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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _____________
Commission File Number 0-22025
AASTROM BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
-----------------------
Michigan 94-3096597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 Frank Lloyd Wright Drive
P. O. Box 376
Ann Arbor, MI 48106
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (734) 930-5555
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The approximate aggregate market value of the registrant's Common Stock, no par
value ("Common Stock"), held by non-affiliates of the registrant (based on the
closing sales price of the Common Stock as reported on the Nasdaq National
Market) on September 15, 1999 was approximately $25 million. Excludes shares of
Common Stock held by directors, officers and each person who holds 5% or more of
the outstanding shares of Common Stock, since such persons may be deemed to be
affiliates of the registrant. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of September 10, 1999, 16,994,125 shares of Common Stock, no par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document FORM 10-K REFERENCE
- -------- -------------------
Proxy Statement for the Annual Meeting of Shareholders
scheduled for November 17, 1999 Items 10, 11, 12 and 13 of Part III
AASTROM BIOSCIENCES, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
No.
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PART I ...................................................................... 3
Item 1. BUSINESS.................................................. 3
Item 2. PROPERTIES................................................ 21
Item 3. LEGAL PROCEEDINGS......................................... 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 21
PART II ..................................................................... 22
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS....................................... 22
Item 6. SELECTED FINANCIAL DATA................................... 23
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 24
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 35
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 50
PART III .................................................................... 50
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 50
Item 11. EXECUTIVE COMPENSATION.................................... 50
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 50
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 50
PART IV ..................................................................... 51
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K............................................... 51
SIGNATURES .................................................................. 52
EXHIBIT INDEX ............................................................... 53
2
Except for the historical information presented, the matters discussed in
this Report include forward-looking statements that involve risks and
uncertainties. Aastrom's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed under the caption "Business Risks" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
OVERVIEW
Aastrom Biosciences, Inc. ("Aastrom" or the "Company") is developing automated
clinical systems designed to enable therapeutic procedures using living cells in
the treatment of cancer and other diseases and in the restoration of normal
tissues. The AastromReplicell(TM) Cell Production System (the
"AastromReplicell(TM) System"), Aastrom's lead product, is currently in multi-
site U.S. clinical trials for the production of either bone marrow or umbilical
cord blood cells to mitigate the toxicity of aggressive chemotherapy used to
treat cancer and other blood disorders. The AastromReplicell(TM) System is
designed to place patient-specific cell production capability directly in
patient treatment centers and to enable physicians to access cells for therapy
just as they do with traditional pharmaceuticals. Improved, cost effective,
access to cells should expand the use of current cell therapies as well as
increase the breadth of new disease treatments with cells. The
AastromReplicell(TM) System is designed as a family of products keyed by a
multi-use instrumentation platform that operates single-use therapy-specific
kits tailored for each patient application. Market launch of the
AastromReplicell(TM) System and the SC-I Therapy Kit for the production of bone-
marrow derived stem cells and the CB-I Therapy Kit for the production of
umbilical cord blood cells has begun in Europe. The AastromReplicell(TM) is also
available for sale in the U.S. for research and investigational use.
Once established for use in stem cell therapy, Aastrom intends to leverage the
cell production capabilities of the AastromReplicell(TM) System into selected
emerging therapies being developed by other companies and institutions. This can
occur through the development of additional therapy kits to be operated by the
AastromReplicell(TM) System instrumentation. Aastrom intends to pursue strategic
collaborations for the development of the AastromReplicell(TM) System in certain
of these other cell therapy market segments. In ex vivo gene therapy, Aastrom is
also developing the Aastrom(TM) Gene Loader, which provides enhanced methods for
the genetic modification of cells and addresses the production of gene-modified
cells.
In May 1999, the Company formed Zellera AG (Zellera) as a wholly-owned
subsidiary based in Berlin, Germany. The formation of Zellera is intended to
provide access to additional funding and collaboration opportunities in new
product areas and also to support Aastrom's European product commercialization
efforts. Initial funding for Zellera is being pursued, which is planned to
consist of a combination of investment capital and loans and subsidies from the
German government. With this potential funding, Zellera will have access to
Aastrom's intellectual property base for certain specified human cell therapies
and will pursue development of new product areas.
CELL THERAPY
Cell therapy is the use of living cells in the treatment of medical
disorders. These cells can either be used in conjunction with, or as a
replacement to, traditional therapies. Cell therapy has been used for many
years, beginning with simple, but very effective, blood and platelet
transfusion. More recently, cell therapies have expanded to include specialized
procedures including bone marrow, or stem cell transplants. In this procedure,
stem cells are transplanted into patients to restore blood and immune system
function that is damaged or destroyed by aggressive chemotherapy used to treat
the cancer. This form of cell therapy, as with a number of emerging new
therapies, has been hampered by a number of limitations relating to gaining
access to the cells necessary for transplantation.
To date, cell therapies have generally involved the collection of large
amounts of cells from the patient, or from a matched donor which are
subsequently re-infused. This approach is time consuming, expensive and quite
invasive to the patient. An alternative to the collection of large quantities
of cells for these therapies is to grow the cells in culture from a
3
small starting quantity of cells. However, this approach has been hampered by a
number of technical difficulties and a requirement to comply with stringent
regulatory standards, which have limited the widespread practice of ex vivo cell
production.
The success of cellular therapy is based, in part, on the need for care
providers to be able to access therapeutic quantities of biologically active
cells necessary for patient treatment. The AastromReplicell(TM) System is being
developed to fill this current and growing need in cell therapy.
In ex vivo gene therapy, genes are introduced into target cells in order to
selectively correct or modulate disease conditions, or to modify cells for
production of a therapeutic protein. Aastrom believes that the successful
practice of ex vivo gene therapy will require the development of processes and
products for the reliable, high-efficiency transfer of genes into cells and a
means to produce the necessary dose of the genetically modified cells under
current Good Manufacturing Practices ("GMP").
STEM CELL THERAPY
Stem cell therapy is used to treat cancer patients who undergo chemotherapy or
radiation therapy at dose levels that are toxic to the hematopoietic system,
which is comprised of the bone marrow and the cells of the blood and immune
system. The objective of stem cell therapy is to restore the patient's blood and
immune system (called the hematopoietic system) via the infusion and subsequent
engraftment of healthy cells to replace bone marrow and result in the rapid
recovery of neutrophils and platelets that have been destroyed by chemotherapy
and radiation therapy. Stem cell therapy reduces the risk of life-threatening
infections and bleeding episodes following cancer treatments. In order to treat
many cancers, high intensity chemotherapy or radiation therapy is often
required, which may substantially destroy ("myeloablate") or partially destroy
("myelosuppress") the patient's hematopoietic system.
Cells required for effective stem cell therapy include stem cells, to
replenish depleted bone marrow and provide a long-term ongoing source of the
multilineage progenitor cells of the blood and immune system, and early and late
stage hematopoietic progenitor cells, to provide for rapid neutrophil and
platelet recoveries. Stromal accessory cells are believed to further augment the
growth of bone marrow. In the adult, all of these cell types originate in the
bone marrow. For traditional stem cell transplant procedures, these cells are
currently collected from the donor or patient directly through multiple syringe
aspirations under general anesthesia, known as bone marrow collection, or
through blood apheresis following treatment with drugs which cause cells to be
released or mobilized from the bone marrow into the blood. This latter technique
is known as a peripheral blood stem cell ("PBSC") collection. The blood cells
found in the umbilical cords of newborn infants include cells effective for stem
cell therapy. This source of cells is being explored by physicians as a
significant new development in stem cell therapy, but is currently limited by
difficulties in obtaining sufficient quantities of these cells and by prolonged
engraftment times for the cells once transplanted into the patient. See
"--Current Stem Cell Collection Methods."
Once collected, the stem cell mixture is infused intravenously and the stem
and stromal accessory cells migrate into the bone cavity where they engraft to
form new marrow tissue. The hematopoietic progenitor cell components of the cell
mixture provide early restoration of circulating white blood cells and
platelets. The replenished bone marrow will normally provide long-term
hematopoietic function, but complete restoration of bone marrow may, in some
cases, take years following myeloablative cancer therapy. When the patient's
hematopoietic system contains malignant cells itself, such as in the case of
leukemia, stem cells from a suitable donor are generally required in order to
avoid reintroducing the disease during cell infusion. Such donor derived
transplants are termed "allogeneic" transplants. Procedures using cells derived
from the patient are termed "autologous" transplants.
STEM CELL THERAPY MARKET OPPORTUNITY
------------------------------------
Stem cell therapy is a widely used medical procedure in the treatment of
cancer patients. It is estimated that over 50,000 stem cell transplant
procedures are performed annually. Stem cell therapy, in the form of bone marrow
transplantation, was originally used in patients who had received treatment for
blood and bone marrow cancers such as leukemia, and genetic diseases of the
blood. However, because stem cell therapy has been shown to promote the rapid
recovery of hematopoietic function, it is now being increasingly used to enable
patients with other forms of cancer to receive high dose or multicycle
chemotherapy and radiation treatments. These high-intensity therapies are
believed to have a greater probability of
4
eradicating certain dose-sensitive cancers but, because of their hematopoietic
toxicity, cannot generally be given without stem cell therapy. As a result, some
patients are treated with lower and less effective doses, and fewer cycles of
therapy than might otherwise be desired.
Stem cell therapy may also enhance the effectiveness of blood cell growth
factors used. The timing and extent of additional cycles of chemotherapy is
often limited by the recovery of a patient's white blood cells and platelets
because a delayed recovery of these cells can leave the patient susceptible to
life-threatening infection and bleeding episodes, and this limitation may allow
for the growth of residual tumor cells. Many cancer patients are routinely
treated with growth factors including G-CSF, such as Neupogen(R) (from Amgen,
Inc.) and GM-CSF, such as Leukine(R) (from Immunex Corp.) which enhance the
development of mature circulating white blood cells and platelets from the early
progenitor bone-marrow derived cells, thereby decreasing the time between cycles
of therapy and the probability of infection. However, during high dose or
multicycle therapy, the stem and progenitor cells on which these growth factors
act are often depleted. Without these cells, growth factors have a limited or
negligible effect. Stem cell therapy generally enhances the effectiveness of
growth factors by introducing target stem and progenitor cells for growth
factors to act upon such that patients generally exhibit a more rapid and
consistent hematopoietic recovery.
CURRENT STEM CELL COLLECTION METHODS
------------------------------------
Currently, the bone marrow-derived cells required for stem cell therapy are
collected primarily either through the bone marrow harvest method or the PBSC
collection method.
BONE MARROW HARVEST
-------------------
A traditional bone marrow harvest is a costly and invasive surgical procedure
in which a physician removes approximately one liter of bone marrow from a
patient or donor. This volume of bone marrow is removed using needles inserted
into the cavity of the hip bone. The bone marrow harvest procedure typically
requires between two to four hours of operating room time, with the physician
often making more than 90 separate puncture sites in the hip bone to collect the
necessary amount of bone marrow. Due to the length of the procedure and the
trauma to the patient, general surgical anesthesia is administered and the
patient is often hospitalized for a day. Frequently, the patient suffers pain
from the procedure for several days after being discharged from the hospital.
Furthermore, complications resulting from the general anesthesia or invasive
nature of the procedure occur in a small percentage of patients. Bone marrow
harvest provides a reliable source of stem and stromal accessory cells and has
been the preferred source of cells in allogeneic transplants.
PBSC MOBILIZATION AND COLLECTION
--------------------------------
PBSC mobilization is a technique in which bone marrow-derived cells are
harvested from a patient's or donor's circulating blood, rather than from bone
marrow. In a PBSC mobilization procedure, the patient receives multiple
injections of growth factors or cytotoxic drugs, or both, over the course of a
week or more, which cause stem and progenitor cells resident in the bone marrow
to mobilize into the circulating blood. The mobilized cells are then collected
by connecting the patient to a blood apheresis device, often times through the
placement of a catheter, which draws and returns large volumes of the patient's
or donor's blood in order to selectively remove the desired stem and progenitor
cells. Each collection procedure typically lasts for two to six hours and is
typically repeated on two to five consecutive days, however, procedure time has
decreased and is expected to continue to decrease as the procedure is further
optimized. Specialized laboratory testing over the period of mobilization and
cell harvesting is necessary to determine that a sufficient quantity of desired
cells has been collected, adding to the cost of the procedure. The PBSC process
has become the predominant procedure in autologous stem cell therapy.
UMBILICAL CORD BLOOD
--------------------
Umbilical Cord Blood ("UCB"), which is collected directly from the umbilical
cords of newborn infants, without pain or risk to the infant or the mother, is
emerging as a new source of cells for stem cell therapy. UCB has been reported
to have stem cell concentrations that are much higher than that typically
obtained from traditional bone marrow and PBSC collection methods. After
collection, UCB is typically frozen for later use in a stem cell therapy
procedure. Storage of UCB samples involves small volumes of cells, compared to
typical bone marrow or PBSC storage. Accordingly, the costs of collection and
5
storage of UCB cells are comparatively low. UCB may provide a tumor-free source
of cells, making it a preferred source of cells for many current stem cell
therapy procedures in cancer patients with metastatic disease (e.g. disease that
has spread throughout the patient's body, affecting their own bone marrow and
stem cells), and particularly in the absence of a suitably matched donor. Before
UCB can become a major supply source for stem cell therapy, a coordinated UCB
banking system must emerge. In this regard, several UCB banking institutions
have been established to date, and the group is growing in both number and size.
The establishment of these UCB banking institutions is an initial step which may
lead to a coordinated UCB banking system.
PROCEDURE CONSIDERATIONS
------------------------
Although stem cell therapy is being utilized to treat more patients for a
broader range of diseases, its availability continues to be limited by the high
costs of procuring cells, the invasive nature of traditional cell procurement
techniques, and by the technical difficulties related to those collection
procedures. Aastrom believes that current charges for typical stem cell
collection procedures through bone marrow harvest or PBSC collection ranges from
$10,000 to $20,000 with considerable variability between institutions.
Overall costs of stem cell therapy include the costs of the cell collection
and infusion procedures, and the costs associated with supporting the patient
during post-transplant recovery. Post-transplant costs include hospitalization
time, antibiotic support, management of adverse reactions to the large volume
cell infusions, and infusions of platelets and red blood cells. Any new stem
cell therapy process will generally need to provide similar recovery endpoints
to be competitive with the current procedures. In this regard, PBSC procedures
have gained popularity compared with bone marrow harvests because the number of
platelet transfusions is reduced for some patients.
While UCB is a promising new source of cells for transplantation, certain
disadvantages exist including the relatively low number of available cells which
may contribute to prolonged engraftment times for the cells once transplanted
into the patient. Unlike bone marrow or PBSC harvest, where the collection of
more cells to meet a particular treatment is typically achievable, the number of
cells available from a UCB donor is limited to the small quantity of cells
available at the initial collection. This problem is exacerbated by the required
cryopreservation of the cells, which causes additional cell loss. The resultant
low cell number is believed to be responsible for the longer hematopoietic
recovery times observed with UCB transplants, as compared with bone marrow or
PBSC transplants. Further, because of the low cell number, UCB transplants are
typically restricted to small patients. Therefore, increasing the number of
therapeutic cells from a UCB sample may facilitate the more widespread use of
UCB transplants. Aastrom believes that providing the transplant site with the
capability to carry out the UCB cell expansion will be a major factor in the
increased use of UCB for stem cell therapy and a significant business
opportunity.
Products to implement a cell isolation method known as CD34 selection have
been developed by other companies in conjunction with bone marrow harvest and
PBSC collections. CD34 selection is a process designed to isolate specific types
of cells in order to decrease storage and infusion problems associated with the
large volume of fluids collected in bone marrow or multiple apheresis procedures
and to assist in depleting T-cells and tumor cells from the transplant cells
collected. CD34 selection is used after the initial collection of stem and
progenitor cells and, therefore, can increase the difficulties or costs
associated with the cell collection procedure.
AASTROM TECHNOLOGY
Aastrom is developing proprietary product and process technologies that are
pioneering the ex vivo production of human stem and progenitor cells. Aastrom's
initial product candidate, the AastromReplicell(TM) System utilizes Aastrom's
process technology and is designed to enable the ex vivo production of human
stem and progenitor cells as an alternative to bone marrow harvest and PBSC
mobilization methods and to enhance the clinical utility of UCB cells. The
initial application of the AastromReplicell(TM) System is the production of
cells for stem cell therapy. However, once established for use in stem cell
therapy, Aastrom plans to leverage the cell production capabilities of the
AastromReplicell(TM) System across multiple cell therapy opportunities as they
develop. As these emerging cell therapies are developed, Aastrom intends to
develop and introduce new therapy kits through collaborative relationships with
others directed toward the treatment of cancer, infectious diseases, auto-immune
diseases and in the restoration of solid tissues.
6
CORE TECHNOLOGIES
-----------------
Stem Cell Growth Process
------------------------
Aastrom has developed proprietary processes and patented technologies for ex
vivo production of therapeutic stem and progenitor cells as well as other key
cells found in human bone marrow. Aastrom's proprietary process entails the
placement of a stem cell mixture in a culture environment that mimics the
biology and physiology of natural bone marrow. This process enables the stem and
early and late-stage progenitor cells needed for an effective stem cell therapy
procedure to be concurrently expanded. Growth factors can be added to stimulate
specific cell lineages to grow or to increase cell growth to meet a particular
therapeutic objective. The stem cell growth process can best be completed with
little or no additional stem cell selection or purification procedures. This
stem cell replication process can also enable or augment the genetic
modification of cells by providing the cell division step needed for new genes
to integrate into the stem cell DNA. Other currently available cell culture
methods tend to result in a loss of stem cells, either through death or through
differentiation into mature cells. Aastrom has exclusive rights to several
issued U.S. patents that cover these processes and cell compositions. See
"--Additional Stem Cell and Other Cell Therapies."
Aastrom Cell Culture Chamber
----------------------------
Aastrom has developed a proprietary cell culture chamber to implement its
process technology. The culture chamber produces cells on a clinical scale and
allows for simple, sterile recovery of the cells for therapeutic use. Aastrom
believes that the Aastrom cell culture chamber may also be used for growing
other human therapeutic cells, such as T-Cells and dendritic cells used for
immunotherapies, chondrocytes for cartilage replacement, and mesenchymal tissues
for bone and cartilage replacement. Aastrom holds exclusive rights to issued
U.S. patents and additional applications for its cell culture chamber device
technology. See "--Additional Stem Cell and Other Cell Therapies."
Efficient Gene Transfer
-----------------------
Aastrom has developed proprietary processes and device technology that may
enable increased efficiency of vector-mediated gene transfer into cells as
compared to conventional procedures. This directed-motion gene transfer or gene
loading technology is being pursued by Aastrom for application in most cell and
tissue types and most vector technologies. Aastrom intends to develop products
based upon its gene loading technology. Development of additional products,
however, will require Aastrom to raise additional funds or to seek collaborative
partners, or both, to finance related research and development activities, as to
which there can be no assurance of success. Furthermore, due to the
uncertainties involved, Aastrom is unable to estimate the length of time such
development may take. If successfully developed into products, Aastrom believes
that such products would facilitate the advancement of numerous gene therapy
protocols into the clinic and ultimately the market. Aastrom has exclusive
rights to issued U.S. patents, and has additional applications pending, for this
technology. See "Aastrom Product Candidates For Ex Vivo Gene Therapy."
The AastromReplicell(TM) System
-------------------------------
The AastromReplicell(TM) System is Aastrom's lead product under development.
While potentially applicable to multiple cell therapy applications such as
immunotherapy, solid tissue repair and ex vivo gene therapy, the
AastromReplicell(TM) System is being developed initially by Aastrom for stem
cell therapy. Market launch of the AastromReplicell(TM) System and the SC-I
Therapy Kit for the production of bone-marrow derived stem cells and the CB-I
Therapy Kit for the production of umbilical cord blood cells has begun in
Europe. The AastromReplicell(TM) System is a proprietary system that Aastrom
believes will enable the large scale ex vivo production of a variety of
therapeutic cells at healthcare facilities, independent laboratories, transplant
centers and blood banks, and has been designed to implement Aastrom's stem cell
growth process as well as processes for the production of other cell types.
The AastromReplicell(TM) System is comprised of several components, including
single-use therapy kits such as the SC-I and CB-I Therapy Kit, and
microprocessor-controlled instruments. The single use therapy kits contain a
cell cassette cartridge which contains the Aastrom cell culture chamber, supply
and waste reservoirs and harvest bag, necessary growth
7
medium and supplements and process specific software which provides the cell
production processing parameters to the AastromReplicell(TM) System instruments.
The microprocessor-controlled instruments include the AastromReplicell(TM)
System Incubator which controls the culture conditions for the operation of the
AastromReplicell(TM) System Cell Cassette, and the Processor which automates the
inoculation of cells into and harvesting of the cells from the
AastromReplicell(TM) System Cell Cassette. The AastromReplicell(TM) System
Manager is a user interface computer that is being developed to simultaneously
track and monitor the cell production process in over thirty
AastromReplicell(TM) System incubators and record relevant process variables and
operator actions.
The AastromReplicell(TM) System is designed to be operated with minimal
operator activity by a medical or laboratory technician and can implement
clinical scale cell production at the patient care site. The end product of the
AastromReplicell(TM) System process is a blood-bag container with the cell
product. The control and documentation features of the AastromReplicell(TM)
System have been designed to meet GMP requirements for the therapeutic
production of cells.
AASTROMREPLICELL(TM) SYSTEM FOR STEM CELL THERAPY
Aastrom's initial application for the AastromReplicell(TM) System is in the
field of stem cell therapy, where Aastrom believes that the AastromReplicell(TM)
System addresses many of the limitations of existing procedures. The
AastromReplicell(TM) System is based on a comparatively simple process in which
a small volume of bone marrow cells are collected from the patient or donor
using a needle aspiration procedure, typically under a local anesthetic or
sedative. Alternatively, UCB cells have been shown to be a new source of cells
for use in stem cell transplantation. The starting mixture of either bone marrow
or UCB cells is quantified, and an appropriate volume of cells is then
inoculated into one or more AastromReplicell(TM) Cell Cassettes with the
necessary growth media. Using the AastromReplicell(TM) System, growth-factor-
stimulated cells are produced in approximately 12 days, with no further patient
involvement. Depending upon the cell quantity necessary for a therapeutic
application, single or multiple AastromReplicell(TM) System Cell Cassettes may
be required, with a different volume requirement of starting cells taken from
the patient at the initial visit or obtained from the UCB bank. The
AastromReplicell(TM) System has been designed to minimize operator involvement
during the cell production process, and the steps required before and after the
AastromReplicell(TM) System are standard laboratory procedures. Cells derived
from UCB may also serve as a tumor-free source of stem and progenitor cells for
expansion in the AastromReplicell(TM) System.
POTENTIAL ADVANTAGES OF AASTROMREPLICELL(TM) SYSTEM
---------------------------------------------------
The AastromReplicell(TM) System is designed to enable a cost-efficient and
minimally invasive alternative, or supplement, to existing procedures, which
could offer numerous advantages for both patients and medical staff:
The AastromReplicell(TM) System can generate larger quantities of cells from a
small starting sample. Alternative procedures to obtain the large quantity of
stem cells necessary for transplantation requires a patient to endure up to
approximately 40 hours of procedure time or up to approximately 100 invasive
needle sticks to obtain the necessary quantity of stem cells required for the
transplant. The AastromReplicell(TM) System offers an alternative that requires
less than two hours of procedure time and significantly fewer needle sticks.
The AastromReplicell(TM) System enables the production of certain cells, such
as umbilical cord blood (UCB) cells, for which there might otherwise be
insufficient quantities available for many transplants. Having access to a
sufficient number of cells is essential to successful clinical outcomes. This is
particularly the case with umbilical cord blood transplants. This source of stem
cells is increasingly being used as an alternative to traditional stem cell
transplant procedures. However, the limited quantities of available cells and
difficulties in expanding the starting volumes to therapeutic quantities have
restricted the widespread practice of UCB transplants. The AastromReplicell(TM)
System is designed to solve this dilemma by providing the capability to easily
and cost-effectively expand UCB cells to higher quantities for therapeutic
treatments.
Pre-clinical tests have demonstrated tumor cell purging of certain cancer
cells in the AastromReplicell(TM) System expansion process. Cancer patients with
tumor metastases, in which the cancer has spread to the blood and bone marrow,
have not traditionally been candidates for autologous stem cell transplants
because such transplant might reintroduce cancer cells into the patient.
Additionally, patients may have undetected tumor cells present in their marrow
or PBSC transplant, which could re-establish cancer in the patient following
transplant. Aastrom's initial pre-clinical results, as well as studies
8
conducted by third-party investigators, have shown that some primary human tumor
cells die or do not grow during hematopoietic cell culture. The smaller volume
of starting cells used for the AastromReplicell(TM) System compared with bone
marrow harvest or PBSC transplants may provide approximately 10 to 70 fold less
tumor cells in a transplant. Further, in an evaluation of 14 tumor-contaminated
bone marrow samples that were expanded with the AastromReplicell(TM) System
process, the presence of breast cancer cells in each sample was either
substantially reduced or was no longer detectable. Further, tumor cells that
were detectable after expansion in the AastromReplicell(TM) System showed a
significant reduction in clonogenicity (the ability to replicate). Aastrom
believes that this combination of passive depletion during culture with the
lower starting volume of tumor cells may result in a tumor-free or tumor-reduced
cell product for transplant. The clinical benefit of such tumor depletion, if
any, will vary depending upon the type of cancer and state of disease.
Supplemental therapy with AastromReplicell(TM) System produced cells.
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Collection of cells for transplant is a variable procedure requiring longer
collection procedures for some patients compared to others. The
AastromReplicell(TM) System offers a means to augment current collection
techniques, thereby reducing variability and the overall collection burden for
the patient and care provider.
The AastromReplicell(TM) System automates the process of growing human cells
----------------------------------------------------------------------------
and is designed to be used directly in a hospital setting. Growing human cells
- ----------------------------------------------------------
has largely been a research laboratory process, requiring substantial time and
technical expertise. The AastromReplicell(TM) System is designed to provide
automated cell production capabilities directly at the patient care site in
compliance with regulatory standards, providing process reliability and reducing
the need for highly skilled operators.
CLINICAL DEVELOPMENT
The AastromReplicell(TM) System is an automated clinical system designed to be
used by medical personnel at hospitals and patient care centers to produce
therapeutic cells for the treatment of a broad range of diseases, including
cancer, infectious diseases and the restoration of solid tissues.
The AastromReplicell(TM) System is designed as a family of products consisting
of an instrumentation platform that operates single-use, patient-specific,
therapy kits. Each therapy kit, which is specific to the desired cell or tissue
type, is operated by the AastromReplicell(TM) System instrument platform, which
automates the otherwise complex cell production processes. This instrument
platform allows for on site cell manufacturing directly at the hospital, that is
compliant with GMP's. The reagents, growth medium, cytokines, and process
instructions contained within each therapy kit are procedure specific for the
production of each cell type of therapy. This product design feature provides
for a variety of therapy kits to be integrated into the AastromReplicell(TM)
System product line.
The AastromReplicell(TM) System is being evaluated in multi-site clinical
trials in the U.S. under Investigational Device Exemptions (IDE's) from the FDA.
The initial goals of Aastrom's clinical trial program are to obtain a Pre-Market
Approval (PMA) in the U.S., necessary to market the AastromReplicell(TM) System
for autologous stem cell therapy and umbilical cord blood transplants, and to
support European marketing activities.
Aastrom has conducted clinical trials in the U.S. evaluating stem cells
produced in the AastromReplicell(TM) System from a small starting amount of bone
marrow. Results from initial studies demonstrated the ability of the
AastromReplicell(TM) System to safely and reliably produce stem and progenitor
cells that engraft and restore blood and immune system function in cancer
patients who had undergone very aggressive chemotherapy. Further, the small
volume aspirate, along with a purging of contaminated tumor cells during the
stem cell production has indicated a way to offer patients a transplant with a
lower risk of receiving back tumor cells.
Aastrom is now conducting a randomized U.S. pivotal clinical trial evaluating
the AastromReplicell(TM) System to compliment traditional therapies by
augmenting stem cells collected from a single PBSC apheresis procedure. The
objectives of this study are to demonstrate that an optimal targeted recovery
can be achieved using the AastromReplicell(TM) System produced cells with a sub-
optimal PBSC cell dose that otherwise would not provide this desired outcome.
This procedure appears to improve the certainty of procedure outcome by
providing a more reliable means of cell collection and patient recovery.
9
Aastrom has also conducted clinical feasibility trials to evaluate UCB cells
produced in the AastromReplicell(TM) System to improve recoveries of pediatric
and adult patients requiring donor derived (or allogeneic) stem cell
transplants. Results of the pediatric transplants indicated that
AastromReplicell(TM) System-produced cells were safe and well tolerated by the
patients, and an improvement in 100-day post-transplant survival for the
patients was observed. Based on the positive data, this Company has obtained
permission from the FDA to conduct its pivotal clinical study in pediatric
patients and expects to begin the trial soon. Results from Aastrom's adult cord
blood trial suggested that the AastromReplicell(TM) System could increase the
quantity of cord blood cells available and enable adult-sized patients to
undergo transplant when they may not otherwise be UCB transplant candidates due
to low cell dose availability. Pending regulatory approval, the Company plans to
extend this trial into a pivotal phase as well. Several UCB banking institutions
are now being established by other organizations. This banking infrastructure,
together with the expansion capabilities of the AastromReplicell(TM) System, may
lead to UCB as a promising new source of cells for therapeutic use.
The preliminary results of Aastrom's pre-pivotal trials may not be indicative
of results that will be obtained from subsequent patients in the trials or from
more extensive trials. Further, there can be no assurance that Aastrom's pre-
pivotal or pivotal trials will be successful, or that PMA registration or
required foreign regulatory approvals for the AastromReplicell(TM) System will
be obtained in a timely fashion, or at all. See "Business Risks--Uncertainties
Related to Clinical Trials."
ADDITIONAL STEM CELL AND OTHER CELL THERAPIES
Aastrom's development efforts have been focused on the development of the SC-I
Therapy Kit for the production of bone marrow stem cells and the CB-I Therapy
Kit for the production of cord blood cells. Aastrom believes that additional
therapy kits may be developed for application to a variety of other emerging
cell therapies in addition to stem cell therapy. The AastromReplicell(TM) System
has the potential to supplant current manual cell culture methods to produce
therapeutic quantities of cell types such as T-cells, dendritic cells,
chondrocytes, mesenchymal cells, keratinocytes and neuronal cells. Other than a
limited application of chondrocyte therapy, novel cell therapies are still in
early stages of development by third parties, and no assurance can be given that
such other cell therapies will be successfully developed. Potential advantages
of the AastromReplicell(TM) System in these therapies may include: (i) reducing
labor and capital costs; (ii) enhancing process reliability; (iii) automating
quality assurance and process record keeping; (iv) reducing the need for
specialized, environmentally controlled facilities; and (v) providing greater
accessibility of these procedures to care providers and patients, and (vi) in
certain cases, providing a more biologically active cell product.
Modification of such processes and application of Aastrom's products to the
expansion of other cell types may require substantial additional development of
specialized cell culture capabilities which may need to be incorporated within
Aastrom's existing product platform. Such modifications may require Aastrom to
raise substantial additional funds, or to seek additional collaborative
partners, or both. There can be no assurance that Aastrom will be able to
successfully modify or develop existing or future products to enable such
additional cell production processes. Aastrom's business opportunity is
dependent upon successful development and regulatory approval of these novel
cell therapies. No assurance can be given that such novel therapies will be
successfully developed by other companies or approved by applicable regulatory
authorities, or that Aastrom's processes or product candidates will find
successful application in such therapies. In addition, Aastrom may be required
to obtain license rights to such technologies in order to develop or modify
existing or future products for use in such therapies. No assurance can be given
that Aastrom will be able to obtain such licenses or that such licenses, if
available, could be obtained on commercially reasonable terms. See "--Clinical
Development" and "Business Risks--Future Capital Needs; Uncertainty of
Additional Funding."
IMMUNOTHERAPIES
---------------
Immunotherapy involves using cells of the immune system to eradicate a disease
target. T-lymphocytes (T-cells) and dendritic cells are being actively
investigated by others for this purpose, and Aastrom anticipates that many of
these procedures will require ex vivo cell production.
10
T-cells, a class of lymphocyte white blood cells, play a critical role in the
human immune system and are responsible for the human immune response in a broad
spectrum of diseases, including cancers and infectious diseases. Therapeutic
procedures using Cytotoxic T-lymphocytes ("CTLs") involve collecting T-cells
from a patient and culturing them in an environment resulting in significantly
increased numbers of T-cells with specificity for a particular disease target.
Clinical trials by third parties have been initiated to demonstrate CTL
effectiveness. The ex vivo production of these cells under conditions for use in
medical treatment represents a critical step in the advancement of this therapy.
Dendritic cells (potent antigen presenting cells) are believed to play an
important role in the function of the immune system. Researchers believe that
cultured dendritic cells could augment the natural ability of a patient to
present tumor antigens or antigens from infectious agents to the immune system
and aid in the generation of a cytotoxic T-cell response to the offending agent.
SOLID TISSUE CELL THERAPIES
---------------------------
One of the newest areas of cell therapy involves the production of
chondrocytes for the restoration of cartilage. Chondrocyte therapy involves the
surgical removal of a small amount of tissue from the patient's knee and a
therapeutic quantity of chondrocytes is produced from this surgical biopsy. The
cells are then implanted into the patient's knee. Published reports indicate
that such cells then reestablish mature articular cartilage. Currently, this
cell production process is completed in highly specialized laboratory facilities
using trained scientists and manual laboratory procedures. Aastrom believes that
the AastromReplicell(TM) System may have the potential to reduce costs
associated with the cell production procedure and, if successfully developed by
Aastrom for this application, may eventually facilitate the transfer of the cell
production capability away from specialized facilities directly to the clinical
care sites.
OTHER STEM CELL THERAPY APPLICATIONS
------------------------------------
Autoimmune Diseases. Stem cell therapy is under clinical investigation by
-------------------
third parties for the treatment of other diseases. Clinical studies have
suggested a potential role for stem cell therapy in treatment of severe
autoimmune diseases such as rheumatoid arthritis, multiple sclerosis and lupus
erythematosus. The generic cause of these diseases is a malfunctioning immune
system, including T-lymphocytes. Clinical trials in which the patient receives
treatment resulting in immune ablation (usually involving myelotoxic cancer
drugs or radiation), followed by stem cell therapy to restore the bone marrow
and cells of the blood and immune system, have demonstrated remission of the
autoimmune disease in some patients.
Organ Transplantation. Recently, a number of academic and corporate
---------------------
researchers and companies have identified the potential use of stem cell therapy
to facilitate successful solid organ and tissue transplants between human donors
and recipients, as well as using organs from non-human species for
transplantation into humans. These proposed applications are based on the
observation that donor-specific bone marrow, infused concurrent with or prior to
the organ transplant, can provide for reduction of the normal immune rejection
response by the transplant recipient (e.g. heart, lung, liver and kidney
transplants).
A major limitation to the use of stem cell therapy in solid organ transplant
is the limited availability of sufficient amounts of bone marrow to obtain a
desired therapeutic response of immune tolerization. This limitation is
particularly problematic when cadaveric donor organs are used, which has
traditionally been the source of organs for these procedures. Bone marrow is
also often available from the cadaveric donor, but only in a limited amount.
Normally this amount may be sufficient for one transplant, but a donor might
provide multiple organs for transplant into multiple recipients. Aastrom
believes that the ability to expand the available bone marrow ex vivo will
enhance the use of stem cell therapy for such transplant procedures and may
pursue development of its products for application in such therapy in the
future.
Degenerative Diseases. Bone marrow stromal cells may also contribute to the
---------------------
repair of degenerative bone diseases such as osteoporosis. Aastrom has
completed pre-clinical work in this area and is evaluating a clinical
feasibility trial for use of the AastromReplicell(TM) System and the SC-I
Therapy Kit to produce cells to treat osteoporosis.
11
AASTROM PRODUCT CANDIDATES FOR EX VIVO GENE THERAPY
A novel form of cell therapy is ex vivo gene therapy. For this type of cell
therapy, cells collected from the patient or a donor are genetically modified
prior to their infusion into the patient. Analogous to other cell therapies, the
ability to produce a therapeutic dose of these gene-modified cells is a major
limitation to the commercialization of these cell therapies. This limitation is
further exacerbated by the additional requirement that the cells be genetically
modified under conditions that are sterile and comply with GMP.
Gene therapy is a therapeutic modality that holds the potential to
significantly impact the delivery of healthcare and the delivery of
therapeutically useful protein-based drugs within the body. Gene therapies are
generally targeted at the introduction of a missing normal gene into otherwise
defective human tissue, or the introduction of novel biologic capability into
the body via the introduction of a gene not ordinarily present (for example,
genes providing for the enhanced recognition and destruction or inhibition of
the HIV-1 virus). The major developmental focus of the ex vivo gene therapy
industry has been to identify the therapeutic gene of interest, insert it into a
suitable vector that can be used to transport and integrate the gene into the
DNA of the target cell, and then cause the gene to become expressed. Aastrom
believes that for ex vivo gene therapy to progress to clinical applications, a
process to produce a sufficient quantity of therapeutic cells is required for
many such therapies as is an efficient means to insert the gene vector into
target cells. Gene therapy is still in an early stage of development by third
parties. Aastrom's business opportunity is dependent upon the successful
development and regulatory approval of individual gene therapy applications. No
assurance can be given that such applications will be developed or approved or
that Aastrom's processes or product candidates will find successful applications
in such therapies. Successful development of Aastrom's processes and product
candidates for application in ex vivo gene therapy will require substantial
additional research and development, including clinical testing, and will be
subject to Aastrom's ability to finance such activities on acceptable terms, if
at all. See "Business Risks--Future Capital Needs; Uncertainty of Additional
Funding."
THE AASTROMREPLICELL(TM) SYSTEM FOR GENE THERAPY
------------------------------------------------
The AastromReplicell(TM) System has been designed to produce cells for therapy
and Aastrom believes that the AastromReplicell(TM) System may be useful in many
potential ex vivo gene therapy applications. Further, Aastrom anticipates that
its proprietary stem cell production process technology implemented by the
AastromReplicell(TM) System may provide the conditions for clinical scale stem
cell division, and enable or enhance the introduction of therapeutic genes into
stem cell DNA. Aastrom believes that its technology may also enable expansion of
more mature progeny of these stem cells to create a gene therapy cell product
with potential short and long term therapeutic effect.
Aastrom has two principal objectives for the development of
AastromReplicell(TM) System for gene therapy: (i) the enablement of stem cell
gene therapies for a variety of hematologic and other disorders, based on the
AastromReplicell(TM) System's ability to enable large scale stem cell division
ex vivo; and (ii) the enablement of gene transfer and therapeutic cell
production by local and regional primary patient care facilities and ancillary
service laboratories.
THE AASTROM(TM) GENE LOADER
---------------------------
The Aastrom(TM) Gene Loader process technology, which is under development, is
being designed to enhance the efficiency and reliability of the transfer of new
therapeutic genes, which are carried by vectors, into the target cell. This
process, which is typically inefficient in many human cells, inhibits many ex
vivo gene therapies from moving forward in the clinic. The Aastrom(TM) Gene
Loader is being designed to incorporate Aastrom's proprietary directed motion
gene transfer technology. Complete product development is expected to require
additional funding sources or collaborations with others, or both.
Aastrom believes that these issues represent a general bottleneck for other
companies pursuing clinical ex vivo gene therapy applications. Aastrom's
technology under development may favorably influence these gene therapy
applications, the development of which are impeded due to low transduction
efficiencies and the resultant need for use of large quantities of gene vectors
and/or target "delivery" tissues.
12
MANUFACTURING
Aastrom has established relationships with third party manufacturers which are
FDA registered as suppliers for the manufacture of medical products to
manufacture various components of the AastromReplicell(TM) System.
In May 1994, Aastrom entered into a Collaborative Product Development
Agreement with SeaMED Corporation, ("SeaMED"). Pursuant to this agreement,
Aastrom and SeaMED collaborated on the design of certain instrument components
in the AastromReplicell(TM) System. SeaMED also manufactured pre-production
units of the instrument components for laboratory and clinical evaluation.
Aastrom paid SeaMED for its design and pre-production work on a time and
materials basis. In April 1998 Aastrom entered into a manufacturing agreement
with SeaMED for the commercial manufacturing of the instrument components of the
AastromReplicell(TM) System pursuant to a pricing formula set forth in the
agreement. The initial term of the manufacturing agreement is until April 2001,
after which the agreement is automatically renewed until terminated upon a
24-month notice from SeaMED or a 6-month notice from Aastrom. Aastrom retains
all proprietary rights to its intellectual property which is utilized by SeaMED
pursuant to this agreement. During the initial term of the manufacturing
agreement, SeaMED is regarded as Aastrom's preferred supplier and Aastrom will
purchase a minimum of 65% of its instrument requirements for the
AastromReplicell(TM) System.
In November 1994, Aastrom entered into a Collaborative Product Development
Agreement with Ethox Corporation ("Ethox"). Pursuant to this agreement, Aastrom
and Ethox collaborated on the design of certain bioreactor assembly and custom
tubing kit components of the AastromReplicell(TM) System. Aastrom is paying
Ethox for its design and production work on a time and materials basis,
utilizing Ethox's customary hourly billing rates and actual costs for materials.
Aastrom retains all proprietary rights to its intellectual property which are
utilized by Ethox pursuant to this agreement.
In March 1996, Aastrom entered into a License and Supply Agreement with
Immunex Corporation ("Immunex") for an initial five year term to purchase and
resell certain cytokines and ancillary materials for use in conjunction with the
AastromReplicell(TM) System. The agreement required Aastrom to pay Immunex an
initial up-front fee of $1,500,000 to be followed by subsequent annual renewal
payments equal to $1,000,000 per year during the initial term of the agreement
in addition to payment for supplies purchased by Aastrom. In August 1997,
Aastrom and Immunex amended the agreement to expand Aastrom's territorial rights
to use and sell such materials to a worldwide basis. Unless earlier terminated
or renewed by Aastrom for an additional five-year term, the agreement will
expire in April 2001. Pursuant to agreements between Immunex and Aastrom, the
annual fees due in March 1998 and 1999 were each paid by Aastrom through the
issuance of $1,100,000 in Aastrom's Common Stock. A similar agreement has been
made for the renewal payment due in March 2000. The supply agreement may be
terminated by either party effective immediately upon written notice of
termination to the other party in the event that such party materially breaches
the agreement and such breach continues unremedied after notice and expiration
of a specified cure period or in the event that a bankruptcy proceeding is
commenced against a party and is not dismissed or stayed within a 45-day period.
In addition, Immunex has the right to cease the supply to Aastrom of cytokines
and ancillary materials if Aastrom fails to purchase a minimum amount of its
forecasted annual needs from Immunex after notice to Aastrom and expiration of a
specified cure period. Aastrom also has the right to terminate the agreement at
any time subject to the payment to Immunex of a specified amount for liquidated
damages. In the event that Immunex elects to cease to supply to Aastrom
cytokines and ancillary materials or is prevented from supplying such materials
to Aastrom by reason of force majeure, limited manufacturing rights will be
transferred to Aastrom under certain circumstances. There is, however, no
assurance that Aastrom could successfully manufacture the compounds itself or
identify others that could manufacture these compounds to acceptable quality
standards and costs, if at all.
In December 1996, Aastrom entered into a Collaborative Supply Agreement with
Anchor Advanced Products, Inc., Mid-State Plastics Division ("MSP"). Under this
agreement, MSP conducted both pre-production manufacturing development and now
commercial manufacturing and assembly of the Cell Cassette component of the
AastromReplicell(TM) System for Aastrom. MSP is paid by Aastrom on a per unit
basis for Cell Cassettes delivered to Aastrom under a pricing formula specified
in the agreement. Throughout the term of this agreement, Aastrom has agreed to
treat MSP as its preferred supplier of Cell Cassettes, using MSP as its supplier
of at least 60% of its requirements for Cell Cassettes.
There can be no assurance that Aastrom will be able to continue its present
arrangements with its suppliers, supplement existing relationships or establish
new relationships or that Aastrom will be able to identify and obtain the
ancillary materials that are necessary to develop its product candidates in the
future. Aastrom's dependence upon third parties for the supply and manufacture
of such items could adversely affect Aastrom's ability to develop and deliver
commercially feasible products on
13
a timely and competitive basis. See "Business Risks--Manufacturing and Supply
Uncertainties; Dependence on Third Parties."
PATENTS AND PROPRIETARY RIGHTS
Aastrom's success depends in part on its ability, and the ability of its
licensors, to obtain patent protection for its products and processes. Aastrom
has exclusive rights to 18 issued U.S. patents, and non-exclusive rights to one
issued U.S. patent. These patents present claims to (i) certain methods for ex
vivo stem cell division as well as ex vivo human hematopoietic stem cell stable
genetic transformation and expanding and harvesting a human hematopoietic stem
cell pool; (ii) certain apparatus for cell culturing, including a bioreactor
suitable for culturing human stem cells or human hematopoietic cells; (iii)
certain methods of infecting or transfecting target cells with vectors; and (iv)
a cell composition containing human stem cells or progenitor cells, or
genetically modified stem cells, when such cells are produced in an ex vivo
medium exchange culture. Certain patent equivalents to the U.S. patents have
also been issued in other jurisdictions including Australia, Canada and under
the European Patent Convention. These patents are due to expire beginning in
2006. In addition, Aastrom and its exclusive licensors have filed applications
for patents in the United States and equivalent applications in certain other
countries claiming other aspects of Aastrom's products and processes, including
a number of U.S. patent applications and corresponding applications in other
countries related to various components of the AastromReplicell(TM) System.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that any patents based on pending patent applications or
any future patent applications of Aastrom or its licensors will be issued, that
the scope of any patent protection will exclude competitors or provide
competitive advantages to Aastrom, that any of the patents that have been or may
be issued to Aastrom or its licensors will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held or licensed by Aastrom. Furthermore, there can
be no assurance that others have not developed or will not develop similar
products, duplicate any of Aastrom's products or design around any patents that
have been or may be issued to Aastrom or its licensors. Since patent
applications in the United States are maintained in secrecy until patents issue,
Aastrom also cannot be certain that others did not first file applications for
inventions covered by Aastrom's and its licensors' pending patent applications,
nor can Aastrom be certain that it will not infringe any patents that may issue
to others on such applications.
Aastrom relies on certain licenses granted by the University of Michigan and
others for certain patent rights. If Aastrom breaches such agreements or
otherwise fails to comply with such agreements, or if such agreements expire or
are otherwise terminated, Aastrom may lose its rights in such patents, which
would have a material adverse effect on Aastrom's business, financial condition
and results of operations. See "--Research and License Agreements."
Aastrom also relies on trade secrets and unpatentable know-how that it seeks
to protect, in part, by confidentiality agreements. It is Aastrom's policy to
require its employees, consultants, contractors, manufacturers, outside
scientific collaborators and sponsored researchers, and other advisors to
execute confidentiality agreements upon the commencement of employment or
consulting relationships with Aastrom. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with Aastrom is to be kept confidential
and not disclosed to third parties except in specific limited circumstances.
Aastrom also requires signed confidentiality or material transfer agreements
from any company that is to receive its confidential information. In the case of
employees, consultants and contractors, the agreements generally provide that
all inventions conceived by the individual while rendering services to Aastrom
shall be assigned to Aastrom as the exclusive property of Aastrom. There can be
no assurance, however, that these agreements will not be breached, that Aastrom
would have adequate remedies for any breach, or that Aastrom's trade secrets or
unpatentable know-how will not otherwise become known or be independently
developed by competitors.
Aastrom's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. Aastrom has not conducted freedom of use patent searches and no
assurance can be given that patents do not exist or could not be filed which
would have an adverse effect on Aastrom's ability to market its products or
maintain its competitive position with respect to its products. If Aastrom's
technology components, devices, designs, products, processes or other subject
matter are claimed under other existing United States or foreign patents or are
otherwise
14
protected by third party proprietary rights, Aastrom may be subject to
infringement actions. In such event, Aastrom may challenge the validity of such
patents or other proprietary rights or be required to obtain licenses from such
companies in order to develop, manufacture or market its products. There can be
no assurances that Aastrom would be able to obtain such licenses or that such
licenses, if available, could be obtained on commercially reasonable terms.
Furthermore, the failure to either develop a commercially viable alternative or
obtain such licenses could result in delays in marketing Aastrom's proposed
products or the inability to proceed with the development, manufacture or sale
of products requiring such licenses, which could have a material adverse effect
on Aastrom's business, financial condition and results of operations. If Aastrom
is required to defend itself against charges of patent infringement or to
protect its own proprietary rights against third parties, substantial costs will
be incurred regardless of whether Aastrom is successful. Such proceedings are
typically protracted with no certainty of success. An adverse outcome could
subject Aastrom to significant liabilities to third parties and force Aastrom to
curtail or cease its development and sale of its products and processes.
Certain of Aastrom's and its licensors' research has been or is being funded
in part by the Department of Commerce and by a Small Business Innovation
Research Grant obtained from the Department of Health and Human Services. As a
result of such funding, the U.S. Government has certain rights in the technology
developed with the funding. These rights include a non-exclusive, paid-up,
worldwide license under such inventions for any governmental purpose. In
addition, the government has the right to require Aastrom to grant an exclusive
license under any of such inventions to a third party if the government
determines that (i) adequate steps have not been taken to commercialize such
inventions, (ii) such action is necessary to meet public health or safety needs
or (iii) such action is necessary to meet requirements for public use under
federal regulations. Additionally, under the federal Bayh Dole Act, a party
which acquires an exclusive license for an invention that was partially funded
by a federal research grant is subject to the following government rights: (i)
products using the invention which are sold in the United States are to be
manufactured substantially in the United States, unless a waiver is obtained;
(ii) if the licensee does not pursue reasonable commercialization of a needed
product using the invention, the government may force the granting of a license
to a third party who will make and sell the needed product; and (iii) the U.S.
Government may use the invention for its own needs.
RESEARCH AND LICENSE AGREEMENTS
-------------------------------
In March 1992, Aastrom and the University of Michigan entered into a License
Agreement, as contemplated by a Research Agreement executed in August 1989
relating to the ex vivo production of human cells. There have been clarifying
amendments to the License Agreement, in March 1992, October 1993 and June 1995.
Pursuant to this License Agreement, (i) Aastrom acquired exclusive worldwide
license rights to the patents and know-how for the production of blood cells and
bone marrow cells as described in the University of Michigan's research project
or which resulted from certain further research conducted through December 1994,
and (ii) Aastrom is obligated to pay to the University of Michigan a royalty
equal to 2% of the net sales of products which are covered by the University of
Michigan's patents. Unless it is terminated earlier at Aastrom's option or due
to a material breach by Aastrom, the License Agreement will continue in effect
until the latest expiration date of the patents to which the License Agreement
applies.
Aastrom has also entered into a License Agreement with Joseph G. Cremonese
which grants to Aastrom non-exclusive worldwide license rights for all fields of
use, to utilize U.S. Patent No. 4,839,292, entitled "Cell Culture Flask
Utilizing a Membrane Barrier," which patent was issued to Dr. Cremonese on June
13, 1989, and to utilize any other related patents that might be issued to Dr.
Cremonese. Under the terms of the License Agreement, Aastrom is to pay to Dr.
Cremonese a royalty of up to 3% of net product sales, to the extent such
products are covered by the patent. Unless earlier terminated or modified, the
License Agreement will continue in effect until the latest expiration date of
the patents to which the License Agreement applies, which latest expiration date
is currently August 2009.
GOVERNMENT REGULATION
Aastrom's research and development activities and the manufacturing and
marketing of Aastrom's products are subject to the laws and regulations of
governmental authorities in the United States and other countries in which its
products will be marketed. Specifically, in the United States, the FDA, among
other activities, regulates new product approvals to establish safety and
efficacy of these products. Governments in other countries have similar
requirements for testing and marketing. In the United States, in addition to
meeting FDA regulations, Aastrom is also subject to other federal laws, such as
the Occupational Safety and Health Act and the Environmental Protection Act, as
well as certain state laws.
15
REGULATORY PROCESS IN THE UNITED STATES
---------------------------------------
To Aastrom's knowledge, it is the first to develop a cell culture system for
ex vivo human cell production to be sold for therapeutic applications.
Therefore, to a certain degree, the manner in which the FDA will regulate
Aastrom's products is uncertain.
Aastrom's products are potentially subject to regulation as medical devices
under the Federal Food, Drug, and Cosmetic Act, and as biological products under
the Public Health Service Act, or both. Different regulatory requirements may
apply to Aastrom's products depending on how they are categorized by the FDA
under these laws. To date, the FDA has indicated that it intends to regulate the
AastromReplicell(TM) System as a Class III medical device through the Center for
Biologics Evaluation and Research. However, there can be no assurance that FDA
will ultimately regulate the AastromReplicell(TM) System as a medical device.
Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the AastromReplicell(TM) System. The FDA is still in the
process of developing its requirements with respect to somatic cell therapy and
gene cell therapy products and has recently issued draft documents concerning
the regulation of umbilical cord blood stem cell products, as well as cellular
and tissue-based products. If the FDA adopts the regulatory approach set forth
in the draft document, the FDA may require separate regulatory approval for such
cells in some cases, called a biologic license application ("BLA"). This
proposal may indicate that the FDA will extend a similar approval requirement to
other types of cellular therapies. Any such additional regulatory or approval
requirements could have a material adverse impact on Aastrom.
Approval of new medical devices and biological products is a lengthy procedure
leading from development of a new product through preclinical and clinical
testing. This process takes a number of years and the expenditure of significant
resources. There can be no assurance that Aastrom's product candidates will
ultimately receive regulatory approval.
Regardless of how Aastrom's product candidates are regulated, the Federal
Food, Drug, and Cosmetic Act and other Federal statutes and regulations govern
or influence the research, testing, manufacture, safety, labeling, storage,
recordkeeping, approval, distribution, use, reporting, advertising and promotion
of such products. Noncompliance with applicable requirements can result in civil
penalties, recall, injunction or seizure of products, refusal of the government
to approve or clear product approval applications or to allow Aastrom to enter
into government supply contracts, withdrawal of previously approved applications
and criminal prosecution.
DEVICES
-------
In order to obtain FDA approval of a new medical device, sponsors must
generally submit proof of safety and efficacy. In some cases, such proof entails
extensive preclinical and clinical laboratory tests. The testing, preparation of
necessary applications and processing of those applications by the FDA is
expensive and may take several years to complete. There can be no assurance that
the FDA will act favorably or in a timely manner in reviewing submitted
applications, and Aastrom may encounter significant difficulties or costs in its
efforts to obtain FDA approvals which could delay or preclude Aastrom from
marketing any products it may develop. The FDA may also require post marketing
testing and surveillance of approved products, or place other conditions on the
approvals. These requirements could cause it to be more difficult or expensive
to sell the products, and could therefore restrict the commercial applications
of such products. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. For patented technologies, delays imposed by the governmental
approval process may materially reduce the period during which Aastrom will have
the exclusive right to exploit such technologies.
If human clinical trials of a proposed device are required and the device
presents significant risk, the manufacturer or distributor of the device will
have to file an IDE submission with the FDA prior to commencing human clinical
trials. The IDE submission must be supported by data, typically including the
results of pre-clinical and laboratory testing. Following submission of the IDE,
the FDA has 30 days to review the application and raise safety and other
clinical trial issues. If Aastrom is not notified of objections within that
period, clinical trials may be initiated, and human clinical trials may commence
at a specified number of investigational sites with the number of patients
approved by the FDA.
16
The FDA categorizes devices into three regulatory classifications subject to
varying degrees of regulatory control. In general, Class I devices require
compliance with labeling and record keeping regulations, Quality System
Regulation ("QSR"), 510(k) pre-market notification, and are subject to other
general controls. Class II devices may be subject to additional regulatory
controls, including performance standards and other special controls, such as
post market surveillance. Class III devices, which are either invasive or life-
sustaining products, or new products never before marketed (for example, non-
"substantially equivalent" devices), require clinical testing to demonstrate
safety and effectiveness and FDA approval prior to marketing and distribution.
The FDA also has the authority to require clinical testing of Class I and Class
II devices.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, the manufacturer or distributor
must submit a PMA application to the FDA. A PMA application must be supported by
extensive data, including preclinical and human clinical trial data, to prove
the safety and efficacy of the device. Upon receipt, the FDA conducts a
preliminary review of the PMA application. If sufficiently complete, the
submission is declared filed by the FDA. By regulation, the FDA has 180 days to
review a PMA application once it is filed, although PMA application reviews more
often occur over a significantly protracted time period, and may take
approximately one year or more from the date of filing to complete.
Some of Aastrom's products may be classified as Class II or Class III medical
devices. Aastrom has submitted several IDEs for the AastromReplicell(TM) System,
and is currently conducting pre-pivotal clinical studies under these IDEs.
Aastrom believes that the AastromReplicell(TM) System product will be regulated
by the FDA as a Class III device, although there can be no assurance that the
FDA will not choose to regulate this product in a different manner.
Aastrom and any contract manufacturer are required to be registered as a
medical device manufacturer with the FDA. As such, they will be inspected on a
routine basis by the FDA for compliance with the FDA's QSR regulations. These
regulations will require that Aastrom and any contract manufacturer, design,
manufacture and service products and maintain documents in a prescribed manner
with respect to manufacturing, testing, distribution, storage, design control
and service activities. The Medical Device Reporting regulation requires that
Aastrom provide information to the FDA on deaths or serious injuries alleged to
be associated with the use of its devices, as well as product malfunctions that
are likely to cause or contribute to death or serious injury if the malfunction
were to recur. In addition, the FDA prohibits a company from promoting an
approved device for unapproved applications and reviews company labeling for
accuracy.
BIOLOGICAL PRODUCTS
-------------------
For certain of Aastrom's new products which may be regulated as biologics, the
FDA requires (i) preclinical laboratory and animal testing, (ii) submission to
the FDA of an investigational new drug ("IND") application which must be
effective prior to the initiation of human clinical studies, (iii) adequate and
well-controlled clinical trials to establish the safety and efficacy of the
product for its intended use, (iv) submission to the FDA of a biologic license
application ("BLA") and (v) review and approval of the BLA as well as
inspections of the manufacturing facility by the FDA prior to commercial
marketing of the product.
Preclinical testing covers laboratory evaluation of product chemistry and
formulation as well as animal studies to assess the safety and efficacy of the
product. The results of these tests are submitted to the FDA as part of the IND.
Following the submission of an IND, the FDA has 30 days to review the
application and raise safety and other clinical trial issues. If Aastrom is not
notified of objections within that period, clinical trials may be initiated.
Clinical trials are typically conducted in three sequential phases. Phase I
represents the initial administration of the drug or biologic to a small group
of humans, either healthy volunteers or patients, to test for safety and other
relevant factors. Phase II involves studies in a small number of patients to
assess the efficacy of the product, to ascertain dose tolerance and the optimal
dose range and to gather additional data relating to safety and potential
adverse effects. Once an investigational drug is found to have some efficacy and
an acceptable safety profile in the targeted patient population, multi-center
Phase III studies are initiated to establish safety and efficacy in an expanded
patient population and multiple clinical study sites. The FDA reviews both the
clinical plans and the results of the trials and may request Aastrom to
discontinue the trials at any time if there are significant safety issues.
17
The results of the preclinical tests and clinical trials are submitted to the
FDA in the form of a BLA for marketing approval. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all.
Additional animal studies or clinical trials may be requested during the FDA
review period that may delay marketing approval. After FDA approval for the
initial indications, further clinical trials may be necessary to gain approval
for the use of the product for additional indications. The FDA requires that
adverse effects be reported to the FDA and may also require post-marketing
testing to monitor for adverse effects, which can involve significant expense.
Under current requirements, facilities manufacturing biological products must
be licensed. To accomplish this, an BLA must be filed with the FDA. The BLA
describes the facilities, equipment and personnel involved in the manufacturing
process. An establishment license is granted on the basis of inspections of the
applicant's facilities in which the primary focus is on compliance with GMP's
and the ability to consistently manufacture the product in the facility in
accordance with the BLA. If the FDA finds the inspection unsatisfactory, it may
decline to approve the BLA, resulting in a delay in production of products.
As part of the approval process for human biological products, each
manufacturing facility must be registered and inspected by FDA prior to
marketing approval. In addition, state agency inspections and approvals may also
be required for a biological product to be shipped out of state.
REGULATORY PROCESS IN EUROPE
----------------------------
The AastromReplicell(TM) instruments and disposables, are currently being
regulated in Europe as a Class I Sterile or Class IIb medical device, under the
authority of the new Medical Device Directives ("MDD") being implemented by
European Union ("EU") member countries. This classification applies to medical
laboratory equipment and supplies including, among other products, many devices
that are used for the collection and processing of blood for patient therapy.
Certain ancillary products (e.g., biological reagents) used as part of the
AastromReplicell(TM) System are expected to be considered Class III medical
devices.
The MDD regulations vest the authority to permit affixing of the "CE Mark"
with various Notified Bodies. These are private and state organizations which
operate under license from the member states of the EU to certify that
appropriate quality assurance standards and compliance procedures are followed
by developers and manufacturers of medical device products or, alternatively,
that a manufactured medical product meets a more limited set of requirements.
Notified Bodies are also charged with responsibility for determination of the
appropriate standards to apply to a medical product. Receipt of permission to
affix the CE Mark enables a company to sell a medical device in all EU member
countries. Other registration requirements may also need to be satisfied in
certain countries.
During 1999, the Company received permission from its Notified Body (The
British Standards Institute) to affix the CE Mark to the AastromReplicell(TM)
instrumentation and components for the SC-I Therapy Kit and CB-I Therapy Kit.
This has allowed Aastrom to market these products in the European Union. There
can be no assurance that the AastromReplicell(TM) System will continue to be
regulated under it current status, any change in which would affect the
Company's ability to sell the product and adversely affect the Company's
business, financial condition and results of operations.
COMPETITION
The biotechnology and medical device industries are characterized by rapidly
evolving technology and intense competition. Aastrom's competitors include major
pharmaceutical, medical device, medical products, chemical and specialized
biotechnology companies, many of which have financial, technical and marketing
resources significantly greater than those of Aastrom. In addition, many
biotechnology companies have formed collaborations with large, established
companies to support research, development and commercialization of products
that may be competitive with those of Aastrom. Academic institutions,
governmental agencies and other public and private research organizations are
also conducting research activities and seeking patent protection and may
commercialize products on their own or through joint ventures. Aastrom's product
development efforts are primarily directed toward obtaining regulatory approval
to market the AastromReplicell(TM) System for stem cell therapy. That market is
currently dominated by the bone marrow harvest and PBSC
18
collection methods. Aastrom's clinical data, although early, suggests that cells
expanded in the AastromReplicell(TM) System using its current process will
enable hematopoietic recovery within the time frames currently achieved by bone
marrow harvest, however, neutrophil and platelet recovery times may be slower
than with PBSC collection methods. In recognition of this, Aastrom has begun
clinical testing of a procedure that utilizes a combination of PBSC's collected
in a single blood apheresis procedure with cells produced in the
AastromReplicell(TM) System. The objectives of this study are to demonstrate
that an optimal targeted recovery can be achieved using AastromReplicell(TM)
System-produced cells with a sub-optimal PBSC cell dose that otherwise would not
provide this desired outcome. Aastrom is also evaluating techniques and methods
to optimize the cells produced in the AastromReplicell(TM) System to reduce the
recovery time of neutrophils and platelets in patients. There can be no
assurance that if such procedure optimization does not lead to recovery times
equal to or faster than those of PBSC collection methods, such outcome would not
have a material adverse effect on Aastrom's business, financial condition and
results of operations. In addition, the bone marrow harvest and PBSC collection
methods have been widely practiced for a number of years and, recently, the
patient costs associated with these procedures have begun to decline. There can
be no assurance that the AastromReplicell(TM) System method, if approved for
marketing, will prove to be competitive with these established collection
methods on the basis of hematopoietic recovery time, cost or otherwise. Aastrom
is aware of certain other products manufactured or under development by
competitors that are used for the prevention or treatment of certain diseases
and health conditions which Aastrom has targeted for product development. There
can be no assurance that developments by others will not render Aastrom's
product candidates or technologies obsolete or noncompetitive, that Aastrom will
be able to keep pace with new technological developments or that Aastrom's
product candidates will be able to supplant established products and
methodologies in the therapeutic areas that are targeted by Aastrom. The
foregoing factors could have a material adverse effect on Aastrom's business,
financial condition and results of operations.
Aastrom's products under development are expected to address a broad range of
existing and new markets. Aastrom believes that its stem cell therapy products
will, in large part, face competition by existing procedures rather than novel
new products. Aastrom's competition will be determined in part by the potential
indications for which Aastrom's products are developed and ultimately approved
by regulatory authorities. In addition, the first product to reach the market in
a therapeutic or preventive area is often at a significant competitive advantage
relative to later entrants to the market. Accordingly, the relative speed with
which Aastrom or its corporate partners can develop products, complete the
clinical trials and approval processes and supply commercial quantities of the
products to the market are expected to be important competitive factors.
Aastrom's competitive position will also depend on its ability to attract and
retain qualified scientific and other personnel, develop effective proprietary
products, develop and implement production and marketing plans, obtain and
maintain patent protection and secure adequate capital resources. Aastrom
expects its products, if approved for sale, to compete primarily on the basis of
product efficacy, safety, patient convenience, reliability, value and patent
position.
19
EMPLOYEES
As of August 31, 1999, Aastrom employed approximately 56 individuals on a full
time equivalent basis. A significant number of Aastrom's management and
professional employees have had prior experience with pharmaceutical,
biotechnology or medical product companies. None of Aastrom's employees are
covered by collective bargaining agreements, and management considers relations
with its employees to be good.
EXECUTIVE OFFICERS OF AASTROM
The executive officers of Aastrom, and their respective ages as of August 31,
1999, are as follows:
Name AGE POSITION
---- --- --------
R. Douglas Armstrong, Ph.D........ 46 President and Chief Executive Officer
William L. Odell.................. 41 Senior Vice President Product Operations
Todd E. Simpson................... 38 Vice President Finance & Administration, Chief
Financial Officer, Secretary and Treasurer
Bruce W. Husel.................... 41 Vice President Quality Systems and Regulatory
Affairs
Alan K. Smith, Ph.D............... 44 Vice President Research
R. Douglas Armstrong, Ph.D. joined Aastrom in June 1991 as a director and as
its President and Chief Executive Officer. From 1987 to 1991, Dr. Armstrong
served in different capacities, including as Executive Vice President and a
Trustee of the La Jolla Cancer Research Foundation ("LJCRF") (now the Burham
Institute), a scientific research institute located in San Diego, California.
Dr. Armstrong received his doctorate in Pharmacology and Toxicology from the
Medical College of Virginia, and has held faculty and staff positions at Yale
University, University of California, San Francisco, LJCRF and University of
Michigan. Dr. Armstrong also serves on the Board of Directors of Nephros
Therapeutics, Inc.
William L. Odell joined Aastrom in August 1998 as Senior Vice President,
Product Operations. Prior to joining Aastrom, Mr. Odell was a Vice President at
Mitchell International, a healthcare consulting firm. Prior to that, Mr. Odell
served at Owens & Minor, Inc. as Division Vice President, where he was
responsible for managing sales, marketing, operations and customer service for
the Chicago division. Mr. Odell has also held senior marketing and product
development positions with Smiths Industries Medical Systems, Intertech
Resources and Baxter International. Mr. Odell received his Bachelor of Science
degree in Business Administration from the University of Illinois at
Champaign/Urbana.
Todd E. Simpson joined Aastrom in January 1996 as Vice President, Finance and
Administration and Chief Financial Officer and is also Aastrom's Secretary and
Treasurer. Prior to that, Mr. Simpson was Treasurer of Integra LifeSciences
Corporation ("Integra"), a biotechnology company, which acquired Telios
Pharmaceuticals, Inc. ("Telios") in August 1995 in connection with the
reorganization of Telios under Chapter 11 of the U.S. Bankruptcy Code. Mr.
Simpson served as Vice President of Finance and Chief Financial Officer of
Telios up until its acquisition by Integra and held various other financial
positions at Telios after joining that company in February 1992. Telios was a
publicly-held company engaged in the development of pharmaceutical products for
the treatment of dermal and ophthalmic wounds, fibrotic disease, vascular
disease, and osteoporosis. From August 1983 through February 1992, Mr. Simpson
practiced public accounting with the firm of Ernst & Young, LLP. Mr. Simpson is
a Certified Public Accountant and received his B.S. degree in Accounting and
Computer Science from Oregon State University.
Bruce W. Husel joined Aastrom in November 1997 as Vice President, Quality
Systems. From May 1994 to September 1997, Mr. Husel served as Director of
Quality Assurance for Sanofi Diagnostics Pasteur, where he led efforts to
achieve EN 46001 registration and prepare for CE Marking. From June 1992 to May
1994, Mr. Husel was Director of Quality and Regulatory Affairs for Baxter
Anesthesia Division (formerly known as Bard MedSystems). Prior to that, he
served as Quality Manager of McGaw, Inc. Mr. Husel received his B.B. degree in
Electrical Engineering from Rice University in 1980, an M.S degree in
Engineering Management from Southern Methodist University in 1986 and an M.B.A.
degree in Accounting from the University of Texas at Dallas in 1987.
20
Alan K. Smith, Ph.D. joined Aastrom in November 1995 as Vice President,
Research. Previously, Dr. Smith was Vice President of Research and Development
at Geneic Sciences, Inc., a developmental stage bone marrow transplantation
company. Prior to that, Dr. Smith held the position of Director, Cell
Separations Research and Development of the Immunotherapy Division of Baxter
Healthcare Corporation. In that capacity, he was responsible for the research
and development activities for a stem cell concentration system approved for
clinical use in the U.S., Europe and a number of other countries. Dr. Smith has
also held positions as Research and Development Manager at BioSpecific
Technologies, and as Director of Biochemistry at HyClone Laboratories. Dr.
Smith received his B.S. degree in Chemistry from Southern Utah State College in
1976 and a Ph.D. in Biochemistry from Utah State University in 1983. Dr. Smith
is a director of Chata Biosystems, Inc., a privately held pharmaceutical service
company.
ITEM 2. PROPERTIES
Aastrom leases approximately 22,000 square feet of office and research and
development space in Ann Arbor, Michigan under a lease agreement expiring in
August 2000. The Lease is renewable at the option of Aastrom for up to an
additional five year term. Aastrom believes that its facilities are adequate for
its current needs. However, additional facilities may be required to support
expansion for research and development abilities or to assume manufacturing
operations which are currently fulfilled through contract manufacturing
relationships.
ITEM 3. LEGAL PROCEEDINGS
Aastrom is not party to any material legal proceedings, although from time to
time it may become involved in disputes in connection with the operation of its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Aastrom's security holders during the
fourth quarter of Aastrom's fiscal year ended June 30, 1999.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since February 4, 1997 the Company's Common Stock has been quoted on the Nasdaq
National Market under the symbol "ASTM". The following table sets forth the
high and low closing prices per share of Common Stock as reported on the Nasdaq
National Market:
PRICE RANGE OF COMMON STOCK
Year ended 6/30/99:
1st Quarter $ 3 3/4 $ 1 7/8
2nd Quarter 5 1 13/16
3rd Quarter 3 1/4 2 3/16
4th Quarter 2 1/4 1 1/4
Year ended 6/30/98:
1st Quarter $ 9 15/16 $ 3 1/4
2nd Quarter 8 1/8 4 3/8
3rd Quarter 6 1/2 4 3/8
4th Quarter 6 3/4 3 1/2
As of August 31, 1999, there were approximately 220 holders of record of the
Common Stock. The Company has never paid any cash dividends on its Common Stock
and does not anticipate paying such cash dividends in the foreseeable future.
The Company currently anticipates that it will retain all future earnings, if
any, for use in the development of its business.
22
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data for the fiscal years ended June 30, 1997, 1998
and 1999 and for the period from Inception to June 30, 1999 and the balance
sheet data at June 30, 1998 and 1999, are derived from, and are qualified by
reference to, the audited financial statements included in the Company's report
on Form 10-K and should be read in conjunction with those financial statements
and notes thereto. The statement of operations data for the fiscal years ended
June 30, 1995 and 1996, and the balance sheet data at June 30, 1995, 1996 and
1997, are derived from audited financial statements not included herein. The
data set forth below are qualified by reference to, and should be read in
conjunction with, the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Year ended June 30, Inception to
---------------------------------------------------------------------------- June 30,
1995 1996 1997 1998 1999 1999
------------- ------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales.............. $ - $ - $ - $ - $ 34,000 $ 34,000
Research and development
agreements............... 396,000 1,342,000 230,000 3,000 - 2,020,000
Grants..................... 121,000 267,000 148,000 246,000 847,000 3,236,000
------------- ------------ ------------ ------------ ------------ ------------
Total revenues.............. 517,000 1,609,000 378,000 249,000 881,000 5,290,000
------------- ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of product sales...... - - - - 6,000 6,000
Research and development... 4,889,000 10,075,000 13,357,000 15,498,000 10,871,000 64,801,000
Selling, general and
administrative............ 1,558,000 2,067,000 1,953,000 2,858,000 2,836,000 14,736,000
------------- ------------ ------------ ------------ ------------ ------------
Total costs and expenses.... 6,447,000 12,142,000 15,310,000 18,356,000 13,713,000 79,543,000
------------- ------------ ------------ ------------ ------------ ------------
Loss from operations........ (5,930,000) (10,533,000) (14,932,000) (18,107,000) (12,832,000) (74,253,000)
Other income (expense):
Other income............... - - - - 1,237,000 1,237,000
Interest income............ 279,000 678,000 676,000 886,000 571,000 3,709,000
Interest expenses.......... (66,000) (62,000) (32,000) (12,000) (4,000) (267,000)
------------- ------------ ------------ ------------ ------------ ------------
Net loss.................... $ (5,717,000) $ (9,917,000) $(14,288,000) $(17,233,000) $(11,028,000) $(69,574,000)
============= ============ ============ ============ ============ ============
Net loss applicable to
common shares.............. $ (5,717,000) $ (9,917,000) $(14,288,000) $(21,023,000) $(11,507,000)
============= ============ ============ ============ ============
Net loss per common share
(Basic and diluted)........ $(.78) $(1.07) $(1.27) $(1.57) $(.75)
============= ============ ============ ============ ============
Weighted average number of
common shares outstanding.. 7,309,000 9,269,000 11,228,000 13,363,000 15,342,000
============= ============ ============ ============ ============
June 30,
-----------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- ------------- ------------- ------------ ------------
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments...... $ 11,068,000 $ 10,967,000 $ 17,007,000 $ 11,212,000 $ 7,528,000
Working capital............. 10,319,000 9,851,000 15,600,000 10,121,000 8,009,000
Total assets................ 12,551,000 12,673,000 18,410,000 12,374,000 9,540,000
Long-term capital lease
obligations................ 412,000 189,000 65,000 - -
Deficit accumulated during
the development stage...... (17,108,000) (27,025,000) (41,313,000) (58,897,000) (70,334,000)
Total shareholders' equity.. 11,186,000 10,850,000 16,583,000 10,846,000 8,511,000
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its inception, the Company has been in the development stage and engaged
in research and product development, conducted principally on its own behalf,
but also in connection with various collaborative research and development
agreements with others. The Company has commenced its initial product launch in
Europe of the AastromReplicell(TM) Cell Production System (System), but does not
expect to generate positive cash flows from operations for at least the next
several years. Unless more significant product sales commence, the Company
expects that its revenue sources will continue to be limited to grant revenue
and research funding, milestone payments and licensing fees from potential
future corporate collaborators. The timing and amount of such future cash
payments and revenues, if any, will be subject to significant fluctuations,
based in part on the success of the Company's research activities, the receipt
of necessary regulatory approvals, the timing of the achievement of certain
other milestones and the extent to which associated costs are reimbursed under
grant or other arrangements. A portion of the Company's revenues from product
sales will be subject to the Company's obligation to make aggregate royalty
payments of up to 2% to certain licensors of its technology. Research and
development expenses may fluctuate due to the timing of expenditures for the
varying stages of the Company's research, product development and clinical
development programs. Generally, product development expenses for the
AastromReplicell(TM) System have decreased as the product has progressed into
general production and market launch. Clinical development costs are expected
to increase as the Company conducts its U.S. pivotal clinical trials. Marketing
and other general and administrative expenses are expected to increase in
support of European marketing activities. Under the Company's license agreement
with Immunex, the $1,000,000 annual renewal fees due in March 1998 and 1999 were
each paid through the issuance of $1,100,000 of the Company's common stock. An
additional $1,000,000 renewal fee is due in March 2000 and the Company has
negotiated for the payment of this fee through the issuance of common stock. As
a result of these and other factors, the Company's results of operations have
fluctuated and are expected to continue to fluctuate significantly from year to
year and from quarter to quarter and therefore may not be comparable to or
indicative of the result of operations for any future periods.
In May 1999, the Company formed Zellera AG (Zellera) as a wholly-owned
subsidiary based in Berlin, Germany. The formation of Zellera is intended to
provide access to additional funding and collaboration opportunities in new
product areas and to also support Aastrom's European product commercialization
efforts. Initial funding for Zellera is being pursued, which is planned to
consist of a combination of investment capital, loans and subsidies from the
German government. With this potential funding, Zellera will have access to
Aastrom's intellectual property base for human cell therapies and will develop
new product areas. Subsequent to June 30, 1999, Aastrom has made commitments
totaling up to $530,000 related to initial start up activities for Zellera's
operations.
Over the past several years, the Company's net loss has primarily increased,
consistent with the growth in the Company's scope and size of operations.
Adjusting to the transition of the AastromReplicell(TM) System into the
production phase, the Company reduced its workforce in November 1998. This
transition led to a reduction in the Company's net loss for 1999 by 36% compared
to 1998. A future growth in employee headcount is expected to become necessary
to address increasing requirements in the areas of product and customer support,
research, clinical and regulatory affairs, quality systems, sales and marketing
and administration. Assuming capital is available to finance such growth, the
Company's operating expenses will increase as a result. At least until such time
as the Company enters into arrangements providing research and development
funding or achieves greater product sales, the Company will continue to incur
net operating losses. The Company has never been profitable and does not
anticipate having net income unless and until significant product sales
commence. Through June 30, 1999, the Company has accumulated losses of
$69,574,000. There can be no assurance that the Company will be able to achieve
profitability on a sustained basis, if at all.
24
RESULTS OF OPERATIONS
Total revenues were $881,000 in 1999, $249,000 in 1998 and $378,000 in 1997. In
1999, revenues include product sales of $34,000, reflecting European launch of
the Company's lead product, the AastromReplicell(TM) System, in the fiscal
fourth quarter. Grant revenues increased to $847,000 in 1999 from $246,000 in
1998 and from $148,000 in 1997, reflecting the award of research grants and
related research activities, to the extent that such associated costs are
reimbursed under the grants. Grant revenues accounted for 96%, 99% and 39% of
total revenues for the years ended June 30, 1999, 1998 and 1997, respectively,
and are recorded on a cost-reimbursement basis. Revenues from research and
development agreements totaled $3,000 in 1998 and $230,000 in 1997. The
revenues in 1997 reflect research funding received by the Company under a
collaboration which commenced in September 1995 and ended in September 1996 and
accounted for 52% of revenues in 1997.
Total costs and expenses were $13,713,000 in 1999, $18,356,000 in 1998 and
$15,310,000 in 1997. The decrease in costs and expenses in 1999 is the result of
a decrease in research and development expense to $10,871,000 from $15,498,000
in 1998. The increase in costs and expenses in 1998 is primarily the result of
an increase in research and development expense to $15,498,000 in 1998 from
$13,357,000 in 1997. These fluctuations reflect development activities for the
AastromReplicell(TM) System which progressed into commercial launch during 1999.
Research and development expense includes a charge of $1,100,000 in both 1999
and 1998 and a charge of $1,000,000 in 1997, representing license fee payments
pursuant to the Company's supply agreement with Immunex. General and
administrative expenses were $2,836,000 in 1999, $2,858,000 in 1998 and
$1,953,000 in 1997. General and administrative expenses, which decreased
slightly in 1999 compared to 1998, but increased in 1998, reflect increased
finance, legal and other administrative and marketing expenses in support of the
Company's product development and research activities. In November 1998, the
Company implemented a reduction in work force, affecting 19 staff positions and
certain other contract positions, reducing overall operating expenses by
approximately 15%. The reduction in headcount generally affected staff and
operations that were not required for product manufacturing and support or to
support the Company's clinical development programs.
Interest income was $571,000 in 1999, $886,000 in 1998 and $676,000 in 1997.
The fluctuations in interest income are due primarily to corresponding changes
in the levels of cash, cash equivalents and short-term investments during the
periods. Interest expense was $4,000 in 1999, $12,000 in 1998 and $32,000 in
1997, reflecting decreasing amounts outstanding under capital leases during
these periods, which have now been fully repaid. Other income for the year
ended June 30, 1999 includes $1,237,000 representing a one-time payment received
from Cobe in connection with the termination of the Company's marketing and
distribution agreement in November 1998.
The Company's net loss was $11,028,000, or $.75 per common share in 1999,
$17,233,000, or $1.57 per common share in 1998 and $14,288,000, or $1.27 per
common share in 1997. The computation of net loss per common share for the
years ended June 30, 1998 and 1999 include adjustments for dividends and yields
on outstanding preferred stock as well as one-time charges related to the sale
of the preferred stock. The one-time charges, dividends and yields affect only
the computation of net loss per common share and are not included in the net
loss for the periods. The Company expects to report additional substantial net
losses while product sales commence.
The Company has not generated any profits to date and therefore has not paid any
federal income taxes since inception. At June 30, 1999, the Company's Federal
tax net operating loss and tax credit carryfowards were $67,800,000 and
$1,990,000, respectively, which will expire from 2004 through 2019, if not
utilized. The Company underwent an ownership change in October 1993, which has
resulted in a limitation under which the Company can utilize a portion of its
net operating loss carryforward amounting to $1,153,000 per year. As of June
1999, the portion of the Company's net operating loss that remains subject to
this limitation is $200,000 and therefore is not expected to ultimately effect
the Company's ability to utilize the benefit. In July 1998, the Company issued
shares of 1998 Series I Convertible Preferred Stock which resulted in an annual
limitation of $3,136,000, which applies to losses incurred between October 1993
and July 1998. As of June 1999, the portion of the Company's net operating loss
that remains subject to this limitation is $47,200,000. The Company's ability
to utilize its net operating loss and tax credit carryforwards may become
subject to further annual limitation.
25
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through public
and private sales of its equity securities, which, from inception through June
30, 1999, have totaled approximately $78,845,000 and, to a lesser degree,
through grant funding, payments received under research agreements and
collaborations, interest earned on cash, cash equivalents, and short-term
investments, and funding under equipment leasing agreements. These financing
sources have historically allowed the Company to maintain adequate levels of
cash and other liquid investments.
The Company's combined cash, cash equivalents and short-term investments totaled
$7,528,000 at June 30, 1999, a decrease of $3,684,000 from June 30, 1998. The
primary uses of cash, cash equivalents and short-term investments during the
year ended June 30, 1999 included $11,128,000 to finance the Company's
operations and working capital requirements, $73,000 in capital equipment
additions and $65,000 in scheduled debt payments. During the year ended June
30, 1999, the Company raised net proceeds of $7,586,000 through the sale of its
equity securities.
The Company's future cash requirements will depend on many factors, including
continued scientific progress in its research and development programs, the
scope and results of clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patents, competing technological and market developments and the cost of product
commercialization. The Company does not expect to generate a positive cash flow
from operations for at least the next several years due to the expected spending
for research and development programs and the cost of commercializing its
product candidates. The Company intends to seek additional funding through
research and development, or distribution and marketing, agreements with
suitable corporate collaborators, grants and through public or private financing
transactions. Assuming that either such additional planned funding is obtained,
or the Company significantly reduces the scope of its operating objectives, the
Company anticipates that its available cash resources and expected interest
income thereon, will be sufficient to finance its operations into mid 2000.
This estimate is a forward-looking statement based on certain assumptions which
could be negatively impacted by the matters discussed under this heading and
under the caption "Business Risks" in the Company's Annual Report on Form 10-K,
included herein. The Company is in active business discussions intended to
obtain additional funding during this period. The Company expects that its
primary sources of capital for the foreseeable future will be through
collaborative arrangements and through the public or private sale of its debt or
equity securities. There can be no assurance that such collaborative
arrangements, or any public or private financing, will be available on
acceptable terms, if at all, or can be sustained. Several factors will affect
the Company's ability to raise additional funding, including, but not limited
to, market volatility of the Company's Common Stock and economic conditions
affecting the public markets generally or some portion or all of the technology
sector. If adequate funds are not available, the Company may be required to
delay, reduce the scope of, or eliminate one or more of its research and
development programs, which may have a material adverse effect on the Company's
business. See "Business Risks--Future Capital Needs; Uncertainty of Additional
Funding" in the Company's 1999 Annual Report on Form 10-K and Notes to Financial
Statements included herein.
YEAR 2000 READINESS
Many currently installed computer systems and software products are not capable
of distinguishing 20th century dates from 21st century dates. As a result, in
less than one year, computer systems and/or software used by many companies in a
wide variety of applications will experience operating difficulties unless they
are modified or upgraded to adequately process information involving, related
to, or dependent upon the century change. Significant uncertainty exists in the
software and information services industries concerning the scope and magnitude
of problems associated with the century change. In light of the potentially
broad effects of the year 2000 on a wide range of business systems, the Company
may be affected. The Company utilizes, and is dependent upon, data processing
computer hardware and software to conduct its business. The Company has
completed its assessment of its own computer systems and based upon this
assessment, believes that its computer systems are "Year 2000 compliant;" that
is, its computer systems are capable of adequately distinguishing 21st century
dates from 20th century dates. However, there can be no assurance that the
Company has timely identified or will timely identify and remediate all
significant Year 2000 problems in its own computer systems, that the remedial
efforts subsequently made will not involve significant time and expense, or that
such problems will not have a material adverse effect on the Company's business,
operating results and financial condition. The Company has yet to determine the
extent, or completed activities to minimize the risk, that the computer systems
of the Company's suppliers and manufactures are not
26
Year 2000 compliant, or will not become compliant on a timely basis. The Company
expects that the process of making inquiries with these suppliers will be
ongoing through the end of 1999. If Year 2000 problems prevent any of the
Company's suppliers from timely delivery of products or services required by the
Company, the Company's operating results could be materially adversely affected.
The Company currently estimates that its costs to address the Year 2000 issue
relating to its suppliers will not be material, and that these costs will be
funded from its operating cash flows. To the extent practical, the Company
intends to identify alternative suppliers and manufactures in the event its
preferred suppliers become incapable of delivering products or services required
by the Company on a timely basis. The Company's estimates of Year 2000 costs
relating to its suppliers and manufacturers are management's best estimates,
which were derived from numerous assumptions of future events, including the
continued availability of certain resources, third party remediation plans with
regard to Year 2000 issues, and other factors. There can be no assurance that
these estimates are correct and actual results could differ materially from
these estimates.
FINANCIAL INSTRUMENTS
The only financial instruments the Company maintains are in accounts
receivables. The Company believes that the interest rate risk related to these
accounts is not significant. The Company manages the risk associated with these
accounts through period reviews of the carrying value for non-collectability and
establishment of appropriate allowances in connection with the Company's
internal controls and policies. The Company does not enter into hedging or
derivative instruments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financial Instruments."
27
BUSINESS RISKS
Aastrom's business is subject to a number of risks and uncertainties,
including those discussed below.
IF WE CANNOT COMPLETE OUR PRODUCT DEVELOPMENT ACTIVITIES SUCCESSFULLY, OUR
ABILITY TO OPERATE OR FINANCE OPERATIONS WILL BE SEVERELY LIMITED.
Commercialization in the United States of our lead product candidate, the
AastromReplicell(TM) Cell Production System, will require additional research
and development by Aastrom as well as substantial clinical trials. While we have
commenced initial marketing on a limited basis of the AastromReplicell(TM)
System in Europe, we believe that the United States will be the principal market
for our products. Aastrom may not be able to successfully complete development
of the AastromReplicell(TM) System or its other product candidates, or
successfully market its technologies or product candidates. Aastrom or its
potential collaborators may encounter problems and delays relating to research
and development, regulatory approval and intellectual property rights of
Aastrom's technologies and product candidates. Aastrom's research and
development programs may not be successful, and its cell culture technologies
and product candidates may not facilitate the ex vivo production of cells with
the expected biological activities in humans. Our technologies and product
candidates may not prove to be safe and efficacious in clinical trials, and we
may not obtain the intended regulatory approvals for our technologies or product
candidates and the cells produced in such products. If any of these events
happen, we may not have adequate resources to continue operations for the period
required to resolve the issue delaying commercialization and we may not be able
to raise capital to finance our continued operation during the period required
for resolution of that issue.
WE MUST SUCCESSFULLY COMPLETE OUR CLINICAL TRIALS TO BE ABLE TO MARKET OUR
PRODUCTS.
To be able to market products in the United States, Aastrom must demonstrate,
through extensive preclinical studies and clinical trials, the safety and
efficacy of its processes and product candidates, together with the cells
produced by such processes in such products, for application in the treatment of
humans. Aastrom is currently conducting a pivotal clinical trial to demonstrate
the safety and biological activity of patient-derived cells produced in the
AastromReplicell(TM) System. We intend to commence two other pivotal clinical
trials to demonstrate the safety and biological activity of umbilical cord blood
cells produced in the AastromReplicell(TM) System. If our clinical trials are
not successful, our products may not be marketable.
Our ability to complete our clinical trials in a timely manner depends on many
factors, including the rate of patient enrollment. Patient enrollment can vary
with the size of the patient population, the proximity of suitable patients to
clinical sites, perceptions of the utility of stem cell therapy for the
treatment of certain diseases and the eligibility criteria for the study. We
have experienced delays in patient accrual in our previous and current clinical
trials. If we experience future delays in patient accrual, we could experience
increased costs and delays associated with clinical trials which would impair
our product development programs and our ability to market our products.
Furthermore, the FDA monitors the progress of clinical trials and it may suspend
or terminate clinical trials at any time due to patient safety or other
considerations.
FAILURE TO OBTAIN AND MAINTAIN REQUIRED REGULATORY APPROVALS WOULD SEVERELY
LIMIT OUR ABILITY TO SELL OUR PRODUCTS.
We must obtain the approval of the U.S. Food and Drug Administration (the
"FDA") before commercial sales of Aastrom's product candidates may commence in
the United States, which we believe will be the principal market for our
products. We may also be required to obtain additional approvals from foreign
regulatory authorities to continue or increase our sales activities in those
jurisdictions. If we cannot demonstrate the safety, reliability and efficacy of
our product candidates, or of the cells produced in such products, we may not be
able to obtain required regulatory approvals. Many of the patients enrolled in
the clinical trials will have previously undergone extensive treatment which
will have substantially weakened the patients and may have irreparably damaged
the ability of their blood and immune system to recover. Some patients
undergoing the transplant recovery process have died, from causes that were,
according to the physicians involved, unrelated to the AastromReplicell(TM)
System procedure, and it is possible that other patients may die or suffer
severe complications during the course of either the current trials or future
trials. In addition, patients receiving cells produced with Aastrom's
technologies and product candidates may not demonstrate long-term engraftment in
a manner comparable to cells
28
obtained from current stem cell therapy procedures. If we cannot demonstrate the
safety or efficacy of our technologies and product candidates, including long-
term sustained engraftment, or if one or more patients die or suffer severe
complications, the FDA or other regulatory authorities could delay or withhold
regulatory approval of our product candidates.
Finally, even if we obtain regulatory approval of a product, that approval may
be subject to limitations on the indicated uses for which it may be marketed.
Even after granting regulatory approval, the FDA, other regulatory agencies, and
governments in other countries continue to review and inspect marketed products,
manufacturers and manufacturing facilities. Later discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on the product or manufacturer, including a withdrawal of the
product from the market. Further, governmental regulatory agencies may establish
additional regulations which could prevent or delay regulatory approval of our
products.
EVEN IF WE OBTAIN REGULATORY APPROVALS TO SELL OUR PRODUCTS, LACK OF COMMERCIAL
ACCEPTANCE MAY IMPAIR OUR BUSINESS.
Aastrom's product development efforts are primarily directed toward obtaining
regulatory approval to market the AastromReplicell(TM) System as an alternative
to, or as an improvement for, the bone marrow harvest and peripheral blood
progenitor cell stem cell collection methods. These stem cell collection methods
have been widely practiced for a number of years, and Aastrom's technologies or
product candidates may not be accepted by the marketplace as readily as these or
other competing processes and methodologies. As a result, even if we obtain all
required regulatory approvals, we cannot be certain that our products and
processes will be adopted at a level that would allow us to operate profitably.
FAILURE OF THIRD PARTIES TO MANUFACTURE COMPONENT PARTS OR PROVIDE LIMITED
SOURCE SUPPLIES WOULD IMPAIR OUR NEW PRODUCT DEVELOPMENT AND OUR SALES
ACTIVITIES.
Aastrom relies solely on third parties to manufacture its product candidates
and their component parts. Aastrom also relies solely on third party suppliers
to provide necessary key mechanical components, as well as growth factors and
other materials used in the cell expansion process. We would not be able to
obtain alternate sources of supply for many of these items on a short-term
basis. If any of our key manufacturers or suppliers fail to perform their
respective obligations or if our supply of growth factors, components or other
materials is limited or interrupted, we would not be able to conduct clinical
trials or market our product candidates on a timely and cost-competitive basis,
if at all.
Furthermore, some of the compounds used by Aastrom in its current stem cell
expansion processes involve the use of animal-derived products. Suppliers or
regulatory authorities may limit or restrict the availability of such compounds
for clinical and commercial use. Any restrictions on these compounds would
impose a potential competitive disadvantage for Aastrom's products. If Aastrom
was not able to develop or obtain alternative compounds, its product development
and commercialization efforts would be harmed.
Finally, Aastrom may not be able to continue its present arrangements with its
suppliers, supplement existing relationships, establish new relationships or be
able to identify and obtain the ancillary materials that are necessary to
develop its product candidates in the future. Aastrom's dependence upon third
parties for the supply and manufacture of such items could adversely affect
Aastrom's ability to develop and deliver commercially feasible products on a
timely and competitive basis.
OUR PAST LOSSES AND EXPECTED FUTURE LOSSES CAST DOUBT ON OUR ABILITY TO OPERATE
PROFITABLY.
Aastrom was incorporated in 1989 and has experienced substantial operating
losses since inception. As of June 30, 1999, Aastrom has incurred net operating
losses totaling approximately $69.6 million. These losses have resulted
principally from costs incurred in the research and development of Aastrom's
cell culture technologies and the AastromReplicell(TM) System, general and
administrative expenses, and the prosecution of patent applications. Aastrom
expects to incur significant operating losses until product sales increase,
primarily owing to its research and development programs, including preclinical
studies and clinical trials, and the establishment of marketing and distribution
capabilities necessary to support commercialization efforts for its products.
Aastrom cannot predict with any certainty the amount of future losses.
Aastrom's ability to achieve profitability will depend, among other things, on
successfully completing the development of its product
29
candidates, obtaining regulatory approvals, establishing manufacturing, sales
and marketing arrangements with third parties, and raising sufficient funds to
finance its activities. Aastrom may not be able to achieve or sustain
profitability.
GIVEN OUR LIMITED INTERNAL SALES AND MARKETING CAPABILITIES, WE NEED TO DEVELOP
COLLABORATIVE RELATIONSHIPS TO SELL, MARKET AND DISTRIBUTE OUR PRODUCTS.
While we have commenced initial marketing on a limited basis of the
AastromReplicell(TM) System in Europe, we have only limited internal sales,
marketing and distribution capabilities. We intend to market our products
through collaborative relationships with companies for sales, marketing and
distribution capabilities. If we cannot develop and maintain those
relationships, we would have only limited abilities to market, sell and
distribute our products. Even if we are able to enter into those relationships,
they may not succeed or be sustained on a long-term basis, and termination would
require us to develop alternate arrangements at a time when we need sales,
marketing or distribution capabilities to meet existing demand. For example,
Aastrom and Cobe BCT recently terminated their strategic alliance for the
worldwide distribution of the AastromReplicell(TM) System for stem cell therapy
and related uses and Aastrom is seeking to enter into other arrangements
relating to the development and marketing of our product candidates.
WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO RAISE THE REQUIRED CAPITAL TO
CONDUCT OUR OPERATIONS AND DEVELOP OUR PRODUCTS.
We will require substantial capital resources in order to conduct our
operations and develop our products. Aastrom anticipates that its available
cash and expected interest income will be sufficient to finance the development
and manufacture of the AastromReplicell(TM) System for use in clinical trials,
expanded clinical trials, other research and development and working capital and
other corporate requirements into early 2000. This estimate is based on certain
assumptions which could be negatively impacted by the matters discussed under
this heading. In order to grow and expand our business, and to introduce our
product candidates into the marketplace, Aastrom will need to raise additional
funds. We will also need additional funds or a collaborative partner to finance
the research and development activities of Aastrom's product candidates for the
expansion of additional cell types.
Aastrom's future capital requirements will depend upon many factors, including
. continued scientific progress in its research and development programs,
. costs and timing of conducting clinical trials and seeking regulatory
approvals and patent prosecutions,
. competing technological and market developments,
. possible changes in existing collaborative relationships,
. the ability of Aastrom to establish additional collaborative
relationships, and
. effective commercialization activities and facilities expansions if and as
required.
Because of our long-term funding requirements, we may attempt to access the
public or private equity markets if and whenever conditions are favorable, even
if we do not have an immediate need for additional capital at that time. This
additional funding may not be available to Aastrom on reasonable terms, or at
all. If adequate funds are not available, Aastrom may be required to delay or
terminate research and development programs, curtail capital expenditures, and
reduce business development and other operating activities.
ANY CHANGES IN THE GOVERNMENTAL REGULATORY CLASSIFICATIONS OF OUR PRODUCTS COULD
PREVENT, LIMIT OR DELAY OUR ABILITY TO MARKET OR DEVELOP OUR PRODUCTS.
The FDA establishes regulatory requirements based on the classification of a
product. Although the FDA has indicated it intends to regulate the
AastromReplicell(TM) System for stem cell therapy as a Class III medical device,
the FDA may ultimately choose to regulate the AastromReplicell(TM) System under
another category. Because our product development programs are designed to
satisfy the standards applicable to Class III medical devices, a change in the
regulatory classification would affect our ability to obtain FDA approval of our
products. Also, the FDA is in the process of developing its requirements with
respect to somatic cell therapy and gene cell therapy products. Until the FDA
issues definitive
30
regulations covering our product candidates, the regulatory guidelines or
requirements for approval of such product candidates will continue to be
uncertain.
IF WE DO NOT KEEP PACE WITH OUR COMPETITORS AND WITH TECHNOLOGICAL AND MARKET
CHANGES, OUR PRODUCTS MAY BECOME OBSOLETE AND OUR BUSINESS MAY SUFFER.
The market for our product is very competitive and is subject to rapid
technological changes. Many of Aastrom's competitors have significantly greater
resources, more product candidates and have developed product candidates and
processes that directly compete with Aastrom's products. Aastrom's competitors
may have developed, or could in the future develop, new technologies that
compete with our products or even render our products obsolete. In addition,
some recently published studies have suggested that stem cell therapy, which is
the current principal market for our products, may have limited clinical benefit
in the treatment of breast cancer, which is a significant portion of the current
overall stem cell transplant market. Our products are designed to improve upon
traditional stem cell collection methods, but even if we are able to demonstrate
improved or equivalent results, practitioners may not switch to our new
processes. Given the experience and expertise associated with traditional
methods, if we can not develop our cell production procedure to lead to a less
expensive and quicker recovery time than seen with the traditional methods, we
will suffer a competitive disadvantage. Finally, to the extent that others
develop new technologies that address the diseases and health conditions we have
targeted, our business will suffer.
OUR PATENTS AND PROPRIETARY RIGHTS DO NOT PROVIDE SUBSTANTIAL PROTECTION, OUR
BUSINESS AND COMPETITIVE POSITION WILL SUFFER.
Our success depends in large part on our ability to develop or license and
protect proprietary products and technologies. However, we cannot be sure that
patents will be granted on any of our pending or future patent applications. We
also cannot be sure that the scope of any of our issued patents will be
sufficiently broad to offer meaningful protection. In addition, our issued
patents or patents licensed to us could be successfully challenged, invalidated
or circumvented so that our patent rights would not create an effective
competitive barrier. Furthermore, Aastrom relies on licenses granted by the
University of Michigan for certain of its patent rights. If Aastrom breaches
such agreements or otherwise fails to comply with such agreements, or if such
agreements expire or are otherwise terminated, Aastrom may lose its rights under
the patents held by the University of Michigan. Aastrom also relies on trade
secrets and unpatentable know-how which it seeks to protect, in part, by
confidentiality agreements with its employees, consultants, suppliers and
licensees. These agreements may be breached, and Aastrom might not have
adequate remedies for any breach. If this were to occur, or business and
competitive position would suffer.
INTELLECTUAL PROPERTY LITIGATION COULD HARM OUR BUSINESS.
Aastrom's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. Although Aastrom has not been subject to any filed infringement claims,
other patents could exist or could be filed which would prohibit or limit our
ability to market our products or maintain our competitive position. In the
event of an intellectual property dispute, Aastrom may be forced to litigate.
Intellectual property litigation would divert management's attention from
developing our products and would force Aastrom to incur substantial costs
regardless of whether we are successful. An adverse outcome could subject
Aastrom to significant liabilities to third parties, and force Aastrom to
curtail or cease its development and sale of its products and processes.
THE MARKET FOR OUR PRODUCTS WILL BE HEAVILY DEPENDENT ON THIRD PARTY
REIMBURSEMENT POLICIES.
Aastrom's ability to successfully commercialize its product candidates will
depend on the extent to which government healthcare programs, such as Medicare
and Medicaid, as well as private health insurers, health maintenance
organizations and other third party payors will pay for our products and related
treatments. Reimbursement by third-party payors depends on a number of factors,
including the payor's determination that use of the product is safe and
effective, not experimental or investigational, medically necessary, appropriate
for the specific patient and cost-effective. Reimbursement in the United States
or foreign countries may not be available or maintained for any of Aastrom's
product candidates. If we do not obtain approvals for adequate third-party
reimbursements, we may not be able to establish or maintain price levels
sufficient to
31
realize an appropriate return on our investment in product development. Any
limits on reimbursement available from third-party payors may reduce the demand
for, or negatively affect the price of, our products.
POTENTIAL PRODUCTS LIABILITY CLAIMS COULD EFFECT OUR EARNINGS AND FINANCIAL
CONDITION.
Aastrom faces an inherent business risk of exposure to product liability
claims in the event that the use of the AastromReplicell(TM) System during
research and development efforts, including clinical trials, or after
commercialization results in adverse effects. As a result, Aastrom may incur
significant product liability exposure, which could exceed existing insurance
coverage. We may not be able to maintain adequate levels of insurance at
reasonable cost and/or reasonable terms. Excessive insurance costs or uninsured
claims would increase our operating loss and affect our financial condition.
IF WE CANNOT ATTRACT AND RETAIN KEY PERSONNEL, OUR BUSINESS WILL SUFFER.
Our success depends in large part upon our ability to attract and retain
highly qualified scientific and management personnel. We face competition for
such personnel from other companies, research and academic institutions and
other entities. For example, since our initial public offering in February 1997
three of the six executive officers who were with Aastrom at the time have since
left for positions with other organizations and Aastrom has hired two new
executive officers to assume their responsibilities. We may not be successful
in hiring or retaining key personnel.
THE SERIES III SHARES AND OTHER OUTSTANDING SHARES OF PREFERRED STOCK SHARE HAVE
THE POTENTIAL FOR SUBSTANTIAL DILUTION.
The Series III shares and the other outstanding shares of preferred stock are
each convertible into a number of shares of common stock that increases as the
current market price of the common stock decreases. If the selling shareholder
was able to and did convert all of its Series III shares and other outstanding
shares of preferred stock as of August 27, 1999, the selling shareholder would
have received approximately 4,765,625 shares of common stock. This number of
shares could become significantly greater in the event of a decrease in the
trading price of the common stock. Purchasers of common stock could therefore
experience substantial dilution of their investment upon conversion of the
Series III shares and the other outstanding shares of preferred stock. The
Series III shares and other outstanding shares of preferred stock are not
registered and may be sold only if registered under the Securities Act or sold
in accordance with an applicable exemption from registration, such as Rule 144.
The shares of common stock into which the Series III shares may be converted are
being registered pursuant to this Registration Statement.
OUR STOCK PRICE HAS BEEN VOLATILE AND FUTURE SALES OF SUBSTANTIAL NUMBERS OF OUR
SHARES COULD HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR SHARES.
The market price of shares of our common stock has been volatile. The price
of our common stock may continue to fluctuate in response to a number of events
and factors, such as:
. clinical trial results,
. the amount of our cash resources and our ability to obtain additional
funding,
. announcements of research activities, business developments,
technological innovations or new products by us or our competitors,
. changes in government regulation,
. disputes concerning patents or proprietary rights,
. changes in our revenues or expense levels,
. public concern regarding the safety, efficacy or other aspects of the
products or methodologies we are developing, and
. changes in recommendations by securities analysts.
Any of these events may cause the price of our shares to fall, which may
adversely affect our business and financing opportunities. In addition, the
stock market in general and the market prices for biotechnology companies in
particular have experienced significant volatility that often has been unrelated
to the operating performance or financial conditions of such
32
companies. These broad market and industry fluctuations may adversely affect the
trading price of our shares, regardless of our operating performance or
prospects. For example, within the last year, the Company has experienced a day
when its stock traded at approximately twice the previous day's closing price
and another day when it dropped by approximately 40% from the previous day's
closing price.
In addition, sales, or the possibility of sales, of substantial numbers of
shares of common stock in the public market could adversely affect prevailing
market prices of shares of common stock. Our employees hold a significant
number of options to purchase shares, many of which are presently exercisable.
Employees may exercise their options and sell shares shortly after such options
become exercisable, particularly if they need to raise funds to pay for the
exercise of such options or to satisfy tax liabilities that they may incur in
connection with exercising their options. Additionally, beginning January 1,
2001, Cobe BCT will be able to sell all of its approximately 2.4 million shares
of our common stock without restriction.
OUR CORPORATE DOCUMENTS AND MICHIGAN LAW CONTAIN PROVISIONS THAT MAY MAKE IT
MORE DIFFICULT FOR US TO BE ACQUIRED.
Our board of directors has the authority, without shareholder approval, to
issue additional shares of preferred stock and to fix the rights, preferences,
privileges and restrictions of these shares without any further vote or action
by our shareholders. This authority, together with certain provisions of our
charter documents, may have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of our company. This effect could occur even if our shareholders
consider the change in control to be in their best interest.
WE MAY BE REQUIRED TO REDEEM A PORTION OF THE SERIES III SHARES, WHICH WOULD
SIGNIFICANTLY REDUCE OUR LIMITED CASH RESOURCES.
The holders of Series III shares may require us to redeem some or all of those
shares. These redemption rights would be triggered if we fail to issue shares
of common stock on conversion of the Series III Preferred, if we fail to
maintain the effectiveness of a registration statement for the resale of those
shares of common stock, if we are subject to bankruptcy or insolvency
proceedings, if we fail to maintain our listing on the Nasdaq stock market, or
if we fail to obtain shareholder approval of the issuance of the Series III
shares and the conversion of those Series III shares would result in the
issuance of more than 3,084,340 shares of common stock. Any redemption would
reduce our available cash resources, which are already very limited.
ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO INVESTORS.
Some investors favor companies that pay dividends, particularly in market
downturns. Aastrom has never paid cash dividends on its common stock and does
not anticipate paying any cash dividends on its common stock in the foreseeable
future. Therefore, the return on this investment will depend on the ability to
sell Aastrom's stock at a profit.
YEAR 2000 ISSUES MAY ADVERSELY AFFECT OUR COMPUTER SYSTEMS AND OUR BUSINESS.
Many currently installed computer systems and software products cannot
distinguish 20th century dates from 21st century dates. As a result, some
computer systems and/or software will experience operating difficulties unless
they are modified or upgraded to adequately process information involving,
related to, or dependent upon the century change. In light of the potentially
broad effects of the year 2000 on a wide range of business systems, we may be
affected. We utilize, and are dependent upon, data processing computer hardware
and software to conduct our business. We have completed an assessment of our
own computer systems and based upon this assessment, we believe our computer
systems are "Year 2000 compliant;" that is, our computer systems are capable of
adequately distinguishing 21st century dates from 20th century dates. However,
we may not have identified all significant Year 2000 problems in our computer
systems, and therefore may be subject to unknown risk and expense. Based on our
internal assessment, we believe that the most likely worst case scenario would
involve our suppliers and manufacturers. We have not determined the extent, or
completed activities to minimize the risk of the computer systems of our
suppliers and manufacturers not being Year 2000 compliant, or not becoming
compliant on a timely basis. We expect to make inquires with these suppliers
through the end of 1999. Year 2000 problems could prevent any of our suppliers
from timely delivery of products or services that we need. We currently believe
33
that our costs to address the Year 2000 issue relating to our suppliers will not
be material, and that these costs will be funded from our operating cash flows.
To the extent practical, we intend to identify alternative suppliers and
manufacturers in the event our preferred suppliers cannot deliver products or
services that we need on a timely basis. Our expectations of Year 2000 costs
relating to our suppliers and manufacturers are only estimates, which were
derived from numerous assumptions of future events, including the continued
availability of resources and third-party remediation plans with regard to year
2000 issues. These estimates may not be correct and actual results could differ
materially from these estimates.
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. These forward-looking statements include statements regarding:
. uncertainties related to product development and marketability,
. uncertainties related to clinical trials,
. manufacturing and supply uncertainties and dependence on third parties,
. anticipation of future losses,
. limited sales and marketing capabilities,
. future capital needs and uncertainty of additional funding,
. uncertainty of regulatory approval and extensive government regulation,
. competition and technological change,
. uncertainty regarding patents and proprietary rights,
. no assurance of third party reimbursement,
. hazardous materials, and
. potential product liability and availability of insurance.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Report of Independent Accountants...................................................... 35
Consolidated Balance Sheets as of June 30, 1998 and 1999............................... 36
Consolidated Statements of Operations for the years ended June 30, 1997, 1998 and 1999
and for the period from March 24, 1989 (Inception) to June 30, 1999.................. 37
Consolidated Statements of Shareholders' Equity from March 24, 1989 (Inception) to
June 30, 1999........................................................................ 38
Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1998 and 1999
and for the period from March 24, 1989 (Inception) to June 30, 1999.................. 39
Notes to Consolidated Financial Statements............................................. 40
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Aastrom Biosciences, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the consolidated financial position of
Aastrom Biosciences, Inc. (a development stage company) at June 30, 1998 and
1999, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 1999, and for the period from March 24, 1989
(Inception) to June 30, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Minneapolis, MN
August 13, 1999
36
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
June 30,
----------------------------------
1998 1999
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 2,078,000 $ 7,528,000
Short-term investments................................. 9,134,000 -
Receivables............................................ 167,000 113,000
Inventory.............................................. - 1,144,000
Prepaid expenses....................................... 270,000 253,000
----------- -----------
Total current assets.................................. 11,649,000 9,038,000
PROPERTY, NET........................................... 725,000 502,000
----------- -----------
Total assets.......................................... $12,374,000 $ 9,540,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................. $ 1,313,000 $ 836,000
Accrued employee expenses.............................. 150,000 193,000
Current portion of capital lease obligations........... 65,000 -
----------- -----------
Total current liabilities............................. 1,528,000 1,029,000
COMMITMENTS (Note 8)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value; shares authorized -
5,000,000; shares issued and outstanding -
2,200,000 and 7,000, respectively (Note 4)............. 9,930,000 6,588,000
Common Stock, no par value; shares authorized -
40,000,000; shares issued and outstanding -
13,639,817 and 16,980,161, respectively................ 59,474,000 72,257,000
Deficit accumulated during the development stage........ (58,897,000) (70,334,000)
Stock purchase warrants................................. 335,000 -
Accumulated other comprehensive income.................. 4,000 -
----------- -----------
Total shareholders' equity............................. 10,846,000 8,511,000
----------- -----------
Total liabilities and shareholders' equity........... $12,374,000 $ 9,540,000
=========== ===========
The accompanying notes are an integral part of these financial statements
37
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
March 24, 1989
(Inception) to
Year ended June 30, June 30,
-------------------
1997 1998 1999 1999
------------ ------------ ------------ -------------
REVENUES:
Product sales....................................... $ - $ - $ 34,000 $ 34,000
Research and development agreements................. 230,000 3,000 - 2,020,000
Grants.............................................. 148,000 246,000 847,000 3,236,000
------------ ------------ ------------ -------------
Total revenues.................................... 378,000 249,000 881,000 5,290,000
------------ ------------ ------------ -------------
COSTS AND EXPENSES:
Cost of product sales............................... - - 6,000 6,000
Research and development............................ 13,357,000 15,498,000 10,871,000 64,801,000
Selling, general and administrative................. 1,953,000 2,858,000 2,836,000 14,736,000
------------ ------------ ------------ -------------
Total costs and expenses.......................... 15,310,000 18,356,000 13,713,000 79,543,000
------------ ------------ ------------ -------------
LOSS FROM OPERATIONS.................................. (14,932,000) (18,107,000) (12,832,000) (74,253,000)
------------ ------------ ------------ -------------
OTHER INCOME (EXPENSE):
Other income........................................ - - 1,237,000 1,237,000
Interest income..................................... 676,000 886,000 571,000 3,709,000
Interest expense.................................... (32,000) (12,000) (4,000) (267,000)
------------ ------------ ------------ -------------
Total other income................................ 644,000 874,000 1,804,000 4,679,000
------------ ------------ ------------ -------------
NET LOSS.............................................. $(14,288,000) $(17,233,000) $(11,028,000) $ (69,574,000)
============ ============ ============ =============
COMPUTATION OF NET LOSS APPLICABLE TO
COMMON SHARES:
Net loss............................................ $(14,288,000) $(17,233,000) $(11,028,000)
Dividends and yields on preferred stock............. - (351,000) (409,000)
Charge related to issuance of preferred stock....... - (3,439,000) (70,000)
------------ ------------ ------------
Net loss applicable to Common Shares.................. $(14,288,000) $(21,023,000) $(11,507,000)
============ ============ ============
NET LOSS PER COMMON SHARE (Basic and Diluted)......... $ (1.27) $ (1.57) $ (.75)
============ ============ ===========
Weighted average number of common shares outstanding.. 11,228,000 13,363,000 15,342,000
============ ============ ===========
The accompanying notes are an integral part of these financial statements
38
AASTROM BIOSCIENCES, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Common Stock
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
BALANCE, MARCH 24, 1989 (Inception)..................... - $ - - $ -
Net loss, comprehensive loss...........................
Non-cash issuance of Common Stock...................... 454,545 -
Issuance of Series A Preferred Stock at $1.00 per share
in August 1989....................................... 1,500,000 1,500,000
Issuance of Series A Preferred Stock in March 1991 at
$1.00 per share, net of issuance costs of $5,000..... 1,000,000 995,000
Issuance of Series B Preferred Stock in April 1992 at
$2.00 per share, net of issuance costs of $46,000.... 3,030,000 6,014,000
Issuance of Common Stock for cash and services......... 33,333 33,000
Issuance of Series C Preferred Stock in October 1993 at
$1,000 per share, net of issuance costs of $175,000.. 10,000 9,825,000
Issuance of Series D Preferred Stock in April and May
1995 at $4.00 per share, net of issuance costs of
$81,000.............................................. 2,500,001 9,919,000
Issuance of Series E Preferred Stock in January 1996 at
$4.25 per share, net of issuance costs of $35,000.... 1,411,765 5,965,000
Exercise of stock options.............................. 1,398,601 93,000
Issuance of Stock Purchase Rights for cash in
September 1995 and March 1996........................
Principal payment received under shareholder note
receivable........................................... 31,000
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1996.................................. 9,451,766 34,218,000 1,886,479 157,000
Net loss...............................................
Unrealized losses on investments.......................
Comprehensive loss...................................
Exercise of stock options.............................. 40,307 26,000
Issuance of Series E Preferred Stock at $17.00 per
share................................................ 205,882 3,500,000
Issuance of Common Stock at $7.00 per share, net of
issuance costs of $2,865,000......................... 3,250,000 19,885,000
Conversion of preferred stock.......................... (9,657,648) (37,718,000) 8,098,422 37,718,000
Compensation expense related to stock options granted.. 120,000
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1997.................................. - - 13,275,208 57,906,000
Net loss...............................................
Unrealized gains on investments........................
Comprehensive loss...................................
Exercise of stock options.............................. 68,500 83,000
Issuance of 5.5% Convertible Preferred Stock at $5.00
per share, net of issuance costs of $1,070,000....... 2,200,000 9,930,000
Dividend paid on 5.5% Convertible Preferred Stock...... 72,940 351,000
Issuance of Common Stock............................... 255,340 1,144,000
Repurchase and retirement of Common Shares
outstanding.......................................... (32,171) (73,000)
Compensation expense related to stock options and
warrants granted..................................... 63,000
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1998.................................. 2,200,000 9,930,000 13,639,817 59,474,000
Net loss...............................................
Unrealized gains on investments........................
Comprehensive loss...................................
Dividend and yields on preferred stock................. 258,000 75,628 151,000
Exercise of stock options.............................. 24,043 28,000
Issuance of 1998 Series I Convertible Preferred Stock
at $1,000 per share, net of issuance costs of
$460,000............................................. 5,000 4,540,000 40,404 149,000
Issuance of 1999 Series III Convertible Preferred Stock
at $1,000 per share, net of issuance costs of
$280,000............................................. 3,000 2,720,000 49,994 90,000
Issuance of Common Stock............................... 451,906 1,159,000
Conversion of 5.5% Convertible Preferred Stock......... (2,200,000) (9,930,000) 2,240,326 9,930,000
Conversion of Series I Convertible Preferred Stock..... (1,000) (930,000) 458,043 930,000
Expiration of stock purchase warrant................... 335,000
Compensation expense related to stock options granted.. 11,000
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1999.................................. 7,000 $ 6,588,000 16,980,161 $ 72,257,000
============ ============ ============ ============
Deficit
Stock accumulated Accumulated
purchase during the other Total
rights and development comprehensive shareholders'
warrants stage income equity
---------- ------------ ------------- ------------
BALANCE, MARCH 24, 1989 (Inception)..................... $ - $ - $ - $ -
Net loss, comprehensive loss........................... (27,025,000) (27,025,000)
Non-cash issuance of Common Stock...................... -
Issuance of Series A Preferred Stock at $1.00 per share
in August 1989....................................... 1,500,000
Issuance of Series A Preferred Stock in March 1991 at
$1.00 per share, net of issuance costs of $5,000..... 995,000
Issuance of Series B Preferred Stock in April 1992 at
$2.00 per share, net of issuance costs of $46,000.... 6,014,000
Issuance of Common Stock for cash and services......... 33,000
Issuance of Series C Preferred Stock in October 1993 at
$1,000 per share, net of issuance costs of $175,000.. 9,825,000
Issuance of Series D Preferred Stock in April and May
1995 at $4.00 per share, net of issuance costs of
$81,000.............................................. 9,919,000
Issuance of Series E Preferred Stock in January 1996 at
$4.25 per share, net of issuance costs of $35,000.... 5,965,000
Exercise of stock options.............................. 93,000
Issuance of Stock Purchase Rights for cash in
September 1995 and March 1996........................ 3,500,000 3,500,000
Principal payment received under shareholder note
receivable........................................... 31,000
----------- ------------ ------------ ------------
BALANCE, JUNE 30, 1996.................................. 3,500,000 (27,025,000) - 10,850,000
Net loss............................................... (14,288,000) (14,288,000)
Unrealized losses on investments....................... (10,000) (10,000)
------------
Comprehensive loss................................... (14,298,000)
Exercise of stock options.............................. 26,000
Issuance of Series E Preferred Stock at $17.00 per
share................................................ (3,500,000) -
Issuance of Common Stock at $7.00 per share, net of
issuance costs of $2,865,000......................... 19,885,000
Conversion of preferred stock.......................... -
Compensation expense related to stock options granted.. 120,000
---------- ------------ ------------ ----------
BALANCE, JUNE 30, 1997.................................. - (41,313,000) (10,000) 16,583,000
Net loss............................................... (17,233,000) (17,233,000)
Unrealized gains on investments........................ 14,000 14,000
----------
Comprehensive loss................................... (17,219,000)
Exercise of stock options.............................. 83,000
Issuance of 5.5% Convertible Preferred Stock at $5.00
per share, net of issuance costs of $1,070,000....... 9,930,000
Dividend paid on 5.5% Convertible Preferred Stock...... (351,000) -
Issuance of Common Stock............................... 1,144,000
Repurchase and retirement of Common Shares
outstanding.......................................... (73,000)
Compensation expense related to stock options and
warrants granted..................................... 335,000 398,000
----------- ------------ ------------ ------------
BALANCE, JUNE 30, 1998.................................. 335,000 (58,897,000) 4,000 10,846,000
Net loss............................................... (11,028,000) (11,028,000)
Unrealized gains on investments........................ (4,000) (4,000)
----------
Comprehensive loss................................... (11,032,000)
Dividend and yields on preferred stock................. (409,000) -
Exercise of stock options.............................. 28,000
Issuance of 1998 Series I Convertible Preferred Stock
at $1,000 per share, net of issuance costs of
$460,000............................................. 4,689,000
Issuance of 1999 Series III Convertible Preferred Stock
at $1,000 per share, net of issuance costs of
$280,000............................................. 2,810,000
Issuance of Common Stock............................... 1,159,000
Conversion of 5.5% Convertible Preferred Stock......... -
Conversion of Series I Convertible Preferred Stock..... -
Expiration of stock purchase warrant................... (335,000) -
Compensation expense related to stock options granted.. 11,000
----------- ------------ ------------ ------------
BALANCE, JUNE 30, 1999.................................. $ - $(70,334,000) $ - $ 8,511,000
=========== ============ ============ ============
The accompanying notes are an integral part of these financial statements
39
March 24, 1989
(Inception) to
Year ended June 30, June 30,
--------------------------------------------
1997 1998 1999 1999
------------ ------------ ------------ -------------
OPERATING ACTIVITIES:
Net loss.................................................. $(14,288,000) $(17,233,000) $(11,028,000) $(69,574,000)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization......................... 564,000 557,000 296,000 2,684,000
Loss on property held for resale...................... - - - 110,000
Amortization of discounts and premiums
on investments...................................... (84,000) (180,000) (70,000) (453,000)
Stock compensation expense............................ 120,000 398,000 11,000 539,000
Stock issued pursuant to license agreement............ - 1,100,000 1,100,000 2,200,000
Changes in assets and liabilities:
Receivables......................................... (148,000) 38,000 54,000 (137,000)
Inventory........................................... - - (1,144,000) (1,144,000)
Prepaid expenses.................................... 311,000 (144,000) 17,000 (253,000)
Accounts payable and
accrued expenses.................................. 316,000 (195,000) (477,000) 836,000
Accrued employee
expenses.......................................... 33,000 20,000 43,000 193,000
Deferred revenue.................................... (122,000) - - -
------------ ------------ ------------ ------------
Net cash used for operating activities.................. (13,298,000) (15,639,000) (11,198,000) (64,999,000)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Organizational costs.................................... - - - (73,000)
Purchase of short-term investments...................... (19,190,000) (12,326,000) (1,000,000) (44,464,000)
Maturities of short-term investments.................... 4,200,000 18,450,000 10,200,000 44,917,000
Capital purchases....................................... (424,000) (234,000) (73,000) (2,449,000)
Proceeds from sale of property held for resale.......... - - - 400,000
------------ ------------ ------------ ------------
Net cash provided by (used for) investing activities.. (15,414,000) 5,890,000 9,127,000 (1,669,000)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Issuance of preferred stock............................. - 9,930,000 7,499,000 51,647,000
Issuance of Common Stock................................ 19,911,000 127,000 87,000 20,241,000
Repurchase of Common Stock.. - (49,000) - (49,000)
Payments received for stock purchase rights............. - - - 3,500,000
Payments received under shareholder notes............... - - - 31,000
Principal payments under capital lease obligations...... (223,000) (124,000) (65,000) (1,174,000)
------------ ------------ ------------ ------------
Net cash provided by financing activities............. 19,688,000 9,884,000 7,521,000 74,196,000
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (9,024,000) 135,000 5,450,000 7,528,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 10,967,000 1,943,000 2,078,000 -
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 1,943,000 $ 2,078,000 $ 7,528,000 $ 7,528,000
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid........................................... $ 32,000 $ 12,000 $ 4,000 $ 267,000
Additions to capital lease obligations.................. - - - 1,174,000
The accompanying notes are an integral part of these financial statements
40
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Aastrom Biosciences, Inc. (Aastrom) was incorporated in March 1989 (Inception)
and is in the development stage at June 30, 1999. The Company operates its
business in one reportable segment research and product development, conducted
both on its own behalf and in connection with various collaborative research and
development agreements with others, involving the development and sale of
processes and products for the ex vivo production of human cells for use in cell
and ex vivo gene therapy.
Successful future operations are subject to several technical and business
risks, including satisfactory product development, obtaining regulatory approval
and market acceptance for its products and the Company's continued ability to
obtain future funding.
As discussed in Note 7, the formation of Zellera is intended, in part, to
provide access to additional funding. If this, or other, funding is not
obtained, the Company will be required to significantly scale back its
operations in order to meet its working capital and capital expenditure needs
through at least June 30, 2000. In addition, the Company may need to raise
additional funds, and it cannot be certain that if such funding is required,
that it will be able to obtain it on favorable terms, if at all. If the Company
cannot raise such funds, it may not be able to develop or enhance products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, which would negatively impact its business,
financial condition and results of operations.
SIGNIFICANT REVENUE RELATIONSHIPS - One company accounted for 52% of total
revenues for the year ended June 30, 1997. One company accounted for 34% of
total revenues for the period from Inception to June 30, 1999. Grant revenues
consist of grants sponsored by the U.S. government.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Aastrom and its wholly-owned subsidiary, Zellera AG (Zellera) which
is located in Berlin, Germany, (collectively, the Company). All significant
inter-company transactions and accounts have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and short-
term investments with original maturities of three months or less.
SHORT-TERM INVESTMENTS - Short-term investments consist of U.S. government
securities and commercial paper with original maturities of over three months
and less than one year. Short-term investments are classified as available-for-
sale, and are presented at market value, with unrealized gains and losses on
investments reflected as a component of shareholders' equity.
DIVERSITY OF CREDIT RISK - The Company invests its excess cash in U.S.
government securities and commercial paper, maintained in U.S. financial
institutions, and has established guidelines relative to diversification and
maturities in an effort to maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any significant realized losses
on its cash equivalents or short-term investments.
INVENTORY - Inventory is valued at the lower of cost (specific identification)
or market and consists primarily of finished components of the Company's
products.
PROPERTY - Property is recorded at cost and depreciated or amortized using the
straight-line method over the estimated useful life of the asset (primarily five
years), or lease term, if shorter, with respect to leasehold improvements and
certain capital lease assets.
REVENUE RECOGNITION - Revenue from grants and research agreements is recognized
on a cost reimbursement basis consistent with the performance requirements of
the related agreement. Revenue from product sales is recognized upon shipment
or transfer of title, whichever occurs later.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are expensed as
incurred. Such costs and expenses related to programs under collaborative
agreements with other companies totaled $154,000 and $3,000 for the years ended
June 30, 1997 and 1998, respectively, and $1,645,000 for the period from
Inception to June 30, 1999.
STOCK COMPENSATION - The Company has adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). As permitted by SFAS 123, the Company continues to
apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," (APB 25) and related
41
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interpretations and does not recognize compensation expense for its employee
stock-based compensation plans as allowed by SFAS 123.
INCOME TAXES - The Company recognizes deferred tax assets and liabilities for
the differences between the carrying amounts and the tax basis of assets and
liabilities, as well as net operating loss and tax credit carryforwards.
Additionally, the Company establishes a valuation allowance to reflect the
likelihood of realization of deferred tax assets.
NET LOSS PER COMMON SHARE - Net loss per common share is computed using the
weighted-average number of common shares outstanding during the period. Common
equivalent shares are not included in the per share calculation where the effect
of their inclusion would be anti-dilutive. Upon the completion of the Company's
initial public offering, all outstanding shares of preferred stock at that time
were automatically converted into common stock. Accordingly, such shares of
preferred stock are assumed to have been converted into common stock at the time
of issuance.
The computation of net loss per common share for the years ended June 30, 1998
and 1999 reflects dividends, yields and other adjustments relating to Company's
preferred stock which affect only the computation of net loss per common share
and are not included in the computation of net loss for the period.
USE OF ESTIMATES - The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
that affect the amounts reported in the financial statements and disclosures
made in the accompanying notes to financial statements. Actual results could
differ from those estimates.
FINANCIAL INSTRUMENTS - The Company evaluates the fair value of those assets and
liabilities identified as financial instruments and estimates that the fair
value of such financial instruments generally approximates the carrying value in
the accompanying financial statements. Fair values have been determined through
information obtained from market sources and management estimates.
LONG-LIVED ASSETS - The Company evaluates the impairment of long-lived assets
and long-lived assets to be disposed of whenever events or changes in
circumstances indicate that the carrying amount of those assets may not be
recoverable. No significant impairment losses have been identified by the
Company for any of the periods presented in the accompanying financial
statements.
NEW ACCOUNTING STANDARDS - The Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) as of July 1,
1998 which sets forth additional requirements for companies to report in the
financial statements Comprehensive Income in addition to Net Income. Adoption
of SFAS 130 did not have a material effect on the accompanying financial
statements.
Effective June 30, 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131"). This statement establishes new standards for
reporting information about operating segments and related disclosures about
products, geographic areas, and major customers in annual and interim financial
statements. Under SFAS 131, operating segments are determined consistent with
the way management organizes and evaluates financial information internally for
making decisions and assessing performance. The Company's adoption of SFAS 131
had no effect on the Company's results of operations, cash flows or financial
position.
42
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SHORT-TERM INVESTMENTS
All short-term investments are available-for-sale and have maturities of one
year or less and are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- ----------
June 30, 1998:
U.S. Government Securities... $ 7,157,000 $ 4,000 $ - $7,161,000
Commercial Paper............. 1,973,000 - - 1,973,000
---------- --------- --------- ---------
$ 9,130,000 $ 4,000 $ - $9,134,000
=========== ========== ========= ==========
3. PROPERTY
Property consists of the following:
June 30,
-------------------------
1998 1999
---------- ------------
Machinery and equipment.......................... $ 1,473,000 $ 1,477,000
Office equipment................................. 903,000 883,000
Leasehold improvements........................... 621,000 622,000
----------- -----------
2,997,000 2,982,000
Less accumulated depreciation and amortization (2,272,000) (2,480,000)
----------- -----------
$ 725,000 $ 502,000
=========== ===========
Equipment under capital leases totaled $240,000 at June 30, 1998, with related
accumulated amortization of $159,000.
4. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING - In February 1997, the Company completed an
underwritten initial public offering of 3,000,000 shares of its Common Stock at
an offering price of $7.00 per share. In March 1997, the underwriters elected
to purchase an additional 250,000 shares of Common Stock pursuant to the
underwriters' over-allotment option at a price of $7.00 per share. Proceeds
from the offering, net of underwriters' commissions and expenses, were
$19,885,000.
PREFERRED STOCK - In connection with the Company's initial public offering, all
9,657,648 shares of then outstanding preferred stock were automatically
converted into 8,098,422 shares of Common Stock.
In December 1997, the Company completed a directed placement of 2,200,000 shares
of its 5.5% Convertible Preferred Stock at a price of $5.00 per share. Proceeds
from the offering, net of placement agent commissions and expenses, were
$9,930,000. In December 1998, all 2,200,000 shares of 5.5% Convertible
Preferred Stock were converted into 2,240,326 shares of Common Stock.
In July 1998, the Company completed the sale of 5,000 shares of its 1998 Series
I Convertible Preferred Stock, yielding 5.5% per annum (1998 Preferred Stock).
Proceeds from the sale, net of finder's fees and expenses, were $4,540,000. The
conversion price of the 1998 Preferred Stock is based on the market price of the
Company's common stock during a pricing
43
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
period preceding conversion, up to a maximum conversion price of $4.81 per share
and automatically converts in July 2001 or earlier upon certain events. During
the year ending June 30, 1999, 1,000 shares of 1998 Preferred Stock were
converted into 458,043 shares of Common Stock. The 1998 Preferred Stock
outstanding as of June 30, 1999 has a preference in liquidation equal to
$4,219,000.
In May 1999, the Company completed the sale of 3,000 shares of its 1999 Series
III Convertible Preferred Stock, yielding 5.5% per annum (1999 Preferred Stock).
Proceeds from the sale, net of finder's fees and expenses, were $2,720,000. The
conversion price of the 1999 Preferred Stock is based on the market price of the
Company's common stock during a pricing period preceding conversion, up to a
maximum conversion price of $2.34 per share and automatically converts in May
2002, or earlier upon certain events. The 1999 Preferred Stock has a preference
in liquidation as of June 30, 1999 equal to $3,015,000.
With certain exceptions, until November 23, 1999, the 1999 Preferred Stock is
convertible upon the market price of the Company's common stock reaching $2.34
per share, or if there is a 17% increase in the market price of the Company's
common stock. Additionally, conversions of the 1998 Preferred Stock are subject
to certain limitations through September 1998, unless the Company's common stock
reaches $4.81 per share, or if there is a 17% increase in the market price of
the Company's common stock.
No cash dividends have ever been declared or paid; however, during the years
ended June 30, 1998 and 1999, the Company issued 72,940 shares and 75,628 shares
of Common Stock valued at $351,000 and $151,000, respectively, in payment of the
dividends on the 5.5% Preferred Stock.
STOCK OPTION PLANS - The Company has various stock option plans and agreements
that provide for the issuance of nonqualified and incentive stock options to
acquire up to 3,099,927 shares of Common Stock. Such options may be granted by
the Company's Board of Directors to certain of the Company's founders,
employees, directors and consultants. The exercise price of incentive stock
options shall not be less than the fair market value of the shares on the date
of grant. In the case of individuals who are also holders of 10% or more of the
outstanding shares of Common Stock, the exercise price of incentive stock
options shall not be less than 110% of the fair market value of the shares on
the date of grant. The exercise price of non-qualified stock options shall not
be less than 85% of the fair market value on the date of grant. Options granted
under these plans expire no later than ten years from the date of grant and
generally become exercisable ratably over a four-year period following the date
of grant.
The Company also has an outside directors' stock option plan that provides for
the issuance of options to purchase up to 150,000 shares of Common Stock to
outside directors. Under this plan, non-qualified options to purchase 5,000
shares of Common Stock are granted to each outside director on the day of the
Annual Shareholders' meeting or upon their appointment as a director. These
options generally vest over a one-year period and expire ten years after the
date of grant.
For certain options granted, the Company recognizes compensation expense for the
difference between the deemed value for accounting purposes and the option
exercise price on the date of grant. During the years ended June 30, 1997, 1998
and 1999 compensation expense totaling $120,000, $63,000 and $11,000,
respectively, has been charged with respect to these options. Additional future
compensation expense with respect to the issuance of such options totals $14,000
and will be recognized through December 2001.
44
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the Company had elected to recognize compensation expense based upon the fair
value at the grant dates for stock option awards granted in 1997, 1998 and 1999,
in accordance with SFAS No. 123, the pro forma net loss and net loss per common
share would be as follows.
June 30,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
Net loss:
As reported................. $14,288,000 $17,233,000 $11,028,000
Pro forma................... 14,793,000 18,042,000 11,935,000
Net loss per common share:
As reported................. $ (1.27) $ (1.57) $ (.75)
Pro forma................... (1.32) (1.63) (.78)
The fair value of options was estimated at the date of grant using the Black-
Scholes option pricing model with the following assumptions; no dividend yields,
40% volatility, risk free interest rates ranging from 4.2% to 6.8% and expected
option lives of three to five years.
The following table summarizes option activity:
Weighted Average Options
Options Options Available Exercise Price Exercisable
Outstanding For Grant Per Share At Period End
----------- ----------------- -------------- -------------
March 24, 1989 (Inception)
Options authorized......... - 2,849,927
Options canceled........... (208,884) 208,884 $ .61
Options granted............ 1,937,781 (1,937,781) $ .43
Options exercised.......... (1,398,601) - $ .21
---------- ----------
Balance, June 30, 1996....... 330,296 1,121,030 $ 1.20 101,021
Options canceled........... (16,818) 16,818 $ 1.83
Options authorized......... - 150,000
Options granted............ 785,200 (785,200) $ 6.78
Options exercised.......... (40,307) - $ .65
---------- ----------
Balance, June 30, 1997....... 1,058,371 502,648 $ 5.36 483,376
Options canceled........... (199,873) 199,873 $ 5.79
Options granted............ 372,520 (372,520) $ 4.41
Options exercised.......... (68,500) - $ 1.21
---------- ----------
Balance, June 30, 1998....... 1,162,518 330,001 $ 5.12 593,930
Options authorized......... - 100,000
Options canceled........... (569,881) 569,881 $ 6.40
Options granted............ 738,700 (738,700) $ 3.12
Options exercised.......... (24,043) - $ 1.18
---------- ----------
Balance, June 30, 1999....... 1,307,294 261,182 $ 3.60 729,786
========== ==========
45
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock-based compensation plans
as of June 30, 1999:
Weighted
Average
Weighted Exercise
Range of Number of Remaining Average Price of
Exercise Options Contractual Exercise Number Exercisable
Prices Outstanding Life-years Price Exercisable Options
------------- ----------- ---------- -------- ----------- ----------
$ .30 - $1.91 184,418 6.8 $1.26 124,959 $1.12
$2.38 - $3.56 856,876 9.0 $3.28 463,327 $3.34
$4.63 - $7.00 266,000 8.0 $6.21 141,500 $6.37
--------- --------
1,307,294 729,786
========= ========
The weighted average fair value of options granted during the year ended June
30, 1999 was $1.33 per share.
MODIFICATIONS TO STOCK OPTIONS - In November 1998, the Company modified certain
of the terms of stock options held by non-executive officers of the Company.
One modification consisted of a reduction in the exercise price of the stock
options to $3.56, the then current fair market value of the common stock. This
affected options to purchase an aggregate of approximately 152,000 shares of
common stock. In connection with a reduction in work force that also occurred
in November 1998, vesting on stock options held by terminated employees was
accelerated by one year. This modification, along with other concessions
offered to terminated employees, was made in exchange for releases from these
individuals relating to their termination of employment. This modification
affected stock options to purchase approximately 12,000 shares of common stock.
No charge to expense has been reflected in the accompanying financial statements
relating to this modification.
EMPLOYEE STOCK PURCHASE PLAN - The Company has an employee stock purchase plan
under which eligible employees can purchase Common Stock, at a discount to the
market price, through payroll deductions up to 10% of the employees base
compensation, subject to certain limitations, during sequential 24-month
offering periods. Each offering period is divided into four consecutive six-
month purchase periods beginning on March 1 and September 1 of each year.
Unless otherwise provided by the Board of Directors prior to the commencement of
an offering period, the price at which stock is purchased under the plan for
such offering period is equal to 85% of the lesser of the fair market value of
the Common Stock on the first day of such offering period or the last day of the
purchase period of such offering period. During the years ended June 30, 1998
and 1999, 13,900 shares and 26,835 shares of Common Stock were purchased under
this plan.
STOCK PURCHASE WARRANTS - In October 1996, the Company issued warrants to
purchase 69,444 shares of Common Stock which expire on October 15, 2000 in
connection with an equity financing commitment. These warrants may be
exercised, in whole or in part, at a price equal to the lesser of (a) $15.00 per
share (increasing to $18.00 per share in February 2000); or (b) 85% of the fair
market value of the Company's Common Stock at the time of exercise.
In addition, in connection with the issuance of the 1999 Preferred Stock, the
Company has issued warrants to purchase 150,000 shares of common stock at $2.28
per share and will issue warrants to purchase 150,000 shares of common stock at
an exercise price equal to 130% of an average of the trading prices of the
Company's common stock during a period ending on November 15, 1999, subject to
an earlier determination upon certain change in ownership conditions. These
warrants expire in May 2004 if not exercised and contain certain anti-dilution
provisions.
46
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMON SHARES RESERVED - As of June 30, 1999, the Company has reserved shares of
Common Stock for future issuance as follows:
Issuance under stock option plans and agreements............ 1,568,476
Issuance under 1996 Employee Stock Purchase Plan............ 209,265
Exercise of Stock Purchase Warrants......................... 369,444
Conversion of 1998 Series I Convertible Preferred Stock..... 2,253,957
Conversion of 1999 Series III Convertible Preferred Stock... 3,855,556
----------
8,256,698
==========
5. INCOME TAXES
Deferred tax assets consist of the following:
June 30,
----------------------------
1998 1999
------------ ------------
Net operating loss carryforwards........... $ 19,950,000 $ 23,740,000
Tax credits and other...................... 1,911,000 2,288,000
------------ ------------
Gross deferred tax assets.................. 21,861,000 26,028,000
Deferred tax assets valuation allowance.... (21,861,000) (26,028,000)
------------ ------------
$ - $ -
============ ============
Due to the historical losses incurred by the Company, a full valuation allowance
for deferred tax assets has been provided. If the Company achieves
profitability, these deferred tax assets may be available to offset future
income taxes.
At June 30, 1999, the Company's Federal tax net operating loss and tax credit
carryfowards were $67,800,000 and $1,990,000, respectively, which will expire
from 2004 through 2019, if not utilized. The Company underwent an ownership
change in October 1993, which has resulted in a limitation under which the
Company can utilize a portion of its net operating loss carryforward amounting
to $1,153,000 per year. As of June 1999, the portion of the Company's net
operating loss that remains subject to this limitation is $200,000 and therefore
is not expected to ultimately effect the Company's ability to utilize the
benefit. In July 1998, the Company issued shares of 1998 Series I Convertible
Preferred Stock which resulted in an annual limitation of $3,136,000, which
applies to losses incurred between October 1993 and July 1998. As of June 1999,
the portion of the Company's net operating loss that remains subject to this
limitation is $47,200,000. The Company's ability to utilize its net operating
loss and tax credit carryforwards may become subject to further annual
limitation.
6. LICENSES, ROYALTIES AND COLLABORATIVE AGREEMENTS:
UNIVERSITY OF MICHIGAN - In August 1989, the Company entered into a research
agreement with the University of Michigan (the University). In March 1992, and
as provided for under the research agreement, the Company also entered into a
license agreement for the technology developed under the research agreement.
The license agreement, as amended, provides for a royalty to be paid to the
University equal to 2% of net sales of products containing the licensed
technology sold by the Company.
COBE BCT, INC. - In connection with the issuance of the Series C Preferred Stock
to Cobe Laboratories, Inc. in October 1993, the Company and Cobe BCT, Inc.
(collectively with Cobe Laboratories, Inc referred to as Cobe), an affiliate of
Cobe, entered into an agreement which granted to Cobe exclusive worldwide
distribution and marketing rights to the AastromReplicell(TM)
47
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cell Production System (System) for stem cell therapy applications (Distribution
Agreement). The Company is implementing the initial European market introduction
of the AastromReplicell(TM) System and related therapy kits for the production
of either bone marrow derived cells or umbilical cord blood cells used in stem
cell therapy. Following market introduction of the AastromReplicell(TM) System
for stem cell therapy, development of additional therapy kits can be pursued for
a number of emerging cell therapies being developed by others. Such other cell
therapy applications were outside of the scope of the Distribution Agreement and
outside of Cobe's area of focus. Accordingly, by mutual agreement, the Company
and Cobe terminated the Distribution Agreement in November 1998. In connection
with the termination of the Distribution Agreement, Cobe made a cash payment to
Aastrom totaling $1,237,000, which is reflected as other income in the
accompanying financial statements. Cobe currently owns approximately 2.4 million
shares of the Company's common stock, and as part of the termination agreement,
Cobe has agreed not to sell any such shares until at least January 1, 2001.
MANUFACTURE, SUPPLY AND OTHER AGREEMENTS - The Company has entered into various
agreements relating to the manufacture of its products and supply of certain
components. Pursuant to one such agreement, the Company makes annual renewal
fees of $1,000,000, due in March of each year during the term of the agreement,
which ends in 2001 unless extended by the Company. The Company and the licensor
amended this agreement to provide for the issuance of $1,100,000 in Common Stock
by the Company as payment for an annual renewal fees due in March, 1998 and
1999. A similar agreement is in place for the payment due in March 2000. The
accompanying financial statements reflect charges to research and development
expense of $1,000,000 for the year ended June 30, 1997 and $1,100,000 for the
years ended June 30, 1998 and 1999.
In September 1995, the Company entered into a research and development
collaboration which was completed in September 1996. Under this collaboration,
the Company received $3,500,000 in equity payments and recognized $1,538,000 in
research revenue.
7. ZELLERA AG
In May 1999, the Company formed Zellera AG (Zellera) as a wholly-owned
subsidiary based in Berlin, Germany. The formation of Zellera is intended to
provide access to additional funding and collaboration opportunities in new
product areas and to also support Aastrom's European product commercialization
efforts. Initial funding for Zellera is being pursued, which is planned to
consist of a combination of investment capital, loans and subsidies from the
German government. With this potential funding, Zellera will have access to
Aastrom's intellectual property base for human cell therapies and will develop
new product areas. Subsequent to June 30, 1999, Aastrom has made commitments
totaling up to $530,000 related to initial start up activities for Zellera's
operations.
8. COMMITMENTS
The Company leases its facility under an operating lease which expires in August
2000. The Company has the option to renew the lease for an additional period of
up to five years and has certain expansion options.
Future minimum payments under non-cancelable operating leases are as follows:
Operating
Year Ending June 30, Leases
------------------ ---------
2000.............................. $ 540,000
2001.............................. 93,000
---------
Total minimum lease payments... $ 633,000
=========
48
AASTROM BIOSCIENCES, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense for the years ended June 30, 1997, 1998 and 1999, was $456,000,
$487,000 and $560,000, respectively, and $2,334,000 for the period from
Inception to June 30, 1999.
9. EMPLOYEE SAVINGS PLAN
The Company has a 401(k) plan that allows participating employees to contribute
up to 15% of their salary, subject to annual limits and minimum qualifications.
The Board may, at its sole discretion, approve Company contributions. Through
June 30, 1999, the Company has made no contributions to the plan.
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are none to report.
PART III
Certain information required by Part III is omitted from this Report, and
is incorporated by reference to Aastrom's definitive Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with its Annual Meeting of Shareholders to be held on November 17,
1999.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the directors of Aastrom is incorporated by
reference to the Proxy Statement as set forth under the caption "General
Information -- Board of Directors." Information relating to the executive
officers of Aastrom is set forth in Part I of this Report under the caption
"Executive Officers of Aastrom."
Information with respect to delinquent filings pursuant to Item 405 of
Regulation S-K is incorporated by reference to the Proxy Statement as set forth
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated by
reference to the Proxy Statement under the caption "Executive Compensation and
Other Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to ownership of equity securities of Aastrom by
certain beneficial owners and management is incorporated by reference to the
Proxy Statement as set forth under the caption "General Information -- Stock
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated by reference to the Proxy Statement under the captions "Certain
Transactions" and "Compensation Committee Interlocks and Insider Participation."
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. FINANCIAL STATEMENTS.
2. FINANCIAL STATEMENT SCHEDULE:
All schedules are omitted because they are not applicable or
not required, or because the required information is
included in the Financial Statements or Notes thereto.
3. EXHIBITS:
See Exhibit Index.
(B) REPORTS ON FORM 8-K:
On June 4, 1999, Aastrom filed with the Securities and Exchange
Commission a Current Report on Form 8-K that contains disclosure
under Item 5.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: September 20, 1999 AASTROM BIOSCIENCES, INC.
By: /s/ R. Douglas Armstrong, Ph.D.
--------------------------------
R. Douglas Armstrong, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on September 20, 1999 by the following persons in
the capacities indicated.
Signature Title
--------- -----
/s/ R. Douglas Armstrong, Ph.D. President, Chief Executive Officer and Director
- ------------------------------------------ (Principal Executive Officer)
R. Douglas Armstrong, Ph.D.
/s/ Todd E. Simpson Vice President, Finance & Administration, Chief
- ------------------------------------------ Financial Officer, Secretary and Treasurer
Todd E. Simpson (Principal Financial and Accounting Officer)
/s/ Robert J. Kunze Chairman of the Board and Director
- ------------------------------------------
Robert J. Kunze
/s/ Mary L. Campbell Director
- ------------------------------------------
Mary L. Campbell
Director
- ------------------------------------------
Stephen G. Emerson, M.D., Ph.D.
/s/ Arthur F. Staubitz Director
- --------------------------------------
Arthur F. Staubitz
/s/ Joseph A. Taylor Director
- --------------------------------------
Joseph A. Taylor
52
EXHIBIT INDEX
EXHIBIT
NUMBER Description of Document
- ------- -----------------------
3.1* Restated Articles of Incorporation of Aastrom.
3.2** Bylaws, as amended.
4.1** Specimen Common Stock Certificate.
4.2** Amended and Restated Investors' Rights Agreement, dated April 7,
1992.
10.1**# Form of Indemnification Agreement.
10.2**# Amended and Restated 1992 Incentive and Non-Qualified Stock Option
Plan and forms of agreements thereunder.
10.3**# 1996 Outside Directors Stock Option Plan and forms of agreements
thereunder.
10.4**# 1996 Employee Stock Purchase Plan and form of agreement
thereunder.
10.7** Lease Agreement, dated May 18, 1992, between Domino's Farms
Holdings, L.P. and Aastrom and amendments thereto dated February
26, 1993, October 3, 1994, November 16, 1994 and July 29, 1996.
10.8**# Promissory Note, dated November 18, 1993, for $120,000 loan by
Aastrom to R. Douglas Armstrong, Ph.D. and amendment thereto dated
October 30, 1996.
10.16** Collaborative Supply Agreement, dated December 16, 1996, between
Aastrom and Anchor Advanced Products, Inc. Mid-State Plastics
Division.
10.20**# Form of Employment Agreement.
10.21** License Agreement, dated July 17, 1992, between J.G. Cremonese and
Aastrom and related addenda thereto dated July 14, 1992 and July
7, 1993.
10.22**+ Collaborative Product Development Agreement, dated May 10, 1994,
between SeaMED Corporation and Aastrom.
10.23**+ Collaborative Product Development Agreement, dated November 8,
1994, between Ethox Corporation and Aastrom.
10.24**+ License and Supply Agreement, dated April 1, 1996, between Immunex
Corporation and Aastrom.
10.26** License Agreement, dated March 13, 1992, between Aastrom and the
University of Michigan and amendments thereto dated March 13,
1992, October 8, 1993 and June 21, 1995.
10.27**# Employee Proprietary Information and Invention Agreement,
effective June 1, 1991, between Aastrom and R. Douglas Armstrong,
Ph.D.
10.29**# Employment Agreement, dated December 8, 1995, between Aastrom and
Todd E. Simpson.
10.32**# Employment Agreement, dated October 26, 1995, between Aastrom and
Alan K. Smith, Ph.D.
10.40**** Amendment to License and Supply Agreement, dated August 25, 1997,
between Immunex Corporation and Aastrom.
10.41+ Manufacturing Supply Agreement, dated as of August 14, 1998, by
and between Aastrom and SeaMED Corporation.
10.42#% Employment Agreement, dated August 10, 1998, by and between
Aastrom and Bruce Husel.
53
10.42# Employment Agreement, dated August 10, 1998, by and between
Aastrom and William Odell.
10.43% Strategic Planning Consulting Services and Collaboration
Agreement, dated October 7, 1997, between Burrill & Company, LLC
and Aastrom.
10.44***** 1998 Series I Preferred Stock Agreements.
10.45****** 1999 Series III Preferred Stock Agreements.
10.46 Executive Retention and Severance Agreement, Dated February 2,
1999, between Aastrom and R. Douglas Armstrong.
10.47******* Cobe Termination and Transition Agreement.
10.48******* Supplemental Agreement to Cobe Termination and Transition
Agreement.
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule.
- -------------
* Incorporated by reference to Aastrom's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996, as filed on March 7, 1997.
** Incorporated by reference to Aastrom's Registration Statement on Form
S-1 (No. 333-15415), declared effective on February 3, 1997.
*** Incorporated by reference to Aastrom's Current Report on Form 8-K, as
filed on July 16, 1997.
**** Incorporated by reference to Aastrom's Annual Report on Form 10-K for
the year ended June 30, 1997, as filed on September 25, 1997.
***** Incorporated by reference to Aastrom's Current Report on Form 8-K, as
filed on July 15, 1998.
****** Incorporated by reference to Aastrom's Current Report on Form 8-K, as
filed on June 4, 1999.
******* Incorporated by reference to Aastrom's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998, as filed on February 11, 1999.
% Incorporated by reference to Aastrom's Registration Statement on Form
S-1 (No. 333-37439), as filed on October 8, 1997.
+ Confidential treatment has been requested as to a portion of this
exhibit.
# Management contract or compensatory plan or arrangement covering
executive officers or directors of Aastrom.
54