-----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, PLYkFk4Pwg5w3erpFyMVw7R5tkV9O7Skf8b0fk5fDNXIGJ9GyCzthrOoAq4VGLjO XIX5g/G42u0i5UDVYkKWbw== 0001032210-98-000302.txt : 19980401 0001032210-98-000302.hdr.sgml : 19980401 ACCESSION NUMBER: 0001032210-98-000302 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TARGETED GENETICS CORP /WA/ CENTRAL INDEX KEY: 0000921114 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 911549568 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-23930 FILM NUMBER: 98580158 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 FORM 10-K FOR FISCAL YEAR END 12/31/1997 ================================================================================ 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 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED COMMISSION FILE NO. DECEMBER 31, 1997 0-23930 TARGETED GENETICS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WASHINGTON 91-1549568 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1100 OLIVE WAY, SUITE 100 SEATTLE, WASHINGTON 98101 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 623-7612 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 WARRANTS FOR THE PURCHASE OF SHARES OF COMMON STOCK, $.01 PAR VALUE PREFERRED STOCK PURCHASE RIGHTS, $.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 6, 1998: $26,557,036. Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of March 6, 1998: TITLE OF CLASS NUMBER OF SHARES -------------- ---------------- Common Stock, $.01 par value 20,216,714 ================================================================================ DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 1998, are incorporated by reference into Part III of this report. 2 PART I ITEM 1. BUSINESS FORWARD-LOOKING STATEMENTS Certain statements within the following description of the business of Targeted Genetics Corporation and elsewhere in this Form 10-K constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: technological uncertainty; results of clinical trials; ability to obtain adequate financing in the future; uncertainty regarding patents and proprietary rights; changes in, or failure to comply with, governmental regulations; competition; rapid technological change; availability of key personnel and scientific collaborators; ability to manufacture and market products; and dependence on corporate collaborators. See "Factors Affecting Forward-Looking Information". OVERVIEW Targeted Genetics is focused on the development of gene and cell therapies for the treatment of certain acquired and inherited diseases. The Company is developing a broad base of core technologies that it believes will allow it to address a variety of such diseases. These technologies include proprietary viral and non-viral gene delivery systems as well as novel techniques for cytotoxic T lymphocyte ("CTL") immunotherapy. The Company is using its core technology platform to develop potential products for the treatment of various genetic disorders, cancer and infectious diseases. The Company believes that in the area of gene therapy, different disease targets will require different methods of gene delivery, depending on the target cell to be modified, the duration of gene expression required and the need for in vivo or ex vivo delivery. Accordingly, the Company has focused its efforts on multiple gene delivery systems based on three different vector technologies: adeno-associated viral ("AAV"), non-viral and retroviral. The Company believes these systems may provide it with the flexibility necessary to develop gene therapies for a broader range of diseases than would be possible using a single gene delivery system. In the area of cell therapy, the Company's expertise with CTLs enables it to isolate from patients and efficiently multiply antigen-specific CTLs, which are immune cells that target and kill specific diseased cells ("Targeted CTLs"). This expertise forms the basis for a series of potential immunotherapies for the treatment of infectious diseases and cancer. Targeted CTLs are based on the Company's proprietary Rapid Expansion Method ("REM") technology, which is used to grow CTLs ex vivo prior to infusion into the patient. The Company has demonstrated that REM enables it to grow billions of CTLs from individual cloned cells over several weeks, while preserving the cells' specific disease-fighting capabilities. The Company's three product development programs are summarized in the following table.
TECHNOLOGY GENE STATUS ---------------- -------------------- ----------- CYSTIC FIBROSIS Maxillary sinus AAV vector CFTR Phase II Lung/nose AAV vector CFTR Phase I Lung--aerosol AAV vector CFTR Preclinical CANCER Ovarian/breast non-viral vector E1A tumor suppressor Phase I Head and neck/breast/lung non-viral vector E1A tumor suppressor Phase I INFECTIOUS DISEASE HIV Targeted CTLs -- Phase I Hepatitis B Targeted CTLs -- Preclinical
3 In addition to the product development programs summarized above, the Company is performing research, both internally and through outside collaborators, oriented toward identifying promising new applications of its technology base. Also, the Company is collaborating with certain academic researchers who are using its retroviral vectors in Phase I clinical trials focused on HIV infection, melanoma and leukemia. PRODUCT DEVELOPMENT PROGRAMS Cystic Fibrosis Cystic fibrosis is the most common single-gene deficiency affecting the Caucasian population, afflicting approximately 30,000 people in the United States and 60,000 people worldwide. The disease is caused by a dysfunctional cystic fibrosis transmembrane regulator ("CFTR") gene, which results in a build-up of mucus in the lungs, infections and early death. Current treatments for cystic fibrosis offer only symptomatic relief and cannot cure or halt the progression of the disease. tgAAV-CFTR. Based on preclinical findings by the Company and its scientific collaborators, the Company believes that the persistence of expression and lack of toxicity observed with its AAV-based gene delivery vector potentially make it better suited than other types of vectors for delivery of the CFTR gene to the lung. In preclinical studies in rabbits, the Company and its collaborators at The Johns Hopkins University ("Johns Hopkins") were able to detect expression of the CFTR gene in the lung for periods of up to six months with no observed side effects. These results were confirmed in similar studies in rhesus monkeys, in which gene transfer occurred in up to 50% of target airway cells, and gene expression, which was confirmed in all animals, persisted for up to six months. Based on these preclinical data, the Company began two clinical trials in late 1995 to evaluate the safety and feasibility of in vivo gene therapy for the treatment of cystic fibrosis by direct delivery of the CFTR gene using an AAV vector. The Company's AAV-CFTR product ("tgAAV-CFTR") has been granted orphan drug status by the United States Food and Drug Administration (the "FDA"). The first clinical trial, which began in November 1995, is a Phase I clinical trial at Johns Hopkins and the University of Florida in which tgAAV- CFTR is delivered to the nose and lung of adult cystic fibrosis patients having mild lung disease. The trial is designed as an interpatient dose escalation trial enrolling a total of 18 patients, two at each of nine escalating dose levels. The tgAAV-CFTR is administered in an open-label single dose to the right lower lobe of the lung via bronchoscopy and to one nostril. Patients are monitored for, among other things, safety and assessment of gene transfer and expression. A total of 19 patients have been treated in this clinical trial with no apparent side effects related to the study drug. A second clinical trial began in December 1995 at Stanford University. This trial was designed as a Phase I/II trial, pursuant to which tgAAV-CFTR is administered to the maxillary sinuses of cystic fibrosis patients with chronic sinusitis. The Phase I part of this trial, designed as a dose escalation study, was completed in 1996. A total of ten patients were enrolled, and 15 sinuses were treated, in five cohorts receiving escalating doses. The results of the trial suggests that tgAAV-CFTR is safe and well tolerated with no resulting inflammatory response or other side effects, even after repeat delivery. Furthermore, administration of tgAAV-CFTR resulted in consistent gene transfer and, in the only patient measured at such timepoint, persistence of the gene for at least 70 days after treatment. Additionally, the dose level was established for the Phase II part of the trial, in which up to 50 patients are to receive tgAAV-CFTR in one sinus and a placebo in the other. Patients in the Phase II trial are monitored to assess the ability of tgAAV-CFTR to prevent the relapse of chronic sinusitis. The Phase II part of the trial began in February 1997 and the Company expects to complete patient treatment in the first half of 1998. The Company is preparing to initiate a Phase I clinical trial in 1998 involving the aerosol delivery of tgAAV-CFTR to the whole lung. The Company expects to begin a toxicology study in non-human primates in the first half of 1998, which must be completed prior to beginning the clinical trial. 4 Cancer Cancer is the second leading cause of death in the United States, with over one million new cases diagnosed each year. The Company's approach to the treatment of cancer utilizes a proprietary non-viral delivery system to deliver in vivo an E1A tumor suppressor gene to cancer cells. tgDCC-E1A. Cancer arises when the genetic pathways that control normal cell growth and division are disrupted. Certain of these pathways are regulated by cellular oncogenes or tumor suppressor genes. Cancer may result from the structural alteration and abnormal expression of cellular oncogenes or from mutation or deletion of tumor suppressor genes. Some viruses have evolved genes that may mimic functions normally exhibited by cellular genes. One such example is the E1A gene of the adenovirus type 5. The E1A gene was shown, by Dr. Mien Chie Hung and his colleagues at University of Texas M.D. Anderson Cancer Center ("M.D. Anderson"), to function as a suppressor of the HER-2/neu oncogene, which is known to be overexpressed in certain cancers. In preclinical mouse studies, E1A was shown to inhibit expression of the HER- 2/neu oncogene, to inhibit growth and metastasis of cancer cells, and to increase significantly the long-term survival of the mice. The Company has worldwide rights to the use of the E1A gene as a tumor suppressor under patents filed by Dr. Hung. Other research, conducted by Dr. Steven Frisch and his colleagues at the Burnham Institute, has suggested that E1A may have other tumor suppression activity unrelated to the inhibition of HER-2/neu expression. Preclinical in vitro experiments have shown that E1A, when introduced to a variety of tumor cell lines, is capable of altering tumor cells such that they appear to have characteristics of normal cells. Furthermore, in vivo mouse studies involving tumor cells not overexpressing HER-2/neu showed reduced tumor growth rates with the administration of E1A versus the same tumor cells without E1A. E1A was also shown in preclinical studies to sensitize tumor cells to killing by certain chemotherapeutic agents. The Company has worldwide rights to patents filed by Dr. Frisch that are complementary to those filed by Dr. Hung. The Company's E1A product ("tgDCC-E1A") is a formulation that combines the E1A tumor suppressor gene with the Company's proprietary non-viral gene delivery system based on the cationic lipid DC cholesterol ("DC Chol"). In the Company's first Phase I clinical trial, which began in July 1996 at M.D. Anderson, 18 patients with ovarian or breast cancer received weekly doses of tgDCC-E1A for up to six months. In early 1997, two additional sites were added to the study, Rush Presbyterian Medical Center in Chicago ("Rush") and Virginia Mason Medical Center in Seattle. This trial was conducted as an interpatient, escalating dose study with doses of tgDCC-E1A delivered intraperitoneally in the ovarian cancer patients and intrapleurally in the breast cancer patients. The objectives of the trial were to assess safety, levels of gene transfer and expression and tumor response. Data from the study are currently being analyzed. A second Phase I clinical trial began in early 1997 at M.D. Anderson, Rush, and Wayne State University in Detroit, in which 18 patients with inoperable primary head or neck tumors or metastatic breast or lung tumors were administered up to ten weekly doses of tgDCC-E1A, injected directly into the patient tumor. The trial was conducted as an interpatient escalating dose study with up to six patients in each of four dose cohorts. The objectives of the trial were to assess safety, levels of gene transfer and expression and tumor response. A total of 18 patients were treated in the trial, which was completed in December 1997. Data from the study are currently being analyzed. Based on the data obtained from the two Phase I clinical trials described above, the Company has begun planning a Phase II clinical trial of tgDCC-E1A in head and neck cancer. This trial is expected to begin in the second half of 1998. In 1996, the Company entered into a license, research and marketing agreement with Laboratoires Fournier S.C.A. ("Fournier") under which Fournier received exclusive rights to develop and commercialize tgDCC-E1A 5 in Europe. Fournier is conducting a Phase I clinical trial in ovarian cancer patients at five hospitals in the United Kingdom and plans to begin additional clinical trials in 1998. See "Research and Development Collaborations." Infectious Diseases Human Immunodeficiency Virus ("HIV"). HIV is a retrovirus that is the cause of AIDS, a condition that is characterized by loss of CD4 cells and progressive immunologic impairment and death. According to the Centers for Disease Control and Prevention, approximately one million people in the United States have been infected with HIV. The World Health Organization estimates that approximately 17 million people worldwide have been infected with HIV and projects that the worldwide incidence of HIV infection will grow to 30 million to 40 million people by the end of the century. The Company and certain other researchers believe that the key to successful long-term treatment of HIV infection may lie in manipulating and harnessing the cell-mediated arm of the immune response. Researchers have found that HIV- infected people who remain symptom-free for prolonged periods have high levels of CTLs that suppress viral proliferation in CD4 cells. The Company believes that the provision of large quantities of cloned HIV-specific CTLs may provide a means of allowing HIV-infected people to maintain an effective immune response, thereby preventing progression to AIDS. In early 1996, the Company began a Phase I clinical trial at the Fred Hutchinson Cancer Research Center (the "Hutchinson Center") in which six HIV- infected patients were administered five escalating doses of Targeted CTLs specific to the HIV gag protein. The first three doses consisted of unmarked cells and the last two consisted of cells modified with a retroviral vector containing a marker gene. Patients in the trial are monitored for safety, persistence of the infused Targeted CTLs and changes in viral burden. The results of the trial are expected to be published in 1998. The Company and its collaborators at the Hutchinson Center are evaluating options related to additional trials in HIV. Hepatitis B. Hepatitis B virus ("HBV") is a disease of global significance, with over 300 million carriers worldwide. HBV is the cause of up to 80% of cases of primary liver cancer. Over 75% of the chronic carriers of HBV are in Asia. It is estimated that 200,000 to 300,000 HBV infections occur annually in the United States and that chronic infection develops in approximately 10% of those cases. During acute HBV infection most patients develop a strong immune response that is capable of clearing the virus. In contrast, the CTL response to HBV is usually not detectable in chronically infected patients. The lack of core specific CTL response may contribute to failure of virus elimination resulting in chronic inflammation. Thus, the Company believes that restoring the immune response by administering Targeted CTLs specific for HBV may provide an effective means to treat patients with this chronic disease. In 1997, the Company took the necessary steps to adapt its Targeted CTL technology to the treatment of HBV in preparation for a preclinical study in which chimpanzees chronically infected with HBV are to be administered Targeted CTLs. The objective of the study, which began in late 1997, is to establish safety of the therapy and, potentially, obtain proof of concept that HBV-specific Targeted CTLs may be promising as a treatment for humans infected with HBV. CORE TECHNOLOGIES The Company is developing a broad range of core technologies that it believes will allow it to address issues specific to a variety of diseases. The Company believes that in the area of gene therapy, different disease targets will require different methods of gene delivery, depending on the target cell to be modified, the duration of gene expression required and the need for in vivo or ex vivo delivery. Accordingly, the Company is developing multiple gene delivery systems based on three different vector technologies: AAV, non-viral and retroviral. In certain treatments, for which in vivo modification of slowly dividing or nondividing target cells is required or 6 preferred, such as modification of lung cells to treat cystic fibrosis, the Company is utilizing its AAV vector technology. The Company uses its retroviral vector technology in therapeutic areas where permanent modification of rapidly dividing cells is necessary. In therapeutic indications where the use of AAV and retroviral vectors is not desirable or feasible, the Company is utilizing its non-viral delivery systems. The Company believes that non-viral vectors may provide greater flexibility relating to the size and sequence of transferred genes and may also allow targeted delivery in vivo. In the area of cell therapy, the Company's expertise in isolating and multiplying CTLs forms the basis for a series of potential immunotherapies. Gene Therapy Overview. Gene therapy is an approach to the treatment and prevention of genetic and acquired diseases that involves the insertion of genetic information into target cells to produce specific proteins needed to correct or modulate disease conditions. Proteins are the fundamental components of all living cells and are essential to cellular structure, growth and function. Proteins are produced by cells from a set of genetic instructions encoded in DNA, which contains all the information necessary to control cellular biological processes. DNA is organized into segments called genes, with each gene containing the information required to express, or produce, a specific protein. An alteration in the function of, or absence of, specific genes is responsible for causing some diseases, including inherited diseases such as cystic fibrosis and certain types of cancer. Gene therapy may be used to treat such diseases by replacing a missing or defective gene to facilitate the normal protein production capabilities of cells. In addition, gene therapy may be used to enable cells to perform additional roles in the body, such as enhancing the function of the immune system to fight infectious diseases or cancer. Gene therapy may also be used to inhibit production of undesirable proteins or viruses within cells. A key factor in the progress of gene therapy is the development of safe and efficient methods of transferring genes into cells. For transfer into cells, the gene is incorporated into a delivery system called a vector. Vectors may be derived from either viral or non-viral systems. The most common gene delivery approach to date relies on viral gene transfer, whereby modified viruses are used to transfer the desired genetic material into host cells. The process of gene transfer can be accomplished ex vivo (outside the body), in which cells are removed from the patient, genetically modified, and then reinfused into the patient, or in vivo (inside the body), in which vectors are introduced directly into the patient's body. The use of viruses takes advantage of their natural ability to introduce genes into host cells and use the host's metabolic machinery to produce proteins essential for the survival and function of the virus. In gene therapy applications, viruses are genetically modified to contain the desired genes and to inhibit the ability of the virus to reproduce. Successful application of viral gene transfer to indications requiring long-term gene expression entails a number of essential technical requirements, including the ability of the viral vector to carry desired segments of genes, to transfer genes into a sufficient number of target cells and to enable genes contained in the viral vector to persist in the host cell. A number of different viral vectors, including AAV and retroviral vectors, are being used for potential gene therapy applications requiring long-term gene expression. Current non-viral vector systems generally consist of DNA incorporating the desired gene, combined with various compounds aimed at enabling the DNA to be taken up by the host cell. These in vivo gene delivery approaches include encapsulating genes into lipid carriers such as liposomes, which facilitate the entry of DNA into cells; ionically binding negatively charged DNA to the surface of cationic lipids which are positively charged prior to infusion; injecting pure plasmid or "naked" DNA in an aqueous solution; and directing DNA to receptors on target cells by combining the gene with protein carriers that are taken up by the cell. AAV Vectors. Targeted Genetics and its scientific collaborators have developed significant expertise with respect to the design and use of AAV vectors in gene therapy. The Company believes that certain features of 7 AAV vectors make them particularly well suited for the treatment of a number of diseases: (i) AAV has never been associated with causing any human disease; (ii) AAV generally cannot replicate without the presence of a helper virus; (iii) AAV vectors contain no viral genes that, if present, might produce unwanted immune responses leading to side effects or reduced efficacy; (iv) unlike some other types of viral systems, AAV vectors can introduce genes into nondividing or slowly dividing cells, such as cells lining the airway of the lung; (v) AAV vectors may persist in the host cell to provide relatively long- term expression; and (vi) AAV vectors can be purified and concentrated, and thereby may allow for more efficient manufacturing. The Company is building its proprietary position in AAV through the development or acquisition of exclusive rights to inventions that (i) provide important enhancements to AAV vectors; (ii) demonstrate novel approaches to the use of AAV vectors for gene therapy; and (iii) establish new and improved methods for large-scale production of AAV vectors. The Company has exclusive rights from the National Institutes of Health (the "NIH") to an issued patent for use of a novel AAV vector for cystic fibrosis. In addition to its development program for cystic fibrosis, the Company is conducting research to assess the potential for delivery of genes to other target cells using AAV vectors. To date, the Company has focused its internal efforts in this area to cells of the cardiovascular system and the gastrointestinal tract. The Company plans to examine the use of its AAV vectors in additional cell types, both internally, to the extent resources are available to do so, and through academic collaborators. Non-Viral Vectors. The Company has exclusive rights to a significant body of non-viral gene delivery technology based on the use of cationic lipids to promote the uptake of DNA into cells. The Company believes that non-viral vectors may have several characteristics that may make them particularly well suited for the treatment of certain diseases, including (i) the ability to target such vectors to a specific cell type; (ii) relative ease of manufacture; and (iii) the ability to transfer relatively large segments of DNA in a single vector. These non-viral vectors are formulated by complexing negatively charged DNA with cationic lipids which are positively charged to promote DNA uptake by cells. Such complexes appear to have good safety profiles and can be used in vivo as well as ex vivo. For in vivo use, these complexes can potentially be delivered topically, intravenously, intraperitoneally, intrapleurally or by aerosol. The Company is working to develop a series of these non-viral delivery systems based on discoveries by Dr. Leaf Huang of the University of Pittsburgh. His original DC Chol system, which appears to have a favorable clinical toxicity profile, was used in two clinical trials by unaffiliated investigators prior to the Company using it in its tgDCC-E1A cancer clinical trials. The Company has acquired an exclusive or co-exclusive license to an issued U.S. patent for the original DC Chol system for the treatment of cancer and certain other diseases. Dr. Huang is developing a series of non-viral delivery systems for which the Company has obtained exclusive worldwide rights in the field of gene therapy from the University of Pittsburgh. One type of system under development employs additional analogs of DC Chol that may have an even more favorable toxicity profile. In another system, the DNA is condensed into particles of defined size that have gene transfer efficiency that is fifty- to eighty-fold higher than the original DC Chol system. An alternate version of this system is being developed that includes specific ligands to enhance delivery to specific target cells and to increase stability when delivered intravenously. An additional system being developed also has increased efficiency of gene transduction and higher stability in serum for intravenous delivery. The Company's initial internal efforts in this area, based on the work of Dr. Huang, are devoted to the development of an efficient lipid-based delivery vehicle with properties suitable for systemic delivery of genes to target tissues via the bloodstream. Retroviral Vectors. The Company uses retroviral vectors to modify T cells and stem cells. These cells multiply to generate large numbers of progeny (daughter) cells and are well suited as targets for retroviral vectors that can modify only rapidly dividing cells. The Company believes that it has positioned itself at the forefront of retroviral gene delivery technology through its exclusive relationship with Dr. A. Dusty Miller, a leader in the development of packaging cell lines for retroviral vectors. One of Dr. Miller's more recent inventions in this area is an improved retroviral vector packaging cell line called PG13, which the Company has licensed 8 exclusively from the Hutchinson Center. Vectors produced in this cell line have been shown to have improved efficiency for ex vivo transfer of genes to human blood cells such as T cells and stem cells. To date, the Company's internal efforts with retroviral vectors have been primarily oriented toward improvements in the design, manufacture and methods of using such vectors for gene transfer and expression. Additionally, the Company has manufactured retroviral vectors for several investigator-sponsored clinical trials. Targeted CTLs Overview. The immune system is the body's major defense mechanism responsible for protecting against disease. It functions through a complex interplay of components and allows the body to detect foreign agents and thereby defend against infections and diseases. The immune system recognizes parts of proteins called antigens that are present on the surface of diseased cells but are not present on normal cells. The immune response to an antigen involves the integrated action of various classes of white blood cells, including lymphocytes. Lymphocytes comprise two major classes: B cells, which produce antibodies that mediate humoral immunity, and T cells, which direct cell-mediated immunity. T cells direct cell-mediated immunity by recognizing antigens on diseased cells. The two main classes of T cells are CD4 cells and CD8 cells. In general, CD8 cells are CTLs that recognize, contact and kill the diseased cells. CD4 cells are primarily helper cells that coordinate the function of other immune cells, including CTLs, by secreting growth factors known as cytokines. CTLs are disease-specific, i.e., they individually recognize and bind to only a single, specific antigen. Furthermore, only in the presence of CD4 helper cells do these specific CTLs proliferate to produce the large population of antigen-specific CTLs required to elicit an effective immune response. In some disease states, the immune system fails to mount or maintain an effective immune response. For infectious diseases and cancer, it is believed such failure may be associated with an inadequate CTL response. For example, HIV infects and kills CD4 cells, which leads to subsequent loss of CTL function and, thus, to destruction of the immune system by the virus. Targeted CTL Cell Therapy. Targeted Genetics is working to develop a highly targeted form of cell therapy, which is intended to produce a powerful, disease-specific immune response through the infusion of large numbers of antigen-specific CTLs. In the Company's Targeted CTL program, antigen-specific CTLs are isolated from a small sample of the patient's blood, multiplied to large numbers ex vivo and then reinfused into the patient. In essence, these Targeted CTLs are intended to amplify the natural disease-fighting function of the immune system relating to specific infected or cancerous cells. The Company believes that its Targeted CTL program represents an improvement over other approaches to immunotherapy because it is based on cloned, antigen- specific CTLs. The Company believes that Targeted CTLs may be more effective than other immunotherapy approaches because virtually all of the reinfused cells will be CTLs targeting the specific diseased cells. The Company also believes that the safety and side effect profile may be improved over other immunotherapy approaches because of the uniformity and consistency of the reinfused cells. The Company's focus on Targeted CTLs originated from research conducted by its collaborators at the Hutchinson Center, Drs. Philip Greenberg and Stanley Riddell. These researchers conducted a Phase I clinical trial to evaluate the safety of infusing donor-derived, CMV-specific CTLs to bone marrow transplant patients, and the potential of this approach for providing an immune response against CMV during the short period in which transplant patients have a high probability of developing CMV. This trial, which was published in The New England Journal of Medicine in October 1995, was the first clinical trial in which cloned, antigen-specific CTLs had been used. None of the 14 patients receiving the CTLs developed CMV viremia or disease. Dr. Riddell is now conducting a Phase II clinical trial following up on the promising results observed in Phase I. 9 Rapid Expansion Method. The Targeted CTL program is based on the Company's proprietary REM technology, which is used to rapidly grow CTLs prior to infusion into the patient. REM represents a significant improvement over other methods of multiplying T cell clones. Using REM, CTL clones can be multiplied over a thousandfold in less than two weeks. The Company has demonstrated that REM enables it to grow billions of CTLs from individual cloned cells over several weeks, while preserving the cells' disease-fighting capabilities in vitro. The Company has seen consistent results from REM in both CD8 and CD4 T cells and for all disease specificities tested to date. The Company has shown that REM is effective for growing Targeted CTLs specific for HIV, CMV, HBV, malignant melanoma and prostate tumor peptides. The Company has filed patent applications, on a worldwide basis, relating to the original REM process and to subsequent process improvements. RESEARCH AND DEVELOPMENT COLLABORATIONS Laboratoires Fournier S.C.A. In May 1996, the Company and Fournier entered into a license, research and marketing agreement under which Fournier received exclusive rights to develop and commercialize in Europe tgDCC-E1A and any other product candidates based on the E1A tumor suppressor gene and developed pursuant to the agreement. Fournier has agreed to coordinate development of tgDCC-E1A in Europe by conducting clinical trials, preparing and filing submissions for regulatory approval in its territory and paying all associated costs, while the Company has corresponding responsibilities with respect to development and commercialization in the United States. Fournier has paid a $5 million upfront license fee and $2.5 million of milestone payments through the end of 1997. The agreement provides that Fournier will make additional milestone payments to the Company upon the achievement of specified goals by Fournier or the Company and royalties on sales of resulting products, if any. In addition, if the parties are able to negotiate a mutually acceptable supply agreement, the Company will be entitled to manufacture products for Fournier in return for manufacturing fees. Pursuant to the agreement, the Company has agreed to indemnify Fournier with respect to claims incurred as a result of the manufacture, supply or sale of tgDCC-E1A. The agreement may be terminated if the parties mutually agree on or about the second anniversary of the agreement that the results of the collaboration are unsatisfactory. Pasteur Merieux In December 1995, the Company entered into an agreement with Pasteur Merieux pursuant to which Pasteur Merieux was granted an exclusive worldwide license and sublicense to certain technology and patent rights relating to DC Chol as an immunoadjuvant in traditional vaccines. In consideration of such grant, Pasteur Merieux paid a process development fee and an upfront license fee. The Company has a supply agreement under which it sells DC Chol to Pasteur Merieux. In addition, the Company may receive milestone payments upon realization of certain benchmarks and a royalty on sales of the products, if any, incorporating the underlying technology. RELATIONSHIP WITH IMMUNEX CORPORATION Targeted Genetics was formed in 1989 as a subsidiary of Immunex Corporation ("Immunex"), a biotechnology company developing immunoregulatory proteins as therapeutics. In February 1992, Targeted Genetics and Immunex entered into a technology license agreement. In exchange for shares of Preferred Stock, which were converted into 1,920,000 shares of Common Stock at the time of the Company's initial public offering, Immunex granted a worldwide, exclusive field of use license to Targeted Genetics for certain Immunex proprietary technology specifically applicable to Targeted Genetics' gene therapy business. The technology transferred from Immunex to Targeted Genetics 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. In addition, until February 1999, the Company has the option to acquire a nonexclusive, worldwide, fully paid royalty-free license (and in certain cases an opportunity to negotiate the 10 conversion of a nonexclusive license into an exclusive license) for certain additional technology relating to Targeted Genetics' gene therapy business. Targeted Genetics granted to Immunex a right of first offer and a 30-day right of first refusal on technology the Company intends to out-license that is based on Immunex technology. The Company may accept or reject any offers made by Immunex under such rights. Immunex currently owns approximately 13% of the Company's outstanding common stock. PATENTS AND PROPRIETARY RIGHTS Patents and licenses are important to the Company's business. The Company's policy is to file patent applications to protect technology, inventions and improvements to inventions that are considered important to the development of its business. The Company also relies on trade secrets, know how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. To date, the Company has filed or exclusively licensed 56 patent applications relating to its product and technology development programs with the United States Patent and Trademark Office (the "USPTO"), as well as foreign counterparts of certain of these applications in Europe, Japan and certain other countries. Of these patent applications, 17 patents have been issued or allowed by the USPTO. In addition to the intellectual property that Targeted Genetics owns or has exclusively licensed, the Company has licensed several issued and pending patents that relate to its development programs on a nonexclusive basis. Among these are the two key patents that relate to the use of AAV vectors for gene therapy licensed from the NIH and the University of Florida Research Foundation. In addition, the Company has acquired nonexclusive rights to the cystic fibrosis gene being delivered in an AAV vector. The patent positions of pharmaceutical and biotechnology firms, including the Company, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved, particularly in regard to human therapeutic uses. In addition, the coverage claimed in a patent application can be significantly reduced before a patent is issued. Consequently, the Company does not know whether any patent applications will result in the issuance of patents or, if any patents are issued, whether the patents will be subjected to further proceedings limiting their scope, whether they will provide significant proprietary protection or will be circumvented or invalidated. Since patent applications in the United States are maintained in secrecy until patents issue and patent applications in certain other countries generally are not published until more than 18 months after they are filed, and since publication of discoveries in scientific or patent literature often lags behind actual discoveries, the Company cannot be certain that it or any licensor was the first creator of inventions covered by pending patent applications or that it or such licensor was the first to file patent applications for such inventions. Moreover, the Company is currently involved in one patent interference proceeding declared by the USPTO to determine priority of invention relating to certain components that may be useful in retroviral vectors and may have to participate in additional interference proceedings. Although the Company does not anticipate that material expenditures will be made in connection with such proceedings, participation could result in substantial cost to the Company, even if the eventual outcome were favorable to it. In addition, although the Company believes that the technology which is the subject of the current patent interference proceeding is not material to its current product development programs, there can be no assurance that such technology will not become material in the future. If the outcome of the current or any additional interference proceeding were unfavorable, the Company may be unable to obtain rights to the invention involved. There can be no assurance that the Company's patents, if issued, would be held valid or enforceable by a court or that a competitor's technology or product would be found to infringe such patents. Litigation, which could result in substantial cost to the Company, may be necessary to enforce the Company's patents or to determine the scope and validity of other parties' proprietary rights. If the outcome of any such litigation were adverse, the Company's business could be materially adversely affected. The Company is unable to predict how courts will resolve any future issues relating to the validity and scope of its patents should they be challenged. A number of pharmaceutical and biotechnology companies and research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to the Company's business. Some of these technologies, applications or patents may conflict with the Company's 11 technologies or patent applications. Such conflict could limit the scope of the patents, if any, that the Company may be able to obtain or result in denial of the Company's patent applications. In addition, if patents that cover the Company's activities are issued to other companies, there can be no assurance that the Company would be able to develop or obtain alternative technology. Furthermore, as the biotechnology industry expands and more patents are issued, the risk increases that the Company's processes and potential products may give rise to claims that they infringe the patents of others. Such other persons could bring legal actions against the Company claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected product or use of the affected process. Litigation may be necessary to enforce patents issued to the Company, to protect trade secrets or know how owned by the Company or to determine the enforceability, scope and validity of proprietary rights of others. If the Company becomes involved in such litigation, it could result in substantial expense to the Company and significant diversion of effort by the Company's technical and management personnel. If there were an adverse outcome of any such litigation, the Company's business could be materially adversely affected. In addition to any potential liability for significant damages, the Company could be required to obtain a license to continue to manufacture or market the affected product or use the affected process. Costs associated with any licensing arrangement may be substantial and could include ongoing royalties. There can be no assurance that any license required under any such patent would be made available to the Company on acceptable terms, if at all. In addition to patent protection, the Company relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology. To protect its trade secrets, the Company requires its employees, consultants, scientific advisors and parties to collaborative agreements to execute confidentiality agreements upon the commencement of employment, the consulting relationship or the collaboration with the Company. In the case of employees, the agreements also provide that all inventions resulting from work performed by them while in the employ of the Company will be the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection of the Company's trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information. COMPETITION The Company is aware of a number of companies and institutions that are developing or considering the development of potential gene therapy and cell therapy treatments, including early-stage gene therapy companies, fully integrated pharmaceutical companies, universities, research institutions, governmental agencies and other healthcare providers. In addition, the Company's potential products will be required to compete with existing pharmaceutical products, or products developed in the future, that are based on established technologies. Many of the Company's competitors have substantially more financial and other resources, larger research and development staffs, and more experience and capabilities in researching, developing and testing products in clinical trials, in obtaining FDA and other regulatory approvals, and in manufacturing, marketing and distribution than the Company. In addition, the competitive positions of other early-stage companies may be enhanced significantly through their collaborative arrangements with large pharmaceutical companies or academic institutions. The Company's competitors may succeed in developing, obtaining patent protection for, receiving FDA and other regulatory approvals for, or commercializing products more rapidly than the Company. If the Company is successful in commercializing its products, it will be required to compete with respect to manufacturing efficiency and marketing capabilities, areas in which it has no experience. The Company also competes with others in acquiring products or technology from research institutions or universities. The Company's competitors may develop new technologies and products that are available for sale prior to the Company's potential products or that are more effective than the Company's potential products. In addition, competitive products may be manufactured and marketed more successfully than the Company's potential products. Such developments could render the Company's potential products less competitive or obsolete, and could have a material adverse effect on the Company's business, financial condition and results of operations. 12 GOVERNMENTAL REGULATION All of the Company's potential products will require regulatory approval by U.S. and foreign governmental agencies prior to commercialization in such countries. Human therapeutic products are subject to rigorous preclinical and clinical testing and other premarket approval procedures administered by the FDA and similar authorities in foreign countries. The FDA exercises regulatory authority over the development, testing, formulation, manufacture, labeling, storage, record keeping, reporting, quality control, advertising, promotion, export and sale of the Company's potential products. Similar requirements are imposed by foreign regulators. In some cases, state requirements also apply. Gene therapy and cell therapy are relatively new technologies and have not been extensively tested in humans. The regulatory requirements governing gene and cell therapy products and related clinical procedures are uncertain and are subject to change. Obtaining approval from the FDA and other regulatory authorities for a new therapeutic product is likely to take several years, if ever, and involve substantial expenditures. Moreover, ongoing compliance with applicable requirements can entail the expenditure of substantial resources. Difficulties or unanticipated costs may be encountered by the Company in its efforts to secure necessary governmental approvals, which could delay or preclude the Company from marketing its products. The activities required before a new therapeutic agent may be marketed in the United States begin with preclinical testing. Preclinical tests include laboratory evaluation and may require animal studies to assess the product's potential safety and efficacy. Animal safety studies must be conducted in accordance with the FDA's Good Laboratory Practice regulations. The results of these studies must be submitted to the FDA as part of an Investigational New Drug application ("IND"), which must be reviewed and cleared by the FDA before proposed clinical testing can begin. Clinical trials must be conducted in accordance with Good Clinical Practices under protocols that detail the objectives of the trial, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. The FDA's review or approval of a study protocol does not necessarily mean that, if the trial is successful, it will constitute proof of efficacy or safety. Further, each clinical trial must be approved by and conducted under the auspices of an independent Institutional Review Board ("IRB") at the institution at which the trial will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. The IRB is also responsible for continuing oversight of the approved protocols in active trials. An IRB may require changes in a protocol, and there can be no assurance that an IRB will permit any given trial to be initiated or completed. Clinical trials are typically conducted in three sequential phases, although the phases may overlap. In Phase I, gene therapy clinical trials generally are conducted with a small number of patients, who may or may not be afflicted with a specific disease, to determine the preliminary safety profile. In Phase II, clinical trials are conducted with larger groups of patients afflicted with a specific disease in order to determine preliminary efficacy and optimal dosages and to obtain expanded evidence of safety. In Phase III, large-scale, multicenter, comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data for the statistical proof of efficacy and safety required by the FDA and others for market approval. The FDA receives reports on the progress of each phase of clinical testing, and it may require the modification, suspension or termination of clinical trials if an unwarranted risk is presented to patients. Because gene therapy products are a new category of therapeutics, there can be no assurance as to the length of the clinical trial period or the number of patients the FDA will require to be enrolled in the clinical trials in order to establish to its satisfaction the safety and efficacy of such products. FDA marketing approval must be obtained after completion of clinical trials of a new product. The Company expects that its products will be regulated as biologic drugs. According to the FDA's 1993 notice outlining its regulatory approach to somatic and gene therapy products, these products are also subject to the drug provisions of the Federal Food, Drug and Cosmetic Act. This notice also stated, however, that the FDA's regulatory approach may evolve as scientific knowledge increases in the area of somatic and gene therapy. Current regulations relating to biologic drugs will require the Company to submit to the FDA both a Product 13 License Application ("PLA") and an Establishment License Application ("ELA"), which must be approved by the FDA before commercial marketing is permitted. The PLA/ELA must include results of product development activities, preclinical studies and clinical trials, in addition to detailed manufacturing information. FDA approval of PLA/ELAs generally takes at least one year. The process may take substantially longer if the FDA has questions or concerns about a product. The FDA may also request additional data relating to safety or efficacy. Notwithstanding the submission of relevant data, the FDA may ultimately decide that a PLA/ELA does not satisfy its regulatory criteria for approval. The FDA may also modify the scope of the desired claims or require the addition of warnings or other safety-related information and require additional clinical tests following approval to confirm product safety and efficacy (Phase IV trials). Even if FDA regulatory clearances are obtained, a marketed product is subject to continual review, and later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on marketing a product or in withdrawal of the product from the market, as well as possible civil or criminal sanctions. The FDA recently amended its regulations to eliminate the ELA requirement for therapeutic DNA plasmid products, therapeutic synthetic peptide products of 40 or fewer amino acids, monoclonal antibody products for in vivo use, and therapeutic recombinant DNA-derived products. Manufacturers of these products will instead be required to submit a biologics license application, which will include, among other information, nonclinical and clinical data demonstrating that the manufactured product meets prescribed standards for safety, purity and potency, and information pertaining to manufacturing methods. It is unclear whether any of the Company's products will fall within the category of products for which the ELA requirement has been eliminated, or what effect such elimination may have on product development and FDA review. The FDA requires that manufacturers of a product comply with current Good Manufacturing Practices ("cGMP") requirements, both as a condition of product approval and on a continuing basis. In complying with cGMP requirements, manufacturers must expend time, money and effort on a continuing basis in production, record keeping and quality control. Manufacturing facilities are subject to periodic inspections by the FDA to ensure compliance. Failure to pass such inspections may subject the manufacturer to possible FDA action such as the suspension of manufacturing, seizure of the product, withdrawal of approval or other regulatory sanctions. The FDA may also require the manufacturer to recall a product. In addition to regulations enforced by the FDA, the Company is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other federal, state and local regulations. The Company's research and development activities involve the controlled use of hazardous materials, chemicals, biological materials and radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any resulting damages, and any such liability could exceed the Company's resources. HUMAN RESOURCES At December 31, 1997, Targeted Genetics had 90 full time equivalent employees; effective February 15, 1998, the Company reduced its workforce to 64 full time equivalent employees in order to reduce the amount of cash being used to fund operations. Of the remaining employees, 50 are directly involved in research and development, of whom 9 have Ph.D. or M.D. degrees. A significant number of the Company's management and professional employees have prior experience with other biotechnology or pharmaceutical companies. The Company considers its relations with its remaining employees to be good. The Company's success will depend in large part on its ability to attract and retain key employees and scientific advisors. Competition among biotechnology and pharmaceutical companies for highly skilled scientific and management personnel is intense. After the recent workforce reduction, the Company put into place several programs involving restructuring and repricing of stock options and cash retention bonuses in order to provide 14 appropriate incentive to all retained employees to continue their employment with the Company. However, there can be no assurance that the Company will be successful in retaining its existing personnel or advisors, or in attracting additional qualified employees. EXECUTIVE OFFICERS The following are the executive officers of Targeted Genetics who will serve in the capacities noted until their successors are duly appointed and qualified.
NAME AGE POSITION ----------------------- --- ---------------------------------------- H. Stewart Parker 42 President, Chief Executive Officer and Director Barrie J. Carter, Ph.D. 53 Executive Vice President and Director of Research and Development James A. Johnson 41 Vice President, Finance, Chief Financial Officer, Treasurer and Secretary
H. Stewart Parker managed the formation of Targeted Genetics as a wholly owned subsidiary of Immunex and has been President, Chief Executive Officer and a director since the Company's inception in 1989. She served in various capacities at Immunex from August 1981 through December 1991, most recently as Vice President, Corporate Development. Ms. Parker also served as President and a director of Receptech Corporation, a company formed by Immunex in 1989 to accelerate the development of soluble cytokine receptor products ("Receptech"), from February 1991 to January 1993. She received her B.A. and M.B.A. from the University of Washington. Barrie J. Carter is Executive Vice President and Director of Research and Development of Targeted Genetics. He joined the Company in August 1992. For the previous 22 years he was employed by the NIH in Bethesda, Maryland where he was Chief of the Laboratory of Molecular and Cellular Biology in the National Institute for Diabetes and Digestive and Kidney Diseases from 1982 to 1992. Dr. Carter received his B.Sc. (Honors) from the University of Otago, Dunedin, New Zealand and his Ph.D. in the Biochemistry Department of the University of Otago Medical School. He then spent a period of postdoctoral training at the Imperial Cancer Research Fund Laboratories in London, England before joining the NIH. His long-term research interests are in molecular biology of viruses, development of AAV vectors and gene therapy. Dr. Carter serves on the Editorial Boards of Human Gene Therapy and Molecular Therapeutics: Gene Therapy & Oligonucleotides and as an Associate Editor of Virology. Since 1995, he has been an Affiliate Professor of Medicine at the University of Washington Medical School. James A. Johnson joined the Company in March 1994 as Vice President, Finance, Chief Financial Officer, Treasurer and Secretary. He was employed by Immunex from January 1988 to February 1994, initially as Director of Finance and as Vice President, Finance since February 1990. While at Immunex, Mr. Johnson served as Treasurer of Targeted Genetics from its inception in 1989. From November 1989 to January 1993, he also served as Treasurer and Assistant Secretary of Receptech. He received his B.A. from the University of Washington. FACTORS AFFECTING FORWARD-LOOKING INFORMATION Need for Additional Capital. The Company expects negative cash flow from operations to continue in the foreseeable future. The Company will require substantial additional funds to continue the development and commercialization of its potential products. Adequate funds, whether obtained through financial markets or from collaborative or other arrangements with corporate partners or other sources, may not be available when needed or may not be available on terms favorable to the Company. If additional funds are raised by issuing equity securities, dilution to existing shareholders may result. If funding is insufficient at any time in the future, the Company may be required to delay, scale back or eliminate some or all of its research and development 15 programs. Furthermore, if at any time the Company's funds are depleted, the Company may be required to cease operations. The Company estimates that its cash, cash equivalents and securities available for sale will be sufficient to meet its needs until May 1998. Early Stage of Product Development, Technological Uncertainty. The Company has no commercial products and all of its potential products are in research, development or early-stage clinical trials. Prior to any commercial use, these potential products will require significant additional research and development, extensive clinical testing and regulatory approval. There can be no assurance that the Company's efforts to develop, test and gain regulatory approval of its potential products will be successful. History of Losses and Uncertainty of Future Results. Targeted Genetics is a development stage company and has generated minimal revenues and significant net losses since inception. The Company expects to incur substantial additional losses over at least the next several years. To achieve profitable operations, Targeted Genetics, alone or with corporate collaborative partners, must successfully develop, manufacture, obtain regulatory approvals and market its potential products. There can be no assurance that the Company's efforts in these areas will be successful. Uncertainties Relating to Clinical Trials. Existing data on the safety and efficacy of gene and cell therapy treatments are very limited. There can be no assurance that clinical trials of the Company's potential products will demonstrate safety and efficacy. Furthermore, there can be no assurance that the Company will not encounter unacceptable side effects or other problems in clinical trials of its potential products that will cause the Company to delay or discontinue development of such products. The rate of completion of the Company's clinical trials depends on, among other factors, the rate of patient enrollment. Delays in patient enrollment may result in increased costs, delays or termination of clinical trials. Uncertainty of Patent Position and Proprietary Rights. The failure of the Company or its licensors to obtain and maintain patent protection for the Company's technology could have a material adverse effect on the Company. Patent positions in the biotechnology field are highly uncertain and involve complex legal, scientific and factual questions. There can be no assurance that any patent application relating to the technology used by the Company will result in a patent being issued or that, if issued, the patent will afford protection against competitors. As the biotechnology industry expands and more patents are issued, the risk increases that the Company's processes and potential products may give rise to claims that they infringe the patents of others. If the Company becomes involved in patent litigation, it could result in substantial expense to the Company and significant diversion of effort by the Company's technical and management personnel. In addition to any potential liability for significant damages, the Company could be required to obtain a license to continue to manufacture or market the affected product or use the affected process. There can be no assurance that any license required under any such patent would be made available to the Company on acceptable terms, if at all. The Company also relies upon unpatented proprietary technology. There can be no assurance that the Company can meaningfully protect its rights in such unpatented proprietary technology. See "Business-- Patents and Proprietary Rights." Uncertainty of Governmental Regulatory Requirements; Lengthy Approval Process. The process of obtaining regulatory approvals for clinical trials or for the manufacturing or marketing of the Company's potential products is costly and time-consuming and is subject to unanticipated delays. There can be no assurance that the Company will be able to obtain the necessary regulatory approvals for manufacturing or marketing any of its product candidates. Even if regulatory approval of a potential product is obtained, later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on marketing a product or withdrawal of the product from the market, as well as possible criminal or civil sanctions. All manufacturing operations also are subject to the FDA's current Good Manufacturing Practice ("cGMP") requirements on an ongoing basis. There can be no assurance that the Company will be able to attain or maintain compliance with cGMP requirements. See "Business--Governmental Regulation." 16 Dependence on Corporate Collaborators. The Company will depend to a significant extent on collaborative partners, licensees or other entities for development, manufacturing and commercialization of its potential products. Although the Company believes that such collaborative partners would have an economic motivation to commercialize products that result from the Company's research and development efforts, the amount and timing of resources devoted to these activities would be controlled by such partners. Furthermore, there can be no assurance that present or future collaborators will not pursue existing or alternative technologies in preference to potential products being developed in collaboration with the Company. Competition. The Company is experiencing intense competition from companies developing gene and cell therapy technologies as well as those using more traditional approaches to treating human diseases. Many of these competitors have substantially more financial and other resources, larger research and development staffs, and more experience and capabilities in researching, developing and testing products in clinical trials, in obtaining FDA and other regulatory approvals, and in manufacturing, marketing and distribution than the Company. Consequently, the Company's competitors may succeed in commercializing products more rapidly than the Company. The Company's competitors may also manufacture and market competitive products more successfully than the Company's potential products. Such developments could render the Company's potential products less competitive or obsolete. See "Business--Competition." Rapid Technological Change. Gene and cell therapy are new and rapidly evolving fields and are expected to continue to undergo significant and rapid technological change. Rapid technological development could result in actual and proposed technologies, products or processes of the Company becoming obsolete prior to successful commercialization. Dependence on Key Personnel and Scientific Collaborators. The Company's success will depend in large part on its ability to attract and retain key employees and scientific collaborators. There can be no assurance that the Company will be successful in retaining its existing personnel or in attracting additional qualified employees. The Company also depends on the continued availability of outside scientific collaborators who perform research in certain areas relevant to the Company's research. There can be no assurance that the Company will be successful in maintaining its relationships with scientific collaborators, or that inventions or processes developed by the Company's collaborators will become the property of the Company. No Commercial Manufacturing or Marketing Capability. The Company's current facilities and staff will need to be expanded, or supplemented through the use of contract providers, for large-scale clinical or commercial production of its potential products. In addition, the Company has no experience in sales and marketing. To market any products that may result from its development programs, Targeted Genetics will have to develop marketing and sales capabilities, either on its own or in conjunction with others. There can be no assurance that the Company will be successful in obtaining the necessary manufacturing or marketing capabilities. Furthermore, the Company's dependence upon third parties for the manufacture, marketing and sale of its potential products may materially adversely affect the Company's ability to develop and deliver products on a timely and competitive basis. Hazardous Materials; Environmental Matters. The Company's research and development activities involve the controlled use of hazardous materials, chemicals, biological materials and radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by applicable laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any resulting damages, and any such liability could exceed the Company's resources. Product Liability. The testing, manufacture, marketing and sale of human healthcare products entail the inherent risk of liability claims or product recalls and associated adverse publicity. The Company currently has a limited amount of product liability insurance. Such insurance is expensive and there can be no assurance that it will continue to be available in sufficient amounts and on acceptable terms, if at all. A product liability claim or 17 product recall could have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 2. PROPERTIES Targeted Genetics currently occupies approximately 33,000 square feet of laboratory and office space in a single facility in Seattle, Washington. The lease expires on April 1, 1999 and includes options to extend the lease term for three consecutive five-year periods. The average annual rent payment during the initial term of the lease is approximately $408,000. In 1996, the company entered into a lease for approximately 4,700 square feet of office space in an office complex adjoining its primary facility. The lease expires on March 31, 2004 and includes options to extend the lease term for two consecutive five-year periods. The average annual rent payment during the initial term of the lease is approximately $95,000. The Company believes its current facilities, together with approximately 2,000 square feet of expansion space remaining in its primary facility and additional expansion space available in the adjoining office complex, will be adequate to meet its projected needs for the next several years. Within that time frame, the Company may be required to locate alternative facilities, depending on the Company's growth and development. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of its fiscal year ended December 31, 1997. 18 PART II ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's common stock trades on The Nasdaq Stock Market under the symbol TGEN. At March 6, 1998, there were approximately 3,500 holders of the Company's common stock. The Company has never paid cash dividends and does not anticipate paying them in the foreseeable future. The following table sets forth for each calendar quarter indicated, the high and low bid quotations for the Company's common stock. These quotes reflect inter-dealer prices, without retail mark-up or commission and may not necessarily represent actual transactions.
1996 ---- 1st Quarter........................... $7 1/4 $4 2nd Quarter........................... 6 1/4 3 7/8 3rd Quarter........................... 5 2 7/8 4th Quarter........................... 5 1/4 3 1/2 1997 ---- 1st Quarter........................... $5 3/4 $3 3/8 2nd Quarter........................... 3 5/8 2 1/2 3rd Quarter........................... 6 7/16 2 7/8 4th Quarter........................... 5 1/2 2 1/4
On March 15, 1997, the Company issued to The Burnham Institute a warrant to purchase up to 50,000 shares of the Company's common stock (the "Burnham Warrant") as partial consideration for the execution of a license agreement. The Burnham Warrant vested 16,667 shares upon execution of such license agreement; additional shares vest upon the occurrence of certain milestones relating to pre-clinical animal studies and the issuance of patents. The vested portion of the Burnham Warrant is exercisable until March 15, 2004 at an exercise price per share of $4.50. On May 15, 1997, the Company issued to Francis Chisari a warrant to purchase up to 25,000 shares of the Company's common stock (the "Chisari Warrant") as partial consideration for the execution of a consulting agreement. The Chisari Warrant vested 5,000 shares immediately; on each May 15, beginning on May 15, 1998, the warrant vests with respect to an additional 5,000 shares. The vested portion of the Chisari Warrant is exercisable until May 15, 2004 at an exercise price per share of $3.13. Each of the Burnham Warrant and the Chisari Warrant provides for accelerated vesting in the event of certain mergers or other similar transactions that result in a change in control of the Company. Each of the Burnham Warrant and the Chisari Warrant were issued in a transaction not involving a public offering and therefore exempt pursuant to Section 4(2) of the Securities Act. ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ------------ ----------- ----------- ----------- RESULTS OF OPERATIONS Revenues................ $ 1,978,477 $ 2,254,178 $ 842,460 $ 448,822 $ 412,076 Expenses................ 16,166,251 28,292,220 10,764,744 8,848,167 5,477,588 Net loss................ (14,187,774) (26,038,042) (9,922,284) (8,399,345) (5,065,512) Basic and diluted net loss per share......... (.70) (1.59) (.94) (1.40) N.M.(/1/) FINANCIAL CONDITION Cash, cash equivalents and securities available for sale..... $ 5,037,821 $ 19,051,070 $14,442,562 $11,474,787 $ 6,797,182 Total assets............ 9,767,084 25,139,052 19,960,460 17,045,881 12,115,184 Long-term obligations, including current portion................ 2,547,324 3,378,420 3,286,508 2,837,370 1,184,706 Shareholders' equity.... 5,591,587 19,507,788 15,772,836 13,242,145 12,115,184
- -------- (/1/)Per share amounts are not meaningful. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Targeted Genetics Corporation, a development stage company, was incorporated in March 1989 as a wholly owned subsidiary of Immunex Corporation. The Company's activities were carried out as a project within Immunex through December 31, 1991. In 1992, the Company began to operate independently from Immunex and raised $16.6 million, net of expenses, in a private placement of preferred stock. Through additional public offerings, the Company has raised an additional $38.4 million. In June 1996, the Company completed a merger with RGene Therapeutics, Inc. ("RGene"), a privately-held biotechnology company. Currently, the Company's only significant revenue sources are a research and development collaborative agreement related to the European development of the Company's tgDCC-E1A cancer product and interest income earned on investments. The Company has generated an accumulated deficit of $67.8 million through December 31, 1997. It is not anticipated that the Company will have any product-related revenues for a number of years. Accordingly, the Company expects to generate substantial additional losses in the future attributable to the continuation of preclinical and clinical research programs, development of manufacturing capabilities and the preparation for commercialization of its products under development. The Company's ability to achieve profitability depends in part on its ability, alone or with others, to complete the development of product candidates, obtain regulatory approvals, comply with applicable regulatory requirements and manufacture and market such products, of which there can be no assurance. RISKS AND UNCERTAINTIES This discussion contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The Company's future cash requirements and expense levels will depend on many factors, including continued scientific progress in its research and development programs; the results of research and development, preclinical studies and clinical trials; acquisition of products or technology, if any; relationships with corporate collaborators; competing technological and market developments; the time and costs involved in filing, prosecuting and enforcing patent claims; the time and costs of manufacturing scale-up and commercialization activities; and other factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to publicly release the results of any revisions to these forward- looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. See "Factors Affecting Forward-Looking Information". RESULTS OF OPERATIONS Revenue under collaborative agreements decreased to $888,000 for the year ended December 31, 1997, from $1.2 million for the year ended December 31, 1996. The decrease primarily resulted from a reduction in milestone payments received under the Company's collaborative agreement with Laboratoires Fournier S.C.A. ("Fournier"). Similarly, the increase in 1996 versus 1995 was attributable to receipts from Fournier. Investment income decreased to $651,000 for the year ended December 31, 1997, from $924,000 for the year ended December 31, 1996. The decrease resulted from a lower average cash balance and securities available for investment. The increase in 1996 versus the year ended December 31, 1995 was attributable to a higher average investment balance during the year and higher rates of return on those balances. Research and development expenses increased to $13.0 million for the year ended December 31, 1997, from $11.5 million for the year ended December 31, 1996. Although internal expenses for research and development leveled off in 1997, the Company experienced an increase in external expenses related to intellectual property and to the continued progression of the Company's clinical trial programs. Of the increase, approximately $1.4 million related to these two areas. The increase in 1996 versus the year ended December 31, 1995 was 20 approximately $3.3 million, of which $1.6 million related to the RGene acquisition and continuation of the acquired research, development and clinical programs. Of this amount, approximately $1.3 million represented recurring, routine charges and approximately $300,000 represented non- recurring charges. Also contributing to the increase in expenses in 1996 over 1995 were a moderate increase in the level of expenses supporting the advancement of clinical, manufacturing process development and regulatory programs as well as additional employees and related expenses in preclinical immunology. A one-time expense resulting from the acquisition of RGene was charged against income in 1996. Of the total RGene purchase price, $13.5 million was allocated to RGene's existing in-process technology and was written-off in the second quarter to in-process research and development expense. General and administrative expenses decreased slightly to $2.8 million for the year ended December 31, 1997, from $2.9 million for the year ended December 31, 1996. Consistent with internal research and development expenses, general and administrative expenses leveled off in 1997. The increase in 1996 expenses versus the year ended December 31, 1995 reflected $338,000 of non- recurring expenses incurred as a result of the RGene acquisition. Other factors contributing to the increase in 1996 expenses were increases in business development and investor relations activities and, to a lesser extent, modest growth in administrative staff. Interest expense decreased to $338,000 for the year ended December 31, 1997, from $397,000 for the year ended December 31, 1996. This expense resulted from obligations under capital leases used to purchase laboratory and computer equipment, furniture and leasehold improvements. The decrease from the prior year was due to a declining principal balance under the related lease obligations. The increase in 1996 versus the year ended December 31, 1995 was due to an increase in the amount of equipment purchases financed. The Company expects that it will continue to finance equipment purchases, if favorable terms are available. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had cash, cash equivalents and securities available for sale totaling $5.0 million, compared to $19.1 million at December 31, 1996. The decrease was primarily attributable to the Company's use of $12.5 million to fund its operations for the year. Also, $1.3 million was used for payments under equipment leases and notes and $705,000 was used for purchases of equipment. These cash outflows were offset partially by the receipt of $468,000 from equipment financing transactions and $277,000 from the exercise of warrants by existing shareholders. In February 1998, the Company reorganized in order to reduce its cash burn rate, in the process reducing its employee headcount by 29% to approximately 64 full-time equivalent employees. Taking into account the effect of the reorganization, the Company estimates that its cash, cash equivalents and securities available for sale at December 31, 1997 will be sufficient to meet its cash needs until May 1998. Therefore, the Company must raise additional capital in the near term in order to continue its operations beyond such time. The Company expects to raise such capital through a private placement of equity securities. There can be no assurance, however, that the Company will be successful in completing such a private placement. If the Company is unable to raise sufficient capital, it may be required to scale back its programs, dispose of technology or cease operations. Over the long-term, the Company will need to raise substantial additional funds in the future to continue the development and commercialization of its products. The Company's business strategy involves entering into agreements with corporate partners that provide license fees, milestone payments, research and development funding and, potentially, equity investment. There can be no assurance, however, that the Company will be successful in establishing any such collaborative arrangements or that any such future partner would be successful in commercializing products. Regardless of its success in partnering, the Company expects that it will need to seek additional sources of public or private equity capital in the future. There can be no assurance that adequate funds will be available to the Company through such sources when needed or will be available on terms favorable to the Company. If at any time the Company is unable to obtain sufficient funds, the Company will be 21 required to delay, restrict or eliminate some or all of its research or development programs, dispose of assets or technology, or cease operations. IMPACT OF YEAR 2000 The Company has completed a computer system assessment and will have to replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is estimated at less than $100,000, which includes approximately $50,000 for the purchase of new software that will be capitalized and approximately $50,000 that will be expensed as incurred. To date, the Company has not incurred any costs for the development of a modification plan or for the purchase new software. The project is estimated to be completed no later than June 30, 1999, which is prior to any anticipated impact on its operating systems. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary data of the Company required by this item are set forth at the pages indicated in Item 14(a)1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT (a) The information required by this item concerning the Company's directors is incorporated by reference from the section captioned "ELECTION OF DIRECTORS" in the Company's definitive Proxy Statement for the annual meeting to be held on May 5, 1998. (b) The information required by this item concerning the Company's executive officers is set forth in Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the section captioned "EXECUTIVE COMPENSATION" in the Company's definitive Proxy Statement for the annual meeting to be held on May 5, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the section captioned "PRINCIPAL TARGETED GENETICS SHAREHOLDERS" in the Company's definitive Proxy Statement for the annual meeting to be held on May 5, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Inapplicable 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements. The following Financial Statements are submitted in a separate section beginning on Page F-1 of this report.
PAGE(S) IN 10-K ---------- Report of Ernst and Young LLP, Independent Auditors................ F-1 Balance Sheets at December 31, 1997 and 1996....................... F-2 Statements of Operations for the years ended December 31, 1997, 1996, and 1995 and for the period from March 9, 1989 (date of inception) through December 31, 1997.............................. F-3 Statements of Shareholders' Equity for the period from March 9, 1989 (date of inception) through December 31, 1997................ F-4 Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 and for the period from March 9, 1989 (date of inception) through December 31, 1997.............................. F-6 Notes to Financial Statements...................................... F-7
2. Financial Statement Schedules All financial statement schedules have been omitted because the required information is either included in the financial statements or the notes thereto or is not applicable. 3. Exhibits 2.1 Agreement and Plan of Merger dated as of April 16, 1996, by and (E) among Targeted Genetics Corporation, TGC Acquisition Corporation and RGene Therapeutics, Inc. (Exhibit 2.1) 3.1 Amended and Restated Articles of Incorporation (Exhibit 3.1) (I) 3.2 Amended and Restated Bylaws (Exhibit 3.2) (I) 4.1 Warrant to Purchase 11,000 shares of the Common Stock of Targeted (D) Genetics Corporation, issued to MMC/GATX Partnership No. 1 on December 27, 1993, as amended (Exhibit 4.1) 4.2 Warrant to Purchase 11,000 shares of the Common Stock of Targeted (A) Genetics Corporation, issued to LINC Capital Management, Ltd. on December 27, 1993 (Exhibit 4.2) 4.3 Warrant to Purchase 18,701 shares of the Common Stock of Targeted (B) Genetics Corporation, issued to MMC/GATX Partnership No. 1 on November 30, 1994 (Exhibit 4.3) 4.4 Warrant Agreement between Targeted Genetics Corporation and First (D) Interstate Bank of Washington, N.A., as Warrant Agent (Exhibit 4.4) 4.5 First Amendment to the Warrant Agreement between Targeted Genetics (L) Corporation and First Interstate Bank of Washington, N.A., as Warrant Agent (Exhibit 3.1) 4.6 Specimen Warrant Certificate (Exhibit 4.5) (C) 4.7 Warrant to Purchase 21,315 shares of the common stock of Targeted (D) Genetics Corporation, issued to Financing for Science International, Inc. on November 30, 1995 (Exhibit 4.6) 4.8 Rights Agreement, dated as of October 17, 1996, between Targeted (H) Genetics Corporation and ChaseMellon Shareholder Services (Exhibit 2.1) 4.9 Warrant to purchase 50,000 shares of the Common Stock of Targeted (J) Genetics Corporation, issued to the Burnham Institute on March 15, 1997 (Exhibit 4.1) 4.10 Warrant to purchase 25,000 shares of the Common Stock of Targeted (K) Genetics Corporation, issued to Francis Chisari on May 15, 1997 (Exhibit 4.1)
23 10.1 Form of Indemnification Agreement between the registrant and its (A) officers and directors (Exhibit 10.6) 10.2 Form of Senior Management Employment Agreement between the (I) registrant and its executive officers (Exhibit 10.2) 10.3 Non-exclusive License Agreement, dated as of November 19, 1991, (A) between the Fred Hutchinson Cancer Research Center and Immunex Corporation* (Exhibit 10.7) 10.4 Gene Transfer Technology License Agreement, dated as of February (A) 18, 1992, between Immunex Corporation and Targeted Genetics Corporation* (Exhibit 10.8) 10.5 License Agreement, dated as of June 1, 1992, between Wisconsin (A) Alumni Research Foundation and Targeted Genetics Corporation* (Exhibit 10.9) 10.6 License Agreement, dated as of August 14, 1992, between Leland (A) Stanford Junior University and Targeted Genetics Corporation* (Exhibit 10.10) 10.7 PHS Patent License Agreement--Non-exclusive, dated as of July 13, (A) 1993, between National Institutes of Health Centers for Disease Control and Targeted Genetics Corporation* (Exhibit 10.13) 10.8 Non-exclusive Patent License Agreement, dated as of December 25, (A) 1993, between The University of Florida Research Foundation, Inc. and Targeted Genetics Corporation* (Exhibit 10.14) 10.9 Research and Exclusive License Agreement, dated as of January 1, 1994, between Targeted Genetics Corporation and the Fred Hutchinson Cancer Research Center* 10.10 PHS Patent License Agreement--Exclusive, dated as of March 10, 1994, between National Institutes of Health Centers for Disease Control and Targeted Genetics Corporation* 10.11 Exclusive License Agreement, dated as of March 14, 1994, between Medical College of Ohio and Targeted Genetics Corporation* 10.12 License Agreement, dated as of March 16, 1994, between the Johns (A) Hopkins University and Targeted Genetics Corporation* (Exhibit 10.17) 10.13 License Agreement, dated as of March 28, 1994, between Targeted Genetics Corporation and the University of Michigan* 10.14 Exclusive License Agreement dated as of March 23, 1994, between the Fred Hutchinson Cancer Research Center and Targeted Genetics Corporation* 10.15 Exclusive License Agreement, dated as of August 25, 1994, between (B) Targeted Genetics Corporation and the Fred Hutchinson Cancer Research Center* (Exhibit 10.20) 10.16 Development Agreement dated April 6, 1994, by and between Argus (F) Pharmaceuticals, Inc. and RGene Therapeutics, Inc.* (Exhibit 10.28) 10.17 Patent and Technology License Agreement effective as of March 1, (F) 1994, by and among the Board of Regents of the University of Texas M.D. Anderson Cancer Center and RGene Therapeutics, Inc.* (Exhibit 10.29) 10.18 First Amended and Restated License Agreement effective October (F) 12, 1995 between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.30) 10.19 Amendment to the First Amended and Restated License Agreement, (G) between The University of Tennessee Research Corporation and RGene Therapeutics, Inc., dated as of June 19, 1996* (Exhibit 10.1) 10.20 Exclusive Sublicense Agreement effective July 23, 1996 by and (I) between Alkermes, Inc. and Targeted Genetics Corporation.* (Exhibit 10.20)
24 10.21 Revised License Agreement effective October 1, 1996, by and (I) between the University of Pittsburgh--of the Commonwealth System of Higher Education and Targeted Genetics Corporation* (Exhibit 10.21) 10.22 Agreement dated as of May 28, 1996 by and between RGene (F) Therapeutics, Inc. and Laboratoires Fournier S.C.A.* (Exhibit 10.32) 10.23 License Agreement, dated as of March 15, 1997, between the Burnham Institute and Targeted Genetics Corporation* 10.24 Olive Way Building Lease, dated as of November 20, 1993, between (A) Metropolitan Federal Savings and Loan Association and Targeted Genetics Corporation (Exhibit 10.21) 10.25 First Amendment to Olive Way Building Lease, dated as of December (B) 10, 1994, between Targeted Genetics Corporation and Metropolitan Federal Savings and Loan Association (Exhibit 10.22) 10.26 Second Amendment to Olive Way Building Lease, dated as of June (I) 12, 1996, between Targeted Genetics Corporation and Ironwood Apartments, Inc. (successor in interest to Metropolitan Federal Savings and Loan Association) (Exhibit 10.25) 10.27 Office Lease, dated as of October 7, 1996, by and between (I) Benaroya Capital Company, LLC and Targeted Genetics Corporation (Exhibit 10.26) 10.28 MMC/GATX Partnership No. 1 Equipment Lease Agreement, dated as of (A) December 27, 1993 (Exhibit 10.22) 10.29 LINC Capital Management, Ltd. Equipment Lease Agreement, dated as (A) of December 27, 1993 (Exhibit 10.23) 10.30 Loan and Security Agreement, dated as of November 30, 1994, (B) between MMC/GATX Partnership No. 1 and Targeted Genetics Corporation (Exhibit 10.25) 10.31 Master Equipment Lease Agreement, dated as of October 17, 1995, (D) between Financing for Science International, Inc. and Targeted Genetics Corporation (Exhibit 10.28) 10.32 Registration Rights Agreement dated as of April 27, 1992, among (A) Targeted Genetics Corporation and the holders of Series A and Series B Convertible Preferred Stock (Exhibit 10.26) 10.33 1992 Restated Stock Option Plan (Exhibit 10.33) (I) 10.34 Stock Option Plan for Nonemployee Directors 23.1 Consent of Ernst & Young LLP, Independent Auditors 27.1 Financial Data Schedule
- -------- * Confidential treatment has been granted by or requested from the Securities and Exchange Commission for portions of these exhibits. (A) Incorporated by reference to the designated exhibit included with the Company's Form S-1 Registration Statement (No. 33-77054) filed on March 30, 1994, as amended. (B) Incorporated by reference to the designated exhibit included with the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (C) Incorporated by reference to the designated exhibit included with the Company's Form S-1 Registration Statement (No. 33-91500) filed on April 24, 1995, as amended. (D) Incorporated by reference to the designated exhibit included with the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (E) Incorporated by reference to the designated exhibit included with the Company's Form 8-K filed April 16, 1996. 25 (F) Incorporated by reference to the designated exhibit included with the Company's Form S-1 Registration Statement (No. 333-03592) filed on April 16, 1996, as amended. (G) Incorporated by reference to the designated exhibit included with the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1996. (H) Incorporated by reference to the designated exhibit included with the Company's Form 8-A filed October 22, 1996. (I) Incorporated by reference to the designated exhibit included with the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (J) Incorporated by reference to the designated exhibit included with the Company's Quarterly Report on Form 10-Q for the period ending March 31, 1997. (K) Incorporated by reference to the designated exhibit included with the Company's Quarterly Report on Form 10-Q for the period ending June 30, 1997. (L) Incorporated by reference to the designated exhibit included with the Company's Form 8-A/A filed July 29, 1997. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1997. 26 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. TARGETED GENETICS CORPORATION /s/ H. Stewart Parker By: _________________________________ H. STEWART PARKER PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: March 18, 1998 POWER OF ATTORNEY 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 and Chief March 18, 1998 ____________________________________ Executive Officer, Director H. STEWART PARKER (Principal Executive Officer) /s/ James A. Johnson Vice President, Finance, March 18, 1998 ____________________________________ Chief Financial Officer, JAMES A. JOHNSON Treasurer and Secretary (Principal Financial and Accounting Officer) /s/ Jeremy L. Curnock Cook Chairman of the Board, March 18, 1998 ____________________________________ Director JEREMY L. CURNOCK COOK /s/ Jack L. Bowman Director March 18, 1998 ____________________________________ JACK L. BOWMAN /s/ Stephen A. Duzan Director March 18, 1998 ____________________________________ STEPHEN A. DUZAN /s/ James D. Grant Director March 18, 1998 ____________________________________ JAMES D. GRANT /s/ Donald E. O'Neill Director March 18, 1998 ____________________________________ DONALD E. O'NEILL /s/ Mark Richmond, Ph.D. Director March 18, 1998 ____________________________________ MARK RICHMOND, PH.D. /s/ Martin P. Sutter Director March 18, 1998 ____________________________________ MARTIN P. SUTTER
27 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Targeted Genetics Corporation We have audited the accompanying balance sheets of Targeted Genetics Corporation (a development stage company) as of December 31, 1997 and 1996, and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997 and the period from March 9, 1989 (date of inception) through December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Targeted Genetics Corporation (a development stage company) at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 and the period from March 9, 1989 (date of inception) through December 31, 1997 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming the company will continue as a going concern. As more fully described in Note 1, the Company has incurred substantial operating losses and negative operating cash flows. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classifications of assets and liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP Seattle, Washington February 3, 1998 F-1 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
DECEMBER 31, -------------------------- 1997 1996 ------------ ------------ ASSETS ------ Current assets: Cash and cash equivalents........................ $ 1,011,845 $ 3,532,568 Securities available for sale.................... 4,025,976 15,518,502 Prepaid expenses and other....................... 248,278 468,671 ------------ ------------ Total current assets........................... 5,286,099 19,519,741 Property, plant and equipment, net................. 3,927,533 4,991,017 Other assets....................................... 553,452 628,294 ------------ ------------ $ 9,767,084 $ 25,139,052 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable................................. $ 1,352,297 $ 1,887,880 Accrued payroll and other liabilities............ 275,876 364,964 Current portion of long-term obligations......... 1,030,562 1,250,263 ------------ ------------ Total current liabilities...................... 2,658,735 3,503,107 Long-term obligations.............................. 1,516,762 2,128,157 Commitments Shareholders' equity: Preferred stock, $.01 par value, 6,000,000 shares authorized, none outstanding................................ -- -- Common stock, $.01 par value, 40,000,000 shares authorized, 20,211,114 and 20,136,468 outstanding at December 31, 1997 and 1996, respectively.......................... 73,401,141 73,115,362 Unrealized gains on securities available for sale............................................ 5,181 19,387 Deficit accumulated during development stage..... (67,814,735) (53,626,961) ------------ ------------ Total shareholders' equity..................... 5,591,587 19,507,788 ------------ ------------ $ 9,767,084 $ 25,139,052 ============ ============
See accompanying notes to the financial statements F-2 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
PERIOD FROM MARCH 9, 1989 (DATE OF INCEPTION) YEAR ENDED DECEMBER 31, THROUGH --------------------------------------- DECEMBER 31, 1997 1996 1995 1997 ------------ ------------ ----------- ------------ Revenues: Collaborative agreements........... $ 888,335 $ 1,202,965 $ 75,000 $ 2,166,300 Investment income..... 650,892 923,720 667,835 3,651,894 Other................. 439,250 127,493 99,625 666,368 ------------ ------------ ----------- ------------ Total revenues...... 1,978,477 2,254,178 842,460 6,484,562 ------------ ------------ ----------- ------------ Expenses: Research and development.......... 13,043,288 11,502,584 8,194,913 47,316,992 In-process research and development...... -- 13,517,911 -- 13,517,911 General and administrative....... 2,784,806 2,874,316 2,267,516 12,233,842 Interest.............. 338,157 397,409 302,315 1,230,552 ------------ ------------ ----------- ------------ Total expenses...... 16,166,251 28,292,220 10,764,744 74,299,297 ------------ ------------ ----------- ------------ Net loss................ $(14,187,774) $(26,038,042) $(9,922,284) $(67,814,735) ============ ============ =========== ============ Basic and diluted net loss per share......... $ (0.70) $ (1.59) $ (0.94) ============ ============ =========== Shares used in computation of basic and diluted net loss per share.............. 20,196,325 16,407,928 10,532,950 ============ ============ ===========
See accompanying notes to the financial statements F-3 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF SHAREHOLDERS' EQUITY PERIOD FROM MARCH 9, 1989 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
UNREALIZED GAINS (LOSSES) DEFICIT ON ACCUMULATED COMMON STOCK ADVANCES SECURITIES DURING TOTAL PREFERRED ---------------------- FROM AVAILABLE DEVELOPMENT SHAREHOLDERS' STOCK SHARES AMOUNT IMMUNEX FOR SALE STAGE EQUITY ------------ ---------- ----------- ----------- ---------- ------------ ------------- Net loss from March 9, 1989 (date of inception) through December 31, 1991...... $ -- -- $ -- $ 2,807,316 $ -- $ (2,807,316) $ -- Sale of common stock... -- 1,080,000 27,600 -- -- -- 27,600 Issuance of 1,920,000 shares of Series A preferred stock to Immunex in repayment of advances........... 2,807,316 -- -- (2,807,316) -- -- -- Sale of 3,675,986 shares of Series B preferred stock, net of issuance costs of $772,415.............. 16,597,399 -- -- -- -- -- 16,597,399 Issuance of common stock as compensation. -- 120,000 66,000 -- -- -- 66,000 Net loss--1992......... -- -- -- -- -- (1,394,462) (1,394,462) ------------ ---------- ----------- ----------- --------- ------------ ----------- Balance at December 31, 1992................... 19,404,715 1,200,000 93,600 -- -- (4,201,778) 15,296,537 Net loss--1993......... -- -- -- -- -- (5,065,512) (5,065,512) ------------ ---------- ----------- ----------- --------- ------------ ----------- Balance at December 31, 1993................... 19,404,715 1,200,000 93,600 -- -- (9,267,290) 10,231,025 Sale of common stock in initial public offering, net of issuance costs of $1,404,056............ -- 2,154,345 11,522,014 -- -- -- 11,522,014 Conversion of Series A and B preferred stock to common stock....... (19,404,715) 5,595,986 19,404,715 -- -- -- -- Exercise of stock options............... -- 8,500 4,555 -- -- -- 4,555 Unrealized losses on securities available for sale.............. -- -- -- -- (116,104) -- (116,104) Net loss--1994......... -- -- -- -- -- (8,399,345) (8,399,345) ------------ ---------- ----------- ----------- --------- ------------ ----------- Balance at December 31, 1994................... -- 8,958,831 31,024,884 -- (116,104) (17,666,635) 13,242,145 Sale of common stock and 830,598 warrants, net of issuance costs of $214,519........... -- 3,322,392 12,244,461 -- -- -- 12,244,461 Exercise of stock options............... -- 35,960 26,091 -- -- -- 26,091 Unrealized gains on securities available for sale.............. -- -- -- -- 182,423 -- 182,423 Net loss--1995......... -- -- -- -- -- (9,922,284) (9,922,284) ------------ ---------- ----------- ----------- --------- ------------ ----------- Balance at December 31, 1995................... $ -- 12,317,183 $43,295,436 $ -- $ 66,319 $(27,588,919) $15,772,836
See accompanying notes to the financial statements F-4 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF SHAREHOLDERS' EQUITY--(CONTINUED) PERIOD FROM MARCH 9, 1989 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
UNREALIZED GAINS (LOSSES) DEFICIT ON ACCUMULATED COMMON STOCK ADVANCES SECURITIES DURING TOTAL PREFERRED ---------------------- FROM AVAILABLE DEVELOPMENT SHAREHOLDERS' STOCK SHARES AMOUNT IMMUNEX FOR SALE STAGE EQUITY ---------- ---------- ----------- ---------- ---------- ------------ ------------- Balance at December 31, 1995................... $ -- 12,317,183 $43,295,436 $ -- $ 66,319 $(27,588,919) $ 15,772,836 Sale of common stock, net of issuance costs of $1,476,779......... -- 4,025,000 14,623,221 -- -- -- 14,623,221 Issuance of common stock in RGene acquisition........... -- 3,636,364 14,854,546 -- -- -- 14,854,546 Exercise of stock options............... -- 78,460 44,179 -- -- -- 44,179 Exercise of warrants... -- 61,000 285,480 -- -- -- 285,480 Issuance of common stock in payment for consulting and license fees.................. -- 18,461 12,500 -- -- -- 12,500 Unrealized losses on securities available for sale.............. -- -- -- -- (46,932) -- (46,932) Net loss--1996......... -- -- -- -- -- (26,038,042) (26,038,042) ---------- ---------- ----------- ---------- --------- ------------ ------------ Balance at December 31, 1996................... -- 20,136,468 73,115,362 -- 19,387 (53,626,961) 19,507,788 Exercise of stock options............... -- 15,380 8,414 -- -- -- 8,414 Exercise of warrants... -- 59,266 277,365 -- -- -- 277,365 Unrealized losses on securities available for sale.............. -- -- -- -- (14,206) -- (14,206) Net loss--1997......... -- -- -- -- -- (14,187,774) (14,187,774) ---------- ---------- ----------- ---------- --------- ------------ ------------ Balance at December 31, 1997................... $ -- 20,211,114 $73,401,141 $ -- $ 5,181 $(67,814,735) $ 5,591,587 ========== ========== =========== ========== ========= ============ ============
See accompanying notes to the financial statements F-5 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
PERIOD FROM MARCH 9, 1989 (DATE OF INCEPTION) YEAR ENDED DECEMBER 31, THROUGH ---------------------------------------- DECEMBER 31, 1997 1996 1995 1997 ------------ ------------ ------------ ------------- OPERATING ACTIVITIES: Net loss............... $(14,187,774) $(26,038,042) $ (9,922,284) $(67,814,735) Adjustments to reconcile net loss to net cash used in operating activities: In-process research and development........... -- 12,867,986 -- 12,867,986 Depreciation and amortization.......... 1,641,151 1,919,510 1,484,549 6,723,542 Expenses paid with common stock.......... -- 12,500 -- 78,500 (Increase) decrease in prepaid expenses and other................. 38,789 (201,575) (49,865) (458,076) (Increase) decrease in accrued interest on securities available for sale.............. 162,497 (72,570) (9,287) 6,999 Increase (decrease) in current liabilities... (190,996) 1,141,275 (17,955) 1,720,270 ------------ ------------ ------------ ------------ Net cash used in operating activities. (12,536,333) (10,370,916) (8,514,842) (46,875,514) ------------ ------------ ------------ ------------ INVESTING ACTIVITIES: Purchases of property, plant and equipment... (704,896) (1,542,594) (1,335,876) (9,418,087) Purchases of securities available for sale.... (814,251) (23,574,123) (13,047,852) (79,478,896) Sales of securities available for sale.... 12,130,074 20,369,007 10,119,622 75,451,101 Net cash received in RGene acquisition..... -- 1,594,386 -- 1,594,386 Increase in other assets................ (50,000) (145,000) (76,500) (769,179) ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities........... 10,560,927 (3,298,324) (4,340,606) (12,620,675) ------------ ------------ ------------ ------------ FINANCING ACTIVITIES: Net proceeds from sale of capital stock...... 285,779 14,952,880 12,270,552 55,660,779 Advances from Immunex.. -- -- -- 2,807,316 Proceeds from equipment financing transactions.......... 468,363 1,097,588 1,089,789 5,412,245 Payments under capital leases and installment loans................. (1,299,459) (1,003,474) (657,058) (3,372,306) ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities........... (545,317) 15,046,994 12,703,283 60,508,034 ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents............ (2,520,723) 1,377,754 (152,165) 1,011,845 Cash and cash equivalents, beginning of period.............. 3,532,568 2,154,814 2,306,979 -- ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period................. $ 1,011,845 $ 3,532,568 $ 2,154,814 $ 1,011,845 ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Deferred sales tax on leasehold improvements and equipment......... $ -- $ -- $ 16,407 $ 509,588 ============ ============ ============ ============ Preferred stock issued to Immunex in payment of advances........... $ -- $ -- $ -- $ 2,807,316 ============ ============ ============ ============
See accompanying notes to the financial statements F-6 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS NOTE 1. ORGANIZATION Targeted Genetics Corporation (the "Company") is developing gene therapy products for the treatment of certain acquired and inherited diseases. As a development stage company, the Company has devoted substantially all its efforts to date to conducting research and development activities, recruiting personnel and raising capital. The Company was incorporated in the state of Washington in March 1989 as a wholly owned subsidiary of Immunex Corporation ("Immunex"). In February 1992, the Company issued 1,920,000 shares of Series A convertible preferred stock to Immunex in exchange for the grant of a license to certain technology, settlement of advances from Immunex and cancellation of 40,000 shares of common stock issued by the Company to Immunex on March 28, 1989. At December 31, 1997, Immunex held approximately 13% of the outstanding stock of the Company. The Company has incurred operating losses and negative cash flows from operations each year since inception. As of December 31, 1997, the Company had an accumulated deficit of $67.8 million. The financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result from the outcome of this uncertainty. As a result of its significant development efforts, the Company has required substantial working capital to fund its operations. To date, the Company has financed it operations principally through the net proceeds from its equity offerings. As of December 31, 1997, the Company had cash, cash equivalents and securities available for sale of $5.0 million. The funds will enable the company to sustain operations until approximately May 1998. The Company is actively pursuing additional working capital, through a private placement of equity securities, to meet its future operational requirements. If the Company is not able to secure additional sources of working capital, it will be forced to curtail operations or dispose of assets or technology. There can be no assurance such funds will be available as needed or on terms that are acceptable to the Company or that the Company will successfully complete other steps necessary to continue as a going concern. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents The Company considers all short-term investments with a purchased maturity of three months or less to be cash equivalents. Cash equivalents, valued at cost which approximates market, consist principally of money market accounts and short-term government obligations. Securities Available for Sale Securities available for sale consist primarily of corporate debt securities and U.S. Government notes, all of which mature within one year. Management currently classifies the Company's entire investment portfolio, other than cash equivalents, as securities available for sale. Such securities are stated at market value, with the unrealized gains and losses included as a component of shareholders' equity. The cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity, which are included in investment income. Realized gains and losses and declines in value judged to be other than temporary on securities available for sale are also included in investment income. The cost of securities sold is calculated using the specific identification method. F-7 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation of furniture and equipment is provided using the straight-line method over the assets' estimated useful lives, ranging from three to seven years. Furniture and equipment under capitalized leases are amortized over the life of the lease. Leasehold improvements are amortized over the life of the improvements or the term of the lease, whichever is shorter. Stock Compensation The Company has adopted the disclosure-only provisions of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("Statement 123"), whereby it will apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plan. Accordingly, the Company's stock-based compensation expense is recognized based on the intrinsic value of the option on the date of the grant. Recognition of the stock-based compensation under Statement 123 requires the use of fair value method to value stock options using option value models which were developed for purposes other than valuing employee stock options. Revenue Under Collaborative Agreements Revenue under collaborative agreements is recognized as defined under the terms of the respective collaborative agreements. Revenue related to milestones is recognized upon the achievement of the related milestone and when collection is probable. Royalty payments and other similar payments due as a direct result of such revenues being earned and received are offset against and recognized in the same period as such revenue. Net Loss Per Share In February 1997, The Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share ("Statement 128"). Under Statement 128, the Company is required to present basic and diluted earnings per share for all years presented. Basic net loss per share is computed based upon the weighted average number of common shares outstanding during the period. Diluted net loss per share includes the impact of stock options, warrants and other potentially dilutive securities unless the effect of their inclusion would be antidilutive. There was no restatement required due to the adoption of Statement 128. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. F-8 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 3. SECURITIES AVAILABLE FOR SALE All securities available for sale at December 31, 1997 mature within one year. Securities available for sale consisted of the following:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ----------- ---------- ---------- ----------- December 31, 1997: U.S. corporate securities... $ 2,485,485 $ 5,779 $ 133 $ 2,491,131 U.S. Treasury securities and obligations of U.S. government agencies........ 1,535,310 -- 465 1,534,845 ----------- ------- ------- ----------- $ 4,020,795 $ 5,779 $ 598 $ 4,025,976 =========== ======= ======= =========== December 31, 1996: U.S. corporate securities... $ 3,905,454 $ 4,311 $ 4,665 $ 3,905,100 U.S. Treasury securities and obligations of U.S. government agencies........ 11,593,661 26,686 6,945 11,613,402 ----------- ------- ------- ----------- $15,499,115 $30,997 $11,610 $15,518,502 =========== ======= ======= ===========
The gross realized gains on sales of securities available for sale totaled $4,448, $27,300 and $25,047 and the gross realized losses totaled $5,806, $1,097 and $48,013, in 1997, 1996, and 1995, respectively. NOTE 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following:
DECEMBER 31, ---------------------- 1997 1996 ----------- ---------- Furniture and equipment............................. $ 5,648,213 $5,248,913 Leasehold improvements.............................. 4,484,365 4,420,590 ----------- ---------- 10,132,578 9,669,503 Less accumulated depreciation and amortization...... 6,205,045 4,678,486 ----------- ---------- $ 3,927,533 $4,991,017 =========== ==========
The Company has leased furniture and equipment, primarily laboratory equipment. The total cost of leased furniture and equipment capitalized at December 31, 1997 and 1996 was $4,321,900 and $3,796,152, respectively, with related accumulated depreciation of $2,788,565 and $1,840,284 at December 31, 1997 and 1996, respectively. At December 31, 1997, the Company had pledged furniture and equipment, having a net book value of $295,799, as collateral under an installment loan agreement. F-9 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 5. LONG-TERM OBLIGATIONS Long-term obligations consisted of the following:
DECEMBER 31, --------------------- 1997 1996 ---------- ---------- Deferred state sales tax............................. $ 400,056 $ 467,540 Installment note payable, effective rate of 16.73%, due in monthly installments through 1999............ 403,335 634,609 Capitalized lease obligations (see note 8)........... 1,743,933 2,276,271 ---------- ---------- 2,547,324 3,378,420 Less current portion................................. 1,030,562 1,250,263 ---------- ---------- $1,516,762 $2,128,157 ========== ==========
The state of Washington granted the Company a deferral of state sales tax on new construction and equipment used in research and development activities. The remaining obligation is payable over the next four years. Principal payments related to long-term obligations for each of the five years ending December 31, 2002 are $1,030,562, $886,068, $518,035, $81,973, and $30,686, respectively. NOTE 6. SHAREHOLDERS' EQUITY Warrants In July 1995, the Company issued warrants to purchase 830,598 shares of common stock in conjunction with an offering of its common stock. At December 31, 1997, 710,332 of such warrants were outstanding and exercisable at a price of $4.68 per share, expiring January 1998. The Company has issued a total of 137,016 warrants related to equipment financing, collaborative and license agreements. These warrants have a weighted average price of $4.77 per share and expire from May 1999 to December 2003. At December 31, 1997, 847,348 shares of common stock were reserved for all such warrants. Shareholder Rights Plan In October 1996, the Company adopted a Shareholder Rights Plan under which it distributed a dividend of one right for each outstanding share of common stock. The issuance of these rights had no dilutive effect, did not impact reported earnings per share and is not taxable to the Company or the Company's shareholders. These rights could cause substantial dilution to certain persons or groups that attempt to acquire the Company on terms not approved by the Board of Directors. Stock Options The Company has two stock option plans under which 2,300,000 shares of common stock were reserved for issuance. Generally, options vest in annual increments over a three- or five-year period. All options expire ten years from date of grant. Options have been granted at market value or, prior to the Company's initial public offering, at the estimated fair value at the date of grant as established by the Company's Board of Directors. As of December 31, 1997, options on 464,998 shares were available for future grant. F-10 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) A summary of activity related to the Company's stock option plans follows:
WEIGHTED AVERAGE EXERCISE SHARES PRICE --------- -------- Balance, January 1, 1995.............................. 838,000 $2.44 Granted............................................. 253,237 4.09 Exercised........................................... (35,960) 0.73 Cancelled........................................... (22,860) 4.00 --------- ----- Balance, December 31, 1995............................ 1,032,417 2.87 Granted............................................. 332,157 4.86 Exercised........................................... (78,460) 0.56 Cancelled........................................... (71,700) 2.67 --------- ----- Balance, December 31, 1996............................ 1,214,414 3.57 Granted............................................. 571,728 3.75 Exercised........................................... (15,380) 0.55 Cancelled........................................... (74,060) 4.42 --------- ----- Balance, December 31, 1997............................ 1,696,702 $3.62 =========
Options for 611,465, 390,884 and 268,620, shares were exercisable at December 31, 1997, 1996 and 1995, respectively. The following table summarizes information related to outstanding and exercisable options at December 31, 1997:
OUTSTANDING EXERCISABLE ------------------------------ ---------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED RANGE OF AVERAGE REMAINING AVERAGE EXERCISE EXERCISE CONTRACTUAL EXERCISE PRICES SHARES PRICE LIFE SHARES PRICE ------------ --------- -------- ----------- ------- -------- $0.50--$3.00 646,480 $1.89 7.19 283,460 $0.82 3.63-- 4.88 600,365 4.38 8.15 131,891 4.13 5.00-- 6.25 449,857 5.10 7.24 196,114 5.12 ------------ --------- ----- ---- ------- ----- $0.50-- 6.25 1,696,702 $3.62 7.55 611,465 $2.91 ========= =======
F-11 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The Company has adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". In conformity with the provisions of SFAS No. 123, the Company has elected to follow the intrinsic value method allowed under the statement for its stock option plans and present pro forma disclosures using the fair value accounting approach. Had compensation costs been recorded, the following amounts would have been reported:
1997 1996 1995 ------------ ------------ ------------ Net loss--as reported............. $(14,187,774) $(26,038,042) $ (9,922,284) Net loss--pro forma............... (15,068,834) (26,558,542) (10,156,530) Basic and diluted net loss per share--as reported............... (.70) (1.59) (.94) Basic and diluted net loss per share--pro forma................. (.75) (1.62) (.96) The fair value of each option is estimated on the date of grant using the Black-Scholes multiple-option approach pricing model with the following weighted average assumptions: 1997 1996 1995 ------------ ------------ ------------ Expected dividend rate............ nil nil nil Expected stock price volatility... .696 .664 .664 Risk-free interest rate........... 6.53% 6.03% 7.16% Expected life of options from vest date............................. 3 years 3 years 3 years
The weighted average fair value of options granted during 1997, 1996 and 1995 was $2.51, $3.11 and $2.64, respectively, per share. NOTE 7. ACQUISITION OF RGENE THERAPEUTICS, INC. On June 19, 1996, the Company completed its acquisition of RGene Therapeutics, Inc. ("RGene"), a privately-held gene therapy company. The Company issued 3,636,364 shares of common stock in exchange for all the outstanding capital stock of RGene. The acquisition was accounted for as a purchase and the consideration issued by the Company was allocated to RGene's tangible and intangible assets acquired based on their relative fair values on the acquisition date. The amount allocated to acquired in-process research and development was written off to operations in 1996. The allocation of the aggregate purchase price was as follows: Cash and cash equivalents................ $ 3,911,901 Other current assets..................... 392,174 In-process technology.................... 13,517,911 ----------- $17,821,986 ===========
The Company may issue up to $5 million in additional common stock to RGene's former stockholders based on the achievement of certain clinical and business- related milestones prior to December 31, 1998. The Company has also assumed certain long-term consulting and research funding agreements as a result of the merger. NOTE 8. COMMITMENTS The Company leases its research and office facilities under two noncancellable operating leases which expire beginning April 1, 1999. The leases may be extended under specific renewal options at the then prevailing fair market value rental rate. F-12 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Future minimum rental payments under noncancellable leases at December 31, 1997 were as follows:
OPERATING CAPITAL ---------- ---------- Year Ending December 31: 1998.............................................. $ 563,635 $ 775,420 1999.............................................. 210,067 819,670 2000.............................................. 94,428 403,830 2001.............................................. 94,428 60,963 2002.............................................. 107,688 -- Thereafter........................................ 134,610 -- ---------- ---------- Total minimum lease payments........................ $1,204,856 2,059,883 ========== Less amount representing interest................... 315,950 ---------- Present value of minimum capitalized lease payments. $1,743,933 ==========
In January 1998, four capital leases were extended. As such, the annual future minimum rental payments for capital leases will be increased by $244,344, $264,724, $122,697 and $33,847 beginning in 1998, respectively. Rent expense under operating leases for the years ended December 31, 1997, 1996 and 1995 was $533,155, $432,335 and $396,220, respectively. NOTE 9. EMPLOYEE RETIREMENT PLAN The Company sponsors an Employee Retirement Plan in accordance with Section 401(k) of the Internal Revenue Code. All employees 21 years old or older are eligible to participate in the plan. Contributions made into the plan are at the discretion of the Company's Board of Directors. The Company incurred $99,426 and $81,364 of expense in 1997 and 1996 related to contributions to the plan. There were no contributions to the plan made by the Company in 1995. NOTE 10. INCOME TAXES At December 31, 1997, the Company had net operating loss carryforwards of $52,547,000 and research and experimental credit carryforwards of $1,439,000. The carryforwards are available to offset future federal income taxes and begin to expire in 2008. The Company has 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. The valuation allowance increased by $5,032,000 and $5,717,000 during 1997 and 1996, respectively. F-13 TARGETED GENETICS CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Significant components of the Company's deferred tax assets and liabilities were as follows:
DECEMBER 31, ----------------------- 1997 1996 ----------- ----------- Deferred tax assets: Net operating loss carryforwards................. $17,866,000 $13,352,000 Research and experimental credit carryforwards... 1,439,000 1,074,000 Depreciation..................................... 559,000 401,000 Other............................................ 135,000 140,000 ----------- ----------- Total deferred tax assets...................... $19,999,000 $14,967,000 =========== =========== Valuation allowance for deferred tax assets........ $19,999,000 $14,967,000 =========== ===========
Utilization of federal income tax carry forwards is subject to certain limitations under Section 382 of the Internal Revenue Code of 1986. The Company's past sales and issuances of common stock have resulted in "ownership changes" as defined under Section 382, resulting in limitations on the future use of carry forwards. At December 31, 1997, the Company calculated its annual limitation to be approximately $3,782,000. However, this annual limitation is not expected to have a material adverse effect on the Company's utilization of its net operating loss and research credit carryforwards. F-14 EXHIBIT INDEX 2.1 Agreement and Plan of Merger dated as of April 16, 1996, by and (E) among Targeted Genetics Corporation, TGC Acquisition Corporation and RGene Therapeutics, Inc. (Exhibit 2.1) 3.1 Amended and Restated Articles of Incorporation (Exhibit 3.1) (I) 3.2 Amended and Restated Bylaws (Exhibit 3.2) (I) 4.1 Warrant to Purchase 11,000 shares of the Common Stock of Targeted (D) Genetics Corporation, issued to MMC/GATX Partnership No. 1 on December 27, 1993, as amended (Exhibit 4.1) 4.2 Warrant to Purchase 11,000 shares of the Common Stock of Targeted (A) Genetics Corporation, issued to LINC Capital Management, Ltd. on December 27, 1993 (Exhibit 4.2) 4.3 Warrant to Purchase 18,701 shares of the Common Stock of Targeted (B) Genetics Corporation, issued to MMC/GATX Partnership No. 1 on November 30, 1994 (Exhibit 4.3) 4.4 Warrant Agreement between Targeted Genetics Corporation and First (D) Interstate Bank of Washington, N.A., as Warrant Agent (Exhibit 4.4) 4.5 First Amendment to the Warrant Agreement between Targeted Genetics (L) Corporation and First Interstate Bank of Washington, N.A., as Warrant Agent (Exhibit 3.1) 4.6 Specimen Warrant Certificate (Exhibit 4.5) (C) 4.7 Warrant to Purchase 21,315 shares of the common stock of Targeted (D) Genetics Corporation, issued to Financing for Science International, Inc. on November 30, 1995 (Exhibit 4.6) 4.8 Rights Agreement, dated as of October 17, 1996, between Targeted (H) Genetics Corporation and ChaseMellon Shareholder Services (Exhibit 2.1) 4.9 Warrant to purchase 50,000 shares of the Common Stock of Targeted (J) Genetics Corporation, issued to the Burnham Institute on March 15, 1997 (Exhibit 4.1) 4.10 Warrant to purchase 25,000 shares of the Common Stock of Targeted (K) Genetics Corporation, issued to Francis Chisari on May 15, 1997 (Exhibit 4.1)
10.1 Form of Indemnification Agreement between the registrant and its (A) officers and directors (Exhibit 10.6) 10.2 Form of Senior Management Employment Agreement between the (I) registrant and its executive officers (Exhibit 10.2) 10.3 Non-exclusive License Agreement, dated as of November 19, 1991, (A) between the Fred Hutchinson Cancer Research Center and Immunex Corporation* (Exhibit 10.7) 10.4 Gene Transfer Technology License Agreement, dated as of February (A) 18, 1992, between Immunex Corporation and Targeted Genetics Corporation* (Exhibit 10.8) 10.5 License Agreement, dated as of June 1, 1992, between Wisconsin (A) Alumni Research Foundation and Targeted Genetics Corporation* (Exhibit 10.9) 10.6 License Agreement, dated as of August 14, 1992, between Leland (A) Stanford Junior University and Targeted Genetics Corporation* (Exhibit 10.10) 10.7 PHS Patent License Agreement--Non-exclusive, dated as of July 13, (A) 1993, between National Institutes of Health Centers for Disease Control and Targeted Genetics Corporation* (Exhibit 10.13) 10.8 Non-exclusive Patent License Agreement, dated as of December 25, (A) 1993, between The University of Florida Research Foundation, Inc. and Targeted Genetics Corporation* (Exhibit 10.14) 10.9 Research and Exclusive License Agreement, dated as of January 1, 1994, between Targeted Genetics Corporation and the Fred Hutchinson Cancer Research Center* 10.10 PHS Patent License Agreement--Exclusive, dated as of March 10, 1994, between National Institutes of Health Centers for Disease Control and Targeted Genetics Corporation* 10.11 Exclusive License Agreement, dated as of March 14, 1994, between Medical College of Ohio and Targeted Genetics Corporation* 10.12 License Agreement, dated as of March 16, 1994, between the Johns (A) Hopkins University and Targeted Genetics Corporation* (Exhibit 10.17) 10.13 License Agreement, dated as of March 28, 1994, between Targeted Genetics Corporation and the University of Michigan* 10.14 Exclusive License Agreement dated as of March 23, 1994, between the Fred Hutchinson Cancer Research Center and Targeted Genetics Corporation* 10.15 Exclusive License Agreement, dated as of August 25, 1994, between (B) Targeted Genetics Corporation and the Fred Hutchinson Cancer Research Center* (Exhibit 10.20) 10.16 Development Agreement dated April 6, 1994, by and between Argus (F) Pharmaceuticals, Inc. and RGene Therapeutics, Inc.* (Exhibit 10.28) 10.17 Patent and Technology License Agreement effective as of March 1, (F) 1994, by and among the Board of Regents of the University of Texas M.D. Anderson Cancer Center and RGene Therapeutics, Inc.* (Exhibit 10.29) 10.18 First Amended and Restated License Agreement effective October (F) 12, 1995 between The University of Tennessee Research Corporation and RGene Therapeutics, Inc.* (Exhibit 10.30) 10.19 Amendment to the First Amended and Restated License Agreement, (G) between The University of Tennessee Research Corporation and RGene Therapeutics, Inc., dated as of June 19, 1996* (Exhibit 10.1) 10.20 Exclusive Sublicense Agreement effective July 23, 1996 by and (I) between Alkermes, Inc. and Targeted Genetics Corporation.* (Exhibit 10.20)
10.21 Revised License Agreement effective October 1, 1996, by and (I) between the University of Pittsburgh--of the Commonwealth System of Higher Education and Targeted Genetics Corporation* (Exhibit 10.21) 10.22 Agreement dated as of May 28, 1996 by and between RGene (F) Therapeutics, Inc. and Laboratoires Fournier S.C.A.* (Exhibit 10.32) 10.23 License Agreement, dated as of March 15, 1997, between the Burnham Institute and Targeted Genetics Corporation* 10.24 Olive Way Building Lease, dated as of November 20, 1993, between (A) Metropolitan Federal Savings and Loan Association and Targeted Genetics Corporation (Exhibit 10.21) 10.25 First Amendment to Olive Way Building Lease, dated as of December (B) 10, 1994, between Targeted Genetics Corporation and Metropolitan Federal Savings and Loan Association (Exhibit 10.22) 10.26 Second Amendment to Olive Way Building Lease, dated as of June (I) 12, 1996, between Targeted Genetics Corporation and Ironwood Apartments, Inc. (successor in interest to Metropolitan Federal Savings and Loan Association) (Exhibit 10.25) 10.27 Office Lease, dated as of October 7, 1996, by and between (I) Benaroya Capital Company, LLC and Targeted Genetics Corporation (Exhibit 10.26) 10.28 MMC/GATX Partnership No. 1 Equipment Lease Agreement, dated as of (A) December 27, 1993 (Exhibit 10.22) 10.29 LINC Capital Management, Ltd. Equipment Lease Agreement, dated as (A) of December 27, 1993 (Exhibit 10.23) 10.30 Loan and Security Agreement, dated as of November 30, 1994, (B) between MMC/GATX Partnership No. 1 and Targeted Genetics Corporation (Exhibit 10.25) 10.31 Master Equipment Lease Agreement, dated as of October 17, 1995, (D) between Financing for Science International, Inc. and Targeted Genetics Corporation (Exhibit 10.28) 10.32 Registration Rights Agreement dated as of April 27, 1992, among (A) Targeted Genetics Corporation and the holders of Series A and Series B Convertible Preferred Stock (Exhibit 10.26) 10.33 1992 Restated Stock Option Plan (Exhibit 10.33) (I) 10.34 Stock Option Plan for Nonemployee Directors 23.1 Consent of Ernst & Young LLP, Independent Auditors 27.1 Financial Data Schedule
- -------- * Confidential treatment has been granted by or requested from the Securities and Exchange Commission for portions of these exhibits. (A) Incorporated by reference to the designated exhibit included with the Company's Form S-1 Registration Statement (No. 33-77054) filed on March 30, 1994, as amended. (B) Incorporated by reference to the designated exhibit included with the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (C) Incorporated by reference to the designated exhibit included with the Company's Form S-1 Registration Statement (No. 33-91500) filed on April 24, 1995, as amended. (D) Incorporated by reference to the designated exhibit included with the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (E) Incorporated by reference to the designated exhibit included with the Company's Form 8-K filed April 16, 1996. (F) Incorporated by reference to the designated exhibit included with the Company's Form S-1 Registration Statement (No. 333-03592) filed on April 16, 1996, as amended. (G) Incorporated by reference to the designated exhibit included with the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1996. (H) Incorporated by reference to the designated exhibit included with the Company's Form 8-A filed October 22, 1996. (I) Incorporated by reference to the designated exhibit included with the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (J) Incorporated by reference to the designated exhibit included with the Company's Quarterly Report on Form 10-Q for the period ending March 31, 1997. (K) Incorporated by reference to the designated exhibit included with the Company's Quarterly Report on Form 10-Q for the period ending June 30, 1997. (L) Incorporated by reference to the designated exhibit included with the Company's Form 8-A/A filed July 29, 1997. EX-10.9 2 RESEARCH AND EXCLUSIVE LICENSE AGREEMENT REDACTED VERSION EXHIBIT 10.9 To Targeted Genetics Corporation's Form 10-K For the Year Ended December 31, 1997 "[ * ]" = omitted, confidential material, which material has been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment. FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT EXHIBIT 10.9 RESEARCH AND EXCLUSIVE LICENSE AGREEMENT ---------------------------------------- This Agreement is made as of the 1st day of January, 1994 between: Fred Hutchinson Cancer Research FHCRC 1124 Columbia Street Seattle, WA 98104 (hereinafter "FHCRC") and Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, WA 98101 (hereinafter "TGC") RECITALS WHEREAS, FHCRC is or will be the owner by assignment from the University of Washington, Seattle, WA 98195 (hereinafter the "UNIVERSITY"), and from Dr. Philip Greenberg ("Dr. Greenberg"), Dr. Stanley Riddell ("Dr. Riddell") and Dr. Brad Nelson of certain patent rights to be defined in this Agreement, together with all confidential information currently in the possession of FHCRC, or to be provided to TGC under the terms of this Agreement; and WHEREAS, TGC desires to obtain an exclusive worldwide license to such know- how and patent rights, and to manufacture, use and sell in the commercial market the products made in accordance therewith; and WHEREAS, TGC is prepared to provide support for FHCRC of research by Drs. Greenberg and Riddell in the field of methods of conferring immunity in humans by adoptive transfer of genetically-modified cytotoxic T lymphocytes providing it receives certain license rights under inventions, biological materials and/or know-how; and WHEREAS, FHCRC is committed to a policy that ideas or creative works produced at FHCRC should be used for the greatest possible public benefit and believes that every reasonable incentive should be provided for the prompt introduction of such ideas into public use, all in a manner consistent with the public interest; and FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants herein contained and intending to be legally bound hereby, FHCRC and TGC agree as follows: AGREEMENT ARTICLE 1 - DEFINITIONS 1.1 "LICENSED PATENT RIGHTS" shall mean rights and claims in and to the inventions in the FIELD which are described in, and rights covered by, the VALID CLAIM(s) of the issued United States patents and patent applications listed on Appendix A to this Agreement, as well as all continuations, continuations-in- part, divisions and renewals thereof, and foreign counterparts thereof which will automatically be deemed incorporated in and added to this Agreement and shall periodically be listed in Appendix A hereto. The term LICENSED PATENT RIGHTS shall further include any and all patents and patent applications, as well as all continuations, continuations-in-part, divisions and renewals thereof, and foreign counterparts thereof which cover any inventions arising in the FIELD out of the RESEARCH PROGRAM as to which TGC has exercised its option to license as provided in Section 3.2. 1.2 "LICENSED PROCESSES" shall mean processes the relevant practice of which would in the applicable jurisdiction, in the absence of the License, infringe upon a VALID CLAIM. 1.3 "LICENSED PRODUCTS" shall mean any product for the diagnosis, prophylaxis or treatment of human diseases the practice of which would, in the applicable jurisdiction, in the absence of the license infringe upon a VALID CLAIM. 1.4 "LICENSED MATERIALS" shall mean materials which exist as of the EFFECTIVE DATE and are covered by the LICENSED PATENT RIGHTS, or which are first produced in the performance of this Agreement, including, but not limited to structural genes, genetic sequences, promoters, enhancers, probes, linkage probes, vectors, plasmids, transformed cell lines, transgenic animals, proteins, biological modifiers, antigens, antibodies, cell lines and other biologically active material. 1.5 "FIELD" shall mean the methods of conferring immunity in humans by adoptive transfer of genetically-modified cytotoxic T lymphocytes. 1.6 "NET SALES" shall mean the amount billed or invoiced on sales of LICENSED PRODUCTS less: 3 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT (a) Customary trade, quantity or cash discounts and non-affiliated brokers' or agents commissions, actually allowed and taken; (b) Amounts repaid or credited by reason of rejection or return and/or; (c) To the extent separately stated on purchase orders, invoices or other documents of sales, taxes levied and/or other governmental charges made as to production, sale, transportation, delivery or use and paid by or on behalf of TGC. 1.7 "AFFILIATES" shall mean any company, corporation, or business in which TGC owns or controls at least a fifty percent (50%) ownership interest or which directly or indirectly owns or controls more than a fifty percent (50%) ownership interest in TGC. 1.8 "INVESTIGATORS" shall mean Dr. Philip Greenberg and Dr. Stanley Riddell and any persons working under the direct supervision of Dr. Greenberg and/or Dr. Riddell. 1.9 "VALID CLAIM" shall mean any claim, or claims of the LICENSED PATENT RIGHTS that have not been held invalid or unenforceable by a final judgment of a court of competent jurisdiction which is unappealable or as to which the applicable time for appeal has expired without an appeal being filed. 1.10 "RESEARCH PROGRAM" shall mean the research to be conducted at FHCRC under the direction of the INVESTIGATORS under this Agreement. 1.11 "FOUNDATION" shall mean the Fred Hutchinson Cancer Research Foundation, and its successors, assigns and subcontractors, including, without limitation, FHCRC. 1.12 The "EFFECTIVE DATE" of this Agreement shall mean January 1, 1994. ARTICLE 2 - RESEARCH PROGRAM 2.1 For the three years ending December 31, 1996, TGC agrees as set forth below, to pay the FOUNDATION funds to entirely support the RESEARCH PROGRAM, and the FOUNDATION agrees to supply the services of requisite personnel and to furnish the necessary facilities to carry out such RESEARCH PROGRAM, all according to a Plan for Research and Budget to be agreed upon by 4 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT TGC and FHCRC as set forth in Section 2.2. INVESTIGATORS shall be precluded from conducting any clinical trials in humans under the RESEARCH PROGRAM. 2.2 FOUNDATION shall annually submit to TGC a proposed Plan for Research and Budget for each of the three (3) Agreement Years following the Effective Date of this Agreement (each Agreement Year being defined to mean the twelve- month period commencing with the Effective Date or anniversary thereof). The Plan for Research and Budget for the first Agreement Year shall be negotiated in good faith by the parties and agreed to on or before June 30, 1994. For each of the two Agreement Years thereafter, FOUNDATION shall submit a proposed Plan for Research and Budget at least ninety (90) days prior to the first and second anniversaries of the Effective Date. The parties will negotiate in good faith and use their best efforts to finalize such Plan for Research and Budget. If FOUNDATION and TGC are not able to agree upon the Plan for Research and Budget after good faith negotiations, TGC may notify FOUNDATION at least sixty (60) days prior to the beginning of the subsequent Agreement Year that it will not support the RESEARCH PROGRAM for such year. Notification less than sixty (60) days prior to the beginning of the Agreement Year will not be effective. As its sole liability upon termination, TGC shall pay FOUNDATION for all reasonable expenses incurred or committed to be expended as of the effective termination date up to a maximum of fifty thousand dollars ($50,000). 2.3 For as long as the INVESTIGATORS remain at FHCRC, the RESEARCH PROGRAM shall be under their direction. During the term of this Agreement the INVESTIGATORS shall not conduct research for other commercial organizations in the FIELD without the prior written consent of TGC. 2.4 In the event that the services of Dr. Greenberg or Dr. Riddell become unavailable during the course of the RESEARCH PROGRAM, under circumstances that TGC reasonably believes to be permanent, TGC shall have the right to terminate its obligation to fund the RESEARCH PROGRAM, except that TGC shall be required to pay FHCRC for reasonable expenses incurred or committed to be expended as of the termination date up to a maximum of fifty thousand dollars ($50,000). 2.5 Except as otherwise provided in Section 3.5, termination of the RESEARCH PROGRAM shall not affect TGC's rights or obligations with respect to the LICENSED PATENT RIGHTS that have been incorporated and added to this Agreement as of the date of such termination, and with respect to commercialization of LICENSED PRODUCTS and LICENSED PROCESSES covered by such LICENSED PATENT RIGHTS. 5 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT 2.6 Within thirty (30) days after each anniversary of the Effective Date, the INVESTIGATORS shall provide TGC a written report of the results of the RESEARCH PROGRAM obtained during the preceding twelve (12) months. In the event of termination of the RESEARCH PROGRAM, TGC shall receive a final summary report of the work carried out and all inventions conceived of and/or reduced to practice under the RESEARCH PROGRAM. 2.7 FOUNDATION shall have the right to subcontract a portion of the work to be performed under the RESEARCH PROGRAM to the UNIVERSITY subject to appropriate supervision of such work by the INVESTIGATORS. The indirect cost rate applied to such work shall be negotiated in good faith by the parties on or before June 30, 1994. ARTICLE 3 - INTELLECTUAL PROPERTY 3.1 FHCRC and TGC will promptly notify the other of any inventions it becomes aware of, whether or not patentable, that arise out of the RESEARCH PROGRAM in the FIELD ("INVENTIONS"). INVENTIONS which are conceived solely by employees of FHCRC shall be assigned to FHCRC ("FHCRC INVENTIONS"). INVENTIONS which are conceived solely by employees of TGC shall be assigned to TGC. INVENTIONS which are jointly conceived by employees of FHCRC and TGC shall be jointly assigned to FHCRC and TGC ("JOINT INVENTIONS"). 3.2 TGC is hereby granted the option to license, under the terms and conditions stated in this Agreement, all FHCRC INVENTIONS and JOINT INVENTIONS on an exclusive, worldwide basis. TGC will have thirty (30) days from the date it is notified by FHCRC of any INVENTION, or from the date TGC becomes aware of an INVENTION, as the case may be, to exercise the option by giving written notice of the election to FHCRC and using its best efforts to take the necessary steps to file a patent application or other application for intellectual property protection at the earliest possible time. Upon exercise of the option, the patent application or other application for intellectual property protection which is the subject of such exercised option shall automatically be deemed incorporated into the LICENSED PATENT RIGHTS. 3.3 FHCRC, including the INVESTIGATORS, and TGC shall cooperate fully in the preparation, filing, prosecution and maintenance of LICENSED PATENT RIGHTS and of all patents and patent applications licensed to TGC hereunder, executing all papers and instruments or requiring members of FHCRC to execute such papers and instruments so as to enable TGC to apply for, to prosecute and to maintain patent applications and patents in FHCRC's name in any country. 6 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT Each party shall provide the other prompt notice as to all matters which come to its attention and which may affect the preparation, filing, prosecution or maintenance of any such patent applications or patents. TGC shall bear all costs incurred in connection with such preparation, filing, prosecution and maintenance of all LICENSED PATENT RIGHTS foreign and domestic; provided that TGC shall first consult with FHCRC as to the preparation, filing, prosecution and maintenance of such patent applications and patents. TGC shall keep FHCRC advised as to all developments with respect to all patent applications and patents included in LICENSED PATENT RIGHTS and shall promptly supply to FHCRC: (i) copies of all official correspondence from the U.S. Patent Office or from a patent office in any country within two weeks of receipt; and (ii) copies of all substantive papers to be filed in the U.S. Patent Office or a patent office in any country at least thirty (30) days prior to filing to provide FHCRC sufficient time to comment thereon. Up to twenty thousand dollars ($20,000) in patent prosecution and interference expenses reasonably incurred by TGC for each of the initial patent applications filed by TGC in the U.S. Patent and Trademark Office for Inventions (i.e., continuations, continuations-in-part and divisions are excluded for the purposes of calculating this credit) and included in the LICENSED PATENT RIGHTS may be credited against royalties due by FHCRC under Section 6.2, but such credit will not reduce the amount which would otherwise be due FHCRC in any year by more than 50%. Any unused credit amount may be carried forward by TGC each year until the full amount of the credit has been exhausted. 3.4 So long as TGC is not in default or in breach of this Agreement, FHCRC grants to TGC an option to license any invention developed under the RESEARCH PROGRAM that is not in the FIELD. The parties shall exercise their good faith best efforts to negotiate commercially reasonable terms based on the relative contribution to such inventions and the commercial value thereof. The option granted by this Section 3.4 may be exercised by TGC by giving written notice to FHCRC within ninety (90) days from the date of disclosure of the invention. If the option is not exercised within the ninety (90) day period, it will expire. 3.5 If TGC fails to financially support the preparation, filing, prosecution or maintenance of any patent application, patent or other intellectual property included in the LICENSED PATENT RIGHTS, TGC shall have deemed to have surrendered its rights under such patent application, patent or other intellectual property. In that event, FHCRC may, at its sole expense, prepare, file, continue prosecution over or maintain any such patent application, patent or other intellectual property protection. 7 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT ARTICLE 4 - GRANT 4.1 FHCRC hereby grants to TGC and TGC accepts, subject to the terms and conditions hereof: (a) an exclusive, worldwide license to make, to have made, to use, to sell and to have sold LICENSED MATERIALS; and (b) an exclusive worldwide license, under LICENSED PATENT RIGHTS, to make, to have made, to use, to sell, and to have sold LICENSED PRODUCTS, and to practice the LICENSED PROCESSES, for the Term permitted in Article 5 of this Agreement (the "License"). The License granted to TGC by FHCRC hereunder is limited to the FIELD. Any license in any other field (including with respect to FHCRC INVENTIONS and JOINT INVENTIONS) shall be the subject of a separate agreement and shall require TGC's submission of evidence demonstrating its willingness and ability to develop and commercialize the kinds of products or processes likely to be encompassed in such other field. The License includes the right to grant sublicenses, subject to the provisions of Section 4.2(e) below. TGC agrees during the period of exclusivity of this license in the United States that any LICENSED PRODUCT produced for sale in the United States will be manufactured substantially in the United States. 4.2 The License is subject to the following policies, obligations and/or conditions: (a) FHCRC's Patents and Inventions Policy adopted September 30, 1983, Public Law 98-620 and FHCRC's obligations under agreement with other sponsors of research. Any right granted in this Agreement greater than that permitted under Public Law 98-620 shall be subject to modification as may be required to conform to the provisions of the statute. (b) For research purposes only and not for any commercial purpose, FHCRC retains the right to practice LICENSED PROCESSES in the FIELD, to make and to use LICENSED MATERIALS, and to grant non- exclusive licenses of these same rights to other not-for-profit organizations for noncommercial research purposes only ("Research License"). In the event that TGC can provide convincing written evidence to FHCRC that a not-for-profit organization that has been granted a Research License is developing inventions either solely or in collaboration with a third party for commercial manufacture or in lieu of purchase if the inventions are available as commercial products, then TGC can request that FHCRC terminate its Research License with 8 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT such organization, such request not to be unreasonably withheld. (c) TGC shall use its best efforts to introduce the LICENSED PRODUCTS into the commercial market as soon as practicable, consistent with sound and reasonable business practices and judgment, and thereafter endeavor to keep LICENSED PRODUCTS reasonably available to the public. (d) FHCRC shall have the right to terminate or render the License granted under this Agreement non-exclusive at any time after three (3) years from the EFFECTIVE DATE, if in FHCRC's reasonable judgment, TGC: (i) has not put the licensed subject matter into commercial use in the country or countries where licensed, directly or through a sublicense, and is not keeping the licensed subject matter reasonably available to the public, or (ii) is not demonstrably engaged in research, development, manufacturing, marketing or licensing program, as appropriate, directed toward these ends; or (iii) has not expended at least three hundred thousand dollars ($300,000) in the twelve (12) month period beginning three (3) years from the EFFECTIVE DATE, or in any (12) twelve month period beginning anytime thereafter, on internal and external personnel, their benefits, supplies and equipment, related to research and development of the LICENSED PRODUCTS. In making this determination FHCRC shall take into account the normal course of such programs conducted with sound and reasonable business practices and judgment and shall take into account the reports provided hereunder by TGC. (e) TGC shall not grant any sublicense without FHCRC's prior written consent, such consent not to be unreasonably withheld. All sublicenses granted by TGC hereunder shall include a requirement that the sublicensee use its best efforts to bring the subject matter of the sublicense into commercial use as quickly as is reasonably possible, shall comply with Section 10.5 of this Agreement, and shall expressly bind the sublicensee to meet 9 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT TGC's obligations to FHCRC under this Agreement. Copies of all sublicense agreements shall promptly be provided to FHCRC. (f) In the event FHCRC becomes aware of third parties that wish to license the LICENSED PATENT RIGHTS in specific fields of use that would not result in direct or indirect competition to TGC, FHCRC shall notify TGC and TGC shall exercise one of the following options: (i) commence active research and development of LICENSE PRODUCTS under the LICENSED PATENT RIGHTS in that field of use; (ii) grant a sublicense to said third parties to make, use and sell LICENSED PRODUCTS under the LICENSED PATENT RIGHTS in that field of use; or (iii) grant the right to FHCRC to directly license said third parties to make, use and sell LICENSED PRODUCTS under the LICENSED PATENT RIGHTS in that field of use. 4.3 Notwithstanding the foregoing provisions of Article 4, TGC shall have the right to assign the license granted under Article 4 to an AFFILIATE or to any organization that acquires all or substantially all of TGC's business, subject to the terms and conditions hereof. 4.4 This Agreement shall have no effect upon any and all rights reserved to the United States Government and others under Public Law 98-620. ARTICLE 5 - TERM OF AGREEMENT 5.1 This Agreement becomes effective as of the date first above written (the "Effective Date"), and, subject to earlier termination as provided in Article 10, shall remain in effect until the last to expire of the LICENSED PATENT RIGHTS (the "Term"). 10 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT ARTICLE 6 - ROYALTIES 6.1 In consideration for the granting of the License, TGC shall pay to FHCRC a non-refundable license fee ("Upfront Fee") in the sum of [ * ] within thirty (30) days of the execution of this Agreement. 6.2(a) During the Term, TGC shall pay to FHCRC a royalty in the amount of [ * ] of the NET SALES of all LICENSED PRODUCTS and all products using LICENSED PROCESSES and all services utilizing LICENSED PRODUCTS or LICENSED PROCESSES which are sold by TGC and its AFFILIATES or sublicensees on a country-by-country basis ("FHCRC Royalties"). 6.2(b) Notwithstanding the foregoing, if TGC is required to pay royalties to an unaffiliated third party(ies) for sales of LICENSED PRODUCTS or to practice LICENSED PROCESSES for which payments are also due to FHCRC ("Third Party Royalties"), then the royalties be paid by TGC to FHCRC shall be reduced by the amount that the sum of the FHCRC Royalties and Third Party Royalties are in excess of [ * ] of NET SALES of LICENSED PRODUCTS, but in no event shall the FHCRC Royalties be reduced to less than [ * ] of NET SALES of LICENSED PRODUCTS. 6.3 TGC shall pay to FHCRC at least the following amounts in royalties in the following contract years (the "Maintenance Royalties"): (a) [ * ] due upon the earlier of the issuance of the first patent arising from [ * ] entitled [ * ] or a continuation, continuation-in-part or division thereof, or June 30, 1996. Notwithstanding the foregoing, in the event that such patent issues with claims that [ * ], or if such claims are not pending in the patent application as of June 30, 1996, then the amount due under this Article 6.3(a) shall be reduced to [ * ]; (b) [ * ], due upon issuance of any patent included in the LICENSED PATENT RIGHTS relating to methods for expanding T cells, on which patent the INVESTIGATORS are named as inventors. Notwithstanding the foregoing, the amount due under this Article 6.3(b) shall not be due and payable by [*] Confidential Treatment Requested 11 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT TGC until the end of the first calendar month following the first calendar year that the research funding provided by TGC under this Agreement is less than one hundred fifty thousand dollars ($150,000); (c) [ * ], due upon the earlier of the first approval to commence Phase 2 clinical trials (as defined by 21 Code of Federal Regulations, Chapter 1) for a LICENSED PRODUCT or December 31, 1997. Notwithstanding the foregoing, the amount due under this Article 6.3(c) shall not be due and payable by TGC until the end of the first calendar month following the first calendar year that the research funding provided by TGC under this Agreement is less than one hundred fifty thousand dollars ($150,000); (d) [ * ], due upon the earlier of the first approval to commence Phase 3 clinical trials (as defined by 21 Code of Federal Regulations, Chapter 1) for a LICENSED PRODUCT for cytomegalovirus (CMV) disease or December 31, 1999; (e) [ * ], due upon the earlier of the first approval to commence Phase 3 clinical trials (as defined by 21 Code of Federal Regulations, Chapter 1) for a LICENSED PRODUCT for HIV disease or cancer or December 31, 1999; (f) [ * ], due upon the earlier of the first approval of a New Drug Application ("NDA") or Product License Application ("PLA") (as defined by 21 Code of Federal Regulations, Chapter 1) for a LICENSED PRODUCT or December 31, 2001; (g) FHCRC shall credit against any royalties due by TGC to FHCRC hereunder the amount equal to [ * ] of all amounts actually paid to FHCRC under this Article 6.3 6.4 No multiple royalties shall be payable because any LICENSED PRODUCT which TGC manufacturers, uses, leases or sells is covered by multiple claims under the LICENSED PATENT RIGHTS. [*] Confidential Treatment Requested 12 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT 6.5 If TGC transfers or otherwise sublicenses LICENSED PATENT RIGHTS to a third party, for value other than NET SALES, TGC shall also pay FHCRC a percentage of [ * ] of all proceeds including, but not limited to, licensing fees, receivable by TGC in connection therewith ("Non-Royalty Fees"). Any such payment to FHCRC shall be made within thirty (30) days after receipt of such proceeds by TGC. Any such sale or transfer shall not affect TGC's obligations to pay royalties under Sections 6.2 and 6.3 above. In no event shall Non-Royalty Fees include any payment or other value due to or received by TGC from a third party as, for example, an upfront fee, research and development payments, milestone payments, equity, or any equivalent of the foregoing, or of any payment that is not explicitly due to or received by TGC in consideration for a grant by TGC to a third party to make, have made, use and sell LICENSED PRODUCTS, or practice LICENSED PROCESSES, under LICENSED PATENT RIGHTS. In the event that TGC transfers or otherwise sublicenses LICENSED PATENT RIGHTS to a third party in combination with patents(s) and/or other rights(s) of a third party(ies) and TGC is due and receives Non-Royalty Fees, then TGC shall pay FHCRC an equitable portion of such Non-Royalty Fees as to be determined by the good faith negotiations of TGC and FHCRC. ARTICLE 7 - REPORTING AND ROYALTY PAYMENT TERMS 7.1 Upon or before execution of this Agreement, TGC shall provide to FHCRC a written research and development plan pursuant to which TGC intends to bring the subject matter of the License granted hereunder into commercial use, including projections of sales and proposed marketing efforts. 7.2 TGC shall report to FHCRC the date of first sale of LICENSED PRODUCTS (or results of LICENSED PROCESSES) in each country within thirty (30) days of occurrence. 7.3 TGC shall provide written annual reports within sixty (60) days after December 31 of each calendar year which shall include the following information: reports of progress on research and development, regulatory approvals, manufacturing, sublicensing, marketing and sales during the preceding twelve (12) months as plans for the coming year. If TGC's progress differs from that anticipated [*] Confidential Treatment Requested 13 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT in the plan provided to FHCRC under Section 7.1, TGC shall explain the reasons for the difference and propose a modified plan for FHCRC's review and approval. TGC shall also provide any reasonable additional data FHCRC requires to evaluate TGC's performance. 7.4 Beginning with the first NET SALES, TGC shall submit to FHCRC within sixty (60) days after June 30 and December 31 of each calendar year during the Term, and upon the effective termination of this Agreement, reports for the preceding six (6) month period identifying the amount of the LICENSED PRODUCTS sold by TGC, its AFFILIATES and sublicensees in each country, the sales volume and NET SALES, and the amount of royalty due to FHCRC together with payment of such royalty amount. Such report shall be certified as correct by an officer of TGC and shall include a detailed listing of all deductions from NET SALES, sublicensee income or from royalties as specified herein. If no royalties are due to FHCRC for any reporting period, the written report shall so state. All royalties due hereunder shall be payable in United States dollars. Conversion of foreign currency to U.S. dollars shall be made at the conversion rate existing in the United States on the date the royalty payments by TGC are due as quoted in the Wall Street Journal for that day. 7.5 All such reports shall be maintained in confidence by FHCRC, except as otherwise required by law, including Public Law 98-620. ARTICLE 8 - RECORD KEEPING 8.1 TGC shall maintain complete and accurate books of account and records showing all sales of LICENSED PRODUCTS and all NET SALES (broken down by gross sales and allowable deductions) attributable to such sales. For purposes of verifying the accuracy of the royalties paid by TGC pursuant to this Agreement or verifying performance of TGC of any other obligation to FHCRC or the FOUNDATION hereunder, such books and records shall be open to inspection and copying, during usual business hours, by an independent certified public accountant mutually agreeable to the parties. Such accountant shall not disclose to FHCRC any information other than information relating to accuracy of reports and calculations of amounts due to FHCRC made under this Agreement. In the event that any such inspection shows any underreporting and underpayment by TGC in excess of five percent (5%) for any twelve (12) month period, then TGC shall pay the cost of such examination. Such books and records shall be maintained for at least two (2) full years after the termination of this Agreement. 14 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT ARTICLE 9 - INFRINGEMENT 9.1 Each party agrees to notify the other promptly of any infringement of the LICENSED PATENT RIGHTS of which such party becomes aware. TGC shall have the option to commence legal proceedings with respect to such infringement. Before TGC commences legal proceedings (an "Action") with respect to any infringement of such patents, TGC shall give careful consideration to the views of FHCRC and to potential effects on the public interest in making its decision whether or not to commence such an Action. 9.2 If TGC elects to commence an Action as described above, TGC may reduce, by up to fifty percent (50%), the royalty due to FHCRC earned under the patent subject to suit by the amount of the expenses and costs of such Action, including attorney fees. In the event such expenses and costs exceed the amount of royalties withheld by TGC for any calendar year, TGC may to that extent reduce the royalties due to FHCRC from TGC in succeeding calendar years, but never by more than fifty percent (50%) of the royalty due in any one year. Any unused royalty credit amount may be carried forward until the full amount of the credit has been exhausted. 9.3 Recoveries or reimbursements from such Action shall first be applied to reimburse TGC and FHCRC for litigation costs not paid from royalties (if any) and then to reimburse FHCRC for royalties withheld. Any remaining recoveries or reimbursements shall be shared equally by TGC and FHCRC. 9.4 In the event that TGC elects not to exercise its option to prosecute an infringement of the LICENSED PATENT RIGHTS pursuant to this Agreement, FHCRC may do so at its own expense, controlling such Action and retaining all recoveries therefrom. ARTICLE 10 - TERMINATION OF AGREEMENT 10.1 Unless terminated earlier in accordance with the terms hereof, this Agreement will expire upon the expiration of the Term as provided in Article 5. Upon termination, a final report shall promptly be submitted in accordance with the provisions of Section 7.4, together with any royalty payments and unreimbursed patent expenses due to FHCRC. 10.2 At FHCRC's option, FHCRC may terminate this Agreement sixty (60) days after giving written notice to TGC of any default in payments due hereunder and subsequent failure by TGC to remedy and such default within such period, provided that FHCRC is not then in breach of any provision hereof. 15 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT 10.3 This Agreement may be terminated by either party upon breach of a material obligation or condition by the other (other than a breach according to Section 10.2), effective ninety (90) days after giving written notice to the other of such termination under this Article and specifying such breach, provided however, that if the breach is cured or shown to be non-existent within the ninety (90) day period, the notice shall be deemed automatically withdrawn and of no effect. If the parties do not agree whether a breach has occurred or been cured or whether it is "material", the dispute shall be resolved through arbitration under Article 14. 10.4 Subject to any provisions of the federal bankruptcy laws limiting rights of termination, this Agreement will automatically terminate if TGC files for protection under federal bankruptcy laws, becomes insolvent, makes an assignment for the benefit of creditors, appoints or suffers appointment of a receiver or trustee over its property, files a petition under any bankruptcy or insolvency act or has any such petition filed against it or files for dissolution. 10.5 Any sublicenses granted by TGC under this Agreement shall provide for termination or assignment to FHCRC, at the option of FHCRC, of TGC's interest therein upon termination of this Agreement. 10.6 TGC shall have the right to terminate this Agreement effective thirty (30) days after giving written notice to FHCRC of termination under this Article, except that TGC shall have continuing obligations to FHCRC in accordance with Sections 2.2 and 2.4 hereof. 10.7 Upon termination of this Agreement, TGC shall have the right for three (3) months to sell all LICENSED PRODUCTS on hand at the time of notification of termination if the royalties from such sales and any and all other payments due FHCRC are paid to and statements rendered to FHCRC with respect to such LICENSED PRODUCTS when due in accordance with this Agreement. 10.8 Upon termination of the Agreement for any reason, and subject to TGC's rights under Section 10.7, TGC shall return to FHCRC and thereafter continue to maintain the confidentiality thereof, and refrain from use thereof or the disclosure thereof to any third party as required by Article 16, and all other rights in LICENSED MATERIALS, LICENSED PROCESSES and LICENSED PRODUCTS granted to TGC under Article 4 shall expire and revert to FHCRC. Immediately upon cessation of discussions between TGC and FHCRC during the Term, or upon request by one of the parties, TGC and FHCRC will return all Proprietary Information of the other, and all documents or data storage media containing any such Proprietary Information and any and all copies thereof, and TGC and FHCRC will delete all Proprietary Information of the other from its documents or data 16 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT storage media, except that the parties shall maintain one copy of such Proprietary Information in their legal or corporate development files. 10.9 Should either party terminate this Agreement as permitted herein, the other party shall not be able to claim from the terminating party any damages or compensation for losses or expenses incurred solely as a result of the termination. 10.10 Provisions hereof and accrued rights hereunder which by their terms or nature survive the termination or expiration of this Agreement shall so survive such termination or expiration. ARTICLE 11 - REPRESENTATIONS AND COVENANTS 11.1 FHCRC represents and warrants that all right, title, and interest in the patent applications or patents comprising the LICENSED PATENT RIGHTS, LICENSED PROCESSES and LICENSED MATERIALS have been assigned to it, or are otherwise owned by it, and that FHCRC has the authority to issue licenses under said LICENSED PATENT RIGHTS, LICENSED PROCESSES and LICENSED MATERIALS. FHCRC disclaims all implied or express warranties of any nature whatsoever concerning the validity of the LICENSED PATENT RIGHTS, LICENSED PROCESSES and LICENSED MATERIALS licensed hereunder. TGC acknowledges and agrees that neither FHCRC nor anyone acting on its behalf has made any representations or warranties and expressly disclaims whatsoever with regard to the scope of the LICENSED PATENT RIGHTS, LICENSED PROCESSES or the LICENSED MATERIALS, or that such LICENSED PATENT RIGHTS, LICENSED PROCESSES and LICENSED MATERIALS may be exploited by TGC, an AFFILIATE, or sublicensee without infringing other patents. 11.2 FHCRC EXPRESSLY DISCLAIMS ANY AND ALL EXPRESS WARRANTIES, EXCEPT THOSE STATED IN THIS ARTICLE 11, AND FURTHER DISCLAIMS ANY AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS OF THE LICENSED PROCESSES, LICENSED MATERIALS OR LICENSED PRODUCTS FOR ANY PARTICULAR USE OR PURPOSE. 11.3 TGC represents and warrants to FHCRC that it has obtained and will at all times during the Term of this Agreement, hold and comply with all licenses, permits and authorizations necessary to TGC'S complete and timely performance of its obligations under this Agreement which are required under any applicable statutes, laws, ordinances, rules and regulations of the United States as well as those of all applicable foreign governmental bodies, agencies and subdivisions, having, 17 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT asserting or claiming jurisdiction over TGC or TGC's performance of the terms of this Agreement. In particular, TGC: (a) will be responsible for obtaining all necessary United States Food and Drug Administration approvals and all approvals required by similar governmental bodies or agencies of all applicable foreign countries; and (b) understands and acknowledges that the transfer of certain commodities and technical data is subject to United States laws and regulations controlling the export of such commodities and technical data, including all Export Administration Regulations of the United States Department of Commerce. These laws and regulations, among other things, prohibit or require a license for the export of certain types of technical data to certain specified countries. TGC hereby agrees and gives written assurance that it will comply with all United States laws and regulations controlling the export of commodities and technical data, that it will be solely responsible for any violation of such by TGC or its AFFILIATES or sublicensees, and that it will defend and hold FHCRC harmless in the event of any legal action of any nature occasioned by such violation. ARTICLE 12 - LEGAL ACTION 12.1 In the event any legal action is commenced against TGC involving the use by TGC of a LICENSED MATERIAL, LICENSED PROCESS or LICENSED PRODUCT, or otherwise relating to this Agreement, whether or not FHCRC is named as a party to the legal action, TGC shall keep FHCRC or its attorney nominee fully advised of the progress of the legal action and shall reimburse FHCRC for its reasonable legal costs (including attorney's fees) incurred as a result of FHCRC's monitoring of such action, FHCRC's being named a party to any such legal action, or when FHCRC's employees or agents are called as witnesses therein or asked to testify for or consult with TGC in connection therewith. 12.2 In the event that any legal action is commenced against FHCRC involving the RESEARCH PROGRAM which is caused by the negligent or wrongful acts of FHCRC or its employees or agents, whether or not TGC is named as a party to the legal action, FHCRC shall keep TGC or its attorney nominees fully advised of the progress of the legal action, and shall reimburse TGC for its reasonable legal costs (including attorney's fees) incurred as a result of TGC's monitoring of such action, TGC's being named a party to any such legal action, or 18 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT when TGC's employees or agents are called as witnesses therein or asked to testify for or consult with FHCRC in connection therewith, unless the legal action is caused by the negligent or wrongful acts of TGC or its employees or agents. 12.3 FHCRC and TGC agree to cooperate with each other, to the extent reasonably possible, in any legal action brought pursuant to this Article 12. ARTICLE 13 - HOLD HARMLESS 13.1 TGC assumes responsibility for and shall defend, indemnify and hold FHCRC, its directors, officers, managers, agents, students, doctors and employees harmless from any and all liability, losses, expenses, damages, assessments and claims arising out of or resulting from (i) the use, sale or any disposition of LICENSED PRODUCTS or LICENSED MATERIALS by TGC or its AFFILIATES, (ii) the practice of the LICENSED PROCESSES by TGC or its AFFILIATES, or (iii) the use, sale or other disposition of the LICENSED PRODUCT or the practice of LICENSED PROCESSES by others who receive LICENSED PRODUCTS, LICENSED MATERIALS or LICENSED PROCESSES directly or indirectly from TGC, its AFFILIATES, agents or representatives, (iv) the negligent or wrongful acts of TGC, its employees or agents. 13.2 FHCRC assumes responsibility for and shall defend, indemnify and hold TGC, its directors, officers, managers, agents and employees harmless from any and all liability, losses, expenses, damages, assessments and claims arising out of or resulting from the negligent or wrongful acts of FHCRC, its employees or agents in connection with the activities to be conducted under the RESEARCH PROGRAM. ARTICLE 14 - ARBITRATION 14.1 Any dispute, other than a question relating to patent validity, between the parties hereunder which cannot be resolved by good faith negotiation between the parties over a period of at least sixty (60) days shall be resolved by arbitration before a panel of three arbitrators under the then current rules and procedures of the American Arbitration Association (the "AAA"), or other rules and procedures as the parties may agree. Each party shall bear its own costs incurred in connection with such arbitration and the fees, expenses and costs of the AAA, the arbitrator(s) and the arbitration proceeding not incurred solely by one party shall be divided equally between the parties. The arbitral award shall be binding and conclusive on both parties and may be enforced in any court of competent jurisdiction. 19 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT ARTICLE 15 - NOTICES 15.1 All communications, including payments, notices, demands or requests required or permitted to be given hereunder, shall be given in writing and shall be: (a) personally delivered; (b) sent by facsimile or other electronic means of transmitting written documents; or (c) sent to the parties at their respective addresses indicated herein by registered or certified U.S. mail, return receipt requested and postage prepaid, or by private overnight mail courier service. The respective addresses to be used for all such payments, notices, demands or requests are as follows: If to FHCRC: Fred Hutchinson Cancer Research FHCRC 1124 Columbia Street, C2M-027 Seattle, Washington 98104 Attention: Catherine J. Hennings, Manager, Technology Transfer Facsimile: (206) 667-4732 With copies to: Douglas J. Shaeffer, Esq. Fred Hutchinson Cancer Research FHCRC 1124 Columbia Street, LY-240 Seattle, Washington 98104 Facsimile: (206) 667-6590 If to TGC: Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, WA 98101 Attention: H. Stewart Parker, President Facsimile: (206) 223-0288 ARTICLE 16 - CONFIDENTIALITY AND NON-DISCLOSURE 16.1 Any and all information relating to the LICENSED MATERIALS or RESEARCH PROGRAM furnished to either party (or its agents or employees) by the other party (or its laboratories or agents or employees), including but not limited to information regarding or relating to devices, cell lines, monoclonal antibodies, methods, processes, data regarding testing and experiments, drawings, documentation, patent applications and patents (when issued) and product development plans, is confidential, proprietary, trade secret information and any and all such information is hereinafter referred to as "Proprietary Information." (a) As used herein, "Proprietary Information" includes the following: 20 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT (i) written material which is clearly designated on its face as confidential and patent applications; (ii) oral disclosures, the content of which is within thirty (30) days after communication designated in writing as confidential, or which is so designated as confidential orally during oral disclosures or in contemporaneous written memoranda; and (iii) specimens, samples, and other physical materials which are prior to or at the time of disclosure designated in writing as confidential. (b) As used herein, "Proprietary Information" does not include: (i) information which at the time of disclosure to the receiving party is generally available to the public, or which after such disclosure becomes generally available to the public by publication or otherwise; (ii) information that is demonstrated to have been in the receiving party's possession prior to the time of disclosure by the disclosing party; (iii) information that is demonstrated by a preponderance of the evidence to have been independently developed by the receiving party's personnel without reference to or use of Proprietary Information disclosed by the disclosing party; and (iv) information received from a third party unless such information is obtained subject to a confidential disclosure agreement. 16.2 Each party agrees: (a) to hold in strict confidence and trust and maintain as confidential all Proprietary Information disclosed by the other party and any information derived therefrom; (b) not to disclose any such Proprietary Information or any information derived therefrom to any person, except to those employees or legal counsel of the receiving party who are required to receive the Proprietary Information for the purposes described in this Agreement and who are bound by the provisions of this Agreement; (c) not to export or otherwise disclose any such Proprietary Information to any person who is, or who the receiving party believes may be, located or may use the Proprietary Information outside the United 21 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT States; and (d) to use the Proprietary Information only for the purposes described in this Agreement. 16.3 Each party agrees that: all Proprietary Information disclosed by the other party will at all times be and remain the sole property of the disclosing party and the disclosing party is the sole owner of all patents, copyrights and other intellectual property rights and other proprietary rights related to the Proprietary Information disclosed by it. Nothing in this Agreement shall be construed as granting to or permitting to the receiving party any implied license in, or right or option to, license or use any intellectual property right (including but not limited to any patent right obtained by the disclosing party) relating to the Proprietary Information disclosed by it or any other right to use such Proprietary Information except as expressly provided herein and for any reason other than for the purposes described in this Agreement. 16.4 Immediately upon the termination of this Agreement, or upon either disclosing party's request, the receiving party will deliver to the disclosing party all Proprietary Information disclosed by the disclosing party and all documents and data storage media containing any such Proprietary Information and any and all copies thereof, and will delete all such Proprietary Information from its documents and data storage media, except that the parties shall maintain one copy of such Proprietary Information in its legal or corporate development files. 16.5 The obligations of confidentiality provided herein shall continue in force and effect for five (5) years from the date of termination of this Agreement, whether by lapse of the Term hereof or otherwise, unless extended or limited by mutual agreement executed in writing by an officer of each party. ARTICLE 17 - PATENT MARKING 17.1 Subsequent to the issuance of any patent based on the application(s) covered by LICENSED PATENT RIGHTS, TGC agrees to mark and to have marked by its sublicensees every LICENSED PRODUCT manufactured, used or sold by TGC, its AFFILIATES or its sublicensees in accordance with the statutes of the United States relating to the marking of patented articles. ARTICLE 18 - RIGHT TO PUBLISH 18.1 Nothing in this Agreement shall be construed as prohibiting FHCRC or its researchers from publishing any of the results of research conducted under the RESEARCH PROGRAM in reputable scientific journals. Notwithstanding the foregoing, INVESTIGATORS shall not publish or otherwise publicly disclose the results of their research hereunder, either orally or in writing, unless the proposed 22 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT disclosure is first submitted in manuscript or other written form to TGC for review, comment, consideration of appropriate patent action, and removal of Proprietary Information, at least thirty (30) days prior to any submission or other public disclosure. TGC may request an additional delay not to exceed forty five (45) days so that a patent application can be filed or other appropriate steps taken to protect Proprietary Information. ARTICLE 19 - MISCELLANEOUS 19.1 The rights and obligations of the parties under this Agreement shall be governed by and construed in accordance with the laws of the State of Washington. 19.2 This Agreement may not be amended except by an instrument in writing signed by both parties. 19.3 The Agreement shall be binding on the parties hereto and upon their respective heirs, administrators, successors and assigns. This Agreement may not be assigned or sublicensed by TGC or by operation of law without the prior written consent of FHCRC. 19.4 TGC acknowledges that FHCRC is a non-profit organization qualifying for and holding the status of an exempt organization under Section 501(c)(3) of the United States Internal Revenue Code. If the Internal Revenue Service determines, or a determination by FHCRC based on advice of legal or tax counsel is reasonably made, that any part or all of this Agreement will jeopardize FHCRC's Section 501(c)(3) status, the parties agree to meet and confer in good faith to amend this Agreement to the extent necessary to satisfy Internal Revenue Service requirements for retention of FHCRC'S Section 501(c)(3) status. If FHCRC and TGC cannot agree within 30 days after commencing negotiations regarding the amendments to be made to this Agreement in order for FHCRC to retain its Section 501(c)(3) status, FHCRC may terminate this Agreement effective upon giving written notice to TGC of termination under this Article 19. 19.5 TGC understands and acknowledges that agreements between FHCRC and agencies of the United States Government funding FHCRC's programs may contain clauses granting patent and/or other rights to the agencies or the U.S. Government; TGC agrees that the rights granted to it under this Agreement shall be subject to any rights of the agencies and the U.S. Government. In the event of a conflict between any of the provisions of this Agreement and the provisions of any U.S. Government agency funding agreement and/or regulation shall prevail and FHCRC will have no liability to TGC as a result of such conflict. 23 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT 19.6 Except as otherwise provided herein, FHCRC and its employees, including but not limited to the INVESTIGATORS, shall not use the name of TGC, its employees or agents, and TGC, including its employees, shall not use the name of FHCRC or any of its employees or agents in any advertising, publicity, news release, promotional materials or any public disclosure, whatsoever, EITHER WRITTEN OR ORAL, related to the existence of this Agreement or any actions or work undertaken pursuant to terms of this Agreement without the prior written consent of the other party. FHCRC shall have three (3) business days from the time it receives a proposed disclosure ("Review Period") to approve and/or provide comments to TGC with respect to such disclosure. In the event that TGC receives no communications from FHCRC regarding such disclosure within the Review Period, then FHCRC's consent of the public release of such disclosure shall be deemed to have been granted. 19.7 Upon the earlier of any: (i) testing or use in human subjects or (ii) sale of a LICENSED PRODUCT, TGC will have FHCRC named as an additional insured on TGC'S product liability insurance policies, with limits of at least $1,000,000 per claim and $5,000,000 annual aggregate. Such policies shall not be terminated without thirty (30) days prior written notice to FHCRC. If FHCRC's insurance costs can be shown to have increased solely because of this Agreement, and such increases are verified by an independent certified public accountant, TGC shall reimburse FHCRC for such increase within twenty (20) days of receiving written notice from FHCRC requesting such reimbursement and the parties shall attempt to agree to changes and revisions of this Agreement. If the parties fail to arrive at agreement within a reasonable time, or TGC does not reimburse FHCRC, FHCRC may by written notice terminate this Agreement. 19.8 All letters, documents, or other materials of a written or physical nature, required by or relating to this Agreement shall be in English and sent to the party at the address given in Article 15. 19.9 The parties to this Agreement recognize and agree that each is operating as an independent contractor and not as an agent of the other. This Agreement shall not constitute a partnership or joint venture, and neither party may be bound by the other to any contract, arrangement or understanding except as specifically stated herein. 19.10 Should a court of competent jurisdiction later consider any provision of this Agreement to be invalid, illegal, or unenforceable, it shall be considered severed from this Agreement. All other provisions, rights and obligations shall continue without regard to the severed provision, provided that the remaining provisions of this Agreement are in accord with the intention of the parties. 24 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT 19.11 In the event any party to this Agreement commences any action or proceeding, including an appeal of an action or proceeding, against the other, or otherwise retains an attorney, by reason of any breach or claimed breach of any provision of this Agreement, or to seek a judicial declaration of rights hereunder or judicial or equitable relief, the prevailing party in such action or proceeding shall be entitled to recover its reasonable attorneys' fees and costs. At the option of FHCRC, venue of any such legal or equitable action shall lie in Seattle, Washington. TGC hereby submits to the jurisdiction of the Federal District Court of Western Washington located in Seattle, Washington, and hereby agrees to accept service of process by certified mail, return receipt requested, effective upon delivery to TGC. IN WITNESS WHEREOF, the parties have executed this Agreement through duly authorized representatives as of the date first above written. TARGETED GENETICS CORPORATION By H. Stewart Parker ------------------------------ Name H. Stewart Parker ------------------------------ Title President and CEO ------------------------------ Date March 28, 1994 ------------------------------ FRED HUTCHINSON CANCER RESEARCH CENTER By Catherine J. Hennings ------------------------------ Name Catherine J. Hennings ------------------------------ Title Manager, Technology Transfer ------------------------------ Date March 28, 1994 ------------------------------ 25 FHCRC-TGC RESEARCH AND EXCLUSIVE LICENSE AGREEMENT READ AND AGREED TO: By Philip Greenberg, M.D. -------------------------- Name Philip Greenberg, M.D. -------------------------- Title Member, FHCRC -------------------------- Date 3/28/94 -------------------------- By Stanley Riddell, M.D. -------------------------- Name Stanley Riddell, M.D. -------------------------- Title Assistant Member -------------------------- Date 3/28/94 -------------------------- 26 APPENDIX A PATENT APPLICATIONS AND PATENTS
PATENT FILE OR APPLCTN. NO. COUNTRY ISSUE DATE TITLE/INVENTOR [ * ] [ * ] [ * ] [ * ] 07/764,596 U.S. September 24, 1991 METHOD FOR PRODUCING T-HELPER INDEPENDENT CYTOTOXIC T LYMPHOCYTES (P. Greenberg, R. Overell) 08/043,389 U.S. April 6, 1993 CHIMERIC CYTOKINE RECEPTORS IN LYMPHOCYTES (P. Greenberg, B. Nelson) - ------------------------------------------------------------------------------------------------------------------------------
[*] Confidential Treatment Requested 27 EX-10.10 3 PHS PATENT LICENSE AGREEMENT REDACTED VERSION EXHIBIT 10.10 To Targeted Genetics Corporation's Form 10-K For the Year Ended December 31, 1997 "[ * ]" = omitted, confidential material, which material has been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 10.10 NATIONAL INSTITUTES OF HEALTH CENTERS FOR DISEASE CONTROL PATENT LICENSE AGREEMENT - EXCLUSIVE COVER PAGE - ------------------------------------------------------------------------ For Office of Technology Transfer/NIH internal use only: - ------------------------------------------------------------------------ Patent License Number: L-059-93 Serial Numbers of Licensed Patents: USPA SN 07/891,962 Licensee: Targeted Genetics Corporation CRADA Number (if applicable): Not-applicable Additional Remarks: - ------------------------------------------------------------------------ This Patent License Agreement, hereinafter referred to as the "Agreement," consists of this Cover Page, an attached Agreement, a Signature Page, Appendix A (Patent or Patent Application), Appendix B (Fields of Use and Territory), Appendix C (Royalties), Appendix D (Modifications), and Appendix E (Benchmarks). This Cover Page serves to identify the Parties to this Agreement: 1) The National Institutes of Health ("NIH") or the Centers for Disease Control ("CDC"), hereinafter singly or collectively referred to as "PHS," agencies of the United States Public Health Service within the Department of Health and Human Services ("DHHS"); and 2) The person, corporation, or institution identified above and/or on the Signature Page, having offices at the address indicated on the Signature Page, hereinafter referred to as "Licensee." PHS PATENT LICENSE AGREEMENT-EXCLUSIVE PHS and Licensee agree as follows: 1. BACKGROUND ---------- 1.01 In the course of conducting biomedical and behavioral research, PHS investigators made inventions that may have commercial applicability. 1.02 By assignment of rights from PHS employees and other inventors, DHHS, on behalf of the United States Government, owns intellectual property rights claimed in any United States and foreign patent applications or patents corresponding to the assigned inventions. DHHS also owns any tangible embodiments of these inventions actually reduced to practice by PHS. 1.03 The Assistant Secretary for Health of DHHS has delegated to PHS the authority to enter into this Agreement for the licensing of rights to these inventions under 35 U.S.C. (S)(S) 200-212, the Federal Technology Transfer Act of 1986, 15 U.S.C. (S) 3710a, and/or the regulations governing the licensing of Government-owned inventions, 37 CFR Part 404. 1.04 PHS desires to transfer these inventions to the private sector through commercialization licenses to facilitate the commercial development of products and processes for public use and benefit. 1.05 Licensee desires to acquire commercialization rights to certain of these inventions in order to develop processes, methods, or marketable products for public use and benefit. 2. DEFINITIONS ----------- 2.01 "Licensed Patent Rights" shall mean: a) U.S. patent applications and patents listed in Appendix A, all divisions and continuations of these applications, all patents issuing from such applications, divisions, and continuations, and any reissues, reexaminations, and extensions of all such patents; 2 b) to the extent that the following contain one or more claims directed to the invention or inventions claimed in a) above: i) continuations-in-part of a) above; ii) all divisions and continuations of these continuations-in-part; iii) all patents issuing from such continuations-in-part, divisions, and continuations; and iv) any reissues, reexaminations, and extensions of all such patents; c) to the extent that the following contain one or more claims directed to the invention or inventions claimed in a) above: all counterpart foreign applications and patents to a) and b) above, including those listed in Appendix A. Licensed Patent Rights shall not include b) or c) above to the extent that they contain one or more claims directed to new matter which is not the subject matter of a claim in a) above. 2.02 "Licensed Product(s)" means tangible materials which, in the course of manufacture, use, or sale would, in the absence of this Agreement, infringe one or more claims of the Licensed Patent Rights that have not been held invalid or unenforceable by an unappealed or unappealable judgement of a court of competent jurisdiction. 2.03 "Licensed Process(es)" means processes which, in the course of being practiced would, in the absence of this Agreement, infringe one or more claims of the Licensed Patent Rights that have not been held invalid or unenforceable by an unappealed or unappealable judgment of a court of competent jurisdiction. 2.04 "Licensed Territory" means the geographical area identified in Appendix B. 2.05 "Net Sales" means the total gross receipts for sales of Licensed Products or practice of Licensed Processes by or on behalf of Licensee or its sublicensees, and from leasing, renting, or otherwise making Licensed Products available to others without sale or other dispositions, whether invoiced or not, less returns and allowances actually granted, packing costs, insurance costs, freight out, taxes or excise duties imposed on the transaction (if separately invoiced), and wholesaler and cash discounts in amounts customary in the trade. No deductions shall be made for commissions paid to individuals, whether they be with independent sales agencies or regularly 3 employed by Licensee, or sublicensees, and on its payroll, or for the cost of collections. 2.06 "First Commercial Sale" means the initial transfer by or on behalf of Licensee or its sublicensees of Licensed Products or the initial practice of a Licensed Process by or on behalf of Licensee or its sublicensees in exchange for cash or some equivalent to which value can be assigned for the purpose of determining Net Sales. 2.07 "Government" means the government of the United States of America. 2.08 "Licensed Fields of Use" means the fields of use identified in Appendix B. 3. GRANT OF RIGHTS --------------- 3.01 PHS hereby grants and Licensee accepts, subject to the terms and conditions of this Agreement, an exclusive license to Licensee under the Licensed Patent Rights in the Licensed Territory to make and have made, to use and have used, and to sell and have sold any Licensed Products in the Licensed Fields of Use and to practice and have practiced any Licensed Processes in the Licensed Fields of Use. 3.02 This Agreement confers no license or rights by implication, estoppel, or otherwise under any patent applications or patents of PHS other than Licensed Patent Rights regardless of whether such patents are dominant or subordinate to Licensed Patent Rights. 4. SUBLICENSING ------------ 4.01 Upon written approval by PHS, which approval will not be unreasonably withheld, Licensee may enter into sublicensing agreements under the Licensed Patent Rights. 4.02 Licensee agrees that any sublicenses granted by it shall provide that the obligations to PHS of Paragraphs 5.01-5.05, 8.01, 10.01, 10.02, 12.05, and 13.08-13.11 of this Agreement shall be binding upon the sublicensee as if it were a party to this Agreement. Licensee further agrees to attach copies of these Paragraphs to all sublicense agreements. 4 4.03 Any sublicenses granted by Licensee shall provide for the termination of the sublicense, or the conversion to a license directly between such sublicensees and PHS, at the option of the sublicensee, upon termination of this Agreement under Article 13. Such conversion is subject to PHS approval and contingent upon acceptance by the sublicensee of the remaining provisions of this Agreement. 4.04 Licensee agrees to forward to PHS a copy of each fully executed sublicense agreement postmarked within sixty (60) days of the execution of such agreement. 5. STATUTORY AND PHS REQUIREMENTS AND RESERVED GOVERNMENT RIGHTS ------------------------------------------------------------- 5.01 PHS reserves on behalf of the Government an irrevocable, nonexclusive, nontransferable, royalty-free license for the practice of all inventions licensed under the Licensed Patent Rights throughout the world by or on behalf of the Government and on behalf of any foreign government or international organization pursuant to any existing or future treaty or agreement to which the Government is a signatory. 5.02 Licensee agrees that products used or sold in the United States embodying Licensed Products or produced through use of Licensed Processes shall be manufactured substantially in the United States, unless a written waiver is obtained in advance from PHS. 5.03 Licensee acknowledges that PHS may enter into future Cooperative Research and Development Agreements (CRADAs) under the Federal Technology Transfer Act of 1986 that relate to the subject matter of this Agreement. Licensee agrees not to unreasonably deny requests for sublicense or cross-license rights from such future collaborators with PHS when acquiring such derivative rights is necessary in order to make a CRADA project feasible. Licensee may request an opportunity to join as a party to the proposed CRADA. 5.04 DHHS has responsibility for funding basic biomedical research, for funding medical treatment through programs such as Medicare and Medicaid, for providing direct medical care and, more generally, for protecting the health and safety of the public. Because of these 5 responsibilities, and the public investment in the research that culminated in the Licensed Patent Rights, PHS may require Licensee to submit documentation in confidence showing a reasonable relationship between the pricing of a Licensed Product, the public investment in that product, and the health and safety needs of the public. This paragraph shall not restrict the right of Licensee to price a Licensed Product or Licensed Process so as to obtain a reasonable profit for its sale or use. This Paragraph 5.04 does not permit PHS to set or dictate prices for Licensed Products or Licensed Processes. 5.05 In addition to the reserved license of Paragraph 5.01 above, PHS reserves the right to grant nonexclusive licenses to make and to use the inventions defined by the Licensed Patent Rights for purposes of research involving the inventions themselves, and not for purposes of commercial manufacture or in lieu of purchase if the inventions are available as commercial products for research purposes. The purpose of this research license is to encourage basic research, whether conducted at an academic or corporate facility. In order to safeguard the Licensed Patent Rights, however, PHS shall consult with Licensee before granting to commercial entities a research license or providing to them research samples of the materials claimed in the Licensed Patent Rights. 6. ROYALTIES AND REIMBURSEMENT --------------------------- 6.01 Licensee agrees to pay to PHS a noncreditable, nonrefundable license issue royalty as set forth in Appendix C within thirty (30) days from the date that this Agreement becomes effective. 6.02 Licensee agrees to pay to PHS a nonrefundable minimum annual royalty as set forth in Appendix C. The minimum annual royalty is due and payable on January 1 of each calendar year and may be credited against any earned royalties due for sales made in that year. The minimum annual royalty due for the first calendar year of this Agreement may be prorated according to the fraction of the calendar year remaining between the effective date of this Agreement and the next subsequent January 1. 6.03 Licensee agrees to pay PHS earned royalties as set forth in Appendix C. 6 6.04 Licensee agrees to pay PHS benchmark royalties as set forth in Appendix C. 6.05 A claim of a patent or patent application licensed under this Agreement shall cease to fall within the Licensed Patent Rights for the purpose of computing the minimum annual royalty and earned royalty payments in any given country on the earliest of the dates that a) the claim has been abandoned but not continued, b) the patent expires, c) the patent is no longer maintained by the Government, or d) all claims of the Licensed Patent Rights have been held to be invalid or unenforceable by an unappealed or unappealable decision of a court of competent jurisdiction or administrative agency. 6.06 No multiple royalties shall be payable because any Licensed Products or Licensed Processes are covered by more than one of the Licensed Patent Rights. 6.07 On sales of Licensed Products by Licensee to sublicensees or affiliated parties or on sales made in other than an arm's-length transaction, the value of the Net Sales attributed under this Article 6 to such a transaction shall be that which would have been received in an arm's-length transaction, based on sales of like quantity and quality products on or about the time of such transaction. 6.08 As an additional royalty, Licensee agrees to pay PHS, within sixty (60) days of PHS's submission of a statement and request for payment, an amount equivalent to all reasonable expenses previously incurred by PHS in the preparation, filing, prosecution, and maintenance of Licensed Patent Rights. Licensee further agrees to pay PHS annually, within sixty (60) days of PHS's submission of a statement and request for payment, a royalty amount equivalent to all such future patent expenses incurred during the previous calendar year, as of the date the statement and request for payment is sent by PHS to Licensee. Fifty percent (50%) of the cumulative amount of such payments may be credited against royalties due under Paragraph 6.03; however, the net royalty payment in any calendar year may not be lower than the minimum annual royalty specified in Appendix B. Licensee may elect to surrender its rights in any country of the Licensed Territory under any Licensed Patent Rights upon sixty (60) days' written notice to PHS and owe no payment obligation under this paragraph for subsequent patent-related expenses incurred in that country. 7 7. DOMESTIC AND FOREIGN PATENT FILING, PROSECUTION, AND MAINTENANCE ---------------------------------------------------------------- 7.01 PHS agrees to take responsibility for, but to consult with the Licensee in, the preparation, filing, prosecution, and maintenance of any and all patent applications or patents included in the Licensed Patent Rights and shall furnish copies of relevant patent- related documents to Licensee. 7.02 Each party shall promptly inform the other as to all matters that come to its attention that may affect the preparation, filing, prosecution, or maintenance of the Licensed Patent Rights and permit each other to provide comments and suggestions with respect to the preparation, filing, and prosecution of Licensed Patent Rights, which comments and suggestions shall be considered by the other party. 8. RECORD KEEPING -------------- 8.01 Licensee agrees to keep accurate and correct records of Licensed Products made, used, or sold and Licensed Processes practiced under this Agreement appropriate to determine the amount of royalties due PHS. Such records shall be retained for at least five (5) years following a given reporting period. They shall be available during normal business hours for inspection at the expense of PHS by an accountant or other designated auditor selected by PHS for the sole purpose of verifying reports and payments hereunder. The accountant or auditor shall only disclose to PHS information relating to the accuracy of reports and payments made under this Agreement. If an inspection shows an underreporting or underpayment in excess of five percent (5%) for any twelve (12) month period, then Licensee shall reimburse PHS for the cost of the inspection at the time Licensee pays the unreported royalties, including any late charges as required by Paragraph 7.06 of this Agreement. All payments required under this Paragraph shall be due within thirty (30) days of the date PHS provides Licensee notice of the payment due. 9. REPORTS ON PROGRESS, BENCHMARKS, SALES, AND PAYMENTS ---------------------------------------------------- 9.01 Prior to signing this Agreement, Licensee has provided to PHS a written commercialization plan ("Commercial Development Plan") 8 under which Licensee intends to bring the subject matter of the Licensed Patent Rights into commercial use. The Commercial Development Plan is hereby incorporated by reference into this Agreement. Based on this plan, performance benchmarks are determined as specified in Appendix E ("Benchmarks"). 9.02 Licensee shall provide written annual reports on its product development progress or efforts to commercialize under the Commercial Development Plan for each of the Licensed Fields of Use within sixty (60) days after December 31 of each calendar year. These progress reports shall include, but not be limited to: progress on research and development, status of applications for regulatory approvals, manufacturing, sublicensing, marketing, and sales during the preceding calendar year, as well as plans for the present calendar year. If reported progress differs from that projected in the Commercial Development Plan and Benchmarks, Licensee shall explain the reasons for such differences. Licensee may propose amendments in any such annual report to the Commercial Development Plan, acceptance of which by PHS may not unreasonably be denied. Licensee agrees to provide any additional data reasonably required by PHS to evaluate Licensee's performance. Licensee may amend the Benchmarks at any time upon written consent by PHS. PHS shall not unreasonably withhold approval of any request of Licensee to extend the time periods of this schedule if such request is supported by a reasonable showing by Licensee of diligence in its performance under the Commercial Development Plan and toward bringing the Licensed Products to the point of practical application as defined in 37 CFR 404.3(d). Licensee shall amend the Commercial Development Plan and Benchmarks at the request of PHS to address any Licensed Fields of Use not specifically addressed in the plan originally submitted. 9.03 Licensee shall report to PHS the date of the First Commercial Sale in each country in the Licensed Territory within thirty (30) days of such occurrence. 9.04 Licensee shall submit to PHS within sixty (60) days after each calendar half-year ending June 30 and December 31 a royalty report setting forth for the preceding half-year period the amount of the Licensed Products sold or Licensed Processes practiced by or on behalf of Licensee in each country within the Licensed Territory, the 9 Net Sales, and the amount of royalty accordingly due. With each such royalty report, Licensee shall submit payment of the earned royalties due. If no earned royalties are due to PHS for any reporting period, the written report shall so state. The royalty report shall be certified as correct by an authorized officer of Licensee and shall include a detailed listing of all deductions made under Paragraph 2.05 to determine Net Sales made under Article 6 to determine royalties due. 9.05 Licensee agrees to forward semi-annually to PHS a copy of such reports received by Licensee from its sublicensees during the preceding half-year period as shall be pertinent to a royalty accounting to PHS by Licensee for activities under the sublicense. 9.06 Royalties due under Article 6 shall be paid in U.S. dollars. For conversion of foreign currency to U.S. dollars, the conversion rate shall be the rate quoted in The Wall Street Journal on the day that the payment is due. All checks and bank drafts shall be drawn on United States banks and shall be payable to NIH/Patent Licensing at the address shown on the Signature Page below. Any loss of exchange, value, taxes, or other expenses incurred in the transfer or conversion to U.S. dollars shall be paid entirely by Licensee. All royalty payments due under this Agreement shall be mailed to the following address: NIH, P.O. Box 360120, Pittsburgh, Pennsylvania 15251-6120. The royalty report required by paragraph 9.04 of this Agreement shall accompany each such payment and a copy of such report shall also be mailed to PHS at its address for notices indicated on the Signature Page of this Agreement. 9.07 Late charges will be applied to any overdue payments as required by the U.S. Department of Treasury in the Treasury Fiscal Requirements Manual, Section 8025.40. The payment of such late charges shall not prevent PHS from exercising any other rights it may have as a consequence of the lateness of any payment. 9.08 All plans and reports required by this Article 9 and marked "confidential" by Licensee shall be treated by PHS as commercial and financial information obtained from a person and as privileged and confidential and, to the extent permitted by law, shall not be subject to disclosure under the Freedom of Information Act, 5 U.S.C. (S) 552. 10 10. PERFORMANCE ----------- 10.01 Licensee shall use its reasonable best efforts to introduce the Licensed Products into the commercial market or apply the Licensed Processes to commercial use as soon as practicable. "Reasonable best efforts" for the purpose of this provision shall include, but not be limited to, adherence to the Commercial Development Plan and performance of the Benchmarks. The efforts of a sublicensee shall be considered the efforts of Licensee. 10.02 Upon the First Commercial Sale, until the expiration of this Agreement, Licensee shall use its reasonable best efforts to keep Licensed Products and Licensed Processes reasonably accessible to the public. 11. INFRINGEMENT AND PATENT ENFORCEMENT ----------------------------------- 11.01 PHS and Licensee agree to notify each other promptly of each infringement or possible infringement, as well as any facts which may affect the validity, scope, or enforceability of the Licensed Patent Rights of which either Party becomes aware. 11.02 Pursuant to this Agreement and the provisions of Chapter 29 of Title 35, United States Code, Licensee may a) bring suit in its own name, at its own expense, and on its own behalf for infringement of presumably valid claims in the Licensed Patent Rights; b) in any such suit, enjoin infringement and collect for its use, damages, profits, and awards of whatever nature recoverable for such infringement; and c) settle any claim or suit for infringement of the Licensed Patent Rights-provided, however, that PHS and appropriate Government authorities shall have the first right to take such actions and shall have a continuing right to intervene in such suit. Licensee shall take no action to compel the Government either to initiate or to join in any such suit for patent infringement. Licensee may request the Government to initiate or joining any such suit if necessary to avoid dismissal of the suit. Should the Government be made a party to any such suit, Licensee shall reimburse the Government for any costs, expenses, or fees which the Government incurs as a result of such motion or other action, including any and all costs incurred by the Government in opposing any such motion or other action. Upon Licensee's payment of all costs incurred by the Government as a result of Licensee's joinder motion or other action, these actions by 11 Licensee will not be considered a default in the performance of any material obligation under this Agreement. In all cases, Licensee agrees to keep PHS reasonably apprised of the status and progress of any litigation. Before Licensee commences an infringement action, Licensee shall notify PHS and give careful consideration to the views of PHS and to any potential effects of the litigation on the public health in deciding whether to bring suit. 11.03 In any infringement action commenced under Paragraph 11.02, the expenses including costs, fees, attorney fees, and disbursements, shall be paid by Licensee. Up to fifty percent (50%) of such expenses may be credited against the royalties payable to PHS under Paragraph 6.03 under the Licensed Patent Rights in the country in which such a suit is filed. In the event that fifty percent (50%) of such expenses exceed the amount of royalties payable by Licensee in any calendar year, the expenses in excess may be carried over as a credit on the same basis into succeeding calendar years. A credit against litigation expenses, however, may not reduce the royalties due in any calendar year to less than the minimum annual royalty. Any recovery made by Licensee, through court judgment or settlement, first shall be applied to reimburse PHS for royalties withheld as a credit against litigation expenses and then to reimburse Licensee for its litigation expense. Any remaining recoveries shall be shared equally by Licensee and PHS. 11.04 PHS shall cooperate fully with Licensee in connection with an infringement action initiated under Paragraph 11.02. PHS agrees promptly to provide access to all necessary documents and to render reasonable assistance in response to a request by Licensee. 11.05 In the event that a declaratory judgment action alleging invalidity or non-infringement of any of the Licensed Patent Rights shall be brought against Licensee or raised by way of counterclaim or affirmative defense in an infringement suit brought by Licensee under Paragraph 11.02, pursuant to this Agreement and the provisions of Chapter 29 of Title 35, United States Code or other statutes, Licensee may a) defend the suit in its own name, at its own expense, and on its own behalf for presumably valid claims in the Licensed Patent Rights; b) in any such suit, ultimately to enjoin infringement and to collect for its use, damages, profits, and awards of whatever nature recoverable for such infringement; and c) settle 12 any claim or suit for declaratory judgment involving the Licensed Patent Rights-provided, however, that PHS and appropriate Government authorities shall have the first right to take such actions and shall have a continuing right to intervene in such suit. Licensee shall take no action to compel the Government either to initiate or to join in any such declaratory judgment action. Licensee may request the Government to initiate or joining any such suit if necessary to avoid dismissal of the suit. Should the Government be made a party to any such suit by motion or any other action of Licensee, Licensee shall reimburse the Government for any costs, expenses, or fees which the Government incurs as a result of such motion or other action. Upon Licensee's payment of all costs incurred by the Government as a result of Licensee's joinder motion or other action, these actions by Licensee will not be considered a default in the performance of any material obligation under this Agreement. If Licensee elects not to defend against such declaratory judgment action, PHS, at its option, may do so at its own expense. In all cases, Licensee agrees to keep PHS reasonably apprised of the status and progress of any litigation. Before Licensee commences an infringement action, Licensee shall notify PHS and give careful consideration to the views of PHS and to any potential effects of the litigation on the public health in deciding whether to bring suit. 12. NEGATION OF WARRANTIES AND INDEMNIFICATION ------------------------------------------ 12.01 PHS offers no warranties other than those specified in Article 1. 12.02 PHS does not warrant the validity of the Licensed Patent Rights and makes no representations whatsoever with regard to the scope of the Licensed Patent Rights, or that the Licensed Patent Rights may be exploited without infringing other patents or other intellectual property rights of third parties. 12.03 PHS MAKES NO WARRANTIES, EXPRESSED OR IMPLIED, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF ANY SUBJECT MATTER DEFINED BY THE CLAIMS OF THE LICENSED PATENT RIGHTS. 12.04 PHS does not represent that it will commence legal actions against third parties infringing the Licensed Patent Rights. 13 12.05 Licensee shall indemnify and hold PHS, its employees, students, fellows, agents, and consultants harmless from and against all liability, demands, damages, expenses, and losses, including but not limited to death, personal injury, illness, or property damage in connection with or arising out of a) the use by or on behalf of Licensee, its sublicensees, directors, employees, or third parties of any Licensed Patent Rights, or b) the design, manufacture, distribution, or use of any Licensed Products, Licensed Processes or materials, or other products or processes developed in connection with or arising out of the Licensed Patent Rights. Licensee agrees to maintain a liability insurance program consistent with sound business practice. 13. TERM, TERMINATION, AND MODIFICATION OF RIGHTS --------------------------------------------- 13.01 This Agreement is effective when signed by all parties and shall extend to the expiration of the last to expire of the Licensed Patent Rights unless sooner terminated as provided in this Article 13. 13.02 In the event that Licensee is in default in the performance of any material obligations under this Agreement, and if the default has not been remedied within ninety (90) days after the date of notice in writing of such default, PHS may terminate this Agreement by written notice. 13.03 At least thirty (30) days prior to filing a petition in bankruptcy, Licensee must inform PHS in writing of its intention to file the petition in bankruptcy or of a third party's intention to file an involuntary petition in bankruptcy. 13.04 In the event that Licensee becomes insolvent, files a petition in bankruptcy, has such a petition filed against it, determines to file a petition in bankruptcy, or receives notice of a third party's intention to file an involuntary petition in bankruptcy, Licensee shall immediately notify PHS in writing. Furthermore, PHS shall have the right to terminate this Agreement by giving Licensee written notice. Termination of this Agreement is effective upon Licensee's receipt of the written notice. 13.05 Licensee shall have a unilateral right to terminate this Agreement and/or any licenses in any country by giving PHS sixty (60) days' written notice to that effect. 14 13.06 PHS shall specifically have the right to terminate or modify, at its option, this Agreement, if PHS determines that the Licensee: 1) is not executing the Commercial Development Plan submitted with its request for a license and the Licensee cannot otherwise demonstrate to PHS's satisfaction that the Licensee has taken, or can be expected to take within a reasonable time, effective steps to achieve practical application of the Licensed Products or Licensed Processes; 2) has not achieved the Benchmarks as may be modified under Paragraph 9.02; 3) has willfully made a false statement of, or willfully omitted, a material fact in the license application or in any report required by the license agreement; 4) has committed a substantial breach of a covenant or agreement contained in the license; 5) is not keeping Licensed Products or Licensed Processes reasonably available to the public after commercial use commences; 6) cannot reasonably satisfy unmet health and safety needs; or 7) cannot reasonably justify a failure to comply with the domestic production requirement of Paragraph 5.01 unless waived. In making this determination, PHS will take into account the normal course of such commercial development programs conducted with sound and reasonable business practices and judgment and the annual reports submitted by Licensee under Paragraph 9.02. Prior to invoking this right, PHS shall give written notice to Licensee providing Licensee specific notice of, and a ninety (90) day opportunity to respond to, PHS's concerns as to the previous items 1) to 7). If Licensee fails to alleviate PHS's concerns as to the previous items 1) to 7) or fails to initiate corrective action to PHS's satisfaction, PHS may terminate this Agreement. 13.07 When the public health and safety so require, and after written notice to Licensee providing Licensee a sixty (60) day opportunity to respond, PHS shall have the right to require Licensee to grant sublicenses to responsible applicants, on reasonable terms, in any Licensed Fields of Use under the Licensed Patent Rights, unless Licensee can reasonably demonstrate that the granting of the sublicense would not materially increase the availability to the public of the subject matter of the Licensed Patent Rights. PHS will not require the granting of a sublicense unless the responsible applicant has first negotiated in good faith with Licensee. 13.08 PHS reserves the right according to 35 U.S.C. (S) 209(f)(4) to terminate or modify this Agreement if it is determined that such 15 action is necessary to meet requirements for public use specified by Federal regulations issued after the date of the license and such requirements are not reasonably satisfied by Licensee. 13.09 Within thirty (30) days of receipt of written notice of PHS's unilateral decision to modify or terminate this Agreement, Licensee may, consistent with the provisions of 37 CFR (S) 404.11, appeal the decision by written submission to the Director of NIH or designee. The decision of the NIH Director or designee shall be the final agency decision. Licensee may thereafter exercise any and all administrative or judicial remedies that may be available. 13.10 Within ninety (90) days of termination of this Agreement under this Article 13 or expiration under Paragraph 3.02, a final report shall be submitted by Licensee. Any royalty payments, including those related to patent expense, due to PHS shall become immediately due and payable upon termination or expiration. If terminated under this Article 13, sublicensees may elect to convert their sublicenses to direct licenses with PHS pursuant to Paragraph 4.03. 14. GENERAL PROVISIONS ------------------ 14.01 Neither Party may waive or release any of its rights or interests in this Agreement except in writing. The failure of the Government to assert a right hereunder or to insist upon compliance with any term or condition of this Agreement shall not constitute a waiver of that right by the Government or excuse a similar subsequent failure to perform any such term or condition by Licensee. 14.02 This Agreement constitutes the entire agreement between the Parties relating to the subject matter of the Licensed Patent Rights, and all prior negotiations, representations, agreements, and understandings are merged into, extinguished by, and completely expressed by this Agreement. 14.03 The provisions of this Agreement are severable, and in the event that any provision of this Agreement shall be determined to be invalid or unenforceable under any controlling body of law, such determination shall not in any way affect the validity or enforceability of the remaining provisions of this Agreement. 16 14.04 If either Party desires a modification to this Agreement, the Parties shall, upon reasonable notice of the proposed modification by the Party desiring the change, confer in good faith to determine the desirability of such modification. No modification will be effective until a written amendment is signed by the signatories to this Agreement or their designees. 14.05 The construction, validity, performance, and effect of this Agreement shall be governed by Federal law as applied by the Federal courts in the District of Columbia. 14.06 All notices required or permitted by this Agreement shall be given by prepaid, first class, registered or certified mail properly addressed to the other Party at the address designated on the following Signature Page, or to such other address as may be designated in writing by such other Party, and shall be effective as of the date of the postmark of such notice. 14.07 This Agreement shall not be assigned by Licensee except a) with the prior written consent of PHS, such consent to be reasonably given; or b) as part of a sale or transfer of substantially the entire business of Licensee relating to operations which concern this Agreement. Licensee shall notify PHS within ten (10) days of any assignment of this Agreement by Licensee. 14.08 Licensee agrees in its use of any PHS-supplied materials to comply with all applicable statutes, regulations, and guidelines, including Public Health Service and National Institutes of Health regulations and guidelines. Licensee agrees not to use the materials for research involving human subjects or clinical trials in the United States without complying with 21 CFR Part 50 and 45 CFR Part 46. Licensee agrees not to use the materials for research involving human subjects or clinical trials outside of the United States without notifying PHS, in writing, of such research or trials and complying with the applicable regulations of the appropriate national control authorities. Written notification to PHS of research involving human subjects or clinical trials outside of the United States shall be given no later than sixty (60) days prior to commencement of such research or trials. 14.09 Licensee acknowledges that it is subject to and agrees to abide by the United States laws and regulations (including the Export 17 Administration Act of 1979 and Arms Export Control Act) controlling the export of technical data, computer software, laboratory prototypes, biological material, and other commodities. The transfer of such items may require a license from the cognizant agency of the U.S. Government or written assurances by Licensee that it shall not export such items to certain foreign countries without prior approval of such agency. PHS neither represents that a license is or is not required or that, if required, it shall be issued. 14.10 Licensee agrees to mark the Licensed Products or their packaging sold in the United States with all applicable U.S. patent numbers and similarly to indicate "Patent Pending" status. All Licensed Products manufactured in, shipped to, or sold in other countries shall be marked in such a manner as to preserve PHS patent rights in such countries. 14.11 By entering into this Agreement, PHS does not directly or indirectly endorse any product or service provided, or to be provided, by Licensee whether directly or indirectly related to this Agreement. Licensee shall not state or imply that this Agreement is an endorsement by the Government, PHS, any other Government organizational unit, or any Government employee. Additionally, Licensee shall not use the names of NIH, CDC, or PHS or their employees in any advertising, promotional, or sales literature without the prior written consent of PHS. 14.12 The Parties agree to attempt to settle amicably any controversy or claim arising under this Agreement or a breach of this Agreement, except for appeals of modification or termination decisions provided for in Article 13. Licensee agrees first to appeal any such unsettled claims or controversies to the Director of NIH, or designee, whose decision shall be considered the final agency decision. Thereafter, Licensee may exercise any administrative or judicial remedies that may be available. 14.13 Nothing relating to the grant of a license, nor the grant itself, shall be construed to confer upon any person any immunity from or defenses under the antitrust laws or from a charge of patent misuse, and the acquisition and use of rights pursuant to 37 CFR Part 404 shall not be immunized from the operation of state or Federal law by reason of the source of the grant. 18 14.14 Paragraphs 4.03, 8.01, 9.06, 9.07, 12.01-12.05, 13.09, 13.10, and 14.12 of this Agreement shall survive termination of this Agreement. SIGNATURES BEGIN ON NEXT PAGE 19 PHS PATENT LICENSE AGREEMENT - EXCLUSIVE SIGNATURE PAGE -------------- FOR PHS: by: Barbara McGarey 3/18/94 -------------------------- --------------- Barbara McGarey, J.D. Date Deputy Director, Office of Technology Transfer National Institutes of Health Mailing Address for Notices: Office of Technology Transfer National Institutes of Health Box OTT Bethesda, Maryland 20892 FOR Licensee (Upon information and belief, the undersigned expressly certifies or affirms that the contents of any statements of Licensee made or referred to in this document are truthful and accurate.): by: H. Stewart Parker March 10, 1994 ----------------------------- ----------------- H. Stewart Parker Date President and Chief Executive Officer Targeted Genetics Corporation Mailing Address for Notices: Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, WA 98101 20 APPENDIX A - PATENT OR PATENT APPLICATION ----------------------------------------- Patent or Patent Application: U.S. Patent Application SN 07/891,962 entitled "Modified Adeno-Associated Virus Vector Capable Of Expression From A Novel Promoter" and corresponding foreign applications. 21 APPENDIX B - LICENSED FIELDS OF USE AND TERRITORY ------------------------------------------------- Licensed Territory: World-wide. Licensed Fields of Use: Vector-based gene therapy for cystic fibrosis. 22 APPENDIX C - ROYALTIES ---------------------- Royalties: Licensee agrees to pay to PHS a noncreditable, nonrefundable license issue royalty in the amount of [ * ] according to the following payment schedule: A. [ * ] within thirty (30) days from the Effective Date; and B. [ * ] within three hundred sixty-five (365) days from the Effective Date. Licensee agrees to pay to PHS a nonrefundable minimum annual royalty in the amount of [ * ]. Licensee agrees to pay PHS earned royalties on Net Sales as follows: A. [ * ] of Net Sales by Licensee or an Affiliate of Licensee of all Licensed Products manufactured and sold in the Licensed Territory; and; B. Licensee shall be entitled to a [ * ] credit against the earned royalty rate for each percent of royalty in excess of [ * ] Licensee must pay to other unaffiliated licensors for the manufacture and sale of Licensed Products. Said reduction, however, shall not reduce the royalty rate for Licensed Products below [ * ] provided for under Paragraph A above. Licensee agrees to pay PHS Sublicensing Royalties as follows: A. [ * ] of Net Sales by Sublicensee, or an Affiliate of Sublicensee of all Licensed Products manufactured and sold in the Licensed Territory plus [ * ] of the value of any consideration received in granting the sublicense. B. Licensee shall be entitled to a [ * ] credit against the earned sublicensing royalty rate for each percent of royalty in excess of [ * ]. Sublicensee must pay to other unaffiliated licensors for the manufacture and sale of Licensed Products. Said reduction, however, shall not reduce the sublicensing royalty rate for Licensed Products [ * ] provided for under Paragraph A above. [*] Confidential Treatment Requested 23 Licensee agrees to pay PHS benchmark royalties as follows: [ * ] upon first human use of Licensed Products. [ * ] upon approval of each Product License Application (PLA) for Licensed Products. 24 APPENDIX D - MODIFICATIONS -------------------------- PHS and Licensee agree to the following modifications to the Articles and Paragraphs of this Agreement: ARTICLE FIVE 5.03 (revised) Licensee acknowledges that PHS may enter into future Cooperative Research and Development Agreements (CRADAs) under the Federal Technology Transfer Act of 1986 that relate to the subject matter of this Agreement. Licensee agrees not to unreasonably deny requests for sublicense or cross license rights from such future collaborators with PHS when acquiring such derivative rights is necessary in order to make a CRADA project feasible. Licensee may request an opportunity to join as a party to the proposed CRADA. Notwithstanding the foregoing, the grant of such derivative rights to a prospective PHS collaborator by Licensee shall include the right to sell or have sold the inventions defined by the Licensed Patent Rights in Licensed Fields of Use only at the option of Licensee. 5.05 (revised) In addition to the reserved license of Paragraph 5.01 above, PHS reserves the right to grant nonexclusive licenses to make and to use, but not to sell or have sold, the inventions defined by the Licensed Patent Rights for purposes of research involving the inventions themselves, and not for purposes of commercial manufacture or in lieu of purchase if the inventions are available as commercial products for research purposes. The purpose of this research license is to encourage basic research, whether conducted at an academic or corporate facility. In order to safeguard the Licensed Patent Rights, however, PHS shall consult with Licensee before granting to commercial entities a research license or providing to them research samples of the materials claimed in the Licensed Patent Rights. In the event that Licensee can provide convincing written evidence to PHS that a commercial entity that has been granted a research license to Licensed Patent Rights is developing the inventions for commercial manufacture or in lieu of purchase if the inventions are available as commercial products, then Licensee can request that PHS terminate its research license with such commercial entities, such request not to be unreasonably denied. 25 ARTICLE SIX 6.01 (revised) Licensee agrees to pay to PHS a noncreditable, nonrefundable license issue royalty as set forth in Appendix C. 6.05 (revised) A claim of a patent or patent application licensed under this Agreement shall cease to fall within the Licensed Patent Rights for the purpose of computing the minimum annual royalty and earned royalty payments in any given country on the earliest of the dates that a) the claim has been abandoned but not continued, b) the patent expires, c) the patent is no longer maintained by the Government or Licensee, or d) all claims of the Licensed Patent Rights have been held to be invalid or unenforceable by an unappealed or unappealable decision of a court of competent jurisdiction or administrative agency. ARTICLE SEVEN 7.01 (revised) Upon Effective Date, Licensee agrees to take the responsibility and pay for, but to consult with PHS, in the preparation, filing, prosecution, and maintenance of any and all patent applications or patents included in the Licensed Patent Rights and shall furnish copies of relevant patent-related documents to PHS, who shall retain its principle power of attorney. Fifty percent (50%) of the cumulative amount of such payments may be credited against royalties due under Paragraph 6.03; however, the net royalty payment in any calendar year may not be lower than the minimum annual royalty specified in Appendix B. Licensee may elect to surrender its rights in any country of the Licensed Territory under any Licensed Patent Rights upon sixty (60) days' written notice to PHS and owe no payment obligation under this paragraph for subsequent patent-related expenses incurred in that country. ARTICLE NINE 9.04 (revised) Beginning after the date of the First Commercial Sale, Licensee shall submit to PHS within sixty (60) days after each calendar half- year ending June 30 and December 31 a royalty report setting forth for the preceding half-year period the amount of the Licensed Products sold or Licensed Processes practiced by or on behalf of Licensee in each country within the Licensed Territory, the Net Sales, and the amount of royalty accordingly due. With each such royalty report, Licensee shall submit payment of the earned royalties due. If no earned royalties are due to PHS for any reporting period, the written report shall so state. The royalty report shall be certified as correct by an authorized officer of Licensee and shall include a detailed listing of all deductions made under Paragraph 2.05 to determine Net Sales made under Article 6 to determine royalties due. 26 ARTICLE THIRTEEN 13.01 (revised) This Agreement is effective when signed by all parties ("Effective Date") and shall extend to the expiration of the last to expire of the Licensed Patent Rights unless sooner terminated as provided in this Article 13. 27 APPENDIX E - BENCHMARKS ----------------------- Licensee agrees to the following Benchmarks for its performance under this Agreement and, within ten (10) days of achieving a Benchmark, shall notify PHS that the Benchmark has been achieved: 1. Complete development of a manufacturing process for a Licensed Product within nine (9) months of the Effective Date. 2. Initiate toxicology studies for a Licensed Product within twelve (12) months of the Effective Date. 3. File an investigational New Drug (IND) application for a Licensed Product within eighteen (18) months of the Effective Date. 4. Initiate Phase I clinical trials for a Licensed Product within twenty- four (24) months of the Effective Date. 5. Initiate Phase II or equivalent (e.g. Phase Ib) clinical trials for a Licensed Product within forty-eight (48) months of the Effective Date. 6. Initiate Phase III or equivalent (e.g. Phase II/III) clinical trials for a Licensed Product within eighty-four (84) months of the Effective Date. 28 TARGETED GENETICS CORPORATION COMMERCIAL DEVELOPMENT PLAN U.S.P.A. 07/891,962 BACKGROUND Cystic fibrosis (CF) is an autosomal recessive disease that afflicts 30,000 people in the United States and 60,000 worldwide. The hallmarks of the disease include thick, dehydrated airway mucus, chronic Pseudomonas lung infection, pancreatic insufficiency, bile duct obstruction, infertility in males, reduced fertility in females, intestinal obstruction, nasal polyp formation and chronic sinusitis. CF is caused by a defect in a protein called CFTR, found in epithelial cells. Approximately 90% of the mortality in CF patients is related to pulmonary disease, caused by Pseudomanas infection and airway inflammation. It is believed that the pathology associated with CF may begin very early in life. Thus, treating the patient very early in life before significant lung disease occurs may be crucial. Currently, the average life span of a CF patient is 29. Recently, Genentech's DNase received a unanimous recommendation for approval by an FDA advisory committee. DNase is a useful product for the treatment of the effects of CF, but does not address the causes of this disease. Several gene therapy companies have developed adenovirus vector systems to deliver the CFTR gene into the lungs of CF patients. The single ongoing clinical trial with an adenovirus delivery system, however, has yielded toxicity problems relating to lung tissue inflammation caused by the vector. These results may serve to confirm preclinical animal studies conducted previously with adenovirus-CFTR vectors where serious lung inflammation was also observed. In addition to this toxicity concern, adenovirus is unable to sustain expression of the CFTR gene in vivo beyond a few weeks. Liposomes, which are in preclinical development as delivery vehicles for the CFTR gene, have a similar limitation. TGC APPROACH Adeno-associated virus (AAV) is a non-pathogenic human isolate which integrates stably and with high efficiency into the genome of respiratory epithelial cells. This type of vector may be used for stable correction of the gene defect early in life, prior to onset of irreversible lung disease. 29 TGC will initially deliver the Licensed Product vector directly into lungs of patients via a bronchoscope. An aerosol delivery system may be developed for the vector if treatment is required more than two or three times per year. Prior to initiation of clinical trials, TGC will be required to develop a manufacturing process for the Licensed Product. It is expected that this will be completed by the end of 1994. In parallel with this effort, the company will initiate toxicology studies in large animals at Johns Hopkins University. The project is expected to be completed by the first quarter of 1995. An Investigational New Drug Application is scheduled to be filed by the end of 1995, with Phase I clinical studies slated to begin by the first quarter of 1996. Phase I clinical studies for the Licensed Product will be conducted at Johns Hopkins University under the director of Dr. Terence Flotte. Dr. Flotte recently completed studies at Johns Hopkins that demonstrated that CFTR expression could be sustained for up to six months in the lungs of rabbits receiving direct in vivo delivery of the Licensed Product. The sequence of clinical trials needed to move the Licensed Product into PLA filing position differs substantially from standard clinical trial design. The first Phase I trial will be designed to evaluate toxicity in adult CF patients following delivery to a single lung lobe. Subsequent Phase Ib or Phase II studies are expected to be initiated by early 1998, and will be designed to evaluate, from a safety and efficacy standpoint, bilateral whole lung delivery in adults, repeated delivery of vector, as well as delivery to neonatal and pediatric populations. Phase III or Phase II/III clinical studies are expected to begin by the first quarter of 2001, and will be designed on the basis of the results from the Phase Ib or Phase II trials, as well as from additional pre- clinical studies that may be conducted in parallel with the clinical trials. Among the factors that will dictate how the Phase III (or II/III) trials are designed are those following: . Whether differential toxicity and/or efficacy profiles are observed between the pediatric and adult populations enrolled in the trial . Whether adult patients in the trial derived significant efficacy from the therapy in the setting of chronic inflammation and scarring. . Whether repeated delivery or non-bronchoscopic delivery was necessary for long-term efficacy of the vector. Given the uncertainty regarding the design of the Phase III or Phase II/III trials, it is difficult at this stage to predict when a Product Licensing Application will be filed for the Licensed Product. 30 EX-10.11 4 EXCLUSIVE LICENSE AGREEMENT REDACTED VERSION EXHIBIT 10.11 To Targeted Genetics Corporation's Form 10-K For the Year Ended December 31, 1997 "[ * ]" = omitted, confidential material, which material has been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 10.11 EXCLUSIVE LICENSE AGREEMENT THIS AGREEMENT is made and entered into this 14th day of March 1994 by and between: Medical College of Ohio, a public institution of higher education, having administrative offices in Toledo, Ohio 43699 (hereinafter referred to as "LICENSOR") and Targeted Genetics Corporation, having administrative offices in Seattle, Washington 98101, (hereinafter referred to as "LICENSEE"). WHEREAS, Dr. James Trempe and Qicheng Yang, while employed by the Medical College of Ohio, has invented a technology entitled "Cell Lines that Inducibly Express Adeno-associated Virus (AAV) Proteins" (hereinafter referred to as the "Invention") and Dr. Trempe is under obligation to assign all his rights, title and interest in and to the invention to LICENSOR, and LICENSOR will take appropriate steps to have Dr. Trempe assign such rights to LICENSOR; WHEREAS, the Invention was developed with the financial support of the National Institutes of Health, the March of Dimes Birth Defects Foundation and the Ohio Cancer Research Associates which have an interest in seeing the Invention used in a manner consistent with the public interest; WHEREAS, LICENSOR warrants and represents that upon assignment of the Invention to LICENSOR that it will be the sole and exclusive owner of all Dr. Trempe's rights, title and interest in and to the Invention or, should patent rights not be obtainable, to Know-how provided by Dr. Trempe relating to the Invention, and in and to any patent application(s), both foreign and domestic, that are pending and/or may hereafter be filed on the Invention; WHEREAS, LICENSEE desires to obtain an exclusive license under any and all of LICENSOR's interest in Patent Rights, both foreign and domestic, that may hereafter be sought and/or granted on the Invention, granting to LICENSEE the exclusive right to make, have made, use and/or sell the Invention; WHEREAS, LICENSOR desires that the aforesaid Invention be developed, utilized and commercially exploited to the fullest extent and is willing to grant an exclusive license to LICENSEE in accordance with the terms and conditions hereinafter specified; NOW, THEREFORE, the LICENSOR and LICENSEE agree as follows: ARTICLE I DEFINITIONS ----------- 1.1 "Licensed Patent Rights", as used herein, shall mean U.S. Patent Application Serial No. 08/151,065 and any other patent applications or patents covering "Licensed Materials". The term "Licensed Patent Rights" shall include any divisions, continuations, continuation-in-part or reissues, and all foreign counterparts thereof, covering "Licensed Materials". 1.2 "Licensed Materials", as used herein, shall mean cell lines that inducibly express adeno-associated virus (AAV) proteins developed by James P. Trempe, Ph.D., Biochemistry & Molecular Biology, MCO (hereinafter referred to as "Investigator"), and improvements made by "Investigator" to such cell lines which exist as of the date of execution of this Agreement or are conceived of and reduced to practice by "Investigator" during the five (5) year period beginning on the effective date of this Agreement and are owned by LICENSOR. 1.3 "Licensed Rights", as used herein, shall mean Licensed Patent Rights and Licensed Know How. 1.4. "Licensed Product(s)", as used herein, shall mean any composition of matter, product, apparatus, kit or component part thereof, and any process, procedure or method which cannot be developed, manufactured, used or sold without utilizing Licensed Rights. 1.4.1 "Valid Claim" as used herein, means any claim, or claims, in any granted, unexpired, or judicially validated claim or claims of Patent Rights or of any pending claim in any then pending but unissued patent application which has not been held unenforceable, unpatentable, or invalid by a decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer. 1.5 "Licensed Know-how", as used herein, shall mean any method, procedure, process, composition of matter, biological material or other subject matter within the knowledge and possession of the Investigator on the effective date of this agreement which is incorporated or becomes part of the Licensed Patent Rights and which is disclosed by LICENSOR to LICENSEE and is identified as Licensed Know-how in writing by LICENSOR within 30 days thereafter. 2 1.6 "Net Sales Revenue", as used herein, shall mean the gross receipts, royalties, fees or other valuable consideration of any kind received by or credited to the benefit of the LICENSEE for the sale of Licensed Products to unaffiliated third parties, less the following deductions: i) Trade or quantity discounts actually allowed and taken in such amounts as are customary; ii) Amounts repaid or credited by reason of timely rejections or returns. 1.7 "Affiliates" shall mean any company, corporation, or business in which LICENSEE owns or controls at least a fifty percent (50%) ownership interest or which owns or controls at least a fifty percent (50%) ownership interest of LICENSEE. 1.7.1 "Non-Royalty Income", as used herein, shall mean any licensing fees, upfront fees, milestone payments, equity, or any equivalent of the foregoing, that is explicitly due to or receivable by LICENSEE from a third party in consideration for a grant by LICENSEE to make, have made, use or sell LICENSED PRODUCTS or LICENSED RIGHTS. 1.8 The "Effective Date" of this Agreement shall mean ________________. ARTICLE II GRANT ----- 2.1 LICENSOR hereby grants to LICENSEE and its Affiliates a worldwide exclusive license of LICENSOR's entire interest under Licensed Patent Rights, Licensed Know-how and Licensed Materials to make, have made, use and sell (including to sell for resale by others) Licensed Product(s). Nothing in this paragraph shall preclude LICENSOR from meeting its obligations to grant certain rights to the U.S. Government, the March of Dimes or the Ohio Cancer Research Associates, as required by those organizations. 2.2 LICENSOR hereby grants to LICENSEE under Licensed Patent Rights, Licensed Know-how and Licensed Materials the exclusive right to grant one or more non-exclusive sub-licenses to make, have made, use and sell Licensed Product(s) provided only that such sub-licenses are granted by LICENSEE to such sub-licensees on terms no less favorable to LICENSOR than provided for herein. 3 2.3 LICENSOR reserves unto itself the personal right to make, have made, use and publish information concerning Licensed Product(s) and Licensed Know-How for purposes of scholarly research by or on behalf of LICENSOR only, and for no other purpose; provided only, that LICENSOR agrees to notify LICENSEE of any information to be publicly disseminated by LICENSOR relating to Licensed Product(s) at least ninety (90) days prior to such public dissemination so that LICENSEE can take any steps deemed necessary by it to preserve domestic and/or foreign patent rights. All aforementioned restrictions on the LICENSOR shall terminate five (5) years after the effective date of this agreement, unless an extension is requested in writing by LICENSEE and approved by LICENSOR, such approval not to be unreasonably withheld. Notwithstanding the foregoing, LICENSOR shall not distribute Licensed Materials to commercial third parties without the prior written consent of LICENSEE. LICENSOR shall have the right to distribute Licensed Materials to not-for-profit third parties under terms of a materials transfer agreement incorporated herein as Attachment A. 2.4 LICENSOR shall provide LICENSEE with sufficient quantities of Licensed Material TO enable LICENSEE to make Licensed Product(s). ARTICLE III COMPENSATION-ROYALTIES ---------------------- 3.1 LICENSEE agrees to pay to LICENSOR a royalty of [ * ] of the Net Sales Revenue derived by LICENSEE, and its Affiliates or sub-licensees, from the sale of Licensed Product(s) covered by Licensed Patent Rights throughout the term of this Agreement on a country-by country basis. Notwithstanding the foregoing, in the event that biological materials, patent rights or know-how licensed by LICENSEE from a third party, are required for the manufacture, use or sale (including as part of) a Licensed Product covered by a Valid Claim, LICENSEE shall pay LICENSOR a royalty of [ * ] on the Nets Sales Revenue of Licensed Products on a country-by-country basis. 3.2 LICENSEE agrees to pay to LICENSOR a royalty of [ * ] of the Net Sales Revenue derived by LICENSEE, and its Affiliates or sub-licensees, from the sale of Licensed Products in any country where no Licensed Patent Rights are in effect at the time of such sales. If there are no Licensed Patent Rights under article 1.1 hereof, the term of this Agreement shall extend for ten (10) years from the effective date of the Agreement. [*] Confidential Treatment Requested 4 3.3 The obligation to pay LICENSOR a royalty under this Article III is imposed only once with respect to the same unit of Licensed Product regardless of the number of Valid Claims or Patent Rights covering the same. 3.4 LICENSEE agrees to pay LICENSOR the following sums within thirty (30) days of the time that each of the milestones listed below related to the Licensed Product is first reached: [ * ] upon execution of this Agreement [ * ] upon successful completion of Phase I clinical trials; [ * ] upon successful completion of Phase 111 clinical trials; [ * ] upon FDA approval of a New Drug Application. 3.5 Royalty payments made pursuant to Articles 3.1 and 3.2, supra, shall be made quarterly for the three (3) month periods ending March 31, June 30, September 30 and December 31 of each calendar year and shall be due and payable within two (2) months of the termination of each quarter--i.e., such payments shall be due or payable on or before May 31, August 31, November 31 and the last day of February each calendar year. 3.6 All monies due to LICENSOR hereunder shall be paid in United States dollars. LICENSEE shall be responsible for making the payment to the LICENSOR. The rate of exchange to be used in computing the amount of currency equivalent to United States dollars due to LICENSOR shall be made at the rate of exchange in effect at Chase Manhattan Bank on the last business day of the calendar month in which payment falls due. 3.7 LICENSEE shall also pay to LICENSOR a percentage of [ * ] of all Non- Royalty Income receivable by LICENSEE in connection therewith. Any such payment to LICENSOR shall be made within thirty (30) days after receipt of such proceeds by LICENSEE. Any such sale or transfer shall not affect LICENSEE's obligation to pay royalties pursuant to articles 3.1 and 3.2 above. In no event shall Non- Royalty Income include any payment or other value due to or received by LICENSEE from a third party that is not explicitly due to or received by LICENSEE in consideration for a grant by LICENSEE to a third party to make, have made, use or sell LICENSED PRODUCTS under LICENSED RIGHTS. [*] Confidential Treatment Requested 5 3.8 In the event that LICENSEE transfers or otherwise disposes of LICENSED RIGHTS to a third party in combination with a patent(s) and/or right(s) of one or more third parties and LICENSEE is due or receives Non-Royalty Income then LICENSEE shall pay LICENSOR an equitable portion of such Non-Royalty Income as to be determined by the good faith negotiations of LICENSOR and LICENSEE. ARTICLE IV RECORD KEEPING AND REPORTS -------------------------- 4.1 LICENSEE agrees to keep accurate records in sufficient detail to enable the royalties payable by LICENSEE to LICENSOR hereunder to be determined, and agrees to permit said records to be examined from time to time during the life of this Agreement , and for one (1) year after the expiration or termination thereof, at reasonable intervals by an independent auditor mutually agreeable to the parties, during normal business hours, and to the extent necessary to verify the reports and payments required hereunder. 4.2 LICENSEE agrees to furnish LICENSOR with written Reports within two (2) months of the termination of each calendar quarter (i.e., such written Reports shall be due as in Article 3.5 supra) setting forth separately by model number or other identifying designation, the total number of Licensed Products theretofore made and sold hereunder during the preceding calendar quarter and the royalties due thereon. Each such Report shall be accompanied by a copy of any sub-licensee's Report received subsequent to LICENSEE's prior Report and prior to LICENSEE's current Report. If available, LICENSEE agrees to provide LICENSOR a copy of its audited annual financial report and audited annual financial reports of its affiliates and sublicensees. 4.3 In the event that LICENSEE's royalties calculated for any semi-annual period are in error by greater than MINUS TEN PERCENT (-10%), the costs of any audit and review initiated by LICENSOR will be borne by LICENSEE; but, otherwise, the LICENSOR shall bear the costs of any audit initiated by LICENSOR. ARTICLE V PATENT RIGHTS ------------- 5.1 LICENSEE shall, in the first instance, have the sole and exclusive right to file any and all patent applications, both foreign and domestic on any Invention or improvement falling within the scope of this Agreement; and, LICENSEE shall be responsible for all costs, fees and expenses incurred in connection with the filing, 6 prosecution and maintenance of any such patent application and the maintenance of any patent issuing thereon. Any such patent shall be assigned to the LICENSOR and be included within the Licensed Patent Rights defined by this Agreement. LICENSOR shall be provided with all patent applications, Office Actions and responses in a timely manner for its review and comment prior to filing thereof. LICENSOR agrees to cooperate in filing patent applications in LICENSOR's name on any such Invention and/or improvement. 5.2 In the event that LICENSEE determines that it will not, for any reason, file, prosecute and/or maintain any foreign or domestic patent application or patent on any Invention or improvement relating to the basic technology licensed hereunder, it will promptly notify LICENSOR of its decision and LICENSOR shall thereafter have the sole and exclusive right to file, prosecute and/or maintain any such patent application or patent, either foreign or domestic, at its own expense; and, any patent issuing therefrom shall not be included among Licensed Patent Rights and LICENSEE shall forfeit any right to the technology covered by such patent application or patent unless this Agreement shall be amended, in writing, to include such patent application or patent. LICENSEE agrees to cooperate in filing patent applications in LICENSOR's name on any such Invention and/or improvement where LICENSEE declines to proceed at its own expense. 5.3 If, at any time during the term of this Agreement, LICENSEE elects to abandon any pending patent application or issued patent, either foreign or domestic, it shall notify LICENSOR of that decision at least two (2) months prior to any deadline for filing any response or taking any other action necessary to maintain any such application and/or patent in existence; and, thereafter, LICENSOR shall have the right and option to take over the sole and exclusive responsibility for the prosecution of any such application and/or the maintenance of any such patent solely at LICENSOR's expense, and any patent issuing there from shall not be included among Licensed Patent Rights and LICENSEE shall forfeit any right to that technology covered by such patend application or patent unless this Agreement is amended, in writing, to include such patent. ARTICLE V1 DUE DILIGENCE ------------- 6.1 LICENSEE, during the entire term of this Agreement, shall utilize its best efforts in proceeding with the development, manufacture, sale and commercial exploitation of Licensed Product(s), and in creating a supply and demand for same. 7 6.2 LICENSEE agrees to keep LICENSOR fully and promptly informed of its progress on the commercial exploitation of Licensed Product(s) hereunder by annual reports due at the end of each calendar year. ARTICLE V11 PATENT MARKING -------------- 7.1 LICENSEE shall mark, and shall require its sub-licensee(s) to mark, each Licensed Product made and sold by it or by them with an appropriate patent marking. ARTICLE V111 TERM AND TERMINATION -------------------- 8.1 This Agreement shall be in force from the Effective Date hereof and shall remain in full force and effect thereafter until the later of the last to expire of Patent Rights, unless extended by mutual written agreement of the parties or unless sooner terminated in accordance with the provision set forth herein below. 8.2 If, at any time, LICENSEE shall have defaulted in the performance of its obligations hereunder, LICENSOR may give written notice of such default; and, if such default has not been cured within ninety (90) days after such written notice, this Agreement shall terminate forthwith on the ninety-first (91st) day following the date of such written notice. 8.3 LICENSEE may terminate this Agreement upon ninety (90) days written notice to LICENSOR. ARTICLE IX DISPOSITION OF LICENSED PRODUCTS -------------------------------- ON HAND UPON TERMINATION ------------------------ 9.1 In the event of early termination of this Agreement, LICENSEE and its sub-licensees shall have the right to use or sell all the Licensed Products on hand at the time of such early termination, provided that LICENSEE shall be obligated to pay to the LICENSOR a royalty on such sales as set forth in Article III. 8 ARTICLE X GOVERNMENTAL RIGHT ------------------ 10.1 In the event that it is found that any Licensed Right covered by this Agreement is subject to the rights and limitations of Public Laws (PL) 96-517 and 98-620 and implementing regulations prescribed by the Federal Office of Management and Budget, then LICENSEE agrees to include a statement in any such patent application fully identifying such governmental right; and, LICENSEE acknowledges that LICENSOR will have the right to furnish the Federal Government, among other things, with a worldwide, non-exclusive, royalty free license for such Invention(s) notwithstanding anything in this Agreement to the contrary. ARTICLE X1 PATENT ENFORCEMENT ------------------ 11.1 LICENSEE shall have the sole and exclusive right to enforce LICENSOR's-Patent Rights and to file suit in its own name and in the name of LICENSOR to enforce such Patent Rights using counsel of LICENSEE's choice. LICENSEE shall also have the sole and exclusive right to defend all charges of infringements, using counsel of LICENSEE's choice, arising from the development, manufacture, use or sale of Licensed Products(s). Any infringement prosecution or defense shall be at LICENSEE's expense. LICENSEE shall further have the sole and exclusive right to settle and compromise any such controversy with third parties on terms that it, in its sole discretion, deems right and proper; provided only, that LICENSEE shall not grant to any third party a sub-license which is less favorable to LICENSOR in terms of royalty payments payable to LICENSOR than the terms provided for herein unless and until LICENSEE obtains LICENSOR's approval of such less favorable terms. Any recovery obtained by LICENSEE as the result of any such proceedings, by settlement or otherwise, shall be applied first, to pay LICENSEE's costs and expenses of the proceeding, with the remainder, if any, to be paid fifty percent (50%) to-LICENSOR and fifty percent (50%) to LICENSEE. 11.2 In the event that LICENSEE shall determine, for any reason, that it does not choose to enforce LICENSOR's Patent Rights, then LICENSEE agrees to promptly notify LICENSOR of such decision; and thereafter, LICENSOR shall have the sole and exclusive right to enforce LICENSOR's Patent Rights solely at its expense and any and all recoveries shall be awarded solely and exclusively to LICENSOR. 11.3 In the event that one party elects to prosecute and defend an infringement action pursuant to Articles 11.1 or 11.2, the other party shall cooperate 9 and supply technical assistance reasonably requested by the other party for the conduct of the proceedings. ARTICLE X11 USE OF NAMES. TRADE NAMES AND TRADEMARKS ----------------------------------------- 12.1 LICENSEE agrees to refrain from using and to require its Affiliates to refrain from using the name of the Medical College of Ohio without the express written permission of the President of the Medical College of Ohio, and LICENSOR agrees to refrain from using the name of Targeted Genetics Corporation without the express written permission of the President of Targeted Genetics Corporation, such approval not to be unreasonably withheld by Targeted Genetics Corporation. Notwithstanding the foregoing, LICENSOR hereby consents to references to it (1) in such reports or documents sent to stockholders or filed with or submitted to any governmental regulatory agencies or bodies or stock exchanges or as may be required to obtain investment capital, or (2) pursuant to any requirements of applicable law or governmental regulations, provided that, in the event of any such disclosure, LICENSEE shall afford LICENSOR the prior opportunity to review the text of such disclosure. LICENSEE shall use its best efforts to comply with any reasonable requests by LICENSOR regarding changes. ARTICLE XIII WAIVER ------ 13.1 No omission or delay of either party hereto in requiring due and punctual fulfillment of the obligations of any other party hereto shall be deemed to constitute a waiver by such party of its rights to require such due and punctual fulfillment, or of any other of its remedies hereunder. ARTICLE XIV WARRANTIES ---------- 14.1 LICENSOR warrants that it has the lawful right to grant the license set forth herein. 14.2 LICENSOR makes no express or implied warranties of merchantability or fitness of the Licensed Products for any particular purpose. 14.3 Nothing in this Agreement shall be construed as: 10 i) a warranty or representation by the LICENSOR as to the patentability, validity or scope of any of the Patent Rights; ii) a warranty or representation that anything made, used, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement of patents of proprietary rights of third parties; or, iii) an obligation to bring or prosecute actions or suits against third parties for infringement. ARTICLE XV SUCCESSION AND ASSIGNABILITY ---------------------------- 15.1 This Agreement and the rights and benefits conferred upon LICENSEE hereunder may not be assigned nor transferred by LICENSEE without the prior written consent of LICENSOR, except in the event of sale of all or a portion of the business of LICENSEE. 15.2 This Agreement may be assigned by LICENSOR. 15.3 This Agreement shall be binding upon and inure to the benefit of the successors, representatives and assigns of the parties hereto. ARTICLE XVI INDEMNITY --------- 16.1 LICENSEE agrees to indemnify, hold harmless and defend LICENSOR, its officers, employees and agents, against any and all claims, suits, losses, damages, costs, fees and expenses resulting from or arising out of exercise of this Agreement including, but not limited to, any damages, losses or liabilities whatsoever with respect to death or injury to any person and damage to any property arising from the possession, use or operation of Licensed Products by LICENSEE or its sub-licensees or their customers in any manner whatsoever. ARTICLE XVII CONFIDENTIALITY --------------- 17.1 LICENSOR and LICENSEE agree to hold in confidence all information received from the providing party and not to disclose it to any third party or use it for any purpose except as provided herein. The foregoing restrictions on use and 11 disclosure shall continue for a period of three (3) years following termination of this Agreement, but shall not apply to any such information which: (a) is or later becomes generally available to the public by use, publication or the like, through no fault of the other Party; or (b) is obtained from a third party who had the legal right to disclose the same to the Party; or (c) the Party already possesses, as evidenced by its written records, predating receipt thereof from the other Party. ARTICLE XVIII NOTICES ------- 18.1 Any payment, notice or other communication required or permitted to be given by either party hereto shall be deemed to have been properly given and be effective on the date of delivery if delivered, in writing, in person or by first class certified mail with postage prepaid and return receipt requested to the respective addresses set forth below, or to such other address as either party shall designate by written notice given to the other party: In the case of LICENSOR: R. Douglas Wilkerson, Ph.D. Associate Vice President for Research Medical College of Ohio 3000 Arlington Avenue Toledo, OH 43614 In the case of LICENSEE: H. Stewart Parker President and CEO Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, WA 98101 12 ARTICLE XIX APPLICABLE LAW -------------- 19.1 This Agreement shall be construed in accordance with, and its performance shall be governed by, the laws of the state of Ohio. 19.2 All disputes that may arise in connection with this agreement and that are not adjusted by the parties themselves shall be submitted to binding arbitration under the rules and regulations of the American Arbitration Association relating to voluntary arbitrations. All costs of arbitration shall be divided equally between the parties. Judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction thereof. ARTICLE XX MISCELLANEOUS ------------- 20.1 The headings of the several sections of this Agreement are inserted for convenience and reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 20.2 This Agreement will not be binding upon the parties until it has been signed by, or on behalf of, each party, in which event it shall be effective as of the Effective Date. 20.3 No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed as aforesaid. 20.4 This Agreement embodies the entire understanding of the parties and supersedes all previous communications, representations or understandings, either oral or written, between the parties relating to the subject matter hereof. 20.5 If any provision, or provisions, of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not be in any way affected or impaired thereby. 20.6 In witness whereof, both the LICENSOR and LICENSEE have executed this Agreement, in duplicate originals but collectively evidencing only a single contract, by their respective officers hereunto duly authorized, on the day and year hereinafter written. 13 IN WITNESS WHEREOF, the parties have executed this Agreement through duly authorized representatives as of the date first above written. MEDICAL COLLEGE OF OHIO TARGETED GENETICS CORPORATION By: R.D. Wilkerson By: H. Stewart Parker ------------------------- -------------------------- Title: Title: President & CEO ---------------------- ---------------------- Date: 3/14/94 Date: Feb. 28, 1994 ----------------------- ----------------------- 14 ATTACHMENT A MEDICAL COLLEGE OF OHIO MATERIALS TRANSFER AGREEMENT ---------------------------------------------------- _____________________________ _____________________________ _____________________________ Dear Dr. ______________: This is to acknowledge your request that certain research material (hereinafter Materials) developed in the laboratory of ________________ at the Medical College of Ohio (hereinafter MCO) be sent to you for scientific research purposes at _______________________. The Materials concerned, which belong to the MCO, are: _______________________________________________________________________________. We would be pleased to permit your use of these Materials at your institution for your scientific research. However, before forwarding them to you, MCO would like you and your institution to agree to the following: (i) that the Materials will be used by you solely in connection with the following research project ("Research Project") described with specificity as follows (use an attachment page if necessary) ____________________________________________________________________ ____________________________________________________________________ (ii) that the Material shall be receive by you only for use in scientific research in your laboratory and that all applicable guidelines set forth by the national Institutes of Health (NIH) or other governmental agencies regarding the use of the Materials shall be followed; (iii) these Materials are provided as a service to the research community. THE MATERIALS ARE BEING SUPPLIED TO YOU WITH NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. MCO makes no representations that the use of the Materials will not infringe any patent or proprietary rights of third parties; 15 (iv) that you and your institution shall receive the Materials in confidence and agree not to describe them to others not employed by your institution without MCO's prior written consent; (v) that you shall make known to MCO any results obtained from the use of the Material prior to the written disclosure of those results and/or written disclosure of any description of the Material so others not employed by your institution and you will make good faith efforts to do so thirty (30) days prior to such written (or oral) disclosure; (vi) that you and your institution shall bear all risk to you and/or any others resulting from any use, directly or indirectly, to which you put the Materials or any other material that could not have been made by for these Materials; (vii) that you shall not sell or otherwise transfer to any other party the Materials, method(s) of using the Materials or any other material that could not have been made but for the Materials, whether with or without consideration, for any purpose or use; (viii) that you shall not, directly or indirectly, use the Materials for commercial purposes; (ix) that you and your institution shall not obtain, and shall not attempt to obtain patent coverage on the Materials without the express written consent of MCO; and before seeking patent prosecution for the use of the Materials or any other materials that could not have been made but for the Materials, your institution will notify MCO so that MCO can assert any claims to legal inventorship it or its employees might have. In consideration of MCO's providing of the Material, your institution, to the extent it is able to do so under its policies and obligations to sponsors of your research, hereby grants to MCO a ninety (90) day option to negotiate a commercial license under any such patent application and your institution agrees to negotiate the license terms in good faith taking into account the respective parties' contributions and relevant industry and university standards for similar rights. Such option shall be exercised by MCO's agreement to support the filing of a U.S. patent application; (x) except where precluded by Federal law and to the extent allowed by State law, you and your institution agree to defend, indemnify, and hold harmless MCO, its trustees, officers, employees, and agents from any 16 loss, claim, damage, or liability, of any kind whatsoever, which may arise from you or your institution's use, storage, or disposal of the Materials or any other material that could not have been made but for the Materials, except to the extent such arise due to the gross negligence of MCO; (xi) that you provide us with your Federal Express account number so that we may ship the Materials to you. You understand that no other right or license to these Materials or any other materials that could not have been made but for these Materials or to their use is granted or implied as a result of our transmission of these Materials to you. The Materials are to be used with caution and prudence in any experimental work, since all of their characteristics are not known. Moreover, they are not to be used for testing in or treatment of humans. This Agreement shall be construed, interpreted, and applied in accordance with the laws of the State of Ohio. This Agreement embodies the entire understanding between MCO and (investigator institution) and supersedes all previous communications, representations or understandings, either oral or written, between the parties relating to transfer of these Materials. If you agree to accept these Materials under the above conditions, please sign the enclosed duplicate copy of this letter, have it signed by an authorized representative of your institution, and return one original to me. Upon receipt of that confirmation, the Materials will be forwarded to you. THE MEDICAL COLLEGE OF OHIO --------------------------------------- R. Douglas Wilkerson, Ph.D. Associate Vice President for Research Date ----------------------------------- 17 ACCEPTED: - ------------------------------------ ---------------------------------------- Recipient's Signature Authorized Institutional Representative's Signature - ------------------------------------ ---------------------------------------- Recipient's Printed Name and Title Representative's Printed Name and Title - ------------------------------------ ----------------------------------------- Date Date MCO REF. NO. ---------------------------- 18 EX-10.13 5 LICENSE AGREEMENT REDACTED VERSION EXHIBIT 10.13 To Targeted Genetics Corporation's Form 10-K For the Year Ended December 31, 1997 "[ * ]" = omitted, confidential material, which material has been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 10.13 LICENSE AGREEMENT MICHIGAN FILE 492c2 TECHNOLOGY THERAPEUTIC LICENSE This is an Agreement, effective as of the 28th day of March, 1994 (the "Effective Date"), entered into by Targeted Genetics Corporation, a corporation incorporated in the State of Washington, with offices located at 1100 Olive Way, Suite #100, Seattle, Washington 98101 ("LICENSEE"), the Regents of the University of Michigan, a constitutional corporation of the State of Michigan ("MICHIGAN"), and HSC Research and Development Limited Partnership, a partnership organized and subsisting under the laws of the Province of Ontario, Canada ("RDLP"). LICENSEE, MICHIGAN and RDLP agree as follows: 1. BACKGROUND. ---------- 1.1 Michigan and the Research Institute of the Hospital for Sick Children of Toronto, Ontario, Canada ("HSC") have conducted research relating to cystic fibrosis. As a result of that research, MICHIGAN and RDLP have developed rights in the "Licensed Patents" defined below. 1.2 LICENSEE desires to obtain, and MICHIGAN and RDLP, consistent with their missions of education and research, desire to grant a license of the Licensed Patents on the terms and conditions listed below. 2. DEFINITIONS. ----------- 2.1 "TECHNOLOGY", as used in this Agreement, shall mean the information, manufacturing techniques, data, designs or concepts developed by MICHIGAN and HSC, covering the gene for cystic fibrosis and uses thereof as encompassed by U.S. Patent Application No. 401,609 entitled "Cystic Fibrosis Gene." 2.2 "Parties", in singular or plural usage as required by the context, shall mean LICENSEE, MICHIGAN and/or RDLP. 2.3 "Affiliate(s)" shall mean any individual, corporation, partnership, proprietorship or other entity controlled by, controlling, or under common control with LICENSEE through equity ownership, ability to elect directors, or by virtue of a majority of overlapping directors, and shall include any individual, corporation, partnership, proprietorship or other entity directly or indirectly owning, owned by or under common ownership with LICENSEE to the extent of thirty percent (30%) or more of the voting shares, including shares owned beneficially by such party. 2.4 "Licensed Patent(s)" shall mean U.S. Patent Application No. 401,609 entitled "Cystic Fibrosis Gene." and all foreign equivalent patent applications and Patent Cooperation Treaty filings, and all patents issuing therefrom in which MICHIGAN and/or RDLP has or acquires a property interest (currently including the applications listed in the Appendix attached to this Agreement). "Licensed Patent(s)" shall also include any divisional, continuation (excluding continuations-in-part), reissue, reexamination or extension of the above- described patent applications and resulting patents, along with any extended or restored term, and any confirmation patent, registration patent, or patent of addition. 2.5 "Valid Claim(s)" means any claim(s) in an unexpired patent or pending in a patent application included within the Licensed Patents which has not been held unenforceable, unpatentable, or invalid by a decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer. If in any country there should be two or more such decisions conflicting with respect to the validity of the same claim, the decision of the higher or highest tribunal shall thereafter control; however, should the tribunals be of equal rank, then the decision or decisions upholding the claim shall prevail when the conflicting decisions are equal in number, and the majority of decisions shall prevail when the conflicting decisions are unequal in number. 2.6 "Product(s)" shall mean any product(s) whose manufacture, use or sale in any country would, but for this Agreement, comprise an infringement, including contributory infringement, of one or more Valid Claims. 2.7 "Field of Use" shall refer to the field for which Products may be designed, manufactured, used and/or marketed under this Agreement, and shall mean solely Products to be used for the therapeutic treatment or prophylaxis of the disease cystic fibrosis. 2.8 "Net Sales" shall mean the sum, over the term of this Agreement, of all amounts received and all other consideration received (or, when in a form other than cash or its equivalent, the fair market value thereof when received) by LICENSEE and its Affiliates from persons or entities due to or by reason of the sale or other distribution of Products, or the use of Products, including any use by LICENSEE and Affiliates in the performance of services for their customers; 2 less the following deductions and offsets, but only to the extent such sums are otherwise included in the computation of Net Sales, or are paid by LICENSEE and not otherwise reimbursed: refunds, rebates, replacements or credits actually allowed and taken by purchasers for return of Products; customary trade, quantity and cash discounts actually allowed and taken; excise, value-added, and sales taxes actually paid by LICENSEE for Products; and shipping and handling charges actually paid by LICENSEE for Products. 2.9 "Royalty Quarter(s)" shall mean the three-month periods ending on the last day of March, June, September and December of each year. 2.10 "Territory" means all countries of the world. 2.11 "First Therapeutic Sale" shall mean the first sale of any Product (including any sale of a service using a Product in the Field of Use) by LICENSEE or an Affiliate, other than for use in clinical trials being conducted to obtain FDA or other governmental approvals to market Products. 3. GRANT OF LICENSE. ---------------- 3.1 MICHIGAN and RDLP hereby grant to LICENSEE a non-exclusive license under the Licensed Patents to make, have made, use (including use in the performance of services for its customers), market and sell, in the Territory, Products designed and marketed solely for use in the Field of Use. 3.2 MICHIGAN and RDLP reserve the right to license and use all aspects of the TECHNOLOGY and the Licensed Patents for any use or purpose, including the right to develop and produce Products. 3.3 The license granted to LICENSEE herein shall be without the right to sublicense, except that LICENSEE may sublicense Affiliate(s) who agree to be and are bound in writing to the terms and conditions of this Agreement to the same extent as LICENSEE. LICENSEE agrees to strictly monitor and enforce compliance with the terms and conditions of this Agreement by all Affiliate sublicensees. 3.4 If through exercise of its license under Paragraph 3.1 LICENSEE learns of therapeutic or prophylactic fields of use for Products outside of the Field of Use, then MICHIGAN and RDLP shall, upon LICENSEE's request, discuss in good faith whether a separate agreement may be negotiated to provide LICENSEE the rights necessary to develop and distribute Products designed and marketed for such fields of use. 3 4. CONSIDERATION. ------------- 4.1 LICENSEE shall pay to MICHIGAN a one-time license issue fee of U.S. $40,000.00, forthwith following the Effective Date. Notwithstanding any other terms of this Agreement, this Agreement and the license granted hereunder shall not become effective until such issue fee is received by MICHIGAN. 4.2 LICENSEE shall also pay MICHIGAN, with respect to each Royalty Quarter, a royalty [ * ] of the Net Sales of LICENSEE and Affiliates. 4.3 The obligation to pay MICHIGAN a royalty under this Article 4 is imposed only once with respect to the same unit of Product regardless of the number of Valid Claims or Licensed Patents covering the same; however, for purposes of determination of payments due hereunder, whenever the term "Product" may apply to a property during various stages of manufacture, use or sale, Net Sales, as otherwise defined, shall be derived from the sale, distribution or use of such Product by LICENSEE or Affiliates at the stage of its highest invoiced value to unrelated third parties. 4.4 LICENSEE shall pay to MICHIGAN an annual license maintenance fee. This annual fee shall accrue in the Royalty Quarter ending in March of the years specified below, and shall be due and payable and included with the report for that quarter. If LICENSEE defaults in the payment of any annual license maintenance fee, and fails to remedy that default within thirty (30) days after written notice of it by MICHIGAN, then this Agreement and the license rights conveyed herein shall terminate. The annual license maintenance fees shall be as follows: (1) In 1994 and 1995: [ * ]; (2) In 1996, 1997 and 1998: [ * ]; (3) in 1999, and in each year thereafter during the term of this Agreement up to and including the year in which LICENSEE first obtains FDA approval or other governmental approval to distribute or use Products in the Field of Use: [ * ]; [*] Confidential Treatment Requested 4 Also, notwithstanding (1-3) above (and in place of the amounts therein listed, when applicable): (4) In the first calendar year following the year in which LICENSEE obtains the approval described in (3) above, and in each year thereafter during the term of this Agreement up to and including the year in which the First Therapeutic Sale occurs: [ * ]; Also, notwithstanding (1-4) above (and in place of the amounts therein listed, when applicable); (5) In the first calendar year following the First Therapeutic Sale: [ * ]; (6) In the second year following the First Therapeutic Sale: [ * ]; (7) In the third year following the First Therapeutic Sale: [ * ]; and (8) In the fourth year following the First Therapeutic Sale, and in each year thereafter during the term of this Agreement; [ * ]. Each annual fee paid under (5-8) above may be credited by LICENSEE in full against all earned royalties otherwise to be paid to MICHIGAN under Paragraph 4.2 for the calendar year in which the specific annual fee is paid. The year for which such credits against royalties may be taken includes the Royalty Quarter in which the annual fee accrues and the next three Royalty Quarters. Each annual fee paid under (1-4) above may be credited by LICENSEE in full against all earned royalties otherwise to be paid to MICHIGAN under Paragraph 4.2 after such annual fee is paid. 4.5 If it is necessary for LICENSEE to take any license(s), in a given country, under valid third party patents which would be infringed by the practice of Licensed Patents in that country, then LICENSEE can deduct up to [ * ] of the royalties otherwise due and payable in each Royalty Quarter under Paragraph 4.2 above for Net Sales in that country, until such time as LICENSEE has recovered an amount equal to [ * ] of the royalty paid to such third parties; provided that in no event shall such deducted amounts be applied to reduce or require [*] Confidential Treatment Requested 5 reimbursement of the annual fees required under Paragraph 4.4. This Paragraph is not intended to imply an obligation upon MICHIGAN or RDLP to reimburse LICENSEE's above-described third-party royalties; the rights granted to LICENSEE in this Paragraph shall not exceed the ability of the above-described mechanism (i.e., a [ * ] of royalties due upon Net Sales in the country in question) to reimburse such expenses. LICENSEE shall make an accounting to MICHIGAN of all such third-party royalties, and all resulting deductions from royalties otherwise due and payable to MICHIGAN, as part of its reporting obligations under Article 5 below. 5. REPORTS. ------- 5.1 Within sixty (60) days after the close of (i) any Royalty Quarter in which a fee under Paragraph 4.4 accrues, and (ii) each Royalty Quarter following the First Therapeutic Sale during the term of this Agreement (including the close of any Royalty Quarter immediately following any termination of this Agreement), LICENSEE shall report to MICHIGAN all royalties accruing to MICHIGAN during such Royalty Quarter. Such quarterly reports shall indicate for each Royalty Quarter the gross sales and Net Sales of Products by LICENSEE and Affiliates, and any other revenues with respect to which payments are due, and the amount of such payments, as well as the various calculations used to arrive at said amounts, including the quantity, description (nomenclature and type designation), country of manufacture and country of sale of Products. In case no payment is due for any such period, LICENSEE shall so report. 5.2 LICENSEE covenants that it will promptly establish and consistently employ a system of specific nomenclature and type designations for Products so that various types can be identified and segregated, where necessary; LICENSEE and Affiliates shall consistently employ such system when rendering invoices thereon and henceforth agree to inform MICHIGAN, or its auditors, when requested as to the details concerning such nomenclature system as well as to all additions thereto and changes therein. 5.3 LICENSEE shall keep, and shall require its Affiliates to keep, true and accurate records and books of account containing data reasonably required [*] Confidential Treatment Requested 6 for the computation and verification of payments to be made as provided by this Agreement, which records and books shall be open for inspection upon reasonable notice during business hours by an independent certified accountant selected by MICHIGAN. Said right of inspection will exist for six (6) years from the date of origination of any such record, and this requirement and right of inspection shall survive any termination of this Agreement. The independent certified accountant shall provide to MICHIGAN only such information from LICENSEE's books and records as is necessary to verify the accuracy or degree of inaccuracy of the payments made under this Agreement. MICHIGAN shall be responsible for all expenses of such inspection, except that if such inspection reveals an underpayment of royalties to MICHIGAN in excess of ten percent (10%) for any year, then said inspection shall be at LICENSEE's expense and such underpayment shall become immediately due and payable to MICHIGAN. 5.4 The reports provided for hereunder shall be certified by an authorized representative of LICENSEE to be correct to the best of LICENSEE's knowledge and information. 6. TIMES AND CURRENCIES OF PAYMENTS. -------------------------------- 6.1 Payments accrued during each Royalty Quarter shall be due and payable in Ann Arbor, Michigan on the date each quarterly report is due (as provided in Paragraph 5.1), shall be included with such report and shall be paid in United States dollars. LICENSEE agrees to make all payments due hereunder to MICHIGAN by check made payable to "The Regents of The University of Michigan," and sent by prepaid, certified or registered mail, return receipt requested, to the address for notices set forth in Article 19 herein. 6.2 On all amounts outstanding and payable to MICHIGAN, interest shall accrue from the date such amounts are due and payable at two percentage points above the prime lending rate as established by the Chase Manhattan Bank N.A., in New York City, New York, or at such lower rate as may be required by law. 6.3 Where Net Sales are generated in foreign currency during any Royalty Quarter, such foreign currency shall be converted into its equivalent in United States dollars at the exchange rate of such currency as reported (or if erroneously reported, as subsequently corrected) in the Wall Street Journal on the last business day of that Royalty Quarter (or if not reported on that date, as quoted by the Chase Manhattan Bank, N.A., in New York City, New York). 7 6.4 Except as provided in the definition of Net Sales, all royalty payments to MICHIGAN under this Agreement shall be without deduction for sales, use, excise, personal property or other similar taxes or other duties imposed on such payments by the government of any country or any political subdivision thereof; and any and all such taxes or duties shall be assumed by and paid by LICENSEE. 7. COMMERCIALIZATION. ----------------- 7.1 It is understood that LICENSEE has the responsibility to do all that is necessary for any governmental approvals to manufacture and/or sell Products. 7.2 LICENSEE agrees to use reasonable efforts to develop Products, obtain any government approvals necessary, and manufacture and sell Products at the earliest possible date; and to effectively exploit, market and manufacture in sufficient quantities to meet anticipated customer demand and to make the benefits of the Products reasonably available to the public. 7.3 Within fifteen (15) days of the First Therapeutic Sale, LICENSEE shall report by written letter to MICHIGAN the date and general terms of that sale. 8. PATENT APPLICATIONS AND MAINTENANCE. ----------------------------------- 8.1 MICHIGAN and RDLP shall control all aspects of filing, prosecuting, and maintaining Licensed Patents, including foreign filings and Patent Cooperation Treaty filings. MICHIGAN and RDLP may in their sole discretion decide to refrain from or to cease prosecuting or maintaining any of the Licensed Patents, including any foreign filing or any Patent Cooperation Treaty filing. 8.2 MICHIGAN shall notify LICENSEE of the issuance of any Licensed Patent and the Valid Claims included therein, and any lapse, revocation, surrender, invalidation or abandonment of any Licensed Patent or Valid Claim. 9. INFRINGEMENT. ------------ 9.1 If LICENSEE becomes aware of or reasonably suspects infringement of Licensed Patents by third parties, LICENSEE agrees to promptly notify Michigan of such alleged infringement. 8 9.2 MICHIGAN and RDLP shall take such measures as are in their reasonable discretion appropriate to stop or discourage substantial infringements of the Licensed Patents. On request by the LICENSEE, MICHIGAN and RDLP shall inform LICENSEE of any measures being taken in response to any particular event or allegation of infringement. If MICHIGAN and RDLP fail to commence reasonable efforts to stop or discourage a continuing substantial infringement of the Licensed Patents in any country within six (6) months of MICHIGAN's receipt of written notice by LICENSEE of that infringement, then LICENSEE may, upon written notice to MICHIGAN, withhold royalty payments accruing under this Agreement upon Net Sales which are thereafter generated in the country in which the infringement is occurring, instead placing such royalty payments in escrow with an escrow agent satisfactory to MICHIGAN and LICENSEE. If, within six (6) months of such notice by LICENSEE, MICHIGAN or RDLP commences reasonable efforts to stop or discourage the infringement, then LICENSEE's withheld royalties shall be released from escrow and paid to MICHIGAN. If MICHIGAN and RDLP fail to commence such reasonable efforts, then the withheld payments shall be released and returned to LICENSEE and further royalty payments by LICENSEE with respect to Net Sales generated in the country in which the infringement is occurring shall be waived by MICHIGAN until MICHIGAN or RDLP in good faith commences such reasonable efforts, upon which date the waiver of royalties by MICHIGAN shall terminate and royalties accruing upon LICENSEE's Net Sales generated in that country after that date shall be due and payable as provided in this Agreement. An infringement shall not be deemed substantial under this paragraph unless it can be demonstrated that it generates more than the equivalent of five million U.S. Dollars (U.S. $5,000,000.00) in sales of infringing products for use in the Field of Use, and that such sales comprise five percent or more (in dollar volume) of the total sales market in the Field of Use in that country. Reasonable efforts to be made by MICHIGAN and RDLP to stop or discourage infringements may include notices, attempts to properly license the infringer, or legal proceedings to enjoin or claim damages from the infringement. The reasonable efforts to be made by MICHIGAN or RDLP shall not be deemed to include the commencement or maintenance of any legal proceeding where the projected cost of the proceeding exceeds either the royalties received by MICHIGAN and RDLP for the practice of the Licensed Patents in the Field of Use in that country, or the damages likely to be actually awarded and collected as a result of the proceeding. 9 10. NO WARRANTIES; LIMITATION ON MICHIGAN'S AND RDLP'S LIABILITY. ------------------------------------------------------------ 10.1 MICHIGAN and RDLP, including their fellows, officers, employees and agents, make no representations or warranties that any Licensed Patent is or will be held valid, or that the manufacture, use, sale or other distribution of any Products will not infringe upon any patent or other rights not vested in MICHIGAN or RDLP. 10.2 MICHIGAN HSC AND RDLP, INCLUDING THEIR FELLOWS, OFFICERS, EMPLOYEES AND AGENTS, MAKE NO REPRESENTATIONS, EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND ASSUME NO RESPONSIBILITIES WHATEVER WITH RESPECT TO DESIGN, DEVELOPMENT, MANUFACTURE, USE, SALE OR OTHER DISPOSITION BY LICENSEE OR AFFILIATES OF PRODUCTS. 10.3 THE ENTIRE RISK AS TO THE DESIGN, DEVELOPMENT, MANUFACTURE, OFFERING FOR SALE, SALE OR OTHER DISPOSITION, AND PERFORMANCE OF PRODUCTS IS ASSUMED BY LICENSEE AND AFFILIATES. In no event shall MICHIGAN, RDLP or HSC, including their fellows, officers, employees and agents, be responsible or liable for any direct, indirect, special, incidental, or consequential damages or lost profits to LICENSEE, Affiliates or any other individual or entity regardless of legal theory. The above limitations on liability apply even though MICHIGAN, RDLP, or HSC, including their fellows, officers, employees or agents, may have been advised of the possibility of such damage. 10.4 LICENSEE shall not, and shall require that its Affiliates do not, make any statements, representations or warranties or accept any liabilities or responsibilities whatsoever to or with regard to any person or entity which are inconsistent with any disclaimer or limitation included in this Article 10. 10.5 REGARDLESS OF ANY RESEARCH OR TESTING THAT MAY HAVE BEEN DONE AT HSC OR MICHIGAN, HSC, MICHIGAN AND RDLP MAKE NO REPRESENTATIONS REGARDING HOW PRODUCTS CAN OR SHOULD BE USED IN THE THERAPEUTIC TREATMENT OR PROPHYLAXIS OF THE DISEASE CYSTIC FIBROSIS. 10 11. INDEMNITY; INSURANCE. -------------------- 11.1 LICENSEE shall defend, indemnify and hold harmless and shall require its Affiliates licensed hereunder to defend, indemnify and hold harmless MICHIGAN, RDLP and HSC, as well as their fellows, officers, trustees, directors, employees and agents, for and against any and all claims, demands, damages, losses, and expenses of any nature (including attorneys' fees and other litigation expenses), resulting from, but not limited to, death, personal injury, illness, property damage, economic loss or products liability arising from or in connection with, any of the following: (1) Any manufacture, use, sale or other disposition by LICENSEE, Affiliates or their transferees, of Products; (2) The direct or indirect use by any person of Products made, used, sold or otherwise distributed by LICENSEE or Affiliates; (3) The use by LICENSEE or Affiliates of any invention related to the TECHNOLOGY or the Licensed Patents. 11.2 MICHIGAN and RDLP shall be entitled to participate at their option and expense through counsel of its own selection, and may join in any legal actions related to any such claims, demands, damages, losses and expenses under Paragraph 11.1 above. 11.3 LICENSEE shall purchase and maintain in effect a policy of product liability insurance covering all claims with respect to any Products manufactured, sold, licensed or otherwise distributed by LICENSEE and Affiliates, and shall specify MICHIGAN, RDLP and HSC, including their fellows, officers, trustees, directors and employees, as additional insureds (or otherwise extend such coverage to include those Parties). LICENSEE shall furnish certificate(s) of such insurance to MICHIGAN, upon request. 12. TERM AND TERMINATION. -------------------- 12.1 Upon any termination of this Agreement, and except as provided herein to the contrary, all rights and obligations of the Parties hereunder shall cease, except as follows: (1) Obligations to pay royalties and other sums accruing hereunder up to the day of such termination; 11 (2) MICHIGAN's rights to inspect books and records as described in Article 5, and LICENSEE's obligations to keep such records for the required time; (3) Obligations of defense and indemnity under Article 11; (4) Any cause of action or claim of LICENSEE RDLP or MICHIGAN accrued or to accrue because of any breach or default by the other Party hereunder; (5) The general rights, obligations, and understandings of Articles 2, 10, 15, 17, 26 and 27; and (6) All other terms, provisions, representations, rights and obligations contained in this Agreement that by their sense and context are intended to survive until performance thereof. 12.2 This Agreement will become effective on its Effective Date and, unless terminated under another, specific provision of this Agreement, will remain in effect until and terminate upon the last to expire of Licensed Patents. 12.3 If LICENSEE shall at any time default in the payment of any royalty or the making of any report hereunder, or shall make any false report, or shall commit any material breach of any covenant or promise herein contained, and shall fail to remedy any such default, breach or report within thirty (30) days after written notice thereof by MICHIGAN specifying such default, then MICHIGAN and RDLP may, at their option, terminate this Agreement and the license rights granted herein by notice in writing to such effect. Any such termination shall be without prejudice to any Party's other legal rights for breach of this Agreement. 12.4 LICENSEE may terminate this Agreement by giving MICHIGAN a notice of termination, which shall include a statement of the reasons, whatever they may be, for such termination and the termination date established by LICENSEE, which date shall not be sooner than ninety (90) days after the date of the notice. Such notice shall be deemed by the Parties to be final. 12.5 In the event LICENSEE shall at any time during the term of this Agreement deal with Products in any manner which violates the laws, regulations or similar legal authority of any jurisdiction including, but not limited to, the public health requirements relating to Products or the design, development, manufacture, offering for sale, sale or other disposition of Products, the license 12 granted herein shall terminate immediately with respect to such Products within the territory encompassed by such jurisdiction. 13. ASSIGNMENT. ---------- Due to the unique relationship between the Parties, this Agreement shall not be assignable by LICENSEE without the prior written consent of MICHIGAN and RDLP. Any attempt to assign this Agreement without such consent shall be void from the beginning. MICHIGAN and RDLP shall not unreasonably withhold consent for LICENSEE to assign this Agreement to a purchaser of all or substantially all of LICENSEE's business. No assignment shall be effective unless and until the intended assignee agrees in writing with RDLP and MICHIGAN to accept all of the terms and conditions of this Agreement. Further, LICENSEE shall refrain from pledging any of the license rights granted in this Agreement as security for any creditor. 14. REGISTRATION AND RECORDATION. ---------------------------- 14.1 If the terms of this Agreement, or any assignment or license under this Agreement are or become such as to require that the Agreement or license or any part thereof be registered with or reported to a national or supranational agency of any area in which LICENSEE or Affiliates would do business, LICENSEE will, at its expense, undertake such registration or report. Prompt notice and appropriate verification of the act of registration or report or any agency ruling resulting from it will be supplied by LICENSEE to MICHIGAN. 14.2 Any formal recordation of this Agreement or any license herein granted which is required by the law of any country, as a prerequisite to enforceability of the Agreement or license in the courts of any such country or for other reasons, shall also be carried out by LICENSEE at its expense, and appropriately verified proof of recordation shall be promptly furnished to MICHIGAN. 15. LAWS AND REGULATIONS OF THE UNITED STATES AND CANADA; EXPORT. ------------------------------------------------------------ 15.1 Activities under this Agreement shall be subject to all appropriate United States and Canadian laws and regulations now or hereafter applicable. 15.2 LICENSEE shall comply, and shall require its Affiliates licensed hereunder to comply, with all provisions of any applicable laws, regulations, rules and orders relating to the license herein granted and to the testing, 13 production, transportation, export, packaging, labeling, sale or use of Products, or otherwise applicable to LICENSEE's or its Affiliates' activities hereunder. 15.3 LICENSEE shall obtain, and shall require its Affiliates to obtain, such written assurances regarding export and reexport of technical data (including Products made by use of Technical data) as may be required by the United States Office of Export Administration Regulations, and LICENSEE hereby gives such written assurances as may be required under those Regulations to MICHIGAN. 15.4 LICENSEE shall obtain, and shall require its Affiliates to obtain, such authorization regarding export and re-export of technical data (including Products made by use of technical data) as may be required by the Department of External Affairs, Export Controls Division, or any authorization necessary for export from or import into Canada, and LICENSEE hereby gives written assurances as may be required under those regulations to RDLP. 16. BANKRUPTCY. ---------- If during the term of this Agreement, LICENSEE shall make an assignment for the benefit of creditors, or if proceedings in voluntary or involuntary bankruptcy shall be instituted on behalf of or against Licensee, or if a receiver or trustee shall be appointed for the property of LICENSEE, MICHIGAN and RDLP may, at their option, terminate this Agreement and revoke the license herein granted by written notice to LICENSEE. 17. PUBLICITY. --------- LICENSEE agrees to refrain from using and to require Affiliates to refrain from using the name of MICHIGAN, RDLP and HSC in publicity or advertising without the prior written approval of that entity. Notwithstanding the foregoing, MICHIGAN, RDLP, and HSC hereby consent to references to them (1) in informational reports or documents sent to stockholders or filed with or submitted to any governmental regulatory agencies or bodies or stock exchanges or as may be required by law when obtaining investment capital, or (2) pursuant to any requirements of applicable law or governmental regulations, provided that, in the event of such disclosure, LICENSEE shall afford MICHIGAN, RDLP, and HSC the prior opportunity to review the text of such disclosure. LICENSEE shall use its best efforts to comply with any reasonable request by Michigan, RDLP, and HSC regarding changes. 14 18. PRODUCT MARKING. --------------- LICENSEE agrees to mark, and to require Affiliates to mark, Products with the appropriate patent notice as approved by RDLP or MICHIGAN (when appropriate), such approval not to be unreasonably withheld. 19. NOTICES. ------- Any notice, request, report or payment required or permitted to be given or made under this Agreement by a Party shall be given by sending such notice by certified or registered mail, return receipt requested, to the address set forth below or such other address as such Party shall have specified by written notice given in conformity herewith. Any notice not so given shall not be valid unless and until actually received, and any notice given in accordance with the provisions of this Paragraph shall be effective when mailed. To LICENSEE: Targeted Genetics Corporation 1100 Olive Way Suite #100 Seattle, Washington 98101 Attn: President To MICHIGAN: The University of Michigan Technology Management Office Wolverine Tower, Room 2071 3003 South State Street Ann Arbor, Michigan 48109-1280 U.S.A. Attn: File No. 492c2 with a copy to: HSC Research and Development Limited Partnership 555 University Avenue Toronto, Ontario M5G 1X8 CANADA Attn: Barbara Lavers 20. INVALIDITY. ---------- In the event that any term, provision, or covenant of this Agreement shall be determined by a court of competent jurisdiction to be invalid, illegal or 15 unenforceable, that term will be curtailed, limited or deleted but only to the extent necessary to remove such invalidity, illegality or unenforceability, and the remaining terms, provisions and covenants shall not in any way be affected or impaired thereby. 21. ENTIRE AGREEMENT AND AMENDMENTS. ------------------------------- This Agreement contains the entire understanding of the Parties with respect to the matter contained herein. The Parties may, from time to time during the continuance of this Agreement, modify, vary or alter any of the provisions of this Agreement, but only by an instrument duly executed by authorized officials of all Parties hereto. 22. WAIVER. ------ No waiver by a Party of any breach of this Agreement, no matter how long continuing or how often repeated, shall be deemed a waiver of any subsequent breach thereof, nor shall any delay or omission on the part of a Party to exercise any right, power, or privilege hereunder be deemed a waiver of such right, power or privilege. 23. ARTICLE HEADINGS. ---------------- The Article headings herein are for purposes of convenient reference only and shall not be used to construe or modify the terms written in the text of this Agreement. 24. NO AGENCY RELATIONSHIP. ---------------------- The relationship between the Parties is that of independent contractor and contractees. LICENSEE shall not be deemed to be an agent of MICHIGAN or RDLP in connection with the exercise of any rights hereunder, and shall not have any right or authority to assume or create any obligation or responsibility on behalf of MICHIGAN or RDLP. 25. FORCE MAJEURE. ------------- No Party hereto shall be deemed to be in default of any provision of this Agreement, or for any failure in performance, resulting from acts or events beyond the reasonable control of such Party, such as Acts of God, acts of civil or military authority, civil disturbance, war, strikes, fires, power failures, natural catastrophes or other "force majeure" events. 16 26. GOVERNING LAW. ------------- This Agreement and the relationships of the Parties shall be governed in all respects by the law of the State of Michigan* (notwithstanding any provisions governing conflict of laws under such Michigan law to the contrary),** except that questions affecting the construction and effect of any patent shall be determined by the law of the country in which the patent has been granted. 27. JURISDICTION AND FORUM. ---------------------- LICENSEE hereby consents to the jurisdiction of the courts of the State of Michigan over any dispute concerning this Agreement or the relationship of the Parties. Should LICENSEE bring any claim, demand or other action against MICHIGAN or RDLP, including their fellows, officers, employees or agents, arising out of this Agreement or the relationship between the Parties, LICENSEE agrees to bring said action only in an appropriate court of the State or Province of that Party. 28. 'MOST FAVORED NATION' STATUS. ---------------------------- If MICHIGAN and RDLP grants a license under the Licensed Patents and in the Field of Use to any third party which is substantially the same as the license granted to LICENSEE under Article 3 above, for all or any part of the Territory, but which requires a royalty rate or license maintenance fees lower than those required of LICENSEE under this Agreement, then MICHIGAN and RDLP shall offer those terms to LICENSEE for that part of the Territory, to be effective as of the effective date of the license to that third party. *or the Province of Ontario **depending upon the jurisdiction in which any action relating to the Agreement is brought 17 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement in triplicate originals by their duly authorized officers or representatives. FOR TARGETED GENETICS CORPORATION By H. Stewart Parker ------------------------------ (authorized representative) Typed Name H. Stewart Parker ---------------------- Title Pres. & CEO --------------------------- Date March 21, 1994 ---------------------------- FOR HSC RESEARCH AND DEVELOPMENT FOR THE REGENTS OF THE UNIVERSITY OF LIMITED PARTNERSHIP MICHIGAN By G. Chiasson By Robert L. Robb ------------------------------ ------------------------------------ (authorized representative) (authorized representative) Typed Name George Chiasson Typed Name Robert L. Robb ---------------------- ---------------------------- Title President Title Director, Intellectual Properties --------------------------- ---------------------------------- Date March 28, 1994 Date August 26, 1993 ---------------------------- ---------------------------------- 18 APPENDIX TO LICENSE AGREEMENT MICHIGAN FILE #492C2 TECHNOLOGY - THERAPEUTIC LICENSE BETWEEN THE REGENTS OF THE UNIVERSITY OF MICHIGAN, HSC RESEARCH AND DEVELOPMENT LIMITED PARTNERSHIP, AND TARGETED GENETICS CORPORATION "Cystic Fibrosis Gene" - Patents Pending Country Serial Number Filing Date - ------- ------------- ----------- United States 401,609 August 31, 1989 Ireland 3024/90 August 21, 1990 PCT CA90/00267 August 20, 1990 WO 91/02796 March 7, 1991 EPO* 90912428.1 August 20, 1990 Japan 511424/90 August 20, 1990 Canada 2066204-2 August 20, 1990 Australia 61616/90 August 20, 1990 *Note: EPO designated states include the following countries: Austria, Belgium, Switzerland and Liechtenstein, Germany, Denmark, Spain, France, United Kingdom, Italy, Luxembourg, Netherlands, Sweden EX-10.14 6 EXCLUSIVE LICENSE AGREEMENT REDACTED VERSION EXHIBIT 10.14 To Targeted Genetics Corporation's Form 10-K For the Year Ended December 31, 1997 "[ * ]" = omitted, confidential material, which material has been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment. TGC EXCLUSIVE LICENSE AGREEMENT EXHIBIT 10.14 EXCLUSIVE LICENSE AGREEMENT This Agreement is entered into as of the 23rd day of March, 1994 by and between the Fred Hutchinson Cancer Research Center, a Washington non-profit corporation ("FHCRC") and Targeted Genetics Corporation, 1100 Olive Way, Suite 100, Seattle, WA 98101 ("TGC"), a Washington corporation. RECITALS Whereas, FHCRC and the National Institutes of Health/Alcohol, Drug Abuse and Mental Health Administration (NIH/ADAMHA) are the owners by assignment from Drs. A. Dusty Miller, J. Victor Martinez, Carolyn A. Wilson and Maribeth V. Eiden of the LICENSED PATENT RIGHTS as defined in this Agreement, and FHCRC and NIH/ADAMHA have entered into an agreement that allows FHCRC to act as licensing agent of NIH/ADAMHA; Whereas FHCRC is committed to a policy that ideas or creative works produced at FHCRC should be used for the greatest possible public benefit and believes that every reasonable incentive should be provided for the prompt introduction of such ideas into public use, all in a manner consistent with the public interest; Whereas TGC desires to obtain an exclusive worldwide license in order to practice the above referenced invention covered by LICENSED PATENT RIGHTS in the United States and in certain foreign countries, and to manufacture, use and sell in the commercial market the products made in accordance therewith; and Whereas FHCRC is willing to grant such a license to TGC subject to the terms and conditions of this Agreement. AGREEMENT NOW THEREFORE, in consideration of the foregoing premises and the mutual covenants as set forth herein, the parties agree as follows: ARTICLE 1 - DEFINITIONS 1.1 LICENSED PATENT RIGHTS shall mean rights and claims in and to the inventions described in, and rights covered by, the issued United States patents and patent applications listed in Appendix A attached to this Agreement and made a part hereof, as well as all continuations, continuations-in-part, divisions and renewals thereof, which will automatically be deemed incorporated in and added to this Agreement and shall periodically be added to Appendix A. TGC EXCLUSIVE LICENSE AGREEMENT 1.2 LICENSED PROCESSES shall mean processes the relevant practice of which would in the applicable jurisdiction, in the absence of this License, infringe upon either an unexpired valid claim under LICENSED PATENT RIGHTS or a claim in a then-pending patent application under LICENSED PATENT RIGHTS (treating such application, for such purposes, as having been issued as a patent in such jurisdiction). 1.3 LICENSED PRODUCTS shall mean products the relevant manufacture, use or sale of which would in the applicable jurisdiction, in the absence of this License, infringe upon either an unexpired valid claim under LICENSED PATENT RIGHTS or a claim in a then-pending patent application under LICENSED PATENT RIGHTS or (treating such application, for such purposes, as having been issued as a patent in such jurisdiction), or products made in accordance with or by means of LICENSED PROCESSES. 1.4 NET SALES shall mean the amount billed or invoiced on sales of LICENSED PRODUCTS less: (a) Customary trade, quantity or cash discounts and non-affiliated brokers' or agents' commissions actually allowed and taken; (b) Amounts repaid or credited by reason of rejection or return; and/or (c) To the extent separately stated on purchase orders, invoices or other documents of sales, taxes levied on and/or other governmental charges made as to production, sale, transportation, delivery or use and paid by or on behalf of TGC. 1.5 AFFILIATES shall mean any company, corporation, or business in which TGC owns or controls at least a fifty percent (50%) ownership interest or which directly or indirectly owns or controls more than a fifty percent (50%) ownership interest in TGC. 1.6 TECHNOLOGY shall mean any and all information or LICENSED PATENT RIGHTS supplied by FHCRC to TGC. 2 TGC EXCLUSIVE LICENSE AGREEMENT ARTICLE 2 - GRANT 2.1 FHCRC hereby grants to TGC and TGC accepts, subject to the terms and conditions hereof, an exclusive worldwide license, under LICENSED PATENT RIGHTS, to make, to use, to sell the LICENSED PRODUCTS, and to practice the LICENSED PROCESSES, for the Term permitted in Article 3 of this Agreement (the "License"). The License granted to TGC by FHCRC hereunder is limited to those fields of use relevant for the prophylaxis and treatment of human disease in the methods described under LICENSED PATENT RIGHTS. Any license in any other field shall be the subject of a separate agreement and shall require TGC's submission of evidence demonstrating its willingness and ability to develop and commercialize the kinds of products or processes likely to be encompassed in such other field. Such license shall include the right to grant sublicenses, subject to the provisions of Section 2.2 below. In order to provide TGC with a period of exclusivity, FHCRC agrees it will not grant licenses to others except as permitted in Section 2.2 below. TGC agrees during the period of exclusivity of this license in the United States that any LICENSED PRODUCT produced for sale in the United States will be manufactured substantially in the United States. 2.2 The License is subject to the following policies, obligations and/or conditions: (a) FHCRC's Patents and Inventions Policy adopted September 30, 1983, Public Law 98-620 and FHCRC's obligations under agreements with other sponsors of research. Any right granted in this Agreement greater than that permitted under Public Law 98-620 shall be subject to modification as may be required to conform to the provisions of the statute. (b) For research purposes only and not for any commercial purpose, FHCRC shall have the right to make and to use the TECHNOLOGY. (c) TGC shall use reasonable effort to introduce the LICENSED PRODUCTS into the commercial market as soon as practicable, consistent with sound and reasonable business practices and judgment, and thereafter endeavor to keep LICENSED PRODUCTS reasonably available to the public. (d) FHCRC shall have the right to terminate or render this Agreement nonexclusive at any time after three (3) years from the date hereof if, in FHCRC's reasonable judgment, TGC: 3 TGC EXCLUSIVE LICENSE AGREEMENT (i) has not put the licensed subject matter into commercial use in the country or countries where licensed, directly or through a sublicense, and is not keeping the licensed subject matter reasonably available to the public, or (ii) is not demonstrably engaged in research, development, manufacturing, marketing or licensing program, as appropriate, directed toward these ends; or (iii) has not expended at least three hundred thousand dollars ($300,000) in the twelve (12) month period beginning (3) years from the EFFECTIVE DATE, or in any (12) twelve month period beginning anytime thereafter, on internal and external personnel, their benefits, supplies and equipment related to research and development of the LICENSED PRODUCTS In making this determination FHCRC shall take into account the normal course of such programs conducted with sound and reasonable business practices and judgment and shall take into account the reports provided hereunder by TGC. (e) TGC shall not grant any sublicense without FHCRC's prior written consent. All sublicenses granted by TGC hereunder shall include a requirement that the sublicensee use its best efforts to bring the subject matter of the sublicense into commercial use as quickly as is reasonably possible and shall expressly bind the sublicensee to meet TGC's obligations to FHCRC under this Agreement. Copies of all sublicense agreements shall promptly be provided to FHCRC. (f) In the event FHCRC becomes aware of third parties that wish to license the LICENSED PATENT RIGHTS in specific fields of use that would not result in direct or indirect competition to TGC, FHCRC shall notify TGC and TGC shall exercise one of the following options: (i) commence active research and development of LICENSED PRODUCTS under the LICENSED PATENT RIGHTS in that field of use; 4 TGC EXCLUSIVE LICENSE AGREEMENT (ii) grant a sublicense to said third parties to make, use and sell LICENSED PRODUCTS under the LICENSED PATENT RIGHTS in that field of use; or (iii) grant the right to FHCRC to directly license said third parties to make, use and sell LICENSED PRODUCTS under the LICENSED PATENT RIGHTS in that field of use. 2.3 Notwithstanding the foregoing provisions of Article 2, TGC shall have the right to assign the license granted under Article 2 to an AFFILIATE or to any organization that acquires all or substantially all of TGC's business, subject to the terms and conditions hereof. 2.4 This Agreement shall have no effect upon any and all rights reserved to the United States Government and others under Public Law 98-620. ARTICLE 3 - TERM OF AGREEMENT 3.1 This Agreement becomes effective as of the date first above written (the "Effective Date"), and, subject to earlier termination as provided in Article 9 shall remain in effect until the last to expire of the LICENSED PATENT RIGHTS (the "Term"). ARTICLE 4 - ROYALTIES 4.1 In consideration for the granting of the License, TGC shall pay to FHCRC a non-refundable license fee ("License Fee") in the sum of [ * ] of such License Fee shall be payable within thirty days of the Effective Date and [ * ] shall be payable one (1) year from the Effective Date. 4.2 During the Term, TGC shall pay to FHCRC a royalty in the amount of [ * ] of the NET SALES of all LICENSED PRODUCTS and all products using LICENSED PROCESSES and all services utilizing LICENSED PRODUCTS or LICENSED PROCESSES which are manufactured or used by TGC and its AFFILIATES or sublicensees in the United States, and leased or sold by TGC and its AFFILIATES or sublicenses in the United States, except, however, that the foregoing royalty rate may be reduced by one half the amount of third party royalties payable on [*] Confidential Treatment Requested 5 TGC EXCLUSIVE LICENSE AGREEMENT licenses required to make, use or sell LICENSED PRODUCTS or to practice a LICENSED PROCESS, but in no case shall the royalty rate be reduced to less than [ * ] of NET SALES. 4.3 During the Term, TGC shall pay to FHCRC a royalty in the amount of [ * ] of the NET SALES of all LICENSED PRODUCTS and all products using LICENSED PROCESSES and all services utilizing LICENSED PRODUCTS or LICENSED PROCESSES which are manufactured or used by TGC and its AFFILIATES or sublicensees in the United States, and leased or sold by TGC and its AFFILIATES or sublicenses outside of the United States, except, however, that the foregoing royalty rate may be reduced by one half the amount of third party royalties payable on licenses required to make, use or sell LICENSED PRODUCTS or to practice a LICENSED PROCESS, but in no case shall the royalty rate be reduced to less than [ * ] of NET SALES. 4.4 No multiple royalties shall be payable because any LICENSED PRODUCT which TGC manufactures, uses, leases or sells is covered by multiple claims under the LICENSED PATENT RIGHTS. 4.5 TGC shall pay to FHCRC at least the following amounts in royalties in the following contract years (the "Maintenance Royalties"): (i) [ * ] upon the earlier of the issuance of the first patent included in the LICENSED PATENT RIGHTS or [ * ]; (ii) [ * ] upon the earlier of approval to commence Phase 2 (as defined by 21 Code of Federal Regulations, Chapter 1) clinical trials for the first LICENSED PRODUCT or [ * ]; and (iii) [ * ] upon approval of the New Drug Application ("NDA") or Product License Application ("PLA") (as defined by 21 Code of Federal Regulations, Chapter 1) for the first LICENSED PRODUCT or [ * ]. 4.6 If TGC transfers or otherwise sublicenses LICENSED PATENT RIGHTS to a third party, for value other than NET SALES, TGC shall also pay FHCRC a percentage of [ * ] of all proceeds including, but not limited to, licensing fees, receivable by TGC in connection therewith ("Non-Royalty Fees"). [*] Confidential Treatment Requested 6 TGC EXCLUSIVE LICENSE AGREEMENT Any such payment to FHCRC shall be made within thirty (30) days after receipt of such proceeds by TGC. Any such sale or transfer shall not affect TGC's obligations to pay royalties under Sections 6.2 and 6.3 above. In no event shall Non-Royalty Fees include any payment or other value due to or received by TGC from a third party as, for example, an upfront fee, research and development payments, milestone payments, equity, or any equivalent of the foregoing, or of any payment that is not explicitly due to or received by TGC in consideration for a grant by TGC to a third party to make, have made, use and sell LICENSED PRODUCTS, or practice LICENSED PROCESSES, under LICENSED PATENT RIGHTS. In the event that TGC transfers or otherwise sublicenses LICENSED PATENT RIGHTS to a third party in combination with patents(s) and/or other rights(s) of a third party(ies) and TGC is due and receives Non-Royalty Fees, then TGC shall pay FHCRC an equitable portion of such Non-Royalty Fees as to be determined by the good faith negotiations of TGC and FHCRC. ARTICLE 5 - REPORTING AND ROYALTY PAYMENT TERMS 5.1 Upon or before execution of this Agreement, TGC shall provide to FHCRC a written research and development plan pursuant to which TGC intends to bring the subject matter of the License granted hereunder into commercial use, including projections of sales and proposed marketing efforts. 5.2 TGC shall report to FHCRC the date of first sale of LICENSED PRODUCTS (or results of LICENSED PROCESSES) in each country within thirty (30) days of occurrence. 5.3 TGC shall provide written annual reports within sixty (60) days after June 30 of each calendar year which shall include the following information: reports of progress on research and development, regulatory approvals, manufacturing, sublicensing, marketing and sales during the preceding twelve (12) months as plans for the coming year. If TGC's progress differs from that anticipated in the plan provided to FHCRC under Section 5.1, TGC shall explain the reasons for the difference and propose a modified plan for FHCRC's review and approval. TGC shall also provide any reasonable additional data FHCRC requires to evaluate TGC's performance. 5.4 Beginning after the first NET SALES, TGC shall submit to FHCRC within sixty (60) days after June 30 and December 31 of each calendar year during the Term, and upon the effective termination of this Agreement, reports for the preceding six (6) month period identifying the amount of the LICENSED PRODUCTS sold by TGC, its AFFILIATES and sublicensees in each country, the sales volume and NET 7 TGC EXCLUSIVE LICENSE AGREEMENT SALES, and the amount of royalty due to FHCRC together with payment of such royalty amount. Such report shall be certified as correct by an officer of TGC and shall include a detailed listing of all deductions from NET SALES, sublicensee income or from royalties as specified herein. If no royalties are due to FHCRC for any reporting period, the written report shall so state. All royalties due hereunder shall be payable in United States dollars. Conversion of foreign currency to U.S. dollars shall be made at the conversion rate existing in the United States on the date of royalty payments by TGC as quoted in the Wall Street Journal for that day. 5.5 All such reports shall be maintained in confidence by FHCRC, except as required by law, including Public Law 98-620. ARTICLE 6 - RECORD KEEPING 6.1 TGC shall maintain complete and accurate books of account and records showing all sales of LICENSED PRODUCTS and all NET SALES (broken down by gross sales and allowable deductions) attributable to such sales. For purposes of verifying the accuracy of the royalties paid by TGC pursuant to this Agreement or verifying performance of TGC of any other obligation to FHCRC hereunder, such books and records shall be open to inspection and copying, during usual business hours, by an independent certified public accountant or by employees of FHCRC. Such accountant shall not disclose to FHCRC any information other than information relating to accuracy of reports and calculations of amounts due to FHCRC made under this Agreement. In the event that any such inspection shows any underreporting and underpayment by TGC in excess of five percent (5%) for any twelve (12) month period, then TGC shall pay the cost of such examination. Such books and records shall be maintained for at least two (2) full years after the termination of this Agreement. ARTICLE 7 - DOMESTIC AND FOREIGN PATENT FILING AND MAINTENANCE 7.1 TGC shall reimburse FHCRC for all reasonable expenses FHCRC has incurred for the preparation, filing, prosecution and maintenance of LICENSED PATENT RIGHTS and shall reimburse FHCRC for all such future expenses ("PATENT EXPENSES"). With respect to PATENT EXPENSES incurred prior to the Effective Date, TGC shall reimburse FHCRC for fifty percent (50%) of such expenses no later than June 30, 1994, and shall reimburse FHCRC for fifty percent (50%) of such expenses no later than June 30, 1995. TGC shall reimburse FHCRC for all PATENT EXPENSES incurred subsequent to the Effective Date as they are invoiced by FHCRC. FHCRC shall take responsibility for the preparation, filing, prosecution and maintenance of any and all patent applications and patents included 8 TGC EXCLUSIVE LICENSE AGREEMENT in LICENSED PATENT RIGHTS, provided however that FHCRC shall first consult with TGC as to the preparation, filing, prosecution and maintenance of such patent applications and patents and shall furnish to TGC copies of documents relevant to any such preparation, filing, prosecution or maintenance. Notwithstanding the foregoing, FHCRC may consent subsequent to the Effective Date for TGC to assume such responsibilities with respect to the LICENSED PATENT RIGHTS. 7.2 FHCRC and TGC shall cooperate fully and in good faith in the preparation, filing, prosecution and maintenance of LICENSED PATENT RIGHTS and of all patents and patent applications licensed to TGC hereunder, including the execution of all papers and instruments so as to enable FHCRC to apply for, to prosecute and to maintain patent applications and patents in FHCRC's name in any country. Each party shall provide to the other prompt notice as to all matters which come to its attention and which may affect the preparation, filing, prosecution or maintenance of any such patent applications or patents. 7.3 If TGC elects not to pay the expenses of a patent application or patent included within LICENSED PATENT RIGHTS, TGC shall notify FHCRC not less than sixty (60) days prior to such action and shall thereby surrender its rights under Article 2.1 of this Agreement with regard to such patent or patent application. ARTICLE 8 - INFRINGEMENT 8.1 Each party agrees to notify the other promptly of any infringement of the LICENSED PATENT RIGHTS of which such party becomes aware. TGC shall have the option to commence legal proceedings with respect to such infringement. Before TGC commences legal proceedings (an "Action") with respect to any infringement of such patents, TGC shall give careful consideration to the views of FHCRC and to potential effects on the public interest in making its decision whether or not to commence such an Action. 8.2 If TGC elects to commence an Action as described above, TGC may reduce, by up to fifty percent (50%), the royalty due to FHCRC earned under the patent subject to suit by the amount of the expenses and costs of such Action, including attorney fees. In the event such expenses and costs exceed the amount of royalties withheld by TGC for any calendar year, TGC may to that extent reduce the royalties due to FHCRC from TGC in succeeding calendar years, but never by more than fifty percent (50%) of the royalty due in any one year. Any unused royalty credit amount may be carried forward until the full amount of the credit has been exhausted. 8.3 Recoveries or reimbursements from such Action shall first be applied to reimburse TGC and FHCRC for litigation costs not paid from royalties (if any) and 9 TGC EXCLUSIVE LICENSE AGREEMENT then to reimburse FHCRC for royalties withheld. Any remaining recoveries or reimbursements shall be shared equally by TGC and FHCRC. 8.4 In the event that TGC elects not to exercise its option to prosecute an infringement of the LICENSED PATENT RIGHTS pursuant to this Agreement, FHCRC may do so at its own expense, controlling such Action and retaining all recoveries therefrom. ARTICLE 9 - TERMINATION OF AGREEMENT 9.1 Unless terminated earlier in accordance with the terms hereof, this Agreement will expire upon the expiration of the Term as provided in Article 3. Upon termination, a final report shall promptly be submitted in accordance with the provisions of Section 5.4, together with any royalty payments and unreimbursed patent expenses due to FHCRC. 9.2 At FHCRC's option, FHCRC may terminate this Agreement sixty (60) days after giving written notice to TGC of any default in payments due hereunder and subsequent failure by TGC to remedy any such default within such period, provided that FHCRC is not then in breach of any provision hereof. 9.3 This Agreement may be terminated by either party upon breach of a material obligation or condition by the other (other than a breach according to Section 9.2), effective ninety (90) days after giving written notice to the other of such termination under this Article and specifying such breach, provided however, that if the breach is cured or shown to be non-existent within the ninety (90) day period, the notice shall be deemed automatically withdrawn and of no effect. If the parties do not agree whether a breach has occurred or been cured or whether it is "material", the dispute shall be resolved through arbitration under Article 13. 9.4 Subject to any provisions of the federal bankruptcy laws limiting rights of termination, this Agreement will automatically terminate if TGC files for protection under federal bankruptcy laws, becomes insolvent, makes an assignment for the benefit of creditors, appoints or suffers appointment of a receiver or trustee over its property, files a petition under any bankruptcy or insolvency act or has any such petition filed against it or files for dissolution. 9.5 Any sublicenses granted by TGC under this Agreement shall provide for termination or assignment to FHCRC, at the option of FHCRC, of TGC's interest therein upon termination of this Agreement. 10 TGC EXCLUSIVE LICENSE AGREEMENT 9.6 TGC shall have the right to terminate this Agreement effective thirty (30) days after giving written notice to FHCRC of termination under this Article. 9.7 Upon termination of this Agreement, TGC shall have the right for three (3) months to sell all LICENSED PRODUCTS on hand at the time of notification of termination if the royalties from such sales and any and all other payments due FHCRC are paid to and statements rendered to FHCRC with respect to such LICENSED PRODUCTS when due in accordance with this Agreement. 9.8 Upon termination of the Agreement for any reason, and subject to TGC's rights under Section 9.7, TGC shall return to FHCRC and thereafter continue to maintain the confidentiality thereof, and refrain from use thereof or the disclosure thereof to any third party as required by Article 15, and all other rights in LICENSED PROCESSES and LICENSED PRODUCTS granted to TGC under Article 2 shall expire and revert to FHCRC. Immediately upon cessation of discussions between TGC and FHCRC during the Term, or upon request by one of the parties, TGC and FHCRC will return all Proprietary Information of the other, and all documents or data storage media containing any such Proprietary Information and any and all copies thereof, and TGC and FHCRC will delete all Proprietary Information of the other from its documents or data storage media, except that the parties shall maintain one copy of such Proprietary Information in their legal or corporate development files. 9.9 Should either party terminate this Agreement as permitted herein, the other party shall not be able to claim from the terminating party any damages or compensation for losses or expenses incurred solely as a result of the termination. 9.10 Provisions hereof and accrued rights hereunder which by their terms or nature survive the termination or expiration of this Agreement shall so survive such termination or expiration. ARTICLE 10 - REPRESENTATIONS AND COVENANTS 10.1 FHCRC represents and warrants that all right, title, and interest in the patent applications or patents comprising the LICENSED PATENT RIGHTS have been assigned to it and that FHCRC has the authority to issue licenses under said LICENSED PATENT RIGHTS. FHCRC disclaims all implied or express warranties of any nature whatsoever concerning the validity of the LICENSED PATENT RIGHTS licensed hereunder. TGC acknowledges and agrees that neither FHCRC nor anyone acting on its behalf has made any representations whatsoever with regard to the scope of the LICENSED PATENT RIGHTS or that such LICENSED PATENT RIGHTS may be exploited by TGC, an AFFILIATE, or sublicensee without infringing other patents. 11 TGC EXCLUSIVE LICENSE AGREEMENT 10.2 FHCRC EXPRESSLY DISCLAIMS ANY AND ALL EXPRESS WARRANTIES, EXCEPT THOSE STATED IN THIS ARTICLE 10, AND FURTHER DISCLAIMS ANY AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS OF THE TECHNOLOGY, LICENSED PROCESSES OR LICENSED PRODUCTS FOR ANY PARTICULAR USE OR PURPOSE. 10.3 TGC represents and warrants to FHCRC that it has obtained and will at all times during the Term of this Agreement, hold and comply with all licenses, permits and authorizations necessary to TGC'S complete and timely performance of its obligations under this Agreement which are required under any applicable statutes, laws, ordinances, rules and regulations of the United States as well as those of all applicable foreign governmental bodies, agencies and subdivisions, having, asserting or claiming jurisdiction over TGC or TGC's performance of the terms of this Agreement. In particular, TGC: (a) will be responsible for obtaining all necessary United States Food and Drug Administration approvals and all approvals required by similar governmental bodies or agencies of all applicable foreign countries; and (b) understands and acknowledges that the transfer of certain commodities and technical data is subject to United States laws and regulations controlling the export of such commodities and technical data, including all Export Administration Regulations of the United States Department of Commerce. These laws and regulations, among other things, prohibit or require a license for the export of certain types of technical data to certain specified countries. TGC hereby agrees and gives written assurance that it will comply with all United States laws and regulations controlling the export of commodities and technical data, that it will be solely responsible for any violation of such by TGC or its AFFILIATES or sublicensees, and that it will defend and hold FHCRC harmless in the event of any legal action of any nature occasioned by such violation. ARTICLE 11 - LEGAL ACTION 11.1 In the event any legal action is commenced against TGC involving TECHNOLOGY or a LICENSED PRODUCT or otherwise relating to this Agreement, whether or not FHCRC is named as a party to the legal action, TGC shall keep FHCRC or its attorney nominee fully advised of the progress of the legal action 12 TGC EXCLUSIVE LICENSE AGREEMENT and shall reimburse FHCRC for its reasonable legal costs (including attorney's fees) incurred as a result of FHCRC's monitoring of such action, FHCRC's being named a party to any such legal action, or when FHCRC's employees or agents are called as witnesses therein or asked to testify for or consult with TGC in connection therewith. 11.2 FHCRC agrees to cooperate with TGC, to the extent reasonably possible, in any legal action brought pursuant to this Article 11. ARTICLE 12 - HOLD HARMLESS 12.1 TGC assumes responsibility for and shall defend, indemnify and hold FHCRC, its directors, officers, managers, agents, students, doctors and employees harmless from any and all liability, losses, expenses, damages, assessments and claims arising out of or resulting from (i) the use, sale or any disposition of LICENSED PRODUCTS, (ii) the practice of the LICENSED PROCESSES by TGC or its AFFILIATES, or (iii) the use, sale or other disposition of the LICENSED PRODUCT or LICENSED PROCESSES by others who receive LICENSED PRODUCTS or LICENSED PROCESSES directly or indirectly from TGC, its AFFILIATES, agents or representatives. ARTICLE 13 - ARBITRATION 13.1 Any dispute, other than a question relating to patent validity, between the parties hereunder which cannot be resolved by good faith negotiation between the parties over a period of at least sixty (60) days shall be resolved by arbitration before a panel of three arbitrators under the then current rules and procedures of the American Arbitration Association (the "AAA"), or other rules and procedures as the parties may agree. Each party shall bear its own costs incurred in connection with such arbitration and the fees, expenses and costs of the AAA, the arbitrator(s) and the arbitration proceeding not incurred solely by one party shall be divided equally between the parties. The arbitral award shall be binding and conclusive on both parties and may be enforced in any court of competent jurisdiction. ARTICLE 14 - NOTICES 14.1 All communications, including payments, notices, demands or requests required or permitted to be given hereunder, shall be given in writing and shall be: (a) personally delivered; (b) sent by facsimile or other electronic means of transmitting written documents; or (c) sent to the parties at their respective addresses indicated herein by registered or certified U.S. mail, return receipt requested and postage prepaid, or by private overnight mail courier service. The respective 13 TGC EXCLUSIVE LICENSE AGREEMENT addresses to be used for all such payments, notices, demands or requests are as follows: If to FHCRC: Fred Hutchinson Cancer Research Center 1124 Columbia Street, C2M-027 Seattle, Washington 98104 Attention: Catherine J. Hennings, Manager, Technology Transfer Facsimile: (206) 667-4732 With copies to: Douglas J. Shaeffer, Esq. Fred Hutchinson Cancer Research Center 1124 Columbia Street, LY-240 Seattle, Washington 98104 Facsimile: (206) 667-6590 If to TGC: Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, WA 98101 Attention: President Facsimile: (206) 223-0288 ARTICLE 15 - CONFIDENTIALITY AND NON-DISCLOSURE 15.1 Any and all information relating to the TECHNOLOGY furnished to either party (or its agents or employees) by the other party (or its laboratories or agents or employees), including but not limited to information regarding or relating to devices, cell lines, monoclonal antibodies, methods, processes, data regarding testing and experiments, drawings, documentation, patent applications and patents (when issued) and product development plans, is confidential, proprietary, trade secret information and any and all such information is hereinafter referred to as "Proprietary Information." (a) As used herein, "Proprietary Information" includes the following: (i) written material which is clearly designated on its face as confidential and patent applications; (ii) oral disclosures, the content of which is within thirty (30) days after communication designated in writing as confidential, or which is so designated as confidential orally during oral disclosures or in contemporaneous written memoranda; and 14 TGC EXCLUSIVE LICENSE AGREEMENT (iii) specimens, samples, and other physical materials which are prior to or at the time of disclosure designated in writing as confidential. (b) As used herein, "Proprietary Information" does not include: (i) information which at the time of disclosure to the receiving party is generally available to the public, or which after such disclosure becomes generally available to the public by publication or otherwise; (ii) information that is demonstrated to have been in the receiving party's possession prior to the time of disclosure by the disclosing party; (iii) information that is demonstrated by a preponderance of the evidence to have been independently developed by the receiving party's personnel without reference to Proprietary Information disclosed by the disclosing party; and (iv) information received from a third party unless such information is obtained subject to a confidential disclosure agreement. 15.2 Each party agrees: (a) to hold in strict confidence and trust and maintain as confidential all Proprietary Information disclosed by the other party and any information derived therefrom; (b) not to disclose any such Proprietary Information or any information derived therefrom to any person, except to those employees or legal counsel of the receiving party who are required to receive the Proprietary Information for the purposes described in this Agreement and who are bound by the provisions of this Agreement; (c) not to export or otherwise disclose any such Proprietary Information to any person who is, or who the receiving party believes may be, located or may use the Proprietary Information outside the United States; and (d) to use the Proprietary Information only for the purposes described in this Agreement. 15.3 Each party agrees that: all Proprietary Information disclosed by the other party will at all times be and remain the sole property of the disclosing party and the disclosing party is the sole owner of all patents, copyrights and other intellectual property rights and other proprietary rights related to the Proprietary Information disclosed by it. Nothing in this Agreement shall be construed as granting to or 15 TGC EXCLUSIVE LICENSE AGREEMENT permitting to the receiving party any implied license in, or right or option to, license or use any intellectual property right (including but not limited to any patent right obtained by the disclosing party) relating to the Proprietary Information disclosed by it or any other right to use such Proprietary Information except as expressly provided herein and for any reason other than for the purposes described in this Agreement. 15.4 Immediately upon the termination of this Agreement, or upon either disclosing party's request, the receiving party will deliver to the disclosing party all Proprietary Information disclosed by the disclosing party and all documents and data storage media containing any such Proprietary Information and any and all copies thereof, and will delete all such Proprietary Information from its documents and data storage media. 15.5 The obligations of confidentiality provided herein shall continue in force and effect for five (5) years from the date of termination of this Agreement, whether by lapse of the Term hereof or otherwise, unless extended or limited by mutual agreement executed in writing by an officer of each party. ARTICLE 16 - PATENT MARKING 16.1 Subsequent to the issuance of any patent based on the application(s) covered by LICENSED PATENT RIGHTS and provided FHCRC advises TGC of the patent number or numbers of any such issued patents, TGC agrees to mark and to have marked by its sublicensees every LICENSED PRODUCT manufactured, used or sold by TGC, its AFFILIATES or its sublicensees in accordance with the statutes of the United States relating to the marking of patented articles. ARTICLE 17 - RIGHT TO PUBLISH 17.1 Nothing in this Agreement shall be construed as prohibiting FHCRC or its researchers from publishing any of the results of research on the TECHNOLOGY in reputable scientific journals. Notwithstanding the foregoing, it is expected the FHCRC shall take such measures to obtain appropriate patent or other protection for any inventions which FHCRC reasonably knows will be incorporated into the LICENSED PATENT RIGHTS as a continuation or a continuation-in-part. ARTICLE 18 - MISCELLANEOUS 18.1 The rights and obligations of the parties under this Agreement shall be governed by and construed in accordance with the laws of the State of Washington. 16 TGC EXCLUSIVE LICENSE AGREEMENT 18.2 This Agreement may not be amended except by an instrument in writing signed by both parties. 18.3 The Agreement shall be binding on the parties hereto and upon their respective heirs, administrators, successors and assigns. This Agreement may not be assigned or sublicensed by TGC or by operation of law without the prior written consent of FHCRC. 18.4 TGC acknowledges that FHCRC is a non-profit organization qualifying for and holding the status of an exempt organization under Section 501(c)(3) of the United States Internal Revenue Code. If the Internal Revenue Service determines, or a determination by FHCRC based on advice of legal or tax counsel is reasonably made, that any part or all of this Agreement will jeopardize FHCRC's Section 501(c)(3) status, the parties agree to meet and confer in good faith to amend this Agreement to the extent necessary to satisfy Internal Revenue Service requirements for retention of FHCRC'S Section 501(c)(3) status. If FHCRC and TGC cannot agree within 30 days after commencing negotiations regarding the amendments to be made to this Agreement in order for FHCRC to retain its Section 501(c)(3) status, FHCRC may terminate this Agreement effective upon giving written notice to TGC of termination under this Article 18. 18.5 TGC understands and acknowledges that agreements between FHCRC and agencies of the United States Government funding FHCRC's programs may contain clauses granting patent and/or other rights to the agencies or the U.S. Government; TGC agrees that the rights granted to it under this Agreement shall be subject to any rights of the agencies and the U.S. Government. In the event of a conflict between any of the provisions of this Agreement and the provisions of any U.S. Government agency funding agreement and/or regulation shall prevail and FHCRC will have no liability to TGC as a result of such conflict. 18.6 Except as otherwise provided herein, FHCRC and its employees, including but not limited to the INVESTIGATORS, shall not use the name of TGC, its employees or agents, and TGC, including its employees, shall not use the name of FHCRC or any of its employees or agents in any advertising, publicity, news release, promotional materials or any public disclosure, whatsoever, EITHER WRITTEN OR ORAL, related to the existence of this Agreement or any actions or work undertaken pursuant to terms of this Agreement without the prior written consent of the other party. FHCRC shall have three (3) business days from the time it receives a proposed disclosure ("Review Period") to approve and/or provide comments to TGC with respect to such disclosure. In the event that TGC receives no communications from 17 TGC EXCLUSIVE LICENSE AGREEMENT FHCRC regarding such disclosure within the Review Period, then FHCRC's consent of the public release of such disclosure shall be deemed to have been granted. 18.7 Upon the earlier of any: (i) testing or use in human subjects or (ii) sale of a LICENSED PRODUCT, TGC will have FHCRC named as an additional insured on TGC'S product liability insurance policies, with limits of at least $1,000,000 per claim and $5,000,000 annual aggregate. Such policies shall not be terminated without thirty (30) days prior written notice to FHCRC. If FHCRC's insurance costs can be shown to have increased solely because of this Agreement, and such increases are verified by an independent certified public accountant, TGC shall reimburse FHCRC for such increase within twenty (20) days of receiving written notice from FHCRC requesting such reimbursement and the parties shall attempt to agree to changes and revisions of this Agreement. If the parties fail to arrive at agreement within a reasonable time, or TGC does not reimburse FHCRC, FHCRC may by written notice terminate this Agreement. 18.8 All letters, documents, or other materials of a written or physical nature, required by or relating to this Agreement shall be in English and sent to the party at the address given in Article 14. 18.9 The parties to this Agreement recognize and agree that each is operating as an independent contractor and not as an agent of the other. This Agreement shall not constitute a partnership or joint venture, and neither party may be bound by the other to any contract, arrangement or understanding except as specifically stated herein. 18.10 Should a court of competent jurisdiction later consider any provision of this Agreement to be invalid, illegal, or unenforceable, it shall be considered severed from this Agreement. All other provisions, rights and obligations shall continue without regard to the severed provision, provided that the remaining provisions of this Agreement are in accord with the intention of the parties. 18.11 In the event any party to this Agreement commences any action or proceeding, including an appeal of an action or proceeding, against the other, or otherwise retains an attorney, by reason of any breach or claimed breach of any provision of this Agreement, or to seek a judicial declaration of rights hereunder or judicial or equitable relief, the prevailing party in such action or proceeding shall be entitled to recover its reasonable attorneys' fees and costs. At the option of FHCRC, venue of any such legal or equitable action shall lie in Seattle, Washington. TGC hereby submits to the jurisdiction of the Federal District Court of Western Washington located in Seattle, Washington, and hereby agrees to accept service of process by certified mail, return receipt requested, effective upon delivery to TGC. 18 TGC EXCLUSIVE LICENSE AGREEMENT IN WITNESS WHEREOF, the parties have executed this Agreement through duly authorized representatives as of the date first above written. FRED HUTCHINSON CANCER RESEARCH CENTER TARGETED GENETICS CORPORATION By Catherine J. Hennings By H. Stewart Parker ------------------------------ ---------------------- Name Catherine J. Hennings Name H. Stewart Parker ------------------------------ ---------------------- Title Manager, Technology Transfer Title President and CEO ------------------------------ ---------------------- Date March 24, 1994 Date March 23, 1994 ------------------------------ ---------------------- 19 APPENDIX A PATENT APPLICATIONS AND PATENTS PATENT FILE OR PATENT NO. APPLCTN NO. COUNTRY ISSUE DATE TITLE/INVENTOR ---------- ----------- ------- ---------- -------------- 07/660,616 U.S. 2/22/91 RETROVIRUS PACKAGING CELL LINES BASED ON GIBBON APE LEUKEMIA VIRUS (Miller, Wilson, Eiden, Garcia-Martinez) 20 EX-10.23 7 LICENSE AGREEMENT REDACTED VERSION EXHIBIT 10.23 To Targeted Genetics Corporation's Form 10-K For the Year Ended December 31, 1997 "[ * ]" = omitted, confidential material, which material has been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment. LICENSE AGREEMENT This Agreement is made and entered into as of March 15, 1997 (the "Effective Date") by and between THE BURNHAM INSTITUTE, a non profit public benefit corporation duly organized and existing under the laws of the State of California and having its principal office at 10901 North Torrey Pines Road, La Jolla, CA 92037, USA (hereinafter referred to as "INSTITUTE"), and TARGETED GENETICS CORPORATION, a corporation duly organized under the laws of the State of Washington and having its principal office at 1100 Olive Way, Suite 100, Seattle, WA 98101 (hereinafter referred to as "LICENSEE"). RECITALS -------- A. INSTITUTE is the owner of certain PATENT RIGHTS (as later defined herein) and warrants that it has the right to grant licenses under said PATENT RIGHTS, subject only to a royalty-free, nonexclusive license heretofore granted to the United States Government. B. INSTITUTE desires to have the PATENT RIGHTS developed and commercialized to benefit the public and is willing to grant a license thereunder. C. LICENSEE has represented to INSTITUTE that LICENSEE is experienced in the development of products similar to the LICENSED PRODUCT(s) (as later defined herein) and that it will commit itself to a diligent program of exploiting the PATENT RIGHTS so that public utilization will result therefrom. D. LICENSEE desires to obtain a license under the PATENT RIGHTS upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto agree as follows: ARTICLE 1 - DEFINITIONS ----------------------- For the purposes of this Agreement, the following words and phrases will have the following meanings: 1.1 "LICENSEE" means Targeted Genetics Corporation as well as a related company of Targeted Genetics Corporation, the voting stock of which is directly or indirectly at least fifty percent (50%) owned or controlled by Targeted Genetics Corporation, an organization which directly or indirectly controls more than fifty percent (50%) of the voting stock of Targeted Genetics Corporation and an organization, the majority ownership of which is directly or indirectly common to the ownership of Targeted Genetics Corporation. 1.2 "PATENT RIGHTS" means all of the following: (a) The US Patent Applications listed in Appendix A; (b) divisions, continuations and continuations-in-part of (a) above, including reissues, extensions or reexaminations of the foregoing; and (c) all foreign counterparts of (a) and (b) above; (d) any and all US and foreign counterpart patent applications and patents including divisions, continuations and continuations-in- part and reissues, extensions or reexaminations of the foregoing that claim any Institute Invention or Joint Invention as those terms are defined in the Sponsored Research Agreement of even date herewith; (e) but excluding claims in any or all of (a) - (d) above drawn to any uses of nucleic acid sequences that are not homologous with, or a derivative, variant, progeny or improvement of E1A. 1.3 A "LICENSED PRODUCT" will mean any product or composition which would, in the applicable jurisdiction, in the absence of the license granted hereunder, infringe a Valid Claim. 1.4 A "LICENSED PROCESS" will mean any method or process or part thereof which would in the applicable jurisdiction, in the absence of the license granted hereunder, infringe a Valid Claim. 1.5 "NET SALES" will mean LICENSEE's (and its sublicensees') gross billings for LICENSED PRODUCTS produced hereunder less the sum of the following items to the extent that said items are included in the gross billings: (a) discounts actually allowed in amounts customary in the trade; (b) sales taxes, tariffs, duties and/or use taxes directly imposed and with reference to particular sales; (c) outbound transportation prepaid or allowed; and (d) amounts allowed or credited on returns. -2- No deductions will be made for commissions paid to individuals whether they be with independent sales agencies or regularly employed by LICENSEE and on its payroll, or for cost of collections. LICENSED PRODUCTS will be considered "sold" when billed to the customers. 1.6 "TERRITORY" will mean the entire world. 1.7 "FIELD OF USE" will mean for the diagnosis and/or treatment of cancer. 1.8 "SPONSORED RESEARCH AGREEMENT" means the agreement of even date herewith between the INSTITUTE and LICENSEE having said title. 1.9 "VALID CLAIM" will mean any pending or issued claim of the LICENSED PATENT RIGHTS that has not been held invalid or unenforceable by a final judgment by a court of competent jurisdiction and authority which is unappeallable or as to which the applicable time for appeal has expired without any appeal being filed. ARTICLE 2 - GRANT AND SUBLICENSES --------------------------------- 2.1 License Grant. INSTITUTE hereby grants to LICENSEE the exclusive license right to make, use, sell, import and export (subject to the provisions of Article 9) LICENSED PRODUCTS and LICENSED PROCESSES in the TERRITORY, for use in the FIELD OF USE. This license grant will continue until the last to expire of the PATENT RIGHTS, unless this Agreement is terminated sooner according to the terms hereof. This license grant is subject to the governmental rights referenced in Recital A and to the reserved rights referenced in Paragraph 2.2 hereof. 2.2 Reserved Rights. INSTITUTE reserves the right to (a) practice and have practiced the PATENT RIGHTS for noncommercial purposes; and (b) use and distribute to third parties material covered by the PATENT RIGHTS for noncommercial research purposes and (c) grant to others the right to practice the PATENT RIGHTS to make use or sell products that are not LICENSED PRODUCTS and LICENSED PROCESSES. INSTITUTE will notify LICENSEE of any pending distribution of materials covered by the PATENT RIGHTS to commercial third parties and its intention to grant licenses per (b) and (c) of this section, respectively, at least thirty (30) days prior to such planned distribution. -3- LICENSEE will have the right to request that materials covered by the PATENT RIGHTS not be distributed or licenses not granted, and such request will not be unreasonably denied by the INSTITUTE. 2.3 No Implied Rights. The license granted hereunder will not be construed to confer any rights upon LICENSEE by implication, estoppel or otherwise as to any technology not specifically set forth in Appendix A hereof. 2.4 Sublicensing. LICENSEE will have the right to enter into sublicensing agreements for the rights, privileges and licenses granted hereunder, subject to the INSTITUTE'S prior written approval, which approval will not be unreasonably denied. Upon any termination of this Agreement, sublicensees' rights will also terminate, subject to Paragraph 13.6 hereof. 2.5 Binding on Sublicensee. LICENSEE agrees that any sublicenses granted by it will provide that all obligations of LICENSEE to INSTITUTE created by this Agreement will be binding upon the sublicensee as if it were a party to this Agreement. 2.6 No Extra Consideration from Sublicensee. LICENSEE will not receive from sublicensees anything of value in lieu of cash payments in consideration for any sublicense under this Agreement, without the express prior written permission of INSTITUTE ARTICLE 3 - DUE DILIGENCE ------------------------- 3.1 Commercialization. (a) LICENSEE will use its commercially reasonable efforts to bring LICENSED PRODUCTS to market through a thorough, vigorous and diligent program for exploitation of the PATENT RIGHTS and to continue active, diligent marketing efforts for LICENSED PRODUCTS throughout the life of this Agreement. (b) LICENSEE will prepare and furnish to INSTITUTE an annual development and progress report, as of June 30 of each year, describing LICENSEE'S progress (and sublicensee's plans) for the development and commercialization of LICENSED PRODUCTS. (c) So long as LICENSEE is pursuing commercially reasonable efforts to bring to market and to diligently market at least one -4- LICENSED PRODUCT, including meeting the milestones for said LICENSED PRODUCT as specified in Paragraph 3.2, below, then INSTITUTE will not be entitled to terminate this Agreement on account of a default under this Paragraph 3.1. 3.2 Milestones. In addition, LICENSEE will adhere to the following milestones: (a) Initiate first Phase II clinical trial for a product covered by the PATENT RIGHTS not more than [ * ] from the Effective Date; and (b) Initiate first Phase III clinical trial for a product covered by the PATENT RIGHTS not more than [ * ] from the Effective Date; and (c) File a New Drug Application for a product covered by the PATENT RIGHTS not more than [ * ] years from the Effective Date; and (d) Receive approval of a New Drug Application for a product covered by the PATENT RIGHTS not more than [ * ] years from the Effective Date. 3.3 If LICENSEE fails to achieve the milestones described in Paragraph 3.2 (a), then the INSTITUTE has the option, in its sole discretion, to terminate this Agreement, or to convert the exclusive license granted by this Agreement to a non-exclusive license. 3.4 LICENSEE may request INSTITUTE approval to modify the milestones described in Paragraph 3.2 (b)-(d). If LICENSEE can reasonably demonstrate that such failure is attributable to causes outside of its control, INSTITUTE approval of such request will not be unreasonably denied. If such failure is attributable to causes within LICENSEE'S [*] Confidential Treatment Requested -5- control then the INSTITUTE has the option, in its sole discretion, to consider such failure a material breach or default of this Agreement and may exercise its right to terminate this Agreement pursuant to Paragraph 13.3 hereof. ARTICLE 4 - LICENSE FEES, ROYALTIES AND MILESTONES -------------------------------------------------- 4.1 License Fees and Stock Warrants. In consideration of the license granted LICENSEE pursuant to Article 2 hereof, LICENSEE will pay and/or deliver to the INSTITUTE: (a) a license fee of [ * ] cash payable as follows: [ * ] already paid by LICENSEE upon execution of the term sheet that outlined the terms of this Agreement, receipt of which is hereby acknowledged; [ * ] due within thirty (30) days after the Effective Date; and [ * ] due on or before six months after the Effective Date. (b) a stock warrant to purchase 50,000 of LICENSEE'S common stock at the market price as of the Effective Date of this Agreement, which warrant will be exercisable for a period of seven years after the Effective Date. Such warrant will vest as follows: 1. 16,667 shares upon the Effective Date of this Agreement; 2. 16,666 shares upon successful completion by INSTITUTE of [ * ], provided that such studies are completed within one (1) year after the Effective Date, and provided further that if such studies are not completed within one (1) year after the Effective Date such warrant for these 16,666 shares will be rescinded; 3. 16,667 shares upon issuance of a US patent covering [ * ]. 4.2 Running Royalties. (a) LICENSEE will pay to the INSTITUTE running royalties of [ * ] of NET SALES of the LICENSED [*] Confidential Treatment Requested -6- made, used or sold by LICENSEE or sublicensees; provided however, if there are multiple, stacking royalties payable by LICENSEE on the LICENSED PRODUCTS to third parties, then LICENSEE may reduce the [ * ] royalty to INSTITUTE on the same proportionate basis as all of the other stacking royalties are reduced, so long as the resulting royalty payable to the INSTITUTE does not go below [ * ] of NET SALES of LICENSED PRODUCTS. (b) In the case of NET SALES of LICENSE PRODUCTS by sublicensees, INSTITUTE will be paid the greater of the running royalties specified in Paragraph 4.2(a) or [ * ] of the royalties payable by the sublicensee to LICENSEE. (c) In the case of a sublicense which pays any consideration to LICENSEE other than running royalties on NET SALES of LICENSED PRODUCTS ("Non-Royalty Fees") (e.g. such other consideration includes license fees, marketing fees, milestone payments, equity in sublicensee, bonus payments and the like - but excludes specific funding for specific future research and development work and purchases of equity in LICENSEE) then LICENSEE will pay [ * ] of said other consideration to INSTITUTE. In the event that LICENSEE sublicenses the PATENT RIGHTS to a third party in combination with patent(s) and or other rights of the University of Texas MD Anderson Cancer Center ("MDACC") for which LICENSEE receives Non-Royalty Fees, then the INSTITUTE's share of Non- Royalty Fees will be reduced from [ * ] to the amount of reduction from [ * ] agreed to by MDACC, but in no event will the INSTITUTE's share of Non-Royalty Fees be reduced to less than [ * ]. (d) Payments of royalties will be made within thirty (30)days after March 31, June 30, September 30 and December 31 of each year during the term of this Agreement covering LICENSED PRODUCTS sold during the preceding calendar quarter. Payments of other consideration pursuant to Paragraph 4.2(c) will be made within thirty (30) days after receipt by LICENSEE. [*] Confidential Treatment Requested -7- 4.3 Milestone Payments. LICENSEE will pay to the INSTITUTE the following milestone payments, due as follows: (a) [ * ] upon achievement of the milestone outlined in Paragraph 3.2(a); and (b) [ * ] upon achievement of the milestone outlined in Paragraph 3.2(b); and (c) [ * ] upon achievement of the milestone outlined in Paragraph 3.2(c); and (d) [ * ] upon achievement of the milestone outlined in Paragraph 3.2(d) 4.4 Minimum Sales. From and after the date of the first commercial sale of a LICENSED PRODUCT, in each of the three succeeding calendar yeras, LICENSEE will pay to the INSTITUTE royalties of not less than [ * ] ("Minimum Royalties"). In each calendar year thereafter LICENSEE will achieve sales of LICENSED PRODUCTS sufficient to produce royalties payable to the INSTITUTE of not less than [ * ]. If LICENSEE fails to achieve such sales after three (3) full calendar years from the date of the first commercial sale, INSTITUTE may either terminate this Agreement or convert the license rights from exclusive to non- exclusive. Minimum Royalties for the first year of commercial sales will be pro-rated according to the month when such sales begin. 4.5 Net of Taxes. All payments due hereunder will be paid in full, without deduction of taxes or other fees which may be imposed by any government (excluding however any US income taxes which may be payable by INSTITUTE), and which taxes and fees will be paid by LICENSEE. 4.6 No Multiple Royalties. No multiple royalties will be payable to INSTITUTE because any LICENSED PRODUCT is covered by more [*] Confidential Treatment Requested -8- than one patent or patent application included in the PATENT RIGHTS licensed under this Agreement. 4.7 US Dollar Payments. Royalty payments will be paid in United States dollars in San Diego, California, or at such other place as INSTITUTE may reasonably designate consistent with the laws and regulations controlling in any foreign country. If any currency conversion will be required in connection with the payment of royalties hereunder, such conversion will be made by using the exchange rate prevailing at the Chase Manhattan Bank (NA) on the last business day of the calendar quarterly reporting period to which such royalty payments relate. ARTICLE 5 - REPORTS AND RECORDS ------------------------------- 5.1 LICENSEE'S Books; Inspection. LICENSEE will keep full, true and accurate books of account containing all particulars that may be necessary for the purpose of showing the amounts payable to INSTITUTE hereunder. Said books of account will be kept at LICENSEE's principal place of business or the principal place of business of the appropriate division of LICENSEE to which this Agreement relates. Said books and the supporting data will be open and made available for inspection by the INSTITUTE and/or its agents not less than seven (7) days after receipt by LICENSEE of INSTITUTE'S advance written notice of its intent to inspect said books and data for three (3) years following the end of the calendar year to which they pertain, for the purpose of verifying LICENSEE's royalty statement or compliance in other respects with this Agreement. Such inspection may be conducted no more frequently than annually. Should such inspection lead to the discovery of a greater than ten percent (10%) discrepancy in reporting to INSTITUTE's detriment, LICENSEE agrees to pay the full cost of such inspection. 5.2 Annual Development Reports. Before the first commercial sale of a LICENSED PRODUCT, LICENSEE will submit to INSTITUTE annual reports on June 30 of each year as to LICENSEE'S activities, progress and plans applicable to Paragraphs 3.1 and 3.2. 5.3 Quarterly Royalty Reports. Within thirty (30) days after the expiration of each calendar quarter commencing with the quarter in which the first commercial sale occurs of a LICENSED PRODUCT, LICENSEE will deliver to INSTITUTE a written statement of all royalties due on sales of LICENSED PRODUCTS during such calendar quarter. Such written -9- statements will be duly signed on behalf of LICENSEE and will show the NET SALES of LICENSED PRODUCTS sold by LICENSEE and/or its sublicensees during such calendar quarter and the amount of royalties due, pursuant to section 4.2. If no royalties are due, LICENSEE will so report. 5.4 Late Payment Charge. The payments set forth in this Agreement will, if overdue, bear interest until paid at a per annum rate equal to two percent (2%) above the prime rate in effect at the Chase Manhattan Bank (NA) on the due date. The payment of such interest will not preclude INSTITUTE from exercising any other rights it may have as a consequence of the lateness of any payment. ARTICLE 6 - PATENT PROSECUTION ------------------------------ 6.1 LICENSEE'S Payment of Patent Costs. Payment of all reasonable fees and costs relating to the filing, prosecution, and maintenance of the PATENT RIGHTS incurred after December 1, 1996, will be the responsibility of LICENSEE, and will be paid by LICENSEE. 6.2 INSTITUTE'S Duty. Subject to LICENSEE'S payment of the reasonable costs, INSTITUTE will apply for, seek prompt issuance of, and maintain during the term of this Agreement the PATENT RIGHTS in the United States and in the foreign countries listed in Appendix B hereto. Appendix B may be amended by written agreement of both parties. The prosecution, filing and maintenance of all PATENT RIGHTS will be the primary responsibility of INSTITUTE; provided, however, that INSTITUTE will keep LICENSEE fully informed of the progress thereof, and will provide LICENSEE with copies of all documents related to filing, prosecuting and maintaining the PATENT RIGHTS, and a reasonable opportunity to review any proposed application, amendment, response or other communication related to the PATENT RIGHTS; and the INSTITUTE will use its best efforts to accommodate LICENSEE'S reasonable requests regarding filing, prosecuting and maintaining the PATENT RIGHTS. ARTICLE 7 - INFRINGEMENT ------------------------ 7.1 Prosecution of Infringement Action. If it is believed in good faith that the PATENT RIGHTS are infringed by a third party as evidenced by a third party's manufacture, use or sale of a product, the party to this Agreement first having knowledge of such infringement will promptly -10- notify the other party in writing, which notice will set forth the facts of such infringement in reasonable detail. LICENSEE will have the right, but not the obligation, to institute and prosecute at its own expense any such infringement of the PATENT RIGHTS to enjoin any third party infringement of the PATENT RIGHTS in such third party's efforts to make, use or sell a product and to recover damages as may be awarded. If LICENSEE fails to bring such action or proceedings within a period of three (3) months after receiving written notice or otherwise having knowledge of such infringement, then INSTITUTE will have the right, but not the obligation, to prosecute at its own expense any infringement of the PATENT RIGHTS. In either instance in which one party to this Agreement institutes an infringement action, the second party will agree to be joined as a party plaintiff if required by law, and at the expense of the first party, and the second party further agrees to give the first party reasonable assistance and authority to file and to prosecute such suit. Any recovery of damages and costs in such suits will be apportioned as follows: the party bringing the suit will first recover an amount equal to two (2) times the costs and expenses incurred by the party directly related to the prosecution of such action, and the remainder will be divided equally between the INSTITUTE and LICENSEE. 7.2 Consent to Settlement. No settlement or consent judgment or other voluntary final disposition of a suit under this Article may be entered into without the consent of the INSTITUTE and/or LICENSEE, which consents will not be unreasonably withheld. 7.3 Sublicense to Infringer. LICENSEE will have the sole right to grant a sublicense to any alleged infringer for the FIELD OF USE to make, use or sell LICENSED PRODUCTS, subject to compliance with all of the terms and conditions, including Paragraph 2.4, of this Agreement. ARTICLE 8 - PRODUCT LIABILITY ----------------------------- 8.1 Indemnity. LICENSEE will at all times during the term of this Agreement and thereafter, indemnify, defend and hold INSTITUTE, its trustees, directors, officers, employees and affiliates, harmless against all claims, proceedings, demands and liabilities of any kind whatsoever, including legal expenses and reasonable attorneys' fees, arising out of the death of or injury to any person or persons or out of any damage to property, or resulting from the testing, production, manufacture, sale, use, lease, consumption or advertisement of the LICENSED PRODUCT(s) or arising from any obligation of LICENSEE hereunder, -11- excepting only claims that the PATENT RIGHTS infringe third party intellectual property. 8.2 Insurance. LICENSEE will obtain and carry in full force and effect liability insurance which will protect LICENSEE and INSTITUTE with respect to events covered by Paragraph 8.1, above, as soon as commercially practical, but in no event later than the earlier of the commencement of any clinical trial for or the first sale of a LICENSED PRODUCT or first practice of a LICENSED PROCESS. The limits of such insurance will not be less than One Million Dollars ($1,000,000) per occurrence with an aggregate of Three Million Dollars ($3,000,000) for personal injury or death, and One Million Dollars ($1,000,000) per occurrence with an aggregate of Three Million Dollars ($3,000,000) for property damage and such insurance will be endorsed to included clinical trials or product liability coverage as the circumstances may require. LICENSEE will provide INSTITUTE with Certificates of Insurance evidencing the same and will provide ten (10) days written notice to INSTITUTE prior to any cancellation or material change thereof. LICENSEE will have INSTITUTE named as an additional insured on such insurance prior to the date of the first commercial sale of a LICENSED PRODUCT or the practice of a LICENSED PROCESS. Additionally, LICENSE will use its best efforts to have INSTITUTE named as an additional insured on such insurance prior to the commencement of any clinical trial for a LICENSED PRODUCT or LICENSED PROCESS. If, however, LICENSEE is unable to have INSTITUTE named as an additional insured on such insurance prior to the commencement of any clinical trial for a LICENSED PRODUCT or LICENSED PROCESS, LICENSEE will so advise INSTITUTE prior to the commencement of such clinical trial and the INSTITUTE and LICENSEE will negotiate in good faith alternative means to protect the INSTITUTE with respect to events covered by Paragraph 8.1 during the period of such clinical trial. 8.3 Disclaimers by INSTITUTE. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, INSTITUTE, ITS TRUSTEES, DIRECTORS, OFFICERS, EMPLOYEES, AND AFFILIATES MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF PATENT RIGHTS CLAIMS, ISSUED OR PENDING, -12- AND THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE. NOTHING IN THIS AGREEMENT WILL BE CONSTRUED AS A REPRESENTATION MADE OR WARRANTY GIVEN BY INSTITUTE THAT THE PRACTICE BY LICENSEE OF THE LICENSE GRANTED HEREUNDER WILL NOT INFRINGE THE PATENT RIGHTS OF ANY THIRD PARTY. IN NO EVENT WILL INSTITUTE, ITS TRUSTEES, DIRECTORS, OFFICERS, EMPLOYEES AND AFFILIATES BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING ECONOMIC DAMAGE OR INJURY TO PROPERTY AND LOST PROFITS, REGARDLESS OF WHETHER INSTITUTE WILL BE ADVISED, WILL HAVE OTHER REASON TO KNOW, OR IN FACT WILL KNOW OF THE POSSIBILITY. 8.4 Representations by INSTITUTE. INSTITUTE hereby makes the representations as set forth in Recital A of this Agreement. ARTICLE 9 - EXPORT CONTROLS --------------------------- It is understood that INSTITUTE is subject to United States laws and regulations controlling the export of technical data, computer software, laboratory prototypes and other commodities (including the Arms Export Control Act, as amended and the Export Administration Act of 1979), and that its obligations hereunder are contingent on compliance with applicable United States export laws and regulations. The transfer of certain technical data and commodities may require a license from the cognizant agency of the United States Government and/or written assurances by LICENSEE that LICENSEE will not export data or commodities to certain foreign countries without prior approval of such agency. INSTITUTE neither represents that a license will not be required nor that, if required, it will be issued. ARTICLE 10 - NON-USE OF NAMES ----------------------------- LICENSEE will not use the names or trademarks of The Burnham Institute, nor any adaptation thereof, nor the names of any of their employees, in any advertising, promotional or sales literature without prior written consent obtained from INSTITUTE, or said employee, in each case, except that LICENSEE may state that it is licensed by INSTITUTE under one or more of the patents and/or applications comprising the PATENT RIGHTS. INSTITUTE will not use the name of the LICENSEE in any public disclosure without the prior written consent of the LICENSEE. -13- ARTICLE 11 - ASSIGNMENT ----------------------- This Agreement is not assignable by LICENSE without the express prior written consent of the INSTITUTE except in the event of the sale of all or substantially all of the LICENSEE'S assets and/or business. Any other attempt to assign this Agreement without such consent will be void. This Agreement will bind and inure to the benefit or permitted assigns. ARTICLE 12 - DISPUTE RESOLUTION ------------------------------- 12.1 Arbitration. All disputes arising between the INSTITUTE and LICENSEE under this Agreement will be settled by binding arbitration conducted in the English language in accordance with and US laws with the Commercial Arbitration Rules of the American Arbitration Association. The parties will cooperate with each other in causing the arbitration to be held in an efficient and expeditious manner. Any arbitration proceeding instituted under this Agreement will be brought in the state and county of the principal executive offices of the party against which the arbitration is initiated. 12.2 Award. Any award rendered by the arbitrators will be final and binding upon the parties hereto. Judgment upon the award may be entered in any court of record of competent jurisdiction. Each party will pay its own expenses of the arbitration, and the expenses of the arbitrators will be equally shared, unless the arbitrators assess as part of their award all or any part of the arbitration expenses of one party (including reasonable attorneys' fees) against the other party. 12.3 Jurisdiction. The law governing this Agreement, for purposes of the arbitration will be the law of the state of the principal offices of the party against which the arbitration is initiated. 12.4 No Waiver. Notwithstanding the foregoing, nothing in this Article will be construed to waive any rights or timely performance of any obligations existing under this Agreement. ARTICLE 13 - TERMINATION ------------------------ 13.1 Cessation of Business by LICENSEE. If LICENSEE will cease to carry on its business, this Agreement will terminate upon notice by INSTITUTE. -14- 13.2 Payment Default by LICENSEE. If LICENSEE fails to make any payment due and payable to INSTITUTE hereunder, INSTITUTE will have the right to terminate this Agreement effective on thirty (30) days' written notice, unless LICENSEE will make all such payments to INSTITUTE within said thirty (30) day period. Upon the expiration of the thirty (30) day period, if LICENSEE has not made all such payments to INSTITUTE, the rights, privileges and license granted hereunder will automatically terminate. 13.3 Default by LICENSEE. Upon any material breach or default of this Agreement by LICENSEE (including, but not limited to, breach or default under Paragraphs 3.3 or 4.4 or 8.1 or Article 11), other than those occurrences set out in Paragraphs 13.1 and 13.2 hereinabove, which will always take precedence in that order over any material breach or default referred to in this Paragraph 13.3, INSTITUTE will have the right to terminate this Agreement and the rights, privileges and license granted hereunder effective on ninety (90) days' written notice to LICENSEE. Such termination will become automatically effective unless LICENSEE will have cured any such material breach or default prior to the expiration of the ninety (90) day period. 13.4 LICENSEE'S right to Terminate. LICENSEE will have the right to terminate this Agreement at any time on six (6) months' written notice to INSTITUTE, and upon payment of all amounts due INSTITUTE through the effective date of the termination. 13.5 Effect of Termination. Upon termination of this Agreement for any reason, nothing herein will be construed to release either party from any obligation that matured prior to the effective date of such termination; and Articles 1, 8, 9, 10, 12, 13.5, 13.6, and 15 will survive any such termination. LICENSEE and any sublicensee thereof may, however, after the effective date of such termination, sell its then existing inventory of LICENSED PRODUCTS, and complete LICENSED PRODUCTS in the process of manufacture at the time of such termination and sell the same, provided that LICENSEE will make the payments to INSTITUTE as required by Article 4 of this Agreement and will submit the reports required by Article 5 hereof. 13.6 Sublicenses. Upon termination of this Agreement for any reason, any sublicensee will also terminate, but a sublicensee will have the right to seek a license from INSTITUTE. INSTITUTE agrees to negotiate such a license in good faith under reasonable terms and conditions subject to -15- the INSTITUTE'S sole discretion as to whether or not to enter into a new license agreement. ARTICLE 14 - PAYMENTS AND NOTICES ---------------------------------- Any payment, notice or other communication pursuant to this Agreement will be sufficiently made or given on the date of mailing if sent to such party by certified first class mail, postage prepaid, addressed to it at its address below or as it will designate by written notice given to the other party: In the case of INSTITUTE: Vice President The Burnham Institute 10901 North Torrey Pines Road La Jolla, CA 92037 In the case of LICENSEE: President Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, WA 98101 ARTICLE 15 - MISCELLANEOUS PROVISIONS ------------------------------------- 15.1 Governing Law. This Agreement will be construed, governed, interpreted and applied in accordance with the laws of the State of California, USA, except that questions affecting the construction and effect of any patent will be determined by the law of the country in which the patent was granted. 15.2 Entirety. The parties hereto acknowledge that this Agreement sets forth the entire Agreement and understanding of the parties hereto as to the subject matter hereof, and will not be subject to any change or modification except by the execution of a written instrument subscribed to by the parties hereto. 15.3 Severability. The provisions of this Agreement are severable, and in the event that any provisions of this Agreement will be determined to be invalid or unenforceable under any controlling body of the law, such invalidity or unenforceability will not in any way affect the validity or enforceability of the remaining provisions hereof. -16- 15.4 Patent Marking. LICENSEE agrees to mark the LICENSED PRODUCTS sold in the United States with all applicable United States patent numbers. All LICENSED PRODUCTS shipped to or sold in other countries will be marked in such a manner as to conform with the patent laws and practice of the country of manufacture or sale. 15.5 No Waiver. The failure of either party to assert a right hereunder or to insist upon compliance with any term or condition of this Agreement will not constitute a waiver of that right or excuse a similar subsequent failure to perform any such term or condition by the other party. 15.6 No Third Party Beneficiary. The rights set forth in this Agreement are for the benefit of the parties to this Agreement. No third party will have any benefits or rights under this Agreement, without the expressed written approval of both parties to this Agreement. 15.7 Counterparts. This Agreement may be signed in counterparts, and signatures may be transmitted by facsimile. 15.8 Construction. The words and provisions in the Agreement will be construed and applied in accordance with the customary and plain meaning of the words and provisions. Any ambiguity in the interpretation of this Agreement will not be construed against either party as the draftsman of this Agreement. 15.9 The INSTITUTE and its agents will maintain in confidence and will not disclose to any third party or use for any purpose not expressly authorized by this Agreement, all information provided to the INSTITUTE or its agents pursuant to Articles 3 and 5 of this Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement the day and year set forth below. THE BURNHAM INSTITUTE By: Louis R. Coffman 3/17/97 ---------------------- --------- Signature Date -17- TARGETED GENETICS CORPORATION By: H. Stewart Parker 3/19/97 ----------------------- --------- Signature Date -18- APPENDIX A 1. US Patent Application, "Method of Inhibiting Replication of Hyperproliferative Cells", Serial No. 07/960,112, and continuing application 08/473,399. 2. US Patent Application, Method of Sensitizing Tumor Cells with Adenovirus E1A", Serial No. 08/301,316. 3. Any US or foreign patent applications and patents covering inventions conceived and/or reduced to practice in the laboratory of Dr. Steven Frisch at the INSTITUTE during the course and term of the Sponsored Research Agreement between the INSTITUTE and LICENSEE of even date herewith. -19- APPENDIX B ---------- Foreign Patent Applications (Paragraph 6.2) Foreign countries in which PATENT RIGHTS will be filed, prosecuted and maintained in accordance with Article 6: EPO CANADA JAPAN AUSTRALIA -20- THE BURNHAM INSTITUTE --------------------- Established in 1976 as LaJolla Cancer Research Foundation January 7, 1998 Stephen Lupton, Ph.D. Corporate Development Targeted Genetics Corporation 1100 Olive Way Suite 10 Seattle, WA 98101 re: Amendment to the License Agreement dated March 15, 1997 Dear Dr. Lupton: This letter is to amend the referenced license agreement between The Burnham Institute and Targeted Genetics Corporation. Replacement of Paragraph 4.2(b), with the following allows for a royalty stacking provision previously omitted from the original agreement. (b) In the case of NET SALES of LICENSED PRODUCTS by sublicenses, INSTITUTE will be paid the greater of the running royalties specified in Paragraph 4.2(a) or [ * ] of the royalties payable by the sublicensee to LICENSE; provided, however, if there are multiple, stacking royalties payable by sublicensees on the LICENSED PRODUCTS to third parties, then LICENSEE may reduce the payment to INSTITUTE on the same proportionate basis as all the other stacking royalties are reduced, so long as the resulting payment to the INSTITUTE is no less than the greater of [ * ] of NET SALES of LICENSED PRODUCTS by sublicensees or [ * ] of the royalties payable by the sublicensees to LICENSEE. Please acknowledge the amendment of the agreement by signing in the space provided below, on both copies of this letter, and returning a copy at your earliest convenience. [*] Confidential Treatment Requested -21- Thank you, in advance, for your efforts in completing this amendment. Sincerely yours, Rosalie Gonzalez Technology Licensing Associate AGREED TO AND ACCEPTED AGREED TO AND ACCEPTED The Burnham Institute Targeted Genetics Corporation Louis R. Coffman: Louis R. Coffman By: James A. Johnson --------------------------- --------------------------- Vice President & Chief Administrative Officer Title: Vice President, Finance ------------------------ Date: 1/8/98 Date: 1/14/98 ------------------------- ------------------------
-22- EX-10.34 8 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS EXHIBIT 10.34 TARGETED GENETICS CORPORATION STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS AMENDED AND RESTATED ON JANUARY 14, 1997 SECTION 1 PURPOSES The purpose of the Targeted Genetics Corporation Stock Option Plan for Nonemployee Directors (this "Plan") is to attract and retain the services of experienced and knowledgeable nonemployee directors for Targeted Genetics Corporation (the "Company") and to provide added incentive to such directors by providing an opportunity for stock ownership in the Company. SECTION 2 ADMINISTRATION The administrator of this Plan (the "Plan Administrator") shall be the Board of Directors of the Company (the "Board"). Subject to the terms of this Plan, the Plan Administrator shall have the power to construe the provisions of this Plan, to determine all questions arising hereunder and to adopt and amend such rules and regulations for the administration of this Plan as it may deem desirable. SECTION 3 SHARES SUBJECT TO THE PLAN Subject to adjustment in accordance with Section 6 hereof, the total number of shares of the Company's common stock (the "Common Stock") for which options may be granted under this Plan is 300,000 (the "Shares"). The Shares shall be shares currently authorized but unissued or subsequently acquired by the Company and shall include shares representing the unexercised portion of any option granted under this Plan which expires or terminates without being exercised in full. SECTION 4 ELIGIBILITY 4.1 ELIGIBLE DIRECTORS Each member of the Board elected or appointed who is not otherwise an employee of the Company or any parent or subsidiary corporation (an "Eligible Director") shall be eligible to participate in this Plan. 4.2 INITIAL GRANTS Immediately following his or her initial election or appointment to the Board, each Eligible Director shall automatically receive an option to purchase 15,000 Shares. 4.3 ANNUAL GRANTS Each Eligible Director continuing service as an Eligible Director immediately following an Annual Meeting of Shareholders shall automatically receive an option to purchase 5,000 Shares immediately following each year's Annual Meeting of Shareholders as an annual grant; provided that an Eligible Director who has received an initial grant of 15,000 Shares on such date shall not receive an annual grant until the next Annual Meeting. 4.4 AVAILABILITY OF SHARES No grant shall be made under this Plan if the effect of such grant would be to obligate the Company to issue more Shares than are reserved under Section 3. If insufficient Shares are reserved under Section 3 to fully fund one or more grants to be made under this Section 4 on the same date of grant, then the Shares available shall be divided by the number of Eligible Directors then entitled to a grant and each such Eligible Director shall be granted an option for that number of Shares. SECTION 5 OPTION TERMS Each option granted to an Eligible Director under this Plan and the issuance of Shares hereunder shall be subject to the following terms: 5.1 OPTION AGREEMENT Each option shall be evidenced by an option agreement (an "Agreement") duly executed on behalf of the Company. Each Agreement shall comply with and be subject to the terms and conditions of this Plan. Any Agreement may contain such other terms, provisions and conditions not inconsistent with this Plan as may be determined by the Plan Administrator. 5.2 OPTION EXERCISE PRICE The option exercise price for an option shall be the closing price, or if there is no closing price, the mean between the high and the low sale price of shares of Common Stock on the Nasdaq Stock Market on the day the option is granted or, if no Common Stock was traded on such date, on the next succeeding day on which Common Stock is so traded. 5.3 VESTING AND EXERCISABILITY Each option granted to an Eligible Director shall vest and become exercisable in accordance with the following schedule: 2 3
Period of Eligible Director's Continuous Service as a Director With the Company From the Date the Option is Granted Portion of Total Option Which Is Exercisable - ---------------------------------------- -------------------------------------------- Less than twelve months 0% Twelve months 33 1/3% Twenty-four months 66 2/3% Thirty-six months 100%
5.4 TIME AND MANNER OF EXERCISE OF OPTION Each option may be exercised in whole or in part at any time and from time to time; provided, however, that no fewer than 20% of the Shares purchasable under the option (or the remaining Shares then purchasable under the option, if less than 20%) may be purchased upon any exercise of any option hereunder and that only whole Shares will be issued pursuant to the exercise of any option. Any option may be exercised by giving written notice, signed by the person exercising the option, to the Company stating the number of Shares with respect to which the option is being exercised, accompanied by payment in full for such Shares, which payment may be in whole or in part (a) in cash or by check, (b) in shares of Common Stock already owned for at least six months by the person exercising the option, valued at fair market value at the time of such exercise, or (c) by delivery of a properly executed exercise notice, together with irrevocable instructions to a broker, to properly deliver to the Company the amount of sale or loan proceeds to pay the exercise price, all in accordance with the regulations of the Federal Reserve Board. 5.5 TERM OF OPTIONS Each option shall expire ten years from the date of the granting thereof, but shall be subject to earlier termination as follows: (a) In the event that an Optionee ceases to be a director of the Company for any reason other than the death of the Optionee, the unvested portion of the options granted to such Optionee shall terminate immediately and the vested portion of the options granted to such Optionee may be exercised by him or her only within three months after the date such Optionee ceases to be a director of the Company. 4 (b) In the event of the death of an Optionee, whether during the Optionee's service as a director or during the three-month period referred to in Section 5.5(a), the unvested portion of the options granted to such Optionee shall terminate immediately and the vested portion of the options granted to such Optionee shall be exercisable, and such options shall expire unless exercised within twelve months after the date of the Optionee's death, by the legal representatives or the estate of such Optionee, by any person or persons whom the Optionee shall have designated in writing on forms prescribed by and filed with the Company or, if no such designation has been made, by the person or persons to whom the Optionee's rights have passed by will or the laws of descent and distribution. 5.6 TRANSFERABILITY During an Optionee's lifetime, an option may be exercised only by the Optionee. Options granted under this Plan and the rights and privileges conferred thereby shall not be subject to execution, attachment or similar process and may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by (a) will or by the applicable laws of descent and distribution, or (b) by gift or other transfer to either (i) a spouse or other immediate family member or (ii) any trust or estate in which the Optionee or such Optionee's spouse or other immediate family member has a substantial beneficial interest. In addition, an Optionee may designate in writing during the Optionee's lifetime a beneficiary to receive and exercise options in the event of the Optionee's death (as provided in Section 5.5(b)). Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any option under this Plan or of any right or privilege conferred thereby, contrary to the provisions of this Plan, or the sale or levy or any attachment or similar process upon the rights and privileges conferred hereby, shall be null and void. 5.7 HOLDING PERIOD If an individual subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") sells shares of Common Stock obtained upon the exercise of any option granted under this Plan within six (6) months after the date the option was granted, such sale may result in short-swing profit recovery under Section 16(b) of the Exchange Act. 5.8 PARTICIPANT'S OR SUCCESSOR'S RIGHTS AS SHAREHOLDER Neither an Optionee nor the Optionee's successor in interest shall have any rights as a shareholder of the Company with respect to any Shares subject to an option granted to the Optionee until such person becomes a holder of record of such Shares. 5 5.9 LIMITATION AS TO DIRECTORSHIP Neither this Plan, nor the granting of an option, nor any other action taken pursuant to this Plan shall constitute or be evidence of any agreement or understanding, express or implied, that an Optionee has a right to continue as a director for any period of time or at any particular rate of compensation. 5.10 REGULATORY APPROVAL AND COMPLIANCE The Company shall not be required to issue any certificate or certificates for Shares upon the exercise of an option granted under this Plan, or record as a holder of record of Shares the name of the individual exercising an option under this Plan, without obtaining to the complete satisfaction of the Plan Administrator the approval of all regulatory bodies deemed necessary by the Plan Administrator, and without complying, to the Plan Administrator's complete satisfaction, with all rules and regulations under federal, state or local law deemed applicable by the Plan Administrator. SECTION 6 CAPITAL ADJUSTMENTS 6.1 RECAPITALIZATION The aggregate number and class of shares for which options may be granted under this Plan, the number and class of shares covered by each outstanding option and the exercise price per share thereof (but not the total price), shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock of the Company resulting from a split or consolidation of shares or any like capital adjustment, or the payment of any stock dividend. 6.2 EFFECT OF LIQUIDATION OR REORGANIZATION Upon a merger (other than a merger of the Company in which the holders of shares of Common Stock immediately prior to the merger have the same proportionate ownership of shares of Common Stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation, reorganization (other than a mere reincorporation or the creation of a holding company) or liquidation of the Company (each a "corporate transaction"), as a result of which the shareholders of the Company receive cash, stock or other property in exchange for or in connection with their shares of Common Stock, then the Optionee shall have the right immediately prior to any such merger, consolidation, acquisition of property or stock, reorganization or liquidation to exercise such option in whole or in part whether or not the vesting requirements set forth in the option agreement have been satisfied. 6 To the extent such option is not exercised, it shall terminate, except that in the event of a corporate transaction in which the shareholders of the Company receive capital stock of another corporation in exchange for their shares of Common Stock, such unexercised option shall be assumed or an equivalent option shall be substituted by the successor corporation or a parent or subsidiary of such successor corporation. Any such assumed or equivalent option shall be 100% vested and exercisable with respect to the total number of shares purchasable under such option; provided that such acceleration will not occur if, in the opinion of the Company's outside accountants, such acceleration would render unavailable "pooling of interests" accounting treatment for such transaction for which pooling of interests accounting treatment is sought by the Company. Upon a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of Common Stock in the surviving corporation immediately after the merger, a mere reincorporation or the creation of a holding company, each option outstanding under the Plan shall be assumed or an equivalent option shall be substituted by the successor corporation or a parent or subsidiary of such corporation, and the vesting schedule set forth in the option agreement shall continue to apply to such assumed or equivalent option. 6.3 FRACTIONAL SHARES In the event of any adjustment in the number of shares covered by any option, any fractional shares resulting from such adjustment shall be disregarded and each such option shall cover only the number of full shares resulting from such adjustment. SECTION 7 EXPENSES All costs and expenses of the adoption and administration of this Plan shall be borne by the Company; none of such expenses shall be charged to any Optionee. SECTION 8 COMPLIANCE WITH RULE 16b-3 It is the intention of the Company that this Plan comply in all respects with the requirements for a "formula plan" within the meaning attributed to that term for purposes of Rule 16b-3 promulgated under Section 16(b) of the Exchange Act. Therefore, if any Plan provision is later found not to be in compliance with such requirements, that provision shall be deemed null and void, and in all events this Plan shall be construed in favor of its meeting such requirements. 7 SECTION 9 TERMINATION AND AMENDMENT The Board may amend, terminate or suspend this Plan at any time, in its sole and absolute discretion; provided, however, that if required to qualify this Plan as a formula plan for purposes of Rule 16b-3 under Section 16(b) of the Exchange Act, no amendment may be made more than once every six months that would change the amount, price, timing or vesting of the options, other than to comply with changes in the Internal Revenue Code of 1986, as amended, or the rules and regulations thereunder; provided further that no amendment that would (a) increase the number of Shares that may be issued under this Plan, or (b) otherwise require shareholder approval under any applicable law or regulation shall be made without the approval of the Company's shareholders. SECTION 10 DURATION This Plan shall continue in effect until March 2, 2004 unless it is sooner terminated by action of the Board or the Company's shareholders, but such termination shall not affect the then-outstanding terms of any options. Adopted by the Company's Board of Directors on March 2, 1994 and approved by the Company's shareholders on March 23, 1994. Amended and restated by the Board on October 17, 1996. Amended and restated by the Board on January 14, 1997. 8 EX-23.1 9 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 (Form S-8 Nos. 33-83064 and 333-03889) pertaining to the Targeted Genetics Corporation's 1992 Restated Stock Option Plan and the Targeted Genetics Corporations' Stock Option Plan for Nonemployee Directors of our report dated February 3, 1998, with respect to the financial statements of Targeted Genetics Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1997. ERNST & YOUNG LLP Seattle, Washington March 27, 1998 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1,011,845 4,025,976 0 0 0 5,286,099 10,132,578 6,205,045 9,767,084 2,658,735 0 0 0 73,401,141 (67,809,554) 9,767,084 0 1,978,477 0 0 15,828,094 0 338,157 (14,187,774) 0 0 0 0 0 (14,187,774) (.70) (.70)
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