genovo agrees (except to the extent expressly provided by this Agreement, including Schedules 2.8 and 4.1 of the Genovo Disclosure Memorandum, or as reasonably necessary for Genovo to fulfill its obligations under this Agreement), to carry on its business in the ordinary course consistent with past practice and to use its commercially reasonable best efforts to preserve intact its present business organization, keep available the services of its present officers and key employees and preserve its relationships with customers, suppliers, licensors, licensees, business partners and others having business dealings with it. Genovo agrees to promptly notify Targeted of any event or occurrence not in the ordinary course of its business or that would reasonably be expected to have a Material Adverse Effect on Genovo. Without limiting the generality of the foregoing, from the date of this Agreement until the earlier of the Effective Time and the termination of this Agreement, except as expressly contemplated by this Agreement, Genovo shall not do, cause or permit any of the following without the prior written consent of Targeted (which consent shall not be unreasonably withheld): (a) Charter Documents. Adopt or propose any amendments to its ----------------- certificate of incorporation or bylaws, other than changes effected to facilitate the Merger; (b) Dividends; Changes in Capital Stock; Repurchase. (i) Declare, ----------------------------------------------- set aside or pay any dividends on or make any other distributions (whether in cash, stock or property) with respect to any Genovo Capital Stock; (ii) split, combine or reclassify any Genovo Capital Stock; (iii) issue any other securities with respect to, in lieu of or in substitution for shares of Genovo Capital Stock; (iv) repurchase or otherwise acquire, directly or indirectly, any shares of Genovo Capital Stock or securities convertible into Genovo Capital Stock, except from former employees, directors and consultants in accordance with agreements providing for the 36 repurchase of shares in connection with any termination of service to Genovo; or (v) authorize or propose any of the foregoing; (c) Stock Option Plans. Accelerate, amend or change the period of ------------------ exercisability or vesting of Genovo Stock Options or other rights granted under the Genovo Stock Option Plan, except as provided in this Agreement; (d) Material Contracts. Enter into any material contract or ------------------ commitment, or violate, amend or otherwise modify or waive any of the material terms of any of its Material Contracts, other than in the ordinary course of business consistent with past practice; (e) Issuance of Securities. Issue, deliver, sell, transfer, pledge, ---------------------- dispose of or encumber (or authorize or propose any of the foregoing) any shares of Genovo Capital Stock or securities convertible into Genovo Capital Stock, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than (i) the issuance of shares of Genovo Capital Stock pursuant to the exercise of Genovo Stock Options outstanding as of the date of this Agreement and (ii) the issuance of Genovo Stock Options granted to newly hired employees in the ordinary course consistent with past practice; (f) Intellectual Property. Transfer to any Person any rights to the --------------------- Genovo Intellectual Property; (g) Exclusive Rights. Enter into or amend any agreements pursuant to ---------------- which any other Person is granted exclusive marketing or other exclusive rights of any type or scope with respect to any Product or Genovo Intellectual Property; (h) Dispositions. Sell, lease, license or otherwise dispose of or ------------ encumber any of its properties or assets (other than inventory) that are material, individually or in the aggregate, to its business, except (i) in the ordinary course of business consistent with past practice or (ii) pursuant to existing contracts or commitments listed in Schedule 4.1(h) of the Genovo Disclosure Memorandum; (i) Indebtedness. Incur any indebtedness for borrowed money (except ------------ in the ordinary course consistent with past practice), guarantee any such indebtedness, issue or sell any debt securities or guarantee any debt securities of others; (j) Leases; Real Estate. Enter into any leases providing for annual ------------------- payments in excess of $10,000, except pursuant to commitments for such leases existing as of the date of this Agreement, or acquire any real estate; (k) Payment of Obligations. Pay, discharge or satisfy in an amount ---------------------- in excess of $25,000 in any one case or $100,000 in the aggregate, any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise) arising other than in the ordinary course of business, other than the payment, discharge or satisfaction of liabilities reflected or reserved against in the Genovo Financial Statements or as required by applicable Law; 37 (l) Capital Expenditures. Make any capital expenditures, capital -------------------- additions or capital improvements except for (i) capital expenditures in the ordinary course of business and consistent with past practice, or (ii) individual capital expenditures not exceeding $25,000; (m) Insurance. Materially reduce the amount of any material --------- insurance coverage provided by existing insurance policies; (n) Termination or Waiver. Terminate or waive any right of --------------------- substantial value, other than in the ordinary course of business; (o) Employee Benefit Plans; New Hires; Pay Increases. (i) Adopt or ------------------------------------------------ amend any employee benefit or stock purchase or option plan; (ii) pay any special bonus or special remuneration to any employee, officer or director; (iii) increase the salaries or wage rates of its employees, officers or directors except for normal increases in the ordinary course consistent with past practice; or (iv) hire any new director-level or officer-level employee (provided that Genovo may hire a replacement for any current director-level or officer-level employee if it first provides Targeted advance notice regarding such hiring decision); (p) Severance Arrangement. Grant any severance or termination pay to --------------------- any director, officer or employee except (i) payments made pursuant to standard written agreements in effect on the date of this Agreement or (ii) grants made in the ordinary course consistent with past practice; (q) Lawsuits. Commence a lawsuit other than (i) for the routine -------- collection of bills, (ii) in such cases where Genovo in good faith determines that failure to commence suit would result in the material impairment of a valuable aspect of its business, provided that it consults with Targeted before the filing of such a suit, or (iii) for a breach of this Agreement; (r) Acquisitions. Propose or agree to acquire by merging or ------------ consolidating with, by purchasing a substantial portion of the assets of, or by any other manner, any Person, or otherwise acquire or agree to acquire any assets (other than inventory) that are material, individually or in the aggregate, to Genovo's business; (s) Taxes. Other than in the ordinary course of business, (i) make ----- or change any material election with respect to Taxes; (ii) adopt or change any material accounting method with respect to Taxes; (iii) file any material Tax Return or any material amendment to a material Tax Return; (iv) enter into any material closing agreement; (v) settle any material claim or assessment with respect to Taxes; or (vi) consent to any material extension or waiver of the limitation period applicable to any claim or assessment with respect to Taxes; (t) Revaluation. Except as required by GAAP, revalue any of its ----------- assets, including writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business; or (u) Other. Take, agree or propose to take any of the actions ----- described in subsections (a) through (t) of this Section 4.1, or any action that would make any of Genovo's representations or warranties contained in this Agreement untrue or inaccurate in any material 38 respect at, or as of any time before, the Effective Date, or would prevent Genovo from performing or cause Genovo not to perform its obligations under this Agreement. 4.2 Conduct of Business of Targeted. During the period from the date ------------------------------- of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, Targeted agrees (except to the extent expressly provided by this Agreement, Schedules 3.7 and 4.2 of the Targeted Disclosure Memorandum, or as reasonably necessary for Targeted or Merger Sub to fulfill its obligations under this Agreement), to carry on its and its subsidiaries' business in the ordinary course consistent with past practice and to use its commercially reasonable best efforts to preserve intact its and its subsidiaries' present business organization, keep available the services of its and its subsidiaries' present officers and key employees and preserve its and its subsidiaries' relationships with customers, suppliers, distributors, licensors, licensees, business partners and others having business dealings with it. Targeted agrees to promptly notify Genovo of any event or occurrence not in the ordinary course of its or its subsidiaries' business or that would reasonably be expected to have a Material Adverse Effect on Targeted. Without limiting the generality of the foregoing, from the date of this Agreement until the earlier of the Effective Time and the termination of this Agreement, Targeted shall not do, cause or permit any of the following, or allow, cause or permit any of its subsidiaries to do the following, without the prior written consent of Genovo (which consent shall not be unreasonably withheld): (a) Charter Documents. Adopt or propose any amendments to Targeted's ----------------- or any subsidiary's articles or certificate of incorporation, as applicable, or bylaws, other than changes effected to facilitate the Merger; (b) Dividends; Changes in Capital Stock; Repurchase. (i) Declare, ----------------------------------------------- set aside or pay any dividends on or make any other distributions (whether in cash, stock or property) with respect to any capital stock; (ii) split, combine or reclassify any capital stock; (iii) issue or authorize the issuance of any other securities with respect to, in lieu of or in substitution for shares of capital stock; or (iv) repurchase or otherwise acquire, directly or indirectly, any shares of capital stock; (c) Stock Option Plans. Accelerate, amend or change the period of ------------------ exercisability or vesting of options or other rights granted under the Targeted Stock Option Plan, except (i) as provided by this Agreement, (ii) as provided by the Targeted Stock Option Plan, or (iii) pursuant to commitments to do the foregoing in effect as of the date of this Agreement; (d) Merger; Sale of Assets; Dissolution. Propose or adopt a plan of ----------------------------------- liquidation, dissolution, or merger or consolidation with, or the sale of a substantial portion of its assets to, any Person, other than a liquidation or dissolution of any subsidiary or a merger or consolidation between wholly owned subsidiaries; (e) Issuance of Securities. Issue, deliver, or sell (or authorize or ---------------------- propose any of the foregoing) any securities convertible into shares of Targeted Common Stock, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any 39 character obligating it to issue Targeted Common Stock or any securities convertible into Targeted Common Stock, other than (i) as disclosed in Schedule 4.2 to the Targeted Disclosure Memorandum; (ii) the issuance of options to purchase Targeted Common Stock granted to directors, officers or employees in the ordinary course consistent with past practice; (iii) issuances to financial institutions in connection with financing arrangements; (iv) issuances by any subsidiary of Targeted to Targeted or any other subsidiary of Targeted or (v) the execution of the Genzyme Assumption Agreement and the Biogen Funding Agreement; (f) Material Adverse Effect. Take or cause to be taken any action ----------------------- that would reasonably be expected to have a material adverse effect on Targeted; or (g) Other. Take, agree to take or propose any of the actions ----- described in subsections (a) through (f) of this Section 4.2, or any action that would make any of Targeted's representations or warranties contained in this Agreement untrue or inaccurate in any material respect at, or as of any time before, the Effective Date, or would prevent Targeted from performing or cause Targeted not to perform its obligations under this Agreement. 4.3 No Solicitation. --------------- (a) From the date of this Agreement until termination, neither Genovo nor any of its officers, directors, employees, agents or representatives will, directly or indirectly, (i) take any action to solicit, initiate or encourage any Takeover Proposal (as defined in subsection (c) of this Section 4.3) or (ii) subject to the terms of the immediately following sentence, engage in negotiations with, disclose any nonpublic information relating to Genovo to, or afford access to the properties, books or records of Genovo to, any Person that has advised Genovo that it may be considering making, or that has made, a Takeover Proposal. Notwithstanding the foregoing, nothing contained in this Section 4.3 shall prevent Genovo from (i) providing information concerning this Section 4.3 or (ii) furnishing nonpublic information to, or entering into discussions or negotiations with, any Person in connection with an unsolicited, bona fide Takeover Proposal (or an unsolicited written expression of interest that would reasonably be expected to lead to a Takeover Proposal) that (y) Genovo's board of directors determines in good faith could lead to a Superior Proposal (as defined in subsection (c) of this Section 4.3) and (z) Genovo's board of directors determines in good faith after consultation with outside legal counsel that such action is necessary for Genovo's board of directors to comply with its fiduciary duties to stockholders under applicable Law; provided that Genovo has received an executed confidentiality agreement from such Person before furnishing nonpublic information to, or entering into discussions or negotiations with, such Person. (b) Genovo shall promptly notify Targeted (which notice shall be provided orally and in writing and shall identify the person making and set forth the material terms of such Takeover Proposal) after receipt of any Takeover Proposal or any request for nonpublic information relating to Genovo or for access to the properties, books or records of Genovo by any Person that may be considering making, or has made, a Takeover Proposal, if Genovo is prepared to provide such Person with access to such nonpublic information or properties, books or records. Targeted shall keep confidential the identity of such Person and any information relating to any such Takeover Proposal or unsolicited expression of interest that would reasonably be expected to result in a Takeover Proposal. Genovo shall not, and shall not permit 40 any of its officers, directors, employees or other representatives to, agree to or endorse any Takeover Proposal unless Genovo shall have terminated this Agreement pursuant to Section 7.1(c) of this Agreement and paid Targeted all amounts payable to Targeted pursuant to Section 7.3(b) of this Agreement. (c) For purposes of this Agreement, "Takeover Proposal" means any ----------------- offer or proposal for, or any indication of interest in, a merger or other business combination involving Genovo or the acquisition of any substantial equity interest in, or a significant portion of the assets of, Genovo, other than the transactions contemplated by this Agreement. For purposes of this Agreement, "Superior Proposal" means any bona fide Takeover Proposal on terms ----------------- that Genovo's board of directors determines in its good faith judgment (after consultation with a financial advisor of nationally recognized reputation, taking into account all the terms and conditions of the Takeover Proposal, including any breakup fees, expense reimbursement provisions and conditions to consummation) are more favorable to Genovo Stockholders than this Agreement and the Merger taken as a whole, and for which financing, to the extent required, is then fully committed or reasonably determined to be available by Genovo's board of directors. (d) Genovo will, and will cause its officers, directors, employees, agents or representatives to, immediately cease and cause to be terminated all discussions and negotiations, if any, that have taken place before the date of this Agreement with any party with respect to any Takeover Proposal. 4.4 Notices. Genovo shall give all notices and other information ------- required to be given to the employees of Genovo, any collective bargaining unit representing any group of employees of Genovo, and any applicable government authority under the WARN Act, the National Labor Relations Act, the Code, COBRA, and other applicable Laws in connection with the transactions provided for in this Agreement. 4.5 Termination of 401(k) Plan; Rollover of Distributions. Before ----------------------------------------------------- the Effective Time, Genovo shall take all necessary action to terminate its 401(k) Plan (the "Genovo 401(k) Plan") and to ensure that each employee of ------------------ Genovo is fully vested in his or her account balance under the Genovo 401(k) Plan. As soon as practicable following approval by the Internal Revenue Service of the termination of the Genovo 401(k) Plan or at such earlier time as Targeted may deem reasonably practicable, the assets of the Genovo 401(k) Plan shall be distributed and Targeted shall permit the employees of Genovo employed by the Surviving Corporation to roll their distributions into Targeted's 401(k) Plan. ARTICLE FIVE 5. Additional Agreements. --------------------- 5.1 Efforts and Further Assurances. Subject to the terms and ------------------------------ conditions of this Agreement, each of Targeted, Genovo and, as specifically indicated in this Article Five, Biogen, shall use its commercially reasonable best efforts to take, or cause to be taken, all actions necessary, proper or advisable under applicable Law to consummate the Merger and the other transactions contemplated by this Agreement and to fulfill and cause to be fulfilled the conditions to closing under this Agreement. Each of Targeted, Genovo and, as specifically 41 indicated in this Article Five, Biogen, at the reasonable request of another party to this Agreement, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated by this Agreement. 5.2 Consents; Cooperation. In furtherance and not in limitation of --------------------- the covenants of the parties contained in this Article Five: (a) Each of Targeted and Genovo shall use its commercially reasonable best efforts to promptly (i) obtain from any Governmental Entity any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by Targeted or Genovo or any of Targeted's subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated under this Agreement, and (ii) make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement and the Merger required under the Securities Act, the Exchange Act and any other applicable federal, state or foreign securities Laws. (b) Each of Targeted and Biogen agrees to make any required filing of a Notification and Report Form pursuant to the HSR Act with respect to the transactions contemplated by this Agreement as promptly as practicable and in any event within 10 business days of the date of this Agreement, to supply as promptly as practicable any additional information and documentary material that may be requested pursuant to the HSR Act and to take all other actions reasonably necessary to cause the expiration or termination of the applicable waiting periods under the HSR Act as soon as practicable. The fee for the initial filing with respect to the transactions contemplated by this Agreement (and the fees, if any, for subsequent filings of such information and documentary material as may be requested) shall be paid by Biogen. (c) (i) Each of Targeted, Genovo and Biogen, as applicable, shall use its commercially reasonable best efforts to resolve any objections as may be asserted by any Governmental Entity with respect to the transactions contemplated by this Agreement under the HSR Act, the Sherman Act, the Clayton Act, the Federal Trade Commission Act and any other federal, state or foreign Law or administrative or judicial doctrines or decisions that are designed to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade or lessening of competition through merger or acquisition (collectively, the "Antitrust Laws"). In connection therewith, -------------- if any administrative or judicial action or proceeding is instituted (or threatened to be instituted), including any proceeding by a private Person, challenging any transaction contemplated by this Agreement as violative of any Antitrust Law, each of Targeted, Genovo and Biogen, as applicable, shall cooperate in all respects with each other and each shall use its commercially reasonable best efforts to contest and resist any such action or proceeding and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order, whether temporary, preliminary or permanent (each of these, an "Order"), that is in effect and that prohibits, prevents or restricts - ------ consummation of the Merger or any such other transactions contemplated by this Agreement. (ii) Each of Targeted, Genovo and Biogen, as applicable, shall use its commercially reasonable best efforts to (A) cooperate in all respects with each other in 42 connection with any filing or submission and in connection with any investigation or other inquiry, including any proceeding initiated by a private Person; (B) keep the other party informed in all material respects of any material communication received by such party from, or given by such party to, the Federal Trade Commission (the "FTC"), the Antitrust Division of the --- Department of Justice (the "DOJ") or any other Governmental Entity and of any --- material communication received or given in connection with any proceeding by a private Person, in each case regarding any of the transactions contemplated by this Agreement; and (C) permit the other party to review any material communication given by it to, and consult with each other in advance of any meeting or conference with, the FTC, the DOJ or any such other Governmental Entity or, in connection with any proceeding by a private Person, with any other Person, and to the extent permitted by the FTC, the DOJ or such other applicable Governmental Entity or other Person, give the other party the opportunity to attend and participate in such meetings and conferences. (iii) Notwithstanding anything to the contrary in this subsection (c), (A) neither Targeted nor any of its subsidiaries shall be required to divest any of their respective businesses, product lines or assets, or to take or agree to take any other action or agree to any limitation that would reasonably be expected to have a Material Adverse Effect on Targeted or Targeted combined with the Surviving Corporation after the Effective Time; (B) Genovo shall not be required to divest any of its businesses, product lines or assets, or to take or agree to take any other action or agree to any limitation that would reasonably be expected to have a Material Adverse Effect on Genovo; and (C) Biogen shall not be required to divest any of its businesses, product lines or assets, or to take or agree to take any other action or agree to any limitation that would reasonably be expected to have a Material Adverse Effect on Biogen. (iv) Notwithstanding the foregoing or any other provision of this Agreement, nothing in this subsection (c) shall limit Targeted's or Genovo's right to terminate this Agreement pursuant to Section 7.1. (d) From the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement, each of Targeted, Genovo and Biogen shall promptly notify the other parties in writing of any pending or, to the knowledge of such party, notice, threatened action, proceeding or investigation by any Governmental Entity or any other Person (i) concerning the transactions contemplated by this Agreement, (ii) challenging or seeking material damages in connection with this Agreement or the transactions contemplated under this Agreement or (iii) seeking to restrain or prohibit the consummation of the Merger or the transactions contemplated under this Agreement or otherwise limit the right of Targeted or its subsidiaries to own or operate all or any portion of the businesses or assets of Genovo. (e) Each of Targeted and Genovo shall give or cause to be given any required notices to other Persons, and use its commercially reasonable best efforts to obtain all consents, waivers and approvals from other Persons (i) necessary, proper or advisable to consummate the transactions contemplated under this Agreement, (ii) disclosed or required to be disclosed in the Genovo Disclosure Memorandum or the Targeted Disclosure Memorandum or (iii) required to prevent a Material Adverse Effect on Genovo, Targeted or the Surviving Corporation from occurring before or after the Effective Time. If Targeted or Genovo shall fail to obtain any third-party consent, waiver or approval described in this subsection (e), it shall use its commercially 43 reasonable best efforts, and shall take any such actions reasonably requested by the other party, to minimize any adverse effect upon Targeted and Genovo, Targeted's subsidiaries and their respective businesses resulting (or that would reasonably be expected to result after the Effective Time) from the failure to obtain such consent, waiver or approval. Genovo and Targeted shall promptly notify each other of any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement. (f) Each of Targeted and Genovo will, and Targeted will cause its subsidiaries to, take all reasonable actions necessary to comply promptly with all legal requirements that may be imposed on them with respect to the consummation of the transactions contemplated by this Agreement and will promptly cooperate with and furnish information to any party to this Agreement necessary in connection with any such requirements imposed upon such other party in connection with the consummation of the transactions contemplated by this Agreement. 5.3 Access to Information. --------------------- (a) To the extent permitted by applicable Law, from the date of this Agreement until the Effective Time, Genovo shall afford Targeted and its accountants, counsel and other representatives, reasonable access during normal business hours during the period before the Effective Time to (i) all of Genovo's properties, books, contracts, commitments and records, and (ii) all other information concerning the business, properties and personnel of Genovo as Targeted may reasonably request, which information shall be held in confidence pursuant to the Confidentiality Agreement (as defined in Section 5.4 of this Agreement). Genovo agrees to provide to Targeted and its accountants, counsel and other representatives copies of internal financial statements promptly upon request. (b) To the extent permitted by applicable Law, from the date of this Agreement until the Effective Time, each of Targeted and Genovo shall confer on a regular and frequent basis with one or more representatives of the other party to report material operational matters and the general status of ongoing operations. Targeted shall provide Genovo reasonable access to its accountants, counsel and other representatives. (c) No information or knowledge obtained in any investigation pursuant to this Section 5.3 shall affect or be deemed to modify any representation or warranty contained in this Agreement or the conditions to the obligations of the parties to consummate the Merger. 5.4 Confidentiality. The parties acknowledge that Targeted and --------------- Genovo have previously executed a nondisclosure agreement (the "Confidentiality --------------- Agreement"), which shall continue in full force and effect in accordance with - --------- its terms. 5.5 Public Disclosure. So long as this Agreement is in effect, ----------------- Targeted, Genovo and Biogen shall consult with each other before issuing any press release or otherwise making any public statement (whether or not in response to an inquiry) regarding the terms of this Agreement and the transactions contemplated by this Agreement. Except as may be required by applicable Law, no party to this Agreement, without the prior written approval of the other parties, shall issue any such press release or make any other public statement (a) before 44 consulting with and providing the other parties with a reasonable opportunity to comment on such press release or public statement and (b) that is not reasonably acceptable to the other parties. 5.6 FIRPTA. Genovo shall, before the Closing Date, provide Targeted ------ with a duly executed Foreign Investment and Real Property Tax Act of 1980 ("FIRPTA") Notification Letter, which shall state that shares of Genovo Capital ------ Stock do not constitute "United States real property interests" under Section ------------------------------------- 897(c) of the Code, for purposes of satisfying Targeted's obligations under Treasury Regulation Section 1.1445-2(c)(3). 5.7 State Statutes. If any state takeover Law is or may become -------------- applicable to the Merger, each of Targeted and Genovo shall take such actions as are necessary so that the transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise act to eliminate or minimize the effects of such state takeover Law on the Merger. 5.8 Blue Sky Laws. Targeted shall take such steps as may be ------------- necessary to comply with the securities and blue sky Laws of all jurisdictions that are applicable to the issuance of the Targeted Common Stock in connection with the Merger. Genovo shall use its commercially reasonable best efforts to assist Targeted as may be necessary to comply with the securities and blue sky Laws of all jurisdictions that are applicable in connection with the issuance of Targeted Common Stock in connection with the Merger. 5.9 Listing of Additional Shares. Before the Effective Time, ---------------------------- Targeted shall file with the Nasdaq National Market a Notification Form for Listing of Additional Shares with respect to the shares of Targeted Common Stock issuable upon the conversion of the Genovo Capital Stock in the Merger and upon the exercise of the Genzyme Options, and shall use its best efforts to have such shares approved for listing on the Nasdaq National Market, subject to official notice of issuance. 5.10 Information Statement; Stockholder Approval. ------------------------------------------- (a) As soon as practicable (and, in any event, within 30 days) after the execution of this Agreement, Targeted shall prepare, with the cooperation and assistance of Genovo, an Information Statement (the "Information Statement") --------------------- for distribution to the Genovo Stockholders to approve this Agreement, the Merger and the transactions contemplated by this Agreement. The Information Statement shall constitute (i) a disclosure document for the offer and issuance of the shares of Targeted Common Stock to be received as Merger Consideration and, if applicable, as Contingent Merger Consideration by the Genovo Stockholders and Genovo Optionholders in the Merger and (ii) a proxy statement for the solicitation by Genovo's board of directors of the approval by the requisite vote of Genovo Stockholders of this Agreement and the Merger. Targeted and Genovo shall each use its commercially reasonable best efforts to cause the Information Statement to comply with all applicable federal and state securities Laws. (b) Each of Targeted and Genovo agrees to provide promptly to the other such information concerning its business and financial statements and affairs as, in the reasonable judgment of the providing party or its counsel, may be required or appropriate for inclusion in 45 the Information Statement, or in any amendments or supplements to the Information Statement, and to cause its counsel and auditors to cooperate with the other's counsel and auditors in the preparation of the Information Statement. The information supplied by each of Targeted and Genovo for inclusion in the Information Statement shall not, at (i) the time the Information Statement is first mailed to the Genovo Stockholders, (ii) the time of the Special Meeting (as defined in Section 5.11 of this Agreement), and (iii) the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated or necessary to make the statement not misleading. Genovo will promptly advise Targeted, and Targeted will promptly advise Genovo, in writing if at any time before the Effective Time either Genovo or Targeted shall obtain knowledge of any facts that might make it necessary or appropriate to amend or supplement the Information Statement in order to make the statements contained or incorporated by reference in the Information Statement not untrue or misleading or to comply with applicable Law. (c) Subject to the third sentence of Section 5.11 of this Agreement, the Information Statement shall contain the recommendation of Genovo's board of directors that Genovo Stockholders approve the Merger and this Agreement and the conclusion of Genovo's board of directors that the terms and conditions of the Merger are advisable and fair to Genovo Stockholders. 5.11 Special Meeting of Stockholders. As promptly as practicable ------------------------------- after the date of this Agreement (unless this Agreement shall have been earlier terminated pursuant to Article Seven of this Agreement), Genovo shall take all action necessary in accordance with the DGCL and Genovo's certificate of incorporation and bylaws to convene a special meeting of the Genovo Stockholders (the "Special Meeting") for the purposes of voting on the approval of this -------------- Agreement, the Certificate of Merger and the transactions contemplated by this Agreement and the Certificate of Merger. Subject to the applicable provisions of the DGCL (unless this Agreement shall have been earlier terminated pursuant to Article Seven of this Agreement), Genovo shall take all action reasonably necessary or advisable to secure the vote or consent of the Genovo Stockholders required under the DGCL and Genovo's certificate of incorporation and bylaws to effect the Merger. Genovo's board of directors shall be permitted to (a) decline to recommend to Genovo Stockholders that they give the requisite stockholder approval or (b) withdraw or modify in a manner adverse to Targeted its recommendation to Genovo Stockholders that they give the requisite stockholder approval, only if and to the extent Genovo's board of directors, after consultation with and based upon the advice of independent legal counsel, by a majority vote determines in its good faith judgment that such action is necessary for Genovo's board of directors to comply with its fiduciary duties to Genovo Stockholders under applicable Law. 5.12 Voting Agreements; Lockup Agreements. ------------------------------------ (a) Genovo shall have delivered, concurrently with the execution of this Agreement, a Voting Agreement, substantially in the form attached to this Agreement as Exhibit G (the "Voting Agreement"), executed by Targeted and the ---------- ---------------- holders of at least 75% of the Genovo Capital Stock entitled to vote on the Merger, including Biogen, pursuant to which each such Genovo Stockholder has agreed, among other things, to vote at the Special Meeting in favor of the approval of this Agreement and the Merger. 46 (b) Genovo shall use its best efforts to deliver or cause to be delivered to Targeted, concurrently with the execution of this Agreement and, in each case, before the Effective Time, an executed Lockup Agreement, substantially in the form attached to this Agreement as Exhibit H (the "Lockup --------- ------ Agreement"), from each holder of Genovo Capital Stock or Genovo Stock Options - --------- exercisable for Genovo Capital Stock (or both) convertible in the Merger into an aggregate of at least 20,000 shares of Targeted Common Stock or options to purchase Targeted Common Stock, pursuant to which each such Genovo Stockholder or Genovo Optionholder shall agree not to sell or otherwise transfer or dispose of any shares of Targeted Common Stock he, she or it receives in the Merger or upon the exercise of Roll-Over Options after the Merger during the 30-month period beginning on the Effective Date; provided, however, that such shares of Targeted Common Stock shall be released from the restrictions on transfer in accordance with the provisions set forth in such holder's Lockup Agreement. Targeted and Merger Sub shall be entitled to place appropriate legends on the certificates evidencing any Targeted Common Stock to be received by such Genovo Stockholders or Genovo Optionholders pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for Targeted Common Stock, consistent with the terms of such holder's Lockup Agreement. 5.13 Maintenance of Genovo Indemnification Obligations. ------------------------------------------------- (a) Targeted agrees that, for a period of six years after the Effective Time, it shall, and shall cause the Surviving Corporation and its other subsidiaries to, indemnify, hold harmless and defend each of the Indemnified Genovo Parties (as defined below), to the fullest extent permitted by applicable Law, to the extent such indemnification is provided for in the certificate of incorporation and bylaws of Genovo as in effect immediately before the Effective Time, with respect to any claim, liability, loss, damage, judgment, fine, penalty, amount paid in settlement or compromise, cost or expense (including reasonable fees and expenses of legal counsel), including liability arising under the Securities Act, the Exchange Act or any state Law (any of these, a "Loss"), against any Indemnified Genovo Party in his or her ---- capacity as, as applicable, (i) an employee, agent, officer or director of Genovo, whenever asserted or claimed, based in whole or in part on, or arising in whole or in part out of, any facts or circumstances occurring at or before the Effective Time (including in connection with the transactions contemplated by this Agreement), whether commenced, asserted or claimed before or after the Effective Time, or (ii) the Stockholders' Representative (as defined in Section 8.8 of this Agreement), whenever asserted or claimed, arising out of any action taken by such Stockholders' Representative in his or her capacity as Stockholders' Representative. In the event of any Loss, Targeted shall pay the reasonable fees and expenses of counsel selected by the Indemnified Genovo Party promptly after statements are received, and shall otherwise advance to such Indemnified Genovo Party, upon request, reimbursement of documented expenses reasonably incurred. For purposes of this Section 5.13, "Indemnified Genovo ------------------ Party" shall mean any person (x) who is now, or has been at any time before the - ----- Effective Time, an officer, director, employee or agent of Genovo or its successors and assigns or (y) who is or has been at any time the Stockholders' Representative. (b) Targeted shall, or shall cause the Surviving Corporation to, maintain in effect for a period of six years after the Effective Time the current policies of directors' and officers' liability insurance maintained by Genovo as of the date of this Agreement (provided 47 that Targeted may substitute insurance policies with reputable and financially sound carriers having at least the same coverage and amounts of such policies and containing terms and conditions that are no less advantageous to the persons currently covered by such policies), which shall be available with respect to facts or circumstances occurring at or before the Effective Time; provided that if the aggregate annual premiums for such insurance during such six-year period shall exceed 300% of the per-annum rate of the aggregate premium currently paid by Genovo for such insurance as of the date of this Agreement, then Targeted shall cause the Surviving Corporation to, and the Surviving Corporation shall, provide the most advantageous coverage that shall then be available at an annual premium equal to 300% of such rate. (c) The provisions of this Section 5.13 shall be in addition to any other rights available to the Indemnified Genovo Parties under the certificate of incorporation or bylaws of Genovo or under the DGCL. The rights under this Section 5.13 shall survive consummation of the Merger and are expressly intended to benefit each Indemnified Genovo Party. Targeted agrees to pay all reasonable expenses (including fees and expenses of counsel) that may be incurred by any Indemnified Genovo Party in successfully enforcing the indemnity or other obligations under this Section 5.13. (d) In the event Targeted or any of its successors or assigns or the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Targeted or the Surviving Corporation, as the case may be, fully assume the obligations set forth in this Section 5.13. 5.14 Reorganization Treatment. Neither Genovo nor Targeted shall ------------------------ take any action (either before or after the Closing) that would cause the Merger to fail to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Code. Targeted and Genovo agree to file their federal and applicable state income tax returns consistent with treatment of the Merger as a tax-free reorganization. Each of Genovo, Targeted and Biogen shall execute and deliver to Weil, Gotshal & Manges, LLP, counsel to Genovo ("Weil"), and to ---- Orrick, Herrington & Sutcliffe LLP, counsel to Targeted ("Orrick"), certificates ------ substantially in the forms attached to this Agreement as Exhibit I-1, Exhibit I- ----------- ---------- 2, and Exhibit I-3, at such time or times as reasonably requested by such law - - ----------- firms, in connection with their delivery of the opinions described in Section 6.1(d) of this Agreement. None of Genovo, Targeted, Merger Sub or Biogen shall take or cause to be taken any action that would cause to be untrue any of the representations and covenants in such certificates. 5.15 Board of Directors. As soon as practicable after the ------------------ Closing, Targeted's board of directors shall take all necessary action to appoint Joseph M. Davie (or a substitute nominee, as provided below) to the Targeted board of directors and, in connection with Targeted's annual meetings of shareholders, shall nominate him for election to the board in the applicable class of directors for each of the next two terms subsequent to such initial nomination. Biogen shall have the right to substitute a nominee at any time, provided that such nominee is an 48 executive officer of Biogen of at least the level of vice president and is reasonably acceptable to Targeted. 5.16 Obligations of Merger Sub. Targeted shall take all action ------------------------- necessary to cause Merger Sub to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement. 5.17 Biogen Demand Notes. Biogen agrees to convert at Closing ------------------- (a) the promissory notes payable by Genovo to Biogen, dated February 1998 and June 1998, respectively, with an aggregate outstanding principal amount of $500,000, and (b) the remaining outstanding principal balance of $150,000 on the Hajoca building loan, into a no-interest promissory note from Targeted in the amount of $650,000, with a term of five years and other terms and conditions reasonably acceptable to Biogen and Targeted. 5.18 Escrow Agreement. On or before the Effective Time, ---------------- Targeted, Genovo, the Escrow Agent and the Stockholders' Representative (as defined in Section 8.8 of this Agreement) shall execute the Escrow Agreement contemplated by Section 8.4(b) of this Agreement, substantially in the form attached to this Agreement as Exhibit J (the "Escrow Agreement"). --------- ---------------- 5.19 Registration of Shares. ---------------------- (a) Shelf Registration. As soon as practicable after the ------------------ Closing Date, but in no event later than 60 days after the Closing Date, Targeted shall, at its own expense, prepare and file with the SEC a registration statement on Form S-3 or, if Targeted is ineligible to use Form S-3, then on Form S-1 (the "Registration Statement"), registering for resale the shares of ---------------------- Targeted Common Stock to be issued in the Merger pursuant to Section 1.6(a) and any shares issued as Contingent Merger Consideration to the holders of Genovo Common Stock and Genovo Optionholders pursuant to Section 1.6(h) of this Agreement (the "Registrable Securities"), which sales may be effected from time ---------------------- to time on the Nasdaq National Market (or any other national securities exchange on which Targeted Common Stock is then traded) or in privately negotiated transactions. Targeted shall use its commercially reasonable best efforts to (i) cause the Registration Statement to be declared effective by the SEC as soon as practicable after filing and (ii) cause the Registration Statement to remain effective until the earlier of (A) the second anniversary of the Closing Date, or (B) the date on which all of the Registrable Securities have been sold. (b) Demand Registration. ------------------- (i) Beginning on the second anniversary of the Closing Date and continuing so long as any holder of Registrable Securities is deemed to be an "affiliate" of Targeted, as that term is defined in the rules and regulations under Securities Act (each such affiliate holding Registrable Securities, an "Affiliate Holder"), upon the written request of any Affiliate ---------------- Holder, Targeted shall, as soon as practicable but in no event later than 30 days after such request, prepare and file with the SEC, at its own expense, a registration statement on Form S-3 (the "Demand Registration Statement"), ----------------------------- registering for resale all or such portion of the Registrable Securities then owned by such Affiliate Holder as are requested by such Affiliate 49 Holder. Targeted shall give written notice to all other Affiliate Holders within 10 days of receipt of a request for registration pursuant to this subsection (b) and include all Registrable Securities of any Affiliate Holder joining in such request as are specified in a written request received by Targeted within 10 days after the date of such written notice from Targeted. Targeted shall use its commercially reasonable best efforts to (A) cause the Demand Registration Statement to be declared effective by the SEC as soon as practicable after filing and (B) cause the Demand Registration Statement to remain effective until the earlier of 180 days from the effective date of the Demand Registration Statement and the date on which all of the Registrable Securities covered by the Demand Registration Statement have been sold. Each Affiliate Holder shall be entitled to request that Targeted effect up to two Demand Registration Statements; provided, however, that Targeted shall not be required to file more than two Demand Registration Statements in any 12-month period. (ii) Targeted shall not be obligated to effect any such registration pursuant to this subsection (b) if (A) Form S-3 is not available for such registration; (B) the Affiliate Holder(s) whose Registrable Securities are to be included in the Demand Registration Statement (together with the holders of any other securities of Targeted entitled to inclusion in such registration) propose to sell Registrable Securities (and such other securities entitled to inclusion in such registration, if any) at an aggregate price to the public of less than $5,000,000; (C) Targeted shall furnish to the requesting Affiliate Holder(s) a certificate signed by the president of Targeted stating that (1) Targeted is engaged or has bona fide plans to engage in a registered public offering or is engaged in any other activity that, in the good faith judgment of Targeted's board of directors, would be adversely affected by the requested registration or (2) the requested registration would involve initial or continuing disclosure obligations that are not in the best interests of Targeted's shareholders at such time, in which event Targeted shall have the right to defer the filing of the Demand Registration Statement for a period of not more than 90 days after receipt of the request; provided, however, that Targeted may not exercise such right to delay a request more than once in any 12-month period; or (D) Targeted has already effected one such Demand Registration Statement pursuant to this subsection (b) within the 180-day period preceding the date of the request. (c) With respect to each of the Registration Statements and each Demand Registration Statement, Targeted shall: (i) prepare and file with the SEC such amendments and supplements to the Registration Statement and Demand Registration Statement and take such other action, if any, as may be necessary to comply with the Securities Act; (ii) promptly furnish to the holders of Registrable Securities such number of copies of the Prospectus (as defined in subsection (f)(i) of this Section 5.19), including any supplements to or amendments to the Prospectus, as such holders may reasonably request, in order to facilitate the disposition of all or any of the Registrable Securities covered by the Registration Statement or the Demand Registration Statement; (iii) use its commercially reasonable best efforts to register and qualify the Registrable Securities under the securities laws of such states as the holder of Registrable Securities may reasonably request; provided, however, that Targeted shall not be required to 50 qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented; and (iv) bear all expenses in connection with the procedures in subsections (a) and (b) and clauses (i) through (iii) of this subsection (c), other than any fees and expenses of counsel or other advisors to the holders of Registrable Securities and brokerage fees and commissions incurred by such holders. (d) Transfer of Shares After Registration. Biogen agrees that ------------------------------------- it will not effect any disposition of the Registrable Securities or its right to receive the Registrable Securities that would constitute a sale within the meaning of the Securities Act, except pursuant to the registration statements contemplated by this Section 5.19 and the Biogen Funding Agreement or as otherwise permitted by applicable Law, and that it will promptly notify Targeted of any changes in the information set forth in the Registration Statement or any Demand Registration Statement, as applicable, regarding Biogen or its plan of distribution. (e) Transferability of Registration Rights. The rights of -------------------------------------- holders of Registrable Securities under this Section 5.19 are not transferable except in connection with (i) a transfer during such holder's lifetime or, on death, by will or intestacy, to members of such holder's immediate family (as defined below) or to trusts exclusively for the benefit of members of such holder's immediate family, or to a charity qualified under Section 501(c)(3) of the Code; (ii) a distribution of any of the Registrable Securities, without additional consideration, to the underlying beneficial owners of the Registrable Securities (such as the general partners, limited partners, members, shareholders or trust beneficiaries of a Genovo Stockholder); or (iii) a transfer to an affiliate of such holder, provided that such holder notifies Targeted of such transfer and each such transferee or distributee shall be deemed to be a holder of such Registrable Securities for purposes of this Section 5.19. For purposes of this Section 5.19, "immediate family" shall mean ---------------- such holder's spouse, lineal descendant, father, mother, brother or sister. (f) Indemnification. --------------- (i) Targeted agrees to indemnify, defend and hold harmless each of the Genovo Stockholders and each person, if any, who controls any Genovo Stockholder within the meaning of the Securities Act, against any losses, claims, damages, liabilities or expenses, joint or several, to which such Genovo Stockholders or such controlling person may become subject, under the Securities Act, the Exchange Act, or any other federal or state Law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of Targeted, which consent shall not be unreasonably withheld) (any of these, a "Registration Statement Loss"), insofar --------------------------- as such Registration Statement Losses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or the Demand Registration Statement (as applicable), including the Prospectus (as defined below), exhibits, financial statements and schedules, and all other documents filed as a part of the Registration Statement or the Demand Registration Statement (as applicable), as amended at the time of effectiveness of the Registration Statement or the Demand Registration Statement (as applicable), including any information deemed to be a part of the Registration Statement or the Demand Registration Statement (as applicable) as of the time of effectiveness pursuant to 51 paragraph (b) of Rule 431A or pursuant to Rule 434 under the Securities Act or (B) the Prospectus, in the form first filed with the SEC pursuant to Rule 424(b) under the Securities Act, or filed as part of the Registration Statement or the Demand Registration Statement (as applicable) at the time of effectiveness if no Rule 424(b) filing is required, as such prospectus may be amended or supplemented after the time of effectiveness (the "Prospectus"), or arise out of ---------- or are based upon the omission or alleged omission to state in any of them a material fact required to be stated or necessary to make the statements in any of them, in light of the circumstances under which they were made, not misleading. Targeted shall reimburse each Genovo Stockholder and each such controlling person for any legal and other expenses as such expenses are reasonably incurred by such Genovo Stockholder or such controlling person in connection with investigating, defending, settling, compromising or paying any such Registration Statement Losses; provided, however, that Targeted will not be liable in any such case to the extent that any such Registration Statement Loss arises out of or is based upon (X) an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement or the Demand Registration Statement (as applicable), the Prospectus or any amendment or supplement of the Registration Statement or the Demand Registration Statement (as applicable) or Prospectus in reliance upon and in conformity with written information furnished to Targeted by or on behalf of such Genovo Stockholder expressly for use in the Registration Statement or the Demand Registration Statement (as applicable) or the Prospectus, (B) the failure of such Genovo Stockholder to comply with the covenants and agreements contained in subsection (d) of this Section 5.19 respecting the resale of the Registrable Securities, or (C) any untrue statement or omission of a material fact required to make a statement not misleading in any Prospectus that is corrected in any subsequent Prospectus that was delivered to such Genovo Stockholder before the pertinent sale or sales by such Genovo Stockholder. (ii) The Genovo Stockholders shall indemnify and hold harmless each of Targeted, each of its directors, each of its officers who signed the Registration Statement or the Demand Registration Statement (as applicable) or controlling person from any and all Registration Statement Losses to which they may become subject under the Securities Act, the Exchange Act or any other federal or state Law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Genovo Stockholders, which consent shall not be unreasonably withheld) insofar as such Registration Statement Losses (or actions in respect thereof as contemplated below) arise out of or are based upon (A) any failure to comply with the covenants and agreements contained in subsection (d) of this Section 5.19 respecting the resale of the Registrable Securities or (B) any untrue or alleged untrue statement of any material fact contained in the Registration Statement or the Demand Registration Statement (as applicable), the Prospectus or any amendment or supplement to the Registration Statement or the Demand Registration Statement (as applicable) or Prospectus, or arise out of or are based upon the omission or alleged omission to state in the Registration Statement or the Demand Registration Statement (as applicable) or Prospectus a material fact required to be stated or necessary to make the statements in any of them not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement or the Demand Registration Statement (as applicable), the Prospectus, or any amendment or supplement to the Registration Statement or the Demand Registration Statement (as applicable) or the Prospectus, in reliance upon and in conformity with written information furnished to Targeted by or on 52 behalf of any Genovo Stockholder expressly for use in the Registration Statement or the Demand Registration Statement (as applicable) or Prospectus; provided, however, that the Genovo Stockholders shall not be liable for any such untrue or alleged untrue statement or omission or alleged omission for which any Genovo Stockholder has delivered to Targeted in writing a correction before the occurrence of the transaction from which such Registration Statement Loss was incurred. Any such Registration Statement Losses described in this subsection (f)(ii) shall constitute Damages under Section 8.2(a) of this Agreement. (iii) An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will pay the fees and expenses of only one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest exists between such indemnified party and any other indemnified party with respect to such claim, in which case the indemnifying party will pay the fees and expenses of additional counsel. (g) So long as Registrable Securities remain outstanding (subject to subsection (h) of this Section 5.19), Targeted shall file all reports required to be filed by it under the Securities Act and the Exchange Act and shall take such further action to the extent required to enable the Genovo Stockholders to sell the Registrable Securities pursuant to Rule 144 under the Securities Act (as such rule may be amended from time to time). (h) Notwithstanding anything to the contrary contained in this Section 5.19, all of Targeted's obligations under this Section 5.19 (other than Targeted's obligation to indemnify any Genovo Stockholder for a Registration Statement Loss pursuant to subsection (f)(i) of this Section 5.19) with respect to any holder of Registrable Securities (including its obligation to maintain the effectiveness of the Registration Statement or file and maintain the effectiveness of any Demand Registration Statement with respect to the Registrable Securities of such holder) shall terminate and expire on the earliest date on which all Registrable Securities held by such holder can be sold without registration pursuant to Rule 144(k) under the Securities Act, at which time such Registrable Securities shall cease to be "Registrable Securities" within the meaning of this Section 5.19. At such time, Targeted shall, upon receipt of appropriate supporting documentation as may be reasonably requested by Targeted, authorize the removal of the restrictive legend on such holder's stock certificate(s). 5.20 Roll-Over Stock Option Plan. Before the Closing Date, and --------------------------- contingent upon the consummation of the Merger, Targeted's board of directors shall approve the creation of, and Targeted shall create, the Roll-Over Stock Option Plan. Targeted's board of directors shall recommend the Roll-Over Stock Option Plan to the Targeted shareholders for approval and shall use its commercially reasonable best efforts to have the Roll-Over Stock Option Plan duly approved by Targeted's shareholders within 12 months of the creation of the Roll-Over Stock Option Plan. As soon as practicable after the Closing Date, but in no event later than 30 days after the Closing Date, Targeted shall prepare and file with the SEC a Registration Statement on Form S-8 (or a successor form or other appropriate form) (a "Form S-8") to register the Roll-Over Options and -------- the shares of Targeted Common Stock issuable upon the exercise of the Roll-Over Options. Targeted shall use its commercially reasonable best efforts to have the Form S-8 declared effective by the SEC as soon as practicable after filing and to take any other action, if any, as may be necessary to cause the Form S-8 (and the prospectus contained in the Form S-8) 53 to remain effective until all such securities subject to the Roll-Over Stock Option Plan have been issued. 5.21 Employee Benefits. ------------------ (a) Past Service Credit. With respect to Targeted's employee ------------------- benefit programs and arrangements that will cover or otherwise benefit any of the Continuing Employees (as defined in Section 1.6(c) of this Agreement), Targeted agrees that service with Genovo and its affiliates shall be included for purposes of determining such Continuing Employees' eligibility for benefits (including eligibility for retirement or early retirement), vesting and, solely with respect to vacation and severance benefits, annual rate of benefit accrual. (b) Vacation. Except to the extent required by applicable Law, -------- Genovo shall not pay Continuing Employees for any vacation accrued and unused through the Closing Date. Targeted shall provide each Continuing Employee, without duplication of benefits, vacation time rather than cash in lieu of vacation time for the vacation accrued and unused by such Continuing Employee through the Closing Date, as set forth in Schedule 5.21(b) to the Genovo Disclosure Memorandum, up to a maximum of 160 hours for each Continuing Employee. (c) Medical Plan. Targeted shall grant credit for amounts paid ------------ by Continuing Employees with respect to health benefits during the plan year that includes the Closing Date, and shall offer Continuing Employees the option to choose a Targeted health benefit plan that does not exclude preexisting conditions from benefits under such plan to any greater extent than such preexisting conditions are excluded under Genovo's health plans. 5.22 Amendment of Stock Option Grant Letter Agreements. On or ------------------------------------------------- before the fourth business day before the Closing, Genovo shall amend the option grant letter agreement or agreements of each Consultant, if necessary, to permit the cancellation of Accelerated Options as provided in Section 1.6(c) of this Agreement without further consent or approval of such Consultant, and shall deliver a copy of such amended option grant letter agreements to Targeted. 5.23 University of Pennsylvania Amendment. Targeted shall use ------------------------------------ its commercially reasonable best efforts to execute the University of Pennsylvania Amendment (as defined in Section 8.11) as soon as reasonably practicable after the Effective Date and, in any event, on or before the Escrow Termination Date. ARTICLE SIX 6. Conditions to the Merger. ------------------------ 6.1 Conditions to Obligations of Each Party to Effect the ----------------------------------------------------- Merger. The respective obligations of each party to this Agreement to consummate - ------ the Merger shall be subject to the satisfaction (or written waiver by each party for whose benefit the applicable condition exists) of each of the following conditions: (a) Stockholder Approval. This Agreement and the Merger shall -------------------- have been duly approved and adopted by the holders of a majority of the shares of Genovo Capital Stock outstanding as of the record date set for the Special Meeting. 54 (b) No Injunctions or Restraints; Illegality. No temporary ---------------------------------------- restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or any applicable Law (any of these, a "Restraint") shall prohibit or enjoin the consummation of the Merger, and no --------- proceeding instituted by any Governmental Agency seeking a Restraint shall be pending; provided, however, that each of the parties to this Agreement shall have used its commercially reasonable best efforts to prevent the entry of any such Restraints and to appeal as promptly as possible any such Restraints that may have been entered. (c) HSR Act. The required waiting period (and any extension of ------- the waiting period) under the HSR Act shall have expired or the DOJ or the FTC shall have earlier terminated the waiting period. (d) Tax Opinion. Targeted and Genovo shall have received ----------- written opinions from Orrick and Weil, respectively, dated as of the Effective Date, to the effect that the Merger will constitute a tax-free reorganization within the meaning of Section 368(a) of the Code, and such opinions shall not have been withdrawn. In rendering such opinions, Orrick and Weil shall be entitled to rely upon the representations and covenants of Targeted, Genovo and Biogen contained in the certificates described in Section 5.14 of this Agreement. (e) Listing of Additional Shares. The shares of Targeted Common ---------------------------- Stock issuable to Genovo Stockholders in the Merger, to Genzyme upon the exercise of the Genzyme Options and to the holders of Genovo Optionholders upon the exercise of Roll-Over Options shall have been approved for listing on the Nasdaq National Market, subject to official notice of issuance. (f) Escrow Agreement. Targeted, Genovo, the Escrow Agent and ---------------- the Stockholders' Representative (as defined in Section 8.8 below) shall have executed and delivered the Escrow Agreement. (g) Genzyme Options. Targeted, Genovo and Genzyme shall have --------------- executed and delivered the Genzyme Assumption Agreement. (h) University of Pennsylvania Amendment. Targeted and the ------------------------------------ Stockholders' Representative shall have executed the Targeted-Stockholders' Representative Agreement (as defined in Section 8.11(a) of this Agreement). 6.2 Conditions to Obligations of Genovo. The obligations of ----------------------------------- Genovo to consummate the Merger shall be subject to the satisfaction (or written waiver by Genovo) of each of the following additional conditions: (a) Representations, Warranties and Covenants. ----------------------------------------- (i) Each of the representations and warranties of Targeted and Merger Sub in this Agreement that are qualified as to materiality shall be true and correct, and those that are not so qualified shall be true and correct in all material respects, in each case on and as of the Effective Time as though such representation or warranty had been made on and as of such time 55 (provided that those representations and warranties that address matters only as of a particular date shall remain true and correct as of such date), and (ii) Targeted and Merger Sub shall have performed and complied in all material respects with all covenants, obligations and conditions of this Agreement required to be performed and complied with by them as of the Effective Time. (b) Certificates of Targeted and Merger Sub. --------------------------------------- (i) Each of Targeted and Merger Sub shall have provided Genovo with a certificate executed by its president or its chief financial officer to the effect that, as of the Effective Time, each of the conditions set forth in Section 6.2(a) of this Agreement has been satisfied with respect to Targeted or Merger Sub, as applicable. (ii) Each of Targeted and Merger Sub shall have provided Genovo with a certificate executed by its secretary, certifying: (A) resolutions duly adopted by the board of directors of Targeted or Merger Sub, as applicable, authorizing the execution of this Agreement and the execution, performance and delivery of all agreements, documents and transactions contemplated by this Agreement; and (B) the incumbency of the officers of Targeted or Merger Sub, as applicable, executing this Agreement and all agreements and documents contemplated by this Agreement. (c) Legal Opinion. Genovo shall have received a legal opinion ------------- from Orrick, in form and substance reasonably acceptable to Genovo and Targeted. (d) Authorization. Genovo shall have received (i) a certificate ------------- of the Secretary of State of the state of Washington certifying as of a date no more than three business days before the Effective Time that Targeted has filed all required reports and paid all required fees and, as of such date, is authorized to transact business as a domestic corporation, and (ii) a certificate or certificates of the Secretary of State of the state of Delaware and any applicable franchise tax authority of such state, certifying as of a date no more than three business days before the Effective Time that Merger Sub has filed all required reports, paid all required fees and taxes and, as of such date, is authorized to transact business as a domestic corporation. 6.3 Conditions to the Obligations of Targeted and Merger Sub. -------------------------------------------------------- The obligations of Targeted and Merger Sub to consummate the Merger shall be subject to the satisfaction (or written waiver by Targeted) of the following conditions: (a) Representations, Warranties and Covenants. ----------------------------------------- (i) Each of the representations and warranties of Genovo in this Agreement that are qualified as to materiality shall be true and correct, and those that are not so qualified shall be true and correct in all material respects, in each case on and as of the Effective Time as though such representation or warranty had been made on and as of such time (provided 56 that those representations and warranties that address matters only as of a particular date shall remain true and correct as of such date), and (ii) Genovo shall have performed and complied in all material respects with all covenants, obligations and conditions of this Agreement required to be performed and complied with by it as of the Effective Time. (b) Certificates of Genovo. ---------------------- (i) Genovo shall have provided Targeted with a certificate executed by its president to the effect that, as of the Effective Time, each of the conditions set forth in Section 6.3(a) of this Agreement has been satisfied. (ii) Genovo shall have provided Targeted with a certificate executed by its secretary, certifying: (A) resolutions duly adopted by Genovo's board of directors and Genovo Stockholders authorizing the execution of this Agreement and the execution, performance and delivery of all agreements, documents and transactions contemplated by this Agreement; (B) the certificate of incorporation and bylaws of Genovo, as in effect immediately before the Effective Time, including all amendments to the certificate and bylaws; and (C) the incumbency of the officers of Genovo executing this Agreement and all agreements and documents contemplated by this Agreement. (c) Third-Party Consents. Genovo shall have furnished Targeted -------------------- with evidence reasonably satisfactory to Targeted that Genovo has obtained those consents, waivers, approvals or authorizations of those Persons and Governmental Entities whose consent or approval are required in connection with the Merger, as set forth in Sections 5.2(a) and (e) of this Agreement. (d) Legal Opinion. Targeted shall have received a legal opinion ------------- from Weil, in form and substance reasonably acceptable to Targeted and Genovo. (e) Lockup Agreement; Voting Agreement. Holders of at least 75% ---------------------------------- of Genovo Capital Stock entitled to vote on the Merger, including Biogen, shall have executed and delivered a Voting Agreement to Targeted, and each Genovo Stockholder and Genovo Optionholder listed in Schedule 6.3(e) of the Genovo Disclosure Memorandum shall have executed and delivered a Lockup Agreement to Targeted. (f) FIRPTA Certificate. Genovo shall have provided Targeted ------------------ with a duly executed FIRPTA Notification Letter. 57 (g) Resignation of Directors and Officers. Targeted shall have ------------------------------------- received letters of resignation from each of the directors and officers of Genovo in office immediately before the Effective Time, which resignations shall be effective as of the Effective Time. (h) Biogen Agreements. Targeted, Genovo and Biogen, as ----------------- applicable, shall have executed and delivered the Biogen Agreements. (i) Wilson Consulting Agreement. Genovo shall have terminated --------------------------- the Consulting Agreement dated as of August 14, 1995, between Genovo and Wilson, and Wilson shall have executed and delivered the termination letter agreement from Wilson to Genovo, acknowledged and agreed by Genovo and Targeted, in the form attached to this Agreement as Exhibit K. --------- (j) Aguiar Agreements. Genovo shall have terminated the ----------------- employment letter agreement dated April 24, 1998, as amended July 9, 1999, between Dr. Eric Aguiar ("Aguiar") and Genovo, with no further obligation on the ------ part of either Genovo or Aguiar under such letter agreements. Aguiar shall have executed and delivered the Employment and Consulting Agreement between Targeted and Aguiar, substantially in the form attached to this Agreement as Exhibit L, --------- to be dated the date of the Closing. (k) Key Employee Agreements. Each of Gary Kurtzman, Vaughn Himes ----------------------- and A. Anders Brookes shall have executed an employment agreement among such employee, Targeted and Genovo, substantially in the form attached to this Agreement as Exhibit M, with each such agreement to be dated the date of the --------- Closing. (l) Dissenting Shares. No more than 7% of the shares of Genovo ----------------- Capital Stock issued and outstanding immediately before the Effective Time shall be Dissenting Shares. (m) Termination of Existing Registration Rights. Genovo shall ------------------------------------------- have terminated the Registration Rights Agreement between Genovo and Biogen dated August 14, 1995 and the Registration Rights Agreement between Genovo and Genzyme dated August 30, 1999. ARTICLE SEVEN 7. Termination, Amendment and Waiver. --------------------------------- 7.1 Termination. At any time before the Effective Time, whether ----------- before or after approval of the matters presented in connection with the Merger by Genovo Stockholders, this Agreement may be terminated and the Merger may be abandoned: (a) by mutual written consent of each of Targeted and Genovo; (b) by either Targeted or Genovo, if: (i) the Effective Time shall not have occurred on or before October 31, 2000 (or such later date as may be agreed upon in writing by the parties) (the "End Date"); provided, however, that if a request for -------- additional information is received from a 58 Governmental Entity pursuant to the HSR Act, such date shall be extended to the 60/th/ day following acknowledgment by such Governmental Entity that Targeted, Genovo and Biogen have complied with such request, but in no event shall such date be later than December 31, 2000; (ii) the required approval of Genovo Stockholders shall not have been obtained by reason of the failure to obtain the required vote upon a vote duly held at the Special Meeting or at any adjournment of the Special Meeting; (iii) there shall be any applicable federal or state Law that makes consummation of the Merger illegal or otherwise prohibited or any court of competent jurisdiction or Governmental Entity shall have issued an order, decree, ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and nonappealable, in either case so long as the terminating party has complied in all material respects with its obligations under Article Five of this Agreement; or (iv) a tender offer or exchange offer for 10% or more of the outstanding shares of Genovo Capital Stock is commenced, and Genovo's board of directors, within 10 calendar days after such proposal is first received by Genovo or any of its officers, directors or agents, fails to recommend against acceptance of, or takes no position with respect to the acceptance of, such tender offer or exchange offer by Genovo Stockholders; or (v) any Person shall have acquired beneficial ownership or the right to acquire beneficial ownership of, or any "group" (as such term is defined under Section 13(d) of the Exchange Act and the rules and regulations promulgated under the Exchange Act) shall have been formed which beneficially owns, or has the right to acquire beneficial ownership of, 10% or more of the then outstanding shares of Genovo Capital Stock (excluding for this purpose holdings of shares by persons or groups as currently reflected in filings with the SEC under Section 13(d) of the Exchange Act as of the date of this Agreement); (c) by Genovo, if: (i) Genovo receives an unsolicited Takeover Proposal that Genovo's board of directors has determined in good faith constitutes a Superior Proposal; provided that Genovo shall have given Targeted at least 48 hours notice of any termination pursuant to this subsection (c)(i) and shall have made the payment referred to in Section 7.3(b) of this Agreement; (ii) Targeted shall have breached any of its representations, warranties, covenants or agreements, which breach (A) would give rise to the failure of a condition set forth in Section 6.2(a)(i) or (ii) of this Agreement and (B) shall not have been cured within 30 calendar days of receipt by Targeted of written notice of such breach, such that the conditions set forth in Section 6.2(a)(i) or (ii) would be incapable of being satisfied by the End Date; or (iii) the board of directors of either Targeted or Merger Sub shall have withdrawn, or modified or changed in a manner adverse to Genovo, its approval of this 59 Agreement or the Merger (or resolves to do any of the foregoing), and Targeted or Merger Sub is at that time in breach of any of its representations, warranties or covenants under this Agreement; (d) by Targeted, if: (i) Genovo's board of directors shall have withdrawn or modified, or shall have resolved to withdraw or modify, its recommendation of this Agreement or the Merger in a manner adverse to Targeted, or Genovo's board of directors shall have recommended any Takeover Proposal with a Person other than Targeted or its subsidiaries; (ii) Genovo shall have breached any of its representations, warranties or covenants or agreements, which breach (A) would give rise to the failure of a condition set forth in Section 6.3(a)(i) or (ii) of this Agreement and (B) shall not have been cured within 30 calendar days of receipt by Genovo of written notice of such breach, such that the conditions set forth in Section 6.3(a)(i) or (ii) would be incapable of being satisfied by the End Date; or (iii) for any reason Genovo fails to call and hold the Special Meeting by October 31, 2000. (e) The party desiring to terminate this Agreement pursuant to subsections (b), (c) or (d) of this Section 7.1 shall give written notice of such termination to the other party in accordance with Section 9.2, specifying the provision of this Agreement pursuant to which such termination is effected. Notwithstanding anything else contained in this Agreement, (i) the right to terminate this Agreement under this Section 7.1 shall not be available to any party whose failure to fulfill its obligations or to comply with its covenants under this Agreement in all material respects has been the cause of, or resulted in, the failure to satisfy any condition to the obligations of either party under this Agreement, and (ii) no party that is in material breach of its obligations under this Agreement shall be entitled to any payment of any amount from the other party pursuant to Section 7.3(b) or 7.3(c), as applicable, of this Agreement. 7.2 Effect of Termination. In the event of termination of this --------------------- Agreement as provided in Section 7.1: (a) this Agreement shall become void and of no effect and there shall be no liability on the part of Targeted, Merger Sub or Genovo or their respective officers, directors, shareholders or affiliates, except that (i) the provisions of Section 5.4 (Confidentiality), Section 7.3 (Expenses and Termination Fees), this Section 7.2 and Article Nine shall remain in full force and effect and survive any termination of this Agreement; and (b) the Voting Agreement shall become void and of no effect and there shall be no liability on the part of any Genovo Stockholder executing the Voting Agreement. 7.3 Expenses and Termination Fees. ----------------------------- (a) Except as otherwise provided by this Agreement, whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement, including filing fees and the fees and expenses 60 of advisors, accountants, legal counsel and financial printers, shall be paid by the party incurring such cost or expense. (b) If this Agreement is terminated (A) by Genovo pursuant to Section 7.1(c)(i) or by Targeted pursuant to Section 7.1(d)(iii) and a Superior Proposal is publicly announced at any time within six months after the date of such termination and completed within twelve months after the date of this Agreement or (B) by Targeted pursuant to Section 7.1(b)(iv) or (v) or 7.1(d)(i) or (ii) (each such case of termination, a "Trigger Event"), Genovo shall pay to ------------- Targeted (by wire transfer of immediately available funds not later than the date of termination of this Agreement) an amount equal to $1.5 million; provided that, in the case of termination by Targeted pursuant to Section 7.1(d)(iii), Targeted shall not be in breach of any of its representations, warranties, covenants or agreements. Receipt by Targeted of such payment shall constitute conclusive evidence that this Agreement has been validly terminated and upon payment of such amount Genovo shall be fully released and discharged from any liability or obligation resulting from or under this Agreement. (c) If Genovo shall terminate this Agreement pursuant to Section 7.1(c)(ii) or (iii), Targeted shall pay to Genovo (by wire transfer of immediately available funds not later than the date of termination of this Agreement) an amount equal to $1.5 million. Receipt by Genovo of such payment shall constitute conclusive evidence that this Agreement has been validly terminated and upon payment of such amount Targeted shall be fully released and discharged from any liability or obligation resulting from or under this Agreement. (d) Genovo and Targeted acknowledge that the agreements contained in subsections(b) and (c) of this Section 7.3 are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, Targeted, Merger Sub and Genovo, as the case may be, would not have entered into this Agreement. Accordingly, if Genovo fails to promptly pay the amount due pursuant to subsection (b) or Targeted fails to pay promptly the amount due pursuant to subsection (c) and, in order to obtain such payment, Targeted or Genovo, as the case may be, commences a suit that results in a judgment against Genovo or Targeted for the fee set forth in this Section 7.3, Genovo shall pay to Targeted, or Targeted shall pay to Genovo, as the case may be, such prevailing party's costs and expenses (including attorney's fees) in connection with such suit, together with interest from the date of termination of this Agreement on the amount owed. Such interest shall accrue at the prime rate of Citibank, N.A. in effect from time to time during such period plus two percent. 7.4 Amendment. The boards of directors of the parties may cause --------- this Agreement to be amended at any time by execution of an instrument in writing signed on behalf of each of the parties; provided, however, that an amendment made after approval of the Agreement by the Genovo Stockholders or Merger Sub shall not (a) alter or change the amount of Merger Consideration, (b) alter or change any term of the certificate of incorporation of the Surviving Corporation to be effected by the Merger, (c) alter or change any of the terms and conditions of the Agreement if such alteration or change would adversely affect Genovo Stockholders or Merger Sub or (d) be made if applicable Law requires that such amendment be further approved by the Genovo Stockholders. 61 7.5 Extension; Waiver. At any time before the Effective Time any ----------------- party may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties; (b) waive any inaccuracies in the representations and warranties made to such party contained in this Agreement or in any document delivered pursuant to this Agreement; and (c) waive compliance with any of the agreements or conditions for the benefit of such party contained in this Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. No failure or delay by any party in exercising any right, power or privilege under this Agreement shall operate as a waiver of such right, power or privilege, nor shall any single or partial exercise of such right, power or privilege preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. ARTICLE EIGHT 8. Escrow and Indemnification. -------------------------- 8.1 Survival of Representations and Warranties. All covenants to ------------------------------------------ be performed before the Effective Time and all representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the consummation of the Merger, unless otherwise waived in accordance with the terms of this Agreement, and shall expire 18 months after the Effective Date (the "Escrow Termination Date"); provided, however, that (a) any claim ----------------------- asserted in writing before the Escrow Termination Date that is identified in reasonable detail as a claim for indemnification pursuant to this Article Eight shall survive until finally resolved and satisfied in full, if the party entitled to indemnification prevails in establishing its right to indemnification and (b) any claim that is based upon fraud or intentional misrepresentation asserted in writing before the Escrow Termination Date shall survive for the full period of the applicable statute of limitations, until finally resolved and satisfied in full, if the party entitled to indemnification prevails in establishing its right to indemnification. 8.2 Indemnification by Genovo Stockholders. -------------------------------------- (a) Indemnified Damages. Subject to the limitations set forth in ------------------- this Article Eight, from and after the Effective Time, the Genovo Stockholders shall protect, defend, indemnify and hold harmless Targeted and the Surviving Corporation and their respective officers, directors, employees and shareholders (each of Targeted, the Surviving Corporation and each of the foregoing persons or entities, an "Indemnified Person") from and against any and all claims, ------------------ liabilities, losses, damages, judgments, fines, penalties, amounts paid in settlement or compromise, cost or expense, including reasonable fees and expenses of legal counsel (any of these, "Damages"), that any of the Indemnified ------- Persons incurs by reason of or in connection with (i) any claim, demand, action, proceeding or cause of action arising on or before the Escrow Termination Date (A) alleging material misrepresentation in, breach of or default in connection with, any of the representations, warranties, covenants or agreements of Genovo contained in this Agreement, or (B) arising from or in connection with the Ornithine Transcarbamylase Deficiency clinical trial conducted by the University of Pennsylvania (IND number 6624) (the "University of Pennsylvania OTD Trial"), ------------------------------------ (ii) one-half of any Excess Payments (as defined and as provided in Section 1.6(f)(iii) of this Agreement) and (iii) any Registration Statement Loss (as defined in Section 5.19(f) of this Agreement). In addition, the Genovo Stockholders shall 62 protect, indemnify and hold harmless the Indemnified Persons, to the extent provided in this Agreement and the Escrow Agreement, in the event that the University of Pennsylvania Amendment (as defined in Section 8.11 of this Agreement) fails to satisfy certain conditions described in Section 8.11 of this Agreement. Damages in each case shall be net of the amount of any insurance proceeds and indemnity and contribution actually recovered by the Indemnified Persons. (b) Exclusive Remedy and Limitations. Any transfer of Indemnification -------------------------------- Escrow Shares or Penn Escrow Shares (as defined in Section 8.4(b) and Section 8.4(a), respectively, of this Agreement) to an Indemnified Party out of the Escrow Fund pursuant to the provisions of this Article Eight shall be treated by the parties as an adjustment to the Merger Consideration payable in connection with the Merger. After the Closing, resort to the Indemnification Escrow Shares shall be the sole and exclusive remedy and method of recourse of the Indemnified Persons for breach of this Agreement and any Damages described in clauses (i), (ii) and (iii) of Section 8.2(a), and resort to the Penn Escrow Shares shall be the sole and exclusive remedy and method of recourse of the Indemnified Persons for Damages directly relating to the amended provisions of the University of Pennsylvania Amendment, as provided in Section 8.11 of this Agreement. 8.3 Damages Threshold. Notwithstanding the foregoing, except as ----------------- provided in Section 4(b)(v) of the Escrow Agreement, Targeted may not claim any amount of the Indemnification Escrow Shares from the Escrow Fund unless and until a certificate signed by an officer of Targeted (an "Officer's --------- Certificate") identifying Damages in the aggregate amount in excess of $200,000 - ----------- has been delivered to the Stockholders' Representative. If such amount is determined pursuant to this Article Eight to be payable, Targeted shall receive Indemnification Escrow Shares equal in value only to the full amount of such Damages. For purposes of determining the number of Indemnification Escrow Shares to be received by Targeted from the Escrow Fund pursuant to the terms of this Article Eight, each Indemnification Escrow Share shall have a value equal to the Merger Price (as defined in Section 1.6(g) of this Agreement). 8.4 Escrow Fund; Escrow Agreement. ----------------------------- (a) As soon as practicable after the Effective Time, 1,095,849 shares of the Targeted Common Stock that the Genovo Stockholders are entitled to receive at the Effective Time (or such greater number of shares as shall be set forth on the amended Escrow Allocation Schedule described below, as a result of the exercise of Genovo Stock Options before the Effective Time), of which 486,849 shares shall constitute the "Initial Escrow Shares" and 609,000 shares shall --------------------- constitute the "Penn Escrow Shares," shall, without any act of any Genovo ------------------ Stockholder or the Stockholders' Representative, be issued in the name of the Genovo Stockholders, on a pro rata basis according to the Merger Consideration to be received by each such Genovo Stockholder at the Effective Time, and deposited with such institution as is selected by Targeted (with the reasonable consent of Genovo) to be escrow agent (the "Escrow Agent"). In addition, 11% of ------------ any shares that the holders of Genovo Common Stock receive as Contingent Merger Consideration pursuant to Section 1.6(h) of this Agreement (the "Option Escrow ------------- Shares" and, together with the Initial Escrow Shares, the Penn Escrow Shares and - ------ the New Shares (as defined in Section 8.6(a) of this Agreement), the "Escrow ------ Shares") shall be deposited in the Escrow Fund. The Escrow Shares shall - ------ constitute the "Escrow Fund." Except as provided in ----------- 63 Section 8.9 of this Agreement and in accordance with the provisions of the Escrow Agreement and this Article Eight, the Indemnification Escrow Shares shall be available solely to secure the indemnification obligations of the Genovo Stockholders under Section 8.2(a)(i), (ii) and (iii) of this Agreement, and the Penn Escrow Shares shall be available solely to secure the indemnification obligations of the Genovo Stockholders under Section 8.11 of this Agreement. The escrow allocation schedule attached as Exhibit N to this Agreement (the "Escrow --------- ------ Allocation Schedule"), which Escrow Allocation Schedule shall be amended, if - ------------------- necessary, as of the second business day preceding the Closing, sets forth the number of shares to be initially deposited in the Escrow Fund on behalf of each Genovo Stockholder as Initial Escrow Shares and as Penn Escrow Shares. The Targeted Common Stock held in the Escrow Fund shall be beneficially owned, as of the time of issuance of such shares, by the Genovo Stockholders on whose behalf such Escrow Shares were deposited in the Escrow Fund. Notwithstanding anything to the contrary in this Agreement, no shares of Targeted Common Stock issued to Genzyme upon the exercise of the Genzyme Options or issued to any Genovo Optionholder pursuant to the exercise of any Roll-Over Option or as Contingent Merger Consideration pursuant to Section 1.6(h) of this Agreement shall be subject to deposit in the Escrow Fund or the terms and conditions of the Escrow Agreement or Article Eight of this Agreement. (b) As of the Effective Time (in the case of the Initial Escrow Shares and the Penn Escrow Shares) or the time of issuance (in the case of the Option Escrow Shares and the New Shares), the Escrow Shares shall be deemed to be pledged by the Genovo Stockholders to Targeted, and shall be held by the Escrow Agent on behalf of Targeted pursuant to the terms and conditions of this Agreement and the Escrow Agreement. Genovo shall deliver to Targeted at the Closing or at the time of issuance, as the case may be, appropriate stock powers from the Genovo Stockholders endorsed in blank and such documentation as Targeted may reasonably request to carry out the purposes of this Article Eight. So long as any Initial Escrow Shares, Option Escrow Shares or any New Shares issued or distributed with respect to such Initial Escrow Shares or Option Escrow Shares (collectively, the "Indemnification Escrow Shares") or any Penn ----------------------------- Escrow Shares or New Shares issued with respect to such Penn Escrow Shares are held by the Escrow Agent under this Agreement and the Escrow Agreement, Targeted shall have, and the Genovo Stockholders shall grant to Targeted at the Closing, effective as of the Effective Time or at the time of issuance, as the case may be, a perfected, first-priority security interest in such Escrow Shares (subordinate only to the security interests of the Stockholders' Representative and the Escrow Agent, as described in Sections 7 and 9(f), respectively, of the Escrow Agreement) to secure payment of amounts payable by such Genovo Stockholders with respect to indemnification claims made pursuant to the terms and conditions of this Article Eight. 8.5 Escrow Period. Subject to the provisions of this Section 8.5, the ------------- Escrow Shares shall remain in the Escrow Fund, which shall remain in existence until the Escrow Termination Date (the "Escrow Period"). Upon the expiration of ------------- the Escrow Period, the Escrow Fund shall terminate with respect to all remaining Escrow Shares and the Escrow Agent shall deliver all such Escrow Shares to the Genovo Stockholders; provided, however, that (a) the Escrow Agent shall release the number of Penn Escrow Shares that Targeted and the Stockholders' Representative agree to release from the Escrow Fund pursuant to Section 8.11 of this Agreement as soon as practicable after such agreement and (b) the number of Indemnification Escrow Shares (including any New Shares issued with respect to such shares) that, in the reasonable judgment of Targeted, subject to the objection of the Stockholders' 64 Representative and the subsequent arbitration of the claim in accordance with Section 4(e) of the Escrow Agreement, is necessary to satisfy any unsatisfied claims, if any, specified in any Officer's Certificate delivered to the Escrow Agent before the expiration of the Escrow Period with respect to facts and circumstances existing on or before the Escrow Termination Date shall remain in the Escrow Fund (and the Escrow Fund shall remain in existence) until such claims have been resolved. As soon as all such claims have been resolved, the Escrow Agent shall deliver to the Genovo Stockholders all Indemnification Escrow Shares remaining in the Escrow Fund that are not required to satisfy such claims. Deliveries of Escrow Shares to the Genovo Stockholders pursuant to this Section 8.5 shall be made in accordance with each Genovo Stockholder's proportionate interest in the Escrow Fund, as determined in accordance with Section 3(b) of the Escrow Agreement. 8.6 Distributions; Voting. --------------------- (a) Any shares of Targeted Common Stock or other equity securities issued or distributed by Targeted (including shares issued upon a stock split) with respect to the Indemnification Escrow Shares or Penn Escrow Shares that have not been released from the Escrow Fund (the "New Shares") shall be added to the ---------- Escrow Fund and become a part of the Indemnification Escrow Shares or Penn Escrow Shares, respectively. When and if cash dividends on Indemnification Escrow Shares or Penn Escrow Shares in the Escrow Fund shall be declared and paid, they shall be distributed to the beneficial owners of such shares on the applicable distribution date. Such dividends will not become part of the Escrow Fund and will not be available to satisfy Damages. The beneficial owners of such shares shall pay any taxes on such dividends. (b) Each Genovo Stockholder shall possess voting rights with respect to that number of Indemnification Escrow Shares or Penn Escrow Shares issued to and deposited in the Escrow Fund on behalf of such Genovo Stockholder (and on any voting securities added to the Escrow Fund with respect to such shares), so long as such shares or other voting securities are held in the Escrow Fund. Targeted shall promptly deliver to the Escrow Agent, and the Escrow Agent shall promptly deliver to Genovo Stockholder, copies of all proxy solicitation materials. (c) Targeted shall show the Targeted Common Stock contributed to the Escrow Fund as issued and outstanding on its balance sheet. 8.7 Method of Asserting Claims; Resolution of Conflicts. All claims for --------------------------------------------------- indemnification by Targeted, the Surviving Corporation or any other Indemnified Person pursuant to this Article Eight shall be made in accordance with the provisions of the Escrow Agreement, and any conflicts with respect to the subject matter of this Article Eight (except for the provisions set forth in subsection (b) of Section 8.10 of this Agreement) shall be resolved in accordance with the provisions of the Escrow Agreement. 8.8 Stockholders' Representative; Power of Attorney. Upon the approval ----------------------------------------------- of this Agreement and the Merger by the requisite number of Genovo Stockholders, effective upon each such vote, and without further act of any Genovo Stockholder, Biogen shall be appointed as agent and attorney-in-fact (the "Stockholders' Representative") for each Genovo Stockholder (except such - ----------------------------- Dissenting Holders, if any, as shall have perfected their appraisal rights 65 under the DGCL), for and on behalf of Genovo Stockholders, to (a) execute and deliver the Escrow Agreement; (b) give and receive notices and communications on behalf of Genovo Stockholders; (c) negotiate with Targeted with respect to the specific terms sought to be modified in the University of Pennsylvania Amendment, whether the conditions agreed to with respect to such terms have been satisfied and the release of the Penn Escrow Shares; (d) authorize the transfer to Targeted of the Indemnification Escrow Shares from the Escrow Fund in satisfaction of claims by Targeted or any other Indemnified Person or the transfer to Targeted of the Penn Escrow Shares from the Escrow Fund in accordance with Section 8.11 of this Agreement; (e) object to such deliveries; (f) agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply with orders of courts and awards of arbitrators with respect to, claims by Targeted or any other Indemnified Person; and (g) take all actions necessary or appropriate in the judgment of the Stockholders' Representative for the accomplishment of the foregoing. 8.9 Adjustment to Escrow. In the event that Targeted pays out any -------------------- amounts to Dissenting Holders with respect to Dissenting Shares, the Indemnification Escrow Shares and Penn Escrow Shares shall be automatically reduced by the number of Indemnification Escrow Shares and Penn Escrow Shares allocable to such Dissenting Shares, pursuant to Section 1.6(f) of this Agreement. Upon certification by Targeted to the Escrow Agent of such event, the Indemnification Escrow Shares and Penn Escrow Shares (and any New Shares issued with respect to such shares) allocable to such Damages shall be promptly transferred to Targeted. For purposes of this Section 8.9, each Indemnification Escrow Share and Penn Escrow Share shall have a value equal to the Merger Price. 8.10 Third-Party Claims. ------------------ (a) In the event an Indemnified Person becomes aware of a third-party claim that Targeted or such Indemnified Person believes may result in a demand against the Indemnification Escrow Shares, Targeted shall notify the Stockholders' Representative of such claim; provided, however, that failure to so notify the Stockholders' Representative shall not relieve the Genovo Stockholders from any liability they have under this Article Eight or the Escrow Agreement with respect to such third-party claim, except to the extent the Stockholders' Representative demonstrates that the indemnifying party's ability to resolve such third-party claim is adversely affected by Targeted's failure to notify. That number of Indemnification Escrow Shares that, in the reasonable judgment of Targeted, subject to the objection of the Stockholders' Representative and the subsequent arbitration of the claim in accordance with Section 4(e) of the Escrow Agreement, would be necessary to satisfy a claim for indemnification with respect to such third-party claim, if such third-party claim were to be determined in a matter adverse to the Indemnified Person and the Indemnified Person were to prevail in establishing its right to indemnification, shall remain in the Escrow Fund until such third-party claim and claim for indemnification have been resolved, subject to the provisions of Sections 8.2 and 8.3 of this Agreement. (b) Within 10 days of receipt of such notice of a third-party claim, the Stockholders' Representative shall be entitled to elect to participate in the defense of such claim and, to the extent that the Stockholders' Representative so desires (unless any Genovo Stockholder is also party to such claim and either of the Indemnified Party or Targeted 66 determines in good faith that joint representation would be inappropriate), to assume the defense of such claim; provided that (i) the participation in or defense of such claim by the Stockholders' Representative shall be at the sole cost and expense of the Genovo Stockholders, as provided in Section 5(b) of the Escrow Agreement; (ii) the Stockholders' Representative shall not be entitled to assume defense of such claim without Targeted's written approval of legal counsel for such defense (which consent shall not be unreasonably withheld or delayed); (iii) the assumption of the defense of such claim shall conclusively establish that such claim is within the scope of and subject to indemnification by the Genovo Stockholders; and (iv) no compromise or settlement of such claim may be effected by the Stockholders' Representative without the prior written consent of the Indemnified Party and Targeted unless (A) there is no finding or admission of any violation of Law or any violation of the rights of any Person and no effect on any claims that may be made against the Indemnified Person or Targeted, (B) the sole relief provided is monetary damages that are paid in full by the Genovo Stockholders; and (C) neither the Indemnified Person nor Targeted will have any liability with respect to any compromise or settlement of such claim without its consent. In all other cases, Targeted shall have the right in its discretion to defend, compromise or settle any such claim; provided, however, that Targeted shall not settle such claim without the consent of the Stockholders' Representative (which consent shall not be unreasonably withheld or delayed). If the Stockholders' Representative consents in writing to any such settlement, the Stockholders' Representative shall have no power or authority to object under any provision of this Article Eight or the Escrow Agreement to the amount of any claim by Targeted against the Indemnification Escrow Shares consistent with such settlement. Notwithstanding the foregoing, if an Indemnified Person or Targeted determines in good faith that there is a reasonable probability that a claim or a compromise, settlement or adjudication of a claim may have a Material Adverse Effect on Targeted or any affiliate of Targeted, other than as a result of monetary damages for which it would be entitled to indemnification under this Article Eight or the Escrow Agreement, such Indemnified Person or Targeted may, by notice to the Stockholders' Representative, assume the exclusive right to defend, compromise, or settle such claim. 8.11 University of Pennsylvania Amendment. The Penn Escrow Shares shall ------------------------------------ be held in escrow solely to secure the Genovo Stockholders' obligation to indemnify Targeted in the event that the amendment (the "University of ------------- Pennsylvania Amendment") of the License Agreement Additional Fields and the - ---------------------- License Agreement Lung and Liver Fields, each effective as of June 30, 1995, between Genovo and the Trustees of the University of Pennsylvania, attached to this Agreement as Exhibits O-1 and O-2, fails to satisfy certain conditions to ------------ --- be established by Targeted and the Stockholders' Representative as provided in this Section 8.11. In the event that Genovo and the University of Pennsylvania fail to execute the University of Pennsylvania Amendment on or before the Escrow Termination Date, the Penn Escrow Shares shall be released from the Escrow Fund and distributed to the Genovo Stockholders in accordance with the provisions of this Section 8.11 and Section 4(e) of the Escrow Agreement: (a) The number of Penn Escrow Shares to be released from the Escrow Fund (which number shall not exceed 609,000 shares of Targeted Common Stock deposited into the Escrow Fund on the Effective Date and any New Shares issued after the Effective Date with respect to such Penn Escrow Shares) shall be determined by mutual agreement between Targeted and the Stockholders' Representative after good-faith negotiation, and shall be based on the extent to which the University of Pennsylvania Amendment meets certain conditions to which 67 Targeted and the Stockholders' Representative shall have previously agreed with respect to revisions of specified terms of such license agreements. The conditions shall include a modification in the definition and number of fields to which the licenses apply, changes to the diligence requirements necessary to maintain the license, the addition of stacking provisions to allow a reduction of royalties when royalties are payable to multiple third parties, a reduction of maintenance fees, a modification to the amount of royalties payable on products and a clarification of the terms of payment of non-royalty based sublicensee income. Before the Closing, Targeted and the Stockholders' Representative shall agree (the "Targeted-Stockholders' Representative ------------------------------------- Agreement") on the specific terms of the University of Pennsylvania license - --------- agreements sought to be modified and the maximum number of Penn Escrow Shares that shall be attributable to each corresponding term in the University of Pennsylvania Amendment. (b) Targeted and the Stockholders' Representative shall negotiate in good faith to determine the number of Penn Escrow Shares to be released from the Escrow Fund, as provided in Section 4(e)(i) of the Escrow Agreement and this Section 8.11. In accordance with the provisions of such Section 4(e)(ii), the Escrow Agent shall distribute from the Escrow Fund (i) to the Genovo Stockholders, the number of Penn Escrow Shares to which such Genovo Stockholders are entitled, as agreed between Targeted and the Stockholders' Representative, and (ii) to Targeted, as Damages, the number of Penn Escrow Shares equal to the difference obtained by subtracting the number of Penn Escrow Shares to be released to the Genovo Stockholders pursuant to such Section 4(e)(ii) from 609,000 (or such greater amount reflecting the inclusion of any New Shares issued with respect to the Penn Escrow Shares). (c) In the event that Genovo and the University of Pennsylvania do not execute the University of Pennsylvania Amendment on or before the Escrow Termination Date, the Escrow Agent shall transfer to Targeted, as Damages, all of the Penn Escrow Shares (and any New Shares issued with respect to the Penn Escrow Shares) out of the Escrow Fund. ARTICLE NINE 9. General Provisions. ------------------ 9.1 Expenses. Subject to the provisions of Section 7.3 of this -------- Agreement, each party shall pay its own expenses and fees related directly to the negotiation, preparation and execution of this Agreement (including legal and accounting fees and expenses), and such fees and expenses of Genovo shall be paid on or before the Effective Time; provided, however, that if Genovo's expenses and fees exceed $600,000, not including any fees paid by Genovo to the Genovo Financial Advisor or on behalf of Biogen or Genzyme, the number of shares of Targeted Common Stock to be issued as Merger Consideration shall be reduced by that number of shares equal to (a) the dollar amount by which such expenses and fees exceed $600,000 divided by (b) the Merger Price. 9.2 Notices. Any notice, request or other communication required or ------- permitted by this Agreement shall be in writing and shall be deemed effective (a) upon receipt, (b) when delivered personally or by courier, overnight delivery service or confirmed facsimile, or (c) three days after being deposited in the regular mail as certified or registered mail (airmail if sent internationally) with postage prepaid, if such notice is addressed to the party to be notified 68 at such party's address or facsimile number set forth below or as subsequently modified by written notice from such party: (i) if to Targeted or Merger Sub, to: Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, WA 98101 Attention: James A. Johnson Facsimile No.: (206) 623-7064 Telephone No.: (206) 623-7612 with a copy to: Orrick, Herrington & Sutcliffe LLP 701 Fifth Avenue, Suite 6500 Seattle, WA 98104 Attention: Stephen M. Graham Facsimile No.: (206) 839-4301 Telephone No.: (206) 839-4300 (ii) if to Genovo, to: Genovo, Inc. 516 Elmwood Avenue Sharon Hill, PA 19079 Attention: Dr. Eric Aguiar Facsimile No.: (610) 522-8548 Telephone No.: (610) 522-8500 with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, NY 10153 Attention: Stephen E. Jacobs S. Wade Angus Facsimile No.: (212) 310-8007 Telephone No.: (212) 310-8000 (iii) if to Biogen, to: 69 Biogen, Inc. 14 Cambridge Center Cambridge, MA 02142 Attention: John G. Conley Facsimile No.: (617) 679-2617 Telephone No.: (617) 679-2000 with a copy to: Mintz Levin Cohn Ferris Glovsky and Popeo PC One Financial Center Boston, MA 02111 Attention: Peter Lawrence Facsimile No.: (617) 542-2241 Telephone No.: (617) 542-6000 (iv) if to the Stockholder Representative, to: Biogen, Inc. 14 Cambridge Center Cambridge, MA 02142 Attention: General Counsel Facsimile No.: (617) 679-2617 Telephone No.: (617) 679-2000 with a copy to: Mintz Levin Cohn Ferris Glovsky and Popeo PC One Financial Center Boston, MA 02111 Attention: Peter Lawrence Facsimile No.: (617) 542-2241 Telephone No.: (617) 542-6000 9.3 Headings. The table of contents and headings contained in this -------- Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9.4 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 9.5 Entire Agreement; Nonassignability; Parties in Interest. This ------------------------------------------------------- Agreement and the documents and instruments and other agreements specifically referred to in this Agreement or delivered pursuant to this Agreement, including the Exhibits, the Schedules, including the Genovo Disclosure Memorandum and the Targeted Disclosure Memorandum (a) constitute the entire agreement among the parties with respect to the subject matter of this Agreement and supersede all prior agreements and understandings, both written and oral, among 70 the parties with respect to the subject matter of this Agreement (except for the Confidentiality Agreement, which shall continue in full force and effect) and shall survive any termination of this Agreement or the Closing, in accordance with its terms; (b) are not intended to confer upon any other person any rights or remedies under this Agreement, except as set forth in Sections 1.6(a)-(c) and (g), 1.7. 1.8, 1.12, 5.13 and 5.14 (as to Genovo Stockholders) of this Agreement; and (c) shall not be assigned by operation of law or otherwise except as otherwise specifically provided. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned by any of the parties to this Agreement (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. 9.6 Severability. If one or more provisions of this Agreement are held ------------ to be unenforceable under applicable Law, the parties agree to renegotiate such provision in good faith, so as to effect as closely as possible the original intent of the parties with respect to the provision rendered unenforceable. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 9.7 Remedies Cumulative. Except as otherwise provided in this ------------------- Agreement, any and all remedies in this Agreement expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred by this Agreement, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 9.8 Governing Law. This Agreement and all acts and transactions ------------- pursuant to this Agreement and the rights and obligations of the parties to this Agreement shall be governed, construed and interpreted in accordance with the Laws of the state of Delaware, without giving effect to principles of conflicts of law. Each of the parties to this Agreement consents to the exclusive jurisdiction and venue of the state and federal courts of the state of New York. 9.9 Rules of Construction. The parties to this Agreement agree that --------------------- they have been represented by counsel during the negotiation, preparation and execution of this Agreement and therefore waive the application of any Law, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. 9.10 Amendments and Waivers. Any term of this Agreement may be amended ---------------------- or waived only with the written consent of the parties or their respective successors and assigns. Any amendment or waiver effected in accordance with this Section 9.10 shall be binding upon the parties and their respective successors and assigns. 9.11 Specific Performance. The parties to this Agreement agree that -------------------- irreparable damage would occur in the event any provision of this Agreement is not performed in 71 accordance with the terms of this Agreement and that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any federal or state court of the state of New York, in addition to any other remedy to which they are entitled at law or in equity. 9.12 Joint and Several Liability. Targeted and Merger Sub agree that --------------------------- they shall be jointly and severally liable for all covenants, agreements, obligations and representations and warranties made by either of them in this Agreement. 9.13 Interpretation. Any reference in this Agreement to an article or -------------- section shall be to an article or section of this Agreement unless otherwise indicated. The words "include," "includes" or "including" in this Agreement shall be deemed to be followed by the words "without limitation." The phrases "in this Agreement," "of this Agreement" and "under this Agreement" and similar phrases shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. All terms defined in this Agreement shall have the same defined meanings when used in any certificate or other document made or delivered pursuant to this Agreement unless otherwise defined in the certificate or other document. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. [Signature Page Follows] 72 IN WITNESS WHEREOF, Genovo, Targeted, Merger Sub and Biogen have executed this Agreement as of the date first written above. GENOVO, INC. By: /s/ Eric Aguiar ---------------- Name: Eric Aguiar Title: CEO TARGETED GENETICS CORPORATION By: /s/ H. Stewart Parker ---------------------- Name: H Stewart Parker Title: President & CEO TGC ACQUISITION CORPORATION By: /s/ H. Stewart Parker ---------------------- Name: H Stewart Parker Title: President BIOGEN, INC. By: /s/ James C. Mullen ------------------- Name: James C. Mullen Title: President 73 EX-21.1 4 dex211.txt SUBSIDIARIES OF TARGETED GENETICS EXHIBIT 21.1 Subsidiaries of Targeted Genetics Corporation Targeted Genetics Corporation has four subsidiaries as of December 31, 2001, as follows: Name of Subsidiary Jurisdiction of Organization - ------------------ ---------------------------- CellExSys, Inc. Washington Emerald Gene Systems, Ltd. Bermuda Genovo, Inc. Delaware TGCF Manufacturing, Inc. Washington EX-23.1 5 dex231.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-51625 333-86509, 333-50214 and 333-33192) and Form S-8 (Nos. 33-83064, 333-03889, 333-28151, 333-58907, 333-61738, 333-78523 and 333-48220) pertaining to Targeted Genetics Corporation's 1992 Restated Stock Option Plan, Stock Option Plan for Nonemployee Directors, 1999 Stock Option Plan and Genovo Roll-Over Stock Option Plan, of our report dated February 14, 2002, with respect to the consolidated financial statements of Targeted Genetics Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 2001. /s/ Ernst & Young LLP Seattle, Washington March 18, 2002 -----END PRIVACY-ENHANCED MESSAGE-----