Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22987
------------------------
VALENTIS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3156660
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
863A MITTEN RD., BURLINGAME, CA 94010
(Address of principal offices) (Zip Code)
(650) 697-1900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON
STOCK, PAR VALUE $.001
Indicate by check mark whether the registrant (1) has filed all reports
required 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 aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock reported on the
National Association of Securities Dealers Automated Quotation System on
September 10, 1999 was $160,970,518.
The number of registrant's Common Stock outstanding, as of September 10,
1999 was 26,347,144.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement which will be filed with the
Commission pursuant to Section 14A in connection with the 1999 meeting of
stockholders are incorporated herein by reference in Part III of this Report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in this section under the captions "Risk Factors" as well as
those under in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OVERVIEW
Valentis, Inc. develops proprietary technologies and applies its preclinical
and early clinical development expertise to create novel therapeutics. The
Company's core technologies include multiple gene delivery and gene expression
systems and PEGylation technologies designed to improved the safety, efficacy
and dosing characteristics of genes, proteins, peptides, peptidomimetics
(peptide-like small molecules), antibodies and replicating and non-replicating
viruses. These technologies are covered by a broad patent portfolio that
includes issued U.S. and European claims. Valentis' commercial strategy is to
enter into corporate collaborations for full-scale clinical development and
marketing and sales of products. Valentis itself, or through its PolyMASC
subsidiary, currently has corporate collaborations with:
- Roche Holdings Ltd. ("Roche") for cancer immunotherapeutics,
- Eli Lilly & Co. ("Lilly") to develop treatments for breast and ovarian
cancer using the BRCA1 gene,
- Glaxo Wellcome plc ("Glaxo Wellcome") to develop a treatment for cystic
fibrosis using the CFTR gene,
- Transkaryotic Therapies Inc. for PEGylation of certain proteins,
- Onyx Pharmaceuticals Inc. for a PEGylated virus-based cancer therapeutic,
- Bayer Corporation for a PEGylated Factor VIII, and
- DSM Biologics and Qiagen N.V. for plasmid manufacturing
On March 18, 1999, the Company (formerly Megabios Corp.) completed its
merger with GeneMedicine, Inc. ("GeneMedicine") and the Company was subsequently
renamed Valentis, Inc. Under the terms of the merger agreement, each outstanding
share of GeneMedicine common stock was converted into 0.571 of a share of the
Company's common stock. This resulted in the issuance of approximately 9.1
million additional shares of the Company's common stock, valued at $38.7
million. The goal of this merger is to create a leading company in plasmid-based
therapeutics, or gene medicines.
With the acquisition of London-based PolyMASC Pharmaceuticals plc
("PolyMASC"), in August 1999, Valentis expanded its delivery technologies and
has a more diversified portfolio of products in clinical and preclinical
development. The acquisition broadened Valentis' intellectual property portfolio
in biologics delivery, creating what is believed to be the first company
offering a broad array of technologies and intellectual property in biologics
delivery. This resulted in the issuance of approximately 4.2 million additional
shares of the Company's common stock, valued at $19.8 million.
Valentis now has a full range of delivery systems for biologic products,
including genes, proteins, peptides, peptidomimetics, antibodies and replicating
and non-replicating viruses. This expanded portfolio of delivery technologies
allows Valentis to maintain its focus on creating improved versions of currently
marketed products as well as solving safety, efficacy and compliance issues with
proteins and antibodies in development. The merger also expanded the Company's
gene delivery technologies to include clearly differentiated delivery systems
for replicating and non-replicating viruses.
1
PolyMASC, a wholly owned subsidiary of Valentis, will continue to operate in
its London location and focuses primarily on research and preclinical
development of PEGylation technologies and products.
SCIENTIFIC AND INDUSTRY BACKGROUND
GENES AND GENE-BASED THERAPEUTICS
Gene therapy is an approach to the treatment or prevention of certain
diseases in which therapeutic genes are introduced into the body to cause the
production of specific proteins needed to bring about a therapeutic effect. For
gene-based therapy to be effective, the therapeutic gene must be delivered to,
and transported across, the outer membrane of a targeted cell and into the
nucleus where it can be expressed. The expressed protein may remain within the
cell for an intracellular effect, be transported to the cell membrane to exert a
cell-surface effect or be secreted into the bloodstream to have a systemic
effect. Most gene-based therapies utilize a delivery system, or vector, into
which the therapeutic gene is incorporated to facilitate its delivery to, and
uptake by, the target cell.
Genes provide the "code" for proteins, which determine the nature and
function of cells and tissues in all living organisms. The study of genes and
their function ("genomics") provides the fundamental basis for understanding
human health and disease and has led to the identification of many genes with
potential therapeutic utility ("therapeutic genes").
The entire genetic content of an organism is known as its genome. In humans,
the genome is believed to contain approximately 100,000 genes, each of which is
composed of a unique sequence of DNA molecules that encode genetic instructions.
These genetic instructions enable cells to carry out their normal biological
functions. The process by which an organism utilizes genetic instructions and
produces proteins is known as gene expression. The expression of a defective
gene, or the over- or under-expression of a normal gene, is responsible for
certain disease conditions. For example, the expression of a single defective
gene is known to cause cystic fibrosis and sickle cell anemia, and the defective
expression of multiple genes is believed to be involved in the progression of
diseases such as cancer, diabetes, and cardiovascular and neurological diseases.
The worldwide effort to decipher the human genome and to understand the
function of its constituent genes is yielding important insights into the roles
that genes play in disease conditions, as well as how genes may be useful in the
treatment of such diseases. It is estimated that there are at least 5,000 genes
of known function, many of which have been identified as potential therapeutic
genes. Various companies and academic institutions are investing substantial
financial and human resources to identify additional therapeutic genes, and the
Company believes that this process will create opportunities for gene-based
therapeutics.
GENE DELIVERY APPROACHES
To date, a limiting factor in gene-based therapy has been the lack of safe,
effective gene delivery systems. A number of gene delivery approaches are being
developed, each of which has exhibited certain limitations. These approaches may
be categorized by their mode of administration as EX VIVO (outside the body) or
IN VIVO (inside the body), and by the nature of the gene delivery system (viral
or non-viral).
The first clinical trials of potential gene-based therapeutics used EX VIVO
viral gene delivery. EX VIVO gene-based therapies involve procedures in which
selected cells are removed from the patient, transduced with the therapeutic
gene, expanded in number, cleansed of contaminants and then reintroduced into
the same patient. This lengthy and labor-intensive process significantly differs
from traditional pharmaceutical administration and may result in a complex,
high-cost procedure.
Valentis is developing a broad technology platform consisting of several IN
VIVO, non-viral, or plasmid-based, gene delivery systems. Each delivery system
consists primarily of two components: (i) a DNA plasmid, a circular segment of
DNA that contains a therapeutic gene and components that regulate its
2
expression and is designed to control expression of the therapeutic gene in the
cell; and (ii) lipids, polymers and/or other non-viral agents to facilitate the
delivery of the DNA plasmids into target cells by various modes of
administration, including inhalation, intravenous administration, intratumoral
or intramuscular or intraperitoneal administration. These traditional modes of
administration are familiar to physicians and may be more convenient and cost
effective than EX VIVO approaches.
In most of the Company's gene delivery systems, the Company combines
negatively charged DNA with novel, positively charged and neutral lipids to form
tightly bound DNA: lipid complexes. These complexes can be manufactured at
large-scale to produce high purity, stable products. The Company's other gene
delivery systems utilize polymers or peptides to facilitate the delivery of DNA
plasmids.
The Company believes its proprietary plasmid-based gene delivery systems
have advantages over many other gene delivery systems. The Company's DNA:lipid
complexes have been shown to produce therapeutically relevant protein levels
that persist for up to two months in animal studies. In addition, the Company's
gene delivery systems can preferentially target specific tissues and cell types
and can be handled and administered like traditional pharmaceuticals. The
Company has demonstrated that it can produce clinical-grade DNA plasmids,
DNA:lipid complexes and formulations under controlled conditions, and has
developed manufacturing and production methods designed to be scaled to meet
commercial requirements.
Valentis has tested its gene delivery systems in hundreds of IN VIVO
preclinical experiments and in certain early clinical trials. Valentis' delivery
systems allow for repeat administration of gene-based therapeutics for the
treatment of chronic diseases, such as cystic fibrosis and cancer. While the
results of preclinical animal studies may not predict safety or efficacy in
humans, when further clinical trials are conducted, the Company believes that
its experience in preclinical and early clinical development will enable it to
accelerate the development of gene-based therapeutics and thereby attract
corporate partners.
VALENTIS' IN VIVO, PLASMID-BASED GENE DELIVERY APPROACH
The Company believes its proprietary plasmid-based gene delivery systems may
have the following benefits:
- THERAPEUTICALLY RELEVANT GENE EXPRESSION. Valentis has developed DNA
plasmids that, following their formulation with lipids or polymers and
administration to animals, produce therapeutically relevant protein levels
that persist for up to two months. Following intravenous administration to
mice of the gene for a commercially available cytokine, the cytokine was
detected in the blood at levels consistent with those required for
therapeutic effect. Similarly, following aerosol administration to
primates of the therapeutic gene to treat cystic fibrosis, the resulting
protein was produced in the correct cell type (lung epithelial cells) at
levels believed to be therapeutic.
- TISSUE-SPECIFIC GENE DELIVERY AND EXPRESSION. The Company believes that
its gene delivery systems can target specific tissues and cell types. In
preclinical studies, the Company has demonstrated that various
formulations are taken up selectively by (i) ciliated epithelial cells
lining the airways of the lungs following aerosol administration, (ii)
vascular endothelial cells lining the blood vessels of several tissues,
including lung, heart, spleen and lymphatic tissues, following intravenous
administration, (iii) solid tumors following direct administration either
into the tumor or other local tissues, (iv) circulating macrophages
following intravenous administration and (v) muscle cells following direct
injection. In a preclinical study to test the pattern of uptake of two
intravenous formulations, one formulation resulted in over 90% of
observable gene expression in the vascular endothelial cells of the lungs,
while the other formulation resulted in over 90% of observable gene
expression in the spleen. In addition, following direct injection in
animals, the Company's formulations have been demonstrated to result in
transfection of solid tumors, muscle and brain tissue.
3
- EASE OF HANDLING AND ADMINISTRATION, STABILITY AND SCALABLE MANUFACTURING
METHODS. The Company's gene delivery systems are designed to be handled
and administered like traditional pharmaceuticals. These gene delivery
systems are also designed to be stable when refrigerated and are intended
to be distributed like other pharmaceuticals. Valentis has demonstrated
that it can produce clinical-grade DNA plasmids, DNA:lipid complexes and
formulations under controlled conditions. In addition, Valentis has
developed manufacturing and production methods designed to be scaled to
meet commercial requirements and has produced DNA plasmids at a contract
manufacturer at the 3,000-liter scale.
- IMPROVED SAFETY PROFILE. Valentis has tested its gene delivery systems in
hundreds of IN VIVO, preclinical experiments and in certain early clinical
trials. In animal models, the Company's aerosol gene delivery systems do
not appear to cause the same inflammation that has been seen following the
aerosol administration of other companies' lipid- based gene delivery
systems. Due to its improved safety profile, Valentis believes that its
gene delivery systems may allow for repeat administration of gene-based
therapeutics for the treatment of chronic diseases, such as asthma and
other inflammatory conditions.
PEGYLATION TECHNOLOGIES
The primary technological focus of PolyMASC Pharmaceuticals, which was
acquired by Valentis in August 1999, is the creation of improved biologics
through the application of PEGylation technologies. PEGylation is an established
technology that involves the attachment of the polymer polyethyleneglycol
("PEG") to therapeutics to alter their pharmacokinetics (distribution in the
body, metabolism and excretion). The alteration of the pharmacokinetics of
biologics due to PEGylation can lead to improved dosing intervals and may also
have beneficial effects on safety and efficacy. PEGylation also masks biologics
from the immune system. Both recognition by antibodies (antigenicity) and
stimulation of immune responses (immunogenicity) are reduced.
PolyMASC's proprietary technologies are based on novel patented Molecule
Altering Structural Chemistry (MASC) techniques for attaching polymers to other
molecules or to carrier systems for pharmaceuticals. The MASC family of
technologies is not restricted to use with PEG. However, current applications
are focused on PEG because it has an excellent safety record and is already
approved for administration to humans. The attachment of PEG chains has the
potential to add considerable value to many pharmaceuticals, particularly
proteins and peptides. As well as making them longer acting and less visible to
the body's immune system, PEGylation reduces wastage of the valuable active
element of the therapy. The technology can also be used to link molecules
together. This has an application for the assembly of new pharmaceutical agents.
PolyMASC's PEGylation differs from certain other methods in that it links
only PEG to the target and avoids damaging coupling conditions. The direct
linkage circumvents a range of problems introduced by linker groups. PolyMASC's
linkerless technique has what the Company believes to be an excellent record in
the conservation of bioactivity (and hence therapeutic activity) of delicate
targets.
4
PolyMASC has developed a number of proprietary applications for its
technologies as follows:
- protoMASC-TM--- a process of masking protein or peptide pharmaceuticals to slow
clearance from the body which gives excellent retention of biological
activity;
- viraMASC-TM--- a process for coating viruses to increase efficacy in gene therapy and
the treatment of cancer;
- antiMASC-TM--- a process for cloaking anti-tumor antibody fragments to delay
clearance by the body which provides improved tumor localization and
penetration;
- lipoMASC-TM--- a process for coating liposomes, hollow lipid droplets, which leads to
significantly improved tumor localization and has application in the
delivery of anti-cancer agents.
PolyMASC's technologies are covered by a family of patents and patent
applications filed in all major jurisdictions. Currently, none of the products
using the Company's PEGylation technologies has completed clinical trials.
CORPORATE COLLABORATIONS
Valentis has collaborative research and development corporate agreements and
is actively seeking additional collaborations with pharmaceutical and
biotechnology companies. In addition, the Company has a manufacturing
collaboration based on Valentis' proprietary methods for the manufacture of DNA
plasmids and DNA:lipid complexes, creating the first contract facility that can
produce high-quality, ultrapure material for plasmid-based therapeutics on every
scale, from preclinical toxicology studies to commercial products. Many of the
Company's potential partners have identified therapeutic genes, but Valentis
believes many such companies do not possess the technology or the know-how to
develop gene-based therapeutics. In entering corporate collaborations, the
Company seeks license fees, funding for research and development, milestone
payments and royalties on product sales in exchange for worldwide commercial
licenses to specific gene-based therapeutics and access to its development
expertise.
ROCHE HOLDINGS LTD. ("ROCHE")
Pursuant to the merger with GeneMedicine, Inc. in March 1999, Valentis
acquired rights under a corporate collaboration agreement with Corange, the
parent company of Boehringer Mannheim, and now a subsidiary of Roche, originally
signed in February 1995, providing for research and development of gene
medicines to treat head and neck tumors and melanoma (the "Corange Agreement").
In August 1998, the Corange Agreement was amended and extended through
February 2002. The amendment modified the field of the agreement to gene therapy
using the IL-2, Interferon-ALPHA or IL-12 genes for the treatment of cancer, and
required the Company to conduct a Phase II clinical trial of the IL-2 gene
medicine, and a Phase I/II clinical trial for each of the Interferon-ALPHA and
IL-12 gene medicines. As part of the amendment, the Company received the right
to commercialize products developed under the agreement if Roche does not
initiate Phase III clinical trials on products within twelve months after the
completion of Phase II trials. The Company also agreed to forego a $2 million
equity purchase by Roche due on February 1, 1999 in return for a $2 million
payment to be made to the Company by February 1, 2000 and an additional $2
million milestone upon enrollment of the first patient in a Phase III clinical
study.
If the Company continues to meet the milestones for the development of gene
medicines under the Corange Agreement, the Company may be entitled to milestone
payments. If Valentis fails to reach certain
5
milestones by 2002, it may have to fund an additional year of research at its
own expense, not to exceed $5 million. Upon successful completion of Phase II
clinical testing, Valentis may elect either to receive up to 50 percent of
profits by agreeing to share development and commercialization expenses or to
receive royalty payments based on worldwide product sales.
Also through the merger with GeneMedicine, Valentis acquired a worldwide
exclusive license, with the right to sublicense, from Syntex (U.S.A.) Inc., now
also a subsidiary of Roche renamed Roche Biosciences, for its cationic lipid
gene delivery technology (DOTMA) for IN VIVO gene therapy uses. The rights under
this agreement continue even though the original agreement with Roche
Biosciences ended.
ELI LILLY & COMPANY
In May 1997, the Company entered into a corporate collaboration with Lilly
to develop gene-based therapeutics administered via direct injection or into the
intraperitoneal cavity using BRCA1, a gene that has been identified as a
putative tumor suppressor in diseased cells in breast and ovarian tissue. When a
tumor suppressor gene, such as BRCA1, is missing or defective, a cell may
replicate uncontrollably, resulting in the formation of a tumor. Various
scientific publications have associated defects in BRCA1 with breast, ovarian
and prostate cancers. Increased expression of the BRCA1 gene in diseased tissue
may inhibit or prevent the uncontrolled cell growth associated with cancer,
without causing any adverse effect in normal cells.
Under the agreement, Lilly receives the exclusive worldwide rights to
develop, make, use and sell gene-based therapeutics incorporating BRCA1
resulting from the corporate collaboration. Lilly is responsible for conducting
clinical trials, large-scale clinical and commercial manufacturing, and sales
and marketing of any gene-based therapeutics resulting from the corporate
collaboration. In July 1999, the Lilly agreement was extended through November
1999 when preclinical work is expected to be substantially completed. At that
time, based on the results of preclinical research and development, Lilly will
determine if it will extend the agreement and begin clinical testing of BRCA1
gene therapy.
GLAXO WELLCOME PLC
In April 1994, the Company entered into a corporate collaboration with Glaxo
Wellcome to develop a gene-based therapeutic for the treatment of cystic
fibrosis. Data from preclinical studies conducted to date demonstrate expression
of the human form of the cystic fibrosis transmembrane regulator ("CFTR") gene
in the lungs of non-human primates in the appropriate cell type with no evidence
of inflammation. In addition, approximately 20% of the target cells were shown
to produce CFTR protein six weeks after a single aerosol administration, which
exceeds the level believed to be required for achieving a therapeutic effect.
The Company has completed its obligations under this collaboration and may
receive milestones and royalties on product sales, if any.
In June 1997, Glaxo Wellcome commenced a Phase I/II clinical trial in cystic
fibrosis patients using a Valentis gene delivery system. The trial, which was
completed in October 1998, delivered the CFTR gene to the nasal passages of
cystic fibrosis patients. The product was evaluated in a double blind, dose
escalation study in eleven adult CF patients. The clinical research team saw no
evidence of adverse blood chemistry parameters and no evidence of inflammation
as a result of treatment. They examined a comprehensive panel of biochemical
markers of inflammation and found that the treatment did not elicit any
significant alterations in these parameters. Vector-specific plasmid was
detected at up to five days post-treatment in several patients, after lavage of
the nasal passages. Also reported was a possible trend toward correction of the
CFTR--mediated chloride defect in the treated side of the nose, as compared with
the untreated side. In this study, levels of vector-specific mRNA were not
detectable.
Glaxo is continuing to work on the program at its research facilities in
England. Valentis expects no announcements to be made by Glaxo during the course
of their development work.
6
TRANSKARYOTIC THERAPIES ("TKT")
In November 1997, PolyMASC and TKT signed a licensing agreement for the
development of a PEGylated protein pharmaceutical with an option, now exercised,
to extend the license to a second protein pharmaceutical Under the terms of the
agreement, TKT will develop the PEGylated proteins and PolyMASC will supply the
activated PEG species required to manufacture the PEGylated protein. The goal of
the collaboration is to develop proteins with an increased circulating
half-life, which will allow for longer intervals between administrations.
ONYX PHARMACEUTICALS ("ONYX")
In June 1997, PolyMASC and Onyx entered into a collaborative agreement for
PolyMASC to develop a PEGylated version of Onyx's ONYX-015 cancer therapeutic in
development, and in April 1999, PolyMASC and Onyx signed a non-exclusive license
for PEGylated versions of replicating adenoviruses. Under the terms of the
agreement, Onyx has the right to develop PEGylated replicating adenoviruses, and
PolyMASC will supply the activated PEG species required to manufacture the
PEGylated virus. The goal is to assist ONYX-015 in treating not only primary
tumors but also sites of metastases.
BAYER CORPORATION ("BAYER")
In August 1999, PolyMASC and Bayer entered into an agreement whereby Bayer
will fund a feasibility study on the development of Factor VIII for hemophilia A
using PolyMASC's proprietary ProtoMASC-TM- technology. The study is being done
in order for Bayer to determine whether to enter into a broader agreement which
could lead to clinical and commercial development of a chemically modified
Factor VIII.
DSM BIOLOGICS--QIAGEN N.V.
In September, 1998, Valentis and DSM Biologics (formerly
Gist-Brocades/Bio-Intermediair) formed an alliance focused on the manufacture
and supply of plasmid DNA and lipid:DNA complexes to the gene therapy industry.
In May 1999 Qiagen N.V. joined the manufacturing alliance. The goal of this
alliance is to provide the emerging gene therapy and genetic vaccination
industry with early access to a reliable, accepted contract manufacturing
services platform.
Valentis is contributing its process technologies and its expertise in DNA
formulation and manufacturing to the collaboration. DSM brings manufacturing
experience as a supplier of contract manufacturing services, serving the needs
of the pharmaceutical and biotechnology industry. Qiagen is contributing non-
exclusive access to certain of its technologies and its sales and marketing
force.
The agreement between the parties is intended to be the exclusive vehicle
through which the parties will provide services in the area of contract cGMP
manufacturing of plasmid and formulated DNA for genetic vaccination and gene
therapy purposes. Qiagen has begun marketing these contract manufacturing
services to the gene therapy and genetic vaccination industry in lot sizes of up
to the 3,000-liter fermentation scale. In addition, Qiagen and Valentis intend
to continue to develop and improve these large-scale processes for plasmid DNA
manufacturing.
This manufacturing method has already been used to produce material for a
Phase I/II trial for cystic fibrosis conducted by Valentis' partner, Glaxo
Wellcome, and a Phase I/II study for metastatic melanoma, conducted by Valentis
and its academic collaborators at the University of Colorado Health Sciences
Center.
Under the agreement, Valentis has licensed its proprietary manufacturing
technology for use in DSM facilities in Montreal, Canada and Groningen, The
Netherlands in return for license and milestone fees. DSM, Qiagen and Valentis
will share in the profits generated by the sale of material produced using
Valentis' process. This arrangement could provide revenue for Valentis in
advance of the launch of commercial gene-based products.
7
PFIZER INC
In May 1996, the Company entered into a corporate collaboration with Pfizer
Inc ("Pfizer") to develop a gene-based therapeutic for the treatment of solid
tumors using gene delivery systems which are designed to deliver genes that
inhibit angiogenesis. In December 1997, Pfizer decided to discontinue its
research and development program to develop gene-based therapeutics to treat
cancer via angiogenesis inhibition. Under the terms of the agreement with
Pfizer, Pfizer continued funding the program through May 31, 1998. The Company
has continued to advance the anti-angiogenesis program and is seeking a new
corporate partner.
The Company is highly dependent upon its corporate collaborations with
Roche, Lilly and Glaxo. There can be no assurance that research funds under the
Roche or Lilly agreements or milestone payments contemplated by any of the
Company's corporate collaborations will be received, that the Lilly Agreement
will be extended, or that any of these corporate collaborations will result in
successfully commercialized products and the receipt by the Company of related
royalty revenues. Should the Company fail to receive research funds or should
milestones set forth in any or all of the Roche, Lilly or Glaxo agreements not
be achieved, or should Roche, Lilly or Glaxo breach or terminate their
respective agreements, the Company's business, financial condition and results
of operations will be materially adversely affected. The Company will also need
to enter into additional corporate collaborations, and there can be no assurance
that the Company will be able to do so on favorable terms, or at all. Should any
corporate partner fail to develop or commercialize successfully any product to
which it has obtained rights from the Company, the Company's business, financial
condition and results of operations may be materially adversely affected.
ACADEMIC LICENSES
Valentis actively monitors, investigates and licenses technologies under
development at academic and other research institutions. The Company believes
that such institutions are an important source of breakthrough technologies and
intends to enter into additional licensing arrangements to expand its core
technologies.
REGENTS OF THE UNIVERSITY OF CALIFORNIA
The Company has an exclusive license to certain patents and patent
applications held by The Regents of the University of California ("The Regents")
related to IN VIVO, non-viral delivery of genes using positively charged lipids,
including delivery by various modes of administration and for use in the
treatment of cystic fibrosis ("The Regents License").
Under the terms of The Regents License, the Company paid a license fee to
The Regents and is obligated to make payments upon the achievement of certain
clinical milestones and royalty payments on sales of products, if any. The
Company has certain obligations regarding the process and timing of clinical
activities and seeking FDA approval for the development, manufacture and sale of
products based on the claims contained in such patent applications. The Regents
may terminate the license or convert it to a nonexclusive license upon 60 days
notice if the Company fails to meet certain milestones. However, the date by
which such milestones must be completed may be extended by the Company for up to
three years upon payment of a specified fee for each year the date is extended.
In addition, The Regents may also terminate the license upon 60 days notice for
a material violation or material failure to perform any covenant under the
license.
In addition, the Company has an exclusive worldwide license from The Regents
for patent rights covering certain gene delivery technology as well as
lyophilized, formulated DNA compositions ("The Second Regents License"). Under
The Second Regents License, the Company paid a license fee to The Regents and is
obligated to pay maintenance fees and to make payments upon the earlier to occur
of specified dates or completion of certain clinical milestones, and royalties
on product sales, if any. The Regents may terminate the license or convert it to
a nonexclusive license upon 90 days notice if the
8
Company fails to meet certain milestones. In addition, The Regents may also
terminate the license upon 90 days notice for a material violation or material
failure to perform any covenant under the license.
VANDERBILT UNIVERSITY ("VANDERBILT")
Valentis has an exclusive, worldwide license from Vanderbilt to certain gene
delivery technologies and improvements developed by Dr. Kenneth Brigham ("First
Vanderbilt License"). The license pertains to rights under certain patents and
patent applications covering cationic lipid-mediated gene delivery used for gene
therapeutic products and gene-based vaccines that are administered to patients
systemically or by inhalation. Under the terms of the First Vanderbilt License,
the Company paid a license fee to Vanderbilt and is obligated to pay maintenance
fees, to make payments upon the achievement of certain milestones and to make
royalty payments on sales of products, if any. Vanderbilt may terminate the
license or convert it to a nonexclusive license if the Company fails to satisfy
certain requirements for diligent development of licensed products. In addition,
Vanderbilt may terminate the license upon 60 days notice for a material
violation or material failure to perform any covenant under the license.
Valentis also has an exclusive license from Vanderbilt covering Vanderbilt's
interest in the del-1 gene and protein ("Second Vanderbilt License"). Valentis
acquired the Second Vanderbilt License by assignment from Progenitor, Inc. as
part of the purchase of the del-1 rights held by Progenitor in April 1999. Under
the terms of the Second Vanderbilt License, the Company is obligated to make
payments upon the achievement of certain milestones, to share revenue received
from sublicensing at a specified rate, and to make royalty payments on sales of
products, if any. Vanderbilt may terminate the license if the Company fails to
satisfy certain requirements for diligent development of licensed products. In
addition, Vanderbilt may terminate the license upon 60 days notice for a
material violation or material failure to perform any covenant under the
license.
NATIONAL JEWISH MEDICAL RESEARCH CENTER ("NJMRC")
The Company has obtained an exclusive license from the NJMRC for patent
rights related to the non-viral delivery of a cytokine gene and a superantigen
gene for the treatment of cancer (the "NJMRC License"). Under the terms of the
NJMRC License, the Company has paid a license fee and is obligated to make
payments upon the completion of certain clinical milestones and royalty payments
on sales of products, if any. The Company has certain obligations regarding the
process and timing of clinical activities and seeking FDA approval in the
pursuit of development, manufacture and sale of products based on the claims
contained in such patent applications. NJMRC may terminate the license or
convert it to a nonexclusive license if the Company fails to meet certain
milestones. However, the date by which such milestones must be completed may be
extended by the Company for up to 3 years upon payment of a specified fee for
each year a date is extended. In addition, NJMRC may also terminate the license
for a material violation or material failure to perform any covenant under the
license.
UNIVERSITY OF PITTSBURGH MEDICAL CENTER ("UPMC")
In March of 1998, the Company entered into a licensing and collaboration
agreement with the UPMC through which the Company obtained an exclusive license
to certain patent rights in the field of viral and non-viral gene-based therapy
for rheumatology (the "UPMC License and Collaboration Agreement"). Under the
terms of the UPMC License and Collaboration Agreement the Company issued 117,555
shares of Common Stock in exchange for the exclusive license to these patent
rights. The Company is not obligated to pay additional royalty payments upon the
sale of products, if any, in the field of non-viral gene therapy, but is
required to share revenue with UPMC at a specified rate upon sublicense of
rights in the field of viral gene therapy. Under the terms of the UPMC License
and Collaboration Agreement, the Company is obligated to make payments upon the
completion of certain milestones. Certain of the license rights may revert back
to UPMC in the event that the Company fails to commit resources to the
development of products in the field of rheumatology. In addition, the UPMC
License and Collaboration
9
Agreement established collaborations between the Company and several researchers
at UPMC for the research and development of gene-based therapies in the field of
rheumatology. Intellectual property developed by UPMC under the collaboration
will be included in the exclusive license to the Company described above at no
additional cost to the Company. The value of the common stock issued in the
transaction was $1.5 million, which was expensed to research and development
during the period because the technology was not complete at the date of
acquisition.
STANFORD UNIVERSITY ("STANFORD")
The Company has obtained an exclusive license to patent rights from Stanford
relating to the use of genes that increase nitric oxide levels for the treatment
of certain cardiovascular diseases (the "Stanford License"). Under the terms of
the Stanford License, the Company has paid a license fee and will be obligated
to pay milestone fees upon completion of certain clinical milestones and royalty
payments on sales of products, if any. Under the Stanford License, the Company
has certain obligations regarding the process and timing of clinical activities
and seeking FDA approval in the pursuit of development, manufacture and sale of
products based on the claims contained in such patent applications. Stanford has
the ability to terminate the license or convert it to a nonexclusive license if
the Company fails to meet certain milestones. In addition, Stanford has the
ability to terminate the license for a material violation or material failure to
perform any covenant under the license.
BAYLOR COLLEGE OF MEDICINE ("BAYLOR")
The Company has three license agreements with Baylor pursuant to which the
Company has exclusive and non-exclusive rights to certain current and future
gene therapy technologies related to gene expression, gene delivery and gene
regulation technology, including the GeneSwitch-TM- gene regulation system, as
well as access to certain additional technologies ("Baylor Licenses"). Under the
terms of the Baylor Licenses, the Company issued to Baylor 2,100,000 shares of
Common Stock in partial consideration for the exclusive and non-exclusive rights
granted under the licenses. In addition, the Company issued to Baylor a
promissory note in the amount of $905,000. The Company is required to pay Baylor
a royalty based on amounts received by the Company for the commercialization of
the patented technology. Baylor has the ability to terminate the license for a
material violation or material failure to perform any covenant under the
license.
ACADEMIC COLLABORATIONS
UNIVERSITY OF PITTSBURGH MEDICAL CENTER
Valentis has established exclusive collaborations with several researchers
at the UPMC including Drs. Joseph Glorioso, Christopher Evans and Paul Robbins
for the research and development of gene medicines in the field of rheumatology.
In addition, Valentis has an exclusive license to patent rights held by UPMC in
the field of viral- and plasmid-based therapy for rheumatology applications.
In a separate agreement, Dr. Joel Greenberger is conducting preclinical
studies focused on the use of an MnSOD gene, delivered using Valentis'
proprietary delivery and expression technology, for the treatment of esophagitis
and mucositis associated with radiation and/or chemotherapeutic toxicity.
UNIVERSITY OF KUOPIO
Valentis is currently working with Dr. Seppo Yla-Herttuala of the A.I.
Virtanen Institute of the University of Kuopio, Finland. Dr. Yla-Herttuala is
conducting two physician-initiated Phase II trials (i) for treating restenosis
related to peripheral vascular disease, and (ii) for treating restenosis related
to coronary artery disease. Valentis is providing its proprietary DOTMA cationic
lipid gene delivery system for study with the Institute's plasmids encoding a
vascular endothelial growth factor (VEGF).
10
UNIVERSITY OF COLORADO, HEALTH SCIENCES
Valentis is conducting a physician-sponsored Phase I/II clinical study in
melanoma patients using Valentis' IL-2/Superantigen-B gene medicine with Dr. Pat
Walsh.
NATIONAL JEWISH MEDICAL RESEARCH CENTER
Valentis is collaborating with Dr. Steven Dow to develop anti-angiogenic
gene medicines and cancer immunotherapeutics. Dr. Dow is conducting studies in
dogs with osteosarcoma and other diseases.
STANFORD UNIVERSITY
Valentis has established a consulting relationship with Dr. Thomas
Quertermous, Chief, Cardiovascular Medicine at Stanford University, in the field
of angiogenesis. Dr. Quertermous is the co-discoverer of the del-1 gene,
co-owned by Valentis, and will work with Valentis on the preclinical development
of the del-1 gene medicine.
VANDERBILT UNIVERSITY--DR. KENNETH L. BRIGHAM
Valentis has been collaborating with Dr. Brigham for the past four years and
was recently awarded a Phase II SBIR grant which will be used to fund research
conducted in collaboration with Dr. Brigham on the utility of the AAT gene
medicine in inflammatory lung diseases.
BAYLOR COLLEGE OF MEDICINE--DRS. BERT O'MALLEY AND ROBERT SCHWARTZ
Drs. Bert O'Malley and Robert Schwartz collaborate with Valentis on selected
projects. Dr. O'Malley's focus is on improving the GeneSwitch-TM- gene
regulation technology, and Dr. Schwartz collaborates with Valentis in the area
of muscle expression systems and animal health.
RUSH PRESBYTERIAN/INDIANA UNIVERSITY
Valentis has established research and consulting relationships with Drs. Jim
Kerns and Linda Brubaker at Rush Medical College in Chicago, Illinois and with
Dr. Tom Benson from Indiana University to evaluate the Company's gene medicines
for treatment of urinary stress incontinence, a prevalent condition in
post-menopausal women.
UNIVERSITY OF SOUTHERN ALABAMA--DR. DAVID DEAN
Dr. Dean is collaborating with Valentis on improving the Company's
understanding of nuclear localization of DNA.
UNIVERSITY OF MARYLAND--DR. BERT O'MALLEY, JR.
Dr. O'Malley completed the U.S. Phase I clinical trial using the IL-2 gene
medicine for the treatment of head and neck cancer and is collaborating on
preclinical studies to evaluate combination therapies in terminal tumor models.
VALENTIS' PRODUCT DEVELOPMENT PROGRAMS
Valentis is developing gene delivery systems based on three broad classes of
delivery enhancing materials: lipids, polymers and peptides. Valentis has shown
that gene delivery systems containing cationic lipids combined with neutral
lipids enhance the cellular uptake of plasmid-based gene expression systems in
animals. These lipid-based gene delivery systems have been demonstrated to
enhance the entry of genes into tumor cells after intratumoral administration
and also to deliver genes to the endothelium and epithelium of the lung after
intravenous administration and inhalation, respectively. Valentis is using its
11
proprietary cationic lipid gene delivery systems in several of its gene
medicines intended for the treatment of cancer. In addition, Valentis' academic
collaborators are employing cationic lipid gene delivery systems in three
physician-initiated clinical trials: a completed Phase I clinical trial to
deliver genes to cells lining the airways; and two Phase II clinical trials to
deliver genes to endothelium cells lining the blood vessels of muscle tissue and
of the heart.
Valentis has also developed gene delivery systems that employ polymers
which, in certain formulations for conventional drugs, are approved for human
use. Valentis has shown that these polymers interact with plasmids and
facilitate the delivery of genes into muscle cells or tumor cells after IN VIVO
administration. Valentis is employing its proprietary polymeric PINC-TM-, (for
Protective, Interactive, Non-Condensing) gene delivery system, in its IGF-I gene
medicine and in two gene medicines intended for the treatment of cancer.
Valentis' scientists have demonstrated in animal models that the use of
polymeric PINC-TM- gene delivery systems can lead to a significant increase in
both the level and the reproducability of proteins produced in muscle compared
to the administration of plasmids formulated in saline, or "naked" DNA.
Valentis is also creating and developing gene delivery systems made up of
short synthetic peptides and peptides containing simple sugars or glycopeptides.
The peptides are designed to bind to plasmid DNA to form a tightly compacted
complex, which Valentis believes is important for DNA to enter certain types of
cells. The glycopeptides are designed to interact specifically with natural
receptors present on the surfaces of target cells and to effect the entry of
plasmid DNA into those cells. In addition, Valentis' peptides can be utilized in
combination with other materials such as cationic lipids. Valentis has exclusive
and co-exclusive rights to materials in each of the foregoing classes used for
gene delivery systems.
The Company has identified a number of potential therapeutic applications
for its technologies and has developed several gene delivery systems that can
use a variety of therapeutic genes. In each case, the delivery and expression
system developed for a specific product can be used in combination with other
therapeutic genes to create multiple product opportunities for the same
indication. The table below
12
summarizes the Company's leading product candidates, potential therapeutic
indications and their stage of development:
PRODUCT CANDIDATE INDICATIONS DEVELOPMENT STAGE(1) PARTNER
- ----------------------------------- ------------------------------------- -------------------------- ----------
CANCER
Interleukin-2 ("IL-2")............. Solid tumors and metastases Phase II Roche
Interferon-alpha ("IFN-ALPHA")..... Solid tumors and metastases Phase I/II Roche
Interleukin-12 ("IL-12")........... Solid tumors and metastases Phase I/II Roche
IL-2/superantigen B................ Solid tumors and metastases Phase I/II
BRCA-1............................. Breast and ovarian cancer Preclinical Lilly
dnDel-1 (anti-angiogenesis)........ Solid tumors and metastases Preclinical
Anti-angiogenesis gene medicine.... Solid tumors and metastases Preclinical
Systemic (IV) cytokine............. Pulmonary metastases Preclinical
Superoxide dismutase............... Radioprotection/chemoprotection Preclinical
CARDIOVASCULAR DISEASE
VEGF............................... Restenosis (CAD/PVD) Phase II
Del-1.............................. PVD/CAD Preclinical
eNOS............................... Transplant rejection Preclinical
eNOS............................... Restenosis Preclinical
LUNG DISEASE
CFTR............................... Cystic fibrosis Phase I/II completed Glaxo
AAT................................ AAT deficiencies Phase I/II completed
RHEUMATOLOGY....................... RA, OA, cartilage repair Preclinical
NEUROMUSCULAR DISORDERS
IGF-1 "Xeragen-TM-"................ Urinary stress incontinence Preclinical
- ------------------------
(1) "Phase II" indicates that the compound is being tested in humans for
indications of biological activity in a limited patient population.
"Phase I/II" indicates that the compound is being tested in humans for
safety and preliminary indications of biological activity in a limited
patient population.
"Preclinical" indicates that Valentis is conducting efficacy, pharmacology
and/or toxicology testing of a gene delivery system in animal models or
biochemical or cell culture assays.
"Research" includes the development of animal models and assay systems,
discovery of prototype gene delivery systems and evaluation and refinement
of prototype gene delivery systems in IN VITRO and IN VIVO testing.
CANCER
Valentis' most advanced programs are in the field of cancer immunotherapy.
Three genes are being tested under the agreement the Company has with Roche.
In June 1999, the Company initiated a multi-center Phase II clinical trial
with its IL-2 gene therapy for the treatment of squamous cell carcinoma of the
head and neck. The trial will evaluate the safety and efficacy of the IL-2 gene
medicine compared to conventional therapy in approximately 80 patients who have
failed first line chemotherapy.
13
More than 40,000 patients in the United States and 75,000 patients in Europe
are diagnosed with head and neck cancer each year. While head and neck cancers
are slow to metastasize, current therapies do not provide effective treatment,
as evidenced by the fact that recurrence of the tumor is common and mortality
14
in the first five years after diagnosis is approximately 30 percent. The IL-2
gene medicine is intended to reduce disease recurrence and to extend survival.
In June 1998, Valentis announced positive results from two Phase I/II
clinical trials involving its IL-2 gene medicine. The two studies were conducted
at Johns Hopkins University and in Germany in 25 head and neck cancer patients.
The results of the studies showed that the IL-2 gene medicine was safe and well
tolerated, with documented evidence of gene expression for greater than 7 days.
The IL-2 gene medicine is comprised of a plasmid encoding the human IL-2
gene and a proprietary cationic lipid gene delivery system that enhances uptake
of the gene into the target cells after direct intratumoral injection. This
product is designed to provide sustained, localized expression of the IL-2
protein and to promote a local and systemic immune response against the tumor.
The use of a non-viral gene delivery system is intended to enable repeat
administration of genes in a safe and effective manner.
IL-2 is an important human protein that has multiple functions in the body's
immune response to foreign pathogens and tumors. The application of the
recombinant protein in the treatment of cancer is limited by its short half-life
and by significant toxicity when administered systemically. In contrast, the
IL-2 gene medicine is designed to initiate sustained production of the IL-2
protein within the tumor mass and elicits an immune response while avoiding the
potentially harmful systemic levels of the IL-2 protein.
In addition to the IL-2 gene medicine, Valentis is developing IFN-CALPHA and
IL-12 gene medicines. Valentis has incorporated both the IFN-CALPHA and IL-12
genes into the Company's proprietary polymer-based PINC-TM- gene delivery
system. The gene medicines are formulated as stable, single vial, freeze-dried
products that are easily reconstituted and then injected to the patient
intratumorally.
IFN-CALPHA is being studied in a Phase I/II clinical trial which began in
March 1999 to study safety and efficacy in 35 patients with squamous cell
carcinoma of the head and neck at the University of Pennsylvania and at the
University of Kentucky. The recombinant IFN-CALPHA protein is approved for use
in a number of indications including malignant melanoma, hairy cell leukemia,
AIDS-Related Kaposi's sarcoma, chronic hepatitis B and chronic hepatitis C. In
contrast, the IFN-CALPHA gene medicine is designed for both local and systemic
immunotherapy and also has been shown to provide an anti-angiogenic effect in
preclinical cancer models.
In July 1999, Valentis initiated a U.S.-based multi-center Phase I/II
clinical trial with its IL-12 gene therapy also for the treatment of squamous
cell carcinoma of the head and neck. The safety phase of the trial will be
conducted at the Dana Farber Cancer Institute (Harvard University) and the
University of Pennsylvania. Preclinical data demonstrate that local
administration of the IL-12 gene medicine can induce a systemic immune response
against cancer with a reduction in tumor growth or a complete remission in
animals. By expressing the protein locally at the tumor site, Valentis expects
the products to have therapeutic benefits against both primary tumors and well
as their sites of metastases without the toxicity that has limited the utility
of the IL-12 protein when given systemically.
Valentis also initiated a Phase I/II clinical study of an
IL-2/Superantigen-B combination gene medicine in May 1998 at the University of
Colorado Health Sciences Center as a treatment for melanoma. The Phase I/II
dose-ranging study is examining the safety of a two-gene combination, which is
injected directly into tumors. The principal investigator for this trial is Dr.
Pat Walsh from the University of Colorado Health Sciences Center. The costs of
the trial are supported in part by a clinical grant from the National Cancer
Institute. Researchers believe that the two-gene combination being tested may be
more effective than either gene alone and may provide advantages over other
immunotherapy approaches that have been tested.
Preclinical studies on dogs with advanced cases of spontaneously occurring
oral melanoma resulted in tumor regression and increased survival rates.
Specifically, direct administration of this gene-based immunotherapeutic
resulted in a systemic immune response to the tumors in the mouth and in some
cases,
14
their sites of metastasis. Based on these data, Valentis believes that this
product may have applications in the treatment of other solid tumors such as
breast, prostate and head and neck cancers.
Valentis has exclusively licensed the patents covering the two-gene
combination from National Jewish Medical and Research Center for use in
non-viral gene therapy applications for cancer. The patents cover the delivery
of a cytokine gene and a superantigen gene for the treatment of cancer.
Under a 1997 agreement with Lilly, Valentis is developing a gene-based
therapeutic administered via direct injection or into the intraperitoneal cavity
using BRCA1, a gene that has been identified as a putative tumor suppressor in
breast and ovarian cells. Preclinical work is expected to be completed by the
fourth quarter of 1999.
Valentis has conducted preclinical research into a number of other
gene-based approaches to cancer including anti-angiogenesis. The Company is
conducting research with a dominant negative mutant del-1 and other genes to
determine whether using gene therapy to deliver genes that cut off the blood
supply to tumors will shrink or eliminate both the primary tumor as well as any
sites of metastasis. The Company is also researching whether systemic
intravenous delivery of a cytokine will have an effect on controlling cancer and
if a gene-based product can minimize the side effects occurring from traditional
radiation and chemotherapy regimens.
CARDIOVASCULAR DISEASES
In March 1998, a vascular endothelial growth factor ("VEGF") gene medicine
employing Valentis' proprietary cationic lipid gene delivery system became the
subject of two physician initiated Phase II angioplasty clinical trials, one for
treating peripheral vascular disease and one for treating coronary artery
disease. The product is designed to prevent proliferation of smooth muscle cells
and reclosure of the vessels in patients who are undergoing either coronary
angioplasty or peripheral angioplasty. Dr. Seppo Yla-Herttuala of the A.I.
Virtanen Institute of the University of Kuopio, Finland, is conducting the
trials. Valentis is providing it's proprietary DOTMA cationic lipid gene
delivery system for study with the Institute's plasmids encoding a VEGF.
In April 1999, Valentis acquired the rights and intellectual property
related to the del-1 gene and protein from Progenitor, Inc. Del-1 is a novel
extracellular matrix protein involved in early growth and development of blood
vessels and bone that has been demonstrated to have potential application in the
treatment of certain vascular diseases by stimulating angiogenesis. Del-1 has
the potential to be effective in the treatment of a variety of cardiovascular
diseases, including peripheral vascular disease and coronary artery disease.
Del-1 is a unique angiogenic factor that promotes vascular growth and
inhibits endothelial cell death. It has a distinct mechanism of action from
other known angiogenic factors such as members of the vascular endothelial cell
growth factor (VEGF) and fibroblast growth factor (FGF) families. Data indicate
that recombinant del-1 is angiogenic in a mouse model of limb ischemia. A mutant
form of del-1 has also been shown to have utility IN VITRO as an anti-angiogenic
factor and may be useful for the treatment of certain cancers.
Valentis has demonstrated that its proprietary gene delivery and expression
systems can be used to deliver therapeutic genes that stimulate angiogenesis,
resulting in gene expression at therapeutic levels for several weeks and the
growth of new blood vessels in animal models of disease. The Company plans to
initiate a Phase I/II clinical trial for a del-1 gene medicine for the treatment
of peripheral vascular disease, and will be marketing the product to potential
corporate partners.
Valentis also acquired an exclusive worldwide license from Stanford
University to intellectual property covering gene therapy for vascular
degenerative disorders. The exclusive license from Stanford University covers a
series of patents and patent applications directed to the use of genes that
increase nitric oxide levels for the treatment of cardiovascular diseases,
including eNOS, iNOS, VEGF and potentially others.
15
Valentis is using the eNOS gene for the development of gene-based therapeutic
products for the treatment of restenosis following angioplasty and the
inhibition of organ transplant rejection.
LUNG DISEASES
A gene-based therapeutic for cystic fibrosis ("CF") is being developed in a
collaboration with Glaxo Wellcome. A Phase I/II clinical trial, concluded in
October 1998, revealed no evidence of inflammation and satisfied all of the
safety parameters studied. The trial utilized Valentis' delivery technology to
deliver the cystic fibrosis transmembrane regulator ("CFTR") gene to the nasal
passages of cystic fibrosis patients. The product was evaluated in a double
blind, dose escalation study in eleven adult CF patients. The clinical research
team saw no evidence of adverse blood chemistry parameters and no evidence of
inflammation as a result of treatment. They examined a comprehensive panel of
biochemical markers of inflammation and found that the treatment did not elicit
any significant alterations in these parameters.
Vector-specific plasmid was detected at up to five days post-treatment in
several patients, after lavage of the nasal passages. The clinical research team
reported that there was a possible trend toward correction of the CFTR-mediated
chloride transport in the treated side of the nose, as compared with the
untreated side. In this study, levels of vector specific mRNA were not
detectable.
Cystic fibrosis is the most common fatal genetic disease in Caucasians,
occurring in about 1 in 3,000 live births. The disease is believed to afflict
approximately 55,000 patients in the United States and Europe. This defect
results in production of defective CFTR protein, leading to the build-up of
mucus in the lungs that often results in infection, loss of lung function and
premature death. The median life expectancy of a patient with cystic fibrosis is
approximately 30 years, and patients with CF typically incur annual medical
costs ranging from $15,000 to $55,000.
Valentis believes that a gene-based therapeutic which results in increased
levels of normal CFTR protein on the surface of ciliated epithelial cells may
slow or halt the progression of this disease while reducing the total cost of
patient care.
In May 1998, Valentis announced positive results of a physician initiated
Phase I/II clinical trail for an alpha-1 antitrypsin ("AAT") gene medicine. The
AAT gene medicine was well tolerated and all five participants in the study had
sustained elevated levels of the AAT protein following administration of the
gene medicine by nasal instillation. The Company will not pursue additional
research into this project until it is sponsored by a corporate partner.
RHEUMATOLOGY
In March of 1998, the Company entered into a licensing and collaboration
agreement with the University of Pittsburgh Medical Center ("UPMC") through
which the Company obtained an exclusive license to certain patent rights in the
field of viral and non-viral gene-based therapy for rheumatology, and
established collaborations between the Company and several researchers at UPMC
for the research and development of gene-based therapies in the field of
rheumatology. In July 1996, the University researchers initiated the world's
first clinical trial using a gene-based therapeutic to treat rheumatoid
arthritis. This trial and the scientists' extensive experience in arthritis gene
therapy provide the potential for the development of gene-based therapeutics in
rheumatology and joint diseases using Valentis' proprietary gene delivery
technologies.
OTHER PRODUCTS
Valentis has identified female urinary incontinence as the primary target
indication for the IGF-I gene medicine. The Company intends to proceed with
clinical trials with the IGF-I gene medicine only if it can find a corporate
partner to undertake those trials. The IGF-I gene medicine may also have broad
16
application in the treatment of muscle disorders and neuropathies that afflict
large patient populations and are not adequately addressed by current therapies,
if at all.
There can be no assurance that any of the Company's gene delivery systems
will have the performance attributes to justify their further development or to
attract corporate partners. While the Company has demonstrated some evidence of
the utility of its gene delivery systems in preclinical animal studies, these
results do not predict safety or efficacy in humans, when and if further
clinical trials are conducted. The Company's products may prove to have
undesirable and unintended side effects or other characteristics that may
prevent or limit their use. There can be no assurance that any of the Company's
products will ultimately obtain FDA or other regulatory or foreign marketing
approval for any indication. The Company's products are also subject to risks
particular to the development of gene-based therapeutics. Gene-based therapy is
a new and rapidly evolving technology and is expected to undergo significant
technological changes in the future. As a result of the limited clinical data
available regarding the safety and efficacy of gene-based therapeutics and other
factors, clinical trials relating to gene-based therapeutics may take longer to
complete than clinical trials involving traditional pharmaceuticals. There can
be no assurance that any gene-based therapeutic will be demonstrated to be safe
or effective or that the Company or its corporate partners will be able to
manufacture such gene-based therapeutics on a commercial scale or in an
economical manner.
PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to the Company's
business. The Company's policy is to file patent applications and protect
inventions and improvements to inventions that are commercially important to the
development of its business. The Company also relies on trade secrets, know-how,
confidentiality agreements, continuing technology innovations and licensing
opportunities to protect its technology and develop and maintain its competitive
position. To date, the Company has filed or participated as a licensee in the
filing of numerous patent applications in the United States relating to the
Company's technology, as well as foreign counterparts of certain of these
applications in many countries. The Company's failure to obtain patent
protection or otherwise protect its proprietary technology or proposed products
may have a material adverse effect on the Company's competitive position and
business prospects. The patent application process takes several years and
entails considerable expense. There is no assurance that additional patents will
issue from these applications or, if patents do issue, that the claims allowed
will be sufficient to protect the Company's technology.
The Company has numerous patents and patent applications worldwide covering
its gene expression and delivery technology, as well as use patents for various
therapeutic applications, and patents and patent applications on its
manufacturing technology. In addition to patents and patent applications filed
and owned by the Company, the Company has exclusive rights under its licenses
with Roche Biosciences, The Regents, Vanderbilt, NJMRC, Stanford, Baylor, and
UPMC to patents and patent applications worldwide.
The Company has licensed from Roche Biosciences rights under certain U.S.
and foreign patents claiming the use of DOTMA for IN VIVO gene delivery. The
Company has licensed from Vanderbilt and The Regents exclusive rights to patents
and patent applications covering the use of cationic lipids for gene delivery by
systemic administration or by inhalation. In a separate license with Vanderbilt,
the Company has licensed rights to Vanderbilt's interest in the patents covering
the del-l gene and protein. In a separate license with The Regents, the Company
has licensed rights to lyophilized formulated DNA compositions.
The Company has licensed from Baylor patent rights covering the Company's
GeneSwitch-TM- gene regulation technology, patent rights on the use of certain
muscle-specific gene expression, and patent rights covering gene delivery to the
joint. The Company has licensed from UPMC a portfolio of patent rights in the
field of gene-based therapy for rheumatology, including viral and non-viral gene
therapy. The Company has licensed from NJMRC patent rights related to the
non-viral delivery of a cytokine gene and a
17
superantigen gene for the treatment of cancer. The Company has licensed from
Stanford patent rights to the use of genes that increase nitric oxide levels for
the treatment of certain cardiovascular diseases.
A number of the gene sequences that the Company and its corporate partners
are investigating or may use in its products are or may become patented by
others. As a result, the Company or its corporate partners may be required to
obtain licenses to such gene sequences or other technology to which it currently
has no proprietary rights in order to use or market such products. In addition,
some of the products based on the Company's gene delivery systems may require
the use of multiple proprietary technologies. Consequently, the Company or its
corporate partners may be required to make cumulative royalty payments to
several third parties. Such cumulative royalties could reduce amounts paid to
the Company or be commercially prohibitive. In connection with the Company's
efforts to obtain rights to such gene sequences or other proprietary technology,
the Company may find it necessary to convey rights to its technology to others.
There can be no assurance that the Company or its corporate partners will be
able to obtain any required licenses on commercially reasonable terms or at all.
If required licenses are not available to the Company, the Company may not be
able to develop or market certain products.
The patent positions of pharmaceutical and biotechnology firms are often
uncertain and involve complex legal and factual questions. Further, the breadth
of claims allowed in biotechnology patents is unpredictable. Patent applications
in the United States are maintained in secrecy until a patent issues, and the
Company cannot be certain that others have not filed patent applications for
technology covered by the Company's pending applications or that the Company was
the first to invent the technology that is the subject of such patent
application. Competitors may have filed applications for, or may have received
patents and may obtain additional patents and proprietary rights relating to
compounds, products or processes that block or compete with those of the
Company. While the Company is aware of patent applications filed and patents
issued to third parties relating to genes, gene delivery technologies and gene-
based therapeutics, there can be no assurance that any such patent applications
or patents will not have a material adverse effect on products the Company or
its corporate partners are developing or may seek to develop in the future.
There can be no assurance that third parties will not assert patent or other
intellectual property infringement claims against the Company with respect to
its products or technology or other matters.
Patent litigation is widespread in the biotechnology industry. Litigation
may be necessary to defend against or assert claims of infringement, to enforce
patents issued to the Company, to protect trade secrets or know-how owned or
licensed by the Company, or to determine the scope and validity of the
proprietary rights of third parties. Although no third party has asserted that
the Company is infringing such third party's patent rights or other intellectual
property, there can be no assurance that litigation asserting such claims will
not be initiated, that the Company would prevail in any such litigation, or that
the Company would be able to obtain any necessary licenses on reasonable terms,
if at all. Any such claims against the Company, with or without merit, as well
as claims initiated by the Company against third parties, can be time-consuming
and expensive to defend or prosecute and to resolve. If other companies prepare
and file patent applications in the United States that claim technology also
claimed by the Company, the Company may have to participate in interference
proceedings to determine priority of invention, which could result in
substantial cost to the Company even if the outcome is favorable to the Company.
The Company also relies on proprietary information and trade secrets,
including its proprietary database of preclinical IN VIVO experiments, to
develop and maintain its competitive position. There can be no assurance that
third parties will not independently develop equivalent proprietary information
or techniques, will not gain access to the Company's trade secrets or disclose
such technology to the public, or that the Company can maintain and protect
unpatented proprietary technology. The Company typically requires its employees,
consultants, collaborators, advisors and corporate partners to execute
confidentiality agreements upon commencement of employment or other
relationships with the Company. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for the
Company's technology in the event of unauthorized use or disclosure of such
information, that the
18
parties to such agreements will not breach such agreements or that the Company's
trade secrets will not otherwise become known or be discovered independently by
its competitors.
MANUFACTURING AND COMMERCIALIZATION
The Company's focused commercialization strategy is based on entering
corporate collaborations with pharmaceutical and biotechnology companies whereby
the Company will primarily pursue preclinical and early clinical development of
gene-based therapeutics, while the Company's partners will be responsible for
late stage clinical trials, sales, marketing, and large-scale clinical and
commercial manufacturing.
In September, 1998, Valentis and DSM Biologics (formerly
Gist-Brocades/Bio-Intermediair) announced the formation of a broad, strategic
collaboration focused on the manufacture and supply of DNA plasmids and
lipid:DNA complexes to the entire gene therapy industry. In May 1999 Qiagen N.V.
joined the manufacturing alliance. The goal of this alliance is to provide the
emerging gene therapy and genetic vaccination industry with early access to a
reliable, accepted contract manufacturing services platform.
Under the agreement, Valentis has licensed its proprietary manufacturing
technology for use in DSM facilities in Montreal, Canada and Groningen, The
Netherlands for license and milestone fees, and DSM, Qiagen and Valentis will
share in the profits generated by the sale of material produced using Valentis'
process. This arrangement could provide revenue for Valentis in advance of the
launch of commercial gene-based products.
Valentis is contributing its process technologies and its expertise in DNA
formulation and manufacturing to the collaboration. DSM brings extensive
manufacturing experience as a leading supplier of contract manufacturing
services serving the needs of the pharmaceutical and biotechnology industry.
Qiagen is contributing non-exclusive access to certain of its technologies and
its sales and marketing force.
The agreement between the parties is intended to be the exclusive vehicle
through which the parties will provide services in the area of contract cGMP
manufacturing of plasmid and formulated DNA for genetic vaccination and gene
therapy purposes. Qiagen has begun marketing these contract manufacturing
services to the gene therapy and genetic vaccination industry in lot sizes of up
to the 3,000-liter fermentation scale. In addition, Qiagen and Valentis intend
to continue to develop and improve these large-scale processes for plasmid DNA
manufacturing.
This manufacturing method has already been used to produce material for a
Phase I/II trial for cystic fibrosis conducted by Valentis' partner, Glaxo
Wellcome, and a Phase I/II study for metastatic melanoma, conducted by Valentis
and its academic collaborators at the University of Colorado Health Sciences
Center.
Through its arrangement with DSM Biologics, the Company has demonstrated
that its DNA plasmids, DNA:lipid complexes and formulations can be produced at
commercial scale using conventional and proprietary fermentation and
purification processes. In addition, the Company currently operates a pilot
manufacturing facility and has produced DNA plasmids at smaller scales. The
lipid components of Valentis' gene delivery systems can be synthesized using
readily scalable, organic synthesis procedures. To date, the Company has
obtained access to lipid manufacturing through arrangements with contract
manufacturers. Preparation of DNA:lipid complexes has been carried out at the
Company's pilot manufacturing facility and at contract manufacturers.
Valentis itself does not currently operate manufacturing facilities for
commercial production of its gene delivery systems. The Company has no
experience in, and currently lacks the resources and capability to, manufacture
or market any of its products on a commercial scale. Accordingly, the Company
will be dependent initially on corporate partners, licensees or other third
parties for commercial- scale manufacturing of its products. Sustained
large-scale manufacturing of gene-based therapeutics has not been demonstrated
by any third parties. There can be no assurance that its corporate partners will
be able to
19
develop adequate manufacturing capabilities for production of commercial-scale
quantities of gene-based therapeutics.
Under the terms of the Glaxo Wellcome Agreement, the Lilly Agreement and the
Corange Agreement, the Company's corporate partners have received exclusive
rights to market and sell the Company's gene-based therapeutics that are
developed pursuant to these corporate collaborations. In addition Glaxo and
Lilly have received exclusive rights for large-scale, clinical and commercial
manufacturing of the gene-based therapeutics for use in the areas covered by
these agreements. Under the Lilly Agreement, Valentis is obligated to provide
material used in preclinical testing and may supply material for clinical
trials.
The Company is highly dependent upon each of its corporate collaborations
with Roche, Glaxo and Lilly. The Company cannot control whether Roche, Glaxo or
Lilly will devote sufficient resources to the commercialization of the Company's
potential products on a timely basis, and such resources could vary due to
factors unrelated to the Company's products. If such corporate partners fail to
conduct these activities in a timely manner or at all, the commercialization of
the Company's products could be delayed or terminated. There can be no assurance
that any of these corporate collaborations will result in successfully
manufactured or commercialized products and the receipt by the Company of
related royalty revenues. Failure of the Company's corporate partners to
manufacture successfully the potential products for large-scale clinical trials
or commercial use, or to commercialize successfully the potential products,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
GOVERNMENT REGULATION
The production and marketing of the Company's products and its research and
development activities are subject to extensive regulation for safety, efficacy
and quality by numerous governmental authorities in the United States and other
countries. In the United States, pharmaceutical products are subject to rigorous
regulation by the United States Food and Drug Administration ("FDA"). The
Company believes that the FDA and comparable foreign regulatory bodies will
regulate the commercial uses of its products as biologics. Biologics are
regulated under certain provisions of the Public Health Service Act and the
Federal Food, Drug, and Cosmetic Act. These laws and the related regulations
govern, among other things, testing, manufacturing, safety, efficacy, labeling,
storage, record keeping, and the promotion, marketing and distribution of
biological products. At the FDA, the Center for Biologics Evaluation and
Research is responsible for the regulation of biological products and has
handled FDA's regulation of most gene-based therapeutics to date. Gene-based
therapy, however, is a relatively new technology and the regulatory requirements
governing gene-based therapeutics are uncertain. The Company is not aware of any
gene-based therapeutics that have received marketing approval from the FDA or
any comparable foreign authorities.
The necessary steps before a new biological product may be marketed in the
United States include: (i) preclinical laboratory tests and IN VIVO preclinical
studies; (ii) the submission to the FDA of an IND for clinical testing, which
must become effective before clinical trials commence; (iii) under certain
circumstances, approval by a special advisory committee convened to review INDs
involving gene-based therapeutics; (iv) adequate and well-controlled clinical
trials to establish the safety and efficacy of the product; (v) the submission
to the FDA of a product license application and establishment license
application ("PLA/ELA") and (vi) FDA approval of the PLA/ELA prior to any
commercial sale or shipment of the biologic. The FDA has eliminated the
requirement of a separate ELA for certain categories of biotechnology products,
including, for example, therapeutic recombinant DNA-derived products. At this
time, however, it is unclear whether these new regulations would apply to
gene-based therapeutics. Furthermore, the FDA has announced its intention
ultimately to review all new biologic products under a single biologics license
application. However, it is impossible to predict when this procedure will be
adopted.
20
Manufacturing facilities in the United States are subject to periodic
inspection by the FDA and state authorities, and must comply with GMP ("Good
Manufacturing Practice"). Manufacturers of biologics also must comply with FDA
general biological product standards and also may be subject to state
regulation. Failure to comply with GMP or other applicable regulatory
requirements may result in withdrawal of marketing approval, criminal
prosecution, civil penalties, recall or seizure of products, warning letters,
total or partial suspension of production, FDA refusal to review pending
marketing approval applications or supplements to approved applications, or
injunctions, as well as other legal or regulatory action against the Company or
its corporate partners.
Clinical trials are conducted in three sequential phases, but the phases may
overlap. In Phase I, the initial introduction of the product into healthy human
subjects or patients, the drug is tested to assess safety, metabolism,
pharmacokinetics and pharmacological actions associated with increasing doses.
Phase II usually involves studies in a limited patient population to (i)
determine the efficacy of the potential product for specific, targeted
indications, (ii) determine dosage tolerance and optimal dosage and (iii)
further identify possible adverse effects and safety risks. If a compound is
found to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to evaluate further clinical
efficacy and to test further for safety within a broader patient population at
geographically dispersed clinical sites. There can be no assurance that Phase I,
Phase II or Phase III testing will be completed successfully within any specific
time period, if at all, with respect to any of the Company's or its corporate
partners' products subject to such testing. In addition, after marketing
approval is granted, the FDA may require post-marketing clinical studies which
typically entail extensive patient monitoring and may result in restricted
marketing of the product for an extended period of time.
The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of a PLA/ELA for approval
of the manufacture, marketing and commercial shipment of the biological product.
The testing and approval process is likely to require substantial time, effort
and financial and human resources, and there can be no assurance that any
approval will be granted on a timely basis, if at all or that any product
developed by the Company and its corporate partners will prove safe and
effective in clinical trials or will meet all the applicable regulatory
requirements necessary to receive marketing approval from the FDA or the
comparable regulatory body of other countries. Data obtained from preclinical
studies and clinical trials are subject to interpretations that could delay,
limit or prevent regulatory approval. The FDA may deny the PLA/ELA if applicable
regulatory criteria are not satisfied, require additional testing or
information, or require post-marketing testing and surveillance to monitor the
safety or efficacy of a product. Moreover, if regulatory approval of a
biological product is granted, such approval may entail limitations on the
indicated uses for which it may be marketed. Finally, product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. Among the conditions for PLA/ELA
approval is the requirement that the prospective manufacturer's quality control
and manufacturing procedures conform to the appropriate GMP regulations, which
must be followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, financial resources and
effort in the area of production and quality control to ensure full compliance.
For clinical investigation and marketing outside the United States, the
Company and its corporate partners may be subject to FDA as well as regulatory
requirements of other countries. The FDA regulates the export of biological
products, whether for clinical investigation or commercial sale. In Europe, the
approval process for the commencement of clinical trials varies from country to
country. The regulatory approval process in other countries includes
requirements similar to those associated with FDA approval set forth above.
Approval by the FDA does not ensure approval by the regulatory authorities of
other countries.
The Company's research and development processes involve the controlled use
of hazardous materials, chemicals and radioactive materials, and produce waste
products. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such
21
materials and waste products. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated completely. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
Although the Company believes that it is in compliance in all material respects
with applicable environmental laws and regulations, there can be no assurance
that it will not be required to incur significant costs to comply with
environmental laws and regulations in the future, or that any the operations,
business or assets of the Company will not be materially adversely affected by
current or future environmental laws or regulations.
COMPETITION
Gene delivery and gene-based therapies are relatively new, rapidly evolving
areas of science in which significant and unexpected technological advances are
likely. Rapid technological development could result in the Company's products
or technologies becoming obsolete before the Company recovers a significant
portion of its related research, development and capital expenditures. The
Company is aware that several pharmaceutical and biotechnology companies are
actively engaged in research and development in areas related to gene-based
therapy, or have commenced clinical trials of gene-based therapeutics. Many of
these companies are addressing diseases that have been targeted by the Company
or its corporate partners. Valentis also may experience competition from
companies that have acquired or may acquire gene-based technology from
universities and other research institutions. As competitors develop their
technologies, they may develop proprietary positions in certain aspects of gene
delivery and gene-based therapeutics that may materially and adversely affect
the Company. In addition, the Company faces and will continue to face
competition from other companies for corporate collaborations with
pharmaceutical and biotechnology companies, for establishing relationships with
academic and research institutions, and for licenses to proprietary technology,
including intellectual property related to gene delivery systems. Corporate
partners may also elect to internally develop gene-based therapeutics which
compete with the Company's products. In addition, many other companies are
developing non-gene-based therapies to treat these same diseases.
Many of the Company's competitors and potential competitors have
substantially greater product development capabilities and financial,
scientific, manufacturing, managerial and human resources than the Company.
There can be no assurance that research and development by others will not
render the Company's delivery systems or the products developed by corporate
partners using the Company's delivery systems obsolete or non-competitive or
that any product developed by the Company or its corporate partners will be
preferred to any existing or newly developed technologies. In addition, there
can be no assurance that the Company's competitors will not develop safer, more
effective or less costly gene delivery systems, gene-based therapeutics or
non-gene based therapies, achieve superior patent protection or obtain
regulatory approval or product commercialization earlier than the Company, any
of which could have a material adverse effect on the Company's business,
financial condition or results of operations.
PRODUCT LIABILITY INSURANCE
The manufacture and sale of human therapeutic products involve an inherent
risk of product liability claims and associated adverse publicity. The Company
currently has only limited product liability insurance, and there can be no
assurance that it will be able to maintain existing or obtain additional product
liability insurance on acceptable terms or with adequate coverage against
potential liabilities. Such insurance is expensive, difficult to obtain and may
not be available in the future on acceptable terms, or at all. An inability to
obtain sufficient insurance coverage on reasonable terms or to otherwise protect
against potential product liability claims could prevent or inhibit the
commercialization of products by the Company. A product liability claim brought
against the Company in excess of its insurance coverage, if any, or a product
withdrawal, could have a material adverse effect upon the Company's business,
financial condition and results of operations.
22
EMPLOYEES
As of August 31, 1999 Valentis employed 109 individuals full-time, including
30 who hold doctoral degrees. Of the Company's total work force, 86 employees
are engaged in or directly support research and development activities, and 23
are engaged in business development, finance and administrative activities. The
Company's employees are not represented by a collective bargaining agreement.
The Company believes its relationships with its employees are good.
RISK FACTORS
SINCE THE DEVELOPMENT OF ITS PRODUCTS WILL TAKE SEVERAL MORE YEARS, VALENTIS
CANNOT BE CERTAIN THESE PRODUCTS WILL EVER BE SUCCESSFULLY MARKETED OR
MANUFACTURED
Because substantially all of the products under development by Valentis are
in research or preclinical development, revenues from the sale of any products
will not be realized for at least the next several years, if at all. Valentis
cannot be certain that any of its products will be safe and effective or that it
or its corporate partners will obtain regulatory approvals. In addition, any
products developed by Valentis may not be economical to manufacture on a
commercial scale. Even if Valentis develops a product that becomes available for
commercial sale, it cannot be certain that consumers will accept the product.
If Valentis cannot satisfy existing clinical and regulatory approval
requirements, it may be unable to market its products. Valentis and its
corporate partners may not obtain regulatory approval for the commercial sale of
any of their products, or be able to demonstrate that a potential product is
safe and effective for its intended use. Valentis cannot be certain that it or
its corporate partners will be permitted to undertake clinical testing of its
products. Valentis and its corporate partners may also experience delays in
conducting clinical trials due to a variety of factors, including:
- unfavorable or delayed preclinical study results;
- inability to manufacture sufficient quantities of materials used for
clinical trials;
- delays or difficulties in patient enrollment; and
- delays in regulatory approvals.
While Valentis has demonstrated some evidence of the utility of its gene
delivery systems in preclinical studies, these results do not mean that they
will be safe or effective in humans. The gene delivery systems may have
undesirable and unintended side effects or other characteristics that may
prevent or limit their use.
The gene delivery systems of Valentis face risks in addition to those common
to all biotechnology or biopharmaceutical companies. Gene-based therapy is a new
and rapidly evolving technology that is expected to undergo significant
technological changes in the future. Many companies are seeking to identify
therapeutic genes and understand their function in the development and
progression of various diseases. However, there is limited clinical data
available regarding the safety and efficacy of gene-based therapeutics. Valentis
is not aware of any gene-based therapeutic that has received marketing approval
from the US Federal Drugs Administration ("FDA") or foreign regulatory
authorities. As a result of the limited data available and other factors,
clinical trials relating to gene-based therapeutics may take longer to complete
than clinical trials involving more traditional pharmaceuticals.
VALENTIS EXPECTS TO OPERATE AT A LOSS FOR THE FORESEEABLE FUTURE AND MAY NEVER
ACHIEVE PROFITABILITY
Valentis cannot be certain that it will ever achieve and sustain
profitability. Since its inception, Valentis has engaged in research and
development activities. As a result, Valentis has generated minimal revenue from
operations and has experienced significant operating losses. As of June 30,
1999, Valentis had an accumulated deficit of approximately $73.3 million. The
process of developing Valentis' products
23
will require significant additional research and development, preclinical
testing, clinical trials and regulatory approvals. These activities, together
with general and administrative expenses, are expected to result in operating
losses for the foreseeable future.
THE BUSINESS OF VALENTIS MAY BE ADVERSELY AFFECTED IF IT CANNOT ATTRACT AND
RETAIN CORPORATE PARTNERS
Valentis may not be able to retain its corporate collaborations, or
establish additional collaborations. Valentis will rely on such corporate
collaborations to fund or conduct research and development, preclinical studies,
clinical trials, manufacturing, marketing and sales necessary to commercialize
its products. Even if it is able to establish and retain corporate
collaborations, the terms may not be favorable. Valentis' reliance on corporate
partners poses other risks, including:
- uncertainty that its current or future corporate collaborations will be
successful or that it will derive any revenue from such collaborations;
- corporate partners have considerable discretion in electing whether to
pursue the development of any product and may pursue alternative
technologies or products either on their own or in collaboration with
Valentis' competitors;
- disputes may arise in the future with respect to the ownership of rights
to technology developed with corporate partners;
- disagreements with corporate partners could lead to delays or termination
in the research, development or commercialization of product candidates,
or result in litigation or arbitration; and
- if any corporate partner fails to develop or commercialize successfully
any product, Valentis' business, financial condition and results of
operations could be materially adversely affected.
VALENTIS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO PROTECT ITS PATENTS AND
PROPRIETARY RIGHTS
Valentis' success will depend to a significant degree on its ability to:
- obtain patents and licenses to patent rights;
- preserve trade secrets; and
- operate without infringing on the proprietary rights of others.
The patent positions of biotechnology and pharmaceutical companies are
uncertain and involve complex legal and factual questions. As a result, Valentis
cannot predict how broad any claims in allowed patents will be. In addition,
there is a substantial backlog of biotechnology patent applications at the US
Patent and Trademark Office that may delay the review and the potential issuance
of patents.
Valentis has rights to US and foreign issued patents and has filed or
participated as a licensee in the filing of a number of patent applications in
the US relating to their technologies, as well as foreign counterparts of these
applications in many countries. Valentis will continue to file applications as
appropriate for patents covering both products and processes. There is a risk,
however, that patents may not issue from any of these applications or that
claims allowed under issued patents or patents that may issue from such
applications may not be sufficient to protect Valentis' technology.
Patent applications in the USA are maintained in secrecy until the patent
issues. As a result, Valentis cannot be certain that others have not filed
patent applications for technology covered by their pending applications.
Valentis also cannot be certain that it was the first to invent the technology
that is the subject of such patent applications. Competitors may have filed
patent applications or received patents and may obtain additional patents and
proprietary rights that block or compete with those held by Valentis. Valentis
24
is aware of patent applications filed and patents issued to third parties
relating to gene delivery technologies. Valentis currently is unable to verify
that any of these patent applications or patents held by third parties will have
any effect on Valentis' products.
Competitors of Valentis may file patent applications in the USA that claim
technology also invented by Valentis. If so, Valentis may have to participate in
interference proceedings or even litigation to determine priority of invention
and, thus, the right to a patent. This could result in substantial cost to
Valentis to determine its rights or even potential loss of its rights.
Valentis' success depends in large part on its ability to operate without
infringing upon the patents or other proprietary rights of third parties. In the
event of such infringement, Valentis and its corporate partners may be enjoined
from pursuing commercialization of products or may be required to obtain
licenses to these patents or other proprietary rights. Valentis cannot be
certain that it or its corporate partners will be able to obtain alternative
technologies or any required license. Even if Valentis or its corporate partners
were to obtain such technologies or licenses, Valentis cannot be certain that
the terms would be commercially reasonable. If such licenses or alternative
technologies are not obtained, Valentis may be delayed or prevented from
pursuing the development of some or all of its products.
Valentis also relies on proprietary information and trade secrets, including
its proprietary database of preclinical in vivo experiments, to develop and
maintain its competitive positions. Third parties may independently develop
equivalent proprietary information or techniques or gain access to Valentis'
trade secrets. Valentis typically requires its employees, consultants,
collaborators, advisors and corporate partners to execute confidentiality
agreements. However, these agreements may not provide meaningful protection or
adequate remedies in the event of unauthorized use or disclosure of such
information. Valentis cannot be certain that the parties to such agreements will
not breach the agreements.
VALENTIS' BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO OBTAIN RIGHTS TO
PROPRIETARY GENES OR OTHER TECHNOLOGIES
Valentis and its corporate partners are investigating the use of gene
sequences in Valentis' products. A number of these gene sequences are, or may
become, patented by others. As a result, Valentis or its corporate partners may
be required to obtain licenses to those gene sequences or other technology. In
addition, some of the products based on Valentis' gene delivery systems may
require the use of multiple proprietary technologies. Consequently, Valentis or
its corporate partners may be required to make cumulative royalty payments to
several third parties. These cumulative royalties would reduce amounts retained
by or paid to the combined company and could be commercially prohibitive.
Valentis cannot be certain that it or their corporate partners will be able to
obtain any required licenses.
IF VALENTIS IS UNABLE TO SATISFY GOVERNMENT REGULATIONS, IT MAY NOT BE ALLOWED
TO DEVELOP, MARKET, AND MANUFACTURE ITS PRODUCTS IN THE US
Valentis may not receive approval from regulatory authorities to market any
of its products. Prior to marketing any drug or biological product in the US,
the product must undergo rigorous preclinical studies and clinical trials. In
addition, the product must undergo an extensive regulatory approval process
implemented by the FDA. Satisfaction of these regulatory requirements typically
takes several years or more and a substantial commitment of resources. Valentis
cannot be certain that it will obtain regulatory approval even if it devotes
substantial resources and time. Valentis believes that the FDA will regulate the
commercial uses of its products as biologics. However, because gene-based
therapy is a relatively new technology, the regulatory requirements are
particularly uncertain. This uncertainty may result in excessive costs or delays
in the regulatory approval process.
In addition, manufacturing facilities in the US must comply with the FDA's
good manufacturing process regulations. Such facilities are subject to periodic
inspection by the FDA and state authorities. Manufacturers of biologics also
must comply with the FDA's general biological product standards and also
25
may be subject to state regulation. Failure to comply with such regulatory
requirements may result in the following:
- withdrawal of marketing approval;
- civil penalties;
- recall or seizure of products or total or partial suspension of
production;
- FDA warning letters;
- refusal by the FDA to review applications or supplements to approved
applications;
- injunctions; or
- other legal or regulatory actions.
Even after a product is approved for marketing, the product, its
manufacturer and its manufacturing facilities are subject to continued
regulatory review, oversight and periodic FDA inspections. Discovery of
previously unknown problems with a product, manufacturer or facility may result
in penalties, including withdrawal of the product from the market.
IF VALENTIS IS UNABLE TO OBTAIN FOREIGN REGULATORY APPROVALS, IT MAY NOT BE
ALLOWED TO DEVELOP, MARKET, AND MANUFACTURE ITS PRODUCTS IN FOREIGN COUNTRIES
Valentis cannot be certain that it will obtain any regulatory approvals in
other countries. In order to market its products outside the US, Valentis and
its corporate partners must comply with numerous and varying regulatory
requirements of other countries regarding safety and quality. The approval
procedures vary among countries and can involve additional testing. The time
required obtaining approval in other countries might differ from that required
to obtain FDA approval. The regulatory approval process in other countries
involves similar risks to those associated with obtaining FDA approval set forth
above. Approval by the FDA does not ensure approval by the regulatory
authorities of any other country.
VALENTIS' SUCCESS MAY BE ADVERSELY AFFECTED BY INTENSE COMPETITION IN THE
GENE-BASED THERAPEUTICS MARKET
The pharmaceutical and biotechnology industries are highly competitive.
Valentis is aware of several pharmaceutical and biotechnology companies that are
pursuing gene-based therapeutics. Many of these companies are addressing
diseases that have been targeted by Valentis or its corporate partners. Valentis
is also aware that some of its corporate partners are developing gene-based
therapeutics with one or more of their competitors. These corporate partners may
devote more resources to products or technologies that will compete with those
of Valentis. Valentis may also experience competition from companies that enter
the field of gene-based therapeutics in the future. As competitors develop their
technologies, they may develop proprietary positions in a particular aspect of
gene delivery and gene-based therapeutics that could prevent Valentis from
developing its products.
In addition, Valentis will face intense competition from other companies for
corporate collaborations, for establishing relationships with academic and
research institutions and for licenses to proprietary technology. Moreover, many
other companies are developing non-gene-based therapies to treat these same
diseases.
Most of Valentis' competitors and potential competitors have substantially
greater resources than Valentis. Those resources include superior product
development capabilities and financial, scientific, manufacturing, managerial
and human resources. Valentis' competitors may develop safer, more effective or
less costly gene delivery systems, gene-based therapeutics or non-gene-based
therapies. In addition, competitors may achieve superior patent protection or
obtain regulatory approval or product commercialization earlier than Valentis.
26
VALENTIS' BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO ATTRACT AND
RETAIN QUALIFIED EMPLOYEES
Valentis' success will depend on its ability to retain its executive
officers and scientific staff, and the consultants and advisors who assist
Valentis in formulating its research and development strategy. If Valentis loses
any of these persons, its corporate collaborations, business, financial
condition and results of operations could be adversely affected. Valentis does
not maintain key man life insurance on any of its executive officers or other
key employees.
In order to pursue its research and product development plans, Valentis must
attract and retain additional qualified scientific and other personnel. Most of
the individuals who will be sought by Valentis are highly skilled in
pharmaceutical product development or in particular scientific fields. These
individuals are generally in high demand by pharmaceutical and biotechnology
companies and by universities and other research institutions. As a result,
Valentis cannot be certain it will be able to attract and retain qualified
individuals. The loss of key personnel or the inability to hire and retain
qualified personnel could adversely affect Valentis' product development
efforts.
IF VALENTIS IS UNABLE TO SECURE ADDITIONAL FINANCING, ITS RESEARCH AND
DEVELOPMENT EFFORTS MAY BE ADVERSELY AFFECTED
Valentis may be unable to obtain the additional funding it will need in
order to continue its research and development activities. Valentis has financed
its operations primarily through the sale of equity securities and through
corporate collaborations. Valentis has generated no royalty revenues from
product sales. No such revenue for Valentis is expected for the foreseeable
future, if ever. Valentis anticipates that its existing resources will enable it
to maintain its operations through at least the calendar year ending December
31, 2000. However, Valentis may require additional funding prior to such time.
Valentis' future capital requirements will depend on many factors,
including:
- scientific progress in its research and development programs;
- size and complexity of such programs;
- scope and results of preclinical studies and clinical trials;
- ability to establish and maintain corporate collaborations;
- time and costs involved in obtaining regulatory approvals;
- time and costs involved in filing, prosecuting and enforcing patent
claims;
- competing technological and market developments; and
- the cost of manufacturing preclinical and clinical material.
Valentis cannot be certain that additional financing to meet its funding
requirements will be available. Even if financing is available, the terms may
not be attractive. Furthermore, any additional equity financing may be dilutive
to Valentis' stockholders. If Valentis is unable to raise capital when needed,
it may have to reduce operations to conserve cash or cease operations entirely.
VALENTIS' PRODUCTS MAY NOT BE COMMERCIALLY SUCCESSFUL IF THEY ARE NOT ACCEPTED
BY PHYSICIANS AND INSURERS
Concerns have arisen regarding the potential safety and efficacy of
gene-based therapeutics using viral delivery systems. While Valentis' gene
delivery systems are lipid-based and do not contain viruses, these concerns
could adversely affect physicians' and health care payers' evaluations of
Valentis' products. Physicians and health care payers could conclude that
Valentis' products or technologies are not safe and effective. Valentis' success
is dependent on commercial acceptance of its products. Valentis believes that
recommendations by physicians and health care payers will be essential for
commercial acceptance of its
27
products. If products developed by Valentis and its corporate partners are not
commercially accepted by patients, physicians or third-party payers, sales would
be adversely affected.
VALENTIS' BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO EFFECTIVELY
PRICE ITS PRODUCTS OR OBTAIN ADEQUATE REIMBURSEMENT
Even if Valentis and its corporate partners succeed in bringing any products
to market, they cannot be certain that reimbursement will be available. Sales
volume and price of any products successfully developed by the combined company
will depend, in part, on the availability of third-party reimbursement for the
cost of such products and related treatments. Reimbursement is generally
provided by government health administration authorities, private health
insurers and other organizations. Third-party payers are increasingly
challenging the price of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
Even if reimbursement is available, payers' reimbursement policies may adversely
affect corporate partner's ability to sell such products on a profitable basis.
If these corporate partners are unable to profitably sell Valentis' products,
royalty revenue to Valentis will be reduced.
VALENTIS' BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO DEVELOP LARGE
SCALE MANUFACTURING CAPABILITIES
Although Valentis has entered into a strategic collaboration with DSM
Biologics for the manufacture and supply of plasmid DNA for the gene therapy
industry, neither DSM nor any third party has demonstrated successful commercial
large-scale manufacturing of plasmid DNA. The collaboration has the potential to
create the first manufacturing facilities that can produce high-quality,
ultra-pure material for plasmid-based therapeutics on every scale, from
preclinical toxicology studies to commercial products. DSM will have full
responsibility for manufacturing material to be marketed to any company or
institution working in the field of gene therapy. Valentis will depend on DSM
for commercial-scale manufacturing of its products. DSM may be unable to develop
adequate manufacturing capabilities for commercial-scale quantities of
gene-based therapeutic products. If DSM or third parties are unable to establish
and maintain large-scale manufacturing capabilities, Valentis' commercialization
of its products may be delayed and sales of any products would be adversely
affected.
DELAWARE LAW AND VALENTIS' CHARTER COULD MAKE THE ACQUISITION OF VALENTIS BY
ANOTHER COMPANY MORE DIFFICULT
Provisions of Delaware law applicable to Valentis could delay a merger,
tender offer or proxy contest involving Valentis or make such a transaction more
difficult. These provisions prohibit a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
from the date the person became an interested stockholder unless a number of
conditions are met. In addition, the Valentis Board of Directors may issue
shares of preferred stock without Valentis stockholder approval on terms
determined by the Board of Directors. The rights of the holders of Valentis
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. In
addition, the Valentis Amended and Restated Certificate of Incorporation and the
Valentis Bylaws contain the following provisions:
- classified board of directors;
- no right of stockholders to act by written consent without a meeting;
- advance stockholder notice required to nominate directors and raise
matters at the annual stockholders meeting;
- no cumulative voting in the election of directors; and
- removal of directors only for cause and with a two-thirds vote of the
issued Valentis Common Stock.
28
These provisions could delay, defer or prevent a change in control of
Valentis or limit the price that investors might be willing to pay in the future
for shares of Valentis Common Stock.
VALENTIS' BUSINESS MAY BE NEGATIVELY IMPACTED BY COMPUTER FAILURES IN THE YEAR
2000 ("Y2K")
Many existing computer programs and systems, including some of those used by
Valentis and its suppliers and vendors, use only two digits to identify the year
in the date field. These programs may be unable to process date/time information
between the twentieth and twenty-first centuries. This inability could cause the
disruption or failure of such computer systems. Valentis has identified two main
areas of its Y2K risk:
- Valentis' internal computer systems could be disrupted or fail, causing an
interruption or decrease in Valentis' ability to continue its operations;
and
- the computer systems of third parties with whom Valentis regularly deals,
including its suppliers, vendors, utilities and financial institutions,
could be disrupted or fail, causing an interruption or decrease in
Valentis' ability to continue its operations.
Valentis is currently evaluating the nature and extent of the Y2K issues for
its internal systems and has developed a plan to address the issue. If Valentis
does not achieve Y2K compliance for its internal systems on a timely basis,
Valentis' business could be adversely affected. If the business of any third
party, including suppliers, vendors, utilities or financial institutions, is
significantly disrupted because such party is not Y2K compliant, such disruption
could adversely affect Valentis' business. These disruptions could include,
among other things:
- a financial institution's inability to process checks drawn on Valentis'
bank accounts, accept deposits or process wire transfers;
- a client's, supplier's, vendor's or financial institution's business
failure;
- an interruption in deliveries of equipment and supplies from vendors;
- a loss of voice and data connections Valentis will use to share
information;
- a loss of electric power to Valentis' facilities; or
- other interruptions to the normal conduct of business by Valentis, the
nature and extent of which Valentis cannot foresee.
Valentis does not know whether any of the disruptions described above will
actually occur. Even if they do occur, Valentis cannot predict the effect they
will have on Valentis' business.
VALENTIS' RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED IF ENVIRONMENTAL
CLAIMS EXCEED INSURANCE LIMITS OR COSTS TO COMPLY WITH ENVIRONMENTAL LAW BECOME
EXCESSIVE
Valentis' research and development processes will involve the controlled use
of hazardous and radioactive materials. The risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of an
accident, Valentis could be held liable for any damages, which could exceed its
available financial resources, including its insurance coverage. Valentis will
be subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of hazardous or radioactive
materials and waste products. Valentis may be required to incur significant
costs to comply with environmental laws and regulations in the future.
RISKS ASSOCIATED WITH ACQUISITIONS
A part of the Company's strategy is to grow through mergers and acquisitions
of products, companies and businesses, and Valentis intends in the future to
pursue additional acquisitions of complementary
29
product lines, technologies and businesses. The Company may have to issue debt
or equity securities to pay for future acquisitions, which could be dilutive.
Valentis has also incurred and may continue to incur certain liabilities or
other expenses in connection with acquisitions, which have and could continue to
materially adversely affect its business, financial condition and results of
operations. Although the Company believes it has accounted for its acquisitions
properly, the U.S. Securities and Exchange Commission (the "SEC") has recently
been reviewing more closely the accounting for acquisitions by companies,
particularly in the area of "in-process" research and development costs. If the
Company is required by the SEC to restate any charge that we recognized in an
acquisition so far, that could result in a lesser charge to income and increased
amortization expense, which could also have a material adverse effect on our
business, financial condition and results of operations. In addition, mergers
and acquisitions involve numerous other risks, including:
- difficulties assimilating the operations, personnel, technologies and
products of the acquired companies;
- diversion of management's attention from other business concerns;
- the potential loss of key employees of the acquired companies.
For these reasons, Valentis cannot be certain what effect existing or future
acquisitions may have on its business, financial condition and results of
operations.
IF VALENTIS AND POLYMASC ARE NOT SUCCESSFULLY INTEGRATED, THE COMBINED COMPANY'S
BUSINESS WILL BE ADVERSELY AFFECTED
Integrating Valentis and PolyMASC will be a complex, time-consuming and
expensive process. Prior to the acquisition, Valentis and PolyMASC operated
independently, each with its own business, business culture, employees and
systems. After consummation of the merger on August 27, 1999, Valentis and
PolyMASC must operate as a combined organization utilizing common:
- information and communication systems;
- operating procedures;
- financial controls; and
- human resource practices, including benefit, training and professional
development programs.
There may be substantial difficulties, costs and delays involved in
integrating Valentis and PolyMASC. These may include:
- distracting management from the business of the combined company;
- potential incompatibility of business cultures;
- perceived uncertainty in career opportunities, benefits and the long-term
return value of stock options available to employees;
- potential inability to coordinate research and development efforts
successfully;
- costs and delays in implementing common systems and procedures; and
- operating the combined company at three different sites, in California,
Texas and London.
Any one or all of these factors may increase operating costs or lower
anticipated financial performance. In addition, the combined company may lose
corporate partners and employees. Many of these factors are also outside the
control of either company. The failure to integrate Valentis and PolyMASC would
have a material adverse effect on the business, financial condition and results
of operations of the combined company.
30
INEXPERIENCE WITH INTEGRATION OF INTERNATIONAL SUBSIDIARIES COULD DECREASE THE
EFFECTIVENESS OF EUROPEAN OPERATIONS
The acquisition of PolyMASC involves the integration of two companies that
previously operated independently. Such integration will require significant
effort from each company, including the coordination of their operations,
research and development and sales and marketing efforts. There can be no
assurance that Valentis will integrate the operations of PolyMASC without
encountering difficulties or experiencing the loss of PolyMASC or Valentis
personnel or that the benefits expected from such integration will be realized.
The difficulties are exacerbated by the fact that the two companies are located
on different continents separated by economic, governmental and cultural
differences. Valentis has no prior experience integrating a European operation.
The diversion of the attention of management and any difficulties encountered in
the transition process could have an adverse impact on Valentis' ability to
realize anticipated synergies from the acquisition of PolyMASC. Such problems
may include:
- the interruption of, or a loss of momentum in PolyMASC's activities;
- problems associated with integration of management information and
reporting systems; or
- delays in implementing consolidation plans.
ITEM 2. PROPERTIES
Valentis currently leases approximately 45,300 square feet in Burlingame,
California ("The Burlingame Facility"), and a 38,000 square-foot building in The
Woodlands, Texas (the Woodlands Facility"), both of which are occupied. The two
facilities have been built to the Company's specifications to accommodate the
Company's laboratory, support and administrative needs and include manufacturing
facilities designed to supply material required for preclinical research and
development and initial clinical trials. The term of the lease for the 34,700
square feet in use in Burlingame expires in 2004, at which time the Company has
the option to renew the lease. Approximately 10,600 square feet of the
Burlingame Facility has been built-out for use as a pilot manufacturing
facility. The term of the lease for this portion of the facility expires in
2007, at which time the Company has the option to renew the lease. The initial
term of the lease for the Woodlands Facility, which began in January 1995, is 10
years, after which time the Company may renew the lease for an additional period
of five years. The Company also has an option to expand this facility by up to
an additional 62,000 square feet during the first six years of the initial term
of the lease. Valentis believes that its facilities are adequate to meet the
Company's needs for the foreseeable future. Should the Company need additional
space, management believes it will be able to secure such space on reasonable
terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS
A special meeting of stockholders was held on July 30, 1999 to approve an
amendment to the Company's Amended and Restated Certificate of Incorporation to
increase the number of authorized shares of the Company's Common Stock from
30,000,000 to 45,000,000.
The voting of stockholders with respect to the proposal was as follows:
VOTES FOR VOTES AGAINST VOTES ABSTAINED
- ------------ ----------------- -------------------
12,961,451 745,671 273,471
31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the Nasdaq National Market as
Megabios Corp. under the symbol "MBIO" on September 15, 1997. Prior to that
date, there was no public market for the Company's Common Stock. In April 1999
the Company was renamed Valentis and its stock trading symbol was changed to
"VLTS." The following table sets forth, for the calendar periods indicated, the
high and low sales prices of the Common Stock reported by Nasdaq.
HIGH LOW
--------- ---------
1997
Third Quarter (from September 15, 1997)........................................................ $ 16.75 $ 12.37
Fourth Quarter................................................................................. 18.50 10.50
1998
First Quarter.................................................................................. 14.00 8.88
Second Quarter................................................................................. 8.88 6.38
Third Quarter.................................................................................. 8.00 4.25
Fourth Quarter................................................................................. 6.94 4.00
1999
First Quarter.................................................................................. 6.75 4.06
Second Quarter................................................................................. 5.56 3.38
Third Quarter (through September 10, 1999)..................................................... 6.50 3.75
On September 10, 1999 the last sale price reported on the Nasdaq National
Market for the Company's Common Stock was $6.50 per share. At that date, there
were approximately 752 stockholders of record of the Company's Common Stock.
On March 18, 1999, the Company completed its merger with GeneMedicine, Inc.
On April 29, 1999, the combined company was renamed Valentis, Inc. Under the
terms of the merger agreement, each outstanding share of GeneMedicine common
stock was converted into 0.571 of a share of the Company's common stock. This
resulted in the issuance of approximately 9.1 million additional shares of the
Company's common stock, valued at $38.7 million.
The Company has never paid any cash dividends on its capital stock and does
not expect to pay any dividends in the foreseeable future.
32
ITEM 6. SELECTED FINANCIAL DATA
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 related Notes included elsewhere in this report.
YEAR ENDED JUNE 30,
-------------------------------------------------------
1999(2) 1998 1997 1996 1995
---------- ---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Collaborative research and development revenue............ $ 3,430 $ 8,083 $ 5,793 $ 1,890 $ 1,157
Research and development grant revenue.................... 699 -- -- -- --
---------- ---------- --------- --------- ---------
Total revenue........................................... 4,129 8,083 5,793 1,890 1,157
Operating expenses:
Research and development................................ 17,806 13,611 8,598 6,487 4,691
General and administrative.............................. 5,063 3,561 2,417 2,169 1,811
Write-off of acquired in-process research and
development........................................... 26,770 1,500 -- -- --
Amortization of goodwill................................ 819 -- -- -- --
---------- ---------- --------- --------- ---------
Total operating expenses.............................. 50,458 18,672 11,015 8,656 6,502
---------- ---------- --------- --------- ---------
Loss from operations...................................... (46,329) (10,589) (5,222) (6,766) (5,345)
Interest income (expense), net............................ 1,649 2,211 275 (135) (84)
---------- ---------- --------- --------- ---------
Net loss.................................................. $ (44,680) $ (8,378) $ (4,947) $ (6,901) $ (5,429)
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
Basic and diluted net loss per share...................... $ (2.90) $ (0.83) $ (4.40) $ (9.86) $ (8.72)
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
Shares used in computing basic and diluted net loss per
share................................................... 15,430 10,088 1,126 700 622
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
Pro forma net loss per share(1)........................... $ (0.70) $ (0.64)
---------- ---------
---------- ---------
Shares used in computing pro forma net loss per
share(1)................................................ 11,898 7,776
---------- ---------
---------- ---------
- ------------------------
(1) Pro forma net loss per share gives effect to the conversion of the
convertible Preferred Stock that automatically converted upon completion of
the Company's initial public offering (using the if converted method) from
the original date of issuance. See Note 1 of Notes to Financial Statements
for a further explanation of the computation of net loss and pro forma net
loss per share.
(2) Reflects the results of GeneMedicine, Inc. from March 18, 1999, the date of
acquisition.
JUNE 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...... $ 24,307 $ 22,966 $ 24,269 $ 5,253 $ 282
Working capital........................................ 15,461 20,966 21,629 3,568 (873)
Total assets........................................... 64,427 55,901 29,978 9,956 4,969
Long-term debt......................................... 5,459 2,464 1,487 1,894 1,305
Accumulated deficit.................................... (73,266) (28,586) (20,208) (15,261) (8,360)
Total stockholders' equity............................. 45,930 50,282 25,223 6,086 2,219
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH IN THIS SECTION AS WELL AS UNDER "ITEM 1.
BUSINESS," INCLUDING "RISK FACTORS".
OVERVIEW
On March 18, 1999, Megabios Corp. completed its merger with GeneMedicine,
Inc. ("GeneMedicine"). On April 29, 1999, the combined company was renamed
Valentis, Inc. ("the Company"). Each outstanding share of GeneMedicine common
stock was converted into 0.5710 of a share of the common stock of the Company.
The merger resulted in the issuance of approximately 9.1 million shares of the
Company's common stock, valued at $38.7 million. The purchase price also
included approximately $850,000 related to outstanding GeneMedicine stock
options and outstanding warrants assumed by the Company and $1.7 million of
transaction costs, for an aggregate purchase price of $41.3 million.
The merger transaction was accounted for as a purchase. A write-off of $25.9
million for in-process research and development acquired from GeneMedicine was
included in the Company's statement of operations (see detailed discussion of
"Acquisition of GeneMedicine Research and Development Programs" below). The
intangible assets acquired will be amortized over their estimated useful lives
of 3 years.
With the acquisition of London-based PolyMASC Pharmaceuticals plc
("PolyMASC"), in August 1999, Valentis expanded its delivery technologies and
has a more diversified portfolio of products in clinical and preclinical
development. The acquisition broadened Valentis' intellectual property portfolio
in biologics delivery, creating what it believes is the first company offering a
broad array of technologies and intellectual property in biologics delivery.
PolyMASC, a wholly owned subsidiary of Valentis, will continue to operate in its
London location and focuses primarily on research and preclinical development of
PEGylation technologies and products. PEGylation is an established technology
that involves the attachment of the polymer polyethyleneglycol ("PEG") to
therapeutics to alter their pharmacokinetics (distribution in the body,
metabolism and excretion). The alteration of the pharmacokinetics of biologics
due to PEGylation can lead to improved dosing intervals and may also have
beneficial effects on safety and efficacy.
Valentis is conducting operations in California, Texas and London. The
Company expects an increase in both research and administrative expenditures in
future periods.
The Company develops proprietary technologies and applies its preclinical
and early clinical development expertise to create novel therapeutics. The
Company's core technologies include multiple gene delivery and gene expression
systems and PEGylation technologies designed to improved the safety, efficacy
and dosing characteristics of genes, proteins, peptides, peptidomimetics
(peptide-like small molecules), antibodies and replicating and non-replicating
viruses. These technologies are covered by a broad patent portfolio that
includes issued U.S. and European claims. This expanded portfolio of delivery
technologies allows Valentis to maintain its focus on creating improved versions
of currently marketed products as well as solving safety, efficacy and
compliance issues with biologics in development. Valentis' commercial strategy
is to enter into corporate collaborations for full-scale clinical development
and marketing and sales of products. Valentis itself, or through its PolyMASC
subsidiary, currently has corporate collaborations with:
- Roche Holdings Ltd. ("Roche") for cancer immunotherapeutics,
- Eli Lilly & Co. ("Lilly") to develop treatments for breast and ovarian
cancer using the BRCA1 gene,
34
- Glaxo Wellcome plc ("Glaxo Wellcome") to develop a treatment for cystic
fibrosis using the CFTR gene,
- Transkaryotic Therapies Inc. for PEGylation of certain proteins,
- Onyx Pharmaceuticals Inc. for a PEGylated virus-based cancer therapeutic,
- Bayer Corporation for a PEGylated Factor VIII, and
- DSM Biologics and Qiagen N.V. for plasmid manufacturing
To date, substantially all revenue has been generated by collaborative
research and development agreements from corporate partners, and no revenue has
been generated from product sales. Under the terms of its corporate
collaborations the Company generally receives research and development funding
on a quarterly basis in advance of associated research and development costs.
The Company expects that future revenue will be derived in the short-term from
research and development agreements and milestone payments and in the long-term
from royalties on product sales.
The Company has incurred significant losses since inception and expects to
incur substantial losses for the foreseeable future, primarily due to the
expansion of its research and development programs and because the Company does
not expect to generate revenue from the sale of products in the foreseeable
future, if at all.
The Company expects that operating results will fluctuate from quarter to
quarter and that such fluctuations may be substantial. As of June 30, 1999, the
Company's accumulated deficit was approximately $73.3 million.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 1999, 1998, AND 1997
REVENUE
The Company's research and development revenue totaled approximately $4.1
million, $8.1 million and $5.8 million for the years ended June 30, 1999, 1998
and 1997, respectively. The 1999 revenue was attributable to amounts earned for
collaborative research and development performed under the Company's corporate
collaborations with Roche and Lilly, totaling approximately $1.0 million and
$2.2 million, respectively, a $250,000 milestone payment earned from DSM
Biologics, and $699,000 earned under SBIR grants. The 1998 revenue was
attributable primarily to amounts earned for research and development performed
under the Company's corporate collaborations with Pfizer and Lilly, totaling
approximately $4.0 million and $4.0 million, respectively. The 1997 revenue was
primarily attributable to amounts earned for research and development performed
under the Company's corporate collaborations with Glaxo Wellcome, Pfizer and
Lilly totaling approximately $2.0 million, $3.4 million and $270,000,
respectively. No revenue from royalties from product sales has been earned under
any corporate collaboration to date.
EXPENSES
Research and development expenses increased to $17.8 million for the year
ended June 30, 1999 from $15.1 million in 1998 and $8.6 million in 1997. The
increases in 1999 were primarily attributable to the additions of staff,
facilities and projects resulting from the merger with GeneMedicine in March
1999. The increase in 1998 compared to 1997 was primarily due to increased
headcount costs, increased purchases of laboratory supplies and materials,
increased depreciation from additional equipment and leasehold improvements and
the increased use of consultants and other services to support the Company's
research and development activities. In addition, in March 1998, the Company
purchased patent rights and an exclusive license to certain technology from the
University of Pittsburgh. In partial consideration for this exclusive license,
the Company issued 117,555 shares of its common stock to the University of
Pittsburgh.
35
The value of the common stock issued in the transaction was $1.5 million, which
was expensed to research and development during the period. The Company expensed
the value of this common stock as the technology was not complete at the date of
acquisition. The Company expects research and development expenses to increase
as the Company continues to expand its independent and collaborative research
and development programs.
General and administrative expenses increased to $5.1 million for the year
ended June 30, 1999 from $3.6 million in 1998 and $2.4 million in 1997. The
increase in 1999 compared to 1998 was primarily due to the additions of staff
and facilities and the costs of producing the Company's first annual report to
stockholders. The increase in 1998 compared to 1997 was primarily attributable
to increased administrative headcount and costs associated with being a newly
public company. The Company expects general and administrative expenses to
increase due to business development activities and to support expanded research
and development activities.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net was $1.6 million in 1999, $2.2 million in
1998 and $0.3 million in 1997. The decrease in interest income (expense), net in
1999 compared to 1998 resulted primarily from increased interest expenses on
higher outstanding balances on the Company's equipment financing lines of
credit. The increase in 1998 compared to 1997 resulted primarily from the
increase in average cash and investment balances as a result of $31.4 million in
net proceeds from the Company's initial public offering in September 1997
partially offset by higher outstanding balances on an equipment financing line
of credit.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had $39.1 million in cash, cash equivalents
and investments compared to $48.4 million at June 30, 1998. Included in the
Company's cash, cash equivalents and securities balances is $11.8 million of
cash and short-term investments acquired pursuant to the merger with
GeneMedicine on March 18, 1999.
Net cash used in the Company's operations was $20.7 million in 1999, $5.6
million in 1998 and $3.0 million in 1997. Cash was used primarily to fund
increasing levels of research and development and general and administrative
activities. The Company's capital expenditures were $5.8 million in 1999, $2.7
million in 1998 and $1.7 million in 1997.
In June 1998, the Company established a line of credit for $8,000,000 with a
commercial bank. At June 30, 1999, the outstanding balance was $6.8 million
under the line of credit. In accordance with the terms of the agreement, the
entire balance was converted into term loans at interest rates ranging from
8.25% to 9.0% due in equal monthly installments. The loans are secured by
tangible personal property, other than the assets securing the equipment
financing, accounts receivable and funds on deposit. As a condition of the
credit line, the Company must maintain a minimum cash and short-term investments
balance of not less than the greater of the prior two quarters net cash usage or
90% of the total principal drawn under the line of credit.
On September 15, 1997, the Company completed its initial public offering of
2,500,000 shares of common stock at $12.00 per share. In addition, on September
29, 1997, the Company's underwriters exercised their over-allotment option and
purchased an additional 375,000 shares of the Company's common stock at $12.00
per share. The combined net proceeds raised from the initial public offering and
the exercise of the over-allotment option were approximately $31.4 million.
In May 1996, the Company entered into an equipment financing agreement for
up to $2,700,000 with a financing company. The Company has financed $2,700,000
in equipment purchases under this agreement structured as loans. The equipment
loans are to be repaid over 48 months at interest rates ranging from
36
15.2% to 16.2% and are secured by the related equipment. As of June 30, 1999,
the outstanding balance under this financing agreement was $1.7 million.
In June 1995, the Company established a line of credit for $1,500,000 with a
commercial bank that was fully utilized by August 1995. In accordance with the
terms of the agreement, the Company elected to convert the entire balance to a
term loan bearing interest at prime plus 2% due in 36 equal monthly
installments. This line of credit was repaid in full in July 1998.
In December 1993, the Company entered into an equipment financing agreement
for up to $2,300,000 with a financing company. The Company had financed
$1,922,000 in equipment purchases under this agreement structured as loans. The
equipment loans were repaid over 42 months at interest rates ranging from 13.8%
to 16.2% and were secured by the related equipment. This debt was repaid in full
in December 1998.
The Company anticipates that its cash and cash equivalents, committed
funding from existing corporate collaborations, lines of credit and projected
interest income, will enable the Company to maintain its current and planned
operations at least through December 2000. However, the Company may require
additional funding prior to such time. The Company's future capital requirements
will depend on many factors, including scientific progress in its research and
development programs, the size and complexity of such programs, the scope and
results of preclinical studies and clinical trials, the ability of the Company
to establish and maintain corporate collaborations, the time and costs involved
in obtaining regulatory approvals, the time and costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, the cost of manufacturing preclinical and clinical materials and
other factors not within the Company's control. The Company is seeking
additional collaborative agreements with corporate partners and may seek
additional funding through public or private equity or debt financing. The
Company may not be able to enter into any such agreements, however, or if
entered into, any such agreements may not reduce the Company's funding
requirements. The Company expects that additional equity or debt financing may
be required to fund its operations. Additional financing to meet the Company's
funding requirements may not be available on acceptable terms or at all.
If additional funds are raised by issuing equity securities, substantial
dilution to existing stockholders may result. Insufficient funds may require the
Company to delay, scale back or eliminate some or all of its research or
development programs or to relinquish greater or all rights to products at an
earlier stage of development or on less favorable terms than the Company would
otherwise seek to obtain, which could materially adversely affect the Company's
business, financial condition and results of operations.
ACQUISITION OF GENEMEDICINE RESEARCH AND DEVELOPMENT PROGRAMS
There are seven primary GeneMedicine R&D programs that the Company acquired
in March 1999. The Company's management is primarily responsible for estimating
the fair value of the purchased in-process research and development. Each of the
programs has been valued based on a discounted probable future cash flow
analysis using a discount rate of 40%, which management believes adequately
reflects the substantial risk of gene therapy research and development. In the
valuation model, it is assumed that for each program preclinical studies and
clinical trials are successfully completed, regulatory approval to market the
product is obtained, a marketing partner is secured and the Company is able to
manufacture the product in commercial quantities. Each of these activities is
subject to significant risks and uncertainties.
37
The seven primary R&D programs that the Company acquired are valued as
follows (in thousands):
Cancer gene medicines (IL-2, IFN-ALPHA, IL-12)..................................... $ 8,100
Hemophilia gene medicines (Factor VIII and IX)..................................... 1,240
Growth Factor gene medicines (IGF-I)............................................... 5,180
Pulmonary gene medicines (AAT GM).................................................. 1,730
Vascular Growth Factor gene medicines (VEGF)....................................... 4,620
Drug-controlled GeneSwitch-TM- technology.......................................... 3,930
Nucleic Acid Programs/(APC)........................................................ 1,070
---------
$ 25,870
---------
---------
CANCER GENE MEDICINES
The Company is currently working on three cancer gene medicines with Roche
including IL-2, IFN-a, and IL-12. The Company recently began a Phase II clinical
trial for IL-2 in June 1999. The Company has announced the commencement of Phase
I/II trials on its IFN-ALPHA and IL-12 gene medicines for the treatment of head
and neck cancer in March 1999 and July 1999, respectively.
Before a cancer product can be successfully marketed, the Company's
corporate partners must fund clinical studies and, if successfully completed,
the market introduction of the cancer gene medicines. Product efficacy and dose
responsiveness must be proven in Phase II and Phase III human clinical trials
and FDA approval is required before market introduction. The Company currently
estimates that clinical development activities could be completed and revenues
could begin to accrue to the Company with the projected introduction of a
product in 2004. Management estimates that the remaining research and
development efforts will total more than $8 million over the next five years.
HEMOPHILIA GENE MEDICINES (FACTOR VIII & IX)
Before a product can be successfully marketed, the Company needs to attract
a corporate partner to fund product development, clinical studies and market
introduction. The Company needs to complete preclinical animal studies and human
Phase I safety studies. Product efficacy and dose responsiveness must be proven
in Phase II and Phase III human clinical trials and FDA approval is required
before market introduction. The Company currently estimates, and the valuation
reflects, that these activities could be completed and revenues could begin to
accrue to the Company with the projected introduction of a product in 2005.
Management estimates that the remaining research and development efforts will
total more than $5 million over the next four years.
GROWTH FACTOR GENE MEDICINES (IGF-I)
The Company is reevaluating the development of the IGF-I gene medicine for
the treatment of post-menopausal female incontinence. The Company may decide to
delay further investment in this project if it cannot attract a corporate
partner to fund product development, clinical studies and market introduction.
For a successful product introduction, the Company would need to complete
preclinical animal studies and Phase I human safety studies. Product efficacy
and dose responsiveness must be proven in Phase II and Phase III human clinical
trials and FDA approval is required before market introduction. The Company
currently estimates, and the valuation reflects, that if a partner is found to
fund this project, these activities could be completed and revenues could begin
to accrue to the Company with the projected introduction of a product in 2007.
Management expects that if a corporate partner is found for this program, the
remaining R&D efforts related to the IGF-I program would total approximately $12
million over the next six years.
38
PULMONARY GENE MEDICINES (AAT GM)
Valentis has completed preclinical work for the development of a gene
medicine intended to treat alpha-1-antitrypsin ("AAT") deficiency, a significant
contributor to the development of emphysema. The Company has decided to defer
further investment in this project until it is able to attract a corporate
partner to fund product development, clinical studies and market introduction.
Before a product can be successfully marketed, product efficacy and dose
responsiveness must be proven in Phase II and Phase III human clinical trials
and FDA approval is required before market introduction. The Company currently
estimates, and the valuation reflects, that these activities could be completed
and revenues could begin to accrue to the Company with the projected
introduction of a product in 2007. If a corporate partner is found for this
program, the Company expects the remaining R&D efforts related to the (AAT GM)
program to total approximately $16 million over the next seven years.
VASCULAR GROWTH FACTOR GENE MEDICINES (VEGF)
The Company is developing a vascular endothelium growth factor gene medicine
to prevent proliferation of smooth muscle cells and reclosure of the vessels in
patients who are undergoing either coronary angioplasty or peripheral
angioplasty as well as for stimulating angiogenesis in patients with peripheral
vascular disease or coronary artery disease. Before a product can be
successfully marketed, the Company needs to attract a corporate partner to fund
product development, clinical studies and market introduction. Product efficacy
and dose responsiveness must be proven in Phase II and Phase III human clinical
trials and FDA approval is required before market introduction. The Company
currently estimates, and the valuation reflects, that these activities could be
completed and revenues could begin to accrue to the Company with the projected
introduction of a product in 2007. Management estimates that the remaining R&D
efforts related to the VEGF program will total approximately $11 million over
the next seven years.
DRUG-CONTROLLED GENESWITCH-TM- TECHNOLOGY
The Company is developing proprietary systems designed to control the level,
duration, fidelity and reproducibility of expression of administered genes.
Before a product can be successfully marketed, the Company needs to attract
a corporate partner to fund product development, clinical studies and market
introduction. The Company needs to complete Phase I human safety studies.
Product efficacy and dose responsiveness must be proven in Phase II and Phase
III human clinical trials and FDA approval is required before market
introduction. The Company currently estimates, and the valuation reflects, that
these activities could be completed and revenues could begin to accrue to the
Company with the projected introduction of a product in 2008. Management
estimates that the remaining R&D efforts related to the GeneSwitch-TM-
technology development program will total approximately $10 million over the
next seven years.
NUCLEIC ACID PROGRAMS (APC)
The Company is performing research related to opportunities in the field of
nucleic acid vaccines. Before a product can be successfully marketed, the
Company needs to attract a corporate partner to fund product development,
clinical studies and market introduction. The Company needs to complete
preclinical animal studies and Phase I human safety studies. Product efficacy
and dose responsiveness must be proven in Phase II and Phase III human clinical
trials and FDA approval is required before market introduction. The Company
currently estimates, and the valuation reflects, that these activities could be
completed and revenues could begin to accrue to the Company with the projected
introduction of a product in 2008. Management expects that the remaining R&D
efforts related to the APC vaccine/ immunotherapeutic technology development
program would total approximately $13 million over the next eight years.
39
SUMMARY
Prior to March 1999, over the past five years, GeneMedicine Inc. incurred
approximately $50 million of R&D expenses in the development of its current R&D
programs. Costs to complete these projects could aggregate to approximately $75
million over the next five to seven years. The Company presently anticipates
that gene medicines (which utilize its proprietary developmental-stage
technologies) will obtain FDA approval beginning at various times beginning in
2005 through 2008. If such gene medicines are successfully completed, the
Company will receive a royalty on the product sales.
The nature of the efforts required to develop the acquired in-process R&D
into technologically feasible and commercially viable products principally
relate to the successful performance of additional preclinical studies and
clinical trials. Though the Company expects that the acquired in-process
technology will be successfully developed, there can be no assurance that
commercial or technical viability of these products will be achieved. While the
expectations and promise of gene therapy are great, clinical efficacy has not
yet been demonstrated. Many approaches to gene therapy are being pursued by
pharmaceutical and biotechnology companies, but there are currently no marketed
gene therapy products and none are expected for the next several years.
OTHER ACQUIRED TECHNOLOGY
In April 1999, the Company acquired rights and intellectual property related
to the del-1 gene and protein from Progenitor, Inc. Del-1 is a novel
extracellular matrix protein involved in early growth and development of blood
vessels and bone that has been demonstrated to have potential application in the
treatment of certain vascular diseases by stimulating angiogenesis. The
acquisition of del-1 strengthens the Company's product development in the area
of cardiovascular disease. The Company expensed the cost paid to Progenitor for
del-1 of $900,000 to acquired in-process research and development as the
technology was not complete at the date of acquisition.
IMPACT OF THE YEAR 2000
A major issue currently faced by all industries is the Year 2000 ("Y2K")
computer issue. The problem arises from the use in computer hardware and
software of the last two digits rather than four digits to define the year. As a
result, computer programs are unable to distinguish between a year which begins
with "20" or "19". This, can then cause failures in computer systems and
applications, or create erroneous results unless steps are taken to prevent such
failures and errors. The Y2K problem is also compounded by the fact that many
computer and telecommunication systems are interdependent, both within the
United States and throughout the world. Thus, due to interdependence, the
failure of one system may lead other systems to fail, even if these systems are
themselves Y2K compliant.
In order to address this issue, the Company has put a Y2K plan in place to
identify, evaluate and modify its current systems or replace and implement new
systems. Identification includes reviewing and assessing the potential systems
within the Company and at key third party vendors that would be affected by
theY2K issue. A Y2K Committee, comprised of members of all the Company's
departments and senior management, has been established to evaluate, assess and
prioritize the Company's internal systems and key vendors' systems.
In its evaluation stage, the Company determined that it would be required to
upgrade or replace a portion of its accounting software to a Y2K compliant
version. The accounting software upgrade was completed in February 1999. In
addition to the accounting system upgrade, the Company has reviewed its key
informational, operational and manufacturing systems and has determined the Y2K
issue will not pose significant operational problems for its business
activities. The Company has also completed communications with its significant
suppliers to determine the extent to which the Company's operations are
vulnerable to those third parties' failure to solve their own Y2K issues. The
Company has determined that no significant issues exist that would cause it to
believe that it cannot continue to use the services of these
40
third parties. However, if such suppliers or other third parties with which the
Company transacts business experience failures in their computer systems or
equipment due to Y2K non-compliance, it could affect the Company's ability to
process transactions or engage in ordinary business activities. The Company has
not used an independent source to verify and validate its Year 2000 readiness or
that of its partners. Additionally, the Company has no contingency plans to deal
with Year 2000 failures.
The financial impact of the required upgrades and conversion of computer
software relating to the Y2K issue was funded through operating cash flows and
was less than $20,000. All costs to date have been expensed as incurred.
However, costs incurred to date, do not take into account the costs, if any,
that might be incurred as a result of Y2K-related failures that occur despite
the Company's implementation of its Y2K plan. Although the Company is not aware
of any material operational issues associated with preparing its internal
systems for the Year 2000, or material issues with respect to the adequacy of
third party systems, the Company could experience unanticipated material
negative consequences and/or material costs caused by undetected errors or
defects in such systems or by the Company's failure to adequately prepare for
the results of such errors or defects, including the costs of related
litigation, if any. The impact of such consequences could have a material
adverse effect on the Company's business, financial condition or results of
operations.
ITEM 7A. FINANCIAL MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and long-term debt obligations.
The Company maintains a strict investment policy that ensures the safety and
preservation of its invested funds by limiting default risk, market risk, and
reinvestment risk. The Company's investments consist primarily of commercial
paper, medium term notes, U.S. Treasury notes and obligations of U.S. Government
agencies and corporate bonds. The table below presents notional amounts and
related weighted-average interest rates by year of maturity for the Company's
investment portfolio and long-term debt obligations (in thousands, except
percentages).
1999 2000 TOTAL
--------- --------- ---------
Cash equivalents
Fixed rate..................................................................... $ 5,803 -- $ 5,803
Average rate................................................................... 4.72% -- 4.72%
Short-term investments
Fixed rate..................................................................... $ 19,522 -- $ 19,522
Average rate................................................................... 5.78% -- 5.78%
Long-term investments
Fixed rate..................................................................... -- $ 14,830 $ 14,830
Average rate................................................................... -- 5.39% 5.39%
--------- --------- ---------
Total investment securities...................................................... $ 25,325 $ 14,830 $ 40,155
Average rate..................................................................... 5.54% 5.39% 5.48%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and notes thereto appear on pages 48 to
71 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's directors and
executive officers is incorporated by reference from the Company's Definitive
Proxy Statement filed not later than 120 days following the close of the fiscal
year ("the Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference
from the Company's Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference
from the Company's Definitive Proxy Statement under the caption "Security
Ownership of Certain Beneficial Owners".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference
from the Company's Definitive Proxy Statement under the caption "Certain
Relationships and Related Transactions".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) INDEX TO FINANCIAL STATEMENTS
The Financial Statements and report of independent auditors required by this
item are submitted in a separate section beginning on page 48 of this Report.
PAGE NO.
-----------
Report of Ernst & Young LLP, Independent Auditors................................... 48
Balance Sheets...................................................................... 49
Statements of Operations............................................................ 50
Statement of Stockholders' Equity................................................... 51
Statements of Cash Flows............................................................ 52
Notes to Financial Statements....................................................... 53-71
(a)(2) No schedules have been filed as they were not required or are
inapplicable and therefore have been omitted.
(a)(3) EXHIBITS
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- --------- ----------- ----------------------------------------------------------------------------------------------
(1) 3.1 Amended and Restated Certificate of Incorporation of the Registrant
(1) 3.2 Bylaws of the Registrant
4.1 Reference is made to Exhibits 3.1 and 3.2
(1) 4.2 Specimen stock certificate
(1) 4.3 Amended and Restated Investor Rights Agreement, dated as of May 23, 1997 among the Registrant
and the investors named therein
42
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- --------- ----------- ----------------------------------------------------------------------------------------------
(1) 4.4 Preferred Stock Warrant issued to Imperial Bank, dated June 1, 1995
(1) 4.5 Series C Preferred Stock Warrant issued to Phoenix Leasing Incorporated, dated April 30, 1996
(1) 4.6 Stock purchase Agreement between Registrant and Pfizer Inc., dated May 30, 1996
(1) 10.1 1997 Equity Incentive Plan
(1) 10.2 Form of Incentive Stock Option Grant
(1) 10.3 Form of Non-Incentive Stock Option
(1) 10.4 1997 Employee Stock Purchase Plan
(1) 10.5 Form of Indemnification Agreement entered into between the Registrant and its directors and
executive officers
(1) 10.6 Letter Agreement between the Registrant and Benjamin F. McGraw, III, Pharm.D.
(1) 10.7 Letter Agreement between the Registrant and Rodney Pearlman, Ph.D.
(3) 10.8 Letter Agreement between the Registrant and Bennet Weintraub
(3) 10.9 Letter Agreement between the Registrant and John Warner, Ph.D.
(1) 10.10 Lease Agreement between the Registrant and Provident Life and Accident Insurance Company
("Provident"), dated December 21, 1993
(1) 10.11 First Amendment to Lease Agreement between the Registrant and SFO Associates LLC (successor in
interest to Provident)
(1) 10.12 Lease Agreement between the Registrant and SFO Associates LLC, dated March 18, 1997
(1) 10.13 Credit Agreement between the Registrant and Imperial Bank, dated as of August 31, 1995
(1) 10.14 Lease Agreement between the Registrant and LMSI, dated May 13, 1994, as amended as of May 13,
1994
(1) 10.15 Senior Loan and Security Agreement between the Registrant and Phoenix Leasing Incorporated,
dated as of April 22, 1996
(1)* 10.16 Research and License Agreement between the Registrant and Glaxo Wellcome Group Limited, dated
April 11, 1994, as amended as of May 31, 1996
(1)* 10.17 Exclusive License Agreement between the Registrant and Regents of the University of
California, dated May 9, 1996, as amended May 15, 1997
(1)* 10.18 Collaborative Research Agreement between the Registrant and Pfizer Inc., dated May 31, 1996
(1)* 10.19 License and Royalty Agreement between Registrant and Pfizer Inc., dated June 1, 1996
(1)* 10.20 Research and License Agreement between the Registrant and Eli Lilly and Company, effective May
23, 1997
(3) 10.21 Promissory Note for $8,000,000 from Megabios Corp. to Imperial Bank, dated May 13, 1998
(2)+ 10.22 First Amendment and Restatement of License Agreement between Registrant and Baylor College of
Medicine dated March 7, 1994
(2)+ 10.23 First Amendment and Restatement of License Agreement--Woo between Registrant and Baylor
College of Medicine date March 7, 1994
(2)+ 10.24 First Amendment and Restatement of License Agreement--GeneSwitch-TM- between Registrant and
Baylor College of Medicine dated March 7, 1994
(2)+ 10.25 Limited Exclusive License Agreement between Registrant and the Regents of the University of
California dated October 26, 1993, as amended January 21, 1994
(2)+ 10.26 License Agreement between Registrant and British Technology Group Limited dated November 8,
1993
43
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- --------- ----------- ----------------------------------------------------------------------------------------------
(2)+ 10.27 Patent License Agreement between Registrant and the University of Texas System dated October
15, 1993
(2)** 10.28 Employment and Stock Purchase Agreement between Registrant and Eric Tomlinson dated July 31,
1992, as amended June 11, 1998
(4) 10.29 Change of Control Severance Plan
(2) 10.30 Lease Agreement between Registrant and The Woodlands Corporation dated October 29, 1993
(2)+ 10.31 Collaborative Alliance Agreement between Registrant and Syntex (U.S.A.) Inc. dated April 8,
1994
(2)+ 10.32 License Agreement between Registrant and Syntex (U.S.A.) Inc. dated April 8, 1994
++ 10.33 Alliance Agreement between Registrant and Corange International Ltd. effective February 3,
1995. Exhibit 10.21 to GeneMedicine's Form 10-Q for the quarter ended September 30, 1995 is
incorporated herein by reference.
21.1 As of August 30, 1999, PolyMASC Pharmaceuticals plc ("PolyMASC") became a subsidiary of the
Registrant. PolyMASC is incorporated under the laws of England and Wales
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
- ------------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-32593) or amendments thereto and incorporated herein by reference.
(2) Previously filed as an exhibit to GeneMedicine's Registration Statement on
Form S-1 (No. 33-77126) or amendments thereto and incorporated herein by
reference.
(3) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
(No. 0-22987) for fiscal year ended June 30, 1998 and incorporated herein by
reference.
(4) Previously filed as an exhibit to GeneMedicine's Quarterly Report on Form
10-Q (No. 0-24572) for the period ended September 30, 1998 and incorporated
herein by reference.
* Confidential treatment granted pursuant to a Confidential Treatment Order
for portions of this document.
** Amendment filed with GeneMedicine's Quarterly Report on Form 10-Q (No.
0-24572) for the period ended June 30, 1998.
+ Confidential treatment has been afforded to certain portions of this Exhibit
pursuant to Order Granting Application Under the Securities Act of 1933 and
Rule 406 Thereunder Respecting Confidential Treatment dated July 12, 1994.
++ Confidential treatment has been afforded to certain portions of this
Exhibit pursuant to Order Granting Application Under the Securities Act of
1934 and Rule 24b-2 Thereunder Respecting Confidential Treatment dated
February 5, 1996.
(b) REPORTS ON FORM 8-K.
On April 2, 1999, a report on Form 8-K was filed in which Montana
Acquisition Sub, Inc., a Delaware corporation ("Merger Sub"), which was a wholly
owned subsidiary of Megabios Corp., a Delaware corporation ("Megabios"), was
merged with and into GeneMedicine, Inc., a Delaware corporation
("GeneMedicine"), pursuant to an Agreement and Plan of Merger and
Reorganization, as amended, dated as of October 24, 1998, among Megabios, Merger
Sub, and GeneMedicine (the "Agreement"). The terms
44
of the Agreement were determined through arms' length negotiations between
Megabios and GeneMedicine.
The merger of Merger Sub with and into GeneMedicine (the "Merger") became
effective at the time of the filing of a Certificate of Merger with the Delaware
Secretary of State on March 18, 1999 (the "Effective Time"). Approximately 66.2%
of the outstanding shares of GeneMedicine common stock, par value $.001 per
share ("GeneMedicine Common Stock"), approved the Agreement and the Merger and
approximately 60.1% of the outstanding shares of Megabios common stock, par
value $.001 per share ("Megabios Common Stock"), approved the issuance of
Megabios Common Stock in connection with the Merger.
On May 13, 1999, a report on Form 8-K was filed in which pursuant to a
Certificate of Ownership and Merger filed with the Delaware Secretary of State
and declared effective on April 29, 1999, Valentis, Inc., a wholly owned
subsidiary of Megabios Corp., was merged with and into Megabios Corp. In
connection with the merger, the corporate name of Megabios Corp. has been
changed to "Valentis, Inc." Accordingly, all agreements, actions, filings and
reports made after April 29, 1999 shall bear the name "Valentis, Inc." The
symbol for Valentis' common stock as reported on the Nasdaq National Market,
effective May 5, 1999, is "VLTS."
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: September 28, 1999 VALENTIS, INC.
By: /s/ BENJAMIN F. MCGRAW III
-----------------------------------------
Benjamin F. McGraw III
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Benjamin F. McGraw III and Bennet Weintraub, and
each or any one of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Amended Annual Report, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board of
/s/ BENJAMIN F. MCGRAW III Directors, President and
- ------------------------------ Chief Executive Officer September 28, 1999
(Benjamin F. McGraw III) (Principal Executive
Officer)
Vice President Finance and
/s/ BENNET WEINTRAUB Chief Financial Officer
- ------------------------------ (Principal Accounting September 28, 1999
(Bennet Weintraub) Officer)
/s/ STANLEY CROOKE
- ------------------------------ Director September 28, 1999
(Stanley Crooke)
/s/ PATRICK G. ENRIGHT
- ------------------------------ Director September 28, 1999
(Patrick G. Enright)
46
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ RUSSELL C. HIRSCH
- ------------------------------
(Russell C. Hirsch, M.D., Director September 28, 1999
Ph.D.)
/s/ RAJU KUCHERLAPATI
- ------------------------------ Director September 28, 1999
(Raju Kucherlapati, Ph.D.)
/s/ BERT O'MALLEY
- ------------------------------ Director September 28, 1999
(Bert O'Malley)
/s/ ARTHUR M. PAPPAS
- ------------------------------ Director September 28, 1999
(Arthur M. Pappas)
47
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Valentis, Inc.
We have audited the accompanying balance sheets of Valentis, Inc. (formerly
Megabios Corp.) as of June 30, 1999 and 1998, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended June 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Valentis, Inc. as of June
30, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
August 9, 1999
48
VALENTIS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30,
----------------------
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 4,785 $ 15,172
Short-term investments.................................................................... 19,522 7,794
Note receivable from PolyMASC Pharmaceuticals plc......................................... 1,000 --
Other receivables......................................................................... 1,800 616
Prepaid expenses and other current assets................................................. 1,392 539
---------- ----------
Total current assets.................................................................... 28,499 24,121
Property and equipment, net............................................................... 11,897 6,151
Long-term investments..................................................................... 14,830 25,460
Goodwill and other intangible assets...................................................... 9,012 --
Other assets.............................................................................. 189 169
---------- ----------
Total assets............................................................................ $ 64,427 $ 55,901
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 3,691 $ 898
Accrued compensation...................................................................... 872 595
Accrued construction-in-progress.......................................................... 353 589
Other accrued liabilities................................................................. 84 56
Deferred revenue.......................................................................... 4,914 --
Current portion of long-term debt......................................................... 3,124 1,017
---------- ----------
Total current liabilities............................................................... 13,038 3,155
Long-term debt............................................................................ 5,459 2,464
Commitments
Stockholders' equity:
Preferred stock, no par value, 10,000,000 issuable in series, none outstanding at June 30,
1999 and 1998........................................................................... -- --
Common stock, $.001 par value, 45,000,000 shares authorized; 22,072,022 and 12,880,978
shares issued and outstanding at June 30, 1999 and 1998, respectively................... 22 13
Additional paid-in capital................................................................ 119,746 79,838
Deferred compensation, net of amortization................................................ (463) (976)
Accumulated other comprehensive loss...................................................... (109) (7)
Accumulated deficit....................................................................... (73,266) (28,586)
---------- ----------
Total stockholders' equity.............................................................. 45,930 50,282
---------- ----------
Total liabilities and stockholders' equity............................................ $ 64,427 $ 55,901
---------- ----------
---------- ----------
See accompanying notes.
49
VALENTIS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
---------------------------------
1999 1998 1997
---------- ---------- ---------
Collaborative research and development revenue................................. $ 3,430 $ 8,083 $ 5,793
Research and development grant revenue......................................... 699 -- --
---------- ---------- ---------
Total revenue................................................................ 4,129 8,083 5,793
Operating expenses:
Research and development..................................................... 17,806 13,611 8,598
General and administrative................................................... 5,063 3,561 2,417
Acquired in-process research and development................................. 26,770 1,500 --
Amortization of goodwill and other acquired intangible assets................ 819 -- --
---------- ---------- ---------
Total operating expenses................................................... 50,458 18,672 11,015
---------- ---------- ---------
Loss from operations........................................................... (46,329) (10,589) (5,222)
Interest income................................................................ 2,499 2,651 656
Interest expense and other..................................................... (850) (440) (381)
---------- ---------- ---------
Net loss....................................................................... $ (44,680) $ (8,378) $ (4,947)
---------- ---------- ---------
---------- ---------- ---------
Basic and diluted net loss per share........................................... $ (2.90) $ (0.83) $ (4.40)
---------- ---------- ---------
---------- ---------- ---------
Shares used in computing net loss per share.................................... 15,430 10,088 1,126
---------- ---------- ---------
---------- ---------- ---------
See accompanying notes.
50
VALENTIS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ---------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- --------- --------- ----------- ----------- ---------------
Balance at June 30, 1996............................ 5,754,069 $ 20,905 1,368,148 $ 442 $ -- $ --
Issuance of Series E convertible preferred stock,
net of issuance costs of $15...................... 1,333,325 9,985 -- -- -- --
Issuance of Series F convertible preferred stock,
net of issuance costs of $11...................... 1,333,326 13,989 -- -- -- --
Issuance of common stock in lieu of cash payment of
Series E and F stock offering commissions......... -- (179) 119,046 179 -- --
Exercise of stock options........................... -- -- 116,517 56 -- --
Repurchase of common stock from employees........... -- -- (35,984) (17) -- --
Deferred compensation related to grant of certain
stock options, net of amortization................ -- -- -- 750 -- (750)
Amortization of deferred compensation............... -- -- -- -- -- 71
Net loss............................................ -- -- -- -- -- --
--------- --------- --------- ----------- ----------- -----
Balance at June 30, 1997............................ 8,420,720 44,700 1,567,727 1,410 -- (679)
Reincorporation in Delaware with par value.......... -- -- -- (1,408) 1,408 --
Issuance of common stock in initial public offering,
September 1997 ($12 per share), net of offering
costs of $3,124................................... -- -- 2,875,000 3 31,373 --
Conversion of convertible preferred stock into
common stock...................................... (8,420,720) (44,700) 8,154,779 8 44,692 --
Issuance of common stock for technology license..... -- -- 117,555 -- 1,500 --
Exercise of stock options and warrants.............. -- -- 184,346 -- 237 --
Repurchase of common stock from employees........... -- -- (18,429) -- (8) --
Deferred compensation related to grant of certain
stock options, net of amortization................ -- -- -- -- 636 (636)
Amortization of deferred compensation............... -- -- -- -- -- 339
Net loss............................................
Net unrealized loss on available-for-sale
securities........................................ -- -- -- -- -- --
Comprehensive loss..................................
--------- --------- --------- ----------- ----------- -----
Balance at June 30, 1998............................ -- -- 12,880,978 13 79,838 (976)
Issuance of common stock for GeneMedicine, Inc.
merger............................................ -- -- 9,117,794 9 39,510 --
Exercise of stock options........................... -- -- 46,042 -- 85 --
Repurchase of common stock from employees........... -- -- (42,936) -- (42) --
Issuance of common stock pursuant to Employee Stock
Purchase Plan..................................... -- -- 70,144 -- 355 --
Amortization of deferred compensation............... -- -- -- -- -- 513
Net loss............................................
Net unrealized loss on available-for-sale
securities........................................ -- -- -- -- -- --
Comprehensive loss..................................
--------- --------- --------- ----------- ----------- -----
Balance at June 30, 1999............................ -- $ -- 22,072,022 $ 22 $ 119,746 $ (463)
--------- --------- --------- ----------- ----------- -----
--------- --------- --------- ----------- ----------- -----
ACCUMULATED OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
LOSS DEFICIT EQUITY
----------------- ------------ -------------
Balance at June 30, 1996............................ $ -- $ (15,261) $ 6,086
Issuance of Series E convertible preferred stock,
net of issuance costs of $15...................... -- -- 9,985
Issuance of Series F convertible preferred stock,
net of issuance costs of $11...................... -- -- 13,989
Issuance of common stock in lieu of cash payment of
Series E and F stock offering commissions......... -- -- --
Exercise of stock options........................... -- -- 56
Repurchase of common stock from employees........... -- -- (17)
Deferred compensation related to grant of certain
stock options, net of amortization................ -- -- --
Amortization of deferred compensation............... -- -- 71
Net loss............................................ -- (4,947) (4,947)
----- ------------ -------------
Balance at June 30, 1997............................ -- (20,208) 25,223
Reincorporation in Delaware with par value.......... -- -- --
Issuance of common stock in initial public offering,
September 1997 ($12 per share), net of offering
costs of $3,124................................... -- -- 31,376
Conversion of convertible preferred stock into
common stock...................................... -- -- --
Issuance of common stock for technology license..... -- -- 1,500
Exercise of stock options and warrants.............. -- -- 237
Repurchase of common stock from employees........... -- -- (8)
Deferred compensation related to grant of certain
stock options, net of amortization................ -- -- --
Amortization of deferred compensation............... -- -- 339
Net loss............................................ (8,378) (8,378)
Net unrealized loss on available-for-sale
securities........................................ (7) -- (7)
-------------
Comprehensive loss.................................. (8,385)
----- ------------ -------------
Balance at June 30, 1998............................ (7) (28,586) 50,282
Issuance of common stock for GeneMedicine, Inc.
merger............................................ -- -- 39,519
Exercise of stock options........................... -- -- 85
Repurchase of common stock from employees........... -- -- (42)
Issuance of common stock pursuant to Employee Stock
Purchase Plan..................................... -- -- 355
Amortization of deferred compensation............... -- -- 513
Net loss............................................ (44,680) (44,680)
Net unrealized loss on available-for-sale
securities........................................ (102) -- (102)
-------------
Comprehensive loss.................................. (44,782)
----- ------------ -------------
Balance at June 30, 1999............................ $ (109) $ (73,266) $ 45,930
----- ------------ -------------
----- ------------ -------------
See accompanying notes.
51
VALENTIS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
Cash flows from operating activities
Net loss.................................................................... $ (44,680) $ (8,378) $ (4,947)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation.............................................................. 2,517 2,044 1,294
Amortization.............................................................. 819 -- --
Amortization of deferred compensation..................................... 513 339 71
Purchase of in-process research and development with common stock......... 25,870 1,500 --
Changes in operating assets and liabilities:
Other receivables....................................................... (1,154) (481) (214)
Prepaid expenses and other assets....................................... (762) (149) (115)
Deferred revenue........................................................ 744 (887) 356
Accounts payable........................................................ (3,608) 204 546
Accrued liabilities..................................................... (284) 197 (23)
---------- ---------- ----------
Net cash used in operating activities................................. (20,025) (5,611) (3,032)
---------- ---------- ----------
Cash flows from investing activities
Cash acquired in GeneMedicine, Inc. merger.................................. 11,844 -- --
Note receivable from PolyMASC Pharmaceuticals plc........................... (1,000) -- --
Purchase of property and equipment.......................................... (5,478) (2,719) (1,687)
Deposits and other assets................................................... (16) 282 (35)
Purchases of available-for-sale investments................................. (17,039) (41,890) (15,725)
Maturities of available-for-sale investments................................ 15,839 23,700 500
---------- ---------- ----------
Net cash provided by (used in) investing activities................... 4,159 (20,627) (16,947)
---------- ---------- ----------
Cash flows from financing activities
Proceeds from issuance of long-term debt.................................... 6,119 2,128 894
Payments on long-term debt.................................................. (1,035) (1,367) (1,137)
Proceeds from issuance of convertible preferred stock, net of issuance
costs..................................................................... -- -- 23,974
Proceeds from issuance of common stock, net of repurchases.................. 395 31,605 39
---------- ---------- ----------
Net cash provided by financing activities............................. 5,479 32,366 23,770
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......................... (10,387) 6,128 3,791
Cash and cash equivalents, beginning of year.................................. 15,172 9,044 5,253
---------- ---------- ----------
Cash and cash equivalents, end of year........................................ $ 4,785 $ 15,172 $ 9,044
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid................................................................. $ 725 $ 423 $ 381
---------- ---------- ----------
---------- ---------- ----------
SCHEDULE OF NON-CASH TRANSACTIONS
Construction-in-progress included in accrued liabilities.................... $ 353 $ 589 $ 249
---------- ---------- ----------
---------- ---------- ----------
Net exercise of warrants to purchase 14,629 shares of common
stock..................................................................... $ -- $ 84 $ --
---------- ---------- ----------
---------- ---------- ----------
Tangible and intangible assets acquired for shares of common stock, net of
cash acquired and liabilities assumed....................................... $ 3,596 $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes.
52
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Valentis, Inc. ("Valentis" or the "Company", formerly Megabios Corp.),
resulting from the merger of Megabios Corp. and GeneMedicine, Inc. in March
1999, develops proprietary technologies and applies its preclinical and early
clinical development expertise to create novel therapeutics. The Company's core
technologies include multiple gene delivery and gene expression systems and
PEGylation technologies designed to improve the safety, efficacy and dosing
characteristics of genes, proteins, peptides, peptidomimetics, antibodies and
replicating and non-replicating viruses. These technologies are covered by a
broad patent portfolio that includes issued U.S. and European claims. Valentis'
commercial strategy is to enter into corporate collaborations for full-scale
clinical development and marketing and sales of its products.
In September 1997, the Company completed its initial public offering and
reincorporation in the State of Delaware. The Company may require additional
financial resources to complete development and commercialization of its
products. Management plans to continue to finance the Company primarily through
issuances of equity securities, collaborative research and development
arrangements and debt financing. Prior to product commercialization, if the
financing arrangements contemplated by management are not consummated, the
Company may have to seek other sources of capital or re-evaluate its operating
plans.
REVENUE RECOGNITION
Revenue related to collaborative research agreements with the Company's
corporate partners is recognized over the related funding periods for each
contract. The Company is required to perform research and development activities
as specified in each respective agreement on a best-efforts basis. For some
contracts, the Company is reimbursed based on the costs associated with the
number of full time equivalent employees working on each specific contract over
the term of the agreement. Research and development expenses under the
collaborative research agreements approximate or exceed the revenue recognized
under such agreements over the term of the respective agreements. Deferred
revenue results when the Company does not incur the required level of effort
during a specific period in comparison to funds received under the respective
contracts or if additional work may be required to satisfy a contract
obligation. Milestone payments, if any, will be recognized pursuant to
collaborative agreements upon the achievement of specified milestones, such as
the filing of Investigational New Drug Applications, commencement of clinical
trials or receipt of regulatory approvals.
In 1997 the Company was awarded two SBIR grants totaling approximately $1.5
million research and development projects. The terms of these grant agreements
are two years. Revenue related to grant agreements is recognized as related
research and development expenses are incurred.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of costs incurred for independent
and collaborative research and development. These costs include direct and
research-related overhead expenses and the costs of funding clinical studies.
53
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash equivalents consist of highly liquid investments with maturities at the
date of purchase of 90 days or less. Short-term investments consist of
investments with original maturities greater than three months, but less than
one year, while long-term investments have maturities greater than one year.
The Company accounts for its cash equivalents and investments under
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). Under the provisions of
SFAS 115, the Company has classified its cash equivalents and investments as
"available-for-sale." Such investments are recorded at fair value, determined
based on quoted market prices, and unrealized gains and losses, which are
considered to be temporary, are recorded as other comprehensive income (loss) in
a separate component of stockholders' equity until realized.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets (generally three to seven years).
Leasehold improvements are amortized over the shorter of five years or the
estimated useful life of the assets.
ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets consist of the assembled workforce and goodwill
related to the Company's acquisition of GeneMedicine accounted for using the
purchase method (See Note 2). Amortization of these purchased intangibles is
calculated on the straight-line basis over the respective estimated useful lives
of the intangible assets of three years. Amortization of assembled workforce and
goodwill is included as a separate item on the Company's Statements of
Operations. Acquired in-process research and development without alternative
future use is expensed when acquired.
LONG-LIVED ASSETS
The Company accounts for its long-lived assets under Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS 121"). In accordance with
SFAS 121, the Company identifies and records impairment losses, as circumstances
dictate, on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets. No such events have occurred with respect to the Company's
long-lived assets, which consist primarily of machinery and equipment, leasehold
improvements, and acquired intangible assets.
STOCK-BASED COMPENSATION
The Company generally grants stock options to employees for a fixed number
of shares with an exercise price equal to the fair value of the shares at the
date of grant. In accordance with the provisions of Statements of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
54
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
("SFAS 123"), the Company has elected to follow Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related
interpretations in accounting for option grants to employees under its employee
stock option plan and to adopt the pro forma disclosure alternative as described
in SFAS 123 (see Note 11). Option grants to all others are accounted for using
the fair value method prescribed by SFAS 123.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET LOSS PER SHARE
The Company applies the provisions of Statement of Financial Accounting
Standard No. 128, "Earnings Per Share" ("SFAS 128"), which requires the
presentation of basic earnings (loss) per share and diluted earnings (loss) per
share, if dilutive. Basic earnings per share is computed by dividing income or
loss applicable to common stockholders by the weighted-average number of common
shares outstanding for the period net of certain common shares outstanding which
are subject to continued vesting and the Company's right of repurchase. Basic
earnings per share exclude any dilutive effects of options, warrants and
convertible securities. Diluted net loss per share has not been presented
separately as, given the Company's net loss position, the result would be
anti-dilutive.
The following have been excluded from the calculation of net loss per share
because the effect of inclusion would be antidilutive: 56,150 common shares
which are outstanding but are subject to the Company's right of repurchase which
expires ratably over 4 years; options to purchase approximately 2,459,000 shares
of common stock at a weighted average price of $6.99 per share and warrants to
purchase 138,511 shares of common stock at a weighted average exercise price of
$14.74 per share. The repurchasable shares, options and warrants will be
included in the calculation at such time as the effect is no longer
antidilutive, as calculated using the treasury stock method.
For comparison purposes, the pro forma net loss per share amounts have been
presented for fiscal years 1998 and 1997 in the reconciliation below. Pro forma
net loss per share has been computed as described above and also gives effect to
the conversion of the convertible Preferred Stock that automatically converted
upon completion of the Company's initial public offering (using the if converted
method)
55
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from the original date of issuance. A reconciliation of shares used in the
calculation of basic and diluted and pro forma basic and diluted net loss per
share follows:
YEAR ENDED JUNE 30,
--------------------------------
1999 1998 1997
---------- --------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net loss.................................................... $ (44,680) $ (8,378) $ (4,947)
---------- --------- ---------
---------- --------- ---------
BASIC AND DILUTED
Weighted average shares of common stock
outstanding............................................... 15,486 10,313 1,409
Shares subject to repurchase................................ (56) (225) (283)
---------- --------- ---------
Weighted average shares of common stock outstanding used in
computing net loss per share.............................. 15,430 10,088 1,126
---------- --------- ---------
---------- --------- ---------
Basic and diluted net loss per share........................ $ (2.90) $ (0.83) $ (4.40)
---------- --------- ---------
---------- --------- ---------
PRO FORMA
Shares used in computing net loss per share above........... 10,088 1,126
Adjusted to reflect the effect of the assumed conversion of
preferred stock from the date of issuance................. 1,810 6,650
--------- ---------
Shares used in computing pro forma net loss per share....... 11,898 7,776
--------- ---------
--------- ---------
Pro forma net loss per share................................ $ (0.70) $ (0.64)
--------- ---------
--------- ---------
NEW ACCOUNTING STANDARDS
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
established new rules for the reporting and display of comprehensive income and
its components; however, the adoption of SFAS 130 had no impact on the Company's
net loss or stockholder's equity. SFAS 130 requires unrealized gains or losses
on the Company's available-for-sale securities which, prior to adoption, were
reported separately in stockholders' equity, to be included in other
comprehensive income or loss. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 superseded SFAS 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS 131 establishes standards
for the way that public business enterprises report selected information about
operating segments. SFAS 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. Because the
Company operates as one reportable segment, the adoption of SFAS 131 had no
impact on the Company's results of operations or financial position.
56
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was
issued. Adoption is required in fiscal year 2001. Because the Company does not
use derivatives, management does not anticipate that the adoption of SFAS 133
will have a significant impact on the Company's financial position or results of
operations.
2. ACQUISITION OF GENEMEDICINE, INC.
On March 18, 1999, the Company completed its merger with GeneMedicine, Inc.
("GeneMedicine"). On March 29, 1999, the combined company was renamed Valentis,
Inc. Under the terms of the merger agreement, each outstanding share of
GeneMedicine common stock was converted into 0.571 of a share of the Company's
common stock. This resulted in the issuance of approximately 9.1 million
additional shares of the Company's common stock, valued at $38.7 million. The
purchase price also included approximately $850,000 related to GeneMedicine's
stock options and outstanding warrants assumed by the Company and $1.7 million
of transaction costs, for an aggregate purchase price of $41.3 million. The
transaction was accounted for as a purchase.
The following is a summary of the purchase price allocation (in thousands):
Tangible assets acquired........................................... $ 14,410
In-process research and development................................ 25,870
Intangible assets-assembled workforce and goodwill................. 9,831
Liabilities assumed (including GeneMedicine transaction costs and
other obligations due upon close of the merger).................. (8,801)
---------
$ 41,310
---------
---------
A valuation of the purchased assets was undertaken to assist the Company in
determining the fair value of each identifiable intangible asset and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to in-process research and development
projects. Standard valuation procedures and techniques were utilized in
determining the fair value of the acquired in-process research and development.
To determine the value of the technology in the development stage, the Company
considered, among other factors, the stage of development of each project, the
time and resources needed to complete each project, expected income and
associated risks. Associated risks included the inherent difficulties and
uncertainties in completing the project and thereby achieving technological
feasibility, and the risks related to the viability of and potential changes to
future target markets. The analysis resulted in $25.9 million of the purchase
price being charged to in-process research and development. The intangible
assets, consisting of assembled workforce and goodwill, were assigned a value of
$9.8 million and will be amortized over their estimated useful lives of three
years.
57
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
2. ACQUISITION OF GENEMEDICINE, INC. (CONTINUED)
The unaudited pro forma combined condensed results of operations of the
Company for fiscal 1999 and 1998, had the acquisition occurred at the beginning
of each fiscal year presented (in thousands except per share amounts):
1999 1998
---------- ----------
Net revenue........................................................... $ 7,264 $ 12,615
Net loss.............................................................. $ (29,063) $ (25,244)
Net loss per share.................................................... $ (1.34) $ (1.33)
The unaudited pro forma condensed combined results for fiscal 1999 and 1998
exclude the effects of the write-off of acquired in-process research and
development and other merger costs of $28.9 million, as such amounts are
non-recurring. The unaudited pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the operating results that
would have occurred had the transaction been completed at the beginnings of the
periods indicated, nor is it necessarily indicative of future operating results.
3. INVESTMENTS
Investments consist of the following (in thousands):
AMORTIZED UNREALIZED ESTIMATED
COST GAIN/(LOSS) FAIR VALUE
---------- ------------- ----------
JUNE 30, 1999
Money market funds....................................... $ 5,835 $ -- $ 5,835
Corporate debt securities................................ 19,598 (76) 19,522
---------- ----- ----------
25,433 (76) 25,357
Less amounts classified as cash equivalents.............. (5,835) -- (5,835)
---------- ----- ----------
Total short-term investments............................. 19,598 (76) 19,522
Long-term investments (corporate debt securities)........ 14,863 (33) 14,830
---------- ----- ----------
Total investments........................................ $ 34,461 $ (109) $ 34,352
---------- ----- ----------
---------- ----- ----------
JUNE 30, 1998
Money market funds....................................... $ 15,509 $ -- $ 15,509
Corporate debt securities................................ 7,766 28 7,794
---------- ----- ----------
23,275 28 23,303
Less amounts classified as cash equivalents.............. (15,509) -- (15,509)
---------- ----- ----------
Total short-term investments............................. 7,766 28 7,794
Long-term investments (corporate debt securities)........ 25,495 (35) 25,460
---------- ----- ----------
Total investments........................................ $ 33,261 $ (7) $ 33,254
---------- ----- ----------
---------- ----- ----------
Unrealized gains were not material and have therefore been netted against
unrealized losses. The Company had no realized gains or losses in any period
presented.
58
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
3. INVESTMENTS (CONTINUED)
At June 30, 1999, the contractual maturities of short-term investments were
all due in one year or less, while all long-term investments have contractual
maturities of one to two years.
4. COLLABORATIVE AGREEMENTS
ROCHE HOLDINGS LTD. ("ROCHE")
Pursuant to the merger with GeneMedicine, Inc. in March 1999, Valentis
acquired the rights under a corporate collaboration agreement with Corange, the
parent company of Boehringer Mannheim and now a subsidiary of Roche originally
signed in February 1995. The agreement provides for research and development of
gene medicines to treat head and neck tumors and melanoma (the "Corange
Agreement"). Pursuant to the Corange Agreement, Roche agreed to fund $25 million
of research and development at $5 million per year plus certain amounts for the
achievement of milestones of which $20.9 million had been funded prior to the
merger with GeneMedicine. Roche also made equity investments in GeneMedicine
which were converted into 611,785 shares of Valentis common stock at the time of
the merger and acquired a five-year warrant to purchase 611,785 shares of
Valentis common stock at an exercise price of $36.78 per share. The warrant was
not exercised and expired on April 11, 1999. Revenue recognized under the
collaborative research agreement with Roche, after the merger with GeneMedicine
was $1,000,000 (24% of total revenue) for the year ended June 30, 1999.
In August 1998, the Corange Agreement was amended and extended through
February 2002. The amendment modified the field of the agreement to gene therapy
using the IL-2, Interferon-] or IL-12 genes for the treatment of cancer, and
required the Company to conduct a Phase II clinical trial of the IL-2 gene
medicine, and a Phase I/II clinical trial for each of the Interferon-] and IL-12
gene medicines. As part of the amendment, the Company received the right to
commercialize products developed under the agreement if Roche does not initiate
Phase III clinical trials on products within twelve months after the completion
of Phase II trials. The Company also agreed to forego a $2 million equity
purchase by Roche due on February 1, 1999 in return for a $2 million payment to
be made to the Company by February 1, 2000 and an additional $2 million
milestone upon enrollment of the first patient in a Phase III clinical study.
If the Company meets the milestones for the development of gene medicines
under the Corange Agreement, the Company may be entitled to milestone payments
of up to $7.0 million. If Valentis fails to reach certain milestones by 2002, it
may have to fund an additional year of research at its own expense, not to
exceed $5 million, which amount is included in deferred revenue. Upon successful
completion of Phase II clinical testing, Valentis may elect either to receive up
to 50 percent of related profits by agreeing to share development and
commercialization expenses or to receive royalty payments based on worldwide
product sales.
Also through the merger with GeneMedicine, Valentis acquired a worldwide
exclusive license, with the right to sublicense, from Syntex (U.S.A.) Inc., now
also a subsidiary of Roche, for its cationic lipid gene delivery technology
(DOTMA) for in vivo gene therapy uses. The rights under this agreement continue
even though the original agreement with Syntex ended.
59
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
4. COLLABORATIVE AGREEMENTS (CONTINUED)
ELI LILLY AND COMPANY
In May 1997, the Company entered into a two-year collaborative research
agreement with Eli Lilly and Company ("Lilly") to develop gene-based
therapeutics using BRCA1, a gene that has been identified as a putative tumor
suppressor. The agreement provides for research and development funding as well
as funding to support manufacturing and process development efforts. In July
1999, Lilly and the Company agreed to defer the date at which Lilly may extend
or terminate the research agreement from May 1999 to November 30, 1999. No
additional future cash payments are expected from Lilly under the current
agreement. However, if Lilly and the Company agree on an appropriate level of
research and development efforts, funding may be extended for up to an
additional two years. Lilly can cancel the collaborative research agreement upon
three months advance notice to the Company. The agreement provides for certain
royalty and milestone payments to the Company upon the occurrence of specified
events as set forth in the agreement. Lilly will be responsible for clinical
development and regulatory functions, as well as large-scale clinical and
commercial manufacturing and sales and marketing. Revenue recognized under the
collaborative research agreement with Lilly was $2,180,000 (53% of total
revenue), $4,041,000 (50% of total revenue) and $270,000 (5% of total revenue)
for the years ended June 30, 1999, 1998 and 1997, respectively.
In June 1997, in connection with the Lilly agreement, Lilly purchased
285,714 shares of the Company's Series F preferred stock at $10.50 per share,
which were converted into an equal number of shares of common stock in September
1997.
GLAXO WELLCOME PLC
In April 1994, the Company entered into a five-year collaborative agreement
with Glaxo Wellcome plc ("Glaxo Wellcome") to develop a gene-based therapeutic
for the treatment of cystic fibrosis. In May 1996, the agreement was amended
such that the research and development portion of the agreement expired as of
April 1, 1997. The agreement provided for quarterly nonrefundable research and
development fees. The Company has completed all of its obligations under the
Glaxo Wellcome agreement and will receive future payments, if any, only through
the achievement of a certain clinical milestone and the payment of royalties.
Revenue for research and development was recorded as earned in accordance with
the agreement. For the year ended June 30, 1997, revenue recognized under
agreement with Glaxo Wellcome was $1,971,000 (34% of total revenues). No revenue
was recognized under the agreement for the fiscal years ended June 30, 1999 or
1998.
TRANSKARYOTIC THERAPIES ("TKT")
In November 1997, PolyMASC and TKT signed a licensing agreement for the
development of a PEGylated protein pharmaceutical with an option, now exercised,
to extend the license to a second protein pharmaceutical Under the terms of the
agreement, TKT will develop the PEGylated proteins and PolyMASC will supply the
activated PEG species required to manufacture the PEGylated protein. The goal of
the collaboration is to develop proteins with an increased circulating
half-life, which will allow for longer intervals between administrations.
60
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
4. COLLABORATIVE AGREEMENTS (CONTINUED)
ONYX PHARMACEUTICALS ("ONYX")
In June 1997, PolyMASC and Onyx entered into a collaborative agreement for
PolyMASC to develop a PEGylated version of Onyx's ONYX-015 cancer therapeutic in
development, and in April 1999, PolyMASC and Onyx signed a non-exclusive license
for PEGylated versions of replicating adenoviruses. Under the terms of the
agreement, Onyx has the right to develop PEGylated replicating adenoviruses, and
PolyMASC will supply the activated PEG species required to manufacture the
PEGylated virus. The goal is to assist ONYX-015 in treating not only primary
tumors but also sites of metastases.
BAYER CORPORATION ("BAYER")
In August 1999, PolyMASC and Bayer entered into an agreement whereby Bayer
will fund a feasibility study on the development of Factor VIII for hemophilia A
using PolyMASC's proprietary ProtoMASC-TM- technology. The study is being done
in order for Bayer to determine whether to enter into a broader agreement which
could lead to clinical and commercial development of a chemically modified
Factor VIII.
DSM BIOLOGICS ("DSM") AND QIAGEN N.V. ("QIAGEN")
In September, 1998, Valentis and DSM (formerly
Gist-Brocades/Bio-Intermediair) formed an alliance focused on the manufacture
and supply of plasmid DNA and lipid:DNA complexes to the gene therapy industry.
In May 1999 Qiagen joined the manufacturing alliance. The goal of this alliance
is to provide the emerging gene therapy and genetic vaccination industry with
early access to a reliable, accepted contract manufacturing services platform.
Valentis is contributing its process technologies and its expertise in DNA
formulation and manufacturing to the collaboration. DSM brings manufacturing
experience as a supplier of contract manufacturing services, serving the needs
of the pharmaceutical and biotechnology industry. Qiagen is contributing non-
exclusive access to certain of its technologies and its sales and marketing
force. Under the agreement, Valentis has licensed its proprietary manufacturing
technology for use in DSM facilities in Montreal, Canada and Groningen, The
Netherlands in return for license and milestone fees. DSM, Qiagen and Valentis
will share in the profits generated by the sale of material produced using
Valentis' process. This arrangement could provide revenue for Valentis in
advance of the launch of commercial gene-based products.
PFIZER INC. ("PFIZER")
In May 1996, the Company entered into a four-year collaborative research
agreement, as well as a license and royalty agreement, with Pfizer to develop a
gene-based therapeutic for the treatment of solid tumors via angiogenesis
inhibition. Under the terms of the collaborative research agreement, the Company
conducted research and preclinical development activities. In December 1997,
Pfizer exercised the option as stated in the agreement to discontinue its
research and development program. Under the terms of the agreement, Pfizer
continued funding the program through May 31, 1998. Valentis has continued to
advance the angiogenesis inhibition program and is actively seeking a new
corporate partner. Revenue recognized under the collaborative research agreement
with Pfizer was $4,042,000 (50% of total revenues) and $3,352,000 (58% of total
revenues) for the years ended June 30, 1998 and 1997, respectively. No revenue
was recognized under the agreement for the fiscal year ended June 30, 1999.
61
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
4. COLLABORATIVE AGREEMENTS (CONTINUED)
In May 1996, in connection with the above agreements, Pfizer purchased
484,697 shares of the Company's Series D convertible preferred stock at $7.22
per share, which were converted into an equal number of shares of common stock
in September 1997.
5. LICENSE AND RESEARCH AGREEMENTS
The Company has entered into several research agreements with universities
and other organizations. These agreements are generally cancelable by either
party upon written notice and may be extended by mutual consent of both parties.
Research and development expenses are recognized as the related services are
performed, generally ratably over the period of service. Expenses under these
agreements were approximately $2,521,000, $1,077,000, and $865,000 for the years
ended June 30, 1999, 1998 and 1997, respectively.
In March of 1998 the Company entered into a licensing and collaboration
agreement with the University of Pittsburgh Medical Center ("UPMC") through
which the Company obtained an exclusive license to certain patent rights held by
UPMC in the field of viral and non-viral gene-based therapy for rheumatology.
Under the terms of the license and collaboration agreement the Company issued
117,555 shares of common stock in payment for the exclusive license to these
patent rights. The value of the common stock issued in the transaction was $1.5
million, which was expensed to acquired in-process research and development
during the period. The Company expensed the value of this common stock as the
technology was not complete at the date of acquisition. Under the terms of the
license agreement, the Company is not obligated to make royalty payments upon
the sale of products, if any, in the field of non-viral gene therapy, but is
required to share revenue with UPMC at a specified rate upon the sub-license of
rights in the field of viral gene therapy. Valentis is obligated to make
payments upon the completion of certain milestones. Certain of the license
rights may revert back to UPMC in the event that the Company fails to commit
resources to the development of products in the field of rheumatology. In
addition, the license and collaboration agreement with UPMC established
exclusive collaborations between the Company and several researchers at UPMC for
the research and development of gene-based therapies in the field of
rheumatology. Intellectual property developed by UPMC under the collaboration is
included in the exclusive license to the Company described above at no
additional cost to the Company.
6. OTHER ACQUIRED TECHNOLOGY
In April 1999, the Company acquired rights to intellectual property related
to the del-1 gene and protein from Progenitor, Inc. Del-1 is a novel
extracellular matrix protein involved in early growth and development of blood
vessels and bone that has been demonstrated to have potential application in the
treatment of certain vascular diseases by stimulating angiogenesis. The
acquisition of del-1 strengthens the Company's product development in the area
of cardiovascular disease. The Company expensed the cost paid to Progenitor for
del-1 of $900,000 to acquired in-process research and development as the
technology was not complete at the date of acquisition.
62
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
JUNE 30,
--------------------
1999 1998
--------- ---------
Machinery and equipment................................................. $ 7,137 $ 4,417
Furniture and fixtures.................................................. 1,604 836
Leasehold improvements.................................................. 10,710 5,121
Construction-in-progress................................................ -- 818
--------- ---------
19,451 11,192
Less accumulated depreciation........................................... (7,554) (5,041)
--------- ---------
Property and equipment, net............................................. $ 11,897 $ 6,151
--------- ---------
--------- ---------
8. ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets consist of the following (in thousands):
JUNE 30,
----------------------
1999 1998
--------- -----
Assembled workforce........................................................... $ 1,250 $ --
Goodwill...................................................................... 8,581 --
--------- ---
9,831 --
Accumulated amortization...................................................... (819) --
--------- ---
$ 9,012 $ --
--------- ---
--------- ---
9. LONG-TERM DEBT
OPERATING LINES OF CREDIT
In June 1998, the Company established a line of credit for $8,000,000 with a
commercial bank. At June 30, 1999, the outstanding balance was $6.8 million
under the line of credit. In accordance with the terms of the agreement, the
entire balance was converted into term loans at interest rates ranging from
8.25% to 9.0% due in equal monthly installments. The loans are secured by
tangible personal property, other than the assets securing the equipment
financing, accounts receivable and funds on deposit. As a condition of the
credit line, the Company must maintain a minimum cash and short-term investments
balance of not less than the greater of the prior two quarters net cash usage or
90% of the total principal drawn under the line of credit.
In June 1995, the Company established a line of credit for $1,500,000 with a
commercial bank that was fully utilized by August 1995. In accordance with the
terms of the agreement, the Company elected to convert the entire balance to a
term loan bearing interest at prime plus 2% due in 36 equal monthly
installments. This line of credit was repaid in full in July 1998. In
conjunction with this financing arrangement, the Company issued the bank a
warrant to purchase 24,140 shares of the Company's common stock at $3.88 per
share (see Note 11).
63
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
9. LONG-TERM DEBT (CONTINUED)
The carrying amounts of these obligations approximate their fair value
determined using a discounted cash flow model and the Company's current
incremental borrowing rate.
EQUIPMENT FINANCING
In May 1996, the Company entered into an equipment financing agreement for
up to $2,700,000 with a financing company. The Company has financed $2,700,000
in equipment purchases under this agreement structured as loans. The equipment
loans are to be repaid over 48 months at interest rates ranging from 15.2% to
16.2% and are secured by the related equipment. As of June 30, 1999, the
outstanding balance under this financing agreement was $1.7 million. In
conjunction with this equipment financing agreement, the Company issued a
warrant to purchase 38,238 shares of common stock at $3.88 per share (see Note
11).
In December 1993, the Company entered into an equipment financing agreement
for up to $2,300,000 with a financing company. The Company had financed
$1,922,000 in equipment purchases under this agreement structured as loans. The
equipment loans were repaid over 42 months at interest rates ranging from 13.8%
to 16.2% and were secured by the related equipment. This debt was repaid in full
in December 1998.
Following is a schedule of future minimum principal payments under the
operating lines of credit and equipment financing arrangements at June 30, 1999
(in thousands):
Year ended June 30,
2000.............................................................. $ 3,124
2001.............................................................. 2,975
2002.............................................................. 2,484
---------
$ 8,583
---------
---------
10. OPERATING LEASE COMMITMENTS
The Company leases its facilities and certain equipment under operating
leases. These leases expire between April 2001 and October 2007 with renewal
options at the end of the initial terms of the facilities leases. Minimal annual
rental commitments under the operating leases at June 30, 1999 are as follows
(in thousands):
Year ended June 30,
2000.............................................................. $ 1,502
2001.............................................................. 1,489
2002.............................................................. 1,385
2003.............................................................. 1,407
2004.............................................................. 1,412
Thereafter........................................................ 1,447
---------
$ 8,641
---------
---------
64
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
10. OPERATING LEASE COMMITMENTS (CONTINUED)
Rent expense for the years ended June 30, 1999, 1998 and 1997 was
approximately $804,000, $526,000, and $295,000, respectively.
11. STOCKHOLDERS' EQUITY
COMMON STOCK
On July 30, 1999 at a special meeting, stockholders approved an amendment to
the Company's Amended and Restated Certificate of Incorporation to increase the
authorized number of shares of the Company's common stock from 30,000,000 to
45,000,000.
WARRANTS
In June 1995, the Company issued a warrant to purchase 28,969 shares of
common stock at $3.88 per share to the commercial bank providing a line of
credit to the Company. In accordance with the terms of the warrant, the number
of shares subject to the warrant was reduced from 28,969 to 24,140 in July 1995.
The warrant is exercisable immediately and expires at the earlier of June 1,
2000, or in the event of a merger or sale of substantially all of the assets of
the Company.
In connection with the equipment financing agreement in May 1996, the
Company issued a warrant to purchase 38,238 shares of common stock at $3.88 per
share. The warrant is exercisable immediately and expires in September 2007.
The value ascribed to warrants issued by the Company as noted above, both
individually and in the aggregate, is immaterial.
In connection with the merger with GeneMedicine on March 18, 1999, Valentis
assumed warrants to purchase 611,785 shares of common stock at $36.78 per share
that expired on April 11, 1999 and warrants to purchase 76,133 shares of common
stock at $23.64 per share that expired on July 12, 1999.
EQUITY INCENTIVE PLAN
In July 1997, the Board of Directors amended and restated the 1993 Stock
Option Plan, renamed it as the 1997 Equity Incentive Plan (the "Incentive Plan")
and reserved 2,100,000 shares of the Company's common stock for issuance under
the Incentive Plan. The Incentive Plan was approved by shareholders in September
1997. An additional 1,000,000 shares was added to the plan as approved by the
stockholders in December 1998. The Incentive Plan provides for grants to
employees, directors and consultants of the Company. The exercise price of
options granted under the Incentive Plan is determined by the Board of Directors
but cannot be less than 100% of the fair market value of the common stock on the
date of the grant. Options under the Incentive Plan generally vest 25% one year
after the date of grant and on a pro rata basis over the following 36 months and
expire ten years after the date of grant or 90 days after termination of
employment.
In December 1998, the Board of Directors adopted and stockholders approved
the 1998 Non-Employee Directors' Stock Option Plan (the "Directors' Plan")
covering 200,000 shares of common stock of the Company. Option grants under the
Directors' Plan are non-discretionary. Pursuant to the terms of the Directors'
Plan, each non-employee director, other than a non-employee director who
currently serves
65
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
11. STOCKHOLDERS' EQUITY (CONTINUED)
on the Board, automatically shall be granted, upon his or her initial election
or appointment as a non-employee director, an option to purchase 25,000 shares
of common stock, and commencing with the annual meeting of stockholders in
1998,each person who is serving as a non-employee director on the day following
each Annual Meeting of Stockholders automatically shall be granted an option to
purchase 10,000 shares of Common Stock. As of June 30, 1999, options for 125,000
shares had been granted to non-employee directors under this plan.
The merger with GeneMedicine, Inc. included the conversion of outstanding
GeneMedicine stock options into options to purchase 1.5 million shares of
Valentis common stock. These options relate to the Company's assumption of
GeneMedicine's 1993 Stock Option Plan referred to as the "GeneMedicine Plan."
Under the terms of the GeneMedicine Plan, eligible key employees, directors and
consultants received options to purchase shares of GeneMedicine's previously
outstanding common stock at prices not less than 100% and 85% for incentive
stock and nonqualified options, respectively, of the fair value on the date of
grant as determined by GeneMedicine's Board of Directors. Options under the
GeneMedicine Plan typically vest over a four year period and expire ten years
after the date of grant or 90 days after termination of employment. See Note 2
for more information on the acquisition of GeneMedicine.
66
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
11. STOCKHOLDERS' EQUITY (CONTINUED)
Activity under all option plans was as follows:
OUTSTANDING STOCK OPTIONS
---------------------------------------------------
WEIGHTED
SHARES NUMBER AVERAGE
AVAILABLE OF PRICE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
---------- ---------- -------------- -----------
Balance at June 30, 1996................. 98,435 234,018 $0.30 $ 0.30
Additional authorization................. 353,333 -- -- --
Options granted.......................... (388,680) 388,680 $1.50 $ 1.50
Options exercised........................ -- (116,517) $0.30-$1.50 $ 0.45
Options canceled......................... 26,566 (26,566) $0.30-$1.50 $ 0.51
Shares repurchased....................... 32,045 -- $0.30-$1.50 $ 0.39
---------- ----------
Balance at June 30, 1997................. 121,699 479,615 $0.30-$1.50 $ 1.22
Additional authorization................. 770,985 -- -- --
Options granted.......................... (550,722) 550,722 $2.70-$15.50 $ 8.15
Options exercised........................ -- (169,719) $0.30-$2.88 $ 1.28
Options canceled......................... 52,518 (52,518) $0.30-$15.50 $ 4.12
Shares repurchased....................... 18,429 -- $0.30-$1.50 $ 0.43
---------- ----------
Balance at June 30, 1998................. 412,909 808,100 $0.30-$15.50 $ 5.72
---------- ----------
Additional authorization................. 1,200,000 -- -- --
Options granted.......................... (572,460) 572,460 $4.06-$7.00 $ 5.58
Options exercised........................ -- (46,042) $0.30-$4.38 $ 1.86
Options canceled......................... 351,411 (351,411) $0.30-$16.64 $ 6.78
Options assumed in the merger with
GeneMedicine........................... 251,346 1,479,764 $0.31-$17.08 $ 8.01
Shares repurchased....................... 42,936 -- $0.30-$2.88 $ 0.97
---------- ----------
Balance at June 30, 1999................. 1,686,142 2,462,871 $0.30-$17.08 $ 6.98
---------- ----------
---------- ----------
67
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
11. STOCKHOLDERS' EQUITY (CONTINUED)
The options outstanding at June 30, 1999 have been segregated into ranges
for additional disclosure as follows:
WEIGHTED
AVERAGE
OPTIONS REMAINING OPTIONS WEIGHTED
EXERCISE OUTSTANDING CONTRACTUAL VESTED AVERAGE
PRICE AT LIFE AT EXERCISE
PER SHARE JUNE 30, 1999 (IN YEARS) JUNE 30, 1999 PRICE
- --------------- ------------- --------------- ------------- -----------
$0.30-$4.00 354,648 6.84 250,408 $ 1.56
$4.05-$4.98 419,586 5.52 105,092 $ 4.33
$5.04-$5.91 457,615 8.24 88,743 $ 5.61
$6.02-$9.96 740,046 6.63 287,314 $ 7.76
$10.07-$17.08 490,976 5.28 350,848 $ 13.28
------------- -------------
2,462,871 6.50 1,082,405 $ 6.98
------------- -------------
------------- -------------
The weighted average fair value of options granted in fiscal 1999, 1998 and
1997 was $5.58, $8.15, and $1.50, respectively.
At June 30, 1999, 56,150 shares of common stock at a weighted average price
of $1.03 per share were subject to repurchase.
1997 STOCK PURCHASE PLAN
In July 1997, the Board of Directors adopted the 1997 Employee Stock
Purchase Plan (the "Purchase Plan") covering an aggregate of 200,000 shares of
common stock. The Purchase Plan was approved by shareholders in September 1997
and is qualified under Section 423 of the Internal Revenue Code. The Purchase
Plan is designed to allow eligible employees of the Company to purchase shares
of common stock through periodic payroll deductions. The price of common stock
purchased under the Purchase Plan must be equal to at least 85% of the lower of
the fair market value of the common stock on the commencement date of each
offering period or the specified purchase date. Of the 200,000 shares authorized
to be issued under the plan, 129,856 shares were available for issuance at June
30, 1999 and 70,144 shares had been issued under the Purchase Plan at an average
purchase price of $5.06 per share.
DEFERRED COMPENSATION EXPENSE
The Company has recorded deferred compensation expense for the difference
between the exercise price and the deemed fair value for financial statement
presentation purposes of the Company's common stock, as determined by the Board
of Directors, for options granted through the year ended June 30, 1997. Deferred
compensation of $750,000 was recorded on these options based on the deemed fair
value of the common stock at the dates of grant at prices ranging from $1.50 to
$3.75 per share, respectively. In July and August 1997, the Company granted
options to purchase a total of 59,949 shares at exercise prices ranging from
$2.70 to $2.88 per share. Additional deferred compensation of approximately
$636,000 was recorded based on the deemed fair values of common stock ranging
from $9.00 to $9.60 per share. The deferred compensation is being amortized to
expense over the vesting period of the options, generally four years.
Amortization of $513,000, $339,000 and $71,000 were recorded in 1999, 1998 and
1997, respectively.
68
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
11. STOCKHOLDERS' EQUITY (CONTINUED)
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires use of valuation models that were not developed for use in valuing
employee stock options. Under APB 25, if the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma net loss and net loss per share information is required by SFAS
123, which also requires that the information be determined as if the Company
has accounted for its employee stock options granted subsequent to December 31,
1994 under the fair market value method of that statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted-average assumptions:
STOCK PURCHASE PLAN SHARES
EMPLOYEE STOCK OPTIONS
------------------------------- -----------------------------------
YEARS ENDED JUNE 30, 1999 1998 1997 1999 1998 1997
- ------------------------------------- --------- --------- --------- --------- ----- -----
Expected life (in years)............. 2.3 2.5 2.5 0.5 -- --
Risk-free interest rate.............. 4.58% 5.45% 6.05% 4.83% -- --
Volatility........................... 0.93 0.70 0.00 0.93 -- --
Dividend yield....................... -- -- -- -- -- --
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options and employee stock purchase plans have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair market value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options and shares issued pursuant to the employee stock purchase plan.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows (in thousands except for net loss per share
information):
YEAR ENDED JUNE 30,
--------------------------------
1999 1998 1997
---------- --------- ---------
Net loss-as reported......................................... $ (44,680) $ (8,378) $ (4,947)
Net loss-pro forma........................................... $ (45,837) $ (8,708) $ (4,965)
Net loss per share-as reported............................... $ (2.90) $ (0.83) $ (4.40)
Net loss per share-pro forma................................. $ (2.97) $ (0.86) $ (4.41)
12. INCOME TAXES
As of June 30, 1999, the Company had federal net operating loss
carryforwards and federal research credit carryforwards of approximately $90.9
million and $2.1 million, respectively. The federal net
69
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
12. INCOME TAXES (CONTINUED)
operating loss carryforward at June 30, 1999, was composed of $37.9 million
pertaining to Valentis' operations and $53.0 million pertaining to GeneMedicine,
Inc.'s operations. The net operating loss and credit carryforwards will expire
at various dates beginning in 2007 through 2019, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
Significant components of the Company's deferred tax assets and liabilities
for federal income taxes as of June 30 are as follows (in thousands):
1999 1998
---------- ----------
Net operating loss carryforwards...................................... $ 31,100 $ 8,200
Research and development credits...................................... 2,300 600
Manufacturing and research equipment credit carryforward.............. 200 200
Capitalized research and development.................................. 1,900 1,600
Deferred revenue...................................................... 2,000 --
Depreciation.......................................................... 1,900 1,300
Other, net............................................................ 9,400 (600)
---------- ----------
Net deferred tax assets............................................... 48,800 11,300
Valuation allowance................................................... (48,800) (11,300)
---------- ----------
$ -- $ --
---------- ----------
---------- ----------
The net valuation allowance increased by $19.5 million, $3.2 million and
$2.0 million during the years ended June 30, 1999, 1998 and 1997, respectively.
13. SUBSEQUENT EVENTS (UNAUDITED)
On August 27, 1999, Valentis acquired PolyMASC Pharmaceuticals plc
("PolyMASC"). In conjunction with the acquisition, prior to closing, Valentis
loaned PolyMASC $1,000,000 which was secured by certain intellectual property.
Under the terms of the agreement, each outstanding share of PolyMASC common
stock was exchanged, at a fixed exchange ratio of 0.209, for newly issued shares
of common stock of Valentis. This resulted in the issuance of approximately 4.2
million Valentis shares, valued at about $19.8 million based on the Valentis
stock price of $4.50 at the date the transaction was announced. In addition,
Valentis assumed all outstanding employee stock options of PolyMASC. These
options were converted into options to purchase shares of common stock of
Valentis at the same exchange ratio. If and when these options are exercised,
Valentis shares will be issued from shares already held by the PolyMASC Employee
Benefit Trust. Dr. Gillian E. Francis, Chief Executive Officer of PolyMASC, will
join the Board of Directors of Valentis and will serve as Managing Director,
PolyMASC. The Company announced that it intends to manage PolyMASC as a wholly
owned subsidiary of Valentis.
PolyMASC's research and development programs are in various stages of
preclinical development. Currently, none of the products utilizing PolyMASC's
proprietary technology has as yet entered any stage of human clinical testing.
PolyMASC's strategy has been to develop and commercialize its products
70
VALENTIS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
13. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
through alliances with pharmaceutical and biotechnology companies. No products
using PolyMASC's proprietary technology have been approved for marketing to
date. The PolyMASC research and development currently in process has been
preliminarily valued at $14.8 million. The acquired in-process research and
development will be included in the Valentis statement of operations in the
quarter ending September 30, 1999. The intangible assets will be amortized over
their estimated useful lives of 3 years.
71