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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-28272
AVIGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3647113
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1201 HARBOR BAY PARKWAY, SUITE 1000
ALAMEDA, CALIFORNIA 94502
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(510) 748-7150
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 of 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 amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of September 6, 2000, was approximately $501,623,000 based upon
the closing sale price of the registrant's Common Stock as reported on the
Nasdaq National Market System on such date*. The number of outstanding shares of
the Registrant's Common Stock as of September 6, 2000 was 17,048,806.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into Part
III of this Form 10-K Report: The definitive Proxy Statement for the
Registrant's Annual Meeting of Stockholders scheduled to be held on November 17,
2000.
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* Excludes approximately 4,112,453 shares of common stock held by Directors,
Officers and holders of 5% or more of the registrant's outstanding Common
Stock at September 6, 2000. Exclusion of shares held by any person should not
be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the registrant, or that such person is controlled by or under common control
with the registrant.
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ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 9
Item 2. Properties.................................................. 21
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder 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 Disclosure About Market Risk... 26
Item 8. Financial Statements........................................ 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 26
Item 11. Executive Compensation...................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 26
Item 13. Certain Relationships and Related Transactions.............. 26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 27
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PART I
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The forward-looking statements are principally
set forth under "Risk Factors" in Part I, immediately below, and elsewhere in
this Form 10-K. These statements involve known and unknown risks, uncertainties
and other factors which may cause our actual results, performance or
achievements to be materially different from any future results, performances or
achievements expressed or implied by the forward-looking statements.
Forward-looking statements include, but are not limited to:
- the progress of our product development programs, including Coagulin-B;
- developments with respect to clinical development of drug candidates,
clinical trials and the regulatory approval process;
- our expectations as to the various products that we are developing;
- our estimates regarding our capital requirements and our needs for
additional financing; and
- developments relating to our selection and licensing of targets.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. We
discuss many of these risks in greater detail under the heading "Risk Factors,"
in Part I, immediately below. Also, these forward-looking statements represent
our estimates and assumptions only as of the date of this Form 10-K.
You should read this Form 10-K and the documents that we incorporate by
reference completely and with the understanding that our actual future results
may be materially different from what we expect. We may not update these
forward-looking statements, even though our situation may change in the future.
We qualify all of our forward-looking statements by these cautionary statements.
RISK FACTORS
This section briefly discusses certain risks that should be considered by
stockholders and prospective investors in Avigen. Many of these risks are
discussed in other contexts in other sections of this report.
WE EXPECT TO CONTINUE TO OPERATE AT A LOSS AND WE MAY NEVER ACHIEVE
PROFITABILITY
Since Avigen's inception in 1992, we have not been profitable, and we
cannot be certain that we will ever achieve and sustain profitability. To date,
we have been engaged in research and development activities and have not
generated any revenues from product sales. As of June 30, 2000, we had an
accumulated deficit of $51.8 million. The process of developing our products
will require significant research and development, preclinical testing and
clinical trials, as well as regulatory approval. We expect these activities,
together with our general and administrative expenses, to result in operating
losses for the foreseeable future. Our ability to achieve profitability will
depend, in part, on our ability to successfully complete development of our
proposed products, obtain required regulatory approvals and manufacture and
market our products directly or through partners.
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THE RESULTS OF OUR CLINICAL TRIALS FOR COAGULIN-B FOR THE TREATMENT OF
HEMOPHILIA B ARE BASED ON A SMALL NUMBER OF PATIENTS OVER A SHORT PERIOD OF
TIME, AND THE SUCCESSES REPORTED MAY NOT BE INDICATIVE OF RESULTS IN A LARGE
NUMBER OF PATIENTS OR HAVE LASTING EFFECTS
Six patients have received intramuscular injections at low and medium doses
according to the approved protocol for the phase I clinical trial of Coagulin-B
with dose escalations. Through this point in the study, these patients have
demonstrated successful gene expression of factor IX in muscle tissue, and the
treatments have been well tolerated. These results, however, are extremely
preliminary and are based upon the evaluations of only a small group of
patients. Actual results with more data points may show less favorable
measurements. In addition, we do not yet know if these results will have a
lasting effect. If a larger population of patients does not experience similar
results, or these results do not have a lasting effect, this product candidate
may not receive approval from the Food and Drug Administration, commonly
referred to as the "FDA." In addition, any report of clinical trial results that
are below the expectations of financial analysts or investors would most likely
cause our stock price to drop dramatically.
THE SUCCESS OF OUR TECHNOLOGY IN ANIMAL MODELS DOES NOT GUARANTEE THAT THESE
RESULTS WILL BE REPLICATED IN HUMANS
Even though our product candidates have shown successful results in animal
models, animals are different than humans and these results may not be
replicated in our clinical trials with humans. For example, the results of our
gene therapy treatment for Hemophilia B in dogs were different from the results
of our studies with mice. In addition, the results we have seen to date in
humans in our clinical trials for Coagulin-B are different from the results of
our studies with dogs. Consequently, you should not rely on the results in our
animal models as being predictive of the results that we will see in our
clinical trials with humans.
BECAUSE OUR PRODUCT CANDIDATES ARE IN AN EARLY STATE OF DEVELOPMENT, THERE IS A
HIGH RISK THAT THEY MAY NEVER BE COMMERCIALIZED
None of our product candidates have received regulatory approval for
commercial sale, and we face the risk that none of our product candidates will
ever receive regulatory approval. All of our product candidates are in early
stages of development. We have only one product candidate, Coagulin-B for the
treatment of Hemophilia B, in clinical trials, and this product candidate is
only in phase I of a clinical trial with dose escalations. We are not aware of
any gene therapy products that have received regulatory approval. None of our
prospective products, including Coagulin-B for the treatment of Hemophilia B, is
expected to be commercially available for at least several years. Based on
results at any stage of clinical trials, we may decide to discontinue
development of one or more of our potential products.
TECHNOLOGICAL CHANGE MAY MAKE OUR POTENTIAL PRODUCTS AND TECHNOLOGIES LESS
ATTRACTIVE OR OBSOLETE
Gene therapy is new and rapidly evolving and is expected to continue to
undergo significant and rapid technological change. Rapid technological
development could result in our actual and proposed technologies, products or
processes becoming less attractive or obsolete.
ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY IMPACT REGULATORY
APPROVAL OR PUBLIC PERCEPTION OF OUR POTENTIAL PRODUCTS
In November 1999, the death of a patient involved in an unrelated clinical
trial that was undergoing a viral-based gene therapy treatment was widely
publicized. This death and other adverse events in the field of gene therapy
that may occur in the future could result in greater governmental regulation of
our potential products and potential regulatory delays relating to the testing
or approval of our potential products. For example, as a result of this death,
the Recombinant DNA Advisory Committee of the National Institutes of Health may
become more active in reviewing the clinical trials or proposed clinical trials
of all companies involved in gene therapy. It is uncertain what effect this
increased scrutiny will have on our product development efforts or clinical
trials.
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The commercial success of our potential products will depend in part on
public acceptance of the use of gene therapy for the prevention or treatment of
human diseases. Public attitudes may be influenced by claims that gene therapy
is unsafe, and consequently our products may not gain the acceptance of the
public or the medical community. Negative public reaction to gene therapy in
general could result in greater government regulation and stricter labeling
requirements of gene therapy products, including any of our products, and could
cause a decrease in the demand for any products we may develop.
OUR POTENTIAL PRODUCTS MUST UNDERGO RIGOROUS CLINICAL TESTING AND REGULATORY
APPROVALS, WHICH COULD SUBSTANTIALLY DELAY OR PREVENT US FROM MARKETING ANY
PRODUCTS
The clinical trial process is complex, uncertain and expensive. Positive
results from preclinical studies and early clinical trials do not ensure
positive results in clinical trials designed to permit application for
regulatory approval. Prior to marketing in the United States, any product
developed by us must undergo rigorous preclinical testing and clinical trials as
well as an extensive regulatory approval process implemented by the FDA. The FDA
approval process is typically lengthy and expensive, and approval is never
certain. Because of the risks and uncertainties in biopharmaceutical
development, our gene therapy products could take a significantly longer time to
gain regulatory approval than we expect or may never gain FDA approval. If we do
not receive these necessary approvals from the FDA, we will not be able to
generate substantial revenues and will not become profitable. We may encounter
significant delays or excessive costs in our efforts to secure regulatory
approvals. Factors that raise uncertainty in obtaining these regulatory
approvals include:
- gene therapy is a new and rapidly evolving technology;
- to date, there has been only limited research and development in gene
therapy using AAV vectors, which we believe will cause clinical trials to
proceed more slowly than clinical trials involving traditional drugs;
- we must obtain FDA approval to begin clinical trials of our potential
products, which we may not be able to obtain;
- we must demonstrate through clinical trials that the proposed product is
safe and effective for its intended use;
- we are not aware of any gene therapy products that have obtained
marketing approval from the FDA;
- whether or not our product candidates cause patients to develop
antibodies to these potential products or the proteins produced by these
potential products;
- the regulatory requirements governing gene therapy products are uncertain
and are subject to change;
- none of our proposed products has been tested in humans for their
effectiveness; and
- data obtained from preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory
approvals.
Failure to comply with applicable FDA or other regulatory requirements may
result in criminal prosecution, civil penalties and other actions that would
seriously impair our ability to conduct our business. Even if regulatory
approval is granted for a product, this approval will be limited to those
disease states and conditions for which the product is useful, as demonstrated
through clinical trials.
WE HAVE LIMITED EXPERIENCE IN CONDUCTING CLINICAL TRIALS, WHICH MAY CAUSE DELAYS
IN COMMENCING AND COMPLETING CLINICAL TRIALS OF OUR PRODUCTS
Clinical trials must meet FDA regulatory requirements. We have limited
experience in conducting the preclinical studies and clinical trials necessary
to obtain FDA regulatory approval. Consequently, we may encounter problems in
clinical trials which cause us or the FDA to delay, suspend or terminate these
trials. Problems we may encounter include the chance that we may not be able to
conduct clinical trials at preferred sites, obtain sufficient test subjects or
begin or successfully complete clinical trials in a timely fashion, if at all.
Furthermore, the FDA may suspend clinical trials at any time if it believes the
subjects participating in trials
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are being exposed to unacceptable health risks or if it finds deficiencies in
the clinical trial process or conduct of the investigation.
WE MAY NOT BE SUCCESSFUL IN OBTAINING REQUIRED FOREIGN REGULATORY APPROVALS,
WHICH WOULD PREVENT US FROM MARKETING OUR PRODUCTS INTERNATIONALLY
We cannot be certain that we will obtain any regulatory approvals in other
countries. In order to market our products outside of the United States, we also
must comply with numerous and varying foreign regulatory requirements
implemented by foreign regulatory authorities. The approval procedure varies
among countries and can involve additional testing. The time required to obtain
approval may differ from that required to obtain FDA approval. The foreign
regulatory approval process includes all of the risks associated with obtaining
FDA approval set forth above, and approval by the FDA does not ensure approval
by the health authorities of any other country.
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING, AND NO EXPERIENCE IN MARKETING OR
SELLING, OUR POTENTIAL PRODUCTS, WHICH RAISES UNCERTAINTY IN OUR ABILITY TO
COST-EFFECTIVELY COMMERCIALIZE OUR POTENTIAL PRODUCTS
Even if we are able to develop our potential products and obtain necessary
regulatory approvals, we have limited experience in manufacturing and no
experience in marketing or selling, any of our proposed products on a commercial
basis. Although we believe our recently completed construction of a second
manufacturing facility will be capable of producing commercial-scale quantities
of our proprietary adeno-associated virus vectors, if we are unable to
manufacture our products in a cost-effective manner we will not become
profitable. While the facility is designed to meet the FDA's regulations
concerning current good manufacturing practices, we have not yet received final
validation, and may fail to maintain adequate compliance with these requirements
in the future. In addition, we do not anticipate establishing our own sales and
marketing capabilities in the foreseeable future. We may not be able to develop
adequate marketing capabilities either on our own or through third parties.
WE MAY BE REQUIRED TO OBTAIN RIGHTS TO PROPRIETARY GENES AND OTHER TECHNOLOGIES
TO FURTHER DEVELOP OUR BUSINESS, WHICH MAY NOT BE AVAILABLE OR MAY BE COSTLY
We currently investigate and use certain gene sequences or proteins encoded
by those sequences, including the factor VIII gene, and manufacturing processes
that are or may become patented by others. As a result, we may be required to
obtain licenses to these gene sequences or proteins or other technology in order
to test, use or market products. We may not be able to obtain these licenses on
terms favorable to us. In connection with our efforts to obtain rights to these
gene sequences or proteins or other technology, we may find it necessary to
convey rights to our technology to others. Some of our gene therapy products may
require the use of multiple proprietary technologies. Consequently, we may be
required to make cumulative royalty payments to several third parties. These
cumulative royalties could be commercially prohibitive. We may not be able to
successfully negotiate these royalty adjustments.
IF WE DO NOT ACHIEVE CERTAIN MILESTONES WE MAY NOT BE ABLE TO RETAIN CERTAIN
LICENSES TO OUR INTELLECTUAL PROPERTY
We have entered into license agreements with third parties for technologies
related to our gene therapy product development programs. Some of these license
agreements provide for the achievement of development milestones. If we fail to
achieve these milestones or to obtain extensions, the licensor may terminate
these license agreements with relatively short notice to us. Termination of any
of our license agreements could harm our business.
WE EXPECT THAT WE WILL FACE INTENSE COMPETITION, WHICH MAY LIMIT OUR ABILITY TO
BECOME PROFITABLE
Our competitors may develop more effective or more affordable products, or
commercialize products earlier than we do, which would limit the prices that we
could charge for the products that we are able to market, and prevent us from
becoming profitable. We expect increased competition from fully integrated
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pharmaceutical companies and more established biotechnology companies. Most of
these companies have significantly greater financial resources and expertise
than we do in the following:
- research and development;
- preclinical studies and clinical trials;
- obtaining regulatory approvals;
- manufacturing; and
- marketing and distribution.
Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical
companies. Academic institutions, government agencies and other public and
private research organizations also conduct research, seek patent protection and
establish collaborative arrangements for product development and marketing. In
addition, these companies and institutions compete with us in recruiting and
retaining highly qualified scientific and management personnel.
We are aware that other companies are conducting preclinical studies and
clinical trials for viral and non-viral gene therapy products. One of these
companies is supporting clinical studies for use of AAV vectors in the treatment
of cystic fibrosis. See "Item 1. Business -- Competition" for a more detailed
discussion of the competition we face.
OUR SUCCESS IS DEPENDENT UPON OUR ABILITY TO EFFECTIVELY PROTECT OUR PATENTS AND
PROPRIETARY RIGHTS, WHICH WE MAY NOT BE ABLE TO DO
Our success will depend to a significant degree on our ability to obtain
patents and licenses to patent rights, preserve trade secrets, and to operate
without infringing on the proprietary rights of others. If we are not successful
in these endeavors, our business will be substantially impaired.
To date, we have filed a number of patent applications in the United States
relating to our technologies. In addition, we have acquired exclusive and
non-exclusive licenses to certain issued patents and pending patent
applications. We cannot be assured that patents will issue from these
applications or that any patent will issue on technology arising from additional
research or, if patents do issue, that claims allowed will be sufficient to
protect our technologies.
The patent application process takes several years and entails considerable
expense. The failure to obtain patent protection on the technologies underlying
our proposed products may have a material adverse effect on our competitive
position and business prospects. Important legal issues remain to be resolved as
to the scope of patent protection for biotechnology products, and we expect that
administrative proceedings, litigation or both may be necessary to determine the
validity and scope of our and others' biotechnology patents. These proceedings
or litigation may require a significant commitment of our resources in the
future. If patents can be obtained, we cannot assure you that any of these
patents will provide us with any competitive advantage. For example, others may
independently develop similar technologies or duplicate any technology developed
by us, and patents may be invalidated in litigation. In addition, several of our
patents and patent applications are co-owned with co-inventors or institutions.
Under the terms of the agreements with the co-inventors, we have obtained or
have an option to obtain an exclusive, worldwide, transferable, royalty-bearing
license for the technology. To date, we have negotiated exclusive licenses for
two of the more significant co-invented technologies. If we cannot negotiate
exclusive rights to other co-owned technology, each co-inventor may have rights
to independently make, use, offer to sell or sell the patented technology.
Commercialization, assignment or licensing of the technology by a co-inventor
could harm our business.
We also rely on a combination of trade secret and copyright laws, employee
and third-party nondisclosure agreements and other protective measures to
protect intellectual property rights pertaining to our products and
technologies. We cannot be certain that these measures will provide meaningful
protection of our trade secrets, know-how or other proprietary information in
the event of any unauthorized use, misappropriation or disclosure of our trade
secrets, know-how or other proprietary information. In addition, the laws of
certain
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foreign countries do not protect our intellectual property rights to the same
extent as do the laws of the United States. We cannot assure you that we will be
able to protect our intellectual property successfully.
OTHER PERSONS MAY ASSERT RIGHTS IN OUR PROPRIETARY TECHNOLOGY, WHICH WOULD BE
COSTLY TO CONTEST OR SETTLE
Third parties may assert patent or other intellectual property infringement
claims against us with respect to our products or technology or other matters.
Any claims against us, with or without merit, as well as claims initiated by us
against third parties, can be time-consuming and expensive to defend or
prosecute and to resolve. There may be third-party patents and other
intellectual property relevant to our products and technology which are not
known to us. We have not been accused of infringing any third party's patent
rights or other intellectual property, but we cannot assure you that litigation
asserting claims will not be initiated, that we would prevail in any litigation,
or that we would be able to obtain any necessary licenses on reasonable terms,
if at all. If our competitors prepare and file patent applications in the United
States that claim technology also claimed by us, we may have to participate in
interference proceedings declared by the Patent and Trademark Office to
determine priority of invention, which could result in substantial cost to us,
even if the outcome is favorable to us. In addition, to the extent outside
collaborators apply technological information developed independently by them or
by others to our product development programs or apply our technologies to other
projects, disputes may arise as to the ownership of proprietary rights to these
technologies.
IF OUR PRODUCTS ARE NOT ACCEPTED BY PHYSICIANS AND INSURERS, WE WILL NOT BE
SUCCESSFUL
Our success is dependent on acceptance of our gene therapy products. We
cannot assure you that our products will achieve significant market acceptance
among patients, physicians or third-party payors, even if we obtain necessary
regulatory and reimbursement approvals. Failure to achieve significant market
acceptance will harm our business. We believe that recommendations by physicians
and health care payors will be essential for market acceptance of our gene
therapy products. In the past, there has been concern regarding the potential
safety and efficacy of gene therapy products derived from pathogenic viruses
such as retroviruses and adenoviruses. While our proposed gene therapy products
are derived from AAV, which is a non-pathogenic virus, we cannot be certain that
physicians and health care payors will conclude that the technology is safe.
EVEN IF WE BRING OUR PRODUCTS TO MARKET, WE MAY BE UNABLE TO EFFECTIVELY PRICE
OUR PRODUCTS OR OBTAIN ADEQUATE REIMBURSEMENT FOR SALES OF OUR PRODUCTS, WHICH
WOULD PREVENT OUR PRODUCTS FROM BECOMING PROFITABLE
If we succeed in bringing our proposed products to the market, we cannot
assure you that these products will be considered cost-effective and that
reimbursement to the consumer will be available or will be sufficient to allow
us to sell our products on a competitive basis. In both the United States and
elsewhere, sales of medical products and treatments are dependent, in part, on
the availability of reimbursement to the consumer from third-party payors, such
as government and private insurance plans. Third-party payors are increasingly
challenging the prices charged for medical products and services. Our business
and financial condition is affected by the efforts of government and third-party
payors to contain or reduce the cost of health care through various means. In
the United States, there have been and will continue to be a number of federal
and state proposals to implement government controls on pricing. In addition,
the emphasis on managed care in the United States has increased and will
continue to increase the pressure on the pricing of pharmaceutical products. We
cannot predict whether any legislative or regulatory proposals will be adopted
or the effect these proposals or managed care efforts may have on our business.
WE MAY BE UNABLE TO ATTRACT AND RETAIN THE QUALIFIED EMPLOYEES WE NEED TO BE
SUCCESSFUL
We are highly dependent on certain members of our management and research
and development staff. The loss of any of these persons, or our inability to
recruit additional personnel necessary to our business, could substantially
impair our research and development efforts and impede our ability to develop
and commercialize any of our products. Recruiting and retaining qualified
technical and managerial personnel will also be critical to our success. Our
business is located in the San Francisco Bay Area in California, where demand
for
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personnel with these skills is extremely high and is likely to remain high. As a
result, competition for and retention of personnel, particularly for employees
with technical expertise, is intense and the turnover rate for these people is
high. In addition, we rely on consultants and advisors to assist us in
formulating our research and development strategy. A majority of our scientific
advisors are engaged by us on a consulting basis and are employed on a full-time
basis by employers other than us and some have consulting or other advisory
arrangements with other entities that may conflict or compete with their
obligations to us.
WE MUST SECURE ADDITIONAL FINANCING, OTHERWISE WE WILL NOT BE ABLE TO DEVELOP
OUR PRODUCTS
We will require substantial additional funding to complete the research and
development activities currently contemplated and to commercialize our products.
If we do not obtain these funds, we will not be able to develop our products. We
anticipate that our existing capital resources as of June 30, 2000, will be
adequate to fund our needs for approximately two years. Our future capital
requirements will depend on many factors, including:
- continued scientific progress in research and development programs;
- the scope and results of preclinical studies and clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the costs involved in filing, prosecuting and enforcing patent claims;
- competing technological developments;
- the cost of manufacturing scale-up;
- the cost of commercialization activities; and
- other factors which may not be within our control.
We intend to seek additional funding through public or private equity or
debt financing, when market conditions allow. If we raise additional funds by
issuing equity securities, there may be further dilution to existing
stockholders. We cannot assure you that we will be able to enter into financing
arrangements on acceptable terms, if at all. Without additional funding, we may
be required to delay, reduce the scope of or eliminate one or more of our
research or development programs.
WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS WHICH MAY EXCEED THE SCOPE OR
AMOUNT OF OUR INSURANCE COVERAGE
The manufacture and sale of medical products entail significant risk of
product liability claims. We currently carry product liability insurance;
however, we cannot assure you that this coverage will remain in place or that
this coverage will be adequate to protect us from all liabilities which we might
incur in connection with the use or sale of our products. In addition, we may
require increased product liability coverage as additional products are
commercialized. This insurance is expensive and in the future may not be
available on acceptable terms, if at all. A successful product liability claim
or series of claims brought against us in excess of our insurance coverage could
harm our business. We must indemnify certain of our licensors against any
product liability claims brought against them arising out of products developed
by us under these licenses.
OUR USE OF RADIOACTIVE AND OTHER HAZARDOUS MATERIALS EXPOSES US TO THE RISK OF
MATERIAL ENVIRONMENTAL LIABILITIES, AND WE MAY INCUR SUBSTANTIAL ADDITIONAL
COSTS TO COMPLY WITH ENVIRONMENTAL LAWS IN THE EVENT THAT WE DEVELOP OUR OWN
MANUFACTURING FACILITY
Because we use radioactive materials and other hazardous substances in our
research and development operations, we are potentially subject to material
liabilities related to personal injuries or property damages that may be caused
by the spread of radioactive contamination or by other hazardous substance
releases or exposures at, or from, our research facility. Decontamination costs
associated with radioactivity releases, other clean-up costs, and related
damages or liabilities could harm our business.
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We are required to comply with increasingly stringent laws and regulations
governing environmental protection and workplace safety, including requirements
governing the handling, storage and disposal of radioactive and other hazardous
substances and wastes, and laboratory operating and safety procedures. These
laws and regulations can impose substantial fines and criminal sanctions for
violations. Maintaining in compliance with these laws and regulations with
regard to the operation of our own commercial manufacturing facility could
require substantial additional capital. These costs could decrease our ability
to conduct manufacturing operations in a cost-effective manner.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS AND DELAWARE LAW MAY
NEGATIVELY AFFECT THE ABILITY OF A POTENTIAL BUYER TO PURCHASE SOME OR ALL OF
OUR STOCK AT AN OTHERWISE ADVANTAGEOUS PRICE, WHICH MAY LIMIT THE PRICE
INVESTORS ARE WILLING TO PAY FOR OUR COMMON STOCK
Certain provisions of our charter and the Delaware Law may negatively
affect the ability of a potential buyer to attempt a takeover of Avigen, which
may have a negative effect on the price investors are willing to pay for our
common stock. For example, our board of directors has the authority to issue up
to 5,000,000 shares of preferred stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the stockholders. The rights of the holders of common stock will be subject to,
and may be materially adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of Avigen. We have no present
plans to issue shares of preferred stock. In addition, our board of directors is
divided into three classes, and each year on a rotating basis the directors of
one class are elected for a three-year term. This provision could have the
effect of making it less likely that a third party would attempt to obtain
control of Avigen. Furthermore, certain other provisions of our restated
certificate of incorporation may have the effect of delaying or preventing
changes in control or management, which could adversely affect the market price
of the our common stock. In addition, we are subject to the provisions of
Section 203 of the Delaware General Corporation Law, an anti-takeover law.
OUR STOCK PRICE IS VOLATILE, AND AS A RESULT, INVESTING IN OUR COMMON STOCK IS
VERY RISKY
Our stock price has been volatile in the past and may continue to be
volatile. For example, our stock price was $13 in early October 1999, rose to
$89 in March 2000, and then fell to under $30 in May 2000. We believe that
various factors may cause the market price of our common stock to continue to
fluctuate, perhaps substantially, including announcements of:
- technological innovations or regulatory approvals;
- results of clinical trials;
- new products by us or our competitors;
- developments or disputes concerning patents or proprietary rights;
- our failing to achieve certain developmental milestones;
- public concern as to the safety of gene therapy products;
- health care or reimbursement policy changes by governments or insurance
companies;
- developments in relationships with corporate partners; or
- a change in financial estimates or securities analysts' recommendations.
In addition, in recent years the stock market in general, and the shares of
biotechnology and health care companies in particular, have experienced extreme
price fluctuations. These broad market and industry fluctuations may cause the
market price of our common stock to decline dramatically.
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ITEM 1. BUSINESS
THE COMPANY
Avigen is a leader in the development of gene therapy products for the
treatment of inherited diseases. We are developing a broad-based proprietary
gene delivery technology based on adeno-associated virus vector technology,
known as "AAV vectors," to deliver DNA into the cells of patients that are
suffering from genetic diseases. AAV vectors are a relatively new system for
gene therapy. We believe that AAV vectors can be used to deliver genes for the
treatment of hemophilia, Gaucher disease, Parkinson's disease and
beta-thalassemia.
TRADITIONAL APPROACHES TO GENE DELIVERY
All living organisms are made up of cells that contain thousands of
different proteins essential for cell structure, growth and function. Proteins
are made of building blocks called amino acids that together define the
structure and function of the protein. The specific order of these amino acids
in the protein is determined by a set of genetic instructions encoded by DNA, a
commonly used acronym for a chemical that contains all the information necessary
to control a cell's biological processes.
DNA is organized into segments called genes with each gene containing the
information required to produce a specific protein. There are over one hundred
thousand genes in each human cell. Gene expression is the production of proteins
using the DNA as a blueprint. Occasionally, the DNA for one or more genes can be
defective, resulting in the absence or improper production of a functioning
protein in the cell. This improper expression can alter a cell's normal function
and can frequently result in a disease. The goal of gene therapy is to treat
these diseases by delivering DNA containing the corrected gene into cells. This
is intended to result in the normal protein being produced in that cell.
There are several different ways of delivering genes to cells. Each of the
methods of delivery uses carriers, called "vectors," to transport the genes into
cells. These carriers can be either man-made components or modified viruses. The
use of viruses takes advantage of their natural ability to introduce DNA into
cells. Gene therapy takes advantage of this property by replacing viral DNA with
a specific gene. Once the gene is in the cell, it acts as a blueprint directing
the cell to produce the therapeutic protein.
Within the field, there are four major approaches under investigation
utilizing different vectors for human gene therapy:
- Retroviral vectors. These were the first vectors used in human gene
therapy trials. The advantage of retroviral vectors is that the virus is
well understood and is quite efficient at getting genes into cells.
However, their limitation is that the cells must be actively growing for
the vector to work effectively. This typically requires that the cells be
removed from the patient, grown outside the body, exposed to the
retroviral vector and later re-implanted back into the patient. This
process limits the commercial viability of these vectors as a generalized
approach to gene therapy.
- Adenoviral vectors. These vectors are also currently being evaluated in
human gene therapy trials. They have the advantage that the cells do not
have to be removed from the patient in order for the gene transfer
process to take place. Adenovirus can cause disease in humans, creating
safety concerns about the use of adenovirus vectors. Although gene
transfer using adenovirus can be efficient, typically the production of
the protein is short-lived.
- Non-viral vectors. These also are currently being evaluated in human
clinical trials. They consist of either DNA or DNA mixed with other
chemical compounds. These vectors are much less efficient than viral
vectors at getting DNA into the cells and are generally not capable of
delivering large amounts of the intended protein for extended periods of
time.
- Adeno-associated virus vectors. AAV vectors are a relatively new system
for gene therapy. AAV is a common, harmless human virus present in over
90% of the human population. The virus, however, has never been
associated with a disease or illness of any kind.
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AVIGEN'S AAV VECTOR TECHNOLOGY
All of our products in development are based on our proprietary gene
delivery technology in AAV vectors, which take advantage of the natural
efficiency with which viruses deliver genes to cells without the safety concerns
of disease related viruses. Production of an AAV vector requires two steps. In
the first step, the adeno-associated virus is modified by removing all viral
genes and replacing them with a gene for a therapeutic protein, such as factor
IX. In the second step, a human cell line is constructed which contains, among
other things, the original AAV viral genes. The cell line is used to program the
cells to make large quantities of AAV vectors, but without allowing the original
viral genes from re-entering our AAV vector products. The production of AAV
vectors also normally requires the use of a helper virus, typically adenovirus,
which may contaminate the final product. However, Avigen has developed a
proprietary method that does not require a helper virus, which we believe
results in a safer product.
Advantages of Avigen's AAV Vector Technology
Our AAV vector gene therapy approach offers novel treatment alternatives
for diseases that are currently poorly addressed. Benefits of AAV vector gene
therapy technology include:
- Safety. Our AAV vectors are based on a virus that has never been
associated with a human disease of any kind. Over the past eight years,
both our internal work and that of others in the scientific community
have confirmed in animals that AAV vectors are safe for gene therapy
applications.
- Efficient delivery of genes to cells. AAV by nature is very efficient at
getting into cells. Consequently, our AAV vectors are very effective at
delivering genes to cells. Once in the cell, genes delivered by AAV
vectors in animal models have produced large amounts of protein on a
continuous basis, often for months or even years from a single
administration.
- AAV vectors can deliver many different genes. The vast majority of genes
fit into AAV vectors and have been successfully delivered to a wide range
of cell types. Consequently, AAV vectors have the potential to treat many
diseases including hemophilia, Gaucher disease, inherited emphysema,
beta-Thalassemia, Parkinson's and other neurological diseases,
cardiovascular disease and cancer.
- Simple to administer. We intend to administer our AAV vector-based
products on an outpatient basis. For example, our Coagulin-B product for
the treatment of hemophilia is being delivered to patients in the ongoing
Phase I clinical trial with dose escalations by injection in the thigh
muscle of the patient.
- Stability. Unlike other viruses, AAV is stable under a wide range of
conditions. This allows our AAV vectors to be handled like normal
pharmaceutical products, lending themselves to traditional shipping and
storing procedures.
AVIGEN'S BUSINESS STRATEGY
Avigen is committed to being a leader in the development of gene-based
products through the application of our proprietary AAV vector gene delivery
technology. To achieve this goal, we are pursuing a focused strategy that
includes:
- Reduce drug development risk by pursuing genetic diseases with
well-defined gene function. We focus our drug discovery activities and
expenditures on applications of our AAV vector technology to develop drug
candidates that address genetic diseases that are well understood. In
order to reduce the technical and commercial risks that are inherent in
the development of new drugs, we are pursuing diseases that meet the
following criteria:
-- the gene function is well defined;
-- partial correction of the disease is established through
administration of a commercially available protein product;
-- a clear cost and clinical benefit exists for patients and health care
providers; and
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-- clinical testing can be conducted in a relatively small number of
patients within a reasonably short time period.
- Retain development and commercialization rights for our products in the
United States. Our strategy is to retain all rights to our products and
directly market them to patients and physicians in the United States with
a small, specialized sales force. We believe that we will be able to
successfully execute this strategy for a number of reasons, including:
-- the relatively small patient populations of our targeted diseases;
-- many genetic diseases have well-organized patient support groups;
-- treatment decisions are made at regional centers or specialized
institutions;
-- our AAV vector technology allows patients to be treated on a
relatively infrequent basis; and
-- the patient populations of our targeted diseases can be addressed
with a small-scale manufacturing facility.
We believe that by retaining development and commercialization rights we
can better maintain quality control over our products and better capture the
commercial value of our products. However, we may pursue strategic
collaborations with pharmaceutical or other companies to develop products
targeted at markets with larger patients populations or for the marketing of our
products in international markets.
- Ensure that we have the intellectual property needed to freely develop
our products and protect our market. We aggressively pursue patents and
licenses to cover all of the technology we develop or use. As of August
31, 2000, we have 16 issued or licensed patents, and approximately 34
patent applications pending, in the United States, most of which have
also been filed internationally covering:
-- AAV vectors;
-- methods of using AAV vectors;
-- methods of manufacturing AAV vectors; and
-- methods of delivering AAV vectors to specific tissues.
We have two exclusive and three non-exclusive licenses to develop and
utilize AAV vectors for gene therapy that allow us to freely develop and protect
our products. When needed, we intend to acquire or obtain licenses for selected
technologies which would augment our existing patent and product portfolio.
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PRODUCT DEVELOPMENT PROGRAMS
Consistent with our business strategy, we are applying our AAV vector gene
therapy technology initially to the development of products to address the
following five genetic and neurological diseases: Hemophilia A, Hemophilia B,
Gaucher's disease, Parkinson's disease and beta-Thalassemia. The following table
summarizes our current product development programs:
AAV VECTOR-BASED GENE THERAPY PROGRAMS
DISEASE PROTEIN/ENZYME TARGET CELL STATUS(1)
------- -------------- ----------- ---------
Hemophilia B Factor IX Muscle Phase I
Hemophilia B Factor IX Liver Preclinical
Hemophilia A Factor VIII Liver Preclinical
Gaucher's Disease Glucocerebrosidase Muscle/Liver Research
Parkinson's Aromaticaminoacid
Disease decarboxylase Brain Research
Thalassemia(2) Erythropoietin Muscle Research
- ---------------
(1) "Research" indicates activities related to designing, constructing and
testing vectors in specific target cell types in order to evaluate gene
expression. "Preclinical" indicates in vitro and animal studies to evaluate
efficacy, pharmacology and toxicology. "Phase I" indicates the stage within
a clinical trial with dose escalations to evaluate pharmacokinetics and
pharmacological actions in humans.
(2) Includes programs utilizing delivery of an erythropoietin gene for the
treatment of renal failure, sickle cell anemia and beta-thalassemia.
HEMOPHILIA B
Our initial product candidate is Coagulin-B for the treatment of Hemophilia
B. Hemophilia B is a blood clotting disorder characterized by the reduction or
absence of a protein called factor IX, and primarily affects males. Due to the
lack of sustained levels of factor IX protein, patients with Hemophilia B
experience frequent internal bleeding during the course of normal daily
activities. Currently, patients with a severe form of the disease inject
themselves with factor IX protein several times a week to stop these bleeding
episodes. These factor IX protein injections provide temporary relief, but the
protein breaks down after a few days and the bleeding reoccurs. Since the
bleeding typically takes place in the joints and soft tissue, these patients
frequently suffer crippling bone and joint problems. A small percentage of
patients can also suffer permanent disability or even die from bleeding into the
central nervous system.
Hemophilia B affects approximately one in every 30,000 males, afflicting an
estimated 10,000 - 15,000 individuals in developed countries worldwide. The cost
of currently available protein factor IX can exceed $100,000 per year per
patient. Because protein therapy cannot prevent bone and joint damage, each
patient may require an additional $100,000 - $150,000 in medical treatment costs
annually. We believe the cost of treating Hemophilia B patients in the United
States to be over $400 million per year.
Extensive experience with factor IX over the last 25 years has established
that factor IX protein levels equivalent to only 1% of the normal level found in
humans greatly improves the patient's condition. To maintain these levels using
conventional injections is impractical. Avigen's approach is designed to
continuously deliver levels above 1% of normal level of factor IX protein in the
blood of these patients. We believe Coagulin-B has the potential to
substantially reduce the need for daily or weekly injections of factor IX
protein and to improve the patient's quality of life.
Preclinical Studies
In our initial studies, five dogs suffering from Hemophilia B were treated.
Following a single administration into the muscle, the study demonstrated that
Avigen's AAV vector containing the gene for factor IX could produce sustained
levels of factor IX protein in the dogs for over a year with a corresponding
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improvement in blood clotting. The more AAV vector was delivered, the more
factor IX was produced. In the dogs receiving the greatest quantities of our AAV
vector, the levels were above 1% of the normal level, which level is known to be
beneficial to humans. These data provided strong support for the feasibility of
using the same approach to treat hemophilia patients and formed the basis for
FDA approval to begin clinical trials in humans.
Clinical Trials
On June 2, 1999, Avigen began treating human subjects with this first
product candidate, Coagulin-B, in a Phase I clinical trial with dose
escalations. The design and goal of this initial trial is primarily to address
the safety of the product in humans. To assess the safety of the product, a
total of nine patients will have Coagulin-B injected into their thigh muscles.
The clinical trials are being carried out at The Children's Hospital of
Philadelphia and Stanford University Medical Center. The nine patients are
divided into three groups. The trial design provides that the first three
patients receive the lowest dose of AAV vector, the next three patients receive
an intermediate dose and the final three patients receive the highest dose. The
dose range was selected based on the preclinical studies with the objective of
reaching factor IX levels above 1% at the highest dose.
This is an ongoing clinical study. Data from the first two of the low dose
patients was presented at the American Society of Hematology meeting in New
Orleans in December 1999. Since then, all six patients that were scheduled to
receive intramuscular injections at the low and medium doses have been treated.
All of these patients have subsequently demonstrated successful gene expression
of factor IX protein in muscle tissue. In addition, the first patient in the
high dose group has just recently been injected and tests for gene expression
have not yet been performed. Preliminary findings for the first six patients
reported by the scientific investigators leading the trial have suggested that
the AAV-mediated gene transfer treatment appears to be safe with early signs of
clinical efficacy. These results are extremely preliminary, and should not be
considered a guarantee that subsequent patients in the study will demonstrate
the same results or that these treated patients will continue to exhibit
beneficial results.
We are also seeking approval from the FDA to approve a second human
clinical trial protocol to test the safety and effectiveness of infusing the
gene therapy into the liver, which is the normal site of clotting factor
production.
HEMOPHILIA A
Avigen is also developing Coagulin-A for the treatment of Hemophilia A.
Like Hemophilia B, Hemophilia A is a genetic disorder found almost exclusively
in males that is characterized by a protein deficiency in the blood, causing
patients to have a reduced ability to form blood clots. Instead of lacking the
protein factor IX, patients with Hemophilia A lack the protein factor VIII.
Hemophilia A affects approximately one in every 5,000 - 10,000 males,
afflicting an estimated 40,000 - 50,000 individuals in developed countries
worldwide. The cost of currently available protein factor VIII can exceed
$100,000 per year per patient. Because protein therapy has not proven effective
at preventing bone and joint damage, that is common among hemophilia patients,
each patient may require $100,000 - $150,000 in additional medical treatment
costs annually. In total, we believe the cost of treating Hemophilia A patients
worldwide to be over $3 billion per year.
Preclinical Studies
In our initial studies, mice were given AAV vectors containing the gene for
factor VIII. Following an injection into the blood supply feeding the liver, we
detected sustained levels of factor VIII protein in the mice for as long as 11
months. Moreover, these levels were above the 1% of normal level known to be
beneficial to humans. No side effects were observed. These data provided support
for the feasibility of using the same approach with AAV vectors containing the
factor VIII gene to treat human subjects.
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GAUCHER'S DISEASE
Gaucher's disease is a potentially fatal inherited disorder caused by a
defect in the gene for a protein called glucocerebrosidase which results in
abnormalities in blood cells and bone marrow cells. The 10,000 - 20,000 patients
with the disease frequently suffer from anemia, bone damage, and enlarged livers
and spleens. The disease is currently treated by replacement therapy with
commercially available protein with sales approaching $500 million worldwide
annually. Building on the same technology platform and principles used in the
hemophilia programs, Avigen plans to develop a product to treat Gaucher's
disease. We believe this approach is feasible based on our work with AAV vectors
in animal models of related diseases such as Sly syndrome and Hurler's disease.
PARKINSON'S DISEASE
Parkinson's disease is a common neurological disorder which affects 1.5
million people in the United States. A major hallmark of this disease is that
dopamine, a chemical which is essential to the transmission of nerve impulses,
is severely decreased in the striatum, a region of the brain which is critical
to movement and motor control. Dopamine becomes decreased because there is a
slow degeneration (or loss) of the small population of nerve cells in the brain
that produce it; however, the underlying cause of this nerve cell degeneration
is not known.
The current treatment for Parkinson's disease is a replacement strategy in
which a dopamine precursor is given orally to the patient. While this approach
helps relieve symptoms for a while, it eventually becomes ineffective and
results in serious side effects. Alternatively, Avigen's gene therapy strategy
involves delivering a gene to the striatum to locally increase production of
dopamine. This approach is intended to target only the affected region of the
brain and we hope will offer significant advantages to patients. Initial studies
in both murine and primate model systems have been promising and suggest that
Avigen's gene therapy for Parkinson's may be a viable alternative for treating
this devastating neurological disease.
BETA-THALASSEMIA
Beta-Thalassemia is a commonly occurring genetic disease affecting millions
of people worldwide. The patients are missing a red blood cell protein which
results in low red blood cell count or severe anemia. Current treatment options
are limited and only marginally effective, leading to a short life expectancy. A
commercially available protein called erythropoietin, or "EPO," at high doses
shows promise in treating this disease but is impractical due to the large
amounts of protein required. We have demonstrated that an AAV vector containing
the human EPO gene delivered into mouse muscle increases the number of red blood
cells, referred to as the hematocrit level. These high levels have been
sustained for periods beyond one year from a single administration. When this
vector was injected into mice with moderate and severe beta-Thalassemia,
significant improvement in the anemia and associated pathology was observed,
suggesting a possible treatment for beta-Thalassemia.
PATENTS AND INTELLECTUAL PROPERTY
Patents and other proprietary rights are important to our business. Our
policy is to file patent applications and protect technology, inventions and
improvements to inventions that are commercially important to the development of
our business. With respect to products, we seek patent protection on:
- the product itself;
- methods of using the product;
- methods of manufacturing the product; and
- methods of administering the product to certain tissues.
We also rely on trade secrets, know-how, continuing technology innovations
and licensing opportunities to develop and maintain our competitive position.
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As of August 31, 2000, we had 16 issued or licensed U.S. patents and 34
pending U.S. patent applications, most of which have been filed internationally.
Some of the patent applications are co-owned with co-inventors or institutions.
Avigen has exclusive worldwide licenses to five patents, three of which are co-
owned by others, and non-exclusive licenses to four U.S. patents. The patents we
hold or license are set to expire in the U.S. between 2008 and 2019. Under the
terms of some of these licenses, we must pay royalties on the sales of products
using the licensed technology, and in some cases are required to make payments
upon the attainment of developmental milestones.
We currently investigate and use certain gene sequences or proteins encoded
by those sequences, including the factor VIII gene, and manufacturing processes
that are or may become patented by others. As a result, we may be required to
obtain licenses to these gene sequences or proteins or other technology in order
to test, use or market products. However, we may not be able to obtain these
licenses on terms favorable to us.
We cannot be assured that other patents will issue from any of the
applications by or licensed to Avigen, or that any patent will issue on
technology arising from additional research or, if patents do issue, that claims
allowed will be sufficient to protect our technology. The patent application
process takes several years and entails considerable expense. In addition, with
respect to each of our co-owned patent applications, we have executed or are in
discussions with the co-inventors to execute an option to obtain an exclusive,
worldwide, transferable, royalty-bearing license for the technology. In the
event we are unable to negotiate exclusive rights to the co-owned technology,
each co-inventor may have rights to independently make, use, offer to sell or
sell the patented technology. Commercialization, assignment or licensing of the
technology by a co-inventor could harm our business. The failure to obtain
patent protection on these technologies or proposed products may harm our
competitive position and business prospects.
The patent positions of pharmaceutical and biotechnology firms are
generally uncertain and involve complex legal and factual questions. To date,
there has emerged no consistent policy regarding the breadth of claim allowed in
biotechnology patents. Patent applications in the United States are maintained
in secrecy until a patent issues, and we cannot be certain that others have not
filed applications for technology covered by its patent applications or that we
were first to file patent applications for the technology. Competitors may have
filed applications for, or may have received, patents and may obtain additional
patents and proprietary rights relating to compounds or processes that block or
compete with our patents.
We cannot ensure that third parties will not assert patent or other
intellectual property infringement claims against us with respect to our
products or technology or other matters. There may be third-party patents and
other intellectual property relevant to its products and technology that are not
known to us. A number of the gene sequences or proteins encoded by certain of
those sequences that we are investigating or may use in our products are or may
become patented by others. As a result, we may be required to obtain licenses to
the gene sequences or other technology in order to test, use or market products
that contain proprietary gene sequences or encode proprietary proteins. For
example, in connection with our anemia program, we anticipate that we may need
to obtain a license to a gene for human EPO. We cannot ensure that we will be
able to obtain this or any other license on terms favorable to us, if at all.
Patent litigation is becoming more widespread in the biotechnology
industry. Litigation may be necessary to defend against or assert claims of
infringement, to enforce patents issued to us, to protect trade secrets owned by
us, or to determine the scope and validity of proprietary rights of third
parties. Although no third party has asserted that we are infringing the third
party's patent rights or other intellectual property, we cannot ensure that
litigation asserting these claims will not be initiated, that we would prevail
in any litigation, or that we would be able to obtain any necessary licenses on
reasonable terms, if at all. Any claims against us, with or without merit, as
well as claims initiated by us against third parties, can be time-consuming and
expensive to defend or prosecute and to resolve. If our competitors prepare and
file patent applications in the United States that claim technology also claimed
by us, we may have to participate in interference proceedings declared by the
Patent and Trademark Office to determine priority of invention, which could
result in substantial cost to us, even if the outcome is favorable to us. In
addition, to the extent outside collaborators apply technological information
developed independently by them or by others to our product development programs
or apply our technologies to other projects, disputes may arise as to the
ownership of proprietary rights to the technologies.
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We also rely on a combination of trade secret and copyright law, employee
and third-party nondisclosure agreements, and other protective measures to
protect intellectual property rights pertaining to our products and technology.
We cannot ensure that these agreements will provide meaningful protection of its
trade secrets, know-how or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure of its trade secrets, know-how
or other proprietary information. In addition, the laws of certain foreign
countries do not protect intellectual property rights to the same extent as do
the laws of the United States. We cannot ensure that we will be able to protect
our intellectual property successfully.
LICENSING AND RESEARCH AGREEMENTS
Research Corporation Technologies. In May 1992, we entered into a license
agreement with Research Corporation Technologies, Inc. ("RCT") for rights to a
patent and patent application relating to a cell-specific promoter in AAV
vectors. The license is exclusive and worldwide. In consideration for the
license, we paid an initial license fee and issued 247,949 shares of our common
stock. In addition, under the agreement, we are required to pay RCT royalties
based on net sales of products which utilize the licensed technology.
Children's Hospital of Philadelphia. In May of 1999, we entered into an
agreement with the Children's Hospital of Philadelphia for rights to a patent
application related to vectors and methods for treating hemophilia B using
recombinant AAV vectors. The license is exclusive and worldwide for the duration
of the patent, or approximately 2017. Under the terms of the license, we must
exercise our best efforts to achieve certain research, clinical and commercial
milestones.
BTG International. In March of 2000, we entered into an agreement with BTG
International for rights to certain patents related to the factor IX gene. The
license is non-exclusive and worldwide for the duration of the last to expire
patent, or approximately 2008. In consideration for the license, we paid an
initial license fee and issued 50,000 warrants to purchase our common stock. The
warrants were issued with a strike price equal to the fair market value on the
effective date of the agreement. We are also required to make additional
payments at the completion of certain clinical and regulatory milestones, as
well as a royalty based on net sales of products that fall within the scope of
the license.
We have entered into other exclusive and nonexclusive license agreements
with certain research institutions and their representatives. Although specific
terms of the licenses vary, all of such licenses require us to achieve certain
development milestones. In addition, the agreements require us to pay certain
license fees and royalties to the licensors. All of the licenses provide for a
term which extends for the life of the underlying patent.
The failure to achieve any required development milestones or to negotiate
appropriate extensions of any of our license agreements or to make all required
milestone and royalty payments when due, and the subsequent decision of any such
institution to terminate such license could have a material adverse effect on
our financial position.
RESEARCH REVENUES AND EXPENSES
Research and development expense for the years ended June 30, 2000, 1999
and 1998 for Avigen-sponsored research was $8.0 million, $6.5 million and $6.2
million, respectively. Of that, $58,000 and $185,000 in 2000 and 1999,
respectively, was reimbursement by third parties and reflected as grant revenues
on the statement of operations.
In 1998, John Hopkins University and Avigen entered into an agreement under
which John Hopkins University agreed to provide research funding through a
National Institutes of Health Grant. The funded project consisted of researching
Capsid-Targeted Viral Inactivation in the treatment of HIV. The agreement
expired in March 2000. As of June 30, 2000, we were no longer party to any
agreements that would reimburse our research and development expenses from a
third party.
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MANUFACTURING
We have developed a proprietary manufacturing process for AAV vectors and
implemented government approved manufacturing policies and procedures. The
manufacturing process involves the introduction into cells of a set of genes
that provide the cells with the instructions to make the AAV vector. After a
period of AAV vector production, the cells are recovered, broken apart and AAV
vectors are purified from the resulting mixture. We perform a set of tests to
confirm the purity and activity of the material. Our manufacturing process does
not involve the use of adenovirus. We believe we have the capacity to
manufacture AAV vectors in commercial-scale quantities, and with the recently
completed construction of a new manufacturing facility, we believe we will soon
be able to produce enough product to support the needs of two independent
clinical trials.
COMPETITION
The field of gene therapy drug development is new and rapidly evolving, and
it is expected to continue to undergo significant and rapid technological
change. We expect that we will experience intense competition both from other
companies in the gene therapy field and from companies that have other forms of
treatment for the diseases currently being targeted. We are aware of several
development-stage and established enterprises, including major pharmaceutical
and biotechnology firms, that are exploring gene-based drugs or are actively
engaged in gene delivery research and development. These include companies
making protein therapies for hemophilia, Gaucher's disease, and anemia such as
Amgen Inc., Aventis S.A., Bayer Corporation, Baxter Healthcare Corporation,
Genzyme Corporation, Johnson & Johnson and Wyeth-Ayerst Laboratories. In
addition, companies directly engaged in gene therapy product development
include: Cell Genesys, Inc., Chiron Corporation, Targeted Genetics Corporation,
Transkaryotic Therapies, Inc. and Urogen Corp.
Many of our competitors or potential competitors have substantially greater
financial and other resources, larger research and development staffs, and more
extensive marketing and manufacturing organizations, than we do. In addition,
some of them have considerable experience in preclinical testing, clinical
trials and other regulatory approval procedures. There are also academic
institutions, governmental agencies and other research organizations that are
conducting research in areas in which we are working. They may also market
commercial products, either on their own or through collaborative efforts.
Companies that complete clinical trials, obtain required regulatory
approvals and commence commercial sales of their products before their
competitors may achieve a significant competitive advantage. We are aware that
other companies or institutions are pursuing development of new drugs and
technologies directly targeted at applications for which it is developing drug
compounds. For example, we are aware that Chiron is conducting a Phase I/II
clinical trial to treat Hemophilia A patients using a retroviral-based system.
In addition, we are aware that Transkaryotic Therapies is conducting a Phase
I/II clinical trial to treat Hemophilia A patients using a nonviral vector-based
system and Genstar has proposed a clinical trial to treat Hemophilia A patients
using adenovirus vector administered to the liver.
In order to compete successfully, we must develop proprietary positions in
patented products for therapeutic markets that have not been satisfactorily
addressed by conventional research strategies and, in the process, expand our
expertise in its AAV vector gene therapy products. Our products, even if
successfully tested and developed, may not be adopted by physicians over other
products and may not offer economically feasible alternatives to other
therapies.
GOVERNMENT REGULATION
The production and marketing of our proposed products and research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. In the United States, pharmaceutical products are subject to rigorous
regulation by the FDA under the Federal Food, Drug, and Cosmetic Act. Biological
products, in addition to being subject to certain provisions of this act, are
also regulated under the Public Health Service Act. These laws and the
regulations promulgated thereunder govern, among other things, testing,
manufacturing, safety, efficacy, labeling, storage, record keeping, advertising
and promotional practices and import and export of drugs and
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biological products. In general, the Center for Biologics Evaluation and
Research holds primary responsibility for the regulation of biological products
and has handled the investigational new drug, or "IND," application submissions
of most gene therapy products to date. At the present time, we believe that our
products will be regulated as biologics by the FDA and comparable foreign
regulatory bodies. Gene therapy is, however, a relatively new technology and has
not been extensively tested in humans. The regulatory requirements governing
gene therapy products are uncertain and are subject to change. No gene therapy
products have been approved to date in the United States or any foreign country.
Under the National Institutes of Health guidelines for research involving
recombinant DNA molecules, clinical protocols involving human gene transfer
conducted at institutions receiving National Institutes of Health funds cannot
be initiated without simultaneous submission of information describing the
proposed clinical protocol to both the National Institutes of Health and the
FDA. Submission to the National Institutes of Health shall be for registration
purposes and determination regarding the necessity of full review by the
Recombinant DNA Advisory Committee, or "RAC," of the National Institutes of
Health. Full RAC review of an individual human gene transfer protocol can be
initiated by the National Institutes of Health director or recommended to the
National Institutes of Health director by three or more RAC members or other
federal agencies. An individual human gene transfer protocol that is recommended
for full RAC review should represent novel characteristics deserving of public
discussion. Prior to submission of a human gene transfer experiment to National
Institutes of Health, the principal investigator must obtain Institutional
Biosafety Committee approval from each institution that will handle recombinant
DNA material that is to be administered to human subjects and institutional
review board, or "IRB," approval from each institution in which human subjects
will undergo gene transfer. Submission of human gene transfer protocols to the
FDA will be in the form of an IND application. The review process conducted by
National Institutes of Health and the FDA can be unpredictable and may result in
considerable time and expense to us.
The steps required before a new drug, including a biological product, may
be marketed in the United States generally include:
- preclinical laboratory tests and preclinical animal studies;
- the submission to the FDA of an IND application for human clinical
testing, which must become effective before human clinical trials
commence;
- adequate and well-controlled human clinical trials to establish the
safety and efficacy of the product;
- the submission to the FDA of a Biologics License Application, or "BLA,"
for a biological product; and
- FDA approval of the BLA prior to any commercial sale or shipment of the
biological product.
Domestic manufacturing establishments are subject to inspections at any
time by the FDA and must comply with good manufacturing practices regulations
enforced by the FDA through its facilities inspection program. Manufacturers of
biological products also must comply with FDA general biological product
standards. In addition, we have obtained a drug manufacturing license from the
State of California for any of our products administered to humans, including
products intended for clinical trials.
Preclinical safety studies include laboratory evaluation of the product, as
well as animal studies to assess the potential safety and, if possible, efficacy
of the product. Preclinical studies must be conducted by laboratories that
comply with FDA regulations regarding good laboratory practices. The results of
the preclinical tests, together with manufacturing information and analytical
data, are submitted to the FDA as part of an IND, which must become effective
before human clinical trials may be commenced. The IND will become automatically
effective 30 days after its receipt by the FDA unless the FDA indicates prior to
the end of the 30-day period that it does not wish the trials to proceed as
outlined in the IND. In this case, the IND sponsor and the FDA must resolve any
outstanding concerns before clinical trials can proceed. We cannot assure you
that submission of an IND will result in FDA authorization to commence clinical
trials.
Clinical trials must be conducted in accordance with the FDA's good
clinical practice guidelines and must be approved by the IRB at the institution
where the study will be conducted. The IRB will consider, among other things,
safety and ethical issues, proper informed consent of the human subjects,
possible issues
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relating to health care costs and potential liability of the institution. The
IRB may require changes in a protocol, and we cannot assure you that the IRB
will permit any given study to be initiated or completed.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. Phase I typically involves the initial introduction of the
drug into patients primarily to determine the drug's metabolism,
pharmacokinetics and pharmacological actions in humans and the side effects
associated with increasing doses. Phase II typically involves studies in a
limited patient population:
- to determine the efficacy of the drug for specific diseases;
- to determine dosage tolerance and optimal dosage; and
- to further identify possible adverse effects and safety risks.
If the drug appears to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to evaluate
efficacy and safety within an expanded patient population typically at
geographically dispersed clinical study sites. We cannot assure you that Phase
I, Phase II or Phase III testing will be completed successfully within any
specific time period, if at all, with respect to any of our products subject to
this testing. Furthermore, the FDA may suspend clinical trials at any time on
various grounds, including a finding that patients are being exposed to an
unacceptable health risk. FDA regulations also subject sponsors of clinical
investigations to numerous regulatory requirements related to, among other
things, selection of qualified investigators, proper monitoring of
investigations, record keeping and record retention and notice to investigators
and the FDA of any death or serious adverse reaction. In addition, the FDA may
require post marketing clinical studies, sometimes referred to as Phase IV
clinical trials, which will require extensive patient monitoring and record
keeping and may result in restricted marketing of the product for an extended
period of time.
The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of a BLA for approval of
the manufacture, marketing and commercial shipment of the biological product.
The testing and approval process is likely to require substantial time and
effort and we cannot assure you that any approval will be granted on a timely
basis, if at all. The FDA may deny a BLA if applicable regulatory criteria are
not satisfied, require additional testing or information, or require post
marketing testing and surveillance to monitor the safety or efficacy of a
product. Moreover, if regulatory approval of a biological product is granted,
this approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Among the conditions for BLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to good manufacturing practices, which must be followed at all times. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, financial resources and effort in the area of
production and quality control.
In accordance with the Orphan Drug Act, the FDA may grant Orphan Drug
status to certain drugs intended to treat a "rare disease or condition" defined
as a disease or condition which affects fewer than 200,000 people in the United
States, or which affects more than 200,000 people for which the cost of
developing and marketing the drug will not be recovered from sales of the drug
in the United States. An approved Orphan Drug may provide certain benefits
including exclusive marketing rights in the United States to the drug for the
approved disease for seven years following marketing approval and federal income
tax credits for certain clinical trial expenses. We believe that some of our
future products may qualify for Orphan Drug status but we cannot assure you that
these products will receive FDA approval or that they will receive any benefit
under the Orphan Drug Act. In addition, there is no assurance that potential
benefits provided by the Orphan Drug Act will not be significantly limited by
amendment by the United States Congress and/or reinterpretation by the FDA.
For clinical investigation and marketing outside the United States, we are
also subject to foreign regulatory requirements governing clinical trials and
marketing approval for pharmaceutical products. In Europe, the approval process
for the commencement of clinical trials varies from country to country. The
foreign regulatory approval process includes all of the risks associated with
FDA approval set forth above.
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In addition to regulations enforced by the FDA, we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other federal, state and local regulations. Our research and
development activities involve the controlled use of hazardous materials,
chemicals, biological materials and various radioactive compounds. Although we
believe that our safety procedures for handling and disposing of these materials
comply with the standards prescribed by state and federal regulations, we could
be held liable for any damages that result from accidental contamination or
injury and this liability could exceed our resources.
PRODUCT LIABILITY INSURANCE
The manufacture and sale of medical products entail significant risk of
product liability claims. We have established product liability insurance prior
to beginning our clinical trials. There can be no assurance that this coverage
will be adequate to protect us from any liabilities it might incur in connection
with the sale or testing of its products. In addition, we may require increased
product liability coverage as products are commercialized. This insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful product liability claim or series of claims brought against us in
excess of its insurance coverage could have a material adverse effect on our
business and results of operations.
EMPLOYEES
As of August 31, 2000, Avigen had 82 full-time employees, 22 of whom have
Ph.D. or M.D. degrees, including 62 employees in research and development, and
20 in general administration, regulatory affairs, and finance. We also rely on a
number of part-time employees and consultants. None of our employees are
represented by a collective bargaining agreement nor have we ever experienced a
work stoppage. We believe that our relationship with our employees is good.
SCIENTIFIC ADVISORY BOARD
We have established a Scientific Advisory Board, consisting of experts in
the field of medicine, genetics and molecular biology, which reviews and
evaluates our research programs and advises us with respect to technical matters
in fields in which we are involved. The members of the Scientific Advisory Board
are prominent scholars in their field and, as a result, may serve as consultants
to a wide variety of companies. Our Scientific Advisory Board consists of the
following individuals:
Alan McClelland, Ph.D. (Chairman), serves as Vice President, Research and
Development, of Avigen.
Jef D. Boeke, Ph.D., is a professor of Molecular Biology and Genetics at
The Johns Hopkins University School of Medicine. Dr. Boeke co-invented the
capsid targeted viral inactivation technology that provides a basis for Avigen's
antiviral product development program. He has authored more than 100
publications.
Katherine A. High, M.D., is the William H. Bennett Associate Professor of
Pediatrics at the University of Pennsylvania in Philadelphia and the Director of
Research of the Hematology Division at The Children's Hospital of Philadelphia.
Dr. High is a world-renowned expert in both the basic science and clinical
aspects of hemophilia.
Mark A. Israel, M.D., is the Kathleen M. Plant Distinguished Professor in
the Department of Neurological Surgery and Director of the Preuss Laboratory of
Molecular Neuro-oncology at the University of California San Francisco. Dr.
Israel's research has focused on the molecular and cellular biology of tumors of
the nervous system. He has authored more than 200 publications.
Yuichi Iwaki, M.D., Ph.D., serves as a director of Avigen, is a former
Professor at the University of Southern California School of Medicine in the
Departments of Urology and Pathology, and is currently Director of the
Transplantation Immunology and Immunogenetic Laboratory. Dr. Iwaki also holds
visiting professorships at Nihon University School of Medicine in Japan, at the
University of Pittsburgh School of Medicine, and at the University of
California, Irvine.
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Y.W. Kan, M.D., D.Sc., is the Louis K. Diamond Professor of Hematology at
the University of California at San Francisco. He also is an Investigator of the
Howard Hughes Medical Institute. Dr. Kan was the 1991 recipient of the Albert
Lasker Clinical Medical Research Award and is noted as a leader in the fields of
sickle cell anemia and thalassemia.
Mark Kay, M.D., Ph.D., is the Director of the Program in Human Gene
Therapy, and Associate Professor in the Department of Pediatrics and Genetics at
Stanford University School of Medicine. Dr. Kay is one of the founders of the
American Society of Gene Therapy. Dr. Kay received the E. Mead Johnson Award for
Research in Pediatrics in 2000 and was elected to the American Society for
Clinical Investigation in 1997. He is respected worldwide for his work in gene
therapy for hemophilia and is a member of the editorial boards of several
journals, including Gene Therapy, Human Gene Therapy and Molecular Therapy.
Haig H. Kazazian, Jr., M.D., is the Seymour Gray Professor and Chairman in
the Department of Genetics at the University of Pennsylvania School of Medicine
and is president of the American Board of Medical Genetics and a member of the
Institute of Medicine. Dr. Kazazian is best known for his research which was
instrumental to the molecular characterization of beta-Thalassemia. In addition,
Dr. Kazazian's lab has characterized the molecular defects in Hemophilia A and
developed a small animal model of the disease.
Keiya Ozawa, M.D., Ph.D., is a professor and chairman of the Department of
Hematology, Division of Cell Transplantation and Transfusion, and Division of
Genetic Therapeutics, Center for Molecular Medicine, at Jichi Medical School in
Japan, where he has established a research and preclinical program in gene
therapy. Dr. Ozawa is regarded as one of the leading authorities on gene therapy
in Japan and is responsible for drafting the Japanese government's gene therapy
guidelines. He has authored more than 160 publications regarding hematology,
virology and gene therapy.
Jeffrey M. Rosen, Ph.D., is a professor of Cell Biology at Baylor College
of Medicine. Dr. Rosen is an internationally recognized expert in the field of
gene expression, and his research focuses primarily on the mechanisms of
tissue-specific gene expression in the mammary and prostate glands. Dr. Rosen
has served as editorial board of the Journal of Biological Chemistry, Molecular
and Cellular Endocrinology, as and Executive Editor of Nucleic Acids Research
and as an Associate Editor of Molecular Endocrinology.
David W. Russell, M.D., Ph.D., is an Associate Professor in the Department
of Medicine at the University of Washington in Seattle. He is an expert on the
development of viral vectors for gene therapy, especially on the transduction
mechanisms of AAV vectors. Dr. Russell's research interests focus on stem cells
and the manipulation of mammalian chromosomes.
ITEM 2. PROPERTIES
We lease approximately 23,000 square feet and sublease approximately 23,000
square feet of manufacturing, research laboratory and office space in an
established commercial neighborhood in Alameda, California. The lease and
sublease expire in May 2003, and we have an extension for the entire 46,000
square feet of space that runs for an additional five years and expires in 2008.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of Avigen's common stock commenced trading on the Nasdaq National
Market on May 22, 1996, under the symbol "AVGN".
We have never paid cash dividends and do not anticipate paying cash
dividends in the foreseeable future.
The following table sets forth, for fiscal periods indicated, the range of
high and low sale prices available for the fiscal years 1999 and 2000.
1999 HIGH LOW
---- ------ ------
Quarter End 9/30/98......................................... $ 3.56 $ 1.50
Quarter End 12/31/98........................................ $ 7.81 $ 2.00
Quarter End 3/31/99......................................... $ 8.00 $ 4.63
Quarter End 6/30/99......................................... $ 6.63 $ 4.69
2000 HIGH LOW
---- ------ ------
Quarter End 9/30/99......................................... $13.25 $ 5.63
Quarter End 12/31/99........................................ $37.00 $12.25
Quarter End 3/31/00......................................... $89.00 $28.00
Quarter End 6/30/00......................................... $46.75 $25.00
As of September 7, 2000, there were approximately 197 holders of record of
our common stock.
During the fiscal year ended June 30, 2000, Avigen issued a total of
1,017,214 shares of its common stock upon the exercise of warrants previously
sold in private placements. The purchase price of these shares was as follows:
NUMBER OF SHARES EXERCISE PRICE AGGREGATE PURCHASE PRICE
- ---------------- --------------- ------------------------
389,204 $ 2.18 - $ 5.36 $1,732,964
206,960 $ 6.11 - $ 7.09 $1,286,825
244,377 $ 7.80 - $ 9.60 $ 546,794
176,674 $17.81 - $31.95 $4,861,107
--------- ----------
1,017,215 $8,427,690
========= ==========
These shares were issued to a total of 99 purchasers in reliance on Section
4(2) under the Securities Act in that they were issued to the original
purchasers of the warrants. These purchasers represented, in connection with
such purchases of the warrants, that they were accredited investors as defined
in Regulation D under the Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA
OCTOBER 22,
FISCAL YEARS ENDED JUNE 30, 1992
---------------------------------------------------- (INCEPTION)
2000 1999 1998 1997 1996 TO JUNE 30, 2000
-------- ------- ------- ------- ------- ----------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Grant revenue............... $ 58 $ 185 $ 0 $ 98 $ 87 $ 606
Expenses:
Research and
development............ 7,953 6,490 6,235 4,033 2,550 33,041
General and
administrative......... 4,516 3,445 2,990 2,352 1,102 17,560
In-license fees........... 5,034 0 0 0 0 5,034
-------- ------- ------- ------- ------- --------
17,503 9,935 9,225 6,385 3,652 55,635
-------- ------- ------- ------- ------- --------
Loss from operations........ (17,445) (9,750) (9,225) (6,287) (3,565) (55,029)
Interest income, net........ 2,419 148 365 710 (531) 3,072
Other income, net........... (13) (9) (17) (1) (1) 147
-------- ------- ------- ------- ------- --------
Net loss.................... $(15,039) $(9,611) $(8,877) $(5,578) $(4,097) $(51,810)
-------- ------- ------- ------- ------- --------
Net loss per share.......... $ (1.03) $ (0.99) $ (1.22) $ (0.77) $ (0.80)
======== ======= ======= ======= =======
JUNE 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and investments in
marketable securities..................... $ 77,953 $ 14,881 $ 4,477 $ 13,039 $ 16,443
Working capital............................. 76,732 13,471 4,635 11,936 15,364
Total assets................................ 85,287 16,183 5,997 14,760 17,532
Long-term obligations, less current
portion................................... 4,113 265 1,052 1,316 425
Deficit accumulated during development
stage..................................... (51,810) (36,771) (27,160) (18,283) (12,705)
Stockholders' equity........................ 79,013 14,323 3,583 12,341 16,027
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Avigen's actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause or
contribute to such a differences include, but are not limited to, those
discussed herein and in "Risk Factors" in Part I.
OVERVIEW
Since its inception, Avigen has devoted substantially all of its resources
to research and development activities. We are a development stage company and
have not received any revenue from the sale of products, and we do not
anticipate generating revenue from the sale of products in the foreseeable
future. We expect our source of revenue, if any, for the next several years to
consist of government grants and payments under collaborative arrangements. We
have incurred losses since our inception and expect to incur substantial losses
over the next several years due to ongoing and planned research and development
efforts, including preclinical studies and clinical trials. At June 30, 2000 we
had an accumulated deficit of $51.8 million.
RESULTS OF OPERATIONS
Fiscal years ended June 30, 2000, 1999, and 1998.
Grant revenue was $58,000 for the year ended June 30, 2000, compared to
$185,000 for the year ended June 30, 1999, and no revenue for the year ended
June 30, 1998. All grant revenue for these years consisted of reimbursements
under a grant from the National Institutes of Health, which expired on March 31,
2000. At June 30, 2000, we were no longer party to any agreements that would
provide for future reimbursement of research and development expenses, and do
not expect to be party to any similar agreements for the foreseeable future.
Our research and development expenses totaled $8.0 million for the year
ended June 30, 2000, an increase from $6.5 million for the year ended June 30,
1999, and $6.2 million for the year ended June 30, 1998. The increase during
fiscal 2000 over the previous year was primarily related to the increase in
personnel and recruitment costs for additional scientific and manufacturing
staff hired to support our product development efforts, including our clinical
trial for the treatment of Hemophilia B that began in June 1999. The rise in
research and development costs in fiscal 2000 also included over $650,000 in
research fees paid to collaborators in connection with our clinical trial and
other preclinical studies. The increase in research and development expenses
between June 30, 1999 and 1998 was primarily due to the write off of equipment.
We expect research and development spending to increase significantly over the
next several years as we expand our research, product development and clinical
trial efforts.
We incurred in-license fees of $5.0 million in fiscal 2000, the first year
in which these charges were significant, in connection with new agreements to
in-license certain patents that we use in our research and development efforts.
The full-year expense included cash payments to licensors of approximately $1.8
million and a non-cash charge for warrants issued to a licensor that were valued
at approximately $3.2 million. These expenses are primarily initiation fees, and
are not predictive of initial in-license fees to be incurred in future periods.
General and administrative expenses totaled $4.5 million for the year ended
June 30, 2000, up from $3.4 million for the year ended June 30, 1999 and $3.0
million for the year ended June 30, 1998. The increase during fiscal 2000 over
the previous year was primarily related to higher compensation for executive
management and new staff, as well as higher recruitment costs and in an increase
in legal fees related to our patent and other intellectual property activities.
The increase in general and administrative expenses during the year ended June
30, 1999 as compared with the year ended June 30, 1998 was also primarily due to
increases in personnel costs and legal fees in connection with patent
documentation. In general, we expect general and administrative expenses to
continue to increase as the level of our activities increase, but general and
administrative expenses should decrease as a percentage of total expenses as we
expand our research and development efforts.
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Net interest income, for the year ended June 30, 2000 was $2.4 million, up
from $148,000 and $365,000 in fiscal 1999 and 1998, respectively. The increase
in the current year was directly related to the increase in cash and investments
in marketable securities from the application of proceeds received from the
private placement of common stock and warrants that was completed in November
1999, and proceeds received from the public offering completed in April and May
of 2000. Net interest income declined from fiscal 1998 to fiscal 1999 as our
usage of cash for operating expenses exceeded our receipt of cash from equity
investments during the period.
LIQUIDITY AND CAPITAL RESOURCES
Cash expenditures have exceeded revenue since our inception. Our operations
have principally been funded through public offerings and private placements of
equity securities. Since our initial public offering in May 1996, we have
completed four private placements of our common stock and warrants to purchase
our common stock, raising net proceeds of approximately $57.3 million, and
completed a follow-on public offering raising net proceeds of approximately
$27.6 million. During the same period, as a result of exercises of warrants and
options to purchase our common stock, we raised an additional $10.2 million. The
timing and size of the exercise of these warrants and options are determined by
the decisions of the respective warrant and option holders, and are not
controlled by us. Therefore, funds raised in past periods should not be
considered an indication of additional funds to be raised in any future periods.
In addition, we have attempted to contain costs and reduce cash flow
requirements by renting scientific equipment and facilities, contracting with
other parties to conduct research and development and using consultants, where
appropriate. We expect to incur additional future expenses, resulting in
significant losses, as we continue and expand our research and development
activities and undertake additional preclinical studies and clinical trials of
our gene therapy product candidates. We also expect to incur substantial
expenses relating to the filing, prosecution, maintenance, defense and
enforcement of patent and other intellectual property claims.
At June 30, 2000, we had cash, cash equivalents and investments in
marketable securities of approximately $78.0 million compared to $14.9 million
at June 30, 1999. This increase was principally due to proceeds received during
the year from the private placements, public offering, and the on-going exercise
of warrants and stock options.
Our current office and facility includes approximately 46,000 square feet
of space leased through May 2008, with lease payments totaling $679,000 for
fiscal 2001 and increasing each year to approximately $1.1 million for fiscal
2008. In June 2000, we increased to $10.0 million a previously existing
revolving line of credit with Wells Fargo Bank to provide financial support for
construction related activities. Under the terms of the increase, the line of
credit is available through June 1, 2003. At June 30, 2000, we had borrowed $4.0
million from the line of credit. In May 1997, we secured a capital lease
facility under which, at June 30, 2000, we owed $237,000 and had no further
availability.
We believe that our available resources will be sufficient to fund our
operations for approximately two years. However, there may be changes that would
consume available resources significantly before this time. Our long-term
capital requirements and the adequacy of our available funds will depend upon
many factors, including:
- continued scientific progress in research and development programs;
- the scope and results of preclinical studies and clinical trials;
- the time and costs involved in obtaining regulatory approvals.
- the costs involved in filing, prosecuting and enforcing patents claims;
- competing technological developments;
- the cost of manufacturing scale-up;
- the costs of commercialization activities; and
- other factors which may not be within our control.
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We intend to seek additional funding through public or private equity or
debt financing, when market conditions allow. If we raise additional funds by
issuing equity securities, there may be further dilution to existing
stockholders. We cannot assure you that we will be able to enter into these
financing arrangements on acceptable terms or at all. Without additional
funding, we may be required to delay, reduce the scope of or eliminate one or
more of our research or development programs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold derivative financial investments, derivative commodity
investments or other financial investments or engage in foreign currency hedging
or other transactions that expose us to material market risk. We have also
evaluated the risk associated with our Wells Capital Management investments in
marketable securities and have deemed this risk immaterial.
ITEM 8. FINANCIAL STATEMENTS
The financial statements required by this item are set forth beginning at
page F-1 of this report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors and Executive Officers may be found
in the sections entitled "Proposal 1 -- Election of Directors,"
"Management -- Executive Officers of the Company," and "Management -- Compliance
with the Reporting Requirements of Section 16(c)," appearing in the definitive
Proxy Statement to be delivered to stockholders in connection with the
solicitation of proxies for Avigen's Annual Meeting of Stockholders to be held
on November 17, 2000 (the "Proxy Statement"). Such information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in the Proxy Statement
under the heading "Management -- Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in the Proxy Statement
under the heading "Security Ownership of Certain Beneficial Owners and
Management," which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in the Proxy Statement
under the heading "Related Transactions," which information is incorporated
herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) Financial Statements:
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(2) Financial Statements schedules have been omitted from this report
because the information is provided in the Financial Statements or is not
applicable.
(3) Exhibits
EXHIBIT
NUMBER EXHIBITS
------- --------
3.1(1) Amended and Restated Certificate of Incorporation
3.2(1) Restated Bylaws of the Registrant
4.1(1) Specimen Common Stock Certificate
10.2(1, 2) 1993 Stock Option Plan
10.3(2, 3) 1996 Equity Incentive Plan, as amended
10.4(3) Form of Common Stock and Warrant Purchase Agreement, dated
October 29, 1999
10.4.1(1, 2) Form of Incentive Stock Option Grant for 1996 Equity
Incentive Plan
10.5(1, 2) Form of Nonstatutory Stock Option Grant for 1996 Equity
Incentive Plan
10.6(2) 1996 Non-Employee Director Stock Option Plan, as amended
10.7(2, 4) 1997 Employee Stock Purchase Plan
10.8(1, 2) Form of Indemnification Agreement between the Registrant and
its directors and executive officers
10.9(1) Form of Common Stock Warrant
10.10(2, 5) 2000 Equity Incentive Plan
10.11(2) Form of Nonstatutory Stock Option Grant for 2000 Equity
Incentive Plan
10.12(1) Form of Series C Preferred Stock Warrant
10.19(1) Form of Bridge Warrant
10.20(1) License Agreement between the Registrant and Research
Corporation Technologies, Inc., dated May 15, 1992, as
amended as of March 21, 1996 and April 26, 1996
10.21(1) License Agreement between the Registrant and The Johns
Hopkins University, dated November 23, 1993, as amended as
of March 21, 1996
10.22(1) License Agreement between the Registrant and The University
of Manitoba, dated February 2, 1994
10.27(1, 2) Employment Agreement dated August 10, 1992, between Avigen
and John Monahan.
10.29(2, 6) Employment Agreement dated August 14, 1996, between Avigen
and Thomas J. Paulson.
27
30
EXHIBIT
NUMBER EXHIBITS
------- --------
10.32(6) Revolving line of credit signed November 22, 1996 with Wells
Fargo Bank
10.32.1 Amendment No. 1 to Revolving line of credit signed June 1,
2000 with Wells Fargo Bank
10.33(6) Equipment lease dated May 22, 1997 with Transamerica
Business Credit Corporation
10.34(7) Common Stock and Warrant Purchase Agreement by and among
Avigen and certain Purchasers listed on the Schedule of
Purchasers attached thereto.
10.35(8) Amendment to Common Stock and Warrant Purchase Agreement by
and among Avigen and certain Purchasers thereunder dated as
of September 25, 1998.
10.36(2, 8) Management Transition Plan
10.36.1(9) Form of Common Stock and Warrant Purchase Agreement, dated
October 30, 1998.
10.37(10) Form of Common Stock and Warrant Purchase Agreement Date
February 16, 1999.
10.38(4, 11) Factor IX patent and know-how exclusive license agreement
between the Childrens Hospital of Philadephia and Avigen,
dated May 20, 1999.
10.39(11, 12) License Agreement between Avigen and the University of
Florida Research Foundation, Inc., dated November 13, 1992,
and its First Amendment, dated March 25, 1996.
10.40(11, 13) License Agreement, dated March 3, 2000, by and between BTG
International Ltd., a British corporation and Avigen, Inc.
10.41(13) Property Lease Agreement between ARE-1201 Harbor Bay, LLC
and Avigen, Inc., dated February 29, 2000
10.42(13) Property Sublease between Lucent Technologies, Inc. and
Avigen, Inc., dated February 1, 2000
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (Reference to the signature page herein)
27.1 Financial Data Schedule
- ---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-3220) and incorporated herein by reference.
(2) Management Contract or Compensation Plan.
(3) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Quarterly Report on Form 10-Q for the quarter year
ended December 31, 1999, as filed with the SEC.
(4) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Annual Report on Form 10-K for the year ended June 30,
1999, as filed with the SEC.
(5) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Registration Statement on Form S-8 (Registration No.
333-42210) filed with the SEC on July 25, 2000.
(6) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Annual Report on Form 10-K for the year ended June 30,
1997, as filed with the SEC.
(7) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Annual Report on Form 10-K for the year ended June 30,
1998, as filed with the SEC.
(8) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Quarterly Report on Form 10-Q for the quarter year
ended September 30, 1998, as filed with the SEC.
28
31
(9) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Quarterly Report on Form 10-Q for the quarter year
ended December 31, 1998.
(10) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Quarterly Report on Form 10-Q for the quarter year
ended March 31, 1999, as filed with the SEC.
(11) Confidential treatment has been requested for a portion of this exhibit.
(12) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Annual Report on Form 10-K/A for the year ended June
30, 1999, as filed with the SEC on February 11, 2000.
(13) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Quarterly Report on Form 10-Q for the quarter year
ended March 31, 2000, as filed with the SEC.
(b) Avigen filed no reports on Form 8-K during the quarter ended June 30, 2000.
29
32
SIGNATURES
Pursuant to the requirements of Section 13 of 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.
AVIGEN, INC.
By: /s/ JOHN MONAHAN
------------------------------------
John Monahan, Ph.D.
President, Chief Executive Officer
and Director
Dated: September 27, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John Monahan and Philip J. Whitcome, and
each or any one of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Report, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN MONAHAN President, Chief Executive September 27, 2000
- ----------------------------------------------------- Officer and Director
John Monahan, Ph.D. (Principal Executive
Officer)
/s/ THOMAS J. PAULSON Chief Financial Officer September 27, 2000
- ----------------------------------------------------- (Principal Financial and
Thomas J. Paulson Accounting Officer)
/s/ PHILIP J. WHITCOME Chairman of the Board September 27, 2000
- -----------------------------------------------------
Philip J. Whitcome
/s/ ZOLA HOROVITZ Director September 27, 2000
- -----------------------------------------------------
Zola Horovitz
/s/ YUICHI IWAKI Director September 27, 2000
- -----------------------------------------------------
Yuichi Iwaki
/s/ JOHN K.A. PRENDERGAST Director September 27, 2000
- -----------------------------------------------------
John K.A. Prendergast
30
33
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets at June 30, 2000 and 1999.................... F-3
Statements of Operations for Years Ended June 30, 2000,
1999, 1998 and inception through June 30, 2000............ F-4
Statements of Stockholders' Equity for the Period from
October 22, 1992 (inception) through June 30, 2000........ F-5
Statements of Cash Flows for Years Ended June 30, 2000,
1999, 1998 and inception through June 30, 2000............ F-9
Notes to Financial Statements............................... F-10
F-1
34
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Avigen, Inc.
We have audited the accompanying balance sheets of Avigen, Inc. (a
development stage company) as of June 30, 2000 and 1999 and the related
statements of operations, stockholders' equity and cash flows each of the three
years in the period ended June 30, 2000 and for the period from October 22, 1992
(inception) through June 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Avigen, Inc. at June 30,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 2000 and for the period from
October 22, 1992 (inception) through June 30, 2000, in conformity with
accounting principles generally accepted in the United States.
Palo Alto, California
July 28, 2000
F-2
35
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
ASSETS
JUNE 30,
--------------------
2000 1999
-------- --------
Current assets:
Cash and cash equivalents................................. $ 13,361 $ 2,945
Investments in marketable securities...................... 64,592 11,936
Other current receivables................................. 940 185
-------- --------
Total current assets.............................. 78,893 15,066
Property and equipment, net................................. 4,025 1,050
Deposits and other assets................................... 2,369 67
-------- --------
Total assets...................................... $ 85,287 $ 16,183
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities............ $ 1,656 $ 555
Accrued compensation and related expenses................. 268 343
Current portion of capital lease obligations.............. 237 697
-------- --------
Total current liabilities......................... 2,161 1,595
Long-term obligation........................................ 4,113 265
Commitments
Stockholders' equity:
Common stock, $.001 par value, 30,000,000 shares
authorized, 17,000,267 and 12,358,898 shares issued and
outstanding at June 30, 2000 and 1999, respectively.... 17 12
Additional paid-in capital................................ 130,886 51,082
Other comprehensive loss.................................. (80) --
Deficit accumulated during the development stage.......... (51,810) (36,771)
-------- --------
Total stockholders' equity................................ 79,013 14,323
-------- --------
Total liabilities and stockholders' equity........ $ 85,287 $ 16,183
======== ========
See accompanying notes.
F-3
36
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
PERIOD FROM
OCTOBER 22, 1992
YEAR ENDED JUNE 30, (INCEPTION)
------------------------------------- THROUGH
2000 1999 1998 JUNE 30, 2000
----------- ---------- ---------- ----------------
Grant revenue............................. $ 58 $ 185 $ -- $ 606
Expenses:
Research and development................ 7,953 6,490 6,235 33,041
General and administrative.............. 4,516 3,445 2,990 17,560
In-license fees......................... 5,034 -- -- 5,034
----------- ---------- ---------- --------
17,503 9,935 9,225 55,635
----------- ---------- ---------- --------
Loss from operations...................... (17,445) (9,750) (9,225) (55,029)
Interest expense.......................... (129) (178) (222) (1,259)
Interest income........................... 2,548 326 587 4,331
Other (expense) income, net............... (13) (9) (17) 147
----------- ---------- ---------- --------
Net loss.................................. $ (15,039) $ (9,611) $ (8,877) $(51,810)
=========== ========== ========== ========
Primary and fully diluted net loss per
share................................... $ (1.03) $ (.99) $ (1.22)
=========== ========== ==========
Shares used in primary and fully diluted
per share calculation................... 14,557,999 9,684,329 7,298,271
=========== ========== ==========
See accompanying notes.
F-4
37
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM OCTOBER 22, 1992 (INCEPTION) THROUGH JUNE 30, 2000
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
CLASS B DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL OTHER DURING THE
------------------ ------------------ --------------- PAID-IN COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS STAGE
--------- ------ --------- ------ ------ ------ ---------- ------------- -----------
Balance at October 22, 1992
(inception)............... -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock at
$.004 per share in
November and December
1992...................... -- -- 896,062 1 -- -- 4 -- --
Issuance of common stock at
$.554 per share from
January to June 1993 for
services rendered......... -- -- 20,316 -- -- -- 11 -- --
Issuance of common stock at
$.004 to $.222 per share
from November 1992 to
March 1993 for cash....... -- -- 1,003,406 1 -- -- 54 -- --
Issuance of Class B common
stock at $.004 per share
in December 1992 for
cash...................... -- -- -- -- 90,293 -- 1 -- --
Issuance of Series A
preferred stock at $4.43
per share from March to
June 1993 for cash (net of
issuance costs of
$410,900)................. 678,865 1 -- -- -- -- 2,595 -- --
Issuance of Series A
preferred stock at $3.85
per share in March 1993
for cancellation of note
payable and accrued
interest.................. 68,991 -- -- -- -- -- 266 -- --
Issuance of common stock at
$.004 per share in
November 1993 pursuant to
antidilution rights....... -- -- 22,869 -- -- -- 1 -- --
Issuance of Series A
preferred stock at $4.43
per share from July to
November 1993 for cash and
receivable (net of
issuance costs of
$187,205)................. 418,284 -- -- -- -- -- 1,665 -- --
Issuance of Series B
preferred stock at $5.54
per share in March 1994
for cash (net of issuance
costs of $34,968)......... 128,031 -- -- -- -- -- 674 -- --
Issuance of Series C
preferred stock at $4.87
per share from July 1994
to June 1995 for cash and
receivables (net of
issuance costs of
$259,620)................. 739,655 1 -- -- -- -- 3,344 -- --
Issuance of Series C
preferred stock at $4.87
per share in June 1995 for
cancellation of notes
payable................... 35,500 -- -- -- -- -- 173 -- --
Net loss and comprehensive
loss from inception to
June 30, 1995............. -- -- -- -- -- -- -- -- (8,608)
--------- ---- --------- ---- ------ ---- ------ ---- -------
Balance at June 30, 1995.... 2,069,326 2 1,942,653 2 90,293 -- 8,788 -- (8,608)
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance at October 22, 1992
(inception)............... $ --
Issuance of common stock at
$.004 per share in
November and December
1992...................... 5
Issuance of common stock at
$.554 per share from
January to June 1993 for
services rendered......... 11
Issuance of common stock at
$.004 to $.222 per share
from November 1992 to
March 1993 for cash....... 55
Issuance of Class B common
stock at $.004 per share
in December 1992 for
cash...................... 1
Issuance of Series A
preferred stock at $4.43
per share from March to
June 1993 for cash (net of
issuance costs of
$410,900)................. 2,596
Issuance of Series A
preferred stock at $3.85
per share in March 1993
for cancellation of note
payable and accrued
interest.................. 266
Issuance of common stock at
$.004 per share in
November 1993 pursuant to
antidilution rights....... 1
Issuance of Series A
preferred stock at $4.43
per share from July to
November 1993 for cash and
receivable (net of
issuance costs of
$187,205)................. 1,665
Issuance of Series B
preferred stock at $5.54
per share in March 1994
for cash (net of issuance
costs of $34,968)......... 674
Issuance of Series C
preferred stock at $4.87
per share from July 1994
to June 1995 for cash and
receivables (net of
issuance costs of
$259,620)................. 3,345
Issuance of Series C
preferred stock at $4.87
per share in June 1995 for
cancellation of notes
payable................... 173
Net loss and comprehensive
loss from inception to
June 30, 1995............. (8,608)
-------
Balance at June 30, 1995.... 184
F-5
38
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
PERIOD FROM OCTOBER 22, 1992 (INCEPTION) THROUGH JUNE 30, 2000
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
CLASS B DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL OTHER DURING THE
------------------- ------------------ ---------------- PAID-IN COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS STAGE
---------- ------ --------- ------ ------- ------ ---------- ------------- -----------
Issuance of Series C
preferred stock at $4.87
per share in July 1995
for cash (net of
issuance costs of
$26,000)................ 41,042 $ -- -- $ -- -- $ -- $ 174 $ -- $ --
Issuance of Series D
preferred stock at $7.09
per share from October
1995 to February 1996
for cash (net of
issuance costs of
$25,279)................ 205,351 -- -- -- -- -- 1,430 -- --
Issuance of Series D
preferred stock at $7.09
per share in March 1996
in settlement of
accounts payable........ 22,574 -- -- -- -- -- 160 -- --
Issuance of common stock
at $.004 per share in
March 1996 pursuant to
antidilution rights..... -- -- 17,630 -- -- -- 1 -- --
Issuance of stock options
in February 1996 in
settlement of certain
accrued liabilities..... -- -- -- -- -- -- 137 -- --
Conversion of Class B
common stock to common
stock................... -- -- 231,304 1 (90,293) -- (1) -- --
Issuance of warrants to
purchase common stock in
connection with 1996
bridge financing in
March 1996.............. -- -- -- -- -- -- 300 -- --
Conversion of preferred
stock to common stock in
May 1996................ (2,338,293) (2) 2,355,753 2 -- -- (1) -- --
Issuance of common stock
at $8.00 per share in
connection with the May
1996 initial public
offering (net of
issuance costs of
$798,414 and
underwriting discount of
$1,500,000)............. -- -- 2,500,000 2 -- -- 17,699 -- --
Proceeds from exercise of
options in June 1996.... -- -- 6,178 -- -- -- 3 -- --
Repurchase of common
stock................... -- -- (18,325) -- -- -- (1) -- --
Deferred compensation..... -- -- -- -- -- -- 164 -- --
Amortization of deferred
compensation............ -- -- -- -- -- -- (128) -- --
Net loss and comprehensive
loss.................... -- -- -- -- -- -- -- -- (4,097)
---------- ---- --------- ---- ------- ---- ------ ---- -------
Balance at June 30,
1996.................... -- -- 7,035,193 7 -- -- 28,725 -- (12,705)
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Issuance of Series C
preferred stock at $4.87
per share in July 1995
for cash (net of
issuance costs of
$26,000)................ $ 174
Issuance of Series D
preferred stock at $7.09
per share from October
1995 to February 1996
for cash (net of
issuance costs of
$25,279)................ 1,430
Issuance of Series D
preferred stock at $7.09
per share in March 1996
in settlement of
accounts payable........ 160
Issuance of common stock
at $.004 per share in
March 1996 pursuant to
antidilution rights..... 1
Issuance of stock options
in February 1996 in
settlement of certain
accrued liabilities..... 137
Conversion of Class B
common stock to common
stock................... --
Issuance of warrants to
purchase common stock in
connection with 1996
bridge financing in
March 1996.............. 300
Conversion of preferred
stock to common stock in
May 1996................ (1)
Issuance of common stock
at $8.00 per share in
connection with the May
1996 initial public
offering (net of
issuance costs of
$798,414 and
underwriting discount of
$1,500,000)............. 17,701
Proceeds from exercise of
options in June 1996.... 3
Repurchase of common
stock................... (1)
Deferred compensation..... 164
Amortization of deferred
compensation............ (128)
Net loss and comprehensive
loss.................... (4,097)
-------
Balance at June 30,
1996.................... 16,027
F-6
39
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
PERIOD FROM OCTOBER 22, 1992 (INCEPTION) THROUGH JUNE 30, 2000
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
CLASS B DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL OTHER DURING THE
--------------- ------------------- --------------- PAID-IN COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS STAGE
------ ------ ---------- ------ ------ ------ ---------- ------------- -----------
Issuance of common stock at
$8.00 per share in July 1996
in connection with the
exercise of underwriters'
over-allotment option (net of
underwriting discount of
$150,000).................... -- $ -- 250,000 $ -- -- $ -- $ 1,850 $ -- $ --
Proceeds from exercise of
options...................... -- -- 3,387 -- -- -- 1 -- --
Amortization of deferred
compensation................. -- -- -- -- -- -- 41 -- --
Net loss and comprehensive
loss......................... -- -- -- -- -- -- -- -- (5,578)
-- ---- ---------- ---- -- ---- ------- ---- --------
Balance at June 30, 1997....... -- -- 7,288,580 7 -- -- 30,617 -- (18,283)
Proceeds from exercise of
options...................... -- -- 17,278 -- -- -- 10 -- --
Amortization of deferred
compensation................. -- -- -- -- -- -- 41 -- --
Options granted for services... -- -- -- -- -- -- 68 -- --
Net loss and comprehensive
loss......................... -- -- -- -- -- -- -- -- (8,877)
-- ---- ---------- ---- -- ---- ------- ---- --------
Balance at June 30, 1998....... -- -- 7,305,858 7 -- -- 30,736 -- (27,160)
Proceeds from exercise of
options...................... -- -- 181,045 -- -- -- 222 -- --
Amortization of deferred
compensation................. -- -- -- -- -- -- 41 -- --
Issuance of common stock at
$2.25 -- $2.94 per share and
warrants in August to
September 1998 in connection
with a Private Placement (net
of issuance cost of
$233,584).................... -- -- 1,306,505 1 -- -- 2,734 -- --
Issuance of common stock at
$3.81 -- $4.88 per share and
warrants in December 1998 in
connection with a Private
Placement (net of issuance
cost of $438,183)............ -- -- 1,367,280 2 -- -- 5,195 -- --
Issuance of common stock at
$5.50 -- $6.00 per share and
warrants in February to April
1999 in connection with a
Private Placement (net of
issuance cost of
$1,033,225).................. -- -- 2,198,210 2 -- -- 12,154 -- --
Net loss and comprehensive
loss......................... -- -- -- -- -- -- -- -- (9,611)
-- ---- ---------- ---- -- ---- ------- ---- --------
Balance at June 30, 1999....... -- -- 12,358,898 12 -- -- 51,082 -- (36,771)
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Issuance of common stock at
$8.00 per share in July 1996
in connection with the
exercise of underwriters'
over-allotment option (net of
underwriting discount of
$150,000).................... $ 1,850
Proceeds from exercise of
options...................... 1
Amortization of deferred
compensation................. 41
Net loss and comprehensive
loss......................... (5,578)
-------
Balance at June 30, 1997....... 12,341
Proceeds from exercise of
options...................... 10
Amortization of deferred
compensation................. 41
Options granted for services... 68
Net loss and comprehensive
loss......................... (8,877)
-------
Balance at June 30, 1998....... 3,583
Proceeds from exercise of
options...................... 222
Amortization of deferred
compensation................. 41
Issuance of common stock at
$2.25 -- $2.94 per share and
warrants in August to
September 1998 in connection
with a Private Placement (net
of issuance cost of
$233,584).................... 2,735
Issuance of common stock at
$3.81 -- $4.88 per share and
warrants in December 1998 in
connection with a Private
Placement (net of issuance
cost of $438,183)............ 5,197
Issuance of common stock at
$5.50 -- $6.00 per share and
warrants in February to April
1999 in connection with a
Private Placement (net of
issuance cost of
$1,033,225).................. 12,156
Net loss and comprehensive
loss......................... (9,611)
-------
Balance at June 30, 1999....... 14,323
F-7
40
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
PERIOD FROM OCTOBER 22, 1992 (INCEPTION) THROUGH JUNE 30, 2000
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
CLASS B DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL OTHER DURING THE
--------------- ------------------- --------------- PAID-IN COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS STAGE
------ ------ ---------- ------ ------ ------ ---------- ------------- -----------
Proceeds from exercise of
options...................... -- $ -- 440,259 $ 1 -- $ -- $ 1,533 $ -- $ --
Proceeds from exercise of
warrants..................... -- -- 1,017,215 1 -- -- 8,427 -- --
Amortization of deferred
compensation................. -- -- -- -- -- -- 5 -- --
Options granted for services... -- -- -- -- -- -- 89 -- --
Warrants granted for patent
licenses..................... -- -- -- -- -- -- 3,182 -- --
Warrants granted for building
lease........................ -- -- -- -- -- -- 1,738 -- --
Issuance of common stock at
$16.19 to $25.56 per share
and warrants in October and
November 1999 in connection
with a Private Placement (net
of issuance cost of
$2,804,255).................. -- -- 2,033,895 2 -- -- 37,220 -- --
Issuance of common stock at
$26.00 per share and warrants
in April and May 2000 in
connection with a Public
Offering (net of issuance
cost of $2,288,966).......... -- -- 1,150,000 1 -- -- 27,610 -- --
Comprehensive loss:
Net loss..................... -- -- -- -- -- -- -- -- (15,039)
Net unrealized loss on
securities
available-for-sale......... -- -- -- -- -- -- -- (80) --
-- ---- ---------- --- -- ---- -------- ---- --------
Comprehensive loss.............
-- ---- ---------- --- -- ---- -------- ---- --------
Balance at June 30, 2000....... -- $ -- 17,000,267 $17 -- $ -- $130,886 $(80) $(51,810)
== ==== ========== === == ==== ======== ==== ========
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Proceeds from exercise of
options...................... $ 1,534
Proceeds from exercise of
warrants..................... 8,428
Amortization of deferred
compensation................. 5
Options granted for services... 89
Warrants granted for patent
licenses..................... 3,182
Warrants granted for building
lease........................ 1,738
Issuance of common stock at
$16.19 to $25.56 per share
and warrants in October and
November 1999 in connection
with a Private Placement (net
of issuance cost of
$2,804,255).................. 37,222
Issuance of common stock at
$26.00 per share and warrants
in April and May 2000 in
connection with a Public
Offering (net of issuance
cost of $2,288,966).......... 27,611
Comprehensive loss:
Net loss..................... (15,039)
Net unrealized loss on
securities
available-for-sale......... (80)
--------
Comprehensive loss............. (15,119)
--------
Balance at June 30, 2000....... $ 79,013
========
See accompanying notes.
F-8
41
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
OCTOBER 22,
1992
YEAR ENDED JUNE 30, (INCEPTION)
------------------------------ THROUGH
2000 1999 1998 JUNE 30, 2000
--------- -------- ------- -------------
OPERATING ACTIVITIES
Net loss.................................................... $ (15,039) $ (9,611) $(8,877) $ (51,810)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 394 473 678 3,221
Amortization of deferred compensation..................... 5 41 41 164
Amortization of warrants issued in connection with the
extension of the building lease......................... 72 -- -- 72
Write-off of organization costs........................... -- -- -- 146
Noncash interest expense.................................. -- -- -- 510
Common stock, warrants, and stock options issued for
services................................................ 89 -- 68 168
Warrants issued for patent license........................ 3,182 -- -- 3,182
Changes in operating assets and liabilities:
Other current receivables............................... (755) (185) -- (940)
Prepaids, deposits and other assets..................... (636) 94 (91) (704)
Accounts payable, other accrued liabilities and accrued
compensation and related expenses...................... 988 84 28 2,335
--------- -------- ------- ---------
Net cash used in operating activities....................... (11,700) (9,104) (8,153) (43,656)
INVESTING ACTIVITIES
Purchases of property and equipment and construction in
progress.................................................. (3,369) (164) (387) (6,949)
Organization costs.......................................... -- -- -- (219)
Purchases of marketable securities.......................... (150,233) (35,263) (7,405) (223,765)
Maturities of marketable securities......................... 97,497 26,524 13,840 159,094
--------- -------- ------- ---------
Net cash (used in) provided by investing activities......... (56,105) (8,903) 6,048 (71,839)
FINANCING ACTIVITIES
Proceeds from notes payable................................. 4,000 -- -- 6,133
Repayment of notes payable.................................. -- -- -- (1,710)
Proceeds from 1996 bridge financing......................... -- -- -- 1,937
Payment of bridge financing costs........................... -- -- -- (194)
Repayment of 1996 bridge financing.......................... -- -- -- (1,937)
Payments on capital lease obligations....................... (572) (638) (522) (1,917)
Proceeds from sale-leaseback of equipment................... -- -- 490 1,927
Proceeds from issuance of preferred stock, net of issuance
costs..................................................... -- -- -- 9,885
Proceeds from warrants and options exercised................ 9,962 222 10 10,198
Proceeds from issuance of common stock, net of issuance
costs and repurchases..................................... 64,831 20,088 -- 104,533
--------- -------- ------- ---------
Net cash provided by (used in) financing activities......... 78,221 19,672 (22) 128,855
Net increase (decrease) in cash and cash equivalents........ $ 10,416 $ 1,665 $(2,127) $ 13,360
Cash and cash equivalents, beginning of period.............. 2,945 1,280 3,407 --
--------- -------- ------- ---------
Cash and cash equivalents, end of period.................... $ 13,360 $ 2,945 $ 1,280 $ 13,360
========= ======== ======= =========
SUPPLEMENTAL DISCLOSURE
Issuance of preferred stock for cancellation of accounts
payable, notes payable and accrued interest............... $ -- $ -- $ -- $ 499
Issuance of stock options for repayment of certain accrued
liabilities............................................... $ -- $ -- $ -- $ 137
Issuance of warrants in connection with bridge financing.... $ -- $ -- $ -- $ 300
Issuance of warrants in connection with building lease...... $ 1,738 $ -- $ -- $ 1,738
Deferred compensation related to stock option grants........ $ -- $ -- $ -- $ 164
Purchase of property and equipment under capital lease
financing................................................. $ -- $ -- $ -- $ 226
Cash paid for interest...................................... $ 129 $ 178 $ 222 $ 766
See accompanying notes.
F-9
42
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
Avigen, Inc. (the "Company") was incorporated on October 22, 1992 in
Delaware for the purpose of development and commercialization of gene-based
therapeutic products. The Company's activities since inception have consisted
principally of acquiring product rights, raising capital, establishing
facilities and performing research and development. Accordingly, the Company is
considered to be in the development stage.
The Company expects to continue to incur substantial losses over the next
several years during its development state. The Company plans to meet its
capital requirements primarily through issuances of equity securities, research
and development contract revenue, and in the longer term, revenue from product
sales. The Company intends to seek additional funding through public or private
equity or debt financing, when market conditions allow. There can be no
assurance that the Company will be able to enter into financing arrangements on
acceptable terms or at all.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash, Cash Equivalents, and Marketable Securities
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company accounts
for its marketable securities in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company's marketable securities consist principally of
available-for-sale government and corporate debt securities with a minimum
short-term rating of A1/P1 and a minimum long-term rating of A and with
maturities of less than one year. All marketable debt and equity securities are
classified as available-for-sale, and unrealized gains and losses are recorded
in other comprehensive income. Total cash, cash equivalents, and marketable
securities, at amounts that approximate fair value, are as follows (in
thousands):
JUNE 30,
------------------
2000 1999
------- -------
Cash and cash equivalents................................ $13,361 $ 2,945
Corporate debt securities................................ 58,171 7,437
Federal Home Loan Mortgage Obligations................... 2,487 2,499
U.S. Treasury Notes...................................... 3,934 2,000
------- -------
$77,953 $14,881
======= =======
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the respective
assets, which range from five to seven years, using the straight-line method.
Leasehold improvements and assets under capital leases are amortized over
the lives of the related leases or their estimated useful lives, whichever is
shorter, using the straight-line method.
F-10
43
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Grant Revenue
The Company received reimbursements under a grant for research related
activities from the National Institutes of Health. The Company records revenue
as the grantor reimburses expenditures.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB 25") and related interpretations in
accounting for its employee stock based compensation. The Company issues
employee stock options equal to the market price of the underlying stock on the
date of the option grant. As a result, no compensation expense is recognized.
Additional disclosures required by FASB Statement No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123"), are included in Note 5.
Comprehensive Loss
Comprehensive loss is comprised of net loss and unrealized holding gains
and losses on available-for-sale securities. Comprehensive loss is shown in the
statement of stockholders' equity.
Research and Development Costs
Research and development expenses consist of costs incurred for independent
and collaborative research and development. These costs include direct costs and
research-related overhead expenses and are charged to expense as incurred.
Basic and Diluted Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
common shares outstanding during the year. Diluted net loss per share excludes
the effect of the potential shares to be issued upon the assumed exercise of the
options and warrants because the effect of inclusion of such shares would be
antidilutive due to the loss for all periods presented.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of ("SFAS 121"), the Company reviews long-lived assets, including
property and equipment, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. Under SFAS 121, an impairment loss would be recognized when
estimated un-discounted future cash flows expected to result from the use of the
asset and its eventual disposition is less than its carrying amount. Impairment,
if any, is assessed using discounted cash flows. Through June 30, 2000, there
have been no such losses.
Reclassifications
We have reclassified certain prior year amounts to conform to the current
year's presentation.
Recent Accounting Principles
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition. The
adoption of SAB 101 had no significant impact on the Company's revenue
recognition policy or results of operations.
F-11
44
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25." This Interpretation clarifies the definition of
employee for purposes of applying APB 25 and provides the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award. This Interpretation is effective July 1, 2000. The adoption of
FIN 44 does not have a material impact on the Company's financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
JUNE 30,
------------------
2000 1999
------- -------
Leasehold improvements................................... $ 1,613 $ 1,601
Laboratory equipment..................................... 1,771 1,854
Furniture and fixtures................................... 618 344
------- -------
4,002 3,799
Less accumulated depreciation and amortization........... (2,934) (2,749)
------- -------
1,068 1,050
Construction in progress................................. 2,957 --
------- -------
Property and equipment, net.............................. $ 4,025 $ 1,050
======= =======
Property and equipment includes approximately $2,209,000 under capital
lease obligations at June 30, 2000 and 1999. Accumulated amortization of assets
under capital leases was $1,973,000 and $1,622,000 at June 30, 2000 and 1999,
respectively.
3. LONG-TERM OBLIGATION
The Company entered into a financing arrangement for construction related
activities. Under this arrangement, the Company may borrow up to $10 million
through June 1, 2003. Amounts borrowed under this arrangement bear interest at
the London Inter-Bank Offered Rate plus 1.5% on the date of each draw-down and
reset every three months. The interest rate on this long-term obligation was
8.4% at June 30, 2000. The outstanding long-term obligation is secured by the
Company's portfolio of marketable securities. As of June 30, 2000, the Company
has drawn $4 million from the line of credit. Payments of interest only are due
monthly through 2003, at which time a balloon payment of outstanding principle
is due.
4. STOCKHOLDERS' EQUITY
Common Stock
During August through September 1998, the Company issued 1,306,505 shares
of common stock at $2.25 to $2.94 per share to selected institutional investors.
The offering was completed through a private placement. As part of the
transaction, warrants were issued to purchase 261,301 shares of the Company's
common stock at a price of $2.81 to $3.68 per share. The warrants were issued
with an exercise price of 125% of the fair market value of the underlying stock
on the corresponding closing day and carry a five-year term. After deducting
commissions and fees from the gross proceeds of $2,969,000, net proceeds from
this transaction approximated $2,735,000.
In December 1998, the Company issued 1,367,280 shares of common stock at
$3.81 to $4.88 per share, to selected institutional investors. The offering was
completed through a private placement. As part of this transaction, warrants
were issued to purchase 273,456 shares of the Company's common stock at a price
ranging from $4.77 to $6.10 per share. The warrants were issued with an exercise
price of 125% of the fair
F-12
45
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
market value of the underlying stock on the corresponding closing day and carry
a five-year term. After deducting commissions and fees from the gross proceeds
of $5,635,000, net proceeds from this transaction approximated $5,197,000.
During February through April 1999, the Company issued 2,198,210 shares of
common stock at $5.50 to $6.00 per share, to selected institutional investors.
The offering was completed through a private placement. As part of this
transaction, warrants were issued to purchase 439,642 shares of the Company's
common stock at a price of $6.88 to $7.50. The warrants were issued with an
exercise price of 125% of the fair market value of the underlying stock on the
corresponding closing day and carry a five-year term. After deducting
commissions and fees from the gross proceeds of $13,189,000, net proceeds from
this transaction approximated $12,156,000.
During October through November 1999, the Company issued 2,033,895 shares
of common stock at $16.19 to $25.56 per share, to selected institutional
investors. The offering was completed through a private placement. As part of
this transaction, warrants were issued to purchase 406,779 shares of the
Company's common stock at a price of $20.24 to $31.95. The warrants were issued
with an exercise price of 125% of the fair market value of the underlying stock
on each corresponding closing day and carry a five-year term. After deducting
commissions and fees from the gross proceeds of $40,028,000, net proceeds from
this transaction approximated $37,224,000.
In March 2000, the Company issued a warrant to purchase 40,000 shares of
its common stock as partial consideration for the extension of the Company's
building lease. The fair value of the warrant at the date of issuance
approximated $1,738,400 and is recorded as an asset in deposits and other
long-term assets in the financial statements and is being amortized over the
life of the lease extension. This warrant was issued with an exercise price of
the fair market value of the underlying stock at the time of issuance, and
carries a five-year term.
Also, in March 2000, the Company issued a warrant to purchase 50,000 shares
of its common stock as partial consideration for the acquisition of certain
patent licenses used in its research and development activities. The fair value
of the warrant approximated $3,182,000 and was fully expensed. This warrant was
issued with an exercise price of the fair market value of the underlying stock
at the time of issuance, and carries a five-year term.
During April and May 2000, the Company issued 1,150,000 shares of its
common stock at $26 per share through a public offering. After deducting
commissions and fees from the gross proceeds of $29,900,000, net proceeds from
this transaction totaled $27,611,000.
F-13
46
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At June 30, 2000, the Company had outstanding warrants to purchase shares
of common stock as follows:
NUMBER EXPIRATION
OF SHARES EXERCISE PRICE ISSUE DATE DATE
- --------- --------------- ---------- -----------
13,324... $5.36 1995 2005
45,000... $6.40 1996 2001
8,414.... $7.04 1996 2001
4,514.... $7.09 1995 2005
204,254.. $2.81 - $3.68 1998 2003
224,706.. $4.77 - $6.10 1998 2003
594,993.. $6.88 - $7.50 1999 2004
289,711.. $17.81 - $20.63 1999 2004
119,889.. $24.61 - $27.96 1999 2004
18,561... $28.12 - $31.95 1999 2004
40,000... $56.00 2000 2005
50,000... $82.00 2000 2005
- ---------
1,613,366.. $2.81 - $82.00 2001 - 2005
=========
SHARES RESERVED FOR FUTURE ISSUANCE
The Company has reserved shares of common stock for future issuance as
follows:
JUNE 30,
2000
---------
Stock options outstanding................................... 2,355,313
Stock options, available for grant.......................... 4,872,343
Warrants to purchase common stock........................... 1,613,366
Shares available for Employee Stock Purchase Plan........... 360,000
5. STOCK OPTION PLANS
Under the 1993 Stock Option Plan (the "1993 Plan"), incentive and
nonqualified stock options may be granted to key employees, directors and
consultants of the Company to purchase up to 338,600 shares of common stock.
Under the 1993 Plan, options could be granted at a price per share not less than
the fair market value at the date of grant. In March 1996 the Board determined
to grant no further options under the 1993 Plan and adopted the 1996 Equity
Incentive Plan.
The 1996 Equity Incentive Plan ("1996 Plan") provides for grants of
incentive nonqualified stock options, restricted stock purchase awards, stock
bonuses and stock appreciation rights to employees, directors and consultants of
the Company to purchase up to 600,000 shares of common stock. The 1996 Plan was
later amended and approved by stockholders to increase the number of shares
available for grant to 1,300,000 in November 1997 and again to 1,900,000 in
November 1999. Under the 1996 Plan, options may be granted at a price per share
not less than the fair market value at the date of grant. Options granted
generally have a maximum term of 10 years from the grant date and become
exercisable over 4 years.
In June 2000, the Board of Directors adopted the 2000 Equity Incentive Plan
("2000 Plan") which provides for grants of nonqualified stock options,
restricted stock purchase awards, stock bonuses and stock appreciation rights to
employees, directors and consultants of the Company to purchase up to 5,000,000
shares of common stock. Under the 2000 Plan, options may be granted at a price
per share not less than the fair
F-14
47
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
market value at the date of grant. Options granted generally have a maximum term
of 10 years from the grant date and become exercisable over 4 years.
Option activity under the 1993, 1996 and 2000 Plans was as follows:
OUTSTANDING OPTIONS
---------------------------
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
Outstanding at July 1, 1997......................... 826,872 $ 1.94
Granted........................................... 234,025 2.84
Canceled.......................................... (74,456) 3.23
Exercised......................................... (17,278) .60
---------
Outstanding at June 30, 1998........................ 969,163 2.05
Granted........................................... 746,751 4.90
Canceled.......................................... (281,805) 3.29
Exercised......................................... (181,045) 1.22
---------
Outstanding at June 30, 1999........................ 1,253,064 3.29
Granted........................................... 957,844 32.26
Canceled.......................................... (39,305) 4.16
Exercised......................................... (419,038) 3.44
---------
Outstanding at June 30, 2000........................ 1,752,565 $19.65
=========
In July 1995, the Company granted a member of its Board of Directors an
option to purchase 515,248 shares of common stock at $0.49 per share,
exercisable for 10 years from the date of grant. The shares vest in equal
monthly installments over 36 months. The shares issuable upon exercise of such
options may be issued prior to vesting but such shares are subject to repurchase
at the original price per share upon termination of services to the Company.
Such grant was made outside of the 1993 and 1996 Plans.
The Company has reserved 200,000 shares of common stock for issuance under
the 1996 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The
Directors' Plan provides for automatic grants of options to purchase shares of
common stock to non-employee directors of the Company. As of June 30, 2000,
options to purchase 107,500 shares of common stock at $2.00 - $22.375 per share,
exercisable for 10 years from the date of grant, have been granted under the
Directors' Plan. At June 30, 2000, a total of 20,000 options that were granted
under the Directors' Plan had been exercised.
F-15
48
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information with regard to total stock
options outstanding under all stock option plans at June 30, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OF SHARES LIFE PRICE OF SHARES PRICE
- ----------------- --------- ----------- --------- --------- ---------
$ .44 - $ .49.. 528,792 5.06 $ .49 528,792 $ .49
.71 - 3.50.. 284,944 7.54 2.62 135,193 2.48
3.63 - 6.00.. 430,881 8.12 5.20 165,740 4.92
6.19 - 15.50.. 199,102 8.79 7.35 33,286 6.99
17.50 - 29.00.. 373,594 9.77 27.54 7,779 22.87
31.00 - 38.88.. 502,000 9.92 37.33 3,030 34.76
$39.25 - 56.00.. 36,000 9.66 47.77 1,967 48.98
--------- -------
2,355,313 8.09 15.05 875,787 2.31
========= =======
At June 30, 2000, 172,843, 92,500 and 4,607,000 options were available for
future grant under the 1996 Plan, the Director Plan and the 2000 Plan,
respectively.
The weighted-average grant-date fair value of options granted during fiscal
2000, 1999 and 1998 was $32.03, $4.88 and $2.75, respectively.
The Company uses the Black-Scholes option pricing model to calculate the
fair value of these options for 2000, 1999 and 1998 with the following
assumptions:
YEAR ENDED JUNE 30,
--------------------------
2000 1999 1998
------ ------ ------
Expected volatility.............................. 2.5884 2.9242 3.3917
Risk free interest rate.......................... 6.50% 5.00% 5.51%
Life of options in years......................... 5 5 5
Expected dividend yield.......................... -- -- --
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options and warrants that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. The Company's employee stock options have characteristics
significantly different from those of traded options, and changes in the
subjective input assumptions can materially affect the fair value estimate. In
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The pro forma
net loss and pro forma basic and diluted net loss per common share using the
assumptions noted above are as follows:
YEAR ENDED JUNE 30,
-------------------------------
2000 1999 1998
-------- -------- -------
Net loss -- as reported...................... $(15,039) $ (9,611) $(8,877)
Net loss -- pro forma........................ (17,245) (10,374) (9,460)
Net loss per share basic and diluted -- as
reported................................... (1.03) (.99) (1.22)
Net loss per share basic and diluted -- pro
forma...................................... (1.18) (1.07) (1.30)
F-16
49
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Employee Stock Purchase Plan
In September 1997, the Company adopted the 1997 Employee Stock Purchase
Plan ("Purchase Plan"). A total of 360,000 shares of common stock have been
reserved for issuance under the Purchase Plan. As of June 30, 2000, there have
been no employee contributions to the Purchase Plan.
6. RELATED PARTY TRANSACTIONS
In fiscal 1999, the Company paid an entity managed by a Board member
$173,000 related to commissions and fund raising services provided by the entity
in relation to Avigen's private placements.
7. COMMITMENTS
The Company leases its facility under multiple noncancelable operating
lease agreements, which together, provide for the lease of the facility through
May 2008. The Company has also entered into a capital lease for property and
equipment. Future minimum lease payments under noncancelable operating and
capital leases are as follows (in thousands):
CAPITAL OPERATING
LEASES LEASE
------- ---------
Year ending June 30:
2001...................................................... $269 $ 738
2002...................................................... 761
2003...................................................... 700
2004...................................................... 871
2005...................................................... 914
Thereafter................................................ 3,026
---- ------
Total minimum lease payments.................... 269 $7,010
======
Less amount representing interest......................... (32)
----
Present value of minimum lease payments................... $237
====
Rent expense for fiscal 2000, 1999, and 1998 was $551,000, $390,000, and
$425,000, respectively.
8. INCOME TAXES
Significant components of the Company's deferred tax assets are as follows
(in thousands):
JUNE 30,
--------------------
2000 1999
-------- --------
Net operating loss carryforward........................ $ 16,552 $ 11,930
Research and development credit carryforwards.......... 1,743 1,296
Capitalized research and development................... 1,887 1,417
Capitalized patents.................................... 1,947 --
Other.................................................. 691 798
-------- --------
Gross deferred tax assets.............................. 22,820 15,441
Valuation allowance.................................... (22,820) (15,441)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
Due to the Company's history of losses, a valuation allowance has been
provided against the full amount of deferred tax assets.
F-17
50
AVIGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The valuation allowance increased by $7,379,000, $4,053,000, and $3,959,000
for fiscal 2000, 1999, and 1998, respectively.
At June 30, 2000, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $46,000,000 and
$13,000,000, respectively, which expire in fiscal years ended June 30, 2001
through June 30, 2020. At June 30, 2000, the Company has research and
development credit carryforwards for federal tax purposes of approximately
$1,290,000, which expire in fiscal years ended June 30, 2009 through June 30,
2020.
Because of the "change in ownership" provisions of the Internal Revenue
Code of 1986, utilization of the Company's tax net operating loss carryforwards
and tax credit carryforwards may be subject to an annual limitation in future
periods. As a result of the annual limitation, a portion of these carryforwards
may expire before ultimately becoming available to reduce future income tax
liabilities.
9. EMPLOYEE PROFIT SHARING/401(K) PLAN
In January 1996, the Company adopted a Tax Deferred Savings Plan under
Section 401(k) of the Internal Revenue Code (the "Plan") for all full-time
employees. Eligible employees can contribute amounts to the Plan via payroll
withholding, subject to certain limitations. The Company's contributions to the
Plan are discretionary. The Company has made no contributions to the Plan
through June 30, 2000.
F-18
51
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- -----------------------
3.1(1) Amended and Restated Certificate of Incorporation
3.2(1) Restated Bylaws of the Registrant
4.1(1) Specimen Common Stock Certificate
10.2(1,2) 1993 Stock Option Plan
10.3(2,3) 1996 Equity Incentive Plan, as amended
10.4(3) Form of Common Stock and Warrant Purchase Agreement, dated
October 29, 1999
10.4.1(1,2) Form of Incentive Stock Option Grant for 1996 Equity
Incentive Plan
10.5(1,2) Form of Nonstatutory Stock Option Grant for 1996 Equity
Incentive Plan
10.6(2) 1996 Non-Employee Director Stock Option Plan, as amended
10.7(2,4) 1997 Employee Stock Purchase Plan
10.8(1,2) Form of Indemnification Agreement between the Registrant and
its directors and executive officers
10.9(1) Form of Common Stock Warrant
10.10(2,5) 2000 Equity Incentive Plan
10.11(2) Form of Nonstatutory Stock Option Grant for 2000 Equity
Incentive Plan
10.12(1) Form of Series C Preferred Stock Warrant
10.19(1) Form of Bridge Warrant
10.20(1) License Agreement between the Registrant and Research
Corporation Technologies, Inc., dated May 15, 1992, as
amended as of March 21, 1996 and April 26, 1996
10.21(1) License Agreement between the Registrant and The Johns
Hopkins University, dated November 23, 1993, as amended as
of March 21, 1996
10.22(1) License Agreement between the Registrant and The University
of Manitoba, dated February 2, 1994
10.27(1,2) Employment Agreement dated August 10, 1992, between Avigen
and John Monahan.
10.29(2,6) Employment Agreement dated August 14, 1996, between Avigen
and Thomas J. Paulson.
10.32(6) Revolving line of credit signed November 22, 1996 with Wells
Fargo Bank
10.32.1 Amendment No. 1 to Revolving line of credit signed June 1,
2000 with Wells Fargo Bank
10.33(6) Equipment lease dated May 22, 1997 with Transamerica
Business Credit Corporation
10.34(7) Common Stock and Warrant Purchase Agreement by and among
Avigen and certain Purchasers listed on the Schedule of
Purchasers attached thereto.
10.35(8) Amendment to Common Stock and Warrant Purchase Agreement by
and among Avigen and certain Purchasers thereunder dated as
of September 25, 1998.
10.36(2,8) Management Transition Plan
10.36.1(9) Form of Common Stock and Warrant Purchase Agreement, dated
October 30, 1998.
10.37(10) Form of Common Stock and Warrant Purchase Agreement Date
February 16, 1999.
10.38(4,11) Factor IX patent and know-how exclusive license agreement
between the Childrens Hospital of Philadelphia and Avigen,
dated May 20, 1999.
10.39(11,12) License Agreement between Avigen and the University of
Florida Research Foundation, Inc., dated November 13, 1992,
and its First Amendment, dated March 25, 1996.
F-19
52
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- -----------------------
10.40(11,13) License Agreement, dated March 3, 2000, by and between BTG
International Ltd., a British corporation and Avigen, Inc.
10.41(13) Property Lease Agreement between ARE-1201 Harbor Bay, LLC
and Avigen, Inc., dated February 29, 2000
10.42(13) Property Sublease between Lucent Technologies, Inc. and
Avigen, Inc., dated February 1, 2000
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (Reference to the signature page herein)
27.1 Financial Data Schedule
- ---------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-3220) and incorporated herein by reference.
(2) Management Contract or Compensation Plan.
(3) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Quarterly Report on Form 10-Q for the quarter year
ended December 31, 1999, as filed with the SEC.
(4) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Annual Report on Form 10-K for the year ended June 30,
1999, as filed with the SEC.
(5) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Registration Statement on Form S-8 (Registration No.
333-42210) filed with the SEC on July 25, 2000.
(6) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Annual Report on Form 10-K for the year ended June 30,
1997, as filed with the SEC.
(7) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Annual Report on Form 10-K for the year ended June 30,
1998, as filed with the SEC.
(8) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Quarterly Report on Form 10-Q for the quarter year
ended September 30, 1998, as filed with the SEC.
(9) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Quarterly Report on Form 10-Q for the quarter year
ended December 31, 1998.
(10) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Quarterly Report on Form 10-Q for the quarter year
ended March 31, 1999, as filed with the SEC.
(11) Confidential treatment has been requested for a portion of this exhibit.
(12) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Annual Report on Form 10-K/A for the year ended June
30, 1999, as filed with the SEC on February 11, 2000.
(13) Incorporated by reference from such document filed with the SEC as an
exhibit to Avigen's Quarterly Report on Form 10-Q for the quarter year
ended March 31, 2000, as filed with the SEC.
F-20