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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
__________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-22025
AASTROM BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
__________________
Michigan 94-3096597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 Frank Lloyd Wright Drive
P.O. Box 376
Ann Arbor, MI 48106
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (734) 930-5555
__________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no 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. [_]
The approximate aggregate market value of the registrant's Common Stock, no par
value ("Common Stock"), held by non-affiliates of the registrant (based on the
closing sales price of the Common Stock as reported on the Nasdaq National
Market) on September 11, 2000 was approximately $91 million. Excludes shares of
Common Stock held by directors, officers and each person who holds 5% or more of
the outstanding shares of Common Stock, since such persons may be deemed to be
affiliates of the registrant. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of September 12, 2000, 33,842,388 shares of Common Stock, no par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K Reference
- -------- -------------------
Proxy Statement for the Annual Meeting of Shareholders
scheduled for November 15, 2000 Items 10, 11, 12 and 13 of Part III
AASTROM BIOSCIENCES, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
No.
----
PART I.................................................................................. --
Item 1. BUSINESS............................................................... --
Item 2. PROPERTIES............................................................. --
Item 3. LEGAL PROCEEDINGS...................................................... --
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................... --
PART II................................................................................. --
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.................................................... --
Item 6. SELECTED FINANCIAL DATA................................................ --
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................... --
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............. --
Item 8. FINANCIAL STATEMENTS................................................... --
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
PART III................................................................................ --
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................... --
Item 11. EXECUTIVE COMPENSATION................................................. --
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................................. --
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................... --
PART IV................................................................................. --
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K............................................................ --
SIGNATURES.............................................................................. --
EXHIBIT INDEX........................................................................... --
3
Except for the historical information presented, the matters discussed in
this Report, including our product development goals and expectations, our plans
and anticipated results of our clinical development activities and the potential
advantage of our products and product candidates under development, include
forward-looking statements that involve risks and uncertainties. Aastrom's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under the caption
"Business Risks" in "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Unless the context requires otherwise, references
to "we," "us," "our" and Aastrom refer to Aastrom Biosciences. Inc.
PART I
ITEM 1. BUSINESS
Overview
Aastrom Biosciences, Inc. is developing proprietary process technologies
and devices intended for a broad range of cell therapy applications. The
AastromReplicell(TM) System is our lead product under development, and consists
of a clinical cell culture system that operates single-use therapy kits tailored
for patient therapy in the emerging cell therapy market. In April 1999, we
began European commercialization and a lead U.S. pivotal clinical trial of the
AastromReplicell(TM) System for use in stem cell therapy was in process.
However, in October 1999, we suspended marketing efforts and our U.S. clinical
development activities until we could obtain additional funding. With recently
received funding, we have recommenced our U.S. clinical development program, and
we are resuming pilot-scale marketing activities in Europe with targeted medical
centers.
For the current applications in stem cell therapy, we believe that the
AastromReplicell(TM) System method of producing cells will be a cost-effective,
less invasive and less time-consuming alternative, or improvement to, currently
available stem cell collection methods and may enhance the clinical utility of
umbilical cord blood transplants in patients with certain forms of leukemia and
other blood diseases by expanding the number of cells available for transplant.
Further, the AastromReplicell(TM) System is designed as a platform product which
implements our pioneering cell production technology. Accordingly, we believe
that the AastromReplicell(TM) System can be modified to produce a wide variety
of other cell types for selected emerging therapies currently in development,
and we either have, or plan to initiate, development programs targeted towards
some of these emerging therapies.
Aastrom's business model builds on two components; (i) proprietary
procedures and devices to enable certain types of stem cells and other types of
human cells to be produced with superior biological capabilities as compared
with standard cell culture approaches, and (ii) the AastromReplicell(TM) System
clinical platform that is designed to standardize and enable an effective
commercialization pathway for bringing therapeutic cell production to medical
practice. The product configuration of the AastromReplicell(TM) System consists
of an instrumentation platform, to be integrated within the hospital or other
centralized facility, that can operate a variety of single-use therapy kits that
are specific to the desired medical application. This is intended to provide a
product pathway for each cell therapy that is similar to a pharmaceutical
product including regulatory approval, reimbursement, marketing and pricing. We
believe that the product design of the AastromReplicell(TM) System will allow us
to develop additional cell therapy kits to provide product standardization for a
number of emerging cell therapies being developed by other researchers.
Aastrom is currently developing its own SC-I Therapy Kit, CB-I Therapy Kit
and CB-II Therapy Kit for use in stem cell therapy in cancer patients. Stem cell
therapy is a form of cell therapy used to restore blood and immune system
function to cancer patients following chemotherapy or radiation therapy. Current
stem cell collection methods, including bone marrow harvest and peripheral blood
progenitor cell mobilization, can be costly, invasive and time-consuming for
both medical personnel and patients. Aastrom believes that the
AastromReplicell(TM) System may offer significant advantages over traditional
stem cell collection methods in settings where it is difficult to obtain the
desired quantity of cells for transplant using the current cell collection
methods. The AastromReplicell(TM) System is intended to be used to produce cells
for stem cell therapy from a small starting volume of bone marrow or umbilical
cord blood cells. Further, in an evaluation of 14 tumor-contaminated bone marrow
samples that were expanded with the AastromReplicell(TM) System process, the
presence of
4
breast cancer cells in each sample was either substantially reduced or was no
longer detectable. Tumor cells that were detectable after expansion in the
AastromReplicell(TM) System showed a significant reduction in clonogenicity (the
ability to replicate). We believe that the combination of passive tumor cell
depletion during culture with the lower starting volume of cells used for the
process may result in a procedure that offers a tumor-free or tumor-reduced cell
product for transplant. Although we may not market the AastromReplicell(TM)
System in the United States for stem cell therapy unless and until approval is
obtained from the U.S. Food and Drug Administration (FDA), production-level
versions of the AastromReplicell(TM) System have been completed and we have
obtained permission to affix the CE Mark to such versions. CE Mark approval
allows for marketing of the product in Europe. We may also market the
AastromReplicell(TM) System in the U.S. for research and investigational use.
Aastrom has also recently initiated development programs for therapy kits
to produce bone-forming cells and for dendritic cells. The new OC-I Therapy Kit
is intended for the production of bone-forming cells for the treatment of
patients with degenerative bone diseases such as osteoporosis. We expect to
initiate our first Phase I/II-Pilot clinical study for the OC-I Therapy Kit in
patients with severe osteoporosis shortly. The new DC-I Therapy Kit is being
developed for the production of human dendritic cells to be used in cancer
immunotherapy applications. Recent clinical studies conducted by others have
been published indicating that modified dendritic cells may be an important new
way to treat certain cancers.
Cell Therapy
Cell therapy is the use of living cells in the treatment of medical
disorders. These cells can either be used in conjunction with, or as a
replacement to, traditional therapies. Cell therapy has been used for many
years, beginning with simple, but very effective, blood and platelet
transfusions. Cell therapies have expanded to include specialized procedures
including bone marrow, or stem cell transplants. In this procedure, stem cells
are transplanted into patients to restore blood and immune system function that
is damaged or destroyed by aggressive chemotherapy used to treat the cancer.
More recently, emerging cell therapies are being developed utilizing T-cells and
dendritic cells to stimulate an immune response in patients with various forms
of cancers, infectious diseases or viral infections. These forms of cell therapy
have been hampered by a number of limitations relating to gaining access to the
cells necessary for transplantation.
To date, cell therapies have generally involved the collection of large
amounts of cells from the patient, or from a matched donor which are
subsequently re-infused. This approach can be time consuming, expensive and
quite invasive to the patient. An alternative to the collection of large
quantities of cells for these therapies is to grow the cells in culture from a
small starting quantity of cells. However, this approach has been met by a
number of technical difficulties and a requirement to comply with stringent
regulatory standards. These issues have limited the more widespread practice of
ex vivo cell production.
The success of cellular therapy is based, in part, on the need for care
providers to be able to access therapeutic quantities of biologically active
cells necessary for patient treatment. The AastromReplicell System is being
developed to fill this current and growing need in cell therapy.
In ex vivo gene therapy, genes are introduced into target cells in order to
selectively correct or modulate disease conditions, or to modify cells for
production of a therapeutic protein. Aastrom believes that the successful
practice of ex vivo gene therapy will require the development of processes and
products for the reliable, high-efficiency transfer of genes into cells and a
means to produce the necessary dose of the genetically modified cells under
current Good Manufacturing Practices (GMP).
Stem Cell Therapy
Stem cell therapy is used to treat cancer patients who undergo chemotherapy
or radiation therapy at dose levels that are toxic to the hematopoietic system,
which is comprised of the bone marrow and the cells of the blood and immune
system. The objective of stem cell therapy is to restore the patient's blood and
immune system via the infusion and subsequent engraftment of healthy cells to
replace bone marrow and result in the rapid recovery of neutrophils and
platelets that have been destroyed by chemotherapy and radiation therapy. Stem
cell therapy reduces the risk of life-threatening infections and bleeding
episodes following cancer treatments. In order to treat many cancers, high
intensity chemotherapy or radiation
5
therapy is often required, which may substantially destroy (myeloablate) or
partially destroy (myelosuppress) the patient's hematopoietic system.
Cells required for effective stem cell therapy include stem cells, to
replenish depleted bone marrow and provide a long-term ongoing source of the
multilineage progenitor cells of the blood and immune system, and early and late
stage hematopoietic progenitor cells, to provide for rapid neutrophil and
platelet recoveries. Stromal accessory cells are believed to further augment the
growth of bone marrow. In the adult, all of these cell types originate in the
bone marrow. For traditional stem cell transplant procedures, these cells are
currently collected from the donor or patient directly through multiple syringe
aspirations under general anesthesia, known as bone marrow collection, or
through blood apheresis following treatment with drugs which cause cells to be
released or mobilized from the bone marrow into the blood. This latter technique
is known as a peripheral blood stem cell (PBSC) collection. The blood cells
found in the umbilical cords of newborn infants include cells effective for stem
cell therapy. This source of cells is being explored by physicians as a
significant new development in stem cell therapy, but is currently limited by
difficulties in obtaining sufficient quantities of these cells and by prolonged
engraftment times for the cells once transplanted into the patient. See
"--Current Stem Cell Collection Methods."
Once collected, the stem cell mixture is infused intravenously and the stem
and stromal accessory cells migrate into the bone cavity where they engraft to
form new marrow tissue. The hematopoietic progenitor cell components of the cell
mixture provide early restoration of circulating white blood cells and
platelets. The replenished bone marrow will normally provide long-term
hematopoietic function, but complete restoration of bone marrow may, in some
cases, take years following myeloablative cancer therapy. When the patient's
hematopoietic system contains malignant cells itself, such as in the case of
leukemia, stem cells from a suitable donor are generally required in order to
avoid reintroducing the disease during cell infusion. Such donor derived
transplants are termed "allogeneic" transplants. Procedures using cells derived
from the patient are termed "autologous" transplants.
Stem Cell Therapy Market Opportunity
Stem cell therapy is a widely used medical procedure in the treatment of
cancer patients. It is estimated that up to 30,000 stem cell transplant
procedures are performed annually. This market size estimate has decreased from
past estimates as a result of a recent change in medical practice reducing the
number of breast cancer patients receiving this treatment. Stem cell therapy, in
the form of bone marrow transplantation, was originally used in patients who had
received treatment for blood and bone marrow cancers such as leukemia, and
genetic diseases of the blood. However, because stem cell therapy has been shown
to promote the rapid recovery of hematopoietic function, it is now being used to
enable patients with other forms of cancer to receive high dose or multicycle
chemotherapy and radiation treatments. These high-intensity therapies are
believed to have a greater probability of eradicating certain dose-sensitive
cancers but, because of their hematopoietic toxicity, cannot generally be given
without stem cell therapy. As a result, some patients are treated with lower and
less effective doses and fewer cycles of therapy than might otherwise be
desired.
Stem cell therapy may also enhance the effectiveness of blood cell growth
factors used. The timing and extent of additional cycles of chemotherapy is
often limited by the recovery of a patient's white blood cells and platelets
because a delayed recovery of these cells can leave the patient susceptible to
life-threatening infection and bleeding episodes, and this limitation may allow
for the growth of residual tumor cells. Many cancer patients are routinely
treated with growth factors including G-CSF, such as Neupogen (from Amgen, Inc.)
and GM-CSF, such as Leukine (from Immunex Corp.) which enhance the development
of mature circulating white blood cells and platelets from the early progenitor
bone-marrow derived cells, thereby decreasing the time between cycles of therapy
and the probability of infection. However, during high dose or multicycle
therapy, the stem and progenitor cells on which these growth factors act are
often depleted. Without these cells, growth factors have a limited or negligible
effect. Stem cell therapy generally enhances the effectiveness of growth factors
by introducing target stem and progenitor cells for growth factors to act upon
such that patients generally exhibit a more rapid and consistent hematopoietic
recovery.
Current Stem Cell Collection Methods
Currently, the bone marrow-derived cells required for stem cell therapy are
collected primarily either through the bone marrow harvest method or the PBSC
collection method. Another source of stem cells in the blood that can be
collected from the placenta and umbilical cord that is otherwise discarded
following the birth of a child.
6
Bone Marrow Harvest
A traditional bone marrow harvest is a costly and invasive surgical
procedure in which a physician removes approximately one liter of bone marrow
from a patient or donor. This volume of bone marrow is removed using needles
inserted into the cavity of the hip bone. The bone marrow harvest procedure
typically requires between two to four hours of operating room time, with the
physician often making more than 90 separate puncture sites in the hip bone to
collect the necessary amount of bone marrow. Due to the length of the procedure
and the trauma to the patient, general surgical anesthesia is administered and
the patient is often hospitalized for one day. Frequently, the patient suffers
pain from the procedure for several days after being discharged from the
hospital. Furthermore, complications resulting from the general anesthesia or
invasive nature of the procedure occur in a small percentage of patients. Bone
marrow harvest provides a reliable source of stem and stromal accessory cells
and is a preferred source of cells in allogeneic transplants.
PBSC Mobilization and Collection
PBSC mobilization is a technique in which bone marrow-derived cells are
harvested from a patient's or donor's circulating blood, rather than from bone
marrow. In a PBSC mobilization procedure, the patient receives multiple
injections of growth factors or cytotoxic drugs, or both, over the course of a
week or more, which cause stem and progenitor cells resident in the bone marrow
to mobilize into the circulating blood. The mobilized cells are then collected
by connecting the patient to a blood apheresis device, often times through the
placement of a catheter, which draws and returns large volumes of the patient's
or donor's blood in order to selectively remove the desired stem and progenitor
cells. Each collection procedure typically lasts for two to six hours and is
typically repeated on two to five consecutive days; however, procedure time has
decreased and is expected to continue to decrease as the procedure is further
optimized. Specialized laboratory testing over the period of mobilization and
cell harvesting is necessary to determine that a sufficient quantity of desired
cells has been collected, adding to the cost of the procedure. The PBSC process
has become the predominant procedure in autologous stem cell therapy.
Umbilical Cord Blood
Umbilical Cord Blood (CB), which is collected directly from the detached
umbilical cord and placenta of newborn infants without pain or risk to the
infant or the mother, is emerging as a new source of cells for stem cell
therapy. Cord blood has been reported to have stem cell concentrations that are
much higher than that typically obtained from traditional bone marrow and PBSC
collection methods. After collection, CB is typically frozen for later use in a
stem cell therapy procedure. Storage of CB samples involves small volumes of
cells, compared to typical bone marrow or PBSC storage. Accordingly, the costs
of collection and storage of CB cells are comparatively low. CB may provide a
tumor-free source of cells, making it a preferred source of cells for many
current stem cell therapy procedures in cancer patients with metastatic disease
(e.g. disease that has spread throughout the patient's body, affecting their own
bone marrow and stem cells), and particularly in the absence of a suitably
matched donor. Before CB can become a major supply source for stem cell therapy,
a coordinated CB banking system must emerge. In this regard, several CB banking
institutions have been established to date, and the group is growing in both
number and size. The establishment of these CB banking institutions is an
initial step which may lead to a coordinated CB banking system.
Procedure Considerations
Although stem cell therapy is being utilized to treat more patients for a
broader range of diseases, its availability continues to be limited by the high
costs of procuring cells, the invasive nature of traditional cell procurement
techniques, and by the technical difficulties related to those collection
procedures. Aastrom believes that current charges for typical stem cell
collection procedures through bone marrow harvest or PBSC collection range from
$10,000 to $20,000 with considerable variability between institutions.
Overall costs of stem cell therapy include the costs of the cell collection
and infusion procedures, and the costs associated with supporting the patient
during post-transplant recovery. Post-transplant costs include hospitalization
time, antibiotic support, management of adverse reactions to the large volume
cell infusions, and infusions of platelets and red blood cells. Any new stem
cell therapy process will generally need to provide similar recovery endpoints
to be competitive
7
with the current procedures. In this regard, PBSC procedures have gained
popularity compared with bone marrow harvests because the number of platelet
transfusions is reduced for some patients.
While CB is a promising new source of cells for transplantation, certain
disadvantages exist including the relatively low number of available cells which
may contribute to prolonged engraftment times for the cells once transplanted
into the patient. Unlike bone marrow or PBSC harvest, where the collection of
more cells to meet a particular treatment is typically achievable, the number of
cells available from a CB donor is limited to the small quantity of cells
available at the initial collection. This problem is exacerbated by the required
cryopreservation of the cells, which causes additional cell loss. The resulting
low cell number is believed to be responsible for the longer hematopoietic
recovery times observed with CB transplants, as compared with bone marrow or
PBSC transplants. Further, because of the low cell number, CB transplants are
typically restricted to small patients. Therefore, increasing the number of
therapeutic cells from a CB sample may facilitate the more widespread use of CB
transplants. Aastrom believes that providing the transplant site with the
capability to carry out the CB cell expansion will be a major factor in the
increased use of CB for stem cell therapy and a significant business
opportunity.
Products to implement a cell isolation method known as CD34 selection have
been developed by other companies in conjunction with bone marrow harvest and
PBSC collections. CD34 selection is a process designed to isolate specific types
of cells in order to decrease storage and infusion problems associated with the
large volume of fluids collected in bone marrow or multiple apheresis procedures
and to assist in depleting T-cells and tumor cells from the transplant cells
collected. CD34 selection is used after the initial collection of stem and
progenitor cells and, therefore, can increase the difficulties or costs
associated with the cell collection procedure.
Aastrom Technology
Aastrom is developing proprietary product and process technologies that are
pioneering the ex vivo production of human stem and other tissue-specific
progenitor cells. Aastrom's lead product, the AastromReplicell(TM) System
utilizes Aastrom's process technology and is designed to enable the ex vivo
production of human stem and progenitor cells as an alternative or improvement
to, bone marrow harvest and PBSC mobilization methods and to enhance the
clinical utility of CB cells. The initial application of the
AastromReplicell(TM) System is the production of cells for stem cell therapy.
However, once established for use in stem cell therapy, Aastrom plans to
leverage the cell production capabilities of the AastromReplicell(TM) System
across multiple cell therapy opportunities as they develop. As these emerging
cell therapies are developed, Aastrom intends to develop and introduce new
therapy kits through collaborative relationships with others directed toward the
treatment of cancer, infectious diseases, auto-immune diseases and in the
restoration of solid tissues.
Core Technologies
Human Cell Growth Process
Aastrom has developed proprietary processes and patented technologies for
ex vivo production of therapeutic stem and progenitor cells as well as other key
cells found in human bone marrow. Aastrom's proprietary process entails the
placement of a stem cell mixture in a culture environment that mimics the
biology and physiology of natural bone marrow. This process enables the stem and
early and late-stage progenitor cells needed for an effective stem cell therapy
procedure to be concurrently expanded. Growth factors can be added to stimulate
specific cell lineages to grow or to increase cell growth to meet a particular
therapeutic objective. The stem cell growth process can best be completed with
little or no additional stem cell selection or purification procedures. This
stem cell replication process can also enable or augment the genetic
modification of cells by providing the cell division step needed for new genes
to integrate into the stem cell DNA. Other currently available cell culture
methods tend to result in a loss of stem cells, either through death or through
differentiation into mature cells. The same medium-exchange perfusion approach
that enables stem cells to grow, has been shown to improve the biological
features of other types of human cells, compared with cells grown using standard
cell culture techniques. Aastrom has exclusive rights to several issued U.S.
patents that cover these processes and cell compositions. See "--Additional Stem
Cell and Other Cell Therapies."
8
Aastrom Cell Culture Chamber
Aastrom has developed a proprietary cell culture chamber to implement its
process technology. The culture chamber can produce cells on a clinical scale
and allows for recovery of the cells for therapeutic use. Aastrom's pre-clinical
data indicate that its cell culture chamber may also be used for growing various
types of human therapeutic cells, such as stem cells, T-cells and dendritic
cells used for immunotherapies, chondrocytes for cartilage replacement, and
mesenchymal tissues for bone and cartilage replacement. Aastrom holds exclusive
rights to issued U.S. patents and additional applications for its cell culture
chamber device technology. See "--Additional Stem Cell and Other Cell
Therapies."
Efficient Gene Transfer
Aastrom has developed proprietary processes and device technology that may
enable increased efficiency of vector-mediated gene transfer into cells as
compared to conventional procedures. This directed-motion gene transfer or gene
loading technology has potential application in most cell and tissue types and
most vector technologies. Aastrom intends to develop products based upon its
gene loading technology. Development of additional products, however, will
require Aastrom to raise additional funds or to seek collaborative partners, or
both, to finance related research and development activities, as to which there
can be no assurance of success. Furthermore, due to the uncertainties involved,
Aastrom is unable to estimate the length of time such development may take. If
successfully developed into products, Aastrom believes that such products could
facilitate the advancement of numerous gene therapy protocols into the clinic
and ultimately the market. Aastrom has exclusive rights to issued U.S. patents,
and has additional applications pending, for this technology. See "Aastrom
Product Candidates For Ex Vivo Gene Therapy."
The AastromReplicell(TM) System
The AastromReplicell(TM) System is Aastro's lead product under
development. While potentially applicable to multiple cell therapy applications
such as immunotherapy, solid tissue repair and ex vivo gene therapy, the
AastromReplicell(TM) System is being developed initially by Aastrom for stem
cell therapy. Market launch of the AastromReplicell(TM) System and the SC-I
Therapy Kit for the production of bone-marrow derived stem cells and the CB-I
Therapy Kit for the production of umbilical cord blood cells is currently being
resumed in Europe and U.S. clinical trials are in process. The
AastromReplicell(TM) System is a proprietary system that Aastrom believes will
enable the large scale ex vivo production of a variety of therapeutic cells at
healthcare facilities, independent laboratories, transplant centers and blood
banks, and has been designed to implement Aastrom's stem cell growth process as
well as processes for the production of other cell types.
The AastromReplicell(TM) System is comprised of several components,
including single-use therapy kits such as the SC-I and CB-I Therapy Kits, and
microprocessor-controlled instruments. The single use therapy kits contain a
cell cassette cartridge which contains the Aastrom cell culture chamber, supply
and waste reservoirs and harvest bag, necessary growth medium and supplements
and process specific software which provides the cell production processing
parameters to the AastromReplicell System instruments. The microprocessor-
controlled instruments include the AastromReplicell(TM) System Incubator which
controls the culture conditions for the operation of the AastromReplicell(TM)
System Cell Cassette, and the Processor which automates the inoculation of cells
into, and harvesting of the cells from, the AastromReplicell(TM) System Cell
Cassette. The AastromReplicell(TM) System Manager is a user interface computer
that is being developed to simultaneously track and monitor the cell production
process in multiple AastromReplicell(TM) System incubators and record relevant
process variables and operator actions.
The AastromReplicell(TM) System is designed to be operated with minimal
operator activity by a medical or laboratory technician and can implement
clinical scale cell production at the patient care site. The end product of the
AastromReplicell(TM) System process is a blood-bag container with the cell
product. The control and documentation features of the AastromReplicell(TM)
System have been designed to meet GMP requirements for the therapeutic
production of cells. The product configuration of the AastromReplicell(TM)
System consists of an instrumentation platform, to be integrated within the
hospital or other centralized facility, that can operate a variety of single-use
therapy kits that are specific to the desired medical application. This is
intended to provide a product pathway for each cell therapy that is similar to a
pharmaceutical product including regulatory approval, reimbursement, marketing
and pricing. Aastrom believes that the product design of
9
the AastromReplicell(TM) System will allow us to develop additional cell therapy
kits to provide a commercialization pathway for a number of emerging cell
therapies being developed by other researchers.
AastromReplicell(TM) System for Stem Cell Therapy
Aastrom's initial application for the AastromReplicell(TM) System is in the
field of stem cell therapy, where Aastrom believes that the AastromReplicell(TM)
System addresses certain of the limitations of existing procedures. The
AastromReplicell(TM) System is based on a comparatively simple process in which
a small volume of bone marrow cells are collected from the patient or donor
using a needle aspiration procedure, typically under a local anesthetic or
sedative. Alternatively, CB cells have been shown to be a new source of cells
for use in stem cell transplantation. The starting mixture of either bone marrow
or CB cells is quantified, and an appropriate volume of cells is then inoculated
into one or more AastromReplicell(TM) System Cell Cassettes with the necessary
growth media. Using the AastromReplicell(TM) System, growth-factor-stimulated
cells are produced in approximately 12 days with no further patient involvement.
Depending upon the cell quantity necessary for a therapeutic application, single
or multiple AastromReplicell(TM) System Cell Cassettes may be required, with a
different volume requirement of starting cells taken from the patient at the
initial visit or obtained from the CB bank. The AastromReplicell(TM) System has
been designed to minimize operator involvement during the cell production
process, and the steps required before and after the AastromReplicell(TM) System
are standard laboratory procedures. Cells derived from CB may also serve as a
tumor-free source of stem and progenitor cells for expansion in the
AastromReplicell(TM) System.
Potential Advantages of AastromReplicell(TM) System
The AastromReplicell(TM) System is designed to enable a cost-efficient and
minimally invasive alternative, or supplement, to existing procedures, which
could offer numerous advantages for both patients and medical staff:
The AastromReplicell(TM) System can generate larger quantities of cells
from a small starting sample. Alternative procedures to obtain the large
quantity of stem cells necessary for transplantation require a patient to endure
up to approximately 40 hours of procedure time or up to approximately 100
invasive needle sticks to obtain the necessary quantity of stem cells required
for the transplant. The AastromReplicell(TM) System offers an alternative that
requires less than two hours of procedure time and significantly fewer needle
sticks.
The AastromReplicell(TM) System enables the production of certain cells,
such as umbilical cord blood (CB) cells, for which there might otherwise be
insufficient quantities available for many transplants. Having access to a
sufficient number of cells is essential to successful clinical outcomes. This is
particularly the case with umbilical cord blood transplants. This source of stem
cells is increasingly being used as an alternative to traditional stem cell
transplant procedures. However, the limited quantities of available cells and
difficulties in expanding the starting volumes to therapeutic quantities have
restricted the widespread practice of CB transplants. The AastromReplicell(TM)
System is designed to solve this dilemma by providing the capability to easily
and cost-effectively expand CB cells to higher quantities for therapeutic
treatments.
Pre-clinical tests have demonstrated tumor cell purging of certain cancer
cells in the AastromReplicell(TM) System expansion process. Cancer patients with
tumor metastases, in which the cancer has spread to the blood and bone marrow,
have not traditionally been candidates for autologous stem cell transplants
because such transplant might reintroduce cancer cells into the patient.
Additionally, patients may have undetected tumor cells present in their marrow
or PBSC transplant, which could re-establish cancer in the patient following
transplant. Aastrom's initial pre-clinical results, as well as studies conducted
by third-party investigators, have shown that some primary human tumor cells die
or do not grow during hematopoietic cell culture. The smaller volume of starting
cells used for the AastromReplicell(TM) System compared with bone marrow harvest
or PBSC transplants may provide approximately 10 to 70 fold less tumor cells in
a transplant. Further, in an evaluation of 14 tumor-contaminated bone marrow
samples that were expanded with the AastromReplicell(TM) System process, the
presence of breast cancer cells in each sample was either substantially reduced
or was no longer detectable. Tumor cells that were detectable after expansion in
the AastromReplicell(TM) System showed a significant reduction in clonogenicity
(the ability to replicate). Aastrom believes that this combination of passive
depletion during culture with the lower starting
10
volume of tumor cells may result in a tumor-free or tumor-reduced cell product
for transplant. The clinical benefit of such tumor depletion, if any, will vary
depending upon the type of cancer and state of disease.
Supplemental therapy with AastromReplicell(TM) System produced cells.
Collection of cells for transplant is a variable procedure requiring longer
collection procedures for some patients compared to others. The
AastromReplicell(TM) System offers a means to augment current collection
techniques, thereby reducing variability and the overall collection burden for
the patient and care provider.
The AastromReplicell(TM) System automates the process of growing human
cells and is designed to be used directly in a hospital setting. Growing human
cells has largely been a research laboratory process, requiring substantial time
and technical expertise. The AastromReplicell(TM) System is designed to provide
sterilely-closed, automated cell production capabilities directly at the patient
care site in compliance with regulatory standards, providing process reliability
and reducing the need for highly skilled operators.
Clinical Development
The AastromReplicell(TM) System is an automated clinical system designed to
be used by medical personnel at hospitals and patient care centers to produce
therapeutic cells for the treatment of a broad range of diseases, including
cancer, infectious diseases and the restoration of solid tissues.
The AastromReplicell(TM) System is designed as a family of products consisting
of an instrumentation platform that operates single-use, patient-specific,
therapy kits. Each therapy kit, which is specific to the desired cell or tissue
type, is operated by the AastromReplicell(TM) System instrument platform, which
automates the otherwise complex cell production processes. This instrument
platform allows for on site cell manufacturing directly at the hospital, that is
compliant with GMP's. The reagents, growth medium, cytokines, and process
instructions contained within each therapy kit are procedure specific for the
production of each cell type of therapy. This product design feature provides
for a variety of therapy kits to be integrated into the AastromReplicell(TM)
System product line.
The AastromReplicell(TM) System is being evaluated in multi-site clinical
trials in the U.S. under Investigational Device Exemptions (IDE's) from the FDA.
The initial goals of Aastrom's clinical trial program are to obtain a Pre-Market
Approval (PMA) in the U.S., necessary to market the AastromReplicell(TM) System
for autologous stem cell therapy and umbilical cord blood transplants, and to
support European marketing activities.
Aastrom has conducted clinical trials in the U.S. evaluating stem cells
produced in the AastromReplicell(TM) System from a small starting amount of bone
marrow. Results from initial studies demonstrated the ability of the
AastromReplicell(TM) System to safely and reliably produce stem and progenitor
cells that engraft and restore blood and immune system function in cancer
patients who had undergone very aggressive chemotherapy. Further, the small
volume aspirate, along with a purging of contaminated tumor cells during the
stem cell production has indicated a way to offer patients a transplant with a
lower risk of receiving back tumor cells.
Aastrom is now conducting a randomized U.S. pivotal clinical trial
evaluating the AastromReplicell(TM) System to compliment traditional therapies
by augmenting stem cells collected from a single PBSC apheresis procedure. The
objectives of this study are to demonstrate that an optimal targeted recovery
can be achieved using the AastromReplicell(TM) System-produced cells with a sub-
optimal PBSC cell dose that otherwise would not provide this desired outcome.
This procedure appears to improve the certainty of procedure outcome by
providing a more reliable means of cell collection and patient recovery.
Aastrom has also conducted clinical feasibility trials to evaluate CB cells
produced in the AastromReplicell(TM) System to improve recoveries of pediatric
and adult patients requiring donor derived (or allogeneic) stem cell
transplants. Results of the pediatric transplants indicated that
AastromReplicell(TM) System-produced cells were safe and well tolerated by the
patients, and an improvement in 100-day post-transplant survival for the
patients was observed. Results from Aastrom's adult cord blood trial suggested
that the AastromReplicell(TM) System could increase the quantity of cord blood
cells available and enable adult-sized patients to undergo a transplant when
they may not otherwise be CB transplant candidates due to low cell dose
11
availability. Aastrom plans to extend these trials into a randomized trial.
Several CB banking institutions are now being established by other
organizations. This banking infrastructure, together with the expansion
capabilities of the AastromReplicell(TM) System, may lead to CB as a promising
new source of cells for therapeutic use.
The preliminary results of Aastrom's pre-pivotal trials may not be
indicative of results that will be obtained from subsequent patients in the
trials or from more extensive trials. Further, there can be no assurance that
Aastrom's pre-pivotal or pivotal trials will be successful, or that PMA
registration or required foreign regulatory approvals for the
AastromReplicell(TM) System will be obtained in a timely fashion, or at all. See
"Business Risks."
Additional Stem Cell and Other Cell Therapies
Aastrom's development efforts have been focused on the development of the
SC-I Therapy Kit for the production of bone marrow stem cells and the CB-I
Therapy Kit for the production of cord blood cells. Aastrom believes that
additional therapy kits may be developed for application to a variety of other
emerging cell therapies in addition to stem cell therapy. The
AastromReplicell(TM) System has the potential to supplant current manual cell
culture methods to produce therapeutic quantities of cell types such as T-cells,
dendritic cells, chondrocytes, mesenchymal cells, keratinocytes and neuronal
cells. Other than a limited application of chondrocyte therapy, novel cell
therapies are still in early stages of development by third parties, and no
assurance can be given that such other cell therapies will be successfully
developed. Potential advantages of the AastromReplicell(TM) System in these
therapies may include: (i) reducing labor and capital costs; (ii) enhancing
process reliability; (iii) automating quality assurance and process record
keeping; (iv) reducing the need for specialized, environmentally controlled
facilities; and (v) providing greater accessibility of these procedures to care
providers and patients, and (vi) in certain cases, providing a more biologically
active cell product.
Modification of such processes and application of Aastrom's products to the
expansion of other cell types will require additional development of specialized
cell culture capabilities which may need to be incorporated within Aastrom's
existing product platform. Such modifications may require Aastrom to raise
substantial additional funds, or to seek additional collaborative partners, or
both. There can be no assurance that Aastrom will be able to successfully modify
or develop existing or future products to enable such additional cell production
processes. Aastrom's business opportunity is dependent upon successful
development and regulatory approval of these novel cell therapies. No assurance
can be given that such novel therapies will be successfully developed by other
companies or approved by applicable regulatory authorities, or that Aastrom's
processes or product candidates will find successful application in such
therapies. In addition, Aastrom may be required to obtain license rights to such
technologies in order to develop or modify existing or future products for use
in such therapies. No assurance can be given that Aastrom will be able to obtain
such licenses or that such licenses, if available, could be obtained on
commercially reasonable terms. See "--Clinical Development" and "Business
Risks."
Immunotherapies
Immunotherapy involves using cells of the immune system to eradicate a
disease target. T-lymphocytes (T-cells) and dendritic cells are being actively
investigated by others for this purpose, and Aastrom anticipates that many of
these procedures will require ex vivo cell production.
Dendritic cells are bone marrow-derived antigen presenting cells that are
believed to play an important role in the function of the immune system.
Dendritic cells, when exposed to cancers or other pathogens, can serve as
"educator" cells for other cells of the immune system. Researchers believe that
cultured dendritic cells could augment the natural ability of a patient to
present tumor antigens or antigens from infectious agents to the immune system
and aid in the generation of a cytotoxic T-cell response to the offending agent.
In a study published in March 2000, researchers at three leading German
medical centers reported positive results of a new dendritic cell-based therapy.
In this study, renal cell carcinoma patients were treated with dendritic cells
that had been produced outside of the body, and then fused with tumor cells
collected from the patient. The modified dendritic cells, once injected into
the patient, triggered an immune response against the cancer. The results
indicated a major new treatment modality against renal cell cancer. Further,
additional clinical trials are currently underway at leading cancer centers to
demonstrate the effectiveness of this new therapeutic approach in multiple
cancer types. Common to these new therapeutic
12
approaches is the requirement to culture and activate the dendritic cells
outside of the patient (ex vivo). In these initial trials, production of the
dendritic cells is performed using manual research laboratory equipment, open
culture processes and specialized personnel. In order for these procedures to
receive regulatory approval and to be used in standard medical practice, Aastrom
believes that they must be standardized and implemented through user-friendly,
sterilely-closed, process-controlled products. The AastromReplicell(TM) System
is designed to address this key need by enabling automated therapeutic dendritic
cell production through a standardized product format.
T-cells, a class of lymphocyte white blood cells, play a critical role in
the human immune system and are responsible for the human immune response in a
broad spectrum of diseases, including cancers and infectious diseases.
Therapeutic procedures using Cytotoxic T-lymphocytes (CTLs) involve collecting
T-cells from a patient and culturing them in an environment resulting in
significantly increased numbers of T-cells with specificity for a particular
disease target. Clinical trials by third parties have been initiated to
demonstrate CTL effectiveness. The ex vivo production of these cells under
conditions for use in medical treatment represents a critical step in the
advancement of this therapy.
Solid Tissue Cell Therapies
Bone marrow stromal cells may also contribute to the repair of degenerative
bone diseases such as osteoporosis. Over 10 million Americans are estimated to
suffer from osteoporosis, a disease characterized by low bone mass and
structural deterioration of bone tissue, leading to bone fragility and an
increased susceptibility to fractures, especially of the hip, spine and wrist.
Aastrom has completed pre-clinical work in this area and expects to initiate a
clinical feasibility trial for use of the AastromReplicell(TM) System and the
OC-I Therapy Kit to produce cells to treat osteoporosis. The trial will evaluate
the AastromReplicell(TM) System to produce bone progenitor cells from a small
amount of the patients own stem cells. The new expanded cells will then be
infused intravenously with the intention to help restore the degenerated bone
tissue. Trial results will focus on establishing safety and measuring bone
formation, blood alkaline phosphatase and osteocalcin levels and bone
catabolism.
A new form of cell therapy involves the production of chondrocytes for the
restoration of cartilage. Chondrocyte therapy involves the surgical removal of a
small amount of tissue from the patient's knee and a therapeutic quantity of
chondrocytes is produced from this surgical biopsy. The cells are then implanted
into the patient's knee. Published reports indicate that such cells then
reestablish mature articular cartilage. Currently, this cell production process
is completed in highly specialized laboratory facilities using trained
scientists and manual laboratory procedures. Aastrom believes that the
AastromReplicell(TM) System may have the potential to reduce costs associated
with the cell production procedure and, if successfully developed by Aastrom for
this application, may eventually facilitate the transfer of the cell production
capability away from specialized facilities directly to the clinical care sites.
Other Stem Cell Therapy Applications
Autoimmune Diseases. Stem cell therapy is under clinical investigation by
third parties for the treatment of other diseases. Clinical studies have
suggested a potential role for stem cell therapy in treatment of severe
autoimmune diseases such as rheumatoid arthritis, multiple sclerosis and lupus
erythematosus. The generic cause of these diseases is a malfunctioning immune
system, including T-lymphocytes. Clinical trials in which the patient receives
treatment resulting in immune ablation (usually involving myelotoxic cancer
drugs or radiation), followed by stem cell therapy to restore the bone marrow
and cells of the blood and immune system, have demonstrated remission of the
autoimmune disease in some patients.
Organ Transplantation. A number of academic and corporate researchers and
companies have identified the potential use of stem cell therapy to facilitate
successful solid organ and tissue transplants between human donors and
recipients, as well as using organs from non-human species for transplantation
into humans. These proposed applications are based on the observation that
donor-specific bone marrow, infused concurrent with or prior to the organ
transplant, can provide for reduction of the normal immune rejection response by
the transplant recipient (e.g. heart, lung, liver and kidney transplants).
13
One limitation to the use of stem cell therapy in solid organ transplant is
the limited availability of sufficient amounts of bone marrow to obtain a
desired therapeutic response of immune tolerization. This limitation is
particularly problematic when cadaveric donor organs are used, which has
traditionally been the source of organs for these procedures. Bone marrow is
also often available from the cadaveric donor, but only in a limited amount.
Normally this amount may be sufficient for one transplant, but a donor might
provide multiple organs for transplant into multiple recipients. Aastrom
believes that the ability to expand the available bone marrow ex vivo will
enhance the use of stem cell therapy for such transplant procedures and may
pursue development of its products for application in such therapy in the
future.
Aastrom Product Candidates for Ex Vivo Gene Therapy
A novel form of cell therapy is ex vivo gene therapy. For this type of cell
therapy, cells collected from the patient or a donor are genetically modified
prior to their infusion into the patient. Analogous to other cell therapies, the
ability to produce a therapeutic dose of these gene-modified cells is a major
limitation to the commercialization of these cell therapies. This limitation is
further exacerbated by the additional requirement that the cells be genetically
modified under conditions that are sterile and comply with GMP.
Gene therapy is a therapeutic modality that holds the potential to
significantly impact the delivery of healthcare and the delivery of
therapeutically useful protein-based drugs within the body. Gene therapies are
generally targeted at the introduction of a missing normal gene into otherwise
defective human tissue, or the introduction of novel biologic capability into
the body via the introduction of a gene not ordinarily present (for example,
genes providing for the enhanced recognition and destruction or inhibition of
the HIV-1 virus). The major developmental focus of the ex vivo gene therapy
industry has been to identify the therapeutic gene of interest, insert it into a
suitable vector that can be used to transport and integrate the gene into the
DNA of the target cell, and then cause the gene to become expressed. Aastrom
believes that for ex vivo gene therapy to progress to clinical applications, a
process to produce a sufficient quantity of therapeutic cells is required for
many such therapies as is an efficient means to insert the gene vector into
target cells. Gene therapy is still in an early stage of development by third
parties. Aastrom's business opportunity is dependent upon the successful
development and regulatory approval of individual gene therapy applications. No
assurance can be given that such applications will be developed or approved or
that Aastrom's processes or product candidates will find successful applications
in such therapies. Successful development of Aastrom's processes and product
candidates for application in ex vivo gene therapy will require substantial
additional research and development, including clinical testing, and will be
subject to Aastrom's ability to finance such activities on acceptable terms, if
at all. See "Business Risks."
The AastromReplicell(TM) System for Gene Therapy
The AastromReplicell(TM) System has been designed to produce cells for
therapy, and Aastrom believes that the AastromReplicell(TM) System may be useful
in many potential ex vivo gene therapy applications. Further, Aastrom
anticipates that its proprietary stem cell production process technology
implemented by the AastromReplicell(TM) System may provide the conditions for
clinical scale stem cell division, and enable or enhance the introduction of
therapeutic genes into stem cell DNA. Aastrom believes that its technology may
also enable expansion of more mature progeny of these stem cells to create a
gene therapy cell product with potential short and long term therapeutic effect.
Aastrom's technologies are intended to provide two capabilities in ex vivo
gene therapy: (i) the enablement of stem cell gene therapies for a variety of
hematologic and other disorders, based on the AastromReplicell(TM) System's
ability to enable large scale stem cell division ex vivo; and (ii) the
enablement of gene transfer and therapeutic cell production by local and
regional primary patient care facilities and ancillary service laboratories.
The Aastrom(TM) Gene Loader
The Aastrom(TM) Gene Loader process technology, which is under development,
is designed to enhance the efficiency and reliability of the transfer of new
therapeutic genes, which are carried by vectors, into the target cell. This
process, which is typically inefficient in many human cells, may inhibit ex vivo
gene therapies from moving forward in the clinic. The Aastrom(TM) Gene Loader
incorporates Aastrom's proprietary directed-motion gene transfer technology and
is designed to overcome this limitation. Complete product development is
expected to require additional funding sources or collaborations with others, or
both.
14
Aastrom believes that these issues represent a general bottleneck for other
companies pursuing clinical ex vivo gene therapy applications. Aastrom's
technology under development may favorably influence these gene therapy
applications, the development of which are impeded due to low transduction
efficiencies and the resultant need for use of large quantities of gene vectors
and/or target "delivery" tissues.
Manufacturing
Aastrom has established relationships with third party manufacturers which
are FDA registered as suppliers for the manufacture of medical products to
manufacture various components of the AastromReplicell(TM) System.
In May 1994, Aastrom entered into a Collaborative Product Development
Agreement with SeaMED Corporation (SeaMED), now a division company of Plexus
Corporation. Pursuant to this agreement, Aastrom and SeaMED collaborated on the
design of certain instrument components in the AastromReplicell(TM) System. In
April 1998, Aastrom entered into a manufacturing agreement with SeaMED for the
commercial manufacturing of the instrument components of the
AastromReplicell(TM) System pursuant to a pricing formula set forth in the
agreement. The initial term of the manufacturing agreement is until April 2001,
after which the agreement is automatically renewed until terminated upon a 24-
month notice from SeaMED or a 6-month notice from Aastrom. Aastrom retains all
proprietary rights to its intellectual property which is utilized by SeaMED
pursuant to this agreement. During the initial term of the manufacturing
agreement, SeaMED is regarded as Aastrom's preferred supplier, and Aastrom will
purchase a minimum of 65% of its instrument requirements for the
AastromReplicell(TM) System from SeaMED.
In March 1996, Aastrom entered into a License and Supply Agreement with
Immunex Corporation for an initial five-year term to purchase and resell certain
cytokines and ancillary materials for use in conjunction with the
AastromReplicell(TM) System. The agreement allows for Aastrom to extend the term
of the agreement for five years upon written notice, notice of which has been
provided by Aastrom. The agreement provided for Immunex to receive up-front and
renewal fees totaling $5,500,000. Pursuant to agreements between Immunex and
Aastrom, the annual fees due in March 1998, 1999 and 2000 were each paid by
Aastrom through the issuance of $1,100,000 in Aastrom's common stock. In August
1997, Aastrom and Immunex amended the agreement to expand Aastrom's territorial
rights to use and sell such materials to a worldwide basis. The supply
agreement may be terminated by either party effective immediately upon written
notice of termination to the other party in the event that such party materially
breaches the agreement and such breach continues unremedied after notice and
expiration of a specified cure period or in the event that a bankruptcy
proceeding is commenced against a party and is not dismissed or stayed within a
45-day period. In addition, Immunex has the right to cease the supply to Aastrom
of cytokines and ancillary materials if Aastrom fails to purchase a minimum
amount of its forecasted annual needs from Immunex after notice to Aastrom and
expiration of a specified cure period. In the event that Immunex elects to
cease to supply to Aastrom cytokines and ancillary materials or is prevented
from supplying such materials to Aastrom by reason of force majeure, limited
manufacturing rights will be transferred to Aastrom under certain circumstances.
There is, however, no assurance that Aastrom could successfully manufacture the
compounds itself or identify others that could manufacture these compounds to
acceptable quality standards and costs, if at all.
In December 1996, Aastrom entered into a Collaborative Supply Agreement
with Anchor Advanced Products, Inc., Mid-State Plastics Division (MSP), now a
division company of Moll Industries. Under this agreement, MSP conducted both
pre-production manufacturing development and now commercial manufacturing and
assembly of the Cell Cassette component of the AastromReplicell(TM) System for
Aastrom. MSP is paid by Aastrom on a per unit basis for Cell Cassettes delivered
to Aastrom under a pricing formula specified in the agreement. Throughout the
term of this agreement, Aastrom has agreed to treat MSP as its preferred
supplier of Cell Cassettes, using MSP as its supplier of at least 60% of its
requirements for Cell Cassettes.
There can be no assurance that Aastrom will be able to continue its present
arrangements with its suppliers, supplement existing relationships or establish
new relationships or that Aastrom will be able to identify and obtain the
ancillary materials that are necessary to develop its product candidates in the
future. Aastrom's dependence upon third parties for the supply and manufacture
of such items could adversely affect its ability to develop and deliver
commercially feasible products on a timely and competitive basis. See "Business
Risks."
15
Patents and Proprietary Rights
Aastrom's success depends in part on its ability, and the ability of its
licensors, to obtain patent protection for its products and processes. Aastrom
has exclusive rights to over 20 issued U.S. patents, and non-exclusive rights to
one other issued U.S. patent. These patents present claims to (i) certain
methods for ex vivo stem cell division as well as ex vivo human hematopoietic
stem cell stable genetic transformation and expanding and harvesting a human
hematopoietic stem cell pool; (ii) certain apparatus for cell culturing,
including a bioreactor suitable for culturing human stem cells or human
hematopoietic cells; (iii) certain methods of infecting or transfecting target
cells with vectors; and (iv) a cell composition containing human stem cells or
progenitor cells, or genetically modified stem cells, when such cells are
produced in an ex vivo medium exchange culture. Certain patent equivalents to
the U.S. patents have also been issued in other jurisdictions including
Australia, Canada and under the European Patent Convention. These patents are
due to expire beginning in 2006. In addition, Aastrom and its exclusive
licensors have filed applications for patents in the United States and
equivalent applications in certain other countries claiming other aspects of
Aastrom's products and processes, including a number of U.S. patent applications
and corresponding applications in other countries related to various components
of the AastromReplicell(TM) System.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that any patents based on pending patent applications or
any future patent applications of Aastrom or its licensors will be issued, that
the scope of any patent protection will exclude competitors or provide
competitive advantages to Aastrom, that any of the patents that have been or may
be issued to Aastrom or its licensors will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held or licensed by Aastrom. Furthermore, there can
be no assurance that others have not developed or will not develop similar
products, duplicate any of Aastrom's products or design around any patents that
have been or may be issued to Aastrom or its licensors. Since patent
applications in the United States are maintained in secrecy until patents issue,
Aastrom also cannot be certain that others did not first file applications for
inventions covered by Aastrom's and its licensors' pending patent applications,
nor can Aastrom be certain that we will not infringe any patents that may be
issued to others on such applications.
Aastrom relies on certain licenses granted by the University of Michigan
and others for certain patent rights. If Aastrom breaches such agreements or
otherwise fails to comply with such agreements, or if such agreements expire or
are otherwise terminated, Aastrom may lose its rights in such patents, which
would have a material adverse effect on Aastrom's business, financial condition
and results of operations. See "--Research and License Agreements."
Aastrom also relies on trade secrets and unpatentable know-how that it
seeks to protect, in part, by confidentiality agreements. It is Aastrom's policy
to require its employees, consultants, contractors, manufacturers, outside
scientific collaborators and sponsored researchers, and other advisors to
execute confidentiality agreements upon the commencement of employment or
consulting relationships with Aastrom. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with Aastrom is to be kept confidential
and not disclosed to third parties except in specific limited circumstances.
Aastrom also requires signed confidentiality or material transfer agreements
from any company that is to receive its confidential information. In the case of
employees, consultants and contractors, the agreements generally provide that
all inventions conceived by the individual while rendering services to Aastrom
shall be assigned to Aastrom as the exclusive property of Aastrom. There can be
no assurance, however, that these agreements will not be breached, that Aastrom
would have adequate remedies for any breach, or that Aastrom's trade secrets or
unpatentable know-how will not otherwise become known or be independently
developed by competitors.
Aastrom's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. Aastrom has not conducted freedom of use patent searches and no
assurance can be given that patents do not exist or could not be filed which
would have an adverse effect on Aastrom's ability to market its products or
maintain its competitive position with respect to its products. If Aastrom's
technology components, devices, designs, products, processes or other subject
matter are claimed under other existing United States or foreign patents or are
otherwise protected by third party proprietary rights, Aastrom may be subject to
infringement actions. In such event, Aastrom may challenge the validity of such
patents or other proprietary rights or be required to obtain licenses from such
companies in order to develop, manufacture or market its products. There can be
no assurances that Aastrom would be able to obtain such
16
licenses or that such licenses, if available, could be obtained on commercially
reasonable terms. Furthermore, the failure to either develop a commercially
viable alternative or obtain such licenses could result in delays in marketing
Aastrom's proposed products or the inability to proceed with the development,
manufacture or sale of products requiring such licenses, which could have a
material adverse effect on Aastrom's business, financial condition and results
of operations. If Aastrom is required to defend itself against charges of patent
infringement or to protect its proprietary rights against third parties,
substantial costs will be incurred regardless of whether Aastrom is successful.
Such proceedings are typically protracted with no certainty of success. An
adverse outcome could subject Aastrom to significant liabilities to third
parties and force Aastrom to curtail or cease its development and sale of its
products and processes.
Certain of Aastrom's and its licensors' research has been or is being
funded in part by the Department of Commerce and by a Small Business Innovation
Research Grant obtained from the Department of Health and Human Services. As a
result of such funding, the U.S. Government has certain rights in the technology
developed with the funding. These rights include a non-exclusive, paid-up,
worldwide license under such inventions for any governmental purpose. In
addition, the government has the right to require Aastrom to grant an exclusive
license under any of such inventions to a third party if the government
determines that (i) adequate steps have not been taken to commercialize such
inventions, (ii) such action is necessary to meet public health or safety needs
or (iii) such action is necessary to meet requirements for public use under
federal regulations. Additionally, under the federal Bayh Dole Act, a party
which acquires an exclusive license for an invention that was partially funded
by a federal research grant is subject to the following government rights: (i)
products using the invention which are sold in the United States are to be
manufactured substantially in the United States, unless a waiver is obtained;
(ii) if the licensee does not pursue reasonable commercialization of a needed
product using the invention, the government may force the granting of a license
to a third party who will make and sell the needed product; and (iii) the U.S.
Government may use the invention for its own needs.
Research and License Agreements
In March 1992, Aastrom and the University of Michigan entered into a
License Agreement, as contemplated by a Research Agreement executed in August
1989 relating to the ex vivo production of human cells. There have been
clarifying amendments to the License Agreement, in March 1992, October 1993 and
June 1995. Pursuant to this License Agreement, (i) Aastrom acquired exclusive
worldwide license rights to the patents and know-how for the production of blood
cells and bone marrow cells as described in the University of Michigan's
research project or which resulted from certain further research conducted
through December 1994, and (ii) Aastrom is obligated to pay to the University of
Michigan a royalty equal to 2% of the net sales of products which are covered by
the University of Michigan's patents. Unless it is terminated earlier at
Aastrom's option or due to a material breach by Aastrom, the License Agreement
will continue in effect until the latest expiration date of the patents to which
the License Agreement applies.
Government Regulation
Aastrom's research and development activities and the manufacturing and
marketing of Aastrom's products are subject to the laws and regulations of
governmental authorities in the United States and other countries in which its
products will be marketed. Specifically, in the United States, the FDA, among
other activities, regulates new product approvals to establish safety and
efficacy of these products. Governments in other countries have similar
requirements for testing and marketing. In the United States, in addition to
meeting FDA regulations, Aastrom is also subject to other federal laws, such as
the Occupational Safety and Health Act and the Environmental Protection Act, as
well as certain state laws.
Regulatory Process in the United States
To Aastrom's knowledge, it is the first to develop a cell culture system
for ex vivo human cell production to be sold for therapeutic applications.
Therefore, to a certain degree, the manner in which the FDA will regulate
Aastrom's products is uncertain.
Aastrom's products are potentially subject to regulation as medical devices
under the Federal Food, Drug and Cosmetic Act, and as biological products under
the Public Health Service Act. Different regulatory requirements may apply to
Aastrom's products depending on how they are categorized by the FDA under these
laws. To date, the FDA has indicated that it intends to regulate the
AastromReplicell(TM) System as a Class III medical device through the Center for
Biologics
17
Evaluation and Research. However, there can be no assurance that FDA will
ultimately regulate the AastromReplicell(TM) System as a medical device.
Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the AastromReplicell(TM) System. The FDA is still in the
process of developing its requirements with respect to somatic cell therapy and
gene cell therapy products and has issued draft documents concerning the
regulation of umbilical cord blood stem cell products, as well as cellular and
tissue-based products. If the FDA adopts the regulatory approach set forth in
the draft document, the FDA may require separate regulatory approval for such
cells in some cases, called a biologic license application (BLA). This proposal
may indicate that the FDA will extend a similar approval requirement to other
types of cellular therapies. Any such additional regulatory or approval
requirements could have a material adverse impact on Aastrom.
Approval of new medical devices and biological products is a lengthy
procedure leading from development of a new product through preclinical and
clinical testing. This process takes a number of years and the expenditure of
significant resources. There can be no assurance that Aastrom's product
candidates will ultimately receive regulatory approval.
Regardless of how Aastrom's product candidates are regulated, the Federal
Food, Drug, and Cosmetic Act and other Federal statutes and regulations govern
or influence the research, testing, manufacture, safety, labeling, storage,
recordkeeping, approval, distribution, use, reporting, advertising and promotion
of such products. Noncompliance with applicable requirements can result in civil
penalties, recall, injunction or seizure of products, refusal of the government
to approve or clear product approval applications or to allow Aastrom to enter
into government supply contracts, withdrawal of previously approved applications
and criminal prosecution.
Devices
In order to obtain FDA approval of a new medical device, sponsors must
generally submit proof of safety and efficacy. In some cases, such proof entails
extensive preclinical and clinical laboratory tests. The testing, preparation of
necessary applications and processing of those applications by the FDA is
expensive and may take several years to complete. There can be no assurance that
the FDA will act favorably or in a timely manner in reviewing submitted
applications, and Aastrom may encounter significant difficulties or costs in its
efforts to obtain FDA approvals which could delay or preclude Aastrom from
marketing any products it may develop. The FDA may also require post marketing
testing and surveillance of approved products, or place other conditions on the
approvals. These requirements could cause it to be more difficult or expensive
to sell the products, and could therefore restrict the commercial applications
of such products. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. For patented technologies, delays imposed by the governmental
approval process may materially reduce the period during which Aastrom will have
the exclusive right to exploit such technologies.
If human clinical trials of a proposed device are required and the device
presents significant risk, the manufacturer or distributor of the device will
have to file an IDE submission with the FDA prior to commencing human clinical
trials. The IDE submission must be supported by data, typically including the
results of pre-clinical and laboratory testing. Following submission of the IDE,
the FDA has 30 days to review the application and raise safety and other
clinical trial issues. If Aastrom is not notified of objections within that
period, clinical trials may be initiated, and human clinical trials may commence
at a specified number of investigational sites with the number of patients
approved by the FDA.
The FDA categorizes devices into three regulatory classifications subject
to varying degrees of regulatory control. In general, Class I devices require
compliance with labeling and record keeping regulations, Quality System
Regulation (QSR), 510(k) pre-market notification, and are subject to other
general controls. Class II devices may be subject to additional regulatory
controls, including performance standards and other special controls, such as
post market surveillance. Class III devices, which are either invasive or life-
sustaining products, or new products never before marketed (for example, non-
"substantially equivalent" devices), require clinical testing to demonstrate
safety and effectiveness and FDA approval prior to marketing and distribution.
The FDA also has the authority to require clinical testing of Class I and Class
II devices.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, the manufacturer or distributor
must submit a PMA application to the FDA. A PMA application must be supported by
extensive data, including preclinical and human clinical trial data, to prove
the safety and efficacy of the device. Upon
18
receipt, the FDA conducts a preliminary review of the PMA application. If
sufficiently complete, the submission is declared filed by the FDA. By
regulation, the FDA has 180 days to review a PMA application once it is filed,
although PMA application reviews more often occur over a significantly
protracted time period, and may take approximately one year or more from the
date of filing to complete.
Some of Aastrom's products may be classified as Class II or Class III
medical devices. Aastrom has submitted several IDEs for the AastromReplicell(TM)
System, and has conducted clinical studies under these IDEs. Aastrom believes
that the AastromReplicell(TM) System product will be regulated by the FDA as a
Class III device, although there can be no assurance that the FDA will not
choose to regulate this product in a different manner.
Aastrom and any contract manufacturer are required to be registered as a
medical device manufacturer with the FDA. As such, they will be inspected on a
routine basis by the FDA for compliance with the FDA's QSR regulations. These
regulations will require that Aastrom and any contract manufacturer, design,
manufacture and service products and maintain documents in a prescribed manner
with respect to manufacturing, testing, distribution, storage, design control
and service activities. The Medical Device Reporting regulation requires that
Aastrom provide information to the FDA on deaths or serious injuries alleged to
be associated with the use of its devices, as well as product malfunctions that
are likely to cause or contribute to death or serious injury if the malfunction
were to recur. In addition, the FDA prohibits a company from promoting an
approved device for unapproved applications and reviews company labeling for
accuracy.
Biological Products
For certain of Aastrom's new products which may be regulated as biologics,
the FDA requires (i) preclinical laboratory and animal testing, (ii) submission
to the FDA of an investigational new drug (IND) application which must be
effective prior to the initiation of human clinical studies, (iii) adequate and
well-controlled clinical trials to establish the safety and efficacy of the
product for its intended use, (iv) submission to the FDA of a biologic license
application (BLA) and (v) review and approval of the BLA as well as inspections
of the manufacturing facility by the FDA prior to commercial marketing of the
product.
Preclinical testing covers laboratory evaluation of product chemistry and
formulation as well as animal studies to assess the safety and efficacy of the
product. The results of these tests are submitted to the FDA as part of the IND.
Following the submission of an IND, the FDA has 30 days to review the
application and raise safety and other clinical trial issues. If Aastrom is not
notified of objections within that period, clinical trials may be initiated.
Clinical trials are typically conducted in three sequential phases. Phase I
represents the initial administration of the drug or biologic to a small group
of humans, either healthy volunteers or patients, to test for safety and other
relevant factors. Phase II involves studies in a small number of patients to
assess the efficacy of the product, to ascertain dose tolerance and the optimal
dose range and to gather additional data relating to safety and potential
adverse effects. Once an investigational drug is found to have some efficacy and
an acceptable safety profile in the targeted patient population, multi-center
Phase III studies are initiated to establish safety and efficacy in an expanded
patient population and multiple clinical study sites. The FDA reviews both the
clinical plans and the results of the trials and may request Aastrom to
discontinue the trials at any time if there are significant safety issues.
The results of the preclinical tests and clinical trials are submitted to
the FDA in the form of a BLA for marketing approval. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all.
Additional animal studies or clinical trials may be requested during the FDA
review period that may delay marketing approval. After FDA approval for the
initial indications, further clinical trials may be necessary to gain approval
for the use of the product for additional indications. The FDA requires that
adverse effects be reported to the FDA and may also require post-marketing
testing to monitor for adverse effects, which can involve significant expense.
Under current requirements, facilities manufacturing biological products
must be licensed. To accomplish this, a BLA must be filed with the FDA. The BLA
describes the facilities, equipment and personnel involved in the manufacturing
process. An establishment license is granted on the basis of inspections of the
applicant's facilities in which the primary focus is on compliance with GMP's
and the ability to consistently manufacture the product in the facility in
accordance with the
19
BLA. If the FDA finds the inspection unsatisfactory, it may decline to approve
the BLA, resulting in a delay in production of products.
As part of the approval process for human biological products, each
manufacturing facility must be registered and inspected by the FDA prior to
marketing approval. In addition, state agency inspections and approvals may also
be required for a biological product to be shipped out of state.
Regulatory Process in Europe
The AastromReplicell(TM) instruments and disposables are currently being
regulated in Europe as a Class I Sterile or Class IIb medical device, under the
authority of the new Medical Device Directives (MDD) being implemented by
European Union (EU) member countries. These classifications apply to medical
laboratory equipment and supplies including, among other products, many devices
that are used for the collection and processing of blood for patient therapy.
Certain ancillary products (e.g., biological reagents) used as part of the
AastromReplicell(TM) System are treated as Class III medical devices.
The MDD regulations vest the authority to permit affixing of the CE Mark
with various Notified Bodies. These are private and state organizations which
operate under license from the member states of the EU to certify that
appropriate quality assurance standards and compliance procedures are followed
by developers and manufacturers of medical device products or, alternatively,
that a manufactured medical product meets a more limited set of requirements.
Notified Bodies are also given the responsibility for determination of the
appropriate standards to apply to a medical product. Receipt of permission to
affix the CE Mark enables a company to sell a medical device in all EU member
countries. Other registration requirements may also need to be satisfied in
certain countries.
During 1999, Aastrom received permission from its Notified Body (The
British Standards Institute) to affix the CE Mark to the AastromReplicell(TM)
instrumentation and components for the SC-I Therapy Kit and CB-I Therapy Kit.
This has allowed Aastrom to market these products in the European Union. There
can be no assurance that the AastromReplicell(TM) System will continue to be
regulated under its current status, any change in which would affect Aastrom's
ability to sell the product and adversely affect Aastrom's business, financial
condition and results of operations.
Competition
The biotechnology and medical device industries are characterized by
rapidly evolving technology and intense competition. Aastrom's competitors
include major pharmaceutical, medical device, medical products, chemical and
specialized biotechnology companies, many of which have financial, technical and
marketing resources significantly greater than those of Aastrom. In addition,
many biotechnology companies have formed collaborations with large, established
companies to support research, development and commercialization of products
that may be competitive with those of Aastrom. Academic institutions,
governmental agencies and other public and private research organizations are
also conducting research activities and seeking patent protection and may
commercialize products on their own or through joint ventures. Aastrom's product
development efforts are primarily directed toward obtaining regulatory approval
to market the AastromReplicell(TM) System for stem cell therapy. That market is
currently dominated by the bone marrow harvest and PBSC collection methods.
Aastrom's clinical data, although early, suggests that cells expanded in the
AastromReplicell(TM) System using its current process will enable hematopoietic
recovery within the time frames currently achieved by bone marrow harvest,
however, neutrophil and platelet recovery times may be slower than with PBSC
collection methods. In recognition of this, Aastrom has begun clinical testing
of a procedure that utilizes a combination of PBSC's collected in a single blood
apheresis procedure with cells produced in the AastromReplicell(TM) System. The
objectives of this study are to demonstrate that an optimal targeted recovery
can be achieved using AastromReplicell System-produced cells with a sub-optimal
PBSC cell dose that otherwise would not provide this desired outcome. Aastrom is
also evaluating techniques and methods to optimize the cells produced in the
AastromReplicell(TM) System to reduce the recovery time of neutrophils and
platelets in patients. There can be no assurance that if such procedure
optimization does not lead to recovery times equal to or faster than those of
PBSC collection methods, such outcome would not have a material adverse effect
on Aastrom's business, financial condition and results of operations. In
addition, the bone marrow harvest and PBSC collection methods have been widely
practiced for a number of years and the patient costs associated with these
procedures have begun to decline. There can be no assurance that the
AastromReplicell(TM) System method, if approved for marketing, will prove to be
competitive
20
with these established collection methods on the basis of hematopoietic recovery
time, cost or otherwise. Aastrom is aware of certain other products manufactured
or under development by competitors that are used for the prevention or
treatment of certain diseases and health conditions which Aastrom has targeted
for product development. There can be no assurance that developments by others
will not render Aastrom's product candidates or technologies obsolete or
noncompetitive, that Aastrom will be able to keep pace with new technological
developments or that Aastrom's product candidates will be able to supplant
established products and methodologies in the therapeutic areas that are
targeted by Aastrom. The foregoing factors could have a material adverse effect
on Aastrom's business, financial condition and results of operations.
Aastrom's products under development are expected to address a broad range
of existing and new markets. Aastrom believes that its stem cell therapy
products will, in large part, face competition by existing procedures rather
than novel new products. Aastrom's competition will be determined in part by the
potential indications for which Aastrom's products are developed and ultimately
approved by regulatory authorities. In addition, the first product to reach the
market in a therapeutic or preventive area is often at a significant competitive
advantage relative to later entrants to the market. Accordingly, the relative
speed with which Aastrom or its corporate partners can develop products,
complete the clinical trials and approval processes and supply commercial
quantities of the products to the market are expected to be important
competitive factors. Aastrom's competitive position will also depend on its
ability to attract and retain qualified scientific and other personnel, develop
effective proprietary products, develop and implement production and marketing
plans, obtain and maintain patent protection and secure adequate capital
resources. Aastrom expects its products, if approved for sale, to compete
primarily on the basis of product efficacy, safety, patient convenience,
reliability, value and patent position.
Employees
As of August 31, 2000, Aastrom employed approximately 30 individuals on a
full time equivalent basis. A significant number of Aastrom's management and
professional employees have had prior experience with pharmaceutical,
biotechnology or medical product companies. None of Aastrom's employees are
covered by collective bargaining agreements, and management considers relations
with our employees to be good.
Executive Officers of Aastrom
The executive officers of Aastrom, and their respective ages as of August
31, 2000, are as follows:
Name Age Position
---- --- --------
R. Douglas Armstrong, Ph.D.............. 47 President and Chief Executive Officer
Todd E. Simpson......................... 39 Vice President, Finance & Administration, Chief
Financial Officer, Secretary and Treasurer
Brian S. Hampson........................ 43 Vice President, Product Development
Bruce W. Husel.......................... 42 Vice President, Quality Systems and Regulatory
Affairs
R. Douglas Armstrong, Ph.D. joined Aastrom in June 1991 as a director and
as its President and Chief Executive Officer. From 1987 to 1991, Dr. Armstrong
served in different capacities, including as Executive Vice President and a
Trustee of the La Jolla Cancer Research Foundation (LJCRF), now named the
Burnham Institute, a 250-employee scientific research institute located in San
Diego, California. Dr. Armstrong received his doctorate in Pharmacology and
Toxicology from the Medical College of Virginia, and has held faculty and staff
positions at Yale University, University of California, San Francisco, LJCRF and
University of Michigan. Dr. Armstrong also serves on the Board of Directors of
Cytomedix, Inc.
Todd E. Simpson joined Aastrom in January 1996 as Vice President, Finance
and Administration and Chief Financial Officer and is also Aastrom's Secretary
and Treasurer. Prior to that, Mr. Simpson was Treasurer of Integra LifeSciences
Corporation, a biotechnology company, which acquired Telios Pharmaceuticals,
Inc. in August 1995. Mr. Simpson served as Vice President of Finance and Chief
Financial Officer of Telios up until its acquisition by Integra and held various
other financial positions at Telios after joining that company in February 1992.
Telios was a publicly-held company engaged in the development of pharmaceutical
products for the treatment of dermal and ophthalmic wounds, fibrotic disease,
vascular
21
disease, and osteoporosis. From August 1983 through February 1992, Mr. Simpson
practiced public accounting with the firm of Ernst & Young, LLP. Mr. Simpson is
a Certified Public Accountant and received his B.S. degree in Accounting and
Computer Science from Oregon State University.
Brian S. Hampson joined Aastrom in July 1993 as Director, Product
Engineering and became Vice President, Product Development in June 2000. He has
been a principal leader in the development and engineering of the
AastromReplicell(TM) System. Previously, Mr. Hampson served as Manager, In Vitro
Systems at Charles River Laboratories and held other positions after joining
that company in January 1986. While at Charles River, he managed a number of
programs to develop and commercialize novel bioreactor systems to support large-
scale cell culture and biomolecule production. Prior to that, Mr. Hampson held
several engineering positions at Corning Incorporated from September 1979 to
January 1986, including assignments with KC Biological, a wholly owned
subsidiary of Corning at the time. Mr. Hampson received his Bachelor of Science
and Master of Engineering degrees in Electrical Engineering from Cornell
University in 1978 and 1979, respectively.
Bruce W. Husel joined Aastrom in November 1997 as Vice President, Quality
Systems. From May 1994 to September 1997, Mr. Husel served as Director of
Quality Assurance for Sanofi Diagnostics Pasteur, where he led efforts to
achieve EN 46001 registration and prepare for CE Marking. From June 1992 to May
1994, Mr. Husel was Director of Quality and Regulatory Affairs for Baxter
Anesthesia Division (formerly known as Bard MedSystems). Prior to that, he
served as Quality Manager of McGaw, Inc. Mr. Husel received his B.B. degree in
Electrical Engineering from Rice University in 1980, an M.S degree in
Engineering Management from Southern Methodist University in 1986 and an M.B.A.
degree in Accounting from the University of Texas at Dallas in 1987.
ITEM 2. PROPERTIES
Aastrom leases approximately 22,000 square feet of office and research and
development space in Ann Arbor, Michigan. While such facilities have previously
been leased under a long-term operating lease, Aastrom currently leases its
facilities under a month-to-month lease. We believe that our facilities are
adequate for our current needs. Additional facilities may be required to support
expansion for research and development abilities or to assume manufacturing
operations which are currently fulfilled through contract manufacturing
relationships.
ITEM 3. LEGAL PROCEEDINGS
Aastrom is not party to any material legal proceedings, although from time
to time it may become involved in disputes in connection with the operation of
its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A Special Meeting of Shareholders of Aastrom Biosciences, Inc.
was held on May 9, 2000.
(b) At the Special Meeting of Shareholders, votes were cast on
matters submitted to the shareholders, as follows:
1. The vote to authorize Aastrom's Board of Directors to amend
our Articles of Incorporation to increase the number of
authorized shares of common stock up to 100,000,000 shares.
FOR AGAINST ABSTAIN
--- ------- -------
27,944,449 963,721 12,900
2. The vote to approve the amendment of Aastrom's 1992 Incentive
and Non-Qualified Stock Option Plan to increase the shares of
common stock issuable thereunder by 1,400,000 and to
establish a share grant limitation.
FOR AGAINST ABSTAIN
--- ------- -------
27,868,325 1,031,895 20,850
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since February 4, 1997 our common stock has been quoted on the Nasdaq National
Market under the symbol "ASTM". The following table sets forth the high and low
closing prices per share of common stock as reported on the Nasdaq National
Market:
Price Range of Common Stock
High Low
---- ---
Year ended June 30, 1999:
1st Quarter $3 3/4 $1 7/8
2nd Quarter 5 1 13/16
3rd Quarter 3 1/4 2 3/16
4th Quarter 2 1/4 1 1/4
Year ended June 30, 2000:
1st Quarter $1 31/32 $1 5/16
2nd Quarter 1 5/16 7/16
3rd Quarter 7 3/4 23/32
4th Quarter 4 5/16 2
As of August 31, 2000, there were approximately 315 holders of record of the
common stock. Aastrom has never paid any cash dividends on our common stock and
does not anticipate paying such cash dividends in the foreseeable future. We
currently anticipate that we will retain all future earnings, if any, for use in
the development of our business.
23
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data for the years ended June 30, 1998, 1999 and
2000 and for the period from March 24, 1989 (Inception) to June 30, 2000 and the
balance sheet data at June 30, 1999 and 2000, are derived from, and are
qualified by reference to, the audited consolidated financial statements
included in this report on Form 10-K and should be read in conjunction with
those financial statements and notes thereto. The statement of operations data
for the years ended June 30, 1996 and 1997, and the balance sheet data at June
30, 1996, 1997 and 1998, are derived from audited consolidated financial
statements not included herein. The data set forth below are qualified by
reference to, and should be read in conjunction with, the consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
March 24, 1989
(Inception) to
Year ended June 30, June 30,
-------------------------------------------------------------------------
1996 1997 1998 1999 2000 2000
------------ ------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Revenues:
Product sales and rentals............. $ - $ - $ - $ 34,000 $ 169,000 $ 203,000
Research and development
agreements.......................... 1,342,000 230,000 3,000 - - 2,020,000
Grants................................ 267,000 148,000 246,000 847,000 981,000 4,217,000
------------ ------------ ------------ ------------ ------------ ------------
Total revenues...................... 1,609,000 378,000 249,000 881,000 1,150,000 6,440,000
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of product sales
and rentals (1)..................... - - - 6,000 1,251,000 1,257,000
Research and development.............. 10,075,000 13,357,000 15,498,000 10,871,000 6,289,000 71,090,000
Selling, general and administrative... 2,067,000 1,953,000 2,858,000 2,836,000 3,364,000 18,100,000
------------ ------------ ------------ ------------ ------------ ------------
Total costs and expenses............ 12,142,000 15,310,000 18,356,000 13,713,000 10,904,000 90,447,000
------------ ------------ ------------ ------------ ------------ ------------
Loss from operations................... (10,533,000) (14,932,000) (18,107,000) (12,832,000) (9,754,000) (84,007,000)
Other income (expense):
Other income.......................... - - - 1,237,000 - 1,237,000
Interest income....................... 678,000 676,000 886,000 571,000 364,000 4,073,000
Interest expense...................... (62,000) (32,000) (12,000) (4,000) - (267,000)
------------ ------------ ------------ ------------ ------------ ------------
Net loss............................... $ (9,917,000) $(14,288,000) $(17,233,000) $(11,028,000) $ (9,390,000) $(78,964,000)
============ ============ ============ ============ ============ ============
Net loss applicable to
common shares....................... $ (9,917,000) $(14,288,000) $(21,023,000) $(11,507,000) $ (9,598,000)
============ ============ ============ ============ ============
Net loss per common share (basic and
diluted)............................ $ (1.07) $ (1.27) $ (1.57) $ (.75) $ (.41)
============ ============ ============ ============ ============
Weighted average number of common
shares outstanding.................. 9,269,000 11,228,000 13,363,000 15,342,000 23,344,000
============ ============ ============ ============ ============
June 30,
-------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Cash, cash equivalents and
short-term investments............ $ 10,967,000 $ 17,007,000 $ 11,212,000 $ 7,528,000 $ 12,745,000
Working capital.................... 9,851,000 15,600,000 10,121,000 8,009,000 12,143,000
Total assets....................... 12,673,000 18,410,000 12,374,000 9,540,000 13,437,000
Long-term capital lease
obligations....................... 189,000 65,000 - - -
Deficit accumulated during the
development stage................. (27,025,000) (41,313,000) (58,897,000) (70,334,000) (79,932,000)
Total shareholders' equity......... 10,850,000 16,583,000 10,846,000 8,511,000 12,435,000
1 - Cost of product sales and rentals for the year ended June 30, 2000 includes
an inventory write down of $1,027,000.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its inception, Aastrom has been in the development stage and engaged in
research and product development, conducted principally on its own behalf, but
also in connection with various collaborative research and development
agreements with others. Aastrom commenced its initial pilot-scale product launch
in Europe of the AastromReplicell(TM) Cell Production System (System) in April
1999, but subsequently suspended those activities in October 1999 pending the
receipt of additional financing. Aastrom does not expect to generate positive
cash flows from operations for at least the next several years and then only if
more significant product sales commence. Until that time, Aastrom expects that
its revenue sources will be limited to grant revenue and research funding,
milestone payments and licensing fees from potential future corporate
collaborators. The timing and amount of such future cash payments and revenues,
if any, will be subject to significant fluctuations, based in part on the
success of our research activities, the receipt of necessary regulatory
approvals, the timing of the achievement of certain other milestones and the
extent to which associated costs are reimbursed under grant or other
arrangements. A portion of our revenues from product sales will be subject to
our obligation to make aggregate royalty payments of up to 2% to certain
licensors of our technology. Research and development expenses may fluctuate
due to the timing of expenditures for the varying stages of our research,
product development and clinical development programs and the availability of
resources. Generally, product development expenses have decreased as we have
transitioned from prototype-versions to production-level versions of the
AastromReplicell(TM) System. Operating expenses have also decreased over the
past year as a result of cost reduction efforts that we have implemented.
Clinical development costs are expected to increase as we conduct our U.S.
clinical trials, successful completion of which are necessary to submit for
regulatory approvals to market our products in the U.S. Similarly, marketing
and other general and administrative expenses are expected to increase in
support of European marketing activities as they resume. Under our license
agreement with Immunex, the $1,000,000 annual renewal fees due in March 1998,
1999 and 2000 were each paid through the issuance of $1,100,000 of our common
stock. As a result of these and other factors, our results of operations have
fluctuated and are expected to continue to fluctuate significantly from year to
year and from quarter to quarter and therefore may not be comparable to or
indicative of the results of operations for any future periods.
Except for the most recent years, our net loss has primarily increased,
consistent with the growth in our scope and size of operations. In the two most
recent years our net loss has decreased as development activities for our lead
product candidate decreased. The scope and size of Aastrom's operations is
typically tied to the availability of capital and other resources. For example,
in October 1999, we were forced to implement significant cost reduction measures
while we pursued corporate partnering, including merger or acquisition
transactions, and sought additional capital. We completed the sale of equity
securities in February 2000 and June 2000, providing aggregate net proceeds of
$11,800,000 and allowed Aastrom to resume certain activities. With recently
received funding, we have recommenced our U.S. clinical development program, and
we are resuming pilot-scale marketing activities in Europe with targeted medical
centers. Aastrom needs to obtain additional financing and continues to pursue
its financing options.
In order for us to resume more expanded operations, we will need to hire more
personnel to address requirements in the areas of product and customer support,
research, clinical and regulatory affairs, quality systems, sales and marketing
and administration. Our operating expenses are expected to increase as a result.
At least until such time as Aastrom enters into arrangements providing research
and development funding or achieves greater product sales, we will continue to
incur net operating losses. As a development-stage company, Aastrom has never
been profitable and does not anticipate having net income unless and until
significant product sales commence, which is unlikely to occur until we obtain
significant additional funding. Through June 30, 2000, Aastrom has accumulated
losses of $78,964,000. There can be no assurance that we will be able to
achieve profitability on a sustained basis, if at all, obtain the required
funding, or complete a corporate partnering or acquisition transaction.
26
RESULTS OF OPERATIONS
Total revenues were $1,150,000 in 2000, $881,000 in 1999 and $249,000 in 1998.
In 2000 and 1999, revenues include product sales and rentals of $169,000 and
$34,000, respectively, reflecting the pilot-scale launch of our lead product,
the AastromReplicell(TM) System. Grant revenues increased to $981,000 in 2000
from $847,000 in 1999, and from $246,000 in 1998, reflecting the award of
research grants and related research activities, to the extent that such
associated costs are reimbursed under the grants. Grant revenues accounted for
85%, 96% and 99% of total revenues for the years ended June 30, 2000, 1999 and
1998, respectively, and are recorded on a cost-reimbursement basis.
Total costs and expenses were $10,904,000 in 2000, $13,713,000 in 1999 and
$18,356,000 in 1998. The decrease in costs and expenses in 2000 is principally
the result of a decrease in research and development expense to $6,289,000 from
$10,871,000 in 1999. Similarly, the decrease in costs and expenses in 1999 is
principally the result of a decrease in research and development expense to
$10,871,000 from $15,498,000 in 1998. These decreases reflect declining
development activities for the AastromReplicell(TM) System that progressed into
commercial launch during 1999 as well as cost reduction measures implemented in
November 1998 and October 1999 intended to reduce overall operating expenses.
Cost of product sales and rentals were $1,251,000 in 2000 compared to $6,000 in
1999, reflecting the pilot-scale European product launch of the
AastromReplicell(TM) System in 1999. Cost of product sales and rentals in 2000,
principally consisted of AastromReplicell(TM) System inventory that was written
down in connection with the suspension of marketing activities. Research and
development expense includes a charge of $1,100,000 in 2000, 1999 and 1998,
representing license fee payments pursuant to our supply agreement with Immunex.
General and administrative expenses were $3,364,000 in 2000, $2,836,000 in 1999
and $2,858,000 in 1998. General and administrative expenses increased in 2000,
reflecting increased finance, legal and other administrative and marketing
expenses in support of our product development, research and European
activities.
Interest income was $364,000 in 2000, $571,000 in 1999 and $886,000 in 1998.
The fluctuations in interest income are due primarily to corresponding changes
in the levels of cash, cash equivalents and short-term investments during the
periods. Other income for the year ended June 30, 1999 includes $1,237,000
representing a one-time payment that we received in November 1998.
Our net loss was $9,390,000, or $.41 per common share in 2000, $11,028,000, or
$.75 per common share in 1999, and $17,233,000, or $1.57 per common share in
1998. The computations of net loss per common share include adjustments for
dividends and yields on outstanding preferred stock as well as one-time charges
related to the sale of preferred stock. The one-time charges, dividends and
yields affect only the computation of net loss per common share and are not
included in the net loss for the periods. Aastrom expects to report additional
substantial net losses until such time as more substantial product sales
commence.
Aastrom has not generated any profits to date and therefore has not paid any
federal income taxes since inception. At June 30, 2000, our Federal tax net
operating loss and tax credit carryfowards were $75,700,000 and $2,100,000,
respectively, which will expire from 2004 through 2020, if not utilized. In
July 1998, we issued shares of 1998 Series I Convertible Preferred Stock which
resulted in a change in ownership and an annual limitation of $3,136,000, which
applies to losses incurred between October 1993 and July 1998. As of June 2000,
the portion of our net operating loss that remains subject to this limitation is
$44,000,000. Our ability to utilize its net operating loss and tax credit
carryforwards may become subject to further annual limitation in the event of
other change in ownership events.
LIQUIDITY AND CAPITAL RESOURCES
Aastrom has financed its operations since inception primarily through public and
private sales of its equity securities, which, from inception through June 30,
2000, have totaled approximately $92,367,000 and, to a lesser degree, through
grant funding, payments received under research agreements and collaborations,
interest earned on cash, cash equivalents, and short-term investments, and
funding under equipment leasing agreements. These financing sources have
historically allowed us to maintain adequate levels of cash and other liquid
investments.
27
Our combined cash, cash equivalents and short-term investments totaled
$12,745,000 at June 30, 2000, an increase of $5,217,000 from June 30, 1999.
During the year ended June 30, 2000, we raised net proceeds of $12,209,000
through the sale of our equity securities. The primary uses of cash, cash
equivalents and short-term investments during the year ended June 30, 2000
included $6,856,000 to finance our operations and working capital requirements,
and $136,000 in capital equipment additions.
Our future cash requirements will depend on many factors, including continued
scientific progress in its research and development programs, the scope and
results of clinical trials, the time and costs involved in obtaining regulatory
approvals, the costs involved in filing, prosecuting and enforcing patents,
competing technological and market developments and the cost of product
commercialization. Aastrom does not expect to generate a positive cash flow
from operations for at least the next several years due to the expected spending
for research and development programs and the cost of commercializing its
product candidates. Aastrom intends to seek additional funding through research
and development, or distribution and marketing, agreements with suitable
corporate collaborators, grants and through public or private financing
transactions. Successful future operations are subject to several technical and
business risks, including our continued ability to obtain future funding,
satisfactory product development, obtaining regulatory approval and market
acceptance for our products. Based on current funding and anticipated operating
activities, Aastrom expects that its available cash and expected interest income
will be sufficient to finance currently planned activities through mid calendar
year 2001. This estimate is a forward-looking statement based on certain
assumptions which could be negatively impacted by the matters discussed under
this heading and under the caption "Business Risks" in our Annual Report on Form
10-K, included herein. Aastrom is pursuing additional sources of financing. If
it cannot obtain additional funding prior to its current cash reserves being
depleted, we will be forced to make substantial reductions in the scope and size
of our operations, and may be forced to curtail activities currently planned to
be resumed. In order to grow and expand our business, and to introduce its
product candidates into the marketplace, we will need to raise additional funds.
Aastrom will also need additional funds or a collaborative partner, or both, to
finance the research and development activities of its product candidates for
the expansion of additional cell types. Aastrom expects that its primary
sources of capital for the foreseeable future will be through collaborative
arrangements and through the public or private sale of its debt or equity
securities. There can be no assurance that such collaborative arrangements, or
any public or private financing, will be available on acceptable terms, if at
all, or can be sustained. Several factors will affect our ability to raise
additional funding, including, but not limited to, market volatility of our
common stock and economic conditions affecting the public markets generally or
some portion or all of the technology sector. If adequate funds are not
available, we may be required to delay, reduce the scope of, or eliminate one or
more of its research and development programs, which may have a material adverse
effect on our business. See "Business Risks" and Notes to Consolidated
Financial Statements included herein.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as subsequently amended. This statement
establishes a new model for accounting for derivatives and hedging activities
and require that all derivatives be recognized as assets and liabilities and
measured at fair value. The new standards become effective for Aastrom
beginning on July 1, 2000. Because we do not currently hold any derivative
instruments and we do not engage in hedging activities, we do not expect the
adoption of SFAS No. 133 and SFAS No. 138 to have a material impact on our
financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101) which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. Aastrom is in the process of
analyzing the requirements of SAB 101, as amended, and is required to comply no
later than the fourth quarter of fiscal year 2001. We have not yet determined
the impact of SAB 101 on our consolidated financial statements, but do not
expect the adoption of SAB 101 to have a material impact on our results of
operations.
In April 2000, the FASB issued Financial Accounting Standards Board
Interpretation Number 44 to APB 25, "Accounting for Certain Transactions
Involving Stock Compensation and Interpretation of Accounting Principles Board
Opinion No. 25," (Interpretation No. 44), which is effective July 1, 2000,
except for certain conclusions which cover specific events after either December
15, 1998 or January 12, 2000. FASB Interpretation No. 44 clarifies the
application of APB No. 25 related to
28
modifications of stock options, changes in grantee status, and options issued
on a business combination, among other things. As described in Note 3 of the
consolidated financial statements, Interpretation No. 44 will be applied to
certain stock options that were granted during the year ended June 30, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The only financial instruments Aastrom maintains are in accounts receivables.
Aastrom believes that the interest rate risk related to these accounts is not
significant. Aastrom manages the risk associated with these accounts through
period reviews of the carrying value for non-collectability and establishment of
appropriate allowances in connection with our internal controls and policies.
Aastrom does not enter into hedging or derivative instruments.
Aastrom is also exposed to interest rate changes principally affecting its
investments in interest rate sensitive instruments. An analysis of the impact
on Aastrom's interest rate sensitive financial instruments of a hypothetical 10%
change in short-term interest rates compared to interest rates at June 30, 2000
indicates that it would not have a significant impact on expected fiscal year
2001 earnings.
29
BUSINESS RISKS
Aastrom's business is subject to a number of uncertainties, including those
discussed below.
If we cannot complete our product development activities successfully, our
ability to operate or finance operations will be severely limited.
Commercialization in the United States of our lead product candidate, the
AastromReplicell(TM) Cell Production System, will require additional research
and development as well as substantial clinical trials. While we have commenced
initial marketing on a very limited basis of the AastromReplicell(TM) System in
Europe, we believe that the United States will be the principal market for our
products. We may not be able to successfully complete development of the
AastromReplicell System or our other product candidates, or successfully market
our technologies or product candidates. We and any of our potential
collaborators may encounter problems and delays relating to research and
development, regulatory approval and intellectual property rights of our
technologies and product candidates. Our research and development programs may
not be successful, and our cell culture technologies and product candidates may
not facilitate the ex vivo production of cells with the expected biological
activities in humans. Our technologies and product candidates may not prove to
be safe and efficacious in clinical trials, and we may not obtain the intended
regulatory approvals for our technologies or product candidates and the cells
produced in such products. If any of these events occur, we may not have
adequate resources to continue operations for the period required to resolve the
issue delaying commercialization and we may not be able to raise capital to
finance our continued operation during the period required for resolution of
that issue.
We cannot be certain that we will be able to raise the required capital to
conduct our operations and develop our products.
We will require substantial capital resources in order to conduct our operations
and develop our products. In October 1999, Aastrom was forced to reduce
operations based on its declining level of capital resources and its limited
financing alternatives available at that time. Although we have started to
restore operating activities, the previous reduction in our operating activities
has negatively affected our ability to develop our products and has delayed our
product development programs. Based on current funding and anticipated
operating activities, we expect that our available cash and expected interest
income will be sufficient to finance our current activities through mid-calendar
year 2001. This is a forward-looking statement and could be negatively affected
by funding limitations, the implementation of additional research and
development programs and other factors discussed under this heading. We are
currently pursuing additional sources of financing. If we cannot obtain
additional funding prior to that time, we will be forced to make substantial
reductions in the scope and size of our operations, and may be forced to curtail
activities that we currently plan to resume. In order to grow and expand our
business, and to introduce our product candidates into the marketplace, we will
need to raise additional funds. We will also need additional funds or a
collaborative partner, or both, to finance the research and development
activities of our new product candidates for the production of additional cell
types.
Our future capital requirements will depend upon many factors, including:
. continued scientific progress in its research and development programs;
. costs and timing of conducting clinical trials and seeking regulatory
approvals and patent prosecutions;
. competing technological and market developments;
. the ability of Aastrom to establish additional collaborative
relationships; and
. effective commercialization activities and facility expansions if and as
required.
Because of our long-term funding requirements, we may attempt to access the
public or private equity markets if and whenever conditions are favorable, even
if we do not have an immediate need for additional capital at that time.
Further, we may enter into financing transactions at rates which are at a
substantial discount to market. This additional funding may not be available to
us on reasonable terms, or at all. If adequate funds are not available, we may
be required to further delay or terminate research and development programs,
curtail capital expenditures, and reduce business development and other
operating activities.
30
We must successfully complete our clinical trials to be able to market our
products.
To be able to market products in the United States, we must demonstrate, through
extensive preclinical studies and clinical trials, the safety and efficacy of
our processes and product candidates, together with the cells produced by such
processes in such products, for application in the treatment of humans. We are
currently conducting clinical trials to demonstrate the safety and biological
activity of patient-derived cells produced in the AastromReplicell(TM) System.
Depending on the availability of resources, we intend to commence at least one
additional clinical trial to demonstrate the safety and biological activity of
umbilical cord blood cells produced in the AastromReplicell(TM) System. If our
clinical trials are not successful, our products may not be marketable.
Our ability to complete our clinical trials in a timely manner depends on many
factors, including the rate of patient enrollment. Patient enrollment can vary
with the size of the patient population, the proximity of suitable patients to
clinical sites, perceptions of the utility of stem cell therapy for the
treatment of certain diseases and the eligibility criteria for the study. We
have experienced delays in patient accrual in our previous and current clinical
trials. If we experience future delays in patient accrual, we could experience
increased costs and delays associated with clinical trials which would impair
our product development programs and our ability to market our products.
Furthermore, the U.S. Food and Drug Administration (FDA) monitors the progress
of clinical trials and it may suspend or terminate clinical trials at any time
due to patient safety or other considerations.
Failure to obtain and maintain required regulatory approvals would severely
limit our ability to sell our products.
We must obtain the approval of the FDA before commercial sales of our product
candidates may commence in the United States, which we believe will be the
principal market for our products. We may also be required to obtain additional
approvals from foreign regulatory authorities to continue or increase our sales
activities in those jurisdictions. If we cannot demonstrate the safety,
reliability and efficacy of our product candidates, or of the cells produced in
such products, we may not be able to obtain required regulatory approvals. Many
of the patients enrolled in the clinical trials will have previously undergone
extensive treatment which will have substantially weakened the patients and may
have irreparably damaged the ability of their blood and immune system to
recover. Some patients undergoing the transplant recovery process have died,
from causes that were, according to the physicians involved, unrelated to the
AastromReplicell(TM) System procedure, and it is possible that other patients
may die or suffer severe complications during the course of either the current
or future clinical trials. In addition, patients receiving cells produced with
our technologies and product candidates may not demonstrate long-term
engraftment in a manner comparable to cells obtained from current stem cell
therapy procedures. If we cannot demonstrate the safety or efficacy of our
technologies and product candidates, including long-term sustained engraftment,
or if one or more patients die or suffer severe complications, the FDA or other
regulatory authorities could delay or withhold regulatory approval of our
product candidates.
Finally, even if we obtain regulatory approval of a product, that approval may
be subject to limitations on the indicated uses for which it may be marketed.
Even after granting regulatory approval, the FDA, other regulatory agencies, and
governments in other countries continue to review and inspect marketed products,
manufacturers and manufacturing facilities. Later discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on the product or manufacturer, including a withdrawal of the
product from the market. Further, governmental regulatory agencies may establish
additional regulations which could prevent or delay regulatory approval of our
products.
Even if we obtain regulatory approvals to sell our products, lack of commercial
acceptance would impair our business.
Our product development efforts are primarily directed toward obtaining
regulatory approval to market the AastromReplicell(TM) System as an alternative
to, or as an improvement for, the bone marrow harvest and peripheral blood
progenitor cell stem cell collection methods. These stem cell collection methods
have been widely practiced for a number of years, and our technologies or
product candidates may not be accepted by the marketplace as readily as these or
other competing processes and methodologies. Additionally, our technologies or
product candidates may not be employed in all potential applications being
investigated, and any limited applications would limit the market acceptance of
our technologies
31
and product candidates and our potential revenues. As a result, even if we
obtain all required regulatory approvals, we cannot be certain that our products
and processes will be adopted at a level that would allow us to operate
profitably.
Failure of third parties to manufacture component parts or provide limited
source supplies would impair our new product development and our sales
activities.
We rely solely on third parties to manufacture our product candidates and their
component parts. We also rely solely on third party suppliers to provide
necessary key mechanical components, as well as growth factors and other
materials used in the cell expansion process. We would not be able to obtain
alternate sources of supply for many of these items on a short-term basis. In
October 1999, we suspended manufacturing of our products. While we are in the
process of reestablishing our product manufacturing capabilities, we have not
yet completed those activities and resumed production of certain components of
our product line. If any of our key manufacturers or suppliers fail to perform
their respective obligations or if our supply of growth factors, components or
other materials is limited or interrupted, we would not be able to conduct
clinical trials or market our product candidates on a timely and cost-
competitive basis, if at all.
Furthermore, some of the compounds used by us in our current stem cell expansion
processes involve the use of animal-derived products. Suppliers or regulatory
authorities may limit or restrict the availability of such compounds for
clinical and commercial use. Any restrictions on these compounds would impose a
potential competitive disadvantage for our products. If we were not able to
develop or obtain alternative compounds, our product development and
commercialization efforts would be harmed.
Finally, we may not be able to continue our present arrangements with our
suppliers, supplement existing relationships, establish new relationships or be
able to identify and obtain the ancillary materials that are necessary to
develop our product candidates in the future. Our dependence upon third parties
for the supply and manufacture of these items could adversely affect our ability
to develop and deliver commercially feasible products on a timely and
competitive basis.
Our past losses and expected future losses cast doubt on our ability to operate
profitably.
We were incorporated in 1989 and have experienced substantial operating losses
since inception. As of June 30, 2000, we have incurred net operating losses
totaling approximately $79.0 million. These losses have resulted principally
from costs incurred in the research and development of our cell culture
technologies and the AastromReplicell(TM) System, general and administrative
expenses, and the prosecution of patent applications. We expect to incur
significant operating losses until product sales increase, primarily owing to
our research and development programs, including preclinical studies and
clinical trials, and the establishment of marketing and distribution
capabilities necessary to support commercialization efforts for our products.
We cannot predict with any certainty the amount of future losses. Our ability
to achieve profitability will depend, among other things, on successfully
completing the development of our product candidates, obtaining regulatory
approvals, establishing manufacturing, sales and marketing arrangements with
third parties, and raising sufficient funds to finance our activities. We may
not be able to achieve or sustain profitability.
Given our limited internal sales and marketing capabilities, we need to develop
collaborative relationships to sell, market and distribute our products.
While we have commenced initial marketing on a limited basis of the
AastromReplicell(TM) System in Europe, we have only limited internal sales,
marketing and distribution capabilities. We intend to market our products
through collaborative relationships with companies for sales, marketing and
distribution capabilities. If we cannot develop and maintain those
relationships, we would have only a limited ability to market, sell and
distribute our products. Even if we are able to enter into such relationships,
they may not succeed or be sustained on a long-term basis, and termination would
require us to develop alternate arrangements at a time when we need sales,
marketing or distribution capabilities to meet existing demand. For example, in
November 1998 Aastrom and COBE BCT terminated a strategic alliance for the
worldwide distribution of the AastromReplicell(TM) System for stem cell therapy
and related uses. We are now seeking to enter into other arrangements relating
to the development and marketing of our product candidates.
32
Any changes in the governmental regulatory classifications of our products could
prevent, limit or delay our ability to market or develop our products.
The FDA establishes regulatory requirements based on the classification of a
product. Although the FDA has indicated it intends to regulate the
AastromReplicell(TM) System for stem cell therapy as a Class III medical device,
the FDA may ultimately choose to regulate the AastromReplicell(TM) System under
another category. Because our product development programs are designed to
satisfy the standards applicable to Class III medical devices, a change in the
regulatory classification would affect our ability to obtain FDA approval of our
products. Also, the FDA is in the process of developing its requirements with
respect to somatic cell therapy and gene cell therapy products. Until the FDA
issues definitive regulations covering our product candidates, the regulatory
guidelines or requirements for approval of such product candidates and/or the
cells produced by them will continue to be uncertain.
If we do not keep pace with our competitors and with technological and market
changes, our products may become obsolete and our business may suffer.
The market for our product is very competitive and is subject to rapid
technological changes. Many of our competitors have significantly greater
resources, more product candidates and have developed product candidates and
processes that directly compete with our products. Our competitors may have
developed, or could in the future develop, new technologies that compete with
our products or even render our products obsolete. In addition, some recently
published studies have suggested that stem cell therapy, which is the current
principal market for our SC-I Therapy Kit, may have limited clinical benefit in
the treatment of breast cancer, which is a significant portion of the current
overall stem cell transplant market. Our products are designed to improve upon
traditional stem cell collection methods, but even if we are able to demonstrate
improved or equivalent results, practitioners may not switch to our new
processes. Given the experience and expertise associated with traditional
methods, if we cannot develop our cell production procedure to lead to a less
expensive and quicker recovery time than seen with the traditional methods, then
we will suffer a competitive disadvantage. Finally, to the extent that others
develop new technologies that address the diseases and health conditions we have
targeted, our business will suffer.
If we cannot attract and retain key personnel, then our business will suffer.
Our success depends in large part upon our ability to attract and retain highly
qualified scientific and management personnel. We face competition for such
personnel from other companies, research and academic institutions and other
entities. For example, since our initial public offering in February 1997 four
of the six executive officers at that time have since left for positions with
other organizations. We have hired, or promoted, three new executive officers
to assume their responsibilities, one of which subsequently left. Further, in
an effort to conserve financial resources, we have been forced to implement
reductions in our work force on two separate occasions. As a result of these
and other factors, we may not be successful in hiring or retaining key
personnel.
The warrants have the potential for substantial dilution.
In June 2000, we issued warrants to purchase up to 3,348,915 shares of our
common stock at $0.01 per share. If all 3,348,915 shares of common stock are
issued under the warrants, then holders of common stock could experience
significant dilution of their investment.
The exercise price of the warrants that we issued in February 2000 is subject to
certain reduction in the event the price of our common stock goes down at
specified times in the future or if we issue additional securities at less than
the warrant exercise price. If the exercise price of these warrants is reduced,
there would also be an increase in the number of shares that could be issued
upon exercise of the warrants. The warrants are currently exercisable for
1,382,816 shares of common stock. This number of shares could increase to
2,614,386 shares of common stock and the exercise price could be reduced to as
low as $1.60 per share. Holders of common stock could therefore experience
dilution of their investment upon exercise of these warrants.
33
Our stock price has been volatile and future sales of substantial numbers of our
shares could have an adverse effect on the market price of our shares.
The market price of shares of our common stock has been volatile. The price of
our common stock may continue to fluctuate in response to a number of events and
factors, such as:
. clinical trial results;
. the amount of our cash resources and our ability to obtain additional
funding;
. announcements of research activities, business developments,
technological innovations or new products by us or our competitors;
. changes in government regulation;
. disputes concerning patents or proprietary rights;
. changes in our revenues or expense levels;
. public concern regarding the safety, efficacy or other aspects of the
products or methodologies we are developing; and
. changes in potential recommendations by securities analysts.
Any of these events may cause the price of our shares to fall, which may
adversely affect our business and financing opportunities. In addition, the
stock market in general and the market prices for biotechnology companies in
particular have experienced significant volatility that often has been unrelated
to the operating performance or financial conditions of such companies. These
broad market and industry fluctuations may adversely affect the trading price of
our stock, regardless of our operating performance or prospects. For example,
within the last year, our stock price has experienced a day where it traded at
approximately twice the previous day's closing price and another day when it
dropped by over 20% from the previous day's closing price.
In addition, sales, or the possibility of sales, of substantial numbers of
shares of common stock in the public market could adversely affect prevailing
market prices of shares of common stock. Our employees hold a significant
number of options to purchase shares, many of which are presently exercisable.
Employees may exercise their options and sell shares shortly after such options
become exercisable, particularly if they need to raise funds to pay for the
exercise of such options or to satisfy tax liabilities that they may incur in
connection with exercising their options. Additionally, beginning January 1,
2001, COBE BCT will be able to sell all of its approximately 2.4 million shares
of our common stock without restriction.
If our patents and proprietary rights do not provide substantial protection,
then our business and competitive position will suffer.
Our success depends in large part on our ability to develop or license and
protect proprietary products and technologies. However, we cannot be assured
that patents will be granted on any of our pending or future patent
applications. We also cannot be assured that the scope of any of our issued
patents will be sufficiently broad to offer meaningful protection. In addition,
our issued patents or patents licensed to us could be successfully challenged,
invalidated or circumvented so that our patent rights would not create an
effective competitive barrier. Furthermore, we rely on licenses granted by the
University of Michigan for certain of our patent rights. If we breach such
agreements or otherwise fail to comply with such agreements, or if such
agreements expire or are otherwise terminated, we may lose our rights under the
patents held by the University of Michigan. We also rely on trade secrets and
unpatentable know-how which we seek to protect, in part, by confidentiality
agreements with our employees, consultants, suppliers and licensees. These
agreements may be breached, and we might not have adequate remedies for any
breach. If this were to occur, our business and competitive position would
suffer.
Intellectual property litigation could harm our business.
Our success will also depend in part on our ability to develop commercially
viable products without infringing the proprietary rights of others. Although
we have not been subject to any filed infringement claims, other patents could
exist or could be filed which would prohibit or limit our ability to market our
products or maintain our competitive position. In the event of an intellectual
property dispute, we may be forced to litigate. Intellectual property
litigation would divert
34
management's attention from developing our products and would force us to incur
substantial costs regardless of whether we are successful. An adverse outcome
could subject us to significant liabilities to third parties, and force us to
curtail or cease the development and sale of our products and processes.
The market for our products will be heavily dependent on third party
reimbursement policies.
Our ability to successfully commercialize our product candidates will depend on
the extent to which government healthcare programs, such as Medicare and
Medicaid, as well as private health insurers, health maintenance organizations
and other third party payors will pay for our products and related treatments.
Reimbursement by third-party payors depends on a number of factors, including
the payor's determination that use of the product is safe and effective, not
experimental or investigational, medically necessary, appropriate for the
specific patient and cost-effective. Reimbursement in the United States or
foreign countries may not be available or maintained for any of our product
candidates. If we do not obtain approvals for adequate third-party
reimbursements, we may not be able to establish or maintain price levels
sufficient to realize an appropriate return on our investment in product
development. Any limits on reimbursement available from third-party payors may
reduce the demand for, or negatively affect the price of, our products. For
example, recently published studies have suggested that stem cell
transplantation in breast cancer, which constitutes a significant portion of the
overall stem cell therapy market, may have limited clinical benefit. The market
for our products would be negatively affected by lack of reimbursement for these
procedures by insurance payors.
Potential product liability claims could effect our earnings and financial
condition.
We face an inherent business risk of exposure to product liability claims in the
event that the use of the AastromReplicell(TM) System during research and
development efforts, including clinical trials, or after commercialization
results in adverse effects. As a result, we may incur significant product
liability exposure, which could exceed existing insurance coverage. We may not
be able to maintain adequate levels of insurance at reasonable cost and/or
reasonable terms. Excessive insurance costs or uninsured claims would increase
our operating loss and affect our financial condition.
Our corporate documents and Michigan law contain provisions that may make it
more difficult for us to be acquired.
Our board of directors has the authority, without shareholder approval, to issue
additional shares of preferred stock and to fix the rights, preferences,
privileges and restrictions of these shares without any further vote or action
by our shareholders. This authority, together with certain provisions of our
charter documents, may have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire
control of our company. This effect could occur even if our shareholders
consider the change in control to be in their best interest.
We may be required to redeem a portion of our shares which would significantly
reduce our limited cash resources.
The original purchasers of the shares and warrants issued in February 2000 and
June 2000 may require us to redeem some or all of those shares in the event that
we fail to perform certain administrative activities that are within our
control. These administrative activities include: issuing the shares of common
stock upon the exercise of the warrants, transferring or instructing the
transfer agent to transfer shares of common stock issued upon exercise of the
warrants when required and removing any restrictive legends from such shares of
common stock when required. Such a redemption could significantly reduce our
limited capital resources.
Our stock may be delisted from Nasdaq which could affect its market price and
liquidity.
We are required to meet certain financial tests (including, but not limited to,
a minimum bid price of our common stock of $1.00 and $4 million in tangible net
worth) to maintain the listing of our common stock on the Nasdaq National
Market. Within the last year, our common stock price has fallen below the
minimum level for some periods and during other periods our tangible net worth
has been below the amount required. In the future, our stock price or tangible
net worth may fall below the Nasdaq requirements, or we may not comply with
other listing requirements, with the result being that our common stock might be
delisted. If that happened the market price and liquidity of our common stock
would be impaired.
35
Absence of dividends could reduce our attractiveness to investors.
Some investors favor companies that pay dividends, particularly in market
downturns. We have never paid cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Therefore some investor may elect not to invest in Aastrom. Your
return on this investment will depend on your ability to sell our stock at a
profit.
Forward-looking statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. These forward-looking statements include statements regarding:
. uncertainties related to potential strategic collaborations with others;
. future capital needs and uncertainty of additional funding;
. uncertainties related to product development and marketability;
. uncertainties related to clinical trials;
. manufacturing and supply uncertainties and dependence on third parties;
. anticipation of future losses;
. limited sales and marketing capabilities;
. uncertainty of regulatory approval and extensive government regulation;
. competition and technological change;
. uncertainty regarding patents and proprietary rights;
. no assurance of third party reimbursement;
. hazardous materials; and
. potential product liability and availability of insurance.
These statements are subject to risks and uncertainties, including those set
forth in this Business Risks section, and actual results could differ materially
from those expressed or implied in these statements. All forward-looking
statements included in this Report on Form 10-K are made as of the date hereof.
We assume no obligation to update any such forward-looking statement or reason
why actual results might differ.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Report of Independent Accountants....................................................... __
Consolidated Balance Sheets as of June 30, 1999 and 2000................................ __
Consolidated Statements of Operations for the years ended June 30, 1998, 1999
and 2000 and for the period from March 24, 1989 (Inception) to June 30, 2000........... __
Consolidated Statements of Shareholders' Equity from March 24, 1989 (Inception)
to June 30, 2000....................................................................... __
Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1999
and 2000 and for the period from March 24, 1989 (Inception) to June 30, 2000........... __
Notes to Consolidated Financial Statements..............................................
37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Aastrom Biosciences, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the consolidated financial position of
Aastrom Biosciences, Inc. (a development stage company) at June 30, 1999 and
2000, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 2000, and for the period from March 24, 1989
(Inception) to June 30, 2000, in conformity with accounting principles generally
accepted in the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Minneapolis, MN
August 4, 2000
38
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
June 30,
-------------------------------------
1999 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 7,528,000 $ 2,064,000
Short-term investments...................................................... - 10,681,000
Receivables (net of allowance for doubtful
accounts of $94,000 at June 30, 2000)...................................... 113,000 242,000
Inventory................................................................... 1,144,000 -
Prepaid expenses............................................................ 253,000 158,000
------------ ------------
Total current assets...................................................... 9,038,000 13,145,000
PROPERTY, NET................................................................ 502,000 292,000
------------ ------------
Total assets.............................................................. $ 9,540,000 $ 13,437,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses....................................... $ 836,000 $ 837,000
Accrued employee expenses................................................... 193,000 165,000
------------ ------------
Total current liabilities................................................. 1,029,000 1,002,000
------------ ------------
COMMITMENTS (Note 6)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value; shares authorized - 5,000,000;
7,000 shares issued and outstanding as of June 30, 1999..................... 6,588,000 -
Common Stock, no par value; shares authorized - 60,000,000;
shares issued and outstanding - 16,980,161 and
33,607,659, respectively.................................................... 72,257,000 92,367,000
Deficit accumulated during the development stage............................. (70,334,000) (79,932,000)
------------ ------------
Total shareholders' equity................................................ 8,511,000 12,435,000
------------ ------------
Total liabilities and shareholders' equity............................. $ 9,540,000 $ 13,437,000
============ ============
The accompanying notes are an integral part of these financial statements.
39
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
March 24, 1989
(Inception) to
Year ended June 30, June 30,
--------------------------------------------
1998 1999 2000 2000
------------ ------------ ------------ --------------
REVENUES:
Product sales and rentals................................. $ - $ 34,000 $ 169,000 $ 203,000
Research and development agreements....................... 3,000 - - 2,020,000
Grants.................................................... 246,000 847,000 981,000 4,217,000
------------ ------------ ------------ ------------
Total revenues........................................ 249,000 881,000 1,150,000 6,440,000
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of product sales and rentals......................... - 6,000 1,251,000 1,257,000
Research and development.................................. 15,498,000 10,871,000 6,289,000 71,090,000
Selling, general and administrative....................... 2,858,000 2,836,000 3,364,000 18,100,000
------------ ------------ ------------ ------------
Total costs and expenses.............................. 18,356,000 13,713,000 10,904,000 90,447,000
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS........................................ (18,107,000) (12,832,000) (9,754,000) (84,007,000)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Other income.............................................. - 1,237,000 - 1,237,000
Interest income........................................... 886,000 571,000 364,000 4,073,000
Interest expense.......................................... (12,000) (4,000) - (267,000)
------------ ------------ ------------ ------------
Total other income.................................... 874,000 1,804,000 364,000 5,043,000
------------ ------------ ------------ ------------
NET LOSS.................................................... $(17,233,000) $(11,028,000) $ (9,390,000) $(78,964,000)
============ ============ ============ ============
COMPUTATION OF NET LOSS APPLICABLE TO COMMON SHARES:
Net loss.................................................. $(17,233,000) $(11,028,000) $ (9,390,000)
Dividends and yields on preferred stock................... (351,000) (409,000) (208,000)
Charge related to issuance of preferred stock............. (3,439,000) (70,000) -
------------ ------------ ------------
Net loss applicable to common shares........................ $(21,023,000) $(11,507,000) $ (9,598,000)
============ ============ ============
NET LOSS PER COMMON SHARE (Basic and Diluted)............... $ (1.57) $ (.75) $ (.41)
============ ============ ============
Weighted average number of common shares outstanding........ 13,363,000 15,342,000 23,344,000
============ ============ ============
The accompanying notes are an integral part of these financial statements.
40
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Common Stock
-------------------------- --------------------------
Shares Amount Shares Amount
----------- ------------ ----------- ------------
BALANCE, MARCH 24, 1989 (Inception)................... - $ - - $ -
Net loss............................................
Unrealized losses on investments....................
Comprehensive loss...............................
Issuance of common stock for cash, services
and license rights............................... 487,878 33,000
Issuance of Series A through Series E Preferred
Stock for cash, net of issuance costs of
$342,000......................................... 9,451,766 34,218,000
Issuance of Series E Preferred Stock at $17.00
per share........................................ 205,882 3,500,000 (3,500,000)
Exercise of stock options........................... 1,438,908 119,000
Issuance of Stock Purchase Rights for cash in
September 1995 and March 1996.................... 3,500,000
Principal payment received under shareholder
note receivable.................................. 31,000
Initial public offering of common stock at
$7.00 per share, net of issuance costs of
$2,865,000....................................... 3,250,000 19,885,000
Conversion of preferred stock....................... (9,657,648) (37,718,000) 8,098,422 37,718,000
Compensation expense related to stock options
granted.......................................... 120,000
----------- ------------ ----------- ------------
BALANCE, JUNE 30, 1997................................ - - 13,275,208 57,906,000
Net loss............................................
Unrealized gains on investments.....................
Comprehensive loss...............................
Exercise of stock options........................... 68,500 83,000
Issuance of 5.5% Convertible Preferred Stock at
$5.00 per share, net of issuance costs of
$1,070,000....................................... 2,200,000 9,930,000
Dividends on preferred stock........................ 72,940 351,000
Issuance of common stock............................ 255,340 1,144,000
Repurchase and retirement of Common Shares
outstanding...................................... (32,171) (73,000)
Compensation expense related to stock options
and warrants granted............................. 398,000
----------- ------------ ----------- ------------
BALANCE, JUNE 30, 1998................................ 2,200,000 9,930,000 13,639,817 59,809,000
Net loss............................................
Unrealized losses on investments....................
Comprehensive loss...............................
Dividend and yields on preferred stock.............. 258,000 75,628 151,000
Exercise of stock options........................... 24,043 28,000
Issuance of 1998 Series I Convertible Preferred
Stock at $1,000 per share, net of issuance
costs of $460,000................................ 5,000 4,540,000 40,404 149,000
Issuance of 1999 Series III Convertible
Preferred Stock at $1,000 per share, net of
issuance costs of $280,000....................... 3,000 2,720,000 49,994 90,000
Issuance of common stock............................ 451,906 1,159,000
Conversion of preferred stock....................... (2,201,000) (10,860,000) 2,698,369 10,860,000
Compensation expense related to stock options
granted.......................................... 11,000
----------- ------------ ----------- ------------
BALANCE, JUNE 30, 1999................................ 7,000 6,588,000 16,980,161 72,257,000
Net loss and comprehensive loss.....................
Dividend and yields on preferred stock.............. 208,000
Exercise of stock options and warrants.............. 405,753 409,000
Conversion of preferred stock....................... (7,000) (6,796,000) 10,956,918 6,796,000
Compensation expense related to stock options
granted.......................................... 5,000
Issuance of common stock, net of issuance
costs of $200,000................................ 5,264,827 12,900,000
----------- ------------ ----------- ------------
BALANCE, JUNE 30, 2000................................ - $ - 33,607,659 $ 92,367,000
=========== ============ =========== ============
Deficit
accumulated Accumulated
during the other Total
development comprehensive shareholders'
stage income equity
------------ ------------- -------------
BALANCE, MARCH 24, 1989 (Inception)................... $ - $ - $ -
Net loss............................................ (41,313,000) (41,313,000)
Unrealized losses on investments.................... (10,000) (10,000)
------------
Comprehensive loss............................... (41,323,000)
Issuance of common stock for cash, services
and license rights............................... 33,000
Issuance of Series A through Series E Preferred
Stock for cash, net of issuance costs of
$342,000......................................... 34,218,000
Issuance of Series E Preferred Stock at $17.00
per share........................................ -
Exercise of stock options........................... 119,000
Issuance of Stock Purchase Rights for cash in
September 1995 and March 1996.................... 3,500,000
Principal payment received under shareholder
note receivable.................................. 31,000
Initial public offering of common stock at
$7.00 per share, net of issuance costs of
$2,865,000....................................... 19,885,000
Conversion of preferred stock....................... -
Compensation expense related to stock options
granted.......................................... 120,000
------------ ------------ ------------
BALANCE, JUNE 30, 1997................................ (41,313,000) (10,000) 16,583,000
Net loss............................................ (17,233,000) (17,233,000)
Unrealized gains on investments..................... 14,000 14,000
------------
Comprehensive loss............................... (17,219,000)
Exercise of stock options........................... 83,000
Issuance of 5.5% Convertible Preferred Stock at
$5.00 per share, net of issuance costs of
$1,070,000....................................... 9,930,000
Dividends on preferred stock........................ (351,000) -
Issuance of common stock............................ 1,144,000
Repurchase and retirement of Common Shares
outstanding...................................... (73,000)
Compensation expense related to stock options
and warrants granted............................. 398,000
------------ ------------ ------------
BALANCE, JUNE 30, 1998................................ (58,897,000) 4,000 10,846,000
Net loss............................................ (11,028,000) (11,028,000)
Unrealized losses on investments.................... (4,000) (4,000)
------------
Comprehensive loss............................... (11,032,000)
Dividend and yields on preferred stock.............. (409,000) -
Exercise of stock options........................... 28,000
Issuance of 1998 Series I Convertible Preferred
Stock at $1,000 per share, net of issuance
costs of $460,000................................ 4,689,000
Issuance of 1999 Series III Convertible
Preferred Stock at $1,000 per share, net of
issuance costs of $280,000....................... 2,810,000
Issuance of common stock............................ 1,159,000
Conversion of preferred stock....................... -
Compensation expense related to stock options
granted.......................................... 11,000
------------ ------------ ------------
BALANCE, JUNE 30, 1999................................ (70,334,000) - 8,511,000
Net loss and comprehensive loss..................... (9,390,000) (9,390,000)
Dividend and yields on preferred stock.............. (208,000) -
Exercise of stock options and warrants.............. 409,000
Conversion of preferred stock....................... -
Compensation expense related to stock options
granted.......................................... 5,000
Issuance of common stock, net of issuance
costs of $200,000................................ 12,900,000
------------ ------------ ------------
BALANCE, JUNE 30, 2000................................ $(79,932,000) $ - $ 12,435,000
============ ============ ============
The accompanying notes are an integral part of these financial statements.
41
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
March 24, 1989
(Inception) to
Year ended June 30, June 30,
---------------------------------------------
1998 1999 2000 2000
------------ ------------ ------------ --------------
OPERATING ACTIVITIES:
Net loss...................................................... $(17,233,000) $(11,028,000) $ (9,390,000) $ (78,964,000)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization............................. 557,000 296,000 346,000 3,030,000
Loss on property held for resale.......................... - - - 110,000
Amortization of discounts and premiums on
investments............................................. (180,000) (70,000) (21,000) (474,000)
Stock compensation expense................................ 398,000 11,000 5,000 544,000
Write down of inventory................................... - - 1,027,000 1,027,000
Stock issued pursuant to license agreement................ 1,100,000 1,100,000 1,100,000 3,300,000
Changes in assets and liabilities:
Receivables............................................. 38,000 54,000 (129,000) (266,000)
Inventory............................................... - (1,144,000) 117,000 (1,027,000)
Prepaid expenses........................................ (144,000) 17,000 95,000 (158,000)
Accounts payable and accrued expenses................... (195,000) (477,000) 1,000 837,000
Accrued employee expenses............................... 20,000 43,000 (28,000) 165,000
------------ ------------ ------------ --------------
Net cash used for operating activities...................... (15,639,000) (11,198,000) (6,877,000) (71,876,000)
------------ ------------ ------------ --------------
INVESTING ACTIVITIES:
Organizational costs.......................................... - - - (73,000)
Purchase of short-term investments............................ (12,326,000) (1,000,000) (10,660,000) (55,124,000)
Maturities of short-term investments.......................... 18,450,000 10,200,000 - 44,917,000
Capital purchases............................................. (234,000) (73,000) (136,000) (2,585,000)
Proceeds from sale of property held for resale................ - - - 400,000
------------ ------------ ------------ --------------
Net cash provided by (used for) investing activities........ 5,890,000 9,127,000 (10,796,000) (12,465,000)
------------ ------------ ------------ --------------
FINANCING ACTIVITIES:
Issuance of preferred stock................................... 9,930,000 7,499,000 - 51,647,000
Issuance of common stock...................................... 127,000 87,000 12,209,000 32,450,000
Repurchase of common stock.................................... (49,000) - - (49,000)
Payments received for stock purchase rights................... - - - 3,500,000
Payments received under shareholder notes..................... - - - 31,000
Principal payments under capital lease obligations............ (124,000) (65,000) - (1,174,000)
------------ ------------ ------------ --------------
Net cash provided by financing activities................... 9,884,000 7,521,000 12,209,000 86,405,0000
------------ ------------ ------------ --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 135,000 5,450,000 (5,464,000) 2,064,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................ 1,943,000 2,078,000 7,528,000 -
------------ ------------ ------------ --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................... $ 2,078,000 $ 7,528,000 $ 2,064,000 $ 2,064,000
============ ============ ============ ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................... $ 12,000 $ 4,000 $ - $ 267,000
Additions to capital lease obligations...................... - - - 1,174,000
The accompanying notes are an integral part of these financial statements.
42
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Aastrom Biosciences, Inc. (Aastrom) was incorporated in March 1989 (Inception),
began employee-based operations in 1991, and is in the development stage. The
Company operates its business in one reportable segment - research and product
development, conducted both on its own behalf and in connection with various
collaborative research and development agreements with others, involving the
development and sale of processes and products for the ex vivo production of
human cells for use in cell and ex vivo gene therapy.
Successful future operations are subject to several technical and business
risks, including satisfactory product development, obtaining regulatory approval
and market acceptance for its products and the Company's continued ability to
obtain future funding.
The Company is subject to certain risks related to the operation of its business
and development of its products and product candidates. In order to complete
its product development programs and commercialize its first product candidates,
the Company will need to raise additional funds, and it cannot be certain that
such funding will be available on favorable terms, if at all. Some of the
factors that will impact the Company's ability to raise additional capital and
its overall success include, the rate and degree of progress for its product
development programs, the liquidity and volatility of its equity securities,
regulatory and manufacturing requirements and uncertainties, technological
developments by competitors and other factors. If the Company cannot raise such
funds, it may not be able to develop or enhance products, take advantage of
future opportunities, or respond to competitive pressures or unanticipated
requirements, which would negatively impact its business, financial condition
and results of operations.
Significant Revenue Relationships - One company accounted for 28% of total
revenues for the period from Inception to June 30, 2000. Grant revenues consist
of grants sponsored by the U.S. government.
Principles of Consolidation - The consolidated financial statements include the
accounts of Aastrom and its wholly-owned subsidiary, Zellera AG (Zellera) which
is located in Berlin, Germany, (collectively, the Company). All significant
inter-company transactions and accounts have been eliminated in consolidation.
As of June 30, 2000, Zellera has only limited operations and is not a
significant component of the consolidated financial statements.
Cash and Cash Equivalents - Cash and cash equivalents include cash and short-
term investments with original maturities of three months or less.
Short-Term Investments - Short-term investments consist of U.S. government
securities and commercial paper with original maturities of over three months
and less than one year. Short-term investments are classified as available-for-
sale, and are presented at market value, with unrealized gains and losses on
investments reflected as a component of shareholders' equity.
Diversity of Credit Risk - The Company invests its excess cash in U.S.
government securities and commercial paper, maintained in U.S. financial
institutions, and has established guidelines relative to diversification and
maturities in an effort to maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any significant realized losses
on its cash equivalents or short-term investments.
Inventory - Inventory is valued at the lower of cost (specific identification)
or market and consists primarily of finished components of the Company's
products. During 2000, a significant portion of inventory was written off as
the result of the Company suspending its European marketing activities.
Property - Property is recorded at cost and depreciated or amortized using the
straight-line method over the estimated useful life of the asset (primarily
three to five years) or the lease term, whichever is shorter.
43
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition - Revenue from grants and research agreements is recognized
on a cost reimbursement basis consistent with the performance requirements of
the related agreement. Revenue from product sales is recognized upon shipment
or transfer of title, whichever occurs later. Revenue from achievement of
milestone events is recognized when the funding party agrees that the scientific
or clinical results stipulated in the agreement have been met. Revenue from
licensing fees under licensing agreements is recognized as revenue when there
are no future performance obligations remaining with respect to such fees.
Research and Development Costs - Research and development costs are expensed as
incurred. Such costs and expenses related to programs under collaborative
agreements with other companies totaled $3,000 for the year ended June 30, 1998
and $1,645,000 for the period from Inception to June 30, 2000.
Stock Compensation - The Company has adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). As permitted by SFAS 123, the Company continues to
apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," (APB 25) and related interpretations and does not recognize
compensation expense for its employee stock-based compensation plans as allowed
by SFAS 123.
Income Taxes - The Company recognizes deferred tax assets and liabilities for
the differences between the carrying amounts and the tax basis of assets and
liabilities, as well as net operating loss and tax credit carryforwards.
Additionally, the Company establishes a valuation allowance to reflect the
likelihood of realization of deferred tax assets.
Net Loss Per Common Share - Net loss per common share is computed using the
weighted-average number of common shares outstanding during the period. Common
equivalent shares are not included in the per share calculation where the effect
of their inclusion would be anti-dilutive. Upon the completion of the Company's
initial public offering, all outstanding shares of preferred stock at that time
were automatically converted into common stock. Accordingly, such shares of
preferred stock are assumed to have been converted into common stock at the time
of issuance. Other classes of preferred stock are included in the computation
of net loss per common share upon the conversion of such preferred stock into
common stock.
The computation of net loss per common share reflects dividends, yields and
other adjustments relating to the Company's preferred stock which affect only
the computation of net loss per common share and are not included in the
computation of net loss for the period.
Use of Estimates - The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
that affect the amounts reported in the financial statements and disclosures
made in the accompanying notes to financial statements. Actual results could
differ from those estimates.
Financial Instruments - The Company evaluates the fair value of those assets and
liabilities identified as financial instruments and estimates that the fair
value of such financial instruments generally approximates the carrying value in
the accompanying financial statements. Fair values have been determined through
information obtained from market sources and management estimates.
Long-Lived Assets - The Company evaluates the impairment of long-lived assets
and long-lived assets to be disposed of whenever events or changes in
circumstances indicate that the carrying amount of those assets may not be
recoverable. No significant impairment losses have been identified by the
Company for any of the periods presented in the accompanying financial
statements.
New Accounting Standards - In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as subsequently
amended. This statement establishes a new model for accounting for derivatives
and hedging activities and require that all derivatives be recognized as assets
and liabilities and measured at fair value. The new standards become effective
for the Company beginning on July 1, 2000. Because the Company does not
currently hold any derivative instruments and does not engage in
44
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
hedging activities, it does not expect the adoption of SFAS No. 133 and SFAS No.
138 to have a material impact on its financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101) which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. The Company is in the
process of analyzing the requirements of SAB 101, as amended, and is required to
comply no later than the fourth quarter of fiscal year 2001. The Company has
not yet determined the impact of SAB 101 on its consolidated financial
statements but does not expect the adoption of SAB 101 to have a material impact
on the results of operations.
In April 2000, the FASB issued Financial Accounting Standards Board
Interpretation Number 44 to APB 25, "Accounting for Certain Transactions
Involving Stock Compensation and Interpretation of Accounting Principles Board
Opinion No. 25," (Interpretation No. 44), which is effective July 1, 2000,
except for certain conclusions which cover specific events after either December
15, 1998 or January 12, 2000. Interpretation No. 44 clarifies the application of
APB No. 25 related to modifications of stock options, changes in grantee status,
and options issued on a business combination, among other things. As described
in Note 3, Interpretation No. 44 will be applied to certain stock options that
were granted during the year ended June 30, 2000.
45
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Selected Balance Sheet Information
Short-Term Investments - All short-term investments are available-for-sale and
have maturities of one year or less and are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
June 30, 2000:
U.S. Government Securities................................ $ 5,431,000 $ - $ - $ 5,431,000
Commercial Paper.......................................... 5,250,000 - - 5,250,000
----------- ----------- ---------- ----------
$10,681,000 $ - $ - $10,681,000
=========== =========== ========== ===========
Property - Property consists of the following:
June 30,
-----------------------------------
1999 2000
------------- -------------
Machinery and equipment.................................... $ 1,477,000 $ 1,483,000
Office equipment........................................... 883,000 886,000
Leasehold improvements..................................... 622,000 622,000
Equipment under lease...................................... - 120,000
------------- -------------
2,982,000 3,111,000
Less accumulated depreciation and amortization............. (2,480,000) (2,819,000)
------------- -------------
$ 502,000 $ 292,000
============= =============
Accounts Payable and Accrued Expenses - Accounts payable and accrued expenses
consists of the following:
June 30,
---------------------------------
1999 2000
---------- -----------
Accounts payable......................................... $ 276,000 $ 100,000
Accrued Expenses:
Clinical studies...................................... 121,000 118,000
Professional services................................. 48,000 55,000
Manufacturing and engineering......................... 253,000 444,000
Other................................................. 138,000 120,000
---------- -----------
$ 836,000 $ 837,000
========== ===========
3. Shareholders' Equity
In December 1997, the Company completed a directed placement of 2,200,000 shares
of its 5.5% Convertible Preferred Stock at a price of $5.00 per share. Proceeds
from the offering, net of placement agent commissions and expenses, were
$9,930,000. In December 1998, all 2,200,000 shares of 5.5% Convertible
Preferred Stock were converted into 2,240,326 shares of common stock.
46
AASTROM BIOSCIENCE, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 1998, the Company sold 5,000 shares of Series I Preferred Stock for net
proceeds of $4,540,000. In May 1999, the Company sold 3,000 shares of Series
III Preferred Stock for net proceeds of $2,720,000. The shares of Series I
Preferred Stock and Series III Preferred Stock were convertible, at the option
of the holder, into shares of the Company's common stock at a price based on the
market price of the Company's common stock prior to conversion. During the year
ended June 30, 1999, the Company issued 458,043 Shares of common stock upon
conversion of 1,000 shares of Series I Preferred Stock. During the year ended
June 30, 2000, the Company issued 10,956,918 shares of common stock, upon the
conversion of all remaining 4,000 shares of Series I Preferred Stock and all
3,000 shares of Series III Preferred Stock.
In February 2000, the Company completed the sale of 2,264,151 units, each of
which consists of one share of common stock and a three-year warrant to purchase
one-half of one share of common stock for net proceeds of $5,900,000. In June
2000, the Company completed the sale of 2,810,305 shares of common stock for net
proceeds of $5,900,000. The original purchaser of the shares and warrants in
these two financings may require the Company to redeem some or all of those
shares in the event that the Company fails to perform certain administrative
activities that are within its control. These administrative activities include
issuing the shares of common stock upon the exercise of the warrants,
transferring or instructing the transfer agent to transfer shares of common
stock issued upon exercise of the warrants when required and removing any
restrictive legends from such shares of common stock when required.
No cash dividends have ever been declared or paid; however, during the years
ended June 30, 1998 and 1999, the Company issued 72,940 shares and 75,628 shares
of common stock valued at $351,000 and $151,000, respectively, in payment of the
dividends on the 5.5% Convertible Preferred Stock.
Stock Option Plans - The Company has various stock option plans (Option Plans)
and agreements that provide for the issuance of nonqualified and incentive stock
options to acquire up to 4,499,927 shares of common stock. Such options may be
granted by the Company's Board of Directors to certain of the Company's
founders, employees, directors and consultants. The exercise price of incentive
stock options shall not be less than the fair market value of the shares on the
date of grant. In the case of individuals who are also holders of 10% or more
of the outstanding shares of common stock, the exercise price of incentive stock
options shall not be less than 110% of the fair market value of the shares on
the date of grant. The exercise price of non-qualified stock options shall not
be less than 85% of the fair market value on the date of grant. Options granted
under these plans expire no later than ten years from the date of grant and
generally become exercisable ratably over a four-year period following the date
of grant.
Under the Company's outside directors' stock option plan, non-qualified options
to purchase 5,000 shares of common stock are granted to each outside director on
the day following the Annual Shareholders' meeting or upon their appointment as
a director. These options generally vest over a one-year period and expire ten
years after the date of grant.
47
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As allowed by SFAS 123, the Company does not recognize compensation expense on
stock options granted. If the Company had elected to recognize compensation
expense based upon the fair value at the grant dates for stock option awards
granted in 1998, 1999 and 2000, in accordance with SFAS No. 123, the pro forma
net loss and net loss per common share would be as follows.
Year ended June 30,
---------------------------------------
1998 1999 2000
---------- ---------- ----------
Net loss:
As reported................ $17,233,000 $11,028,000 $9,390,000
Pro forma.................. 18,042,000 11,935,000 9,829,000
Net loss per common share:
As reported................ $ (1.57) $ (.75) $ (.41)
Pro forma.................. (1.63) (.81) (.43)
The fair value of options was estimated at the date of grant using the Black-
Scholes option pricing model with the following assumptions; no dividend yields,
40%-80% expected volatility, risk free interest rates ranging from 4.2% to 6.7%
and expected option lives of generally four years.
The following table summarizes option activity:
Options Available Weighted Average Options
Options for Grant Under Exercise Price Exercisable
Outstanding Option Plans Per Share at Period End
---------- ---------- -------------- -------------
March 24, 1989 (Inception)
Options authorized.................... - 2,999,927
Options canceled...................... (225,702) 225,702 $ .70
Options granted....................... 2,722,981 (2,722,981) $2.26
Options exercised..................... (1,438,908) - $ .22
---------- ----------
Balance, June 30, 1997.................. 1,058,371 502,648 $5.36 483,376
Options canceled...................... (199,873) 199,873 $5.79
Options granted....................... 372,520 (372,520) $4.41
Options exercised..................... (68,500) - $1.21
---------- ----------
Balance, June 30, 1998.................. 1,162,518 330,001 $5.12 593,930
Options canceled...................... (569,881) 569,881 $6.40
Options granted....................... 738,700 (638,700) $3.12
Options exercised..................... (24,043) - $1.18
---------- ----------
Balance, June 30, 1999.................. 1,307,294 261,182 $3.60 729,786
Options authorized.................... - 1,400,000
Options canceled...................... (1,091,612) 991,612 $3.64
Options granted....................... 1,058,500 (1,058,500) $1.02
Options exercised..................... (86,126) - $1.72
---------- ----------
Balance, June 30, 2000.................. 1,188,056 1,594,294 $1.30 1,000,224
========== ==========
48
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock-based compensation plans
as of June 30, 2000:
Weighted
Average
Weighted Exercise
Range of Number of Remaining Average Price of
Exercise Options Contractual Exercise Number Exercisable
Prices Outstanding Life-years Price Exercisable Options
--------- ---------- ----------- ------- ---------- -----------
$ .30 - $ .84 860,813 9.5 $ .84 792,360 $ .84
$1.20 - $1.50 66,033 6.6 $1.29 54,158 $1.27
$1.91 - $2.63 84,875 9.7 $2.55 12,188 $2.14
$2.88 - $3.56 161,335 8.0 $3.41 126,518 $3.40
$4.75 - $7.00 15,000 7.2 $5.67 15,000 $5.67
---------- ----------
1,188,056 1,000,224
========== ==========
The weighted average fair value of options granted during the years ended June
30, 1998, 1999 and 2000 was $2.28, $1.33 and $.43 per share, respectively.
Effective July 1, 2000, the Company will adopt Financial Accounting Standards
Board Interpretation Number 44 to APB 25 (Interpretation No. 44) as it relates
to options to purchase 759,000 shares of common stock issued by the Company in
December 1999. As a result, a charge to expense will be recorded for subsequent
increases in the market price of the Company's common stock above $2.41. This
charge will continue until such options have been exercised, forfeited or
otherwise expire.
Employee Stock Purchase Plan - The Company has an employee stock purchase plan
under which eligible employees can purchase common stock, at a discount to the
market price, through payroll deductions up to 10% of the employees base
compensation, subject to certain limitations, during sequential 24-month
offering periods. Each offering period is divided into four consecutive six-
month purchase periods beginning on March 1 and September 1 of each year.
Unless otherwise provided by the Board of Directors prior to the commencement of
an offering period, the price at which stock is purchased under the plan for
such offering period is equal to 85% of the lesser of the fair market value of
the common stock on the first day of such offering period or the last day of the
purchase period of such offering period. During the years ended June 30, 1998,
1999 and 2000, 13,900 shares, 26,835 shares and 19,627 shares, respectively, of
common stock were purchased under this plan.
Stock Purchase Warrants - In October 1996, the Company issued warrants to
purchase 69,444 shares of common stock which expire on October 15, 2000 in
connection with an equity financing commitment. These warrants may be
exercised, in whole or in part, at a price equal to the lesser of $18.00 per
share, or 85% of the fair market value of the Company's common stock at the time
of exercise. In January 2000, warrants to purchase 300,000 shares of stock that
were issued in May 1999 were exercised for total proceeds to the Company of
$233,000.
In February 2000, the Company sold 2,264,151 units, each unit consisting of one
share of common stock and warrants to purchase one-half share of common stock.
The warrants contain certain anti-dilution and other adjustment provisions that
may be triggered by other financings or future stock prices. Subject to
adjustments for stock splits, combinations and similar events, the exercise
price may be adjusted, subject to a floor of $1.60 for adjustments based on
subsequent market prices, and the number of shares issuable upon exercise of the
warrants may be increased, up to a specified maximum number of shares. The
warrants are subject to early termination after February 29, 2001 if the closing
bid price (as defined) of Aastrom's common stock exceeds $7.39 per share for ten
consecutive trading days.
In connection with the sale of common stock in June 2000, the Company issued a
warrant to purchase up to 3,348,915 shares of common stock at $0.01 per share.
This warrant may become exercisable, in whole or in part, under certain
conditions,
49
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effectively providing the investor with a limited price adjustment. The warrant
is exercisable, if at all, beginning on June 8, 2001 if the market price of the
common stock at that time is below $2.135. The warrant will immediately expire
if the average price of the Company's common stock during specified periods
before June 8, 2001 exceeds $4.27 per share, or upon certain change in control
events.
Common Shares Reserved - As of June 30, 2000, the Company has reserved shares of
common stock for future issuance as follows:
Issuance under stock option and stock purchase plans.... 2,971,988
Issuance under stock purchase warrants.................. 5,682,510
----------
8,654,498
==========
50
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Income Taxes
Deferred tax assets consist of the following:
June 30,
---------------------------
1999 2000
------------ ------------
Net operating loss carryforwards......... $ 23,740,000 $ 26,510,000
Tax credits and other.................... 2,288,000 2,787,000
------------ ------------
Gross deferred tax assets................ 26,028,000 29,297,000
Valuation allowance...................... (26,028,000) (29,297,000)
------------ ------------
$ - $ -
============ ============
Due to the historical losses incurred by the Company, a full valuation allowance
for deferred tax assets has been provided. If the Company achieves
profitability, these deferred tax assets may be available to offset future
income taxes. The valuation allowance as of June 30, 1998 was $21,861,000.
At June 30, 2000, the Company's Federal tax net operating loss and tax credit
carryfowards were $75,700,000 and $2,100,000, respectively, which will expire
from 2004 through 2020, if not utilized. In July 1998, the Company issued
shares of 1998 Series I Convertible Preferred Stock which resulted in a change
in ownership and an annual limitation of $3,136,000, which applies to losses
incurred between October 1993 and July 1998. As of June 2000, the portion of
the Company's net operating loss that remains subject to this limitation is
$44,000,000. The Company's ability to utilize its net operating loss and tax
credit carryforwards may become subject to further annual limitation in the
event of other change in ownership events.
5. Licenses, Royalties and Collaborative Agreements:
University of Michigan - In August 1989, the Company entered into a research
agreement with the University of Michigan (the University). In March 1992, and
as provided for under the research agreement, the Company also entered into a
license agreement for the technology developed under the research agreement.
The license agreement, as amended, provides for a royalty to be paid to the
University equal to 2% of net sales of products containing the licensed
technology sold by the Company.
Manufacture, Supply and Other Agreements - The Company has entered into various
agreements relating to the manufacture of its products and the supply of certain
components. Pursuant to one such agreement, the Company makes annual renewal
fees of $1,000,000, due in March of each year during the initial term of the
agreement, which ends in 2001 unless extended by the Company. The Company and
the licensor amended this agreement to provide for the issuance of $1,100,000 in
common stock by the Company as payment for the annual renewal fees due in March,
1998, 1999 and 2000. The accompanying consolidated financial statements reflect
charges to research and development expense of $1,100,000 in each of the years
ended June 30, 1998, 1999 and 2000 relating to this agreement.
Other income for the year ended June 30, 1999 includes $1,237,000 reflecting a
one time payment received by the Company in December 1998 relating to the
termination of a marketing and distribution agreement.
6. Commitments
As of June 30, 2000, the Company leases its facility under a month-to-month
operating lease. Rent expense for the years ended June 30, 1998, 1999 and 2000,
was $487,000, $560,000 and $485,000, respectively, and $2,819,000 for the period
from Inception to June 30, 2000.
7. Employee Savings Plan
51
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a 401(k) plan that allows participating employees to contribute
up to 15% of their salary, subject to annual limits and minimum qualifications.
The Board may, at its sole discretion, approve Company contributions. Through
June 30, 2000, the Company has made no contributions to the plan.
52
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are none to report.
PART III
Certain information required by Part III is omitted from this Report, and
is incorporated by reference to Aastrom's definitive Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with its Annual Meeting of Shareholders to be held on November 15,
2000.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the directors of Aastrom is incorporated by
reference to the Proxy Statement as set forth under the caption "Election of
Directors." Information relating to the executive officers of Aastrom is set
forth in Part I of this Report under the caption "Executive Officers of
Aastrom."
Information with respect to delinquent filings pursuant to Item 405 of
Regulation S-K is incorporated by reference to the Proxy Statement as set forth
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated by
reference to the Proxy Statement under the caption "Executive Compensation and
Other Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to ownership of equity securities of Aastrom by
certain beneficial owners and management is incorporated by reference to the
Proxy Statement as set forth under the caption "General Information -- Stock
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated by reference to the Proxy Statement under the captions "Certain
Transactions" and "Compensation Committee Interlocks and Insider Participation."
53
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements.
2. Financial Statement Schedule:
All schedules are omitted because they are not applicable or
not required, or because the required information is
included in the Financial Statements or Notes thereto.
3. Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
No report on Form 8-K were filed during the fourth quarter.
54
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.
Date: September 21, 2000 AASTROM BIOSCIENCES, INC.
By: /S/ R. Douglas Armstrong, Ph.D.
------------------------------------------
R. Douglas Armstrong, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on September 21, 2000 by the following persons in
the capacities indicated.
Signature Title
--------- -----
/S/ R. Douglas Armstrong, Ph.D. President, Chief Executive Officer and Director
- --------------------------------- (Principal Executive Officer)
R. Douglas Armstrong, Ph.D.
/S/ Todd E. Simpson Vice President, Finance & Administration, Chief
- --------------------------------- Financial Officer, Secretary and Treasurer
Todd E. Simpson (Principal Financial and Accounting Officer)
/S/ Mary L. Campbell Director
- ---------------------------------
Mary L. Campbell
/S/ Arthur F. Staubitz Director
- ---------------------------------
Arthur F. Staubitz
/S/ Joseph A. Taylor Director
- ---------------------------------
Joseph A. Taylor
55
EXHIBIT INDEX
Exhibit
Number Notes Description of Document
- ------ ----- -----------------------
3.1 A Restated Articles of Incorporation of Aastrom.
3.2 B Bylaws, as amended.
4.1 B Specimen Common Stock Certificate.
4.2 B Amended and Restated Investors' Rights Agreement, dated
April 7, 1992.
10.1 # B Form of Indemnification Agreement.
10.2 # B Amended and Restated 1992 Incentive and Non-Qualified
Stock Option Plan and forms of agreements thereunder.
10.3 # B 1996 Outside Directors Stock Option Plan and forms of
agreements thereunder.
10.4 # B 1996 Employee Stock Purchase Plan and form of agreement
thereunder.
10.7 B Lease Agreement, dated May 18, 1992, between Domino's
Farms Holdings, L.P. and Aastrom and amendments
thereto dated February 26, 1993, October 3, 1994,
November 16, 1994 and July 29, 1996.
10.8 # B Promissory Note, dated November 18, 1993, for $120,000
loan by Aastrom to R. Douglas Armstrong, Ph.D. and
amendment thereto dated October 30, 1996.
10.16 B Collaborative Supply Agreement, dated December 16,
1996, between Aastrom and Anchor Advanced Products,
Inc. Mid-State Plastics Division.
10.20 # B Form of Employment Agreement.
10.21 B License Agreement, dated July 17, 1992, between J.G.
Cremonese and Aastrom and related addenda thereto
dated July 14, 1992 and July 7, 1993.
10.22 + B Collaborative Product Development Agreement, dated May
10, 1994, between SeaMED Corporation and Aastrom.
10.23 + B Collaborative Product Development Agreement, dated
November 8, 1994, between Ethox Corporation and
Aastrom.
10.24 + B License and Supply Agreement, dated April 1, 1996,
between Immunex Corporation and Aastrom.
10.26 B License Agreement, dated March 13, 1992, between
Aastrom and the University of Michigan and amendments
thereto dated March 13, 1992, October 8, 1993 and June
21, 1995.
10.27 # B Employee Proprietary Information and Invention
Agreement, effective June 1, 1991, between Aastrom and
R. Douglas Armstrong, Ph.D.
10.29 # B Employment Agreement, dated December 8, 1995, between
Aastrom and Todd E. Simpson.
10.32 # B Employment Agreement, dated October 26, 1995, between
Aastrom and Alan K. Smith, Ph.D.
10.40 D Amendment to License and Supply Agreement, dated August
25, 1997, between Immunex Corporation and Aastrom.
10.41 + C Manufacturing Supply Agreement, dated as of August 14,
1998, by and between Aastrom and SeaMED Corporation.
10.42 # M Employment Agreement, dated August 10, 1998, by and
between Aastrom and Bruce Husel.
10.42 # C Employment Agreement, dated August 10, 1998, by and
between Aastrom and William Odell.
10.43 L Strategic Planning Consulting Services and
Collaboration Agreement, dated October 7, 1997,
between Burrill & Company, LLC and Aastrom.
10.44(a) E Securities Purchase Agreement dated as of July 2, 1998.
10.44(b) E Registration Rights Agreement dated as of July 2, 1998.
10.45(a) F Securities Purchase Agreement dated as of May 27, 1999.
10.45(b) F Registration Rights Agreement dated as of May 27 1999.
10.46 # N Executive Retention and Severance Agreement, dated
February 2, 1999, between Aastrom and R. Douglas
Armstrong.
10.47 G Cobe Termination and Transition Agreement.
10.48 G Supplemental Agreement to Cobe Termination and
Transition Agreement.
10.49 # H Supplemental Agreement by and between Aastrom and Bruce
W. Husel dated October 5, 1999.
10.50 # H Supplemental Agreement by and between Aastrom and
William L. Odell dated October 1, 1999.
10.51 # H Supplemental Agreement by and between Aastrom and Todd
E, Simpson dated September 24, 1999.
10.52 # H Supplemental Agreement by and between Aastrom and Alan
K. Smith dated September 30, 1999.
10.53 H Exclusive financial advisor agreement between Aastrom
and Salomon Smith Barney Inc., dated September 10,
1999.
10.54 # I Form of Supplemental Agreement to Employment Agreement
between Bruce Husel and Aastrom.
10.55 # I Pay to Stay Severance Agreement between R. Douglas
Armstrong, Ph.D. and Aastrom dated October 15, 1999.
10.56 # I Form of Pay to Stay Severance Agreement between Aastrom
and Todd E. Simpson dated October 18, 1999, and
between Aastrom and Alan Smith dated October 21, 1999.
10.57 J Securities Purchase Agreement, dated February 28, 2000,
by and between Aastrom and RGC International
Investors, LDC (RGC).
10.58 J Registration Rights Agreement dated February 28, 2000,
by and between Aastrom and RGC.
10.59 J Stock Purchase Warrant dated February 29, 2000.
10.60 K Securities Purchase Agreement dated June 8, 2000, by
and between Aastrom and RGC.
10.61 K Registration Rights Agreement dated June 8, 2000, by
and between Aastrom and RGC.
10.62 K Stock Purchase Warrant dated June 8, 2000.
10.63 # Agreement Regarding Pay-to-Stay, by and between Aastrom
and R. Douglas Armstrong, Ph.D. dated April 28, 2000.
10.64 # Agreement Regarding Pay-to-Stay, by and between Aastrom
and Todd E. Simpson dated June 30, 2000.
10.65 # Agreement Regarding Pay-to-Stay, by and between Aastrom
and Brian S. Hampson dated April 28, 2000.
10.66 # Form of Retention Bonus Agreement, by and between
Aastrom and each of Brian S. Hampson, Bruce W. Husel
and Todd E. Simpson.
10.67 # Form of Relocation Bonus Agreement, by and between
Aastrom and each of Brian S. Hampson, Bruce W. Husel
and Todd E. Simpson.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
__________
A Incorporated by reference to Aastrom's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996, as filed on March 7, 1997.
B Incorporated by reference to Aastrom's Registration Statement on Form
S-1 (No. 333-15415), declared effective on February 3, 1997.
C Incorporated by reference to Aastrom's Annual Report on Form 10-K for
the year ended June 30, 1998, as filed on September 29, 1998.
D Incorporated by reference to Aastrom's Annual Report on Form 10-K for
the year ended June 30, 1997, as filed on September 25, 1997.
E Incorporated by reference to Aastrom's Current Report on Form 8-K, as
filed on July 15, 1998.
F Incorporated by reference to Aastrom's Current Report on Form 8-K, as
filed on June 4, 1999.
G Incorporated by reference to Aastrom's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998, as filed on February 11,
1999.
H Incorporated by reference to Aastrom's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999, as filed on November 12,
1999.
6
I Incorporated by reference to Aastrom's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1999, as filed on February 14,
2000.
J Incorporated by reference to Aastrom's Report on Form 8-K filed on
March 3, 2000.
K Incorporated by reference to Aastrom's Registration Statement on Form
S-3 (333-39698), as filed on June 20, 2000.
L Incorporated by reference to Aastrom's Registration Statement on Form
S-1 (No. 333-37439), as filed on October 8, 1997.
M Incorporated by reference to Aastrom's Amendment to Registration
Statement on Form S-1 (No. 333-37439), as filed on November 21, 1997.
N Incorporated by reference to Aastrom's Annual Report on Form 10-K for
the year ended June 30, 1999, as filed on September 20, 1999.
+ Confidential treatment has been requested as to a portion of this
exhibit.
# Management contract or compensatory plan or arrangement covering
executive officers or directors of Aastrom.
7