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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
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)
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MICHIGAN 94-3096597
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF 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: (313) 930-5555
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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 15, 1997 was $27,338,000. 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 15, 1997, 13,285,511 shares of Common Stock, no par value,
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT FORM 10-K REFERENCE
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Proxy Statement for the Annual Meeting of
Shareholders scheduled for November 12,
1997 Items 10, 11, 12 and 13 of Part III
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AASTROM BIOSCIENCES, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
NO.
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PART I.................................................................... 3
Item 1. BUSINESS....................................................... 3
Item 2. PROPERTIES..................................................... 23
Item 3. LEGAL PROCEEDINGS.............................................. 23
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 23
PART II................................................................... 23
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS........................................................ 23
Item 6. SELECTED FINANCIAL DATA........................................ 24
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 36
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 36
PART III.................................................................. 37
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 37
Item 11. EXECUTIVE COMPENSATION......................................... 37
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 37
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 37
PART IV................................................................... 38
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.......................................................... 38
SIGNATURES................................................................ 53
EXHIBIT INDEX............................................................. 54
2
Except for the historical information presented, the matters discussed in
this Report include forward-looking statements that involve risks and
uncertainties. The Company'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."
PART I
ITEM 1. BUSINESS
OVERVIEW
Aastrom Biosciences, Inc. ("Aastrom" or the "Company") is developing
proprietary process technologies and devices for a range of cell therapy
applications, including stem cell therapies and gene therapy. The Company's
lead product under development, the Aastrom Cell Production System (the
"Aastrom CPS"), consists of a clinical cell culture system with disposable
cassettes and reagents for use in the rapidly growing stem cell therapy
market. The Company believes that the Aastrom CPS method will be less costly,
less invasive and less time-consuming than currently available stem cell
collection methods. The Aastrom CPS is designed as a platform product which
implements the Company's pioneering stem cell replication technology. The
Company also believes that the Aastrom CPS can be modified to produce a wide
variety of other cell types for new, emerging therapies being developed by
others. Prior to commencement of multiple-site pivotal trials, the Company is
conducting limited "pre-pivotal" trials of the Aastrom CPS under
Investigational Device Exemptions ("IDEs") for use in stem cell therapy. The
Company has entered into a strategic collaboration for the marketing,
distribution and customer service of the Aastrom CPS in stem cell therapy with
Cobe BCT, Inc. (collectively with Cobe Laboratories, Inc., "Cobe"), a
subsidiary of Gambro AB and a leading provider of blood cell processing
products. Additionally, Aastrom is developing products and processes for the
delivery of ex vivo gene therapy that are designed to address the production
of gene-modified cells.
CELL THERAPY
Cell therapy is the use of human cells to treat a medical disorder. The most
common types of cell therapy, blood and platelet transfusions, have been
widely used for many decades. More recently, bone marrow-derived cells have
been used to restore the bone marrow and the blood and immune system cells
which are damaged by chemotherapy and radiation therapy during the treatment
of many cancers. Transplantation of these cells is known as stem cell therapy.
Other cell therapies have recently been used for generating skin and cartilage
tissue and additional cell therapies are being developed by various companies
and researchers to restore immune system cells, as well as bone, kidney,
liver, vascular and neuronal tissues.
Cell therapies require the collection of cells, either from the patient or a
suitably matched donor. These cells are typically processed and stored for
administration to the patient. Although cell therapy is being developed for
use in an increasing number of diseases, widespread application of new cell
therapies remains limited by the difficulties and expense associated with
current cell collection and processing procedures. The problems of current
cell collection techniques are exemplified in the area of stem cell therapy
where the patient or donor undergoes invasive, time-consuming and costly
procedures to collect the large volume of cells currently required for
effective treatment. The Company believes an alternative to collecting the
required therapeutic dose of cells is to grow these cells ex vivo from a small
starting volume. However, ex vivo cell expansion, when biologically possible,
has typically required costly techniques, facilities and operations to comply
with U.S. Food and Drug Administration ("FDA") good manufacturing practices
("GMP"), which are not generally available in hospitals. As a result, cells
needed for such therapies often require specialized cell production facilities
which use labor-intensive, manual cell culture techniques.
There are numerous forms of cell therapy at an early stage of development.
One such example is ex vivo gene therapy, in which 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. The Company
believes that the successful
3
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
GMP conditions.
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 systems. The objective of stem cell therapy is to restore the
hematopoietic 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 is often required, which may severely
destroy ("myeloablation") or partially destroy ("myelosuppression") 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 systems, 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. These cells are currently collected from the donor or patient
directly through multiple syringe aspirations under 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 progenitor cell
("PBPC") collection. See "--Current Stem Cell Collection Methods." Recently,
it has been demonstrated that the blood cells found in the umbilical cord 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.
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 a new marrow. 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 take years
following myeloablative cancer therapy. When the patient's hematopoietic
system is malignant, such as in the case of leukemia, 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
The benefits of stem cell therapy in the treatment of cancer patients have
been well established over the past two decades. 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
increasingly used to enable patients with other forms of cancer to receive
high dose or multicycle chemotherapy and radiation treatments. These high-
intensity therapies have a greater probability of eradicating 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 used.
According to an industry source, approximately 32,000 stem cell therapy
procedures were completed worldwide in 1995, and, according to another
industry source, the number of such procedures utilizing donor-derived and
patient-derived cells has been growing annually by approximately 15% and 20%,
respectively. This growth has been driven by encouraging clinical results in
the treatment of dose-sensitive solid tumors, such as
4
breast and ovarian cancers. The Company expects that the number of stem cell
therapy procedures will continue to grow due to increased incidence and
prevalence of cancer, continued clinical demand for myelotoxic cancer
treatment, and the increased cost effectiveness of stem cell therapy
treatments.
Stem cell therapy may also enhance the effectiveness of blood cell growth
factors. 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 regrowth of residual tumor cells. Many cancer patients are routinely
treated with growth factors including G-CSF, such as Neupogen and GM-CSF, such
as Leukine, 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 PBPC
collection method.
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 a 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 has been the preferred source of cells in
allogeneic transplants.
PBPC Mobilization and Collection
PBPC mobilization is a newer 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 PBPC 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, which draws
and returns large volumes of the patient's or donor's blood in order to
selectively remove the therapeutic volume of stem and progenitor cells. Each
collection procedure typically lasts for two to six hours and is typically
repeated on two to five consecutive days. 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 PBPC process has become the predominant procedure in
autologous stem cell therapy.
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. The Company believes that current charges for bone
marrow harvest, processing and infusion are approximately $10,000 to
5
$15,000 per procedure, with considerable variability between institutions. The
Company believes that current charges for PBPC collection, including
mobilization and infusion, are approximately $12,000 to $20,000 for a two to
three cycle procedure, with considerable variability between institutions
depending on the mobilization regimen and the total volume, time and number of
aphereses required.
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 with the current procedures. In this regard, PBPC procedures
have gained popularity compared with bone marrow harvests because the number
of platelet transfusions is reduced for some patients.
Recently, products to implement a cell isolation method known as CD34
selection have been developed by other companies in conjunction with bone
marrow harvest and PBPC 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. CD34 selection is used after the initial
collection of stem and progenitor cells and, therefore, does not address the
difficulties or costs associated with the basic cell collection procedures. A
future objective of CD34 selection is to assist in depleting tumor cells from
the transplant cells collected, thereby expanding the availability of stem
cell therapy to new patient populations.
UMBILICAL CORD BLOOD
Umbilical cord blood ("UCB"), which is collected directly from the umbilical
cord after delivery, without pain or risk to the infant or the mother, is
emerging as a new source of cells for stem cell therapy. UCB has been reported
to have stem cell concentrations that are much higher than that typically
obtained from traditional bone marrow and PBPC collection methods. After
collection, UCB is frozen for later use in a stem cell therapy procedure.
Storage of UCB samples involves small volumes of cells, compared to typical
bone marrow or PBPC storage. Accordingly, the costs of collection and storage
of UCB cells are comparatively low. This source of cells is also "tumor-free,"
such that UCB would be preferred for many current stem cell therapy procedures
in metastatic cancer patients. Before UCB can become a major supply source for
stem cell therapy, a coordinated UCB banking system must emerge. In this
regard, several UCB banking institutions have been established to date, and
the group is growing in both number and size. The establishment of these UCB
banking institutions is an initial step which may lead to a coordinated UCB
banking system.
Current disadvantages of UCB include 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 PBPC harvest, where the
collection of more cells to meet a particular treatment is typically
achievable, the number of cells available from a UCB donor is limited. This
problem is exacerbated by the required cryopreservation of the cells, which
causes significant cell loss. The resultant low cell number is believed to be
responsible for the longer hematopoietic recovery times observed with UCB
transplants, as compared with bone marrow or PBPC transplants. Further,
because of the low cell number, UCB transplants are typically restricted to
small patients. Therefore, increasing the number of therapeutic cells from a
UCB sample may facilitate the more widespread use of UCB transplants. Aastrom
believes that providing the transplant site with the capability to carry out
the UCB cell expansion will be a major factor in the increased use of UCB for
stem cell therapy and a significant business opportunity.
AASTROM TECHNOLOGY
Aastrom is developing proprietary process technologies that are pioneering
the ex vivo production of human stem and progenitor cells. The Company has
also developed a proprietary cell culture device that mimics the biological
and physical environment necessary for the growth of certain human cells and
tissues, including bone marrow. The Company's initial product candidate, the
Aastrom CPS, utilizes the Company's process technology
6
and is designed to enable the ex vivo production of human stem and progenitor
cells as an alternative to the bone marrow harvest and PBPC mobilization
methods and as an enhancement to the UCB collection method. The Company
believes that the Aastrom CPS may be used for other cell production processes
which are being developed by third parties and, in combination with the
Company's proprietary gene transfer process, may have application in the
developing field of ex vivo gene therapy.
CORE TECHNOLOGY
Stem Cell Growth Process
Aastrom has developed proprietary process technologies for ex vivo
production of therapeutic stem and progenitor cells as well as other key cells
found in human bone marrow. The Company'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. Currently available cell
culture methods tend to result in a loss of stem cells, either through death
or through differentiation into mature cells. The Company has exclusive
licenses to two U.S. patents and additional applications that cover these
processes. See "--Additional Stem Cell and Other Cell Therapies."
Aastrom Cell Culture Chamber
Aastrom has developed a proprietary cell culture chamber to implement the
Company's process technology. The culture chamber produces cells on a clinical
scale, and allow for simple, sterile recovery of the cells for therapeutic
use. The Company believes that the Aastrom cell culture chamber may also be
used for growing other human therapeutic cells, such as T-Cells used for
lymphocyte therapies, chondrocytes for cartilage replacement, and mesenchymal
tissues for bone and cartilage replacement. The Company holds exclusive
licenses to two 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 is being pursued by the Company for application in
most cell and tissue types and most vector technologies. The Company intends
to develop products based upon its gene loading technology. Development of
additional products will require the Company 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. Furthermore,
due to the uncertainties involved, the Company is unable to estimate the
length of time such development may take. If successfully developed into
products, the Company believes that such products would facilitate the
advancement of numerous gene therapy protocols into the clinic and ultimately
the market. The Company is the exclusive licensee of a U.S. Patent, and has
additional applications pending, for this technology. See "--Aastrom Product
Candidates For Ex Vivo Gene Therapy."
THE AASTROM CPS
The Aastrom CPS is the Company's lead product under development. While
potentially applicable to multiple cell therapy applications, the Aastrom CPS
is being developed initially by the Company for stem cell therapy. The Aastrom
CPS is a proprietary system that the Company believes will enable the large
scale ex vivo production of a variety of therapeutic cells at health care
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.
7
The Aastrom CPS is comprised of several components, including single-use
disposable Cell Cassettes and reagents and microprocessor-controlled
instruments, which are at various stages of development. The Cell Cassette is
a single-use disposable cartridge which contains the Aastrom cell culture
chamber and the related media supply waste reservoirs and harvest bag. The
microprocessor-controlled instruments include the Incubator which controls the
culture conditions for the operation of the Cell Cassette, and the Processor
which automates the priming and harvesting of the cells from the Cell
Cassette. The System Manager is a user interface computer that is being
developed to simultaneously track and monitor the cell production process in
over thirty CPS Incubators and record relevant process variables and operator
actions. Prototype components of the Aastrom CPS are currently being used in
clinical trials and ongoing development activities are directed at completing
other production level components of the Aastrom CPS.
The Aastrom CPS 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 Aastrom CPS
process is a blood-bag container with the cell product. The control and
documentation features of the Aastrom CPS have been designed to meet GMP
requirements for the therapeutic production of cells.
AASTROM CPS FOR STEM CELL THERAPY
The Company's initial application for the Aastrom CPS is expected to be in
the growing field of stem cell therapy, where the Company believes that the
Aastrom CPS may address many of the limitations of existing procedures. The
Aastrom CPS 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. This cell
mixture is quantified, and an appropriate volume of cells is then inoculated
into one or more Cell Cassettes with the necessary growth media. Growth-
factor-stimulated cells are produced using the Aastrom CPS in approximately 12
to 13 days, with no further patient involvement. Depending upon the cell
quantity necessary for a therapeutic application, single or multiple Cell
Cassettes may be required, with a different volume requirement of starting
cells taken from the patient at the initial visit. The Aastrom CPS has been
designed to minimize operator involvement during the cell production process,
and the steps required before and after the Aastrom CPS are standard
laboratory procedures.
Potential Advantages of Aastrom CPS
The Company believes that the Aastrom CPS, if approved for commercial sale
by the FDA and foreign regulatory agencies, may provide certain improvements
and efficiencies over traditional cell collection and infusion processes. The
following table, which sets forth estimates based on a 1996 survey conducted
by the Company of 11 stem cell transplant physicians at different transplant
institutions throughout the United States, compares estimated patient care
episodes, procedure time and needle sticks for currently established cell
collection and infusion techniques with the Aastrom CPS method of cell
procurement:
PROCEDURE
CARE TIME NEEDLE
CELL SOURCE EPISODES(1) (HOURS)(1) STICKS(2)
- ----------- ----------- ---------- ---------
Bone Marrow Harvest(3)......................... 8 16 103
PBPC Mobilization and Collection(4)............ 21 39 22
Aastrom CPS(5)................................. 2 1-3 4-10
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(1) Includes all outpatient, inpatient, and home care episodes.
(2) Includes bone marrow aspirates, blood samples, catheter placements and
other venous access, and subcutaneous injections.
(3) Includes operating room procedure and all preparatory and recovery
procedures.
(4) Based on an average of three rounds of apheresis following cell
mobilization injections.
(5) Projections, based on data accumulated during the Company's pre-clinical
research and clinical trials.
8
Reduced Cost. The Company believes the Aastrom CPS has the potential to
replace more costly, labor intensive and invasive cell collection and infusion
procedures currently employed for stem cell therapy and to reduce physician,
staff and patient time requirements.
Reduced Patient and Physician Burden. Cell production with the Aastrom CPS
is expected to require the collection of a small volume of starting material
compared to current collection procedures, eliminating the requirement for
general surgical anesthesia, multiple drug injections and blood apheresis.
Patient benefits are expected to include fewer needle sticks than with current
cell collection and infusion methods and a reduction in overall patient
procedure time. Additionally, Aastrom's process for cell expansion is expected
to minimize the time requirement for physicians compared with bone marrow
harvest.
Enhanced Multicycle High-Dose Chemotherapy. The long restoration period for
the hematopoietic system following myeloablative therapy effectively limits
patients to one opportunity for cell collection prior to cancer therapy. The
Aastrom CPS may enhance the practice of multicycle, high-dose chemotherapy by
providing the ability to produce a therapeutic dose of cells from a small
starting volume. The initial cell collection can be divided into multiple
samples and stored frozen until expansion at a later time is required.
Reduced Quantity of Lymphocytes. The Company believes its approach to stem
cell therapy may provide an additional benefit over current methods by
depleting potentially harmful cells such as T-cells and B-cells. These cells
are believed to be primarily responsible for graft-versus-host disease, a
common manifestation of allogeneic transplants in which the grafted donor's
cells attack the host's tissues and organs.
Tumor Cell Purging. 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 transplant may
reintroduce cancer cells into the patient. Additionally, patients may have
undetected tumor cells in their marrow or PBPC transplant, which can
reestablish the cancer in the patient following transplant. The Aastrom CPS
process may offer benefits for these groups of patients. The Company and other
investigators have shown that some primary human tumor cells die or do not
grow during hematopoietic cell culture. Further, the smaller volume of
starting cells used for the Aastrom CPS compared with bone marrow harvest or
PBPC transplants may provide approximately 10 to 70 fold less tumor cells in a
transplant. This combination of passive depletion during culture with the
lower starting volume of tumor cells may result in a tumor-free or tumor-
reduced cell product for transplant. The benefit of such tumor depletion, if
any, will vary depending upon the type of cancer and state of disease.
CLINICAL DEVELOPMENT
The Company's clinical development plan is initially to obtain regulatory
approval in the United States to market the Aastrom CPS for autologous stem
cell therapy and in Europe for more general cell therapy applications. The
Company also intends to pursue approval of the Aastrom CPS for additional
clinical indications.
The Company believes that the Aastrom CPS for stem cell therapy will be
regulated as a medical device and that the Company will be required to submit
a Pre-Market Approval ("PMA") application to, and obtain approval from, the
FDA to allow it to market this product in the United States. In order to
obtain PMA approval, the Company will be required to complete clinical trials
under an IDE. See "--Government Regulation--Devices."
In a dose-ranging study conducted by the University of Michigan (the
"University") in 1993, ex vivo produced cells utilizing the Company's
proprietary cell production technology were infused into seven patients with
non-Hodgkin's lymphoma after they received myeloablative chemotherapy. These
patients also received cells obtained from either an autologous bone marrow
harvest or PBPC procedure. No safety issues attributable to the infused cells
were observed in this trial and the patients exhibited recovery profiles
consistent with traditional transplantation techniques.
9
Aastrom completed the first feasibility trial of its cell production system
technology under an IDE at the M.D. Anderson Cancer Center in October 1995. In
this trial, ten breast cancer patients, who were subjected to myeloablative
chemotherapy, were treated with cells obtained from a bone marrow harvest and
with cells produced from a sample of such cells with a predecessor of the
Aastrom CPS. The patients exhibited standard clinical recoveries, providing
evidence of the clinical safety of cells obtained from the Company's cell
production process and of the feasibility of cell production with a
predecessor of the Aastrom CPS by clinical personnel at an investigational
site.
Aastrom is currently conducting a pre-pivotal stem cell therapy clinical
trial under an IDE submitted to the FDA. This clinical trial is designed to
demonstrate that cells produced using the Aastrom CPS can provide
hematopoietic recovery in accordance with trial endpoints in breast cancer
patients who have received myeloablative chemotherapy. Bone marrow or
mobilized PBPC obtained from the patients by traditional methods will be
available for precautionary reasons at defined clinical stages. The results
from the five patients accrued at the first trial site have provided evidence
of the clinical safety of the Aastrom CPS-produced cells in patients and that
the hematopoietic recovery endpoints specified for the trial are achievable.
The patients at this trial site were Stage IV breast cancer patients who had
received significant prior cytotoxic therapies for their cancer. Four of these
five patients received the precautionary bone marrow pursuant to the trial
protocol. Preliminary results from the first trial site were reviewed with the
FDA, and the IDE was amended to expand the trial to a second site. The amended
IDE provided for the enrollment of Stage II, III and IV patients, and a
delayed use of the precautionary bone marrow. Patient data from the initial
six patients in this second site trial have been presented and demonstrate
that cells produced in the Aastrom CPS from a small initial amount of material
can lead to engraftment of stem cells in the patient within a recovery time
frame that is comparable with that of conventional bone marrow transplantation
following ablative chemotherapy. These patients started to recover their white
blood cell counts within a median time of seven days post-transplant and
reached safe levels of neutrophils at 16 days and platelets at 23 days.
Following further review by the FDA, the IDE was amended to expand the trial
to additional sites and patient accrual in this clinical trial is now ongoing
at four U.S. sites. The Company has initiated clinical trials under an IDE
submitted to the FDA to evaluate the use of the Aastrom CPS to expand cells
obtained from UCB for use in cancer patients who have received myeloablative
radiation or chemotherapy.
The objective of the current and anticipated future trials is to establish
the protocols for pivotal trials of the Aastrom CPS in stem cell therapy.
Provided that these pre-pivotal trials provide further evidence of the
feasibility and safety of cells produced in the Aastrom CPS, the Company
anticipates initiating pivotal clinical trials at multiple sites no earlier
than late 1997, with patient enrollment typical to support a PMA filing,
although this schedule is subject to numerous risks and uncertainties. See
"Business Risks--Uncertainties Related to Clinical Trials."
Aastrom, in partnership with Cobe, has initiated two clinical trials in
Europe, the first of which began in February 1997, to evaluate the use of
Aastrom CPS cells to promote hematopoietic recovery in breast cancer patients
undergoing aggressive myelosuppressive or myelotoxic chemotherapy. Assuming
the successful completion of these and other clinical trials, the Company
intends to seek approval to market the Aastrom CPS in Europe through CE Mark
Registration. See "--Government Regulation--Regulatory Process in Europe."
The preliminary results of the Company's pre-pivotal trial may not be
predictive of results that will be obtained from subsequent patients in the
trial or from more extensive trials. Further, there can be no assurance that
the Company's pre-pivotal or pivotal trial will be successful, or that PMA
approval or required foreign regulatory approvals for the Aastrom CPS will be
obtained in a timely fashion, or at all.
ADDITIONAL STEM CELL AND OTHER CELL THERAPIES
The Company believes that the Aastrom CPS hardware and disposables may be
developed to serve as platform products for application in a variety of other
emerging cell therapies in addition to stem cell therapy. The Company believes
that the Aastrom CPS has the potential to supplant current manual cell culture
methods to produce therapeutic quantities of cell types such as T-cells,
chondrocytes, mesenchymal cells, keratinocytes, neuronal cells and dendritic
cells. Other than a limited application of chondrocyte therapy, novel cell
therapies
10
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 Aastrom CPS in these therapies may include: (i)
reducing labor and capital costs; (ii) enhancing process reliability; (iii)
automating quality assurance; (iv) reducing the need for specialized,
environmentally controlled facilities; and (v) providing greater accessibility
of these procedures to care providers and patients.
Modification of such processes and application of the Company's products to
the expansion of other cell types may require substantial additional
development of specialized cell culture environments which may need to be
incorporated within the Company's existing Cell Cassettes. Such modifications
may require the Company to raise substantial additional funds, or to seek
additional collaborative partners, or both. There can be no assurance that the
Company will be able to successfully modify or develop existing or future
products to enable such additional cell production processes. The Company'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 the Company's processes or
product candidates will find successful application in such therapies. In
addition, the Company 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 the Company 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--Future Capital Needs; Uncertainty of Additional Funding."
Immunotherapies
Immunotherapy involves using cells of the immune system to eradicate a
disease target. T-cell lymphocytes and dendritic cells are being actively
investigated by other companies for this purpose, and the Company anticipates
that many of these procedures will require ex vivo cell production.
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.
Cytotoxic T-lymphocytes ("CTLs") is a new process that involves collecting T-
cells from a patient and culturing them in an environment resulting in 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.
Dendritic cells (the potent antigen presenting cells) are believed to play
an important role in the function of the immune system. Researchers believe
that cultured dendritic cells could augment the natural ability of a patient
to present antigens from the infectious agents to the immune system and aid in
the generation of a cytotoxic T-cell response to the infectious agent.
Solid Tissue Cell Therapies
One of the newest areas 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. The Company believes that the Aastrom CPS may have the potential
to reduce costs associated with the cell production procedure and, if
successfully developed by the Company 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 Therapies
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 autoimmune
11
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. Recently, 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 or
kidney transplants).
A major 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 cells 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 procured 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. The
Company believes that for ex vivo gene therapy to progress to clinical
applications, a process to produce a sufficient quantity of therapeutic cells
is required 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. The Company'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 the Company's processes or product candidates will find successful
applications in such therapies. Successful development of the Company'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 the Company's ability to finance such
activities on acceptable terms, if at all. See "Business Risks--Future Capital
Needs; Uncertainty of Additional Funding."
THE AASTROM CPS FOR GENE THERAPY (GT-CPS)
The Aastrom CPS has been designed to produce cells for therapy and the
Company believes that the Aastrom CPS may be useful in many potential ex vivo
gene therapy applications. Further, the Company anticipates that its
proprietary stem cell production process technology implemented by the Aastrom
CPS may provide the conditions for clinical scale stem cell division, and
enable or enhance the introduction of therapeutic
12
genes into stem cell DNA. The Company 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.
The Company has two principal objectives for the development of Aastrom GT-
CPS: (i) the enablement of stem cell gene therapies for a variety of
hematologic and other disorders, based on the GT-CPS'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 GENE LOADER
The Aastrom Gene Loader product technology, which is under development, is
being 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 inhibits many
ex vivo gene therapies from moving forward in the clinic. The Aastrom Gene
Loader is being designed to incorporate the Company's proprietary directed
motion gene transfer technology. Complete product development is expected to
require additional funding sources or collaborations with others, or both.
The Company believes that these issues represent a general bottleneck for
other companies pursuing ex vivo gene therapy clinical applications. The
Company'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 extreme quantities
of gene vectors and/or target "delivery" tissues.
STRATEGIC RELATIONSHIPS
On October 22, 1993, the Company entered into a Distribution Agreement (the
"Distribution Agreement") with Cobe for Cobe to be the Company's exclusive,
worldwide distributor of the Aastrom CPS for stem cell therapy applications
(the "Stem Cell Therapy Applications"). Under the terms of the Company's
Distribution Agreement with Cobe, other than with respect to sales to
affiliates, the Company is precluded from selling the Aastrom CPS to customers
for stem cell therapy applications. The Company has, however, reserved the
right to sell the Aastrom CPS for: (i) all diagnostic or other non-therapeutic
clinical applications; (ii) all gene therapy or gene transfer applications,
including those for stem cells; (iii) all non-human applications; (iv) certain
permitted clinical research applications; and (v) all applications that are
labeled not for human use. The Company has also reserved the unconditional
right to sell other products under development, including but not limited to
products based upon its gene loading technology. The initial term of the
Distribution Agreement expires on October 22, 2003, and Cobe has the option to
extend the term for an additional ten-year period. The Company is responsible
for the expenses to obtain FDA and other regulatory approval in the United
States, while Cobe is responsible for the expenses to obtain regulatory
approval in foreign countries to allow for worldwide marketing of the Aastrom
CPS for Stem Cell Therapy Applications. See "Business Risks--Consequences of
Cobe Relationship."
Under the terms of the Distribution Agreement, the Company will realize
approximately 58% to 62% of the net sales price at which Cobe ultimately sells
the Aastrom CPS for Stem Cell Therapy Applications, subject to certain
negotiated discounts and volume-based adjustments and subject to the
obligation of the Company to make aggregate royalty payments of up to 5% to
certain licensors of its technology. The Company is also entitled to a premium
on United States sales in any year in which worldwide sales exceed specified
levels.
The Distribution Agreement may be terminated by Cobe upon twelve months
prior notice to the Company in the event that any person or entity other than
Cobe beneficially owns more than 50% of the Company's outstanding Common Stock
or voting securities. The Distribution Agreement may also be terminated by
Cobe at any time after December 31, 1997 if Cobe determines that
commercialization of the Aastrom CPS for stem cell therapy on or prior to
December 31, 1998 is unlikely.
In conjunction with the Distribution Agreement, the Company also entered
into a Stock Purchase Agreement with Cobe (the "Cobe Stock Agreement"),
whereby Cobe acquired certain option, registration, preemptive and
13
other rights pertaining to shares of the Company's stock. Pursuant to such
preemptive rights, Cobe elected to purchase 714,200 shares of Common Stock in
the Company's initial public offering in February 1997.
MANUFACTURING
The Company has no current intention of internally manufacturing its product
candidates and, accordingly, is developing relationships with third party
manufacturers which are FDA registered as suppliers for the manufacture of
medical products.
On May 10, 1994, the Company entered into a Collaborative Product
Development Agreement with SeaMED Corporation, ("SeaMED"). Pursuant to this
agreement, the Company and SeaMED will collaborate on the further design of
certain instrument components in the Aastrom CPS, and enable SeaMED to
manufacture pre-production units of the instrument components for laboratory
and clinical evaluation. The Company is paying SeaMED for its design and pre-
production work on a "time and materials" basis, utilizing SeaMED's customary
hourly billing rates and actual costs for materials. Subject to certain
conditions, the Company has committed to enter into a manufacturing agreement
with SeaMED for commercial manufacture of the instrument components for three
years after shipment by SeaMED of the first commercial unit pursuant to a
pricing formula set forth in the agreement. The Company retains all
proprietary rights to its intellectual property which is utilized by SeaMED
pursuant to this agreement.
On November 8, 1994, the Company entered into a Collaborative Product
Development Agreement with Ethox Corporation ("Ethox"). Pursuant to this
agreement, the Company and Ethox will collaborate on the further design of
certain bioreactor assembly and custom tubing kit components of the Aastrom
CPS, and enable Ethox to manufacture pre-production units of such components
for laboratory and clinical evaluation. The Company is paying Ethox for its
design and production work on a "time and materials" basis, utilizing Ethox's
customary hourly billing rates and actual costs for materials. The Company
retains all proprietary rights to its intellectual property which are utilized
by Ethox pursuant to this Agreement.
In March 1996, the Company entered into a five-year License and Supply
Agreement with Immunex Corporation ("Immunex") to purchase and resell certain
cytokines and ancillary materials for use in conjunction with the Aastrom CPS.
The agreement required the Company to pay Immunex an initial up-front fee of
$1,500,000 to be followed by subsequent annual renewal payments equal to
$1,000,000 per year during the term of the agreement in addition to payment
for supplies purchased by the Company. In August 1997, the Company and Immunex
amended the agreement to expand the Company's territorial rights to use and
sell such materials to a worldwide basis. Unless earlier terminated or renewed
by the Company for an additional 5-year term, the agreement will expire in
April 2001. The 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 the Company of cytokines and ancillary materials if the
Company fails to purchase a minimum amount of its forecasted annual needs from
Immunex after notice to the Company and expiration of a specified cure period.
The Company also has the right to terminate the agreement at any time subject
to the payment to Immunex of a specified amount for liquidated damages. In the
event that Immunex elects to cease to supply to the Company cytokines and
ancillary materials or is prevented from supplying such materials to the
Company by reason of force majeure, limited manufacturing rights will be
transferred to the Company under certain circumstances. There is, however, no
assurance that the Company could successfully manufacture the compounds itself
or identify others that could manufacture these compounds to acceptable
quality standards and costs, if at all.
On December 16, 1996, the Company entered into a Collaborative Supply
Agreement with Anchor Advanced Products, Inc., Mid-State Plastics Division
("MSP"). Under this agreement, MSP will conduct both pre-production
manufacturing development and commercial manufacturing and assembly of the
Cell Cassette component of the Aastrom CPS for the Company. During the initial
phase of the seven-year agreement, the
14
Company will pay MSP for its development activities on a time and materials
basis. Upon reaching certain commercial manufacturing volumes, MSP will be
paid by the Company on a per unit basis for Cell Cassettes delivered to the
Company under a pricing formula specified in the agreement. Throughout the
term of this agreement, the Company 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 the Company will be able to continue its
present arrangements with its suppliers, supplement existing relationships or
establish new relationships or that the Company will be able to identify and
obtain the ancillary materials that are necessary to develop its product
candidates in the future. The Company's dependence upon third parties for the
supply and manufacture of such items could adversely affect the Company's
ability to develop and deliver commercially feasible products on a timely and
competitive basis. See "Business Risks--Manufacturing and Supply
Uncertainties; Dependence on Third Parties."
PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability, and the ability of its
licensors, to obtain patent protection for its products and processes. The
Company and its licensors are seeking patent protection for technologies
related to (i) human stem and progenitor cell production processes; (ii)
bioreactors and systems for stem and progenitor cell production and production
of other cells; and (iii) gene transfer devices and processes. The Company has
exclusive license rights to seven issued U.S. patents and two patents with
respect to which the Company has received notice of allowance that 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. Patents
equivalent to two of these U.S. patents have also been issued in other
jurisdictions: one in Australia and another in Canada and under the European
Patent Convention. These ten issued patents, in addition to the two patents
with respect to which the Company has received notice of allowance, are due to
expire beginning in 2006, through 2014. In addition, the Company and its
exclusive licensors have filed applications for patents in the United States
and equivalent applications in certain other countries claiming other aspects
of the Company's products and processes, including five U.S. patent
applications and corresponding applications in other countries related to
various components of the Aastrom CPS.
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 the Company or its licensors
will be issued, that the scope of any patent protection will exclude
competitors or provide competitive advantages to the Company, that any of the
patents that have been or may be issued to the Company 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 the Company. Furthermore, there can be no assurance that others have not
developed or will not develop similar products, duplicate any of the Company's
products or design around any patents that have been or may be issued to the
Company or its licensors. Since patent applications in the United States are
maintained in secrecy until patents issue, the Company also cannot be certain
that others did not first file applications for inventions covered by the
Company's and its licensors' pending patent applications, nor can the Company
be certain that it will not infringe any patents that may issue to others on
such applications.
The Company relies on certain licenses granted by the University of Michigan
and Dr. Cremonese for the majority of its patent rights. If the Company
breaches such agreements or otherwise fails to comply with such agreements, or
if such agreements expire or are otherwise terminated, the Company may lose
its rights under the patents held by the University of Michigan and Dr.
Cremonese, which would have a material adverse effect on the Company's
business, financial condition and results of operations. See "--University of
Michigan Research Agreement and License Agreement" and "--License Agreement
with J.G. Cremonese."
15
The Company also relies on trade secrets and unpatentable know-how which it
seeks to protect, in part, by confidentiality agreements. It is the Company'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 the Company. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific limited
circumstances. The Company also requires signed confidentiality or material
transfer agreements from any company that is to receive its confidential data.
In the case of employees, consultants and contractors, the agreements
generally provide that all inventions conceived by the individual while
rendering services to the Company shall be assigned to the Company as the
exclusive property of the Company. There can be no assurance, however, that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets or unpatentable
know-how will not otherwise become known or be independently developed by
competitors.
The Company's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. The Company 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 the Company's ability to market its products
or maintain its competitive position with respect to its products. If the
Company'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, the
Company may be subject to infringement actions. In such event, the Company 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 the
Company would be able to obtain such 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 the Company'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 the Company's business, financial condition and results of operations. If
the Company is required to defend itself against charges of patent
infringement or to protect its own proprietary rights against third parties,
substantial costs will be incurred regardless of whether the Company is
successful. Such proceedings are typically protracted with no certainty of
success. An adverse outcome could subject the Company to significant
liabilities to third parties and force the Company to curtail or cease its
development and sale of its products and processes.
Certain of the Company'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 the
Company 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.
UNIVERSITY OF MICHIGAN RESEARCH AGREEMENT AND LICENSE AGREEMENT
In August 1989, the Company entered into a Research Agreement (the "Research
Agreement") with the University, pursuant to which the Company funded a
research project at the University under the direction of Stephen G. Emerson,
M.D., Ph.D., as the principal inventor, together with Michael F. Clarke, M.D.,
and
16
Bernhard O. Palsson, Ph.D., as co-inventors. Pursuant to the Research
Agreement, the Company was granted the right to acquire an exclusive,
worldwide license to utilize all inventions, know-how and technology derived
from the research project. By Extension Agreements, the Company and the
University extended the scope and term of the Research Agreement through
December 1994.
In March 1992, the Company and the University entered into the License
Agreement, as contemplated by the Research Agreement. There have been
clarifying amendments to the License Agreement, in March 1992, October 1993
and June 1995. Pursuant to this License Agreement, (i) the Company 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's research project or which resulted from certain further research
conducted through December 1994, and (ii) the Company is obligated to pay to
the University a royalty equal to 2% of the net sales of products which are
covered by the University's patents. Unless it is terminated earlier at the
Company's option or due to a material breach by the Company, the License
Agreement will continue in effect until the latest expiration date of the
patents to which the License Agreement applies.
LICENSE AGREEMENT WITH J. G. CREMONESE
In July 1992, the Company entered into a License Agreement with Joseph G.
Cremonese pursuant to which the Company obtained exclusive worldwide license
rights for all fields of use, to utilize U.S. Patent No. 4,839,292, entitled
"Cell Culture Flask Utilizing a Membrane Barrier," which patent was issued to
Dr. Cremonese on June 13, 1989, and to utilize any other related patents that
might be issued to Dr. Cremonese. Pursuant to the License Agreement, the
Company has reimbursed Dr. Cremonese for $25,000 of his patent costs. Under
the terms of the License Agreement, the Company is to pay to Dr. Cremonese a
royalty of 3% of net sales of the products which are covered by said patent,
subject to specified minimum royalty payments ranging from $20,000 to $50,000
per year, commencing in calendar year 1997. Unless earlier terminated, the
License Agreement will continue in effect until the latest expiration date of
the patents to which the License Agreement applies, which latest expiration
date is currently August 2009. The License Agreement may be terminated by
either party upon default by the other party of any of its obligations under
the agreement without cure after expiration of a 30-day notice period. The
Company also has the right to terminate the License Agreement at any time
without cause upon 30 days prior written notice to Dr. Cremonese.
GOVERNMENT REGULATION
The Company's research and development activities and the manufacturing and
marketing of the Company'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, the Company 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 the Company'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 the
Company's products is uncertain.
The Company'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, or both. Different regulatory
requirements may apply to the Company'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 Aastrom CPS product for stem cell therapy as a
Class III medical device through the Center for Biologics Evaluation and
Research. However, there can be no assurance that FDA will ultimately regulate
the Aastrom CPS as a medical device.
17
Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the Aastrom CPS. The FDA is still in the process of
developing its requirements with respect to somatic cell therapy and gene cell
therapy products and has recently issued a draft document concerning the
regulation of umbilical cord blood stem cell 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. The FDA also
recently proposed a new type of license, called a biologic license application
("BLA"), for autologous cells manipulated ex vivo and intended for structural
repair or reconstruction. This proposal may indicate that the FDA will extend
a similar approval requirement to other types of autologous cellular
therapies, such as autologous cells for stem cell therapy. Any such additional
regulatory or approval requirements could significantly delay the introduction
of the Company's product candidates to the market, and have a material adverse
impact on the Company.
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 the Company's product
candidates will ultimately receive regulatory approval.
Regardless of how the Company'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 the Company 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 clinical and preclinical 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 the Company may encounter significant difficulties
or costs in its efforts to obtain FDA approvals which could delay or preclude
the Company from marketing any products it may develop. The FDA may also
require postmarketing 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 the Company 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. If the IDE is granted, 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 recordkeeping regulations, GMPs, 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 postmarket
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.
18
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 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 the Company's products may be classified as Class II or Class III
medical devices. The Company has submitted several IDEs for the Aastrom CPS,
and is currently conducting pre-pivotal clinical studies under these IDEs. The
Company believes that the Aastrom CPS 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.
The Company 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 GMP regulations. These
regulations will require that the Company and any contract manufacturer
manufacture products and maintain documents in a prescribed manner with
respect to manufacturing, testing, distribution, storage, design control and
service activities, and that adequate design and service controls are
implemented. The Medical Device Reporting regulation requires that the Company
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 the Company'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
product license application ("PLA") and establishment license application
("ELA") and (v) review and approval of the PLA and ELA 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 the Company
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 the Company 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 PLA 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
19
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, an ELA must be filed with the FDA. The
ELA 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 and the ability to consistently manufacture the product in
the facility in accordance with the PLA. If the FDA finds the inspection
unsatisfactory, it may decline to approve the ELA, resulting in a delay in
production of products. Although reviewed separately, approval of both the PLA
and ELA must be received prior to commercial marketing of a cellular biologic.
As part of the approval process for human biological products, each
manufacturing facility must be registered and inspected by 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 Company believes that the Aastrom CPS will be regulated in Europe as a
Class IIb medical device, under the authority of the new Medical Device
Directives ("MDD") being implemented by European Union ("EU") member
countries. This classification applies 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 with the Aastrom CPS may be
considered Class III medical devices.
The MDD regulations vest the authority to permit affixing of the "CE Mark"
with various "Notified Bodies." These are private organizations which operate
under license from 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 charged with 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, although there is a general trend among EU member countries
not to impose additional requirements beyond those specified for CE Mark
certification.
COMPETITION
The biotechnology and medical device industries are characterized by rapidly
evolving technology and intense competition. The Company'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 the Company. 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 the Company. 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. The Company's product development efforts are primarily directed
toward obtaining regulatory approval to market the Aastrom CPS for stem cell
therapy. That market is currently dominated by the bone marrow harvest and
PBPC collection methods. The Company's clinical data, although early, is
inconclusive as to whether or not cells expanded in the Aastrom CPS will
enable hematopoietic recovery within the time frames currently achieved by the
bone marrow harvest and PBPC collection methods. In addition, the bone marrow
harvest and PBPC collection methods have been widely practiced for a number of
years and, recently, the patient costs associated with these procedures have
begun to decline. There can be no assurance that the Aastrom CPS method, if
20
approved for marketing, will prove to be competitive with these established
collection methods on the basis of hematopoietic recovery time, cost or
otherwise. The Company 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 the Company has targeted for
product development. In particular, the Company is aware that competitors such
as Amgen, Inc., CellPro, Incorporated, Systemix, Inc., Baxter Healthcare Corp.
and Rhone-Poulenc Rorer Inc. ("RPR") are in advanced stages of development of
technologies and products for use in stem cell therapy and other market
applications currently being pursued by the Company. In addition, Cobe, a
significant shareholder of the Company, is a market leader in the blood cell
processing products industry and, accordingly, a potential competitor of the
Company. There can be no assurance that developments by others will not render
the Company's product candidates or technologies obsolete or noncompetitive,
that the Company will be able to keep pace with new technological developments
or that the Company's product candidates will be able to supplant established
products and methodologies in the therapeutic areas that are targeted by the
Company. The foregoing factors could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's products under development are expected to address a broad
range of existing and new markets. The Company believes that its stem cell
therapy products will, in large part, face competition by existing procedures
rather than novel new products. The Company's competition will be determined
in part by the potential indications for which the Company'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 the Company 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. The Company'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. The Company
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, 1997, the Company employed approximately 72 individuals
full-time. A significant number of the Company's management and professional
employees have had prior experience with pharmaceutical, biotechnology or
medical product companies. None of the Company's employees are covered by
collective bargaining agreements, and management considers relations with its
employees to be good.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, and their respective ages as of
August 31, 1997, are as follows:
NAME AGE POSITION
---- --- --------
R. Douglas Armstrong, Ph.D..... 44 President and Chief Executive Officer
James Maluta................... 50 Vice President, Product Development
Todd E. Simpson................ 36 Vice President, Finance &
Administration, Chief Financial
Officer, Secretary and Treasurer
Walter C. Ogier................ 40 Vice President, Marketing
Thomas E. Muller, Ph.D......... 61 Vice President, Regulatory Affairs
Alan K. Smith, Ph.D............ 42 Vice President, Research
R. Douglas Armstrong, Ph.D. joined the Company 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
21
President and a Trustee of the La Jolla Cancer Research Foundation ("LJCRF"),
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 Nephros
Therapeutics, Inc.
James Maluta joined the Company in August 1992 as Vice President, Product
Development. Mr. Maluta has a broad background in the development and
manufacturing of medical devices, with 25 years of experience in the industry,
principally with OHMEDA and with Cobe BCT, Inc. While with Cobe BCT, Inc., Mr.
Maluta was Program Manager for the Cobe Spectra Apheresis System, a device for
blood cell processing and apheresis. Mr. Maluta held other engineering
management positions and also was director of Quality Assurance for Cobe BCT.
Mr. Maluta received his degree in electrical engineering from the University
of Wisconsin.
Todd E. Simpson joined the Company in January 1996 as Vice President,
Finance and Administration and Chief Financial Officer and is also the
Company's Secretary and Treasurer. Prior to that, Mr. Simpson was Treasurer of
Integra LifeSciences Corporation ("Integra"), a biotechnology company, which
acquired Telios Pharmaceuticals, Inc. ("Telios") in August 1995 in connection
with the reorganization of Telios under Chapter 11 of the U.S. Bankruptcy
Code. 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 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.
Walter C. Ogier joined the Company in March 1994 as Director of Marketing
and was promoted to Vice President, Marketing during 1995. Prior to that, Mr.
Ogier was at Baxter Healthcare Corporation's Immunotherapy Division, where he
served as Director, Business Development from 1992 to 1994 and as Manager,
Marketing and Business Development in charge of the company's cell therapy
product lines from 1990 to 1992. Mr. Ogier previously held positions with
Ibbottson Associates and with the Business Intelligence Center at SRI
International (formerly Stanford Research Institute). Mr. Ogier received his
B.A. degree in Chemistry from Williams College in 1979 and his Masters of
Management degree from the Yale School of Management in 1987.
Thomas E. Muller, Ph.D. joined the Company in May 1994 as Vice President,
Regulatory Affairs. Prior to that, Dr. Muller was Director, Biomedical Systems
with W.R. Grace & Company in Lexington, Massachusetts. Prior to this, Dr.
Muller was Vice President, Engineering and Director of Research and
Development with the Renal Division of Baxter Healthcare in Deerfield,
Illinois. Dr. Muller has also served as Adjunct Professor at Columbia
University and as Visiting Professor at the University of Gent, Belgium. Dr.
Muller graduated from the Technical University in Budapest, Hungary, in 1956
with a B.S. in Chemical Engineering. Dr. Muller received his M.S. degree in
1959 and was awarded a Ph.D. in 1964, both in Polymer Chemistry, from McGill
University.
Alan K. Smith, Ph.D. joined the Company in November 1995 as Vice President,
Research. Previously, Dr. Smith was Vice President of Research and Development
at Geneic Sciences, Inc., a developmental stage bone marrow transplantation
company. Prior to that, Dr. Smith held the position of Director, Cell
Separations Research and Development of the Immunotherapy Division of Baxter
Healthcare Corporation. In this capacity, he was responsible for the research
and development activities for a stem cell concentration system approved for
clinical use in Europe and currently in pivotal clinical trials in the United
States. Dr. Smith has also held positions as Research and Development Manager
at BioSpecific Technologies, as Director of Biochemistry at HyClone
Laboratories and as a member of the Board of Directors of Dallas Biomedical.
Dr. Smith received his B.S. degree in Chemistry from Southern Utah State
College in 1976 and a Ph.D. in Biochemistry from Utah State University in
1983.
22
ITEM 2. PROPERTIES
The Company leases approximately 20,000 square feet of office and research
and development space in Ann Arbor, Michigan under a lease agreement expiring
in May 1998. The lease is renewable at the option of the Company for up to an
additional five-year term. The Company believes that its facilities will be
adequate for its currently anticipated needs. Contract manufacturing or
additional facilities will be required in the future to support expansion of
research and development and to manufacture products.
ITEM 3. LEGAL PROCEEDINGS
The Company 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
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the Company's fiscal year ended June 30, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company effected an initial public offering of its Common Stock during
February 1997 at a price of $7.00 per share. Commencing on February 4, 1997,
the Company's Common Stock has been quoted on the Nasdaq National Market under
the symbol "ASTM." The following table sets forth, for the periods indicated,
the high and low sales prices per share of Common Stock as reported on the
Nasdaq National Market:
YEAR ENDED JUNE 30, 1997 HIGH LOW
------------------------ ----- -----
3rd Quarter (from February 4, 1997)............................ 7 5/8 5 3/4
4th Quarter.................................................... 8 1/2 3 1/2
As of August 31, 1997, there were approximately 140 shareholders of record
of the Common Stock. The Company has never declared or paid any cash dividends
on its Common Stock and does not anticipate paying such cash dividends in the
foreseeable future. The Company currently anticipates that it will retain all
future earnings, if any, for use in the development of its business.
23
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data presented below for the five years ended
June 30, 1997 and for the period from the Company's inception on March 24,
1989 ("Inception") to June 30, 1997 and the balance sheet data at June 30,
1993, 1994, 1995, 1996 and 1997, were derived from the audited financial
statements of the Company.
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto appearing elsewhere in this Report.
YEAR ENDED JUNE 30, INCEPTION TO
---------------------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1997
----------- ----------- ----------- ----------- ------------ ------------
STATEMENT OF OPERATIONS
DATA:
Revenues:
Research and development
agreements............ $ -- $ 49,000 $ 396,000 $ 1,342,000 $ 230,000 $ 2,017,000
Grants................. 784,000 823,000 121,000 267,000 148,000 2,143,000
----------- ----------- ----------- ----------- ------------ ------------
Total revenues....... 784,000 872,000 517,000 1,609,000 378,000 4,160,000
Costs and expenses:
Research and development 2,600,000 5,627,000 4,889,000 10,075,000 13,357,000 38,432,000
General and
administrative........ 1,153,000 1,565,000 1,558,000 2,067,000 1,953,000 9,042,000
----------- ----------- ----------- ----------- ------------ ------------
Total costs and
expenses............ 3,753,000 7,192,000 6,447,000 12,142,000 15,310,000 47,474,000
----------- ----------- ----------- ----------- ------------ ------------
Loss from operations.... (2,969,000) (6,320,000) (5,930,000) (10,533,000) (14,932,000) (43,314,000)
----------- ----------- ----------- ----------- ------------ ------------
Other income (expense):
Interest income........ 148,000 245,000 279,000 678,000 676,000 2,252,000
Interest expense....... (26,000) (65,000) (66,000) (62,000) (32,000) (251,000)
----------- ----------- ----------- ----------- ------------ ------------
Net loss................ $(2,847,000) $(6,140,000) $(5,717,000) $(9,917,000) $(14,288,000) $(41,313,000)
=========== =========== =========== =========== ============ ============
Net loss per share(1)... $ (.52) $ (.82) $ (.66) $ (.98) $ (1.26)
=========== =========== =========== =========== ============
Weighted average number
of shares
outstanding(1)......... 5,480,000 7,461,000 8,644,000 10,103,000 11,315,000
=========== =========== =========== =========== ============
JUNE 30,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $ 3,085,000 $ 6,730,000 $ 11,068,000 $ 10,967,000 $ 17,007,000
Working capital......... 2,744,000 6,187,000 10,319,000 9,851,000 15,600,000
Total assets............ 4,156,000 8,227,000 12,551,000 12,673,000 18,410,000
Long-term capital lease
obligations............ 311,000 425,000 412,000 189,000 65,000
Deficit accumulated
during the development
stage.................. (5,251,000) (11,391,000) (17,108,000) (27,025,000) (41,313,000)
Total shareholders'
equity................. 3,268,000 6,985,000 11,186,000 10,850,000 16,583,000
- --------
(1) See Note 1 of Notes to Financial Statements for information concerning the
computation of net loss per share and shares used in computing pro forma
net loss per share.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section of this Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The Company's actual results may differ materially from those 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."
OVERVIEW
Since its Inception, the Company has been in the development stage and
engaged in research and product development, conducted both on its own behalf
and in connection with various collaborative research and development
agreements with other entities. The Company expects that its revenue sources
for at least the next several years will continue to be limited to grant
revenues 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 the Company's research
activities, the timing of the achievement of certain milestones and the extent
to which associated costs are reimbursed under grant or other arrangements.
Substantially all of the Company's revenues from product sales, if any, will
be subject to the Company's obligation to make aggregate royalty payments of
up to 5% to certain licensors of its technology. Further, under the Company's
Distribution Agreement with Cobe, Cobe will perform marketing and distribution
activities and in exchange will receive approximately 38% to 42% of the
Company's product sales in the area of stem cell therapy, subject to
negotiated discounts and volume based adjustments. Research and development
expenses are expected to increase as product development programs and
applications of the Company's products progress through research and
development stages. Under the Company's License Agreement with Immunex, annual
renewal fees of $1,000,000 are payable in each of the next three fiscal years.
Under the Company's Distribution Agreement with Cobe, regulatory approval
activities for the Company's products for stem cell therapies outside of the
United States will be conducted, and paid for, by Cobe. As a result of these
and other factors, the Company's 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 other periods.
Over the past several years, the Company's net loss has primarily increased,
consistent with the growth in the Company's scope and size of operations. In
the near term, the Company plans additional moderate growth in employee
headcount necessary to address increasing requirements in the areas of product
development, research, clinical and regulatory affairs and administration.
Assuming capital is available to finance such growth, the Company's operating
expenses will continue to increase as a result. At least until such time as
the Company enters into arrangements providing research and development
funding, the net loss will continue to increase as well. The Company has never
been profitable and does not anticipate having net income for at least the
next several years. Through June 30, 1997, the Company had an accumulated
deficit of $41,313,000. There can be no assurance that the Company will be
able to achieve profitability on a sustained basis, if at all.
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Total revenues were $378,000 in 1997, $1,609,000 in 1996 and $517,000 in
1995. Grant revenues decreased to $148,000 in 1997 from $267,000 in 1996 and
were $121,000 in 1995, reflecting the timing of grant awards and related
research activities, to the extent that such associated costs are reimbursed
under the grants. Grant revenues accounted for 39%, 17% and 23% of total
revenues for the years ended June 30, 1997, 1996 and 1995, respectively, and
are recorded on a cost-reimbursement basis. Revenues from research and
development agreements totaled $230,000 in 1997, $1,342,000 in 1996 and
$396,000 in 1995, reflecting research funding received by the Company under
its collaboration with RPR which commenced in September 1995 and ended in
September 1996. Revenues from RPR accounted for 52%, 83% and 48% of such
revenue in 1997, 1996 and 1995, respectively.
25
Total costs and expenses were $15,310,000 in 1997, $12,142,000 in 1996 and
$6,447,000 in 1995. The increases in costs and expenses in 1996 and 1997 are
primarily the result of increases in research and development expense to
$13,357,000 in 1997 from $10,075,000 in 1996 and $4,889,000 in 1995. Research
and development expense includes charges of $1,000,000 and $1,500,000 for the
years ended June 30, 1997 and 1996, respectively, representing license fee
payments pursuant to the Company's supply agreement with Immunex. The increase
in research and development expense reflects an increase in research, clinical
development and product development activities. General and administrative
expenses were $1,953,000 in 1997, $2,067,000 in 1996 and $1,558,000 in 1995.
General and administrative expenses, which decreased slightly in 1997 compared
to 1996, are expected to increase as a result of increasing finance, legal and
other administrative and marketing expenses in support of the Company's
increasing product development and research activities.
Interest income was $676,000 in 1997, $678,000 in 1996 and $279,000 in 1995.
The fluctuations in interest income are due primarily to corresponding changes
in the levels of cash, cash equivalents and short-term investments for such
periods. Interest expense was $32,000 in 1997, $62,000 in 1996 and $66,000 in
1995, reflecting decreasing amounts outstanding under capital leases during
these periods.
The Company's net loss was $14,288,000 in 1997, $9,917,000 in 1996 and
$5,717,000 in 1995. The Company expects to report substantial net losses for
at least the next several years.
The Company has not generated any profits to date and therefore has not paid
any federal income taxes since its Inception. At June 30, 1997, the Company's
federal tax net operating loss and tax credit carryforwards were $40,420,000
and $971,000, respectively, which will expire from 2004 through 2012, if not
utilized. The Company underwent an ownership change in October 1993, which has
resulted in a limitation under which the Company can utilize a portion of its
net operating loss carryforward amounting to $1,153,000 per year. As of June
1997, the portion of the Company's net operating loss that remains subject to
this limitation is $2,490,000 and therefore is not expected to ultimately
effect the Company's ability to utilize this benefit. If certain changes in
ownership should occur again in the future, the Company's ability to utilize
its net operating loss and tax credit carryforwards may become subject to
further annual limitation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since Inception primarily through
public and private sales of its equity securities, which, from Inception
through June 30, 1997, have totaled approximately $57,906,000, 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 the Company to maintain adequate
levels of cash and other liquid investments. Under the Company's primary
equipment leasing agreement, the lessor is granted a security interest in all
of the Company's property and assets.
The Company's combined cash, cash equivalents and short-term investments
totaled $17,007,000 at June 30, 1997, an increase of $6,040,000 from June 30,
1996. The primary uses of cash, cash equivalents and short-term investments
during the year ended June 30, 1997 included $13,214,000 to finance the
Company's operations and working capital requirements, $424,000 in capital
equipment additions and $223,000 in scheduled debt payments. On February 7,
1997, the Company completed an underwritten initial public offering of
3,000,000 shares of its Common Stock at an offering price of $7.00 per share.
On March 5, 1997, the underwriters elected to purchase an additional 250,000
shares of Common Stock pursuant to the underwriters' over-allotment option
(the "Option") at a price of $7.00 per share. The Option, which has expired,
granted the underwriters the right to purchase up to 450,000 shares of Common
Stock at the initial public offering price. Proceeds from the offering, net of
underwriters' commissions and expenses, were $19,885,000. The Company plans to
continue its policy of investing excess funds in short-term, investment-grade,
interest-bearing instruments.
The Company's 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
26
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. The Company does not
expect to generate a positive cash flow from operations for several years due
to the expected increase in spending for research and development programs and
the expected cost of commercializing its product candidates. The Company
intends to seek additional funding through research and development agreements
with suitable corporate collaborators, grants and through public or private
financing transactions. The Company 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 collaboration arrangements, or any public or
private financing, will be available on acceptable terms, if at all, or can be
sustained on a long-term basis. Several factors will affect the Company's
ability to raise additional funding, including, but not limited to, market
volatility of the Company's 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, the Company 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 the Company's business.
See "Business Risks--Future Capital Needs; Uncertainty of Additional Funding"
and Notes to Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENT
During March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128),
which amends the standards for computing earnings per share previously set
forth in Accounting Principles Board Opinion No. 15, "Earnings per Share" (APB
15). SFAS 128, which will be adopted by the Company for the periods ending
December 31, 1997, will not have a material effect on the computation of the
Company's historical net loss per share amounts.
27
BUSINESS RISKS
The Company's business is subject to a number of risks and uncertainties,
including those discussed below.
UNCERTAINTIES RELATED TO PRODUCT DEVELOPMENT AND MARKETABILITY
The Company has not completed the development or clinical trials of any of
its cell culture technologies or product candidates and, accordingly, has not
begun to market or generate revenue from their commercialization. Furthermore,
the Company's technologies and product candidates are based on cell culture
processes and methodologies which are not widely employed. Commercialization
of the Company's lead product candidate, the Aastrom CPS, will require
substantial additional research and development by the Company as well as
substantial clinical trials. There can be no assurance that the Company will
successfully complete development of the Aastrom CPS or its other product
candidates, or successfully market its technologies or product candidates,
which lack of success would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company or its collaborators may encounter problems and delays relating
to research and development, regulatory approval and intellectual property
rights of the Company's technologies and product candidates. There can be no
assurance that the Company's research and development programs will be
successful, that its cell culture technologies and product candidates will
facilitate the ex vivo production of cells with the expected biological
activities in humans, that its technologies and product candidates, if
successfully developed, will prove to be safe and efficacious in clinical
trials, that the necessary regulatory approvals for any of the Company's
technologies or product candidates and the cells produced in such products
will be obtained or, if obtained, will be as broad as sought, that patents
will issue on the Company's patent applications or that the Company's
intellectual property protections will be adequate. The Company's product
development efforts are primarily directed toward obtaining regulatory
approval to market the Aastrom CPS as an alternative to the bone marrow
harvest and PBPC stem cell collection methods. These stem cell collection
methods have been widely practiced for a number of years, and there can be no
assurance that any of the Company's technologies or product candidates will be
accepted by the marketplace as readily as these or other competing processes
and methodologies, or at all. The failure by the Company to achieve any of the
foregoing would have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
The approval of the FDA will be required before any commercial sales of the
Company's product candidates may commence in the United States, and approvals
from foreign regulatory authorities will be required before international
sales may commence. Prior to obtaining necessary regulatory approvals, the
Company will be required to demonstrate the safety and efficacy of its
processes and product candidates and the cells produced by such processes and
in such products for application in the treatment of humans through extensive
preclinical studies and clinical trials. To date, the Company has only tested
the safety of cells produced in the cell culture chamber predecessor of the
Aastrom CPS, and only in a limited numbers of patients. The Company is
currently conducting a pre-pivotal clinical trial to demonstrate the safety
and biological activity of patient-derived cells produced in the Company's
cell culture chamber in a limited number of patients with breast cancer and,
if the results from this pre-pivotal trial are successful, the Company intends
to seek clearance from the FDA to commence its pivotal clinical trial. The
results of preclinical studies and clinical trials of the Company's product
candidates, however, may not necessarily be predictive of results that will be
obtained from subsequent or more extensive clinical trials. Further, there can
be no assurance that pre-pivotal or pivotal clinical trials of any of the
Company's product candidates will demonstrate the safety, reliability and
efficacy of such products, or of the cells produced in such products, to the
extent necessary to obtain required regulatory approvals or market acceptance.
The ability of the Company to complete its clinical trials in a timely
manner is dependent upon many factors, including the rate of patient
enrollment. Patient enrollment is a function of many factors, including the
28
size of the patient population, the proximity of suitable patients to clinical
sites and the eligibility criteria for the study. The Company has experienced
delays in patient accrual in its current pre-pivotal clinical trials. Further
delays in patient accrual, in the Company's current pre-pivotal clinical
trials or in future clinical trials, could result in increased costs
associated with clinical trials or delays in receiving regulatory approvals
and commercialization, if any. Furthermore, the progress of clinical
investigations with the Aastrom CPS and the Company's other product candidates
will be monitored by the FDA, which has the authority to cease clinical
investigations, at any time, due to patient safety or other considerations.
Any of the foregoing would have a material adverse effect on the Company's
business, financial condition and results of operations. See "--Uncertainty of
Regulatory Approval; Extensive Government Regulation."
The Company's current pre-pivotal trials are designed to demonstrate
specific biological safety and activity of cells produced in the Aastrom CPS,
but is not designed to demonstrate long-term sustained engraftment of such
cells. The patients enrolled in this pre-pivotal trial will have undergone
extensive chemotherapy treatment prior to the infusion of cells produced in
the Aastrom CPS. Such treatments will have substantially weakened these
patients and may have irreparably damaged their hematopoietic systems. Due to
these and other factors, it is possible that one or more of these patients may
die or suffer severe complications during the course of the pre-pivotal trial.
Further, there can be no assurance that patients receiving cells produced with
the Company's technologies and product candidates will demonstrate long-term
engraftment in a manner comparable to cells obtained from current stem cell
therapy procedures, or at all. The failure to adequately demonstrate the
safety or efficacy of the Company's technologies and product candidates,
including long-term sustained engraftment, or the death of, or occurrence of
severe complications in, one or more patients could substantially delay, or
prevent, regulatory approval of such product candidates and have a material
adverse effect on the Company's business, financial condition and results of
operations.
MANUFACTURING AND SUPPLY UNCERTAINTIES; DEPENDENCE ON THIRD PARTIES
The Company does not operate and has no current intention to operate
manufacturing facilities for the production of its product candidates. The
Company currently arranges for the manufacture of its product candidates and
their components, including certain cytokines, serum and media, with third
parties, and expects to continue to do so in the foreseeable future. The
Company has entered into collaborative product development and supply
agreements with SeaMED, Ethox and MSP for the collaborative development and
manufacture of certain components of the Aastrom CPS and is dependent upon
those suppliers to manufacture its products. The Company is also dependent
upon Immunex, Life Technologies, Inc. and Biowhittaker for the supply of
certain cytokines, serum and media to be used in conjunction with the Aastrom
CPS. With regard to cytokines that are not commercially available from other
sources, Immunex is currently the Company's sole supplier and few alternative
supply sources exist. Apart from SeaMED, Ethox, MSP and Immunex, the Company
currently does not have contractual commitments from any of these
manufacturers or suppliers. There can be no assurance that the Company's
supply of such key cytokines, components and other materials will not become
limited, be interrupted or become restricted to certain geographic regions.
Additionally, there can be no assurance that the Company will not require
additional cytokines, components and other materials to manufacture, use or
market its product candidates, or that necessary key components will be
available for use on a sustained basis, if at all, by the Company in the
markets in which it intends to sell its products. There can also be no
assurance that the Company will be able to obtain alternative components and
materials from other manufacturers of acceptable quality, or on terms or in
quantities acceptable to the Company or that the Company will not require
additional cytokines, components and other materials to manufacture or use its
product candidates. In the event that any of the Company's key manufacturers
or suppliers fail to perform their respective obligations or the Company's
supply of such cytokines, components or other materials become limited or
interrupted, the Company would not be able to market its product candidates on
a timely and cost-competitive basis, if at all, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Certain of the compounds used by the Company in its current stem cell
expansion process involve the use of animal-derived products. The availability
of these compounds for clinical and commercial use may become
29
limited by suppliers or restricted by regulatory authorities, which may impose
a potential competitive disadvantage for the Company's products compared to
competing products and procedures. To date, the availability of such materials
has not had a significant adverse effect on the Company, however, there can be
no assurance that such delays or disadvantages will not be experienced by the
Company in the future. Any restriction on the use of such materials could have
a material adverse effect on the Company's business, financial condition and
results of operations, and there can be no assurance that the Company will be
able to develop or obtain alternative compounds.
Like SeaMED, Ethox and MSP, other suppliers would need to meet FDA
manufacturing requirements and undergo rigorous facility and process
validation tests required by federal and state regulatory authorities. Any
significant delays in the completion and validation of such facilities could
have a material adverse effect on the ability of the Company to complete
clinical trials and to market its products on a timely and profitable basis,
which in turn would have a material adverse effect on the Company's business,
financial condition and results of operations.
There can also be no assurance that the Company will be able to continue its
present arrangements with its suppliers, supplement existing relationships or
establish new relationships or that the Company will be able to identify and
obtain the ancillary materials that are necessary to develop its product
candidates in the future. The Company's dependence upon third parties for the
supply and manufacture of such items could adversely affect the Company's
ability to develop and deliver commercially feasible products on a timely and
competitive basis.
HISTORY OF OPERATING LOSSES; ANTICIPATION OF FUTURE LOSSES
The Company is a development stage company and there can be no assurance
that its product applications for cell therapy will be successful. The Company
has not yet completed the development and clinical trials of any of its
product candidates and, accordingly, has not yet begun to generate revenues
from the commercialization of any of its product candidates. Aastrom was
incorporated in 1989 and has experienced substantial operating losses since
inception. As of June 30, 1997, the Company has incurred net operating losses
totaling approximately $41,313,000. Such losses have resulted principally from
costs incurred in the research and development of the Company's cell culture
technologies and the Aastrom CPS, general and administrative expenses, and the
prosecution of patent applications. The Company expects to incur significant
and increasing operating losses for at least the next several years, primarily
owing to the expansion of its research and development programs, including
preclinical studies and clinical trials. The amount of future losses and when,
if ever, the Company will achieve profitability, are uncertain. The Company's
ability to achieve profitability will depend, among other things, on
successfully completing the development of its product candidates, obtaining
regulatory approvals, establishing manufacturing, sales and marketing
arrangements with third parties, and raising sufficient funds to finance its
activities. No assurance can be given that the Company's product development
efforts will be successful, that required regulatory approvals will be
obtained, that any of the Company's product candidates will be manufactured at
a competitive cost and will be of acceptable quality, or that the Company will
be able to achieve profitability or that profitability, if achieved, can be
sustained.
LIMITED SALES AND MARKETING CAPABILITIES; DEPENDENCE ON COLLABORATIVE
RELATIONSHIPS
The Company has limited internal sales, marketing and distribution
capabilities. If any of the Company's product candidates are successfully
developed and the necessary regulatory approvals are obtained, the Company
intends to market such products through collaborative relationships with
companies that have established sales, marketing and distribution
capabilities. The Company has established a strategic alliance with Cobe for
the worldwide distribution of the Aastrom CPS for stem cell therapy and
related uses. Cobe has the right to terminate its Distribution Agreement with
the Company upon twelve months' notice upon a change of control of the
Company, other than to Cobe, or at any time after December 31, 1997, if Cobe
determines that commercialization of the Aastrom CPS for stem cell therapy on
or prior to December 31, 1998 is unlikely. See "--Consequences of Cobe
Relationship."
30
The amount and timing of resources that Cobe commits to its strategic
alliance activities with the Company are, to a significant extent, outside of
the control of the Company. There can be no assurance that Cobe will pursue
the marketing and distribution of the Company's products, continue to perform
its obligations under its agreements with the Company or that the Company's
strategic alliance with Cobe will result in the successful commercialization
and distribution of the Company's technologies and product candidates. There
can also be no assurance that Cobe will be successful in its efforts to market
and distribute the Company's products for stem cell therapy. The suspension or
termination of the Company's strategic alliance with Cobe or the failure of
the strategic alliance to be successful would have a material adverse effect
on the Company's business, financial condition and results of operations.
Subject to the contractual requirements of the Cobe relationship, the
Company will seek to enter into other agreements relating to the development
and marketing of product candidates and in connection with such agreements may
rely upon corporate partners to conduct clinical trials, seek regulatory
approvals for, manufacture and market its potential products. There can be no
assurance that the Company will be able to establish collaborative
relationships for the development or marketing of the Company's product
candidates on acceptable terms, if at all. The inability of the Company to
establish such collaborative relationships may require the Company to curtail
its development or marketing activities with regard to its potential products
which would have a material adverse effect on the Company's business,
financial condition and results of operations.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
To date, Aastrom has funded its operations primarily through the sale of
equity securities and corporate collaborations. In order to grow and expand
its business, and to introduce its product candidates into the marketplace,
the Company will need, among other things, to raise additional funds. The
development of the Company's products for the expansion of additional cell
types will require the Company to raise additional funds or to seek
collaborative partners, or both, to finance related research and development
activities.
The Company's future capital requirements will depend upon many factors,
including, but not limited to, 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, possible changes in existing collaborative
relationships, the ability of the Company to establish additional
collaborative relationships, and effective commercialization activities and
facilities expansions if and as required. Because of the Company's potential
long-term funding requirements, it may attempt to access the public or private
equity markets if and whenever conditions are favorable, even if it does not
have an immediate need for additional capital at that time. There can be no
assurance that any such additional funding will be available to the Company on
reasonable terms, or at all. If adequate funds are not available, the Company
may be required to delay or terminate research and development programs,
curtail capital expenditures, and reduce business development and other
operating activities. If the Company is not successful in finding, entering
into and maintaining arrangements with collaborative partners, its development
efforts could be delayed. Furthermore, there can be no assurance that the
Company will be able to implement collaborative development agreements under
acceptable terms, if at all. Any of the foregoing capital constraints would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
UNCERTAINTY OF REGULATORY APPROVAL; EXTENSIVE GOVERNMENT REGULATION
The Company's research and development activities, preclinical studies,
clinical trials, and the anticipated manufacturing and marketing of its
product candidates are subject to extensive regulation by the FDA and other
regulatory authorities in the United States. These activities are also
regulated in other countries where the Company intends to test and market its
product candidates. The approval of the FDA will be required before any
commercial sales of the Company's product candidates may commence in the
United States. Additionally, the Company will be required to obtain approvals
from foreign regulatory authorities before international sales may commence.
31
The Company's products are potentially subject to regulation as medical
devices under the Federal Food, Drug, and Cosmetic Act, or as biological
products under the Public Health Service Act, or both. Different regulatory
requirements may apply to the Company'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 Aastrom CPS for stem cell therapy as a Class III
medical device through the Center for Biologics Evaluation and Research.
However, there can be no assurance that the FDA will ultimately regulate the
Aastrom CPS for stem cell therapy as a medical device or that regulatory
approval for such product will be obtained in a timely fashion or at all.
Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the Aastrom CPS. The FDA is in the process of
developing its requirements with respect to somatic cell therapy and gene cell
therapy products, and recently proposed a new type of license for autologous
cells manipulated ex vivo and intended for structural repair or
reconstruction; autologous cells are cells obtained from, and administered to,
the same patient. This proposal may indicate that the FDA will impose a
similar approval requirement on other types of autologous cellular therapies,
such as autologous cells for stem cell therapy. Any such additional regulatory
or approval requirement could significantly delay the introduction of the
Company's product candidates to the market, and have a material adverse effect
on the Company's business, financial condition and results of operations.
Until the FDA issues definitive regulations covering the Company's product
candidates, the regulatory requirements for approval of such product
candidates will continue to be subject to significant uncertainty.
Before marketing, the Aastrom CPS or other product candidates developed by
the Company must undergo an extensive regulatory approval process. The
regulatory process, which includes preclinical studies and clinical trials to
establish safety and efficacy, takes many years and requires the expenditure
of substantial resources. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay, limit
or prevent FDA approval. In addition, delays or rejections may be encountered
based upon changes in FDA policy for medical product approvals during the
period of product development and FDA regulatory review of applications
submitted by the Company for product approval. Similar delays may also be
encountered in foreign countries. There can be no assurance that, even after
the expenditures of substantial time and financial resources, regulatory
approval will be obtained for any products developed by the Company. Moreover,
if regulatory approval of a product is obtained, such approval may be subject
to limitations on the indicated uses for which it may be marketed. Further,
even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections by the FDA, and later discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions
on such product or manufacturer, including a withdrawal of the product from
the market. Failure to comply with the applicable regulatory requirements can,
among other things, result in fines, suspensions of regulatory approvals,
product recalls, operating restrictions and criminal prosecution. Further,
additional government regulation may be established which could prevent or
delay regulatory approval of the Company's products. See "Business--Government
Regulation."
CONSEQUENCES OF COBE RELATIONSHIP
Cobe is the largest single shareholder of the Company, beneficially owning
approximately 24% of the outstanding Common Stock as of August 31, 1997. In
addition, Cobe has certain preemptive rights to maintain its relative
percentage ownership and voting interest in the Company, and has the option,
until February 2000, to purchase from the Company an amount of Common Stock
equal to 30% of the Company's fully diluted shares after the exercise of such
option, at a purchase price equal to 120% of the public market trading price
of the Company's Common Stock. If such option is exercised, Cobe would
significantly increase its ownership interest in the Company and, as a
consequence of such share ownership, obtain effective control of the Company.
Such effective control would include the ability to influence the outcome of
shareholder votes, including votes concerning the election of directors, the
amendment of provisions of the Company's Restated Articles of Incorporation or
Bylaws, and the approval of mergers and other significant transactions. Cobe
also has been granted a "right of first negotiation" in the event that the
Company determines to sell all, or any material portion,
32
of its assets to another company or to merge with another company.
Furthermore, the Company has agreed to use reasonable and good faith efforts
to cause a nominee designated by Cobe to be elected to the Board of Directors
for as long as Cobe owns at least 15% of the outstanding Common Stock. In
addition, Edward C. Wood, Jr., the President of Cobe BCT, is a director of the
Company. The agreements establishing the Company's relationship with Cobe
provide the Company with an option (the "Put Option") to require Cobe to
purchase the lesser of 20%, or $5,000,000, in an initial public offering
("IPO") or a private offering meeting certain minimum requirements. In the
event that the Company exercises the Put Option, Cobe then has the option to
purchase up to 40% of that offering. While the Put Option was not exercised by
the Company in connection with the IPO, Cobe voluntarily elected to purchase
an additional $5,000,000 in Common Stock in the IPO. The Company and Cobe are
evaluating whether or not the Put Option remains in effect as to a subsequent
private offering of the Company's equity securities. The existence of the
foregoing rights or the exercise of such control by Cobe could have the effect
of delaying, deterring or preventing certain takeovers or changes in control
of the management of the Company, including transactions in which shareholders
might otherwise receive a premium for their shares over then current market
prices.
UNCERTAINTY REGARDING 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,
preserve its trade secrets, defend and enforce its rights against infringement
and operate without infringing the proprietary rights of third parties, both
in the United States and in other countries. 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 the Company or its licensors will be issued, that the scope of
any patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the patents that have been or may be
issued to the Company 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 the Company. Furthermore,
there can be no assurance that others have not developed or will not develop
similar products, duplicate any of the Company's products or design around any
patents that have been or may be issued to the Company or its licensors. Since
patent applications in the United States are maintained in secrecy until
patents issue, the Company also cannot be certain that others did not first
file applications for inventions covered by the Company's and its licensors'
pending patent applications, nor can the Company be certain that it will not
infringe any patents that may issue to others on such applications. The
Company relies on certain licenses granted by the University of Michigan and
Dr. Cremonese for the majority of its patent rights. If the Company breaches
such agreements or otherwise fails to comply with such agreements, or if such
agreements expire or are otherwise terminated, the Company may lose its rights
under the patents held by the University of Michigan and Dr. Cremonese, which
would have a material adverse effect on the Company's business, financial
condition and results of operation. See "Business--Patents and Proprietary
Rights--University of Michigan Research Agreement and License Agreement" and
"--Patents and Proprietary Rights--License Agreement with J.G. Cremonese." The
Company also relies on trade secrets and unpatentable know-how which it seeks
to protect, in part, by confidentiality agreements with its employees,
consultants, suppliers and licensees. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets or unpatentable know-how
will not otherwise become known or be independently developed by competitors.
The Company's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. The Company 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 the Company's ability to market its products
or maintain its competitive position with respect to its products. If the
Company'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, the
Company may be subject to infringement actions. In such event, the Company may
challenge the validity of such patents or other proprietary rights or be
required to obtain licenses from such
33
companies in order to develop, manufacture or market its products. There can
be no assurance that the Company would be able to obtain such 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 the
Company'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 the Company's business, financial condition and
results of operations. If the Company is required to defend itself against
charges of patent infringement or to protect its own proprietary rights
against third parties, substantial costs will be incurred regardless of
whether the Company is successful. Such proceedings are typically protracted
with no certainty of success. An adverse outcome could subject the Company to
significant liabilities to third parties, and force the Company to curtail or
cease its development and sale of its products and processes. See "Business--
Patents and Proprietary Rights."
NO ASSURANCE OF THIRD PARTY REIMBURSEMENT
The Company's ability to successfully commercialize its product candidates
will depend in part on the extent to which payment for the Company's products
and related treatments will be available from government healthcare programs,
such as Medicare and Medicaid, as well as private health insurers, health
maintenance organizations and other third party payors. Government and other
third-party payors are increasingly attempting to contain health care costs,
in part by challenging the price of medical products and services.
Reimbursement by third-party payors depend 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. Since reimbursement approval is required
from each payor individually, seeking such approvals is a time-consuming and
costly process which will require the Company to provide scientific and
clinical support for the use of each of the Company's products to each payor
separately. Significant uncertainty exists as to the payment status of newly
approved medical products, and there can be no assurance that adequate third-
party payments will be available to enable the Company to establish or
maintain price levels sufficient to realize an appropriate return on its
investment in product development. If adequate payment levels are not provided
by government and third-party payors for use of the Company's products, the
market acceptance of those products will be adversely affected.
There can be no assurance that reimbursement in the United States or foreign
countries will be available for any of the Company's product candidates, that
any reimbursement granted will be maintained, or that limits on reimbursement
available from third-party payors will not reduce the demand for, or
negatively affect the price of, the Company's products. The unavailability or
inadequacy of third-party reimbursement for the Company's product candidates
would have a material adverse effect on the Company. Finally, the Company is
unable to forecast what additional legislation or regulation relating to the
healthcare industry or third-party coverage and reimbursement may be enacted
in the future, or what effect such legislation or regulation would have on the
Company's business.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company is engaged in the development of medical products and processes
which will face competition in a marketplace characterized by rapid
technological change. Many of the Company's competitors have significantly
greater resources than the Company, and have developed and may develop product
candidates and processes that directly compete with the Company's products.
Moreover, competitors that are able to achieve patent protection, obtain
regulatory approvals and commence commercial sales of their products before
the Company, and competitors that have already done so, may enjoy a
significant competitive advantage. The Company's product development efforts
are primarily directed toward obtaining regulatory approval to market the
Aastrom CPS for stem cell therapy. That market is currently dominated by the
bone marrow harvest and PBPC collection methods. The Company's clinical data,
although early, is inconclusive as to whether or not cells expanded in the
Aastrom CPS will enable hematopoietic recovery within the time frames
currently achieved by the bone marrow harvest and PBPC collection methods. In
addition, the bone marrow harvest and PBPC collection methods have been widely
practiced for a number of years and, recently, the patient costs associated
34
with these procedures have begun to decline. There can be no assurance that
the Aastrom CPS method, if approved for marketing, will prove to be
competitive with these established collection methods on the basis of
hematopoietic recovery time, cost or otherwise. The Company also 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 the Company has targeted for product development. In
particular, the Company is aware that competitors such as Amgen, Inc.,
CellPro, Incorporated, Systemix, Inc., Baxter Healthcare Corp. and RPR are in
advanced stages of development of technologies and products for use in stem
cell therapy and other market applications currently being pursued by the
Company. In addition, Cobe, a significant shareholder of the Company, is a
market leader in the blood cell processing products industry and, accordingly,
a potential competitor of the Company. There can be no assurance that
developments by others will not render the Company's product candidates or
technologies obsolete or noncompetitive, that the Company will be able to keep
pace with new technological developments or that the Company's product
candidates will be able to supplant established products and methodologies in
the therapeutic areas that are targeted by the Company. The foregoing factors
could have a material adverse effect on the Company's business, financial
condition and results of operations.
HAZARDOUS MATERIALS
The Company's research and development activities involve the controlled use
of hazardous materials, chemicals and various radioactive compounds. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. In the event of any contamination or injury from these
materials, the Company could be held liable for any damages that result and
any such liability could exceed the resources of the Company. Furthermore, the
failure to comply with current or future regulations could result in the
imposition of substantial fines against the Company, suspension of production,
alteration of its manufacturing processes or cessation of operations. There
can be no assurance that the Company will not be required to incur significant
costs to comply with any such laws and regulations in the future, or that such
laws or regulations will not have a material adverse effect on the Company's
business, financial condition and results of operations. Any failure by the
Company to control the use, disposal, removal or storage of, or to adequately
restrict the discharge of, or assist in the cleanup of, hazardous chemicals or
hazardous, infectious or toxic substances could subject the Company to
significant liabilities, including joint and several liability under certain
statutes. The imposition of such liabilities would have a material adverse
effect on the Company's business, financial condition and results of
operations.
POTENTIAL PRODUCT LIABILITY; AVAILABILITY OF INSURANCE
The Company is, and will continue to be, subject to the risk of product
liability claims alleging that the use of its products has adverse effects on
patients. This risk exists for product candidates tested in human clinical
trials as well as products that are sold commercially, if any. Further, given
the medical conditions for which the Aastrom CPS is expected to be utilized,
any product liability claim could entail substantial compensatory and punitive
damages. The assertion of product liability claims against the Company could
result in a substantial cost to, and diversion of efforts by, the Company.
There can be no assurance that the Company would prevail in any such
litigation or that product liability claims, if made, would not result in a
recall of the Company's products or a change in the indications for which they
may be used. The Company maintains product liability insurance coverage up to
an aggregate of $5,000,000 for claims arising from the use of its product
candidates in clinical trials. There can be no assurance that the Company will
be able to maintain such insurance or obtain product liability insurance in
the future to cover any of its product candidates which are commercialized or
that such existing or any future insurance and the resources of the Company
would be sufficient to satisfy any liability resulting from product liability
claims. Consequently, a product liability claim or other claim with respect to
uninsured or underinsured liabilities could have a material adverse effect on
the Company's business, financial condition and results of operations.
35
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends in large part upon the Company's ability
to attract and retain highly qualified scientific and management personnel.
The Company faces competition for such personnel from other companies,
research and academic institutions and other entities. There can be no
assurance that the Company will be successful in hiring or retaining key
personnel. See "Business--Employees" and "--Executive Officers of the
Company."
CONTROL BY EXISTING MANAGEMENT AND SHAREHOLDERS
As of August 31, 1997, the Company's directors, executive officers, and
certain principal shareholders, including Cobe, affiliated with members of the
Board of Directors and their affiliates beneficially owned approximately 36%
of the outstanding shares of Common Stock. Accordingly, such shareholders,
acting together, may have the ability to exert significant influence over the
election of the Company's Board of Directors and other matters submitted to
the Company's shareholders for approval. The voting power of these holders may
discourage or prevent certain takeovers or changes in control of the
management of the Company unless the terms are approved by such holders.
POSSIBLE STOCK PRICE VOLATILITY
Since the Company's initial public offering in February 1997, the price of
the Company's Common Stock has experienced large fluctuations. The trading
price of the Common Stock and the price at which the Company may sell
securities in the future could be subject to wide fluctuations in response to
announcements of clinical results, research activities, technological
innovations or new products by the Company or competitors, changes in
government regulation, developments concerning proprietary rights, variations
in the Company's operating results, announcements by the Company of regulatory
developments, litigation, disputes concerning patents or proprietary rights or
public concern regarding the safety, efficacy or other implications of the
products or methodologies to be developed by the Company or its collaborators
or enabled by the Company's technology, general market conditions, the
liquidity of the Company or its ability to raise additional funds, and other
factors or events. In addition, the stock market has experienced extreme
fluctuations in price and volume. This volatility has significantly affected
the market prices for securities of emerging biotechnology companies for
reasons frequently unrelated to or disproportionate to the operating
performance of the specific companies. These market fluctuations as well as
general fluctuations in the stock markets may adversely affect the market
price of the Common Stock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements as of June 30, 1996 and 1997, for each of
the three years in the period ended June 30, 1997 and for the period from
Inception to June 30, 1997 and the report of independent accountants are
included in this Report as listed in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
See Item 14(b) of this Report.
36
PART III
Certain information required by Part III is omitted from this Report, in
that the Company will file its Proxy Statement with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this Report, and certain information
included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the directors of the Company is incorporated by
reference to the Company's Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Company's Annual Meeting of
Shareholders to be held on November 12, 1997 (the "Proxy Statement") as set
forth under the caption "General Information--Board of Directors." Information
relating to the executive officers of the Company is set forth in Part I of
this Report under the caption "Executive Officers of the Company."
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 the Company 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."
37
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.
Balance Sheets--As of June 30, 1996 and 1997
Statements of Operations--For the years Ended June 30, 1995, 1996
and 1997, and from March 24, 1989 (Inception) to June 30, 1997
Statements of Shareholders' Equity--From March 24, 1989 (Inception)
to June 30, 1997
Statements of Cash Flows--For the years Ended June 30, 1995, 1996
and 1997, and from March 24, 1989 (Inception) to June 30, 1997
Notes to 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:
On July 16, 1997, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K, dated July 9, 1997, which contains
disclosure under Item 4 concerning a change in the Company's independent
auditors. A letter from Coopers & Lybrand L.L.P., dated July 15, 1997, was
filed as an exhibit to such report.
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Aastrom Biosciences, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of Aastrom Biosciences, Inc. (a
development stage company) at June 30, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997, and for the period from March 24, 1989 (Inception) to June 30,
1997, in conformity with generally accepted accounting principles. 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
generally accepted auditing standards 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.
Price Waterhouse LLP
Detroit, Michigan
August 15, 1997
39
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
JUNE 30,
--------------------------
1996 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 10,967,000 $ 1,943,000
Short-term investments........................... -- 15,064,000
Receivables...................................... 81,000 229,000
Prepaid expenses................................. 437,000 126,000
------------ ------------
Total current assets........................... 11,485,000 17,362,000
PROPERTY, NET...................................... 1,188,000 1,048,000
------------ ------------
Total assets................................... $ 12,673,000 $ 18,410,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............ $ 1,192,000 $ 1,508,000
Accrued employee expenses........................ 97,000 130,000
Current portion of capital lease obligations..... 223,000 124,000
Deferred revenue................................. 122,000 --
------------ ------------
Total current liabilities...................... 1,634,000 1,762,000
CAPITAL LEASE OBLIGATIONS.......................... 189,000 65,000
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value; shares authorized--
9,951,765 and 5,000,000, respectively; shares
issued and outstanding--9,451,766 and 0,
respectively...................................... 34,218,000 --
Common Stock, no par value; shares authorized--
18,500,000 and 40,000,000, respectively; shares
issued and outstanding--1,886,479 and 13,275,208,
respectively...................................... 324,000 58,073,000
Deficit accumulated during the development stage... (27,025,000) (41,313,000)
Shareholder notes receivable....................... (167,000) (167,000)
Stock purchase rights.............................. 3,500,000 --
Unrealized losses on investments................... -- (10,000)
------------ ------------
Total shareholders' equity....................... 10,850,000 16,583,000
------------ ------------
Total liabilities and shareholders' equity..... $ 12,673,000 $ 18,410,000
============ ============
The accompanying notes are an integral part of these financial statements.
40
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
MARCH 24, 1989
YEAR ENDED JUNE 30, (INCEPTION) TO
--------------------------------------- JUNE 30,
1995 1996 1997 1997
----------- ------------ ------------ --------------
REVENUES:
Research and
development
agreements........... $ 396,000 $ 1,342,000 $ 230,000 $ 2,017,000
Grants................ 121,000 267,000 148,000 2,143,000
----------- ------------ ------------ ------------
Total revenues...... 517,000 1,609,000 378,000 4,160,000
COSTS AND EXPENSES:
Research and
development.......... 4,889,000 10,075,000 13,357,000 38,432,000
General and
administrative....... 1,558,000 2,067,000 1,953,000 9,042,000
----------- ------------ ------------ ------------
Total costs and
expenses........... 6,447,000 12,142,000 15,310,000 47,474,000
----------- ------------ ------------ ------------
LOSS FROM OPERATIONS.... (5,930,000) (10,533,000) (14,932,000) (43,314,000)
----------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income....... 279,000 678,000 676,000 2,252,000
Interest expense...... (66,000) (62,000) (32,000) (251,000)
----------- ------------ ------------ ------------
Other income........ 213,000 616,000 644,000 2,001,000
----------- ------------ ------------ ------------
NET LOSS................ $(5,717,000) $ (9,917,000) $(14,288,000) $(41,313,000)
=========== ============ ============ ============
NET LOSS PER SHARE...... $ (.66) $ (.98) $ (1.26)
=========== ============ ============
Weighted average number
of common and common
equivalent shares
outstanding............ 8,644,000 10,103,000 11,315,000
=========== ============ ============
The accompanying notes are an integral part of these financial statements.
41
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
DEFECIT UNREALIZED
ACCUMULATED GAIN TOTAL
PREFERRED STOCK COMMON STOCK DURING THE SHAREHOLDER STOCK (LOSSES) SHARE-
------------------------- ------------------------- DEVELOPMENT NOTES PURCHASE ON HOLDERS'
SHARES AMOUNT SHARES AMOUNT STAGE RECEIVABLE RIGHTS INVESTMENTS EQUITY
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, MARCH
24, 1989
(Inception)... -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Non--cash
issuance of
Common Stock.. 454,545 -- --
Issuance of
Series A
Preferred Stock
at $1.00 per
share in
August 1989... 1,500,000 1,500,000 1,500,000
Issuance of
Series A
Preferred Stock
in March 1991
at $1.00 per
share, net of
issuance costs
of $5,000.... 1,000,000 995,000 995,000
Issuance of
Series B
Preferred Stock
in April 1992
at $2.00 per
share, net of
issuance costs
of $46,000..... 3,030,000 6,014,000 6,014,000
Issuance of
Common Stock
for services... 33,333 10,000 10,000
Issuance of
Series C
Preferred Stock
in October 1993
at $1,000 per
share, net of
issuance costs
of $175,000.... 10,000 9,825,000 9,825,000
Exercise of
stock options.. 1,229,482 230,000 (198,000) 32,000
Net loss........ (11,391,000) (11,391,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, JUNE
30, 1994....... 5,540,000 18,334,000 1,717,360 240,000 (11,391,000) (198,000) -- -- 6,985,000
Issuance of
Series D
Preferred Stock
in April and
May 1995 at
$4.00 per
share, net
of issuance
costs of
$81,000........ 2,500,001 9,919,000 9,919,000
Exercise of
stock
options........ 39,103 8,000 8,000
Retirement of
Common
Shares
outstanding.... (25,000) (7,000) (7,000)
Unrealized loss
on investments. (2,000) (2,000)
Net loss........ (5,717,000) (5,717,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, JUNE
30, 1995....... 8,040,001 28,253,000 1,731,463 241,000 (17,108,000) (198,000) -- (2,000) 11,186,000
Issuance of
Series E
Preferred Stock
in January 1996
at $4.25 per
share, net of
issuance costs
of $35,000..... 1,411,765 5,965,000 5,965,000
Exercise of
stock
options........ 130,016 53,000 53,000
Issuance of
Common Stock
at $1.20 per
share.......... 25,000 30,000 30,000
Issuance of
Stock
Purchase Rights
for cash in
September 1995
and March 1996. 3,500,000 3,500,000
Repurchase of
Series D
Preferred Stock
at $4.00
per share...... (62,500) (250,000) (250,000)
Sale of Series D
Preferred Stock
at $4.00 per
share.......... 62,500 250,000 250,000
Principal payment
received under
shareholder
note receivable. 31,000 31,000
Unrealized gain on
investments.... 2,000 2,000
Net loss........ (9,917,000) (9,917,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE,
JUNE 30, 1996... 9,451,766 34,218,000 1,886,479 324,000 (27,025,000) (167,000) 3,500,000 -- 10,850,000
Exercise of
stock options.. 40,307 26,000 26,000
Issuance of
Series E
Preferred Stock
at $17.00 per
share.......... 205,882 3,500,000 (3,500,000) --
Issuance of
Common Stock at
$7.00 per
share, net of
issuance costs
of $2,865,000.. 3,250,000 19,885,000 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........ 120,000 120,000
Unrealized
losses on
investments.... (10,000) (10,000)
Net loss........ (14,288,000) (14,288,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, JUNE
30, 1997....... -- $ -- 13,275,208 $ 58,073,000 $(41,313,000)$ (167,000)$ -- $ (10,000)$ 16,583,000
============ ============ ============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
42
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
MARCH 24, 1989
YEAR ENDED JUNE 30, (INCEPTION) TO
--------------------------------------- JUNE 30,
1995 1996 1997 1997
------------ ----------- ------------ --------------
OPERATING ACTIVITIES:
Net loss.............. $ (5,717,000) $(9,917,000) $(14,288,000) $(41,313,000)
Adjustments to
reconcile net loss to
net cash used for
operating activities:
Depreciation and
amortization....... 329,000 536,000 564,000 1,831,000
Loss on property
held for resale.... -- -- -- 110,000
Amortization of
discounts and
premiums on
investments........ (9,000) (110,000) (84,000) (203,000)
Stock compensation
expense............ -- -- 120,000 130,000
Changes in assets
and liabilities:
Receivables....... 132,000 18,000 (148,000) (229,000)
Prepaid expenses.. (59,000) (332,000) 311,000 (126,000)
Accounts payable
and accrued
expenses......... (40,000) 864,000 316,000 1,508,000
Accrued employee
expenses......... 28,000 (33,000) 33,000 130,000
Deferred revenue.. 79,000 (103,000) (122,000) --
------------ ----------- ------------ ------------
Net cash used for
operating
activities......... (5,257,000) (9,077,000) (13,298,000) (38,162,000)
------------ ----------- ------------ ------------
INVESTING ACTIVITIES:
Organizational costs.. -- -- -- (73,000)
Purchase of short-term
investments.......... (10,981,000) -- (19,190,000) (31,138,000)
Maturities of short-
term investments..... 3,567,000 8,500,000 4,200,000 16,267,000
Capital purchases..... (118,000) (445,000) (424,000) (2,142,000)
Proceeds from sale of
property held for
resale............... -- -- -- 400,000
------------ ----------- ------------ ------------
Net cash provided by
(used for)
investing
activities......... (7,532,000) 8,055,000 (15,414,000) (16,686,000)
------------ ----------- ------------ ------------
FINANCING ACTIVITIES:
Issuance of Preferred
Stock................ 9,919,000 5,965,000 -- 34,218,000
Issuance of Common
Stock................ 1,000 83,000 19,911,000 20,027,000
Payments received for
stock purchase
rights............... -- 3,500,000 -- 3,500,000
Payments received
under shareholder
notes................ -- 31,000 -- 31,000
Principal payments
under capital lease
obligations.......... (214,000) (270,000) (223,000) (985,000)
------------ ----------- ------------ ------------
Net cash provided by
financing
activities......... 9,706,000 9,309,000 19,688,000 56,791,000
------------ ----------- ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (3,083,000) 8,287,000 (9,024,000) 1,943,000
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD.... 5,763,000 2,680,000 10,967,000 --
------------ ----------- ------------ ------------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................. $ 2,680,000 $10,967,000 $ 1,943,000 $ 1,943,000
============ =========== ============ ============
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid......... $ 66,000 $ 62,000 $ 32,000 $ 251,000
Additions to capital
lease obligations.... 270,000 -- -- 1,174,000
The accompanying notes are an integral part of these financial statements.
43
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Aastrom Biosciences, Inc. (the Company) was incorporated in March 1989
(Inception) under the name Ann Arbor Stromal, Inc. The Company changed its
name in 1991 concurrent with the commencement of employee-based operations.
The Company is in the development stage with its principal business activities
being research and product development, conducted both on its own behalf and
in connection with various collaborative research and development agreements
with other companies, involving the development of processes and
instrumentation for the ex vivo production of human stem cells and their
progeny, and hematopoetic and other tissues.
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 maintain adequate levels of funding.
SIGNIFICANT REVENUE RELATIONSHIPS--Two companies accounted for 49% and 28%
of total revenues for the year ended June 30, 1995 and one company accounted
for 83% and 52% of total revenues for the year ended June 30, 1996 and 1997,
respectively. One company accounted for 43% of total revenues for the period
from Inception to June 30, 1997. Grant revenues consist of grants sponsored by
the U.S. government.
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
but 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.
PROPERTY--Property is recorded at cost and depreciated or amortized using
the straight-line method over the estimated useful life of the asset
(primarily five years), or the remaining lease term, if shorter, with respect
to leasehold improvements and certain capital lease assets.
REVENUE RECOGNITION--Revenue from grants and research agreements is
recognized on a cost reimbursement basis consistent with the performance
requirements of the related agreement. Funding received in advance of costs
incurred is presented as deferred revenue in the accompanying financial
statements.
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 $146,000, $1,294,000 and $154,000 for
the years ended June 30, 1995, 1996 and 1997, respectively, and $1,642,000 for
the period from Inception to June 30, 1997.
STOCK COMPENSATION--The Company adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123) as of July 1, 1996. 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 in accounting for its plans and does not recognize
compensation expense for its employee stock-based compensation plans as
prescribed in SFAS 123.
44
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 SHARE--Net loss per share is computed using the weighted
average number of common and common equivalent 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. However, common
and common equivalent shares issued during the twelve month period preceding
the filing of the registration statement for the Company's initial public
offering which was completed in February 1997, (the IPO) at a price below the
expected offering price are considered to be cheap stock and are included in
the calculation for periods prior to the IPO, as if they were outstanding for
all periods using the treasury stock method, as applicable, even though their
inclusion is anti-dilutive. Due to the automatic conversion of all outstanding
shares of Preferred Stock into Common Stock upon the completion of the IPO,
Preferred Stock is assumed to have been converted into Common Stock at the
time of issuance, except for those shares considered to be cheap stock which
are treated as outstanding for all periods presented.
During March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128) which
amends the standards for computing earnings per share previously set forth in
Accounting Principles Board Opinion No. 15 Earnings per Share (APB 15). SFAS
128, which will be adopted by the Company for the periods ending December 31,
1997, will not have a material effect on the computation of net loss per share
for the periods presented in the accompanying financial statements.
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 adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121) as of July 1, 1996 and 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. Adoption of this pronouncement has not significantly
impacted the accompanying financial statements as no impairment losses have
been identified by the Company.
2. 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
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
June 30, 1997:
U.S. Government Securities... $13,574,000 $ 1,000 $(11,000) $13,564,000
Commercial Paper............. 1,500,000 -- -- 1,500,000
----------- -------- -------- -----------
$15,074,000 $ 1,000 $(11,000) $15,064,000
=========== ======== ======== ===========
45
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY
Property consists of the following:
JUNE 30,
------------------------
1996 1997
----------- -----------
Machinery and equipment............................ $ 1,337,000 $ 1,425,000
Office equipment................................... 482,000 733,000
Leasehold improvements............................. 520,000 605,000
----------- -----------
2,339,000 2,763,000
Less accumulated depreciation and amortization..... (1,151,000) (1,715,000)
----------- -----------
$ 1,188,000 $ 1,048,000
=========== ===========
Equipment under capital leases totaled $1,131,000 at June 30, 1996 and 1997,
with related accumulated amortization of $622,000 and $844,000, respectively
(Note 7).
4. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING--In February 1997, the Company completed an
underwritten initial public offering of 3,000,000 shares of its Common Stock
at an offering price of $7.00 per share. In March 1997, the underwriters
elected to purchase an additional 250,000 shares of Common Stock pursuant to
the underwriters' over-allotment option (the Option) at a price of $7.00 per
share. The Option, which has expired, granted the underwriters the right to
purchase up to 450,000 shares of Common Stock at the initial public offering
price. Proceeds from the offering, net of underwriters' commissions and
expenses, were $19,885,000.
PREFERRED STOCK--The Company had the following classes of preferred stock
outstanding as of June 30, 1996. As a result of the IPO, all 9,657,648 shares
of previously outstanding preferred stock were automatically converted into
8,098,422 shares of Common Stock.
SHARES
SHARES ISSUED AND LIQUIDATION
AUTHORIZED OUTSTANDING PREFERENCE
---------- ----------- -----------
Series A.................................. 2,500,000 2,500,000 $ 2,500,000
Series B.................................. 3,030,000 3,030,000 6,060,000
Series C.................................. 10,000 10,000 10,000,000
Series D.................................. 3,000,000 2,500,001 10,000,000
Series E.................................. 1,411,765 1,411,765 6,000,000
--------- --------- -----------
Balance, June 30, 1996.................... 9,951,765 9,451,766 $34,560,000
========= ========= ===========
No dividends have ever been declared or paid.
COBE LABORATORIES, INC. STOCK PURCHASE RIGHTS--In connection with the
purchase of the Series C Convertible Preferred Stock by Cobe Laboratories,
Inc. (Cobe) in October 1993, Cobe received a preemptive right to purchase a
pro-rata portion of any newly issued shares of stock by the Company in order
to maintain its then current percentage ownership interest. Any such purchase
of newly issued shares shall be at the net price to the Company after
deducting underwriters' discounts and commissions, if any. The agreements
establishing the Company's relationship with Cobe provide the Company with an
option (the Put Option) to require Cobe to purchase the lesser of 20%, or
$5,000,000, in an initial public offering or a private offering meeting
certain minimum requirements. In the event that the Company exercises the Put
Option, Cobe then has the option to
46
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
purchase up to 40% of that offering. While the Put Option was not exercised by
the Company in connection with the IPO, Cobe elected to purchase an additional
$5,000,000 in Common Stock as part of the IPO. The Company and Cobe are
evaluating whether or not the Put Option remains in effect as it relates to
the Company's ability to exercise the option in a subsequent private offering
of its equity securities.
Cobe has an option to purchase additional shares from the Company equal to
30% of the total number of shares outstanding assuming exercise of the option.
Such option, which is exercisable until February 2000, must be exercised in
full with the purchase price of the shares equal to 120% of the public market
trading price as determined by the 30-day average market price preceding the
date of exercise of the option.
The Company has granted Cobe a right of first negotiation in the event the
Company receives any proposal concerning, or otherwise decides to pursue, a
merger, consolidation or other transaction in which all or a majority of the
Company's equity securities or substantially all of the Company's assets, or
any material portion of the assets of the Company used by the Company in
performing its obligation under the Distribution Agreement (Note 6), would be
acquired by a third party outside of the ordinary course of business.
STOCK OPTION PLANS--The Company has various stock option plans which provide
for the issuance of nonqualified and incentive stock options to acquire up to
2,986,594 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.
For certain options granted, the Company recognizes compensation expense for
the difference between the deemed value for accounting purposes and the option
exercise price on the date of grant. During the year ended June 30, 1997,
compensation expense totaling approximately $120,000 has been charged with
respect to these options. Additional future compensation expense with respect
to the issuance of such options totals approximately $135,000 and will be
recognized through December 2001.
As permitted by SFAS 123, the Company continues to apply APB 25 and related
interpretations in accounting for its stock option plans and does not
recognize compensation expense for its employee stock-based compensation plans
as prescribed in SFAS 123. If the Company had elected to recognize
compensation expense based upon the fair value at the grant dates for stock
option awards granted in 1996 and 1997, in accordance with SFAS No. 123, the
pro forma net loss and net loss per share would be as follows.
JUNE 30,
-----------------------
1996 1997
---------- -----------
Net Loss:
As reported...................................... $9,917,000 $14,288,000
Pro forma........................................ 9,942,000 14,793,000
Net Loss per common share:
As reported...................................... $ (.98) $ (1.26)
Pro forma........................................ (.98) (1.31)
47
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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% volatility, risk free interest rates ranging from 5.2% to 6.8% and
expected option lives of three to five years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the use of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock based
compensation plans.
The following table summarizes option activity under the Company's stock
option plans:
WEIGHTED
AVERAGE
EXERCISE OPTIONS
OPTIONS PRICE EXERCISABLE
OPTIONS AVAILABLE PER AT PERIOD
OUTSTANDING FOR GRANT SHARE END
----------- ---------- -------- -----------
March 24, 1989 (Inception)
Options authorized......... -- 1,703,261
Options granted............ 1,727,111 (1,727,111) $ .31
Options exercised.......... (1,229,482) -- $ .19
Options canceled........... (103,964) 103,964 $ .66
---------- ----------
Balance, June 30, 1994....... 393,665 80,114 $ .61 77,682
Options authorized......... -- 333,333
Options granted............ 55,333 (55,333) $1.20
Options exercised.......... (39,103) -- $ .21
Options canceled........... (60,230) 60,230 $ .34
---------- ----------
Balance, June 30, 1995....... 349,665 418,344 $ .78 108,492
Options authorized......... -- 800,000
Options granted............ 155,337 (155,337) $1.44
Options exercised.......... (130,016) -- $ .41
Options canceled........... (44,690) 44,690 $ .85
---------- ----------
Balance, June 30, 1996....... 330,296 1,107,697 $1.20 101,021
Options authorized......... -- 150,000
Options granted............ 785,200 (785,200) $6.78
Options exercised.......... (40,307) -- $ .65
Options canceled........... (16,818) 16,818 $1.83
---------- ----------
Balance, June 30, 1997....... 1,058,371 489,315 $5.36 483,376
========== ==========
OUTSIDE DIRECTORS' STOCK OPTION PLAN--The Company has an outside directors'
stock option plan which provides for the issuance of options to purchase up to
150,000 shares of Common Stock to outside directors. Under this plan, non-
qualified options to purchase 5,000 shares of Common Stock are granted to each
outside director on the day of the Annual Shareholders' meeting. These options
generally vest over a one-year period and expire ten years after the date of
grant. As of June 30, 1997, options to purchase 30,000 shares of Common Stock
at $7.00 per share are outstanding under this plan, of which options to
purchase 10,002 shares of Common Stock are exercisable.
48
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock-based compensation
plans outstanding as of June 30, 1997:
NUMBER OF REMAINING WEIGHTED AVERAGE
RANGE OF OPTIONS CONTRACTUAL WEIGHTED AVERAGE NUMBER EXERCISE PRICE OF
EXERCISE PRICES OUTSTANDING LIFE-YEARS EXERCISE PRICE EXERCISABLE EXERCISABLE OPTIONS
--------------- ----------- ----------- ---------------- ----------- -------------------
$ .30-$1.20............. 260,170 7.7 $1.15 135,542 $1.11
$3.20-$3.88............. 58,418 9.2 $3.24 4,501 $3.20
$7.00-$7.13............. 739,783 9.6 $7.00 343,333 $7.00
--------- -------
1,058,371 483,376
========= =======
The weighted average fair value of options granted during the year ended
June 30, 1997 was $6.78 per share.
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 ending 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. The initial purchase date under this
plan is August 31, 1997, accordingly, no shares have been sold under this plan
as of June 30, 1997.
STOCK PURCHASE WARRANTS--The Company has issued warrants to purchase 69,444
shares of Common Stock which expire on October 15, 2000. These warrants may be
exercised, in whole or in part, at a price equal to the lesser of (a) $9.00
per share, which price increases by $3.00 per share on February 3, 1998, 1999
and 2000; or (b) 85% of the fair market value of the Company's Common Stock at
the time of exercise.
COMMON SHARES RESERVED--As of June 30, 1997, the Company has reserved shares
of Common Stock for future issuance as follows:
Issuance under stock option plans:
1992 Incentive and Non-Qualified Stock Option Plan.... 1,397,686
1995 Outside Director Stock Option Plan............... 150,000
---------
1,547,686
Issuance under 1996 Employee Stock Purchase Plan........ 250,000
Exercise of Stock Purchase Warrants..................... 69,444
---------
1,867,130
=========
49
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
Deferred tax assets consist of the following:
JUNE 30,
-------------------------
1996 1997
----------- ------------
Net operating loss carryforwards................ $ 9,210,000 $ 14,150,000
Tax credits and other........................... 440,000 1,162,000
----------- ------------
Gross deferred tax assets....................... 9,650,000 15,312,000
Deferred tax assets valuation allowance......... (9,650,000) (15,312,000)
----------- ------------
$ -- $ --
=========== ============
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.
At June 30, 1997, the Company's Federal tax net operating loss and tax
credit carryforwards were $40,420,000 and $971,000, respectively, which will
expire from 2004 through 2012, if not utilized. The Company underwent an
ownership change in October 1993 which has resulted in a limitation under
which the Company can utilize a portion of its net operating loss carryforward
amounting to $1,153,000 per year. As of June 1997, the portion of the
Company's net operating loss that remains subject to this limitation is
$2,490,000 and therefore is not expected to ultimately effect the Company's
ability to utilize the benefit. If certain changes in ownership should occur
again in the future, the Company's ability to utilize its net operating loss
and tax credit carryforwards may become subject to further annual limitation.
6. 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). Under the terms of
this research agreement, as amended, the Company agreed to reimburse the
University for certain research costs through the date of its expiration in
December 1994. Payments made to the University under the aforementioned
agreements totaled $121,000 and $2,521,000 for the years ended June 30, 1995
and for the period from Inception to June 30, 1997, respectively, which
amounts are included in research and development expense in the accompanying
Statements of Operations. As part of this relationship, the Company issued to
the University 454,545 shares of Common Stock in August 1989. No value has
been assigned to these shares in the accompanying financial statements. In
March 1992, and as provided for under the research agreement, the Company
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.
COBE BCT, INC.--In connection with the issuance of the Series C Preferred
Stock to Cobe in October 1993, the Company and Cobe BCT, Inc. (Cobe BCT), an
affiliate of Cobe, entered into an agreement which grants to Cobe BCT
exclusive worldwide distribution and marketing rights to the Company's Cell
Production System (CPS) for stem cell therapy applications (Distribution
Agreement). The term of the Distribution Agreement is ten years, with an
option, exercisable by Cobe BCT, to extend the term for an additional ten
years. Cobe has the right to terminate its Distribution Agreement with the
Company with twelve months' notice upon a change of control of the Company,
other than to Cobe, or at any time after December 31, 1997, if Cobe determines
that commercialization of the Aastrom CPS for stem cell therapy on or prior to
December 31, 1998 is unlikely. Pursuant to the Distribution Agreement, Cobe
BCT will perform worldwide marketing and distribution activities
50
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of the CPS for use in stem cell therapy and will receive a share of the
resulting net sales, as defined, ranging from 38% to 42%, subject to certain
negotiated discounts and volume-based adjustments.
The agreements establishing this collaboration provided for payments
totaling $5,000,000 to be made by Cobe BCT upon the Company meeting certain
development milestones. In May 1995, the Company accepted, as part of the sale
of the Series D Preferred Stock, an equity investment of $5,000,000 from Cobe
in lieu of those future milestone payments.
LICENSE AND ROYALTY AGREEMENTS--In July 1992, the Company licensed certain
cell culture technology under which it obtained an exclusive worldwide license
to the technology in exchange for a royalty payable of up to 3% of net sales
on products containing the licensed technology.
In March 1996, the Company executed a license agreement which provides for
the use of licensed products in the CPS. Pursuant to this license agreement,
the Company recorded a charge to research and development expense of
$1,500,000 representing the license fee payable upon execution of the
agreement. The license agreement provides for annual renewal fees of
$1,000,000 over the five year license term, if renewed by the Company, and can
be extended at the Company's option for an additional five years.
RHONE-POULENC RORER, INC.--In September 1995, the Company entered into a
research and development collaboration with Rhone-Poulenc Rorer, Inc. (RPR),
granting RPR a right to license the Company's CPS for Lymphoid cell
applications. Pursuant to the agreements establishing this collaboration, RPR
was obligated to fund certain research costs associated with the development
of the CPS for Lymphoid cell applications and was entitled to make equity
purchases of up to $12,500,000 subject to the Company's satisfaction of
certain milestones and RPR's decision to exercise certain options. In
September 1996, RPR notified the Company of its intent to not exercise its
additional options under the collaboration. This notification was made after
RPR had determined that for strategic reasons it would not pursue Lymphoid
cell therapy applications, including those being pursued under the
collaboration the Company. The Company received $3,500,000 in equity payments
and recognized $1,538,000 in research revenue under this collaboraton. As a
result of this termination, no further equity payments or research funding is
due from RPR and RPR's license rights to the Company's CPS for Lymphoid cell
applications have been terminated.
7. COMMITMENTS
The Company leases certain machinery and equipment and office equipment
under capital leases. Obligations under these leasing arrangements bear
interest at rates ranging from 9.7% to 12.1% and mature through May 1999.
Additionally, the Company leases its facility under an operating lease which
expires in May 1998, at which time the Company has the option to renew the
lease for an additional period of up to five years.
Future minimum payments under capital leases and non-cancelable operating
leases are as follows:
CAPITAL OPERATING
YEAR ENDING JUNE 30, LEASES LEASES
-------------------- -------- ---------
1998................................................... $138,000 $435,000
1999................................................... 69,000 --
-------- --------
Total minimum lease payments........................... 207,000 $435,000
========
Less amount representing interest...................... (18,000)
--------
Obligations under capital lease........................ $189,000
========
51
AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Certain of the Company's capital lease agreements contain restrictive
provisions which require that the Company's total assets exceed its total
liabilities by at least $1,000,000. Should the Company fall out of compliance
with this provision, and a waiver cannot be obtained from the lessor,
remaining amounts due under the lease agreements become immediately due and
payable.
Rent expense for the years ended June 30, 1995, 1996 and 1997, was $241,000,
$338,000 and $456,000, respectively, and for the period from Inception to June
30, 1997 was $1,278,000.
8. EMPLOYEE SAVINGS PLAN
The Company has a 401(k) plan that became effective in January 1994. The
plan 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, 1997, the
Company has made no contributions to the plan.
52
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 25, 1997 Aastrom Biosciences, Inc.
/s/ R. Douglas Armstrong, Ph.D.
By: _________________________________
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 25, 1997 by the following persons in
the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ R. Douglas Armstrong, Ph.D. President, Chief Executive Officer and
___________________________________________ Director
R. Douglas Armstrong, Ph.D. (Principal Executive Officer)
/s/ Todd E. Simpson Vice President, Finance & Administration,
___________________________________________ Chief Financial Officer, Secretary and Treasurer
Todd E. Simpson (Principal Financial and Accounting
Officer)
/s/ Robert J. Kunze Chairman of the Board and Director
___________________________________________
Robert J. Kunze
/s/ Albert B. Deisseroth, M.D., Ph.D. Director
___________________________________________
Albert B. Deisseroth, M.D., Ph.D.
/s/ Stephen G. Emerson, M.D., Ph.D. Director
___________________________________________
Stephen G. Emerson, M.D., Ph.D.
/s/ G. Bradford Jones Director
___________________________________________
G. Bradford Jones
/s/ Horst R. Witzel, Dr.-Ing. Director
___________________________________________
Horst R. Witzel, Dr.-Ing.
/s/ Edward C. Wood, Jr. Director
___________________________________________
Edward C. Wood, Jr.
53
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1* Restated Articles of Incorporation of the Company.
3.2** Bylaws, as amended.
4.1** Specimen Common Stock Certificate.
4.2** Amended and Restated Investors' Rights Agreement, dated April 7,
1992.
10.1**# Form of Indemnification Agreement.
10.2**# Amended and Restated 1992 Incentive and Non-Qualified Stock Option
Plan and forms of agreements thereunder.
10.3**# 1996 Outside Directors Stock Option Plan and forms of agreements
thereunder.
10.4**# 1996 Employee Stock Purchase Plan and form of agreement thereunder.
10.5** Stock Purchase Agreement, dated October 22, 1993, between Cobe
Laboratories, Inc. and the Company and amendment thereto dated
October 29, 1996.
10.6**+ Distribution Agreement, dated October 22, 1993, between Cobe BCT,
Inc. and the Company and amendments thereto dated March 29, 1995,
September 11, 1995 and October 29, 1996.
10.7** Lease Agreement, dated May 18, 1992, between Domino's Farms Holdings,
L.P. and the Company and amendments thereto dated February 26, 1993,
October 3, 1994, November 16, 1994 and July 29, 1996.
10.8**# Promissory Note, dated November 18, 1993, for $120,000 loan by the
Company to R. Douglas Armstrong, Ph.D. and amendment thereto dated
October 30, 1996.
10.9**# Promissory Note, dated October 20, 1993, for $47,303 loan by the
Company to Stephen G. Emerson, M.D., Ph.D. and amendment thereto
dated October 30, 1996.
10.10** Clinical Trial Agreement dated August 28, 1996 between the Company
and Loyola University Medical Center Cancer Center.
10.11** Stock Purchase Commitment Agreement, dated October 15, 1996, between
the State Treasurer of the State of Michigan and the Company.
10.12** Convertible Loan Commitment Agreement, dated October 15, 1996,
between the State Treasurer of the State of Michigan and the
Company.
10.13** Letter Agreement, dated November 11, 1996, between the Company and
Cobe Laboratories, Inc.
10.14** Termination Agreement, dated November 14, 1996, between the Company
and Rhone-Poulenc Rorer Inc.
10.15** Stock Purchase Agreement, dated November 14, 1996, between the
Company and Rhone-Poulenc Rorer Inc.
10.16** Collaborative Supply Agreement, dated December 16, 1996, between the
Company and Anchor Advanced Products, Inc. Mid-State Plastics
Division.
10.17**# 1989 Stock Option Plan and form of agreement thereunder.
10.18**# Ancillary Stock Option Plan and form of agreement thereunder.
10.19**# 401(k) Plan.
10.20**# Form of Employment Agreement.
10.21** License Agreement, dated July 17, 1992, between J.G. Cremonese and
the Company and related addenda thereto dated July 14, 1992 and July
7, 1993.
10.22**+ Collaborative Product Development Agreement, dated May 10, 1994,
between SeaMED Corporation and the Company.
10.23**+ Collaborative Product Development Agreement, dated November 8, 1994,
between Ethox Corporation and the Company.
54
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.24**+ License and Supply Agreement, dated April 1, 1996, between Immunex
Corporation and the Company.
10.25** Clinical Trial Agreement, dated April 19, 1996, between the Company
and the University of Texas M.D. Anderson Cancer Center.
10.26** License Agreement, dated March 13, 1992, between the Company and the
University of Michigan and amendments thereto dated March 13, 1992,
October 8, 1993 and June 21, 1995.
10.27**# Employee Proprietary Information and Invention Agreement, effective
June 1, 1991, between the Company and R. Douglas Armstrong, Ph.D.
10.28**# Employment Agreement, dated June 19, 1992, between the Company and
James Maluta.
10.29**# Employment Agreement, dated December 8, 1995, between the Company and
Todd E. Simpson.
10.30**# Employment Agreement, dated February 10, 1994, between the Company
and Walter C. Ogier.
10.31**# Employment Agreement, dated April 19, 1994, between the Company and
Thomas E. Muller, Ph.D.
10.32**# Employment Agreement, dated October 26, 1995, between the Company and
Alan K. Smith, Ph.D.
10.33**# Consulting Agreement, dated June 1, 1995, between the Company and
Stephen G. Emerson, M.D., Ph.D.
10.34** Form of Subscription Agreement for the purchase of Series D Preferred
Stock (Enterprise Development Fund L.P., Enterprise Development Fund
II, L.P. and Northwest Ohio Venture Fund Limited Partnership).
10.35** Stock Purchase Agreement, dated January 8, 1996, among the Company,
SBIC Partners, L.P. and the State Treasurer of the State of
Michigan.
10.36** Form of Subscription Agreement for the purchase of Series D Preferred
Stock (Brentwood Associates V, L.P., Candice E. Appleton Family
Trust, Candis J. Stern, Helmut F. Stern, H&Q Life Science Technology
Fund, H&Q London Ventures, State Treasurer of the State of Michigan
and Windpoint Partners II, Limited Partnership).
10.37** Subscription Agreement, dated December 11, 1995, between the Company
and Northwest Ohio Venture Fund Limited Partnership.
10.38# Second Amendment to Promissory Note payable to the Company by Stephen
G. Emerson, M.D., Ph.D., dated June 30, 1997.
10.39# Second Amendment to Promissory Note payable to the Company by R.
Douglas Armstrong, Ph.D., dated June 30, 1997.
10.40 Amendment to License and Supply Agreement, dated August 25, 1997,
between Immunex Corporation and the Company.
11.1 Statement regarding computation of net loss per share.
16.1*** Letter from Coopers & Lybrand L.L.P., dated July 15, 1997.
23.1 Consent of Price Waterhouse LLP.
27.1 Financial Data Schedule.
- --------
* Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996, as filed on March 7, 1997.
** Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-15415), declared effective on February 3, 1997.
*** Incorporated by reference to the Company's Current Report on Form 8-K, as
filed on July 16, 1997.
+ Confidential treatment has been granted as to a portion of this exhibit.
# Management contract or compensatory plan or arrangement covering executive
officers or directors of the Company.
55