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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED ____________.
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JULY 1, 2001 TO DECEMBER 31, 2001.
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COMMISSION FILE NUMBER: 000-21291
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INTROGEN THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2704230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
301 CONGRESS AVENUE, SUITE 1850
AUSTIN, TEXAS 78701
(Address of principal executive offices, including zip code)
(512) 708-9310
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, $0.001
PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock (common stock) held by
non-affiliates of the Registrant, as of December 31, 2001, was approximately
$57.4 million based upon the last sale price reported on the Nasdaq National
Market for December 31, 2001. For purposes of this disclosure, shares of common
stock held by persons who hold more than 5% of the outstanding shares of common
stock and shares held by executive officers and directors of the Registrant have
been excluded because such persons may be deemed to be affiliates. This
determination is not necessarily conclusive.
As of December 31, 2001, the Registrant had 21,446,363 shares of common
stock, $0.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference to the Registrant's proxy statement ("2002 Proxy
Statement") for the 2002 Annual Stockholders' Meeting, which will be filed with
the Securities and Exchange Commission within 120 days after the close of the
Registrant's fiscal year ended December 31, 2001.
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INTROGEN THERAPEUTICS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I.................................................................... 1
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 21
ITEM 3. LEGAL PROCEEDINGS........................................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 22
PART II................................................................... 23
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................ 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 43
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.... 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 43
PART III.................................................................. 44
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 44
ITEM 11. EXECUTIVE COMPENSATION...................................... 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 44
PART IV................................................................... 44
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 44
SIGNATURES.............................................................. 48
i
PART I
ITEM 1. BUSINESS
This Report 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. These statements include, among others, statements
concerning our future operations, financial condition and prospects, and our
business strategies. The words "believe," "expect," "anticipate" and other
similar expressions generally identify forward-looking statements. Investors in
our common stock are cautioned not to place undue reliance on these
forward-looking statements. These forward-looking statements are subject to
substantial risks and uncertainties that could cause our future business,
financial condition, or results of operations to differ materially from
historical results or currently anticipated results. Investors should carefully
review the information contained under the caption "Factors Affecting Future
Operating Results" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in, or incorporated by
reference into, this Report.
OVERVIEW
We are a leading developer of gene therapy products for the treatment of
cancer. We are capitalizing on the significant advances in the understanding of
the human genome and the role that genetic function plays in the development of
cancer and other diseases. Our drug discovery and development programs have
resulted in innovative approaches by which physicians use genes to treat cancer
and other diseases.
Our lead product candidate, ADVEXIN(R) gene therapy (formerly known as INGN
201), combines the p53 gene, one of the most potent members of a group of
naturally occurring genes, the tumor suppressor genes, that act to protect cells
from becoming cancerous, with a gene delivery system that we have developed and
extensively tested. The gene delivery system, or vector, uses a modified
adenovirus, a common cold virus, to deliver p53 and genes like it to cancer
cells. We are conducting pivotal Phase III clinical studies of ADVEXIN gene
therapy in head and neck cancer. Pivotal Phase III trials are typically the
final phase required for FDA approval. We have completed a Phase II clinical
trial in non-small cell lung cancer, a category that includes approximately 80%
of the various types of lung cancer. Phase II trials are safety and efficacy
studies. We are also conducting several Phase I clinical trials, or safety
studies, of ADVEXIN gene therapy in additional cancer types, or indications. To
date, doctors at clinical sites in North America, Europe and Japan have treated
hundreds of patients with ADVEXIN gene therapy, establishing a large safety
database.
We are developing additional gene therapy product candidates that we
believe may be effective in treating certain cancers, notably those based on the
mda-7 and PTEN genes, as well as associated vector technologies for delivering
the gene-based products into target cells. Our INGN 241 product candidate, which
combines the mda-7 gene with our gene delivery system, is undergoing safety
testing in a Phase I clinical study. We believe that our research and
development expertise gained in gene therapy treatment for cancer is also
applicable to other diseases that, like cancer, result from cellular dysfunction
and uncontrolled cell growth. As a result, we are conducting research in
collaboration with medical institutions to understand the safety and
effectiveness of our gene therapy product candidates in the treatment of
cardiovascular disease and rheumatoid arthritis. In addition, we have developed
a variety of technologies, which we refer to as enabling technologies, for
administering gene therapy products to patients and enhancing the effects of
these products. We also have specialized manufacturing expertise and a
manufacturing facility to support our continued product development and
commercialization efforts.
BACKGROUND
Gene Function and Genomics
A typical living cell in the body contains thousands of different proteins
essential to cellular structure, growth and function. The cell produces proteins
according to a set of genetic instructions encoded by DNA, which contains all
the information necessary to control the cell's biological processes. DNA is
organized into segments called genes, with each gene containing the information
required to produce one or more specific
1
proteins. Production of a protein that a particular gene encodes requires gene
expression, or activity. Many of the proteins inside a cell interact to form
pathways that enable a cell to perform its various functions. The improper
expression of one or more genes can alter these pathways and affect a cell's
normal function, frequently resulting in disease.
In recent years, scientists have made significant progress toward
understanding the nature of the set of human genes, the human genome, and
evaluating the role that genes play in both normal and disease states. The Human
Genome Project and other commercial, academic and governmental initiatives have
sequenced all of the genes that comprise the human genome. As new genes are
discovered and decoded, scientists are identifying and understanding their
functions. These discoveries provide opportunities to develop therapeutic
applications for individual genes, including treatment and prevention of
disease.
Gene Therapy
Gene therapy uses genes to regulate cellular function or to correct
cellular dysfunction. These processes involve the introduction of genes into
cells to restore missing gene functions, correct aberrant gene functions,
augment normal gene activity, neutralize the activity of defective genes or
induce cell death. In order to perform these processes, a gene for disease
treatment, or therapeutic gene, is often combined with a vector for gene
delivery, which enables the gene to enter the target cell and make its gene
product. For in vivo gene therapy, physicians typically inject the vector
containing the therapeutic gene directly into a patient's tissue, body cavity or
bloodstream.
The genes used for disease treatment are typically the normal counterparts
of genes that are defective or inadequately expressed in the diseased cell. In
some cases, the therapeutic gene will simply act to replace a missing protein or
to augment the level of a protein that is otherwise inadequate to prevent
disease. In other cases, the therapeutic gene will act to eliminate the diseased
cells through a process that scientists refer to as apoptosis. Apoptosis, or
cell death, is a normal process that the body uses to eliminate damaged cells
and cells that are no longer necessary.
The delivery system must be able to deliver a sufficient dose of genes for
disease treatment to the correct tissue in order to cause a therapeutic effect.
The most common delivery systems currently in use are modified versions of
viruses such as adenoviruses. Scientists often use viruses as delivery systems
because viruses have the ability to efficiently infect cells and carry their
genetic material, or genome, into the cells where they will initiate a program
to produce more virus. Scientists can modify these viruses by deleting pieces of
the viral genome that are necessary for viral reproduction and replacing the
deleted pieces with a therapeutic gene. The resulting "viral vector" retains the
ability of the virus to efficiently deliver its genes, which now include a gene,
or genes, for disease treatment, into cells, but has lost the ability to
reproduce itself and spread to other cells. Scientists have also developed
synthetic substances such as liposomes, which are structures made of fatty
materials that have no viral pieces. The synthetic systems that lack any viral
pieces, or non-viral systems, can also deliver genetic material to host cells.
Scientists have developed these systems to mimic the characteristics of viral
systems in order to expand the disease targets that can be treated with gene
therapy.
Many of the clinical trials currently ongoing that involve gene therapy use
adenoviral vectors. Scientists create adenoviral vectors using adenoviruses,
which are among several common cold viruses. These vectors have been modified so
that their ability to reproduce and spread will be inhibited in a human host.
The DNA of adenoviral vectors rarely becomes incorporated into the cell genome.
Instead, it remains as an independent genetic unit and eventually disintegrates.
This feature protects normal cells that might have taken up the viral vector.
For cancer treatment, where the goal is to rapidly kill or repair the cancer
cells, the relatively short life of the adenoviral vector and its ability to
carry sufficient genes for disease treatment makes its use particularly
appropriate.
Cancer, a Genetic Disease
Cancer is the second leading cause of death in the United States, surpassed
only by heart disease. In the United States, approximately 1.3 million people
are newly diagnosed with cancer and over 550,000 people die from the disease
each year. Although the prevalence of specific cancers varies among different
populations, we
2
believe that the overall incidence of cancer worldwide is similar to that
experienced in the United States. The American Cancer Society estimates the
annual direct cost of treating cancer patients in the United States is
approximately $60.0 billion.
Cancer is a group of diseases in which the body's normal self-regulatory
mechanisms no longer control the growth of some kinds of cells. Cells are
frequently exposed to a variety of agents, from both external and internal
sources, that damage DNA. Even minor DNA damage can have profound effects,
causing certain genes to become overactive, to undergo partial or complete
inactivation, or to function abnormally. Genes control a number of protective
pathways in cells that prevent cells from becoming cancerous. For example,
pathways that transmit signals for a cell to divide have on-off switches that
control cell division. Cells also have mechanisms that allow them to determine
if their DNA has been damaged, and they have pathways to repair that damage or
eliminate the cell.
The failure of any of these protective pathways can lead to the development
of cancer. Cancer is one of the more attractive initial applications for gene
therapy, because in contrast to more complex genetic disorders, which may
require long-term function of the transferred gene, the treatment for cancer
restores just those functions that will lead to the destruction of the cancer
cell. The introduction of normal tumor suppressor genes, such as p53, into
cancer cells is among the most promising of these approaches.
Tumor Suppressor Genes
Tumor suppressor genes are one class of genes that play a crucial role in
preventing cancer and its spread. This class of genes includes the p53, mda-7
and PTEN genes, among others.
The best known and most studied of the tumor suppressor genes is the p53
gene. Initially mislabeled an oncogene, or cancer-causing gene, p53 is now known
to be a powerful tumor suppressor gene that acts to block cancer development by
preventing the accumulation of DNA damage. The p53 gene is involved in multiple
cellular processes, including control of cell division, DNA repair, cell
differentiation, genome integrity, apoptosis, and inhibition of blood vessel
growth, or anti-angiogenesis. Angiogenesis refers to the process by which new
blood vessels are formed, such as those that supply blood and nutrients to
tumors to feed their growth. The p53 gene is capable of such wide-ranging
effects because it orchestrates the activity of a host of other genes and
proteins. If a cell suffers DNA damage, p53 responds to the damage by initiating
a cascade of protective processes to either repair the DNA damage or to destroy
the damaged cell through apoptosis. These p53-mediated processes prevent damaged
cells from multiplying and progressing towards cancer. Therefore, the presence
of a normally functioning p53 pathway allows the body to naturally suppress
tumor growth. Most cancers have found ways to block the normal function of the
p53 pathway; approximately 50% of human cancers have done this through mutation
of the p53 gene itself. Scientists describe tumors with that mutation as p53
mutant tumors.
Current Treatment of Cancer
Despite advances in cancer research in recent years, better treatments for
cancer are urgently needed. The conventional therapeutic approaches, including
surgery, chemotherapy and radiation therapy, are ineffective or only partially
effective in treating many types of cancer. Surgery is inadequate for many
patients because the cancer is inaccessible or impossible to remove completely.
Surgery, although applicable to over half of all cancer cases, is also
inadequate where the cancer has spread, or metastasized. For certain cancers
such as head and neck cancer, surgery can be an effective treatment of the
cancer, but may result in severe disfigurement of and disability to the patient.
Radiation therapy and chemotherapy are, by their nature, toxic procedures that
damage both normal and cancerous tissue. Physicians must carefully control
administration of these therapies to avoid life-threatening side effects, and
many patients are unable to withstand the most effective doses due to toxicity.
These conventional therapies typically cause debilitating side effects such as
bone marrow suppression, nausea, vomiting and hair loss, often requiring
additional and costly medications to ameliorate such side effects. Further, the
usefulness of certain chemotherapies may be limited in tumors that have
developed mechanisms to evade the action of the drugs, a phenomenon known as
multi-drug resistance.
3
Due to the various limitations of current cancer therapies, the treatment
of cancer remains complex. Physicians refer to the first treatment regimen for a
newly-diagnosed cancer, usually surgery if possible, or radiation therapy, as
primary treatment. If the primary treatment is not successful, the cancer will
re-grow or continue to grow; physicians call this recurrent disease. In most
cases, recurrent cancer is not curable, with secondary treatment regimens,
usually chemotherapy, only providing marginal benefits for a limited period of
time. Physicians consider recurrent cancer that has proven resistant to a
secondary treatment to be refractory. Most new cancer treatments are tested
initially in patients with either recurrent or refractory disease because the
effects of the new therapy are more quickly apparent.
Given that established cancer therapies often prove to be incomplete,
ineffective or toxic to the patient, there is a need for new treatment
modalities that either complement established therapies or replace them by
offering better therapeutic outcomes. For example, for a limited number of
cancers, immunotherapy, which seeks to stimulate a patient's own immune system
to kill cancer cells, has rapidly become widely accepted by improving on the
shortcomings of existing therapy. However, for a broad range of cancers,
additional approaches are needed to improve the toxicity and marginal benefits
common to current cancer treatments. Gene therapy directly addresses the
cellular dysfunction that causes cancer, compared with small molecule drugs or
immunotherapeutic agents, which may act indirectly.
THE INTROGEN APPROACH
We believe that the emerging field of gene therapy presents a new approach
for treating many cancers without the toxic side effects common to traditional
therapies. We have developed significant expertise in identifying therapeutic
genes, which are genes that may be used to treat disease, and in using what we
believe are safe and effective delivery systems to transport these genes to the
cancer cells. We believe that we are able to treat a number of cancers in a way
that kills cancer cells without harming normal cells.
Because most cancers are amenable to local treatment, we generally
administer gene therapy directly into a patient's cancerous tumor by hypodermic
syringe. We have initially focused on advanced cancers that lack effective
treatments and in which local tumor growth control, where the tumor stops
growing or shrinks, is likely to lead to measurable benefit. We believe our
clinical studies have shown that our gene therapy can be used alone and in
combination with conventional treatments such as surgery, radiation therapy and
chemotherapy. To date, doctors at clinical sites in North America, Europe and
Japan have treated hundreds of patients with our lead product candidate, ADVEXIN
gene therapy, establishing a large safety database.
We have developed ADVEXIN gene therapy by inserting the p53 gene into the
adenoviral delivery system we have developed and extensively tested. Evidence
from laboratory, pre-clinical and clinical studies suggests that the p53 tumor
suppressor gene may be sufficient to slow, stop or kill many cancer cell types.
We believe that ADVEXIN gene therapy holds promise as an effective anti-cancer
therapeutic that would restore or augment normal tumor suppressor functions,
both in combination with conventional cancer treatment and as a stand-alone
treatment for patients who are resistant to or unable to receive conventional
therapies. We have also developed INGN 241 by inserting the mda-7 gene into the
adenoviral delivery system we have developed and extensively tested, and believe
it also holds promise as an effective anti-cancer therapeutic.
THE INTROGEN STRATEGY
Our objective is to be the leader in the development of gene therapy
products for the treatment of cancer and other diseases that, like cancer,
result from cellular dysfunction and uncontrolled cell growth. To accomplish
this objective, we are pursuing the following strategies:
- Develop and Commercialize ADVEXIN gene therapy and INGN 241 for Multiple
Cancer Indications. We plan to continue developing ADVEXIN gene therapy
using the p53 gene and our INGN 241 product using the mda-7 gene in
multiple cancer indications. Using ADVEXIN gene therapy, we are
conducting a pivotal Phase III clinical trial in head and neck cancer,
Phase II clinical trials in non-small cell lung cancer and breast cancer,
and in cooperation with the National Cancer Institute, or NCI, seven
Phase I studies in five other cancer types. We are also conducting a
Phase I study of
4
ADVEXIN gene therapy delivered intravenously. Using INGN 241, we are
conducting safety testing in a Phase I clinical study.
- Develop Our Portfolio of Gene Therapy Drug Products. Utilizing our
significant research, clinical, and regulatory expertise, we are pursuing
additional gene therapy drug products for various cancers. We have
established an efficient process for evaluating new drug candidates and
rapidly progressing them from pre-clinical to clinical development. We
have identified and licensed multiple genes, including PTEN, which we
intend to combine with our adenoviral vector system and which we believe
are attractive development targets for the treatment of various cancers.
- Expand Our Delivery System Technologies. We believe that no single gene
delivery system will be applicable to all clinical needs. At present, we
have a broad portfolio of delivery technologies under development. We are
leveraging our experience gained with our existing adenoviral vector
systems to develop next generation vectors for both viral and non-viral
delivery systems. To augment our portfolio, we will continue to examine
new licensing opportunities and develop collaborations in the area of
novel delivery and targeting technologies.
- Leverage Our Manufacturing Capabilities to Produce Additional Gene
Therapy Drug Products. We have developed significant expertise and
infrastructure for process development and manufacturing of therapeutic
genes and delivery systems. We have built and validated a manufacturing
facility that we believe meets current Good Manufacturing Practices, or
CGMP requirements. We believe that this facility is capable of supporting
the market launch of ADVEXIN gene therapy and the clinical testing
requirements of INGN 241. We have also established a variety of process
methodologies, formulation strategies and quality release assays to
produce clinical grade materials at commercial scale. We intend to
utilize these processing and production capabilities to advance clinical
development and commercialization of our pipeline of gene therapy product
candidates, as well as capitalize on opportunities to produce other
companies' products for them.
- Establish Targeted Sales and Marketing Capabilities. Because the
oncology market is characterized by a concentration of specialists in
relatively few major cancer centers, it can be effectively addressed by a
small, focused sales force. We will address this market by building a
direct sales force as part of the ADVEXIN gene therapy commercialization
process and by pursuing marketing and distribution agreements with
corporate partners for ADVEXIN gene therapy as well as additional gene
therapy products.
- Expand Our Market Focus to Non-Cancer Indications. Our long-term
strategy is to leverage our scientific, research and process competencies
in gene function and vector development to pursue gene-based therapies
for a variety of other diseases and conditions. We believe that gene
therapy holds promise for diseases such as cardiovascular disease and
rheumatoid arthritis, which, like cancer, result from cellular
dysfunction or uncontrolled cell growth.
5
PRODUCT DEVELOPMENT PROGRAMS
The following table summarizes the status of our gene therapy product
development programs.
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PRODUCT (GENE) CANCER INDICATION DEVELOPMENT STATUS
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ADVEXIN(R) Gene Therapy (p53) Head and Neck Phase III
Non-Small Cell Lung Phase II
Breast Phase II*
Prostate Phase I
Intravenous Administration Phase I
Ovarian Phase I**
Bladder Phase I**
Brain (glioblastoma) Phase I**
Bronchoalveolar Phase I**
Rheumatoid Arthritis Pre-clinical
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INGN 241 (mda-7) Various (solid tumors) Phase I
Breast Pre-clinical
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INGN 251 (PTEN)*** Colorectal Pre-clinical
Brain (glioblastoma) Pre-clinical
Cardiovascular Disease Pre-clinical
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BAK Program Various Research
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FUS-1 Program Various Research
p16 Program Pancreatic Research
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* Aventis Pharma provides funding for this study.
** Conducted in conjunction with the National Cancer Institute.
*** Assigned to Gendux AB, our indirect, wholly-owned subsidiary.
Indications for ADVEXIN(R) Gene Therapy (p53)
ADVEXIN gene therapy combines the (p53) gene with an adenoviral vector for
gene delivery. Physicians typically inject ADVEXIN gene therapy directly into
the tumor. The importance of the p53 gene in controlling tumor growth suggests
that ADVEXIN gene therapy is applicable to multiple cancers. Our initial
development strategy for ADVEXIN gene therapy is to obtain approval for cancer
indications, like head and neck and lung cancer, which have few or no treatment
options available and have near-term clinical endpoints.
We have conducted a number of Phase I and Phase II studies to establish the
safety and evaluate the efficacy of ADVEXIN gene therapy both alone and in
combination with radiation therapy, chemotherapy and/or surgery. We evaluated
efficacy by measuring tumors during each study to analyze whether tumors had
regressed, remained stable or progressed during treatment. We supplemented these
analyses, where possible, with microscopic tissue analysis, or biopsy, to
determine the presence of residual cancer cells within the treated area. We
further evaluated efficacy by measuring the survival time of the patients
treated in all of these studies.
Head and Neck Cancer
Head and neck cancer, encompassing cancers of the tongue, mouth, vocal
cords and tissues surrounding them, has a worldwide incidence of approximately
400,000 new cases per year. In the United States, the
6
annual incidence of squamous cell cancer, a cancer of cells that line the oral
cavity, pharynx and larynx, is approximately 40,000 with annual deaths of
approximately 11,800. Head and neck cancer is frequently fatal, with most
patients dying from local and regional disease, rather than from metastasis to
other organs. Primary treatments for head and neck cancer are surgery and
radiation therapy. However, these treatments are debilitating and have permanent
side effects, including loss of teeth, loss of voice or disfigurement. Moreover,
a large number of patients with head and neck cancer experience recurrence. Once
the disease recurs, few patients survive despite secondary treatment with
conventional therapies, with median patient survival of less than 12 months.
Although often used as a secondary treatment, there are no chemotherapy drugs
available today that have been approved by the FDA for treatment of patients
with recurrent head and neck cancer.
Because physicians can administer ADVEXIN gene therapy locally, we believe
it is an excellent candidate for treatment of head and neck cancer. Based on
clinical results from our Phase I and Phase II trials, we are currently
enrolling patients in and conducting two multi-national pivotal Phase III
studies that the FDA has reviewed, and if successful, will be used to support
regulatory approval. We intend these studies to demonstrate the efficacy of
ADVEXIN gene therapy for treatment of patients with squamous cell carcinoma of
the head and neck, regardless of whether the p53 gene is mutant or non-mutated,
in whom standard treatment of surgery and radiation therapy have not been
effective and who have recurrent or refractory disease. The first study compares
the efficacy of ADVEXIN gene therapy to a standard chemotherapy treatment in
patients with refractory disease. The second study compares the efficacy of
ADVEXIN gene therapy when it is used in combination with a standard chemotherapy
treatment to that of standard chemotherapy treatment used alone in patients with
recurrent disease.
The first Phase III study is planned for 240 patients with refractory
disease. Patients in the control group receive weekly methotrexate, a standard
chemotherapy treatment for this condition, while patients in the treatment group
receive twice weekly injections of ADVEXIN gene therapy. The study's primary
endpoint, or result that we will principally evaluate, is survival. The
investigators will measure a possible survival advantage by comparing how long
the p53 treatment group patients live relative to how long the control group
patients live. The second Phase III study is planned for 288 patients with
recurrent head and neck cancer. These patients will not have previously been
treated with chemotherapy. The control group will receive a standard
chemotherapy treatment with the drugs cisplatin and 5-fluorouracil and the
treatment group will receive the same drugs and ADVEXIN gene therapy. Each
treatment will be repeated every three weeks, which is a standard interval for
chemotherapy. The primary endpoint will be the duration of tumor growth control
in the head and neck region as measured by a patient's tumor growth beyond the
patient's baseline, or tumor size at the beginning of the study. These studies
are complementary, with the primary endpoint in each serving as a secondary
endpoint, or result that we will evaluate secondarily, in the other. Both are
randomized studies, meaning that neither the doctor nor the patient knows
whether the patient will be in the control group or the treatment group at the
time the patient is enrolled in either study. An independent data safety
monitoring board will oversee safety for the studies and conduct a specified
interim data analysis for each study. Both of these Phase III studies are
intended to be conducted at approximately 60 cancer centers in the United
States, Canada and Europe. Both of these studies have been extensively discussed
with the FDA.
We conducted a Phase II study of ADVEXIN gene therapy in 112 patients with
either recurrent or refractory head and neck cancers at 18 clinical centers in
the United States and Europe, using the highest dose of ADVEXIN gene therapy
tested in the Phase I study. This study did not have a treatment control arm and
the main purpose of the study was to evaluate the safety, side effects and
efficacy of ADVEXIN gene therapy administered alone to tumors of various sizes.
The primary measure of efficacy was to assess patient response to ADVEXIN gene
therapy by periodically measuring the size of all tumors in the patient compared
to their size at the start of treatment. A positive response is defined as the
disappearance of the tumor, shrinkage of the tumor or the absence of additional
tumor growth beyond 25% of pre-treatment measurements, an accepted indicator of
tumor growth control.
In order to design pivotal Phase III studies and to identify the patient
characteristics most amenable to ADVEXIN gene therapy, we conducted a
preliminary analysis on the first 88 patients treated and evaluated in our Phase
II study. This analysis showed that approximately 25% of the patients that the
investigators injected and evaluated had a positive response to treatment. In
addition, because a subset of patients had multiple
7
tumors treated, the preliminary analysis also evaluated individual tumor
response. The analysis showed that 60% of the individual tumors that the
investigators injected and evaluated had a positive response. Tumors with
non-mutated p53 genes and those with mutant p53 genes both responded to ADVEXIN
gene therapy. The patients in this Phase II study tolerated ADVEXIN gene therapy
well, without the significant side effects common to conventional cancer
treatments. Side effects were consistent with those experienced in the Phase I
study discussed below.
This preliminary analysis also provided important data with regard to the
effect of ADVEXIN gene therapy on the median survival time of the patients. The
data showed a median patient survival time from the start of treatment of 7.5
months for a subset of patients with refractory disease and tumors below a
specified size. Patients with these characteristics comprise the population for
our first Phase III study. Based on an historical expected survival time that
our clinical advisors estimate to be 4 months, this median survival time of 7.5
months suggests an 88% increase in survival time for these patients.
Previously, ADVEXIN gene therapy was tested in a Phase I safety study with
patients with recurrent head and neck cancer. In this study, 33 patients
received a total of 429 doses. We believe this study demonstrates that
physicians can safely inject ADVEXIN gene therapy into head and neck tumors
repetitively over many months. Side effects were minimal, consisting of pain at
the site of the injection and flu-like symptoms that could be readily treated
without disrupting the administration of the drug. No patient had treatment
stopped or reduced because of toxicity, even at the maximum dose. In 15 of these
patients, we showed that surgery could be safely combined with ADVEXIN gene
therapy without increasing the risk of wound infections or inhibiting healing.
Non-Small Cell Lung Cancer
Lung cancer is the most common cause of cancer-related death in the United
States, with an estimated 169,000 new cases diagnosed annually. An estimated
157,000 people die from the disease annually. The five-year survival rate for
patients diagnosed with lung cancer is 14%. Non-small cell, or NSC, lung cancer
comprises approximately 80% of all lung cancer cases. Surgery can be an
effective treatment, but only a minority of patients are eligible because
early-stage diagnosis is uncommon. Only 30% of these patients will have a
complete surgical resection of their disease. The remaining patients typically
undergo a combination of surgery, radiation and chemotherapy. This combination
treatment is only effective in a small percentage of cases. Of patients who have
unresectable disease, 80% will again have active cancer cells three months after
completing a full course of radiation. Due to the ineffective treatment of NSC
lung cancer in many patients, a significant, unmet need for better treatments
exists. The opportunity for a new beneficial treatment is great, particularly if
it can be combined with existing treatments without increasing the toxicity of
those treatments.
We have completed a Phase II study of ADVEXIN gene therapy in combination
with radiotherapy as the primary treatment for patients who had newly-diagnosed,
inoperable NSC lung cancer and who could not tolerate chemotherapy. Radiotherapy
is the standard treatment for patients in this condition. All patients in this
study received three ADVEXIN gene therapy injections into their tumors during a
five-to-six week course of radiotherapy. These patients were evaluated for the
efficacy, safety and side effects of the treatment to ascertain whether the
combination of ADVEXIN gene therapy with radiation was tolerated. Objectives of
this study were to determine if the addition of ADVEXIN gene therapy injected
directly into the tumor with standard radiotherapy improved the response rate of
the injected tumor in patients with inoperable NSC lung cancer, and to evaluate
the tolerability of the combination treatment. An evaluation was performed three
months after treatment was completed, consisting of a radiograph to assess the
size of the treated tumor mass, supplemented by a biopsy to assess for living
cancer cells within the tumor at the site of treatment. The patients were then
followed without further treatment for clinical evidence of disease progression.
We conducted an analysis of 19 patients that the investigators treated and
evaluated in the Phase II study of ADVEXIN gene therapy. This analysis included
both the radiographs and the tumor biopsies that we refer to above. The results
of this analysis established an acceptable safety profile and showed evidence of
local tumor control and reductions in tumor size. Fifteen of the 19 patients
that the investigators treated, or 79%, had radiographic evidence of local tumor
growth control, including 12 complete or partial responses of the
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tumor that the investigators injected. Furthermore, the preliminary analysis
showed that nine of these 12 patients had no living tumor cells in the biopsy
that the investigator took from the site of the gene therapy injection. Based on
the preliminary results of this Phase II study using gene therapy with radiation
therapy, a larger Phase II study is being designed to evaluate whether p53
enhances the effectiveness of radiation therapy and chemotherapy when
investigators use them together to treat NSC lung cancer.
We conducted a Phase I safety study of ADVEXIN gene therapy in 53 patients
with end-stage NSC lung cancer who had failed surgery, radiation and
chemotherapy. In one arm of the study, 29 patients received ADVEXIN gene therapy
injected into a single tumor site. In the other arm, 24 patients received
ADVEXIN gene therapy in combination with cisplatin, a commonly used
chemotherapeutic agent. The patients in this study tolerated the ADVEXIN gene
therapy well, and the most severe side effects noted were consistent with those
experienced with the use of cisplatin alone. Also, the National Cancer Institute
(NCI) is initiating a Phase I safety study using ADVEXIN gene therapy in
combination with radio therapy in patients with NSC lung cancer.
Breast Cancer
Physicians diagnose an estimated 193,000 new cases of breast cancer
annually in the United States, and more than 40,000 of these people are
estimated to die from the disease each year. We and Aventis Pharma SA, or
Aventis, under an agreement separate from the restructured p53 collaboration
agreement discussed below, are commencing a Phase II study using ADVEXIN gene
therapy administered alone and in combination with chemotherapy in women who
have locally advanced breast cancers. Also, the NCI has initiated a Phase I
clinical trial using ADVEXIN gene therapy in patients with locally recurrent
breast cancer involving the chest wall.
Prostate Cancer
Prostate cancer is one of the most common forms of cancer. Approximately
198,000 new cases occur annually in the United States and more than 31,000
people are estimated to die from the disease each year. Most prostate cancer
patients are treated with either surgery or radiation therapy. Because newer and
simpler methods of diagnosis that detect the disease at an earlier stage exist
today, a significant number of patients who are diagnosed with prostate cancer
before it has metastasized may benefit from local treatment therapies such as
ADVEXIN gene therapy.
We plan to conduct a randomized, controlled Phase II study for patients who
have failed radiation therapy for prostate cancer. The study would enroll only
patients who have local recurrence in the pelvic region, thus excluding those
with metastases beyond the pelvic region. Patients in the study arm would be
treated with a combination of ADVEXIN gene therapy injections and additional
radiation therapy, while patients in the control arm would receive only
radiation treatment. The goal of this study is to demonstrate the safety and
efficacy of ADVEXIN gene therapy and radiation in reducing or eliminating
further tumor growth in patients with localized disease who are not candidates
for surgery.
We have completed enrollment and treatment in a Phase I study of 30
patients where investigators injected ADVEXIN gene therapy into the prostate
gland with a subsequent surgical resection of the gland. The patients tolerated
the ADVEXIN gene therapy injections well. In a preliminary analysis, 27% of the
patients showed measurable evidence of tumor shrinkage from the ADVEXIN gene
therapy injections.
Other Cancers
There are several other cancer indications for which ADVEXIN gene therapy
is in earlier stages of clinical development. To evaluate the possible use of
ADVEXIN gene therapy in these indications, we have entered into a Cooperative
Research and Development Agreement, or CRADA, with the NCI. Under this program
the NCI has initiated clinical trials with ADVEXIN gene therapy at leading
cancer centers using clinical protocols that we have developed in connection
with the NCI. These protocols are designed to demonstrate the safety of ADVEXIN
gene therapy in these indications and by various routes of administration.
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Ovarian Cancer. There are an estimated 23,000 new cases of ovarian cancer
and 14,000 deaths attributed to ovarian cancer in the United States each year.
In approximately 80% of patients with advanced disease, the cancer remains
localized within the peritoneal, or abdominal, cavity. This allows ready access
to cancer cells for simple intraperitoneal administration, that is,
administration into the abdominal cavity of gene therapeutic agents. The NCI has
initiated Phase I clinical trials of ADVEXIN gene therapy in this population. We
anticipate that these trials will be expanded to evaluate the use of ADVEXIN
gene therapy in combination with surgery and/or chemotherapy.
Bladder Cancer. There are an estimated 53,000 new cases of bladder cancer
each year in the United States. The annual number of deaths from this indication
in the United States is estimated to be 12,000. The anatomy of the bladder
allows uniform delivery of high concentrations of gene therapeutic agents via
catheter. The NCI has initiated a Phase I clinical trial using ADVEXIN gene
therapy in this indication.
Brain Cancer (Glioblastoma). An estimated 13,000 people die from cancers
of the brain and central nervous system in the United States each year.
Glioblastoma multiforme, or GBM, is a particularly deadly form of primary brain
cancer that afflicts children as well as adults. This condition occurs in
approximately 30% of all brain cancer patients in the United States. GBM is not
effectively treated with conventional therapies because the lesions are deep
within the brain and are large and grow rapidly. The NCI has initiated a Phase I
clinical trial using ADVEXIN gene therapy in recurrent GBM.
Bronchoalveolar Cancer. It is estimated that physicians diagnosed an
estimated 9,800 new cases of bronchoalveolar cancer in the United States each
year. Bronchoalveolar cancer is a form of non-small cell lung cancer which
spreads throughout the lungs, but does not spread elsewhere in the body. Current
treatments are not effective for this condition. The NCI is completing a Phase I
clinical trial in bronchoalveolar cancer with ADVEXIN gene therapy administered
by directly bathing the airway leading to the diseased lung segments.
Other p53 Product Development
We are also exploring additional therapeutic approaches of combining the
p53 gene with other vectors. We have studied the p53 gene in combination with
retroviral vectors, which are described below, in a Phase I clinical trial and
observed no significant side effects. In addition, we are studying the use of
the p53 gene in combination with non-viral delivery systems to evaluate the
benefits of systemic and other administration of the p53 gene to treat cancer.
Indications for INGN-241 (mda-7)
The mda-7 gene is a promising tumor suppressor gene which we believe, like
p53, has broad potential to induce apoptosis in many types of cancer. We have
combined the mda-7 gene with our adenoviral system to form INGN 241. Our
pre-clinical studies have determined that INGN 241 suppresses growth of many
cancer cells, including those of the breast, lung, colon, prostate and central
nervous system, while not affecting growth of normal cells. Because INGN 241
kills cancer cells, even if other tumor suppressor genes, including p53 or p16,
are not functioning properly, it appears that mda-7 functions via a novel
mechanism of tumor suppression. We have an exclusive license to the mda-7 gene
for gene therapy applications from Corixa Corporation. We are currently
conducting a Phase I study using INGN 241 testing safety and mechanism of action
in approximately 15 patients with solid tumors. Our pre-clinical program with
INGN 241 has included research at The University of Texas M.D. Anderson Cancer
Center, Columbia University and Corixa Corporation.
RESEARCH AND DEVELOPMENT PROGRAMS
In addition to our clinical programs underway with ADVEXIN(R) gene therapy
and INGN 241, we are conducting a number of pre-clinical and research programs
involving a variety of therapeutic genes for the treatment of cancer. These
programs involve genes that act through diverse mechanisms to inhibit the growth
of or kill cancer cells.
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We have combined the PTEN tumor suppressor gene with our adenoviral system
to form INGN 251. Researchers have linked mutations in the PTEN tumor suppressor
gene to a variety of common human cancers, including brain, prostate and breast
cancers. Preliminary studies have demonstrated that INGN 251 can inhibit the
growth of colorectal, prostate and brain cancer cells and promote apoptosis in
many of these cells. Our pre-clinical program with INGN 251 has included studies
with Imperial Cancer Research Technology Limited in London, or ICRT. We are also
conducting pre-clinical studies of PTEN's role in prohibiting advancement of
cardiovascular disease in a collaboration with the Texas Heart Institute. We
obtained an exclusive license to the PTEN gene from ICRT, which we have assigned
to Gendux AB.
In addition to our pre-clinical programs, we are conducting research on
additional genes, including BAK and p16, which hold promise as therapeutic
candidates. BAK is a pro-apoptotic gene that kills cancer cells. We are working
with our collaborators at M.D. Anderson Cancer Center to identify and develop
both viral and non-viral vectors containing this gene. We have exclusive rights
to use the BAK gene under a license with LXR Biotechnology, Inc., the rights of
which were subsequently sold to Tanox, Inc. We have licensed the adenoviral
vector containing the p16 gene, a widely known tumor suppressor gene, from M.D.
Anderson Cancer Center and have demonstrated that the gene inhibits tumor growth
in animal models. After evaluating the results of early stages of research with
two other genes, DBCCR1 and rsk3, we notified ICRT in July 2001 that we would
not exercise our options to license these two genes. We were also conducting
pre-clinical research on the CCAM gene, which we had licensed from the M.D.
Anderson Cancer Center. After evaluating the results of our research, we
notified M.D. Anderson Cancer Center in early 2002 that we would not continue
with our CCAM program and returned the rights to this gene.
In October 2001, we licensed from M.D. Anderson Cancer Center a group of
genes known as the 3p21.3 family of genes. This family of genes includes the
FUS-1 gene. Pre-clinical research performed on these genes by collaborators at
The University of Texas Southwestern Medical Center and M.D. Anderson Cancer
Center suggests that the 3p21.3 genes play a critical role in the suppression of
tumor growth in lung and other cancers. We are working with M.D. Anderson Cancer
Center to further evaluate FUS-1 and other 3p21.3 genes as clinically-relevant
therapeutics.
INTROGEN ENABLING TECHNOLOGIES
We have a portfolio of technologies, referred to as enabling technologies,
for administering gene therapy products to patients and for enhancing the
effects of these products, which we plan to exploit to develop additional gene
therapy products to treat cancer and other diseases which, like cancer, result
from cellular dysfunction and uncontrolled cell growth.
Viral Delivery Systems
Adenoviral Systems. We have demonstrated that ADVEXIN gene therapy and
INGN 241, which use our adenoviral vector system, enter tumor cells and express
their proteins despite the body's natural immune response to the adenoviral
vector. While the adenoviral vector system used is appropriate for the treatment
of cancer by local administration, we have developed a number of additional
systems that utilize modified adenoviral vectors for gene delivery. These
systems also may be applicable to indications where activity of the gene for
disease treatment is required for longer periods of time or where systemic
administration may be necessary.
- Viral Gene Expression Modulation System. We are developing this
technology to block production of viral proteins in the patient to reduce
immune response to the vector, thus prolonging the activity of the
disease treatment gene.
- Expanded Payload Systems. We are developing these technologies to allow
the removal of very large pieces of the genome in order to increase the
amount of genetic material that can be carried to the cell, allowing
multiple genes to be incorporated into a single vector. Also, since many
viral genes are deleted, we expect that the immune response against these
vectors will be reduced.
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Retroviral Systems. Retroviral vectors are based on a different type of
virus that has RNA rather than DNA as its genetic material. Retroviral vectors
may be advantageous for particular clinical applications where the gene for
disease treatment needs to be active for an extended period of time. We have
clinical experience combining retroviral vectors with p53 and have established
manufacturing capability for these delivery systems.
Non-Viral Delivery Systems
We have in-licensed and are developing a non-viral delivery platform as a
potential alternative to viral delivery for certain types of cancers, or
clinical indications, particularly those that require systemic administration.
Although we are not currently using non-viral vector technology in our clinical
programs, we have completed proof-of-concept studies in animal models that
suggest that this system may be a useful way to deliver tumor suppressor genes
for systemic cancer treatment.
Additional Enabling Technologies
We are also developing a number of additional technologies that expand our
capabilities.
- Multi-Gene Vector System. This technology is designed to combine
multiple genes with a vector. This has the potential to be used with both
viral and non-viral delivery systems to allow the activity of more than
one gene for disease treatment at a time.
- Pro-Apoptotic Gene Delivery System. This technology is designed to allow
the activity of pro-apoptotic, or apoptosis-inducing, genes during
treatment only, while temporarily suppressing the ability of the gene for
disease treatment to kill cells during production. This will facilitate
production of the gene therapeutic at higher volumes.
- Tissue-Specific Targeting Systems. This technology is designed to limit
the activity of the gene for disease treatment to particular cell types.
It is intended to be applied to both viral and non-viral vectors.
- Selective Inhibition of Gene Expression. This technology is designed to
block the dysfunctional activity or expression of certain genes, like
cancer-promoting oncogenes.
- Gene Screen Vector System. This technology is designed to aid in the
rapid screening of genes for therapeutic potential. This system should
allow us to quickly evaluate genes of unknown function for their
potential as cancer treatments.
MANUFACTURING AND PROCESS DEVELOPMENT
Commercialization of a gene therapy product requires process methodologies,
formulations and quality release assays in order to produce high quality
materials at a large scale. We believe that the expertise we have developed in
the areas of manufacturing and process development represents a competitive
advantage. We have developed scale-up methodologies for both upstream and
downstream production processes, formulations that are safe and stable, and
quality release assays that ensure product quality.
We own and operate a state-of-the-art, validated manufacturing facility
that we believe complies with CGMP requirements, and which replaces an earlier
pilot production facility. We produce ADVEXIN gene therapy in this facility for
use in our Phase I, II and III clinical studies and INGN 241 for use in our
Phase I clinical studies. The design and processes of this facility have been
reviewed with the FDA. The validation of our manufacturing processes is ongoing.
We plan to use this facility for our market launch of ADVEXIN gene therapy. Our
production and quality personnel team has been in place for approximately four
years. To date, we have produced over 20 batches of ADVEXIN gene therapy
clinical material, including all clinical material used in the Phase II and
Phase III studies for this product candidate. In addition, we have entered into
agreements with third parties under which we have provided process development
and manufacturing services related to products they are developing.
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BUSINESS AND COLLABORATIVE ARRANGEMENTS
Aventis Pharma AG
In October 1994, we entered into two collaboration agreements with
Rhone-Poulenc Rorer Pharmaceuticals Inc. to develop therapeutics based on p53
and on K-ras pathway inhibition. In December 1999, Rhone-Poulenc S.A., the
ultimate parent company of Rhone-Poulenc Rorer Pharmaceuticals Inc., combined
with Hoechst AG, and the parties have combined Hoechst Marion Roussel, the
pharmaceutical business of Hoechst AG, with that of Rhone-Poulenc Rorer to form
Aventis Pharma, or Aventis. Rhone-Poulenc Rorer Pharmaceuticals Inc. is now
known as Aventis Pharmaceuticals Inc. Aventis Pharma, the parent company of
Aventis Pharmaceuticals Inc., is a multi-billion dollar, global pharmaceutical
company.
In June 2001, we restructured our collaborative relationship with Aventis.
Under this restructuring, we assumed responsibility for the worldwide
development of all p53 and K-ras products, and acquired all marketing and
commercialization rights with respect to those products. We assumed the control
and performance of ongoing clinical trials for p53- and K-ras-based products,
and are now fully responsible for all pre-clinical research and development and
clinical trials for new gene therapy products. In connection with this
restructuring and pursuant to a stock purchase agreement executed on June 30,
2001, Aventis purchased $25.0 million of non-voting preferred stock from us, the
payment for which was received on July 2, 2001. During the quarter ended
September 30, 2001, we made a one-time payment of $2.0 million to Aventis in
consideration for internal costs it incurred in facilitating the transition of
control and performance of these clinical trials from Aventis to us.
In accordance with the restructured p53 and K-ras collaboration agreement,
Aventis licensed to us all of its patents covering the manufacture, sale,
offering for sale, importation or use of ADVEXIN gene therapy and other K-ras
patents, delivery patents and targeting technologies. Aventis also agreed, for a
period of seven years, not to conduct any activities directed to the development
or commercialization of any gene therapy products using the p53 or K-ras genes.
We now have the exclusive, worldwide right to market and manufacture the
products developed under each of the prior collaboration agreements, as well as
any new p53- or K-ras-based gene therapy products. Aventis agreed to transfer,
and is in the process of transferring to us, all trademarks and goodwill
associated with ADVEXIN gene therapy.
Through December 31, 2001, Aventis provided us with approximately $57.2
million in the form of funding for early-stage development programs and
purchases of ADVEXIN gene therapy product for later-stage clinical development
and purchased over $39.4 million of preferred stock from us. These purchases of
preferred stock were made upon the achievement of the milestones contemplated in
our stock purchase agreement with Aventis.
Gendux, Inc. and Gendux AB
We established our wholly-owned subsidiary, Gendux, Inc., and its
wholly-owned subsidiary Gendux AB, which is based in Stockholm, Sweden, in order
to create a European presence with which to extend our technology and product
development opportunities and enhance our interactions with European academic
and commercial institutions. We have assigned to Gendux AB certain rights in the
PTEN technologies, as well as a non-exclusive license to use our vector
technology in commercializing gene therapy products.
Academic and Other Collaborations
Academic collaboration agreements have been a cost-effective way of
expanding our intellectual property portfolio, generating data necessary for
regulatory submissions, accessing industry expertise and finding new technology
in-license candidates, all without building a large internal scientific and
administrative infrastructure.
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The University of Texas M.D. Anderson Cancer Center
Many of our core technologies were developed by scientists at M.D. Anderson
Cancer Center in Houston, Texas, one of the largest academic cancer centers in
the world. We sponsor research conducted at M.D. Anderson Cancer Center to
further the development of technologies that have potential commercial
viability. Through these sponsored research agreements, we have access to M.D.
Anderson Cancer Center's resources and expertise for the development of our
technology. In addition, we have the right to include certain patentable
inventions arising from these sponsored research agreements under our exclusive
license with M.D. Anderson Cancer Center.
We entered into this license agreement on July 20, 1994, and the agreement
terminates on July 20, 2009. The agreement is also terminable upon our
insolvency, either party's breach or upon our notice on a patent-by-patent
basis. The technologies we have licensed from M.D. Anderson Cancer Center, under
the exclusive license agreement, relate to p53 and the 3p21.3 family of genes.
Under the agreement, we have agreed to pay M.D. Anderson Cancer Center royalties
on sales of products utilizing these technologies and we are obligated to
reimburse any of M.D. Anderson Cancer Center's costs that may be incurred in
connection with obtaining patents related to the licensed technologies. Our
strategy for product development is designed to take advantage of the
significant multidisciplinary resources available at M.D. Anderson Cancer
Center. These efforts have resulted in our becoming one of the largest corporate
sponsors of activities at M.D. Anderson Cancer Center in recent years and have
yielded to us exclusive patent and licensing rights to numerous technologies.
National Cancer Institute
We have entered into a cooperative research and development agreement, or
CRADA, with the NCI. The CRADA has a flexible duration, but is terminable upon
the mutual consent of the parties or upon 30 days notice of either party. NCI
will sponsor and conduct pre-clinical and human clinical trials to evaluate the
effectiveness and potential superiority to other treatments of ADVEXIN gene
therapy against a range of designated cancers, including breast cancer, ovarian
cancer, bladder cancer and brain cancer. Under the CRADA, NCI will conduct five
or more Phase I clinical trials and will provide most of the funding for these
activities. We will supply NCI with ADVEXIN gene therapy product to be
administered in these trials. We have exclusive rights to all pre-clinical and
clinical data accumulated under the CRADA.
Corixa Corporation
We have entered into a research and license agreement with Corixa
Corporation pursuant to which we acquired an exclusive, worldwide license to the
mda-7 gene for gene therapy applications. The agreement is effective until the
expiration of the subject patents. It is terminable upon the breach or
insolvency of either party, or upon our notice on a patent-by-patent or
product-by-product basis. Under the agreement, we paid Corixa an initial license
fee and have agreed to make additional payments upon the achievement of
development milestones, as well as royalty payments on product sales. We also
made research payments to Corixa in connection with research it performed
involving the mda-7 gene.
Imperial Cancer Research Technology Limited
We have entered into two option agreements with Imperial Cancer Research
Technology Limited, or ICRT. ICRT is the technology and licensing unit of the
Imperial Cancer Research Fund, which conducts over one-third of all cancer
research in the United Kingdom. The agreements are terminable upon either
party's breach or insolvency, or by ICRT upon our failure to make required
payments. Under the agreements, we have an option to obtain exclusive worldwide
licenses to PTEN, rsk3 and DBCCR1 genes, the first of which we have
assigned -- and the last two of which we have licensed -- to Gendux AB. In July
2001, Gendux notified ICRT of its intent not to exercise its options to license
the rsk3 and DBCCR1 genes. Gendux AB has exercised the option with respect to
the PTEN gene and entered into a license with ICRT for that gene. We are
currently evaluating the PTEN gene for its ability to reduce cardiovascular
disease in a research collaboration with the Texas Heart Institute.
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MARKETING AND SALES
We are focusing our current product development and commercialization
efforts on the oncology market. This market is characterized by its
concentration of specialists in relatively few major cancer centers, which we
believe can be effectively addressed by a small, focused sales force. We will
likely address this market by building a direct sales force as part of the
ADVEXIN gene therapy commercialization process and by pursuing marketing and
distribution arrangements with corporate partners for ADVEXIN gene therapy as
well as additional gene therapy products.
PATENTS AND INTELLECTUAL PROPERTY
Our Portfolio
Our success will depend in part on our ability to develop and maintain
proprietary aspects of our technology. To this end, we have an intellectual
property program directed at developing proprietary rights in technology that we
believe may be important to our success. We also rely on a licensing program to
ensure continued strong technology development and technology transfer from
companies and research institutions with whom we work. In addition to our
intellectual property license with Aventis, we have entered into a number of
exclusive license agreements or options with companies and institutions,
including M.D. Anderson Cancer Center, Sidney Kimmel Cancer Center, Corixa, the
Imperial Cancer Research Fund and LXR Biotechnology, Inc., with the LXR rights
being subsequently sold to Tanox, Inc. In addition to patents, we rely on trade
secrets and proprietary know-how, which we seek to protect, in part, through
confidentiality and proprietary information agreements.
We currently own or have an exclusive license to over 16 issued United
States patents and more than 40 pending United States patents. In addition, we
own or license over 17 issued foreign patents and in excess of 100 pending
foreign patent applications that generally parallel the United States portfolio.
If we do not seek a patent term extension, the currently issued United States
patents that we own or have exclusively licensed will expire between the years
2010 and 2017. The exclusive licenses that give us rights on the patents, and
applications that such licenses cover, will expire no earlier than the life of
any patent covered under the license.
Adenoviral p53 Compositions and Therapies
In developing our patent portfolio, we have focused our efforts in part on
protecting our potential products and how they will be used in the clinical
trials. Arising out of our work with M.D. Anderson Cancer Center, we currently
have an exclusive license to a number of United States and corresponding
international patent applications directed to adenoviruses that contain the p53
gene, referred to as adenoviral p53, adenoviral p53 pharmaceutical compositions
and the use of adenoviral p53 compositions in various cancer therapies and
protocols. One of these applications, directed to the clinical use of adenoviral
p53 to treat cancer, has issued as a United States patent. We have also
exclusively licensed from Aventis a United States patent application, and
corresponding international applications, directed to adenoviral p53 and its
clinical applications. We also have an exclusive license to a United States
patent application and corresponding international applications directed to the
use of the p53 gene in the treatment of cancer patients whose tumors appear to
express a normal p53 protein.
Combination Therapy with the p53 Gene
We have also focused our portfolio development on protecting clinical
therapeutic strategies that combine the use of the p53 gene with traditional
cancer therapies. In this regard, also arising out of our work with M.D.
Anderson Cancer Center, we have an exclusive license to two issued United States
patents, and one pending application with corresponding international
applications, directed to cancer therapy using the p53 gene in combination with
DNA-damaging agents such as conventional chemotherapy or radiotherapy. This
patent and corresponding international applications concern the therapeutic
application of the p53 gene either before, during or after chemotherapy or
radiotherapy. We have also exclusively licensed from Aventis a United States
application and corresponding international applications directed to therapy
using the p53 gene together with taxanes such as Taxol(R) or Taxotere(R).
Furthermore, we have exclusively licensed a United States
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patent application, and corresponding international applications, directed to
the use of the p53 gene in combination with surgical intervention in cancer
therapy.
Adenovirus Production, Purification and Formulation
Another focus of our research has involved the development of procedures
for the commercial scale production of our potential adenoviral-based gene
therapy products, including that of our potential adenoviral p53 product. In
this regard, we own an issued United States patent as well as a number of
pending United States applications, and corresponding international
applications, directed to commercial scale processes for producing adenoviral
gene therapy compositions having a high level of purity, as well as to
storage-stable formulations. These applications include procedures for preparing
commercial quantities of recombinant adenoviruses for gene therapy and include
procedures applicable to the p53 gene, as well as any of the other of our
potential gene therapy products. We have also licensed from Aventis a United
States application and corresponding international applications directed to
processes for the production of purified adenoviruses, useful for gene therapy
applications.
Other Tumor Suppressor Genes
We either own or have exclusively licensed rights in a number of other
patents and applications directed to the clinical application of various tumor
suppressor genes other than the p53 gene, including the p16, PTEN, mda-7,
3p21.3, BAK, FHIT, the 3p21.3 gene family and anti-sense K-ras genes. We have
exclusively licensed or optioned rights in two issued United States patents
covering the use of the BAK and mda-7 genes, a United States patent relating to
the PTEN gene and a United States patent directed to the use of the adenoviral
p16 in cancer therapy have issued.
Other Therapeutic, Composition and Process Technologies
We also own or have exclusively licensed a number of United States and
international patent applications on a range of additional technologies. These
include various applications relating to the p53 gene, combination therapy with
2-methoxyestradiol, anti-proliferative factor technologies, retroviral delivery
systems, stimulation of anti-p53, screening and product assurance technologies,
as well as second generation p53 gene molecules. We have exclusively licensed a
number of United States and international applications directed to various
improved gene therapy vectors for use in gene therapy protocols, gene therapy
employing more than one gene for disease treatment, as well as applications
directed to the delivery of genes for disease treatment without the use of a
vector, or "non-viral" therapy. We also have exclusive rights in an issued
United States patent and corresponding international applications directed to a
low toxicity analogue of IL-2, also called F42K.
Trade Secrets
We rely on trade secrets law to protect technology where we believe patent
protection is not appropriate or obtainable. However, trade secrets are
difficult to protect. In addition, we generally require employees, academic
collaborators and consultants to enter into confidentiality agreements. Despite
these measures, we may not be able to adequately protect our trade secrets or
other proprietary information. We are a party to various license agreements that
give us rights to use specified technologies in our research and development
processes. If we are not able to continue to license this technology on
commercially reasonable terms, our product development and research may be
delayed. In addition, in the case of technologies that we have licensed, we do
not have the ability to make the final decisions on how the patent application
process is managed, and accordingly are unable to exercise the same degree of
control over this intellectual property as we exercise over our internally
developed technology. Our research collaborators and scientific advisors have
rights to publish data and information in which we have rights. If we cannot
maintain the confidentiality of our technology and other confidential
information in connection with our collaborations, then our ability to receive
patent protection or protect our proprietary information will be diminished.
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GOVERNMENT REGULATION
The production and marketing of our proposed products and our research and
development activities are subject to regulation for safety, effectiveness and
quality by numerous governmental authorities in the United States and other
countries. In the United States, drugs and research personnel are subject to
rigorous FDA and National Institutes of Health, or NIH, regulations. The Federal
Food, Drug and Cosmetic Act (the FDC Act), as amended, the regulations
promulgated under the FDC Act, and other federal and state statutes and
regulations govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, advertising and promotion of
our products. Product development and approval within this regulatory framework
takes a number of years and involves the expenditure of substantial resources.
The Drug Approval Process
The steps required before our proposed products may be marketed in the
United States include pre-clinical testing, the submission to the FDA of an
investigational new drug, or IND, application for clinical trials, clinical
trials to establish the safety and effectiveness of the drug, the submission to
the FDA of a BLA (for a biologic) or an NDA (for a drug) and the FDA approval of
the BLA or NDA prior to any commercial sale of the drug. Our products will be
regulated as biologics. In addition to obtaining FDA approval for each product,
each domestic manufacturing establishment must be registered with, and approved
by, the FDA. Domestic manufacturing establishments are subject to biennial
inspections by the FDA and must comply with CGMP requirements. To supply
products for use in the United States, foreign manufacturing establishments,
including third party facilities, must comply with CGMP requirements and are
subject to periodic inspection by the FDA or by corresponding regulatory
agencies in such countries under reciprocal agreements with the FDA.
Pre-Clinical Testing
Pre-clinical testing includes laboratory evaluation of product chemistry
and formulation as well as animal studies to assess the potential safety and
effectiveness of the product. Compounds must be adequately manufactured and
pre-clinical safety tests must be conducted in compliance with FDA Good
Laboratory Practices regulations. The results of the pre-clinical tests are
submitted to the FDA as part of an IND application to be reviewed by the FDA
prior to the commencement of human clinical trials. Submission of an IND
application may not result in FDA authorization to commence clinical trials, but
the IND becomes effective if not rejected by the FDA within 30 days. The IND
application must indicate the results of previous testing; how, where and by
whom the clinical studies will be conducted; the chemical structure of the
compound; the method by which it is believed to work in the human body; any
toxic effects of the compound found in the animal studies and how the compound
is manufactured.
Clinical Trials
Clinical trials involve the administration of the IND to healthy volunteers
or to patients, under the supervision of qualified principal investigators. All
clinical trials must be conducted in accordance with Good Clinical Practices
regulations, under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the effectiveness criteria to be
evaluated. Each protocol must be submitted to the FDA for review as part of the
IND application prior to commencing the study. Further, each clinical trial must
be conducted under the auspices of an independent review panel, the
Institutional Review Board, or IRB, at the institution at which the trial will
be conducted. The IRB will consider, among other things, ethical factors, the
safety of human subjects, informed consent and the possible liability of the
institution. Progress reports detailing the results of the clinical trials must
be submitted at least annually to the FDA.
Clinical trials are typically conducted in three sequential phases, but the
phases often overlap. In Phase I, the initial introduction of the drug into
healthy volunteers or patients, the drug is tested for safety or adverse
effects, dosage tolerance, absorption, distribution, metabolism, excretion and
clinical pharmacology. Phase II involves studies in a limited patient population
to determine the effectiveness of the drug for specific, targeted indications,
determine dosage tolerance and optional dosage and identify possible adverse
effects and safety
17
risks. When a compound is found to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to further
evaluate clinical effectiveness and to further test for safety within an
expanded patient population at geographically dispersed clinical study sites.
Phase III studies conducted to seek marketing approval by the FDA are called
pivotal studies.
National Institutes of Health
The National Institute of Health, or NIH, publishes guidelines concerning
gene therapy products. The NIH guidelines require that human gene therapy
protocols subject to the guidelines that involve a novel product, disease
indication, route of administration or other component be discussed at the
quarterly meetings of the NIH Recombinant DNA Advisory Committee, or RAC.
Companies involved in clinical trials as sponsors are expected to report all
serious adverse events to the NIH.
Following routine procedure, we report to the FDA and the NIH serious
adverse events, whether treatment-related or not, that occur in our clinical
trials, including deaths. In one of our Phase I studies conducted from 1995 to
1997, we reported two deaths for which the clinical investigator involved could
not unequivocally rule out the possibility that the deaths were related to our
gene therapy treatment; however, there was no evidence that our gene therapy
treatment was responsible for the deaths. Often, gene therapy clinical trials
include cancer patients who have failed all conventional treatments available to
them, and who therefore have short life expectancies and who sometimes die
before completion of their clinical trials. We have not received any
correspondence from any regulatory body or experienced any increased scrutiny of
our clinical or other activities as a result of these deaths.
Marketing Applications
After the completion of all three clinical trial phases, if the data
indicate that the drug is safe and effective, a BLA or an NDA is filed with the
FDA for approval of the marketing and commercial shipment of the drug. This
marketing application must contain all of the information on the drug gathered
to that date, including data from the clinical trials. It is often over 100,000
pages in length.
The FDA reviews all marketing applications submitted to it before it
accepts them for filing and may request additional information, rather than
accepting the application for filing. In such event, the application must be
re-submitted with the additional information and the application is again
subject to review before filing. Once the submission is accepted for filing, the
FDA begins an in-depth review of the BLA or NDA. Under the FDC Act, the FDA has
180 days in which to review it and respond to the applicant. The review process
is often significantly extended by FDA requests for additional information or
clarification of information already provided in the submission. The FDA may
refer the application to an appropriate advisory committee, typically a panel of
clinicians, for review, evaluation and a recommendation as to whether the
application should be approved. However, the FDA is not bound by the
recommendation of an advisory committee. If the FDA evaluations of the marketing
application and the manufacturing facilities are favorable, the FDA may issue
either an approval letter or an approvable letter. An approvable letter usually
contains a number of conditions that must be met in order to secure final
approval of the application. When, and if, those conditions have been met to the
FDA's satisfaction, the FDA will issue an approval letter, authorizing
commercial marketing of the drug for certain indications. Approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. If the FDA's evaluation of the
submission or manufacturing facilities is not favorable, the FDA may refuse to
approve the BLA or NDA or issue a not-approvable letter.
If the FDA approves the BLA or NDA, the drug becomes available for
physicians to prescribe. Periodic reports must be submitted to the FDA,
including descriptions of any adverse reactions reported. The FDA may request
additional studies, referred to as Phase IV studies, to evaluate long-term
effects. Phase IV clinical trials and post-marketing studies may also be
conducted to explore new indications and to broaden the application and use of
the drug and its acceptance in the medical community.
18
"Off-Label" Use
Physicians may prescribe drugs for uses that are not described in the
product's labeling that differ from those tested by us and approved by the FDA.
Such "off-label" uses are common across medical specialties and may constitute
the best treatment for many patients in various circumstances. The FDA does not
regulate the behavior of physicians in their choice of treatments. The FDA does,
however, restrict manufacturer's communications on the subject of off-label use.
Companies cannot actively promote FDA-approved drugs for off-label uses.
However, new regulations, if followed, provide a safe harbor from FDA
enforcement action that would allow us to disseminate to physicians articles
published in peer-reviewed journals, like the New England Journal of Medicine,
that discuss off-label uses of approved products. We cannot disseminate articles
concerning drugs that have not been approved for any indication.
Orphan Drug Act
The Orphan Drug Act provides incentives to manufacturers to develop and
market drugs for rare diseases and conditions affecting fewer than 200,000
people in the United States. The first developer to receive FDA marketing
approval for an orphan drug is entitled to a seven-year exclusive marketing
period in the United States following approval for that product. However, the
FDA will allow the sale of a drug clinically superior to or different from
another approved orphan drug, although for the same indication, during the
seven-year exclusive marketing period.
We believe that certain of our potential products may qualify for orphan
drug designation. We cannot be sure that any of our potential products will
ultimately receive orphan drug designation, or that the benefits currently
provided by such a designation will not subsequently be amended or eliminated.
The Orphan Drug Act has been controversial, and legislative proposals have from
time to time been introduced in Congress to modify various aspects of the Orphan
Drug Act, particularly the market exclusivity provisions. New legislation may be
introduced in the future that could adversely affect the availability or
attractiveness of orphan drug status for our potential products. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the
regulatory review and approval process.
FDAMA
The Food and Drug Administration Modernization Act of 1997, or FDAMA, was
enacted, in part, to ensure the timely availability of safe and effective drugs,
biologics and medical devices, by expediting the FDA review process for new
products. FDAMA established a statutory program for the approval of "fast track
products." The fast track provisions essentially codify FDA's Accelerated
Approval regulations for drugs and biologics. A "fast track product" is defined
as a new drug or biologic intended for the treatment of a serious or
life-threatening condition that demonstrates the potential to address unmet
medical needs for such a condition. Under the new fast track program, the
sponsor of a new drug or biologic may request the FDA to designate the drug or
biologic as a "fast track product" at any time during the clinical development
of the product. FDAMA specifies that the FDA must determine if the product
qualifies for fast track designation within 60 days of receipt of the sponsor's
request. Approval of an NDA for a fast track product can be based on a clinical
endpoint or on a surrogate endpoint that is reasonably likely to predict
clinical benefit. Approval of a fast track product may be subject to (1)
post-approval studies to validate the surrogate endpoint or confirm the effect
on the clinical endpoint and (2) prior review of copies of all promotional
material. If a preliminary review of the clinical data suggests efficacy, the
FDA may initiate review of sections of an application for a "fast track product"
before the application is complete. This "rolling review" is available if the
applicant provides a schedule for submission of remaining information and pays
applicable user fees.
We may seek fast track designation to secure expedited review of
appropriate products. It is uncertain whether we will obtain fast track
designation. We cannot predict the ultimate effect, if any, of the new fast
track process on the timing or likelihood of FDA approval of any of our
potential products.
19
International
Steps similar to those in the United States must be undertaken in virtually
every other country comprising the market for our products before any such
product can be commercialized in those countries. The approval procedure and the
time required for approval vary from country to country and may involve
additional testing. We cannot be sure that approvals will be granted on a timely
basis, or at all. In addition, regulatory approval of prices is required in most
countries, other than the United States. There can be no assurance that the
resulting prices would be sufficient to generate an acceptable return to us.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid and
intense technological change. We face, and will continue to face, competition in
the development and marketing of our product candidates from academic
institutions, government agencies, research institutions and biotechnology and
pharmaceutical companies. Competition may arise from other drug development
technologies, methods of preventing or reducing the incidence of disease,
including vaccines, and new small molecule or other classes of therapeutic
agents. Developments by others may render our product candidates or technologies
obsolete or non-competitive.
There are many companies, both publicly and privately held, including
well-known pharmaceutical companies, as well as academic and other research
institutions, engaged in developing products for human therapeutic applications.
We are aware that Canji, Inc., a subsidiary of Schering-Plough Corporation, is
currently conducting clinical trials with p53-related gene therapy products.
Various small molecule drug and anti-sense approaches are being investigated by
other companies in earlier stages of research and development. We are also aware
that Onyx Pharmaceuticals, Inc. has conducted clinical studies of an
adenovirus-based therapy for head and neck cancer. We also compete with
universities and other research institutions in the development of products,
technologies and processes. In many instances, we compete with other commercial
entities in acquiring products or technologies from universities and other
research institutions.
We expect that competition among products approved for sale will be based,
among other things, on product efficacy, safety, reliability, availability,
price, patent position and sales, marketing and distribution capabilities. Our
competitive position also depends upon our ability to attract and retain
qualified personnel, obtain patent protection or otherwise develop proprietary
products or processes, and secure sufficient capital resources for the often
substantial period between technological conception and commercial sales.
HUMAN RESOURCES
As of December 31, 2001, we had approximately 77 employees and contracted
personnel engaged in research and development, regulatory affairs, clinical
affairs, manufacturing and quality, finance, and corporate development
activities. Our employees include 13 holders of a Ph.D. or M.D. degree. Many of
our employees have extensive experience in the pharmaceutical and biotechnology
industries.
In addition to our full-time staff, we provide financial support through
sponsored research agreements for numerous research scientists and technicians
at M.D. Anderson Cancer Center and other institutions who serve as investigators
for Introgen on clinical and pre-clinical research projects. We have also
entered into part-time consulting arrangements with several M.D. Anderson Cancer
Center scientists and clinicians.
Our sponsored research projects with M.D. Anderson Cancer Center involve
investigators in a wide range of specialties, including thoracic and
cardiovascular surgery, neurology, gynecology, urology and gastrointestinal
medicine. The human resources devoted to development of our technology and
products are further augmented by our collaborators at the numerous other
institutions where sponsored research work is performed.
SCIENTIFIC ADVISORY BOARD
We receive guidance on a broad range of scientific, clinical and technical
issues from our Scientific Advisory Board. Members of our Scientific Advisory
Board are recognized experts in their respective fields of
20
research and clinical medicine related to molecular oncology. The members of the
Scientific Advisory Board are:
Jack A. Roth, M.D., Chairman of the Scientific Advisory Board, is Chairman
of the Department of Thoracic and Cardiovascular Surgery at M.D. Anderson Cancer
Center. Dr. Roth was one of our founders and is our Chief Medical Advisor. Dr.
Roth is a widely-recognized pioneer in the application of gene therapy to the
treatment of cancer. He is the primary inventor of the technology upon which our
gene therapy products are based. He received his M.D. from The Johns Hopkins
University School of Medicine.
Carol L. Prives, Ph.D., is a professor of biology at Columbia University.
She is the Chair of the NIH Experimental Virology Study Section, a member of the
NCI Intramural Scientific Advisory Board, and a member of the Advisory Board of
the Dana-Farber Cancer Center in Boston. Dr. Prives is an editor of the Journal
of Virology and serves on the editorial boards of three other prominent
journals. She received her Ph.D. in biochemistry from McGill University.
Daniel D. Von Hoff, M.D., is the Director of the Arizona Cancer Center in
Tucson, Arizona, and a professor of medicine in the Department of Medicine of
the University of Arizona. Dr. Von Hoff is the President of the American
Association for Cancer Research. Dr. Von Hoff is certified in medical oncology
by the American Board of Internal Medicine.
Elizabeth Grimm, Ph.D., is a professor of tumor biology at M.D. Anderson
Cancer Center. Dr. Grimm has served as Cancer Expert, Surgical Branch of the
NCI. She received her Ph.D. in microbiology from the University of California,
Los Angeles School of Medicine.
Michael J. Imperiale, Ph.D., is the Director of Cancer Biology Training
Programs at the University of Michigan Cancer Center and holds a concurrent
position in the Department of Microbiology and Immunology at the University of
Michigan. Dr. Imperiale earned his Ph.D. degree in biological sciences from
Columbia University and received postdoctoral training at the Rockefeller
University Laboratory of Molecular Cell Biology, where he studied the regulation
of early adenovirus gene expression.
ITEM 2. PROPERTIES
We lease from TMX Realty Corporation, our wholly-owned subsidiary,
facilities in Houston, Texas, totaling approximately 42,000 square feet in two
buildings. These buildings consist of a 12,000 square foot CGMP production
facility designed to support an ADVEXIN gene therapy product launch, as well as
support multiple vector manufacturing, and a 30,000 square foot building which
contains our research and development laboratories and administrative offices.
We sublease to M.D. Anderson Cancer Center approximately 10,000 square feet of
space in our Houston research and development facility under an eight-year lease
at prevailing market rates. Our corporate offices are located in Austin, Texas.
We expect our current facilities to satisfy our requirements for at least the
next four years.
TMX Realty Corporation leases the land for these facilities from a third
party. The buildings are financed under mortgage notes, and such buildings are
pledged as collateral for the notes. Certain equipment in the buildings is
financed under leases, and such equipment is pledged as collateral for the
leases. See the discussion under "Liquidity and Capital Resources" in this
Report for a summary of our obligations under these mortgage notes and leases.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in legal proceedings relating to claims
arising out of our operation in the ordinary course of business, including
actions relating to intellectual property rights.
On January 12, 2001, we received notice that we had been named as a
defendant in a first amended complaint filed on January 11, 2001 by Canji, Inc.
in an action entitled, Canji, Inc. v. Sidney Kimmel Cancer Center, Introgen
Therapeutics, Inc., and Does 2 through 25 (Case No. GIC745643, in the California
Superior Court for the County of San Diego, Central District). Canji, Inc. filed
the original complaint against the Sidney Kimmel Cancer Center, or SKCC, on
March 24, 2000. On February 9, 2001, the action was removed
21
to the United States District Court for the Southern District of California. On
August 29, 2001, the case was remanded to California State Superior Court in San
Diego County. The claims against us in Canji's first amended complaint arise out
of SKCC's grant of an exclusive license to us to patent rights resulting from
gene therapy technology developed by SKCC under a sponsored research agreement
between SKCC and us. Canji contends that SKCC developed the technology using
materials provided by Canji to SKCC under a Material Transfer Agreement, or MTA.
Canji also contends that under the MTA, Canji had the right of first refusal to
an exclusive license to any patent rights arising out of the technology
developed by SKCC using these materials and that SKCC was prohibited from
disclosing to us the results of any research using Canji's materials. Canji also
alleges that we wrongfully obtained rights in intellectual property derived from
SKCC's use of Canji's materials and that we knew of, or consciously disregarded,
the existence of the MTA.
In its answer, SKCC, who was a party to the MTA, stated that Canji's
representations were false and made with the intent to defraud SKCC, and that
SKCC would not have given its consent to the contract had it not been for
Canji's fraudulent action. As relief against us, Canji seeks (1) a declaratory
judgment that we are not entitled to the intellectual property rights conveyed
by SKCC to us, and that instead, those rights belong to Canji, (2) the
imposition of a constructive trust on the patent rights granted to us and (3)
injunctive relief to restore Canji to the position that it was in prior to
SKCC's grant of intellectual property rights to us. While Canji is not seeking
an award of damages, it has requested reasonable attorney fees and costs. We
believe that Canji's allegations are without merit and we intend to vigorously
defend the action. The SKCC intellectual property is not material to our
business.
We do not believe that the outcome of any present, or all litigation in the
aggregate, other than our opposition of three European patents owned by Canji
discussed under "Factors Affecting Future Operating Results" will have a
material effect on our business. You can read the discussion of our opposition
of the patents under "Factors Affecting Future Operating Results."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 5, 2001, we held our Annual Meeting of Stockholders in Houston,
Texas.
We held an election of Class I directors with the following individuals
being elected to our Board of Directors as Class I directors:
NAME VOTED FOR VOTED AGAINST
---- ---------- -------------
William H. Cunningham.................................... 19,542,566 17,192
Elise T. Wang............................................ 19,542,566 17,192
The current Class II and Class III directors with terms continuing after
the Annual Meeting of Stockholders are as follows:
CONTINUING CLASS II DIRECTORS
Mahendra G. Shah, Ph.D.
Charles E. Long
CONTINUING CLASS III DIRECTORS
John N. Kapoor, Ph.D.
David G. Nance
The stockholders ratified the amendment to our Bylaws that increased the
number of authorized directors from five to six and increased the number of
Class II directors from one to two. There were 19,528,883 votes cast in favor of
this ratification, 19,225 votes cast against this ratification and 11,650
abstentions.
The stockholders approved the amendment of our Certificate of Incorporation
to permit our Board of Directors to amend Section 3.2 of our Bylaws relating to
the number and classes of directors. There were 14,661,826 votes cast in favor
of this ratification, 4,886,382 votes cast against this ratification and 11,550
abstentions.
22
The stockholders ratified the approval of our 2000 Stock Option Plan for
purposes of Rule 162(m) of the Internal Revenue Code of 1986, as amended. There
were 19,487,451 votes cast in favor of this ratification, 54,897 votes cast
against this ratification and 17,410 abstentions.
The stockholders ratified the appointment of Arthur Andersen LLP as our
independent public accountants for the six-month period ending December 31,
2001, and the fiscal year ending December 31, 2002. There were 19,529,623 votes
cast for the appointment, 7,325 votes cast against the appointment and 22,810
abstentions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET AND EQUITYHOLDER INFORMATION
Our common stock has been traded on the Nasdaq National Market under the
symbol "INGN" since our initial public offering in October 2000. Prior to
October 2000, there was no established public trading market for our common
stock. The following table sets forth, for the periods indicated, the high and
low closing prices reported on the Nasdaq National Market.
HIGH LOW
------ -----
Fiscal Year Ended June 30, 2001:
First Fiscal Quarter...................................... N/A N/A
Second Fiscal Quarter..................................... $15.50 $5.25
Third Fiscal Quarter...................................... 8.25 3.31
Fourth Fiscal Quarter..................................... 7.80 3.20
Transition Period Ended December 31, 2001:
Quarter Ended September 30, 2001.......................... $ 5.50 $2.61
Quarter Ended December 31, 2001........................... 6.74 3.24
At December 31, 2001, there were 21,446,363 shares of our common stock
issued and outstanding held by 234 stockholders of record. We estimate that
there are approximately 3,740 beneficial stockholders.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain all of our future earnings, if any, to support the
development of our business and do not anticipate paying any cash dividends in
the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to a stock purchase agreement with Aventis executed on June 30,
2001, we issued 100,000 shares of Series A Non-Voting Convertible Preferred
Stock to Aventis in exchange for $25.0 million, the payment for which was
received on July 2, 2001. We relied on Rule 506 promulgated under Section 4(2)
of the Securities Act of 1933, as amended, for an exemption from registration,
as the sale was to a single accredited investor. Under the terms of the
certificate of designations filed in connection with the sale, the Series A
Non-Voting Convertible Preferred Stock is convertible into 2,343,721 shares of
our common stock at any time upon either party's election. We expect to use the
proceeds from this sale to conduct research and development, including clinical
trials, advance our process development and manufacturing capabilities, initiate
product marketing and commercialization programs, and for general corporate
purposes, including working capital.
23
USE OF PROCEEDS FROM REGISTERED SECURITIES
We closed our initial public offering on October 17, 2000, pursuant to a
Registration Statement on Form S-1 (File No. 333-30582), which was declared
effective by the Securities and Exchange Commission on October 11, 2000. In the
initial public offering, we sold an aggregate of 4,000,000 shares of common
stock at $8.00 per share, with the underwriters' over-allotment option of
600,000 shares of common stock being exercised on October 18, 2000, at $8.00 per
share. The sale of the shares of common stock generated aggregate net proceeds
of approximately $32.2 million. We expect to continue to use the net proceeds
from our initial public offering to conduct research and development, including
clinical trials, advance our process development and manufacturing capabilities,
initiate product marketing and commercialization programs, and for general
corporate purposes, including working capital. Pending these uses, the net
proceeds of the offering are invested in interest-bearing, investment-grade
securities.
24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data presented below is derived from
the consolidated financial statements of Introgen Therapeutics, Inc. and our
subsidiaries, which appear in Part IV of this Report. Those consolidated
financial statements, except for the financial statements as of December 31,
2000, and for the six months then ended, have been audited by Arthur Andersen
LLP, independent public accountants. Their report on the consolidated financial
statements as of June 30, 2000 and 2001 and for the years then ended, and as of
December 31, 2001 and the six months then ended, appears in Part IV of this
Report. The selected consolidated financial data as of and for the six-month
period ended December 31, 2000, is unaudited. The selected consolidated
financial data set forth below is qualified in its entirety by, and should be
read in conjunction with, the Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Report.
YEAR ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------- -----------------------------
1997 1998 1999 2000 2001 2000 2001
---------- ---------- ---------- ---------- ----------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Revenue from
collaborations......... $ 12,052 $ 8,606 $ 6,714 $ 6,204 $ 3,016 $ 3,016 $ --
---------- ---------- ---------- ---------- ----------- ----------- -----------
Revenue from product
sales to affiliate..... -- 2,505 1,475 2,087 1,500 1,500 --
Cost of product sales.... -- 1,729 994 1,476 2,488 (2,488) --
---------- ---------- ---------- ---------- ----------- ----------- -----------
Gross margin on product
sales.................. -- 776 481 611 (988) (988) --
---------- ---------- ---------- ---------- ----------- ----------- -----------
Other revenue............ -- -- -- 97 684 391 298
Operating costs and
expenses:
Research and
development.......... 12,954 10,361 7,539 10,075 15,014 5,153 10,063
General and
administrative....... 2,635 1,825 2,977 4,701 4,875 2,040 3,526
---------- ---------- ---------- ---------- ----------- ----------- -----------
Total operating costs
and expenses......... 15,589 12,186 10,516 14,776 19,889 7,193 13,589
---------- ---------- ---------- ---------- ----------- ----------- -----------
Loss from operations..... (3,537) (2,804) (3,321) (7,864) (17,177) (4,774) (13,291)
Interest income, net..... 421 789 675 140 381 403 445
Other income............. -- -- -- -- 354 -- 518
---------- ---------- ---------- ---------- ----------- ----------- -----------
Net loss................. $ (3,116) $ (2,015) $ (2,646) $ (7,724) $ (16,442) $ (4,371) $ (12,328)
========== ========== ========== ========== =========== =========== ===========
Basic and diluted net
loss per share......... $ (0.80) $ (0.51) $ (0.66) $ (1.89) $ (1.02) $ (0.39) $ (0.58)
========== ========== ========== ========== =========== =========== ===========
Shares used in computing
basic and diluted net
loss per share......... 3,909,376 3,922,768 4,005,893 4,095,623 16,163,027 11,120,670 21,440,380
========== ========== ========== ========== =========== =========== ===========
YEAR ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------- -----------------------------
1997 1998 1999 2000 2001 2000 2001
---------- ---------- ---------- ---------- ----------- ------------- -------------
(IN THOUSANDS) (UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents,
and short-term
investments............ $ 9,411 $ 16,848 $ 15,761 $ 11,765 $ 34,977 $ 36,430 $ 48,825
Working capital.......... 7,780 15,944 14,226 10,263 54,296 33,694 43,175
Total assets............. 9,990 17,766 25,741 24,855 72,347 55,975 60,424
Long-term debt
obligations, net of
current portion........ -- -- 3,388 8,021 9,798 9,199 9,037
Accumulated deficit...... (6,359) (8,375) (11,021) (18,744) (35,186) (23,115) (47,515)
Stockholders' equity..... 8,359 16,322 19,187 13,592 56,069 42,261 44,566
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our condensed consolidated financial statements and the related notes thereto
included in this Report on Form 10-K. The discussion and analysis 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. These
statements include the statements below under "Factors Affecting Future
Operating Results." These forward-looking statements are based on our current
expectations and entail various risks and uncertainties. Our actual results
could differ materially from those projected in the forward-looking statements
as a result of various factors, including those set forth below under "Factors
Affecting Future Operating Results."
OVERVIEW
We are a leading developer of gene therapy products for the treatment of
cancer. Our drug discovery and development programs have resulted in innovative
approaches by which physicians use genes to treat cancer and other diseases. Our
lead product candidate, ADVEXIN(R) gene therapy (formerly known as INGN 201),
combines the p53 gene, one of the most potent members of a group of naturally
occurring genes, the tumor suppressor genes, that act to protect cells from
becoming cancerous, with a gene delivery system that we have developed and
extensively tested. We are conducting pivotal Phase III clinical studies of
ADVEXIN gene therapy in head and neck cancer. Pivotal Phase III trials are
typically the final phase required for FDA approval. We have completed a Phase
II clinical trial in non-small cell lung cancer, a category that includes
approximately 80% of the various types of lung cancer. Phase II trials are
efficacy studies. We are also conducting several Phase I clinical trials, or
safety studies, of ADVEXIN gene therapy in additional cancer types, or
indications. To date, doctors at clinical sites in North America, Europe and
Japan have treated hundreds of patients with ADVEXIN gene therapy, establishing
a large safety database.
We are developing additional gene therapy product candidates that we
believe may be effective in treating certain cancers, notably those based on the
mda-7 and PTEN genes, as well as associated vector technologies for delivering
the gene-based products into target cells. Our INGN 241 product candidate, which
combines the mda-7 gene with our gene delivery system, is undergoing safety
testing in a Phase I clinical study.
Since our inception in 1993, we have used our resources primarily to
conduct research and development activities, primarily for ADVEXIN gene therapy
and, to a lesser extent, for other product candidates. At December 31, 2001, we
had an accumulated deficit of approximately $47.5 million. We anticipate that we
will incur losses in the future that are likely to be greater than cumulative
losses incurred in prior years. At December 31, 2001, we had cash, cash
equivalents and short-term investments of $48.8 million. During the six months
ended December 31, 2001, we used $10.4 million of cash for operating activities.
This cash usage rate is expected to increase in future periods as we continue
our ADVEXIN gene therapy Phase III clinical studies and expand our research and
development of various other gene therapy technologies. Since our inception, our
only significant revenues have been payments from Aventis under collaborative
research and development agreements for our early-stage development work on
ADVEXIN gene therapy and Aventis' purchases of ADVEXIN gene therapy product we
manufactured for its use in later-stage clinical trials it previously performed.
We have also earned interest income on cash placed in short-term investments. We
may need to raise additional funds through public or private equity offerings,
debt financings or additional corporate collaboration and licensing
arrangements. We do not know whether such additional financing will be available
when needed, or on terms favorable to us or our stockholders.
COLLABORATIVE RELATIONSHIP WITH AVENTIS
In October 1994, we entered into two collaboration agreements with
Rhone-Poulenc Rorer Pharmaceuticals Inc. to develop therapeutics based on p53
and on K-ras pathway inhibition. In December 1999, Rhone-Poulenc S.A., the
ultimate parent company of Rhone-Poulenc Rorer Pharmaceuticals Inc., combined
with Hoechst AG, and the parties have combined Hoechst Marion Roussel, the
pharmaceutical business of Hoechst AG, with that of Rhone-Poulenc Rorer to form
Aventis Pharma, or Aventis. Rhone-Poulenc Rorer
26
Pharmaceuticals Inc. is now known as Aventis Pharmaceuticals Inc. Aventis
Pharma, the parent company of Aventis Pharmaceuticals Inc., is a multi-billion
dollar, global pharmaceutical company.
In June 2001, we restructured our collaborative relationship with Aventis.
Under this restructuring, we assumed responsibility for the worldwide
development of all p53 and K-ras products, and acquired all marketing and
commercialization rights with respect to those products. We assumed the control
and performance of ongoing clinical trials for p53- and K-ras-based products,
and we are now fully responsible for all pre-clinical research and development
and clinical trials for new gene therapy products. In connection with this
restructuring and pursuant to a stock purchase agreement executed on June 30,
2001, Aventis purchased $25.0 million of non-voting preferred stock from us, the
payment for which was received on July 2, 2001. During the quarter ended
September 30, 2001, we made a one-time payment of $2.0 million to Aventis in
consideration for internal costs it incurred in facilitating the transition of
control and performance of these clinical trials from Aventis to us. As of
December 31, 2001, we owed Aventis $1.2 million for external costs relating to
payments Aventis made to third parties in facilitating the completion of the
transition of these clinical trials from Aventis to us.
In accordance with the restructured p53 and K-ras collaboration agreement,
Aventis licensed to us all of its patents covering the manufacture, sale,
offering for sale, importation or use of ADVEXIN gene therapy and other K-ras
patents, delivery patents and targeting technologies. Aventis also agreed, for a
period of seven years, not to conduct any activities directed to the development
or commercialization of any gene therapy products using the p53 or K-ras genes.
We now have the exclusive, worldwide right to market and manufacture the
products developed under each of the prior collaboration agreements, as well as
any new p53- or K-ras-based gene therapy products. Aventis agreed to transfer,
and is in the process of transferring to us, all trademarks and goodwill
associated with ADVEXIN gene therapy.
Under the prior collaboration agreements, we generally received quarterly
payments from Aventis for early-stage development activities in advance. We
recorded these payments as revenue as we performed the collaboration work and
incurred the related expenses. We recorded as deferred revenue collaborative
research and development payments which we received but for which the related
expenses had not yet been incurred. Under the restructured collaboration,
Aventis will no longer fund any of our research and development.
Through December 31, 2001, Aventis provided us with approximately $57.2
million in the form of funding for early-stage development programs and
purchases of ADVEXIN gene therapy product for later-stage clinical development,
and Aventis purchased $39.4 million of preferred stock from us. These purchases
of preferred stock were made upon the achievement of the milestones contemplated
in our stock purchase agreement with Aventis.
Under the prior collaboration agreements, we manufactured and sold ADVEXIN
gene therapy to Aventis for use in later-stage clinical trials under the terms
of the collaboration agreements. We recorded revenue from these product sales
upon completion of production and delivery and Aventis' acceptance of the
product. From the inception of these agreements through December 31, 2001, we
have recorded $7.5 million in revenues from these product sales. Under the
restructured collaboration, we no longer sell ADVEXIN gene therapy to Aventis
for use in clinical trials.
CRITICAL ACCOUNTING POLICIES
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 reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Short-Term Investments. Short-term investments consisted of investments in
short-term, investment-grade securities, which consist primarily of federal and
state government obligations, commercial paper and/or corporate bonds with
various maturity dates not exceeding one year. All short-term investments have
been
27
classified as held-to-maturity and are carried at amortized cost. At any point
in time, amortized costs may be greater or less than fair value. If investments
are sold prior to maturity, we could incur a realized gain or loss based on the
fair market value of the investments at the date of sale. Additionally, Introgen
could incur future losses on investments if the investment issuer becomes
impaired or the investment is downgraded.
Research and Development Costs. In conducting our pivotal Phase III
clinical trials of ADVEXIN gene therapy, we procure services from numerous
third-party vendors. The cost of these services constitutes a significant
portion of the cost of these trials and of our research and development expenses
in general. These vendors do not necessarily provide us billings for their
services on a regular basis and, accordingly, are not a timely source of
information to determine the costs we have incurred relative to their services
for any given accounting period. As a result, we make significant accounting
estimates as to the amount of costs we have incurred relative to these vendors
in each accounting period. These estimates are based on numerous factors,
including, among others, costs set forth in our contracts with these vendors,
the period of time over which the vendor will render the services and the rate
of enrollment of patients in our clinical trials. Using these estimates, we
record expenses and accrued liabilities in each accounting period that we
believe fairly represent our obligations to these vendors. Actual results could
differ from these estimates resulting in increases or decreases in the amount of
expense recorded and the related accrual.
RESULTS OF OPERATIONS
COMPARISON OF SIX-MONTH PERIODS ENDED DECEMBER 31, 2001 AND 2000
REVENUES
Revenue from Collaborations. Collaborative research and development
revenues from Aventis were zero for the six-month period ended December 31, 2001
and $3.0 million for the six-month period ended December 31, 2000. This decrease
was due to the restructuring of our collaboration with Aventis, which resulted
in our not receiving payments from Aventis subsequent to December 31, 2000, for
early-stage research and development related to p53-based gene therapy products.
As a result of the restructuring, we will not have any collaborative research
and development revenues from Aventis in the future. Prior to this
restructuring, we earned revenue for the early-stage research and development we
performed under our collaboration agreements with Aventis.
Revenue from Product Sales to Affiliate. Revenues from product sales to
Aventis were zero for the six-month period ended December 31, 2001 and $1.5
million for the six-month period ended December 31, 2000. This decrease was due
to the restructuring of our collaboration with Aventis, which resulted in no
product sales subsequent to December 31, 2000. The restructuring eliminated our
product sales to Aventis since we are using the product internally for the
future development of ADVEXIN gene therapy. As a result of the restructuring, we
will not have any revenues from product sales to Aventis in the future.
Furthermore, we do not expect to generate revenues from the commercial sale of
products in the foreseeable future, and we may never generate revenues from the
sale of products.
Other Revenue. Other revenue was $298,000 for the six-month period ended
December 31, 2001 and $391,000 for the six-month period ended December 31, 2000.
This decrease was due to a decline in amounts earned under research grants from
U.S. Government agencies and contract manufacturing work for third parties.
COSTS AND EXPENSES
Cost of Product Sales. Cost of product sales was zero for the six-month
period ended December 31, 2001 and $2.5 million for the six-month period ended
December 31, 2000. This decrease was due to the restructuring of our
collaboration with Aventis, which resulted in no product sales subsequent to
December 31, 2000, thereby eliminating our cost of product sales.
Research and Development. Research and development expenses, excluding
amortization of deferred stock compensation of $229,000 in 2001 and $209,000 in
2000, were $9.8 million for the six-month period ended December 31, 2001, and
$4.9 million for the six-month period ended December 31, 2000. The 100%
28
increase in 2001 compared to 2000 was primarily due to our assumption of
responsibility for conducting, managing and funding the Phase II and Phase III
clinical trials activities for ADVEXIN gene therapy, our lead product candidate,
under the terms of the restructuring of our collaboration with Aventis.
General and Administrative. General and administrative expenses, excluding
amortization of deferred stock compensation of $570,000 in 2001 and $537,000 in
2000, were $3.0 million in 2001 and $1.5 million in 2000. The 100% increase in
2001 was due primarily to the additional, ongoing costs associated with
operating as a public company, subsequent to our initial public offering in
October 2000, and the cost of providing administrative support for our conduct
and management of the Phase II and Phase III clinical trials activities for
ADVEXIN gene therapy, our lead product candidate, the responsibility for which
we assumed under the terms of the restructuring of our collaboration with
Aventis.
Amortization of Deferred Compensation. Amortization of deferred stock
compensation was $799,000 in 2001 and $746,000 in 2000. The 7% increase in 2001
was due primarily to deferred compensation arising from the issuance to an
officer in April 2001 of an option to purchase shares of the Company's common
stock. For options currently outstanding, we expect to record amortization
expense for deferred compensation of $1.4 million during 2002, $1.1 million
during 2003 and $21,000 during 2004. The amount of deferred compensation expense
to be recorded in future periods may decrease if unvested options for which
deferred compensation has been recorded are subsequently forfeited or may
increase if additional options are issued at prices below the deemed fair value
of the common stock.
Interest Income and Interest Expense. Interest income was $912,000 for the
six-month period ended December 31, 2001 and $783,000 for the six-month period
ended December 31, 2000. The 16% increase was primarily due to higher average
cash and investment balances in 2001 on which interest was earned as a result of
our initial public offering in October 2000. Interest expense was $467,000 for
the six-month period ended December 31, 2001 and $380,000 for the six-month
period ended December 31, 2000. The 23% increase in 2001 was primarily due to
higher balances under notes payable in 2001 compared to 2000 as a result of
borrowings to finance tenant improvements to our facility related to our
sublease of space to M.D. Anderson Cancer Center.
Other Income. Other income was $518,000 for the six-month period ended
December 31, 2001 compared to zero for the six-month period ended December 31,
2000 due to 2001 being the first year in which we earned rental income related
to our sublease of research laboratories in our facilities to M.D. Anderson
Cancer Center.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999
REVENUES
Revenue from Collaborations. Collaborative research and development
revenues from Aventis were $3.0 million in 2001, $6.2 million in 2000 and $6.7
million in 1999. The 51% decrease in 2001 compared to 2000 was primarily due to
the restructuring of our collaboration with Aventis, which resulted in our not
receiving payments from Aventis subsequent to December 31, 2000, for early-stage
research and development related to p53-based gene therapy products. As a result
of the restructuring, we will not have any collaborative research and
development revenues from Aventis in the future. Prior to this restructuring, we
earned revenue for the early-stage research and development we performed under
our collaboration agreements with Aventis. The 7.6% decrease in 2000 compared to
1999 was due primarily to a decrease in early-stage development program funding
in 2000 under the Aventis collaboration that was in effect at that time as
ADVEXIN gene therapy continued to progress from early-stage development
activities we performed to later-stage clinical development activities performed
at that time by Aventis.
Revenue from Product Sales to Affiliate. Revenues from product sales to
Aventis were $1.5 million in 2001, compared to $2.2 in 2000 and $1.5 million in
1999. The 31% decrease in 2001 compared to 2000 occurred because there were no
product sales subsequent to December 31, 2000, due to the restructuring of our
collaboration with Aventis. The restructuring eliminated our need to sell
product to Aventis since we are using the product internally for the future
development of ADVEXIN gene therapy. As a result of the
29
restructuring, we will not have any revenues from product sales to Aventis in
the future. The 48% increase in 2000 compared to 1999 was primarily due to
increased sales of ADVEXIN gene therapy product to Aventis for their use in
later-stage clinical trials they were performing at that time prior to the
restructuring of our collaboration agreement with them.
Other Revenue. Other revenue was $684,000 in 2001, compared to zero in
2000 and 1999. This increase was due to funding received under research grants
from U.S. Government agencies and contract manufacturing work for third parties.
COSTS AND EXPENSES
Cost of Product Sales. Cost of product sales was $2.5 million in 2001,
compared to $1.5 million in 2000 and $994,000 in 1999. The 67% increase in 2001
was due to a reduction in the number of batches of clinical material in
production during the quarter ended December 31, 2000, which resulted in an
increase in the amount of the costs of our manufacturing operations that were
expensed as incurred instead of capitalized as part of inventory. This situation
did not continue subsequent to December 31, 2000, due to the restructuring of
the Aventis collaboration that ended sales of clinical materials to Aventis,
thereby eliminating our cost of product sales. The 49% increase between 2000 and
1999 reflects costs associated with our increased sales of ADVEXIN gene therapy
product to Aventis for their use in later-stage clinical trials they were
performing at that time prior to the restructuring of our collaboration
agreement with them.
Research and Development. Research and development expenses, excluding
amortization of deferred stock compensation of $442,000 in 2001 and zero in 2000
and 1999, were $14.6 million in 2001, compared to $10.1 million in 2000 and $7.5
million in 1999. The 45% increase in 2001 compared to 2000 was primarily due to
(1) increased activity related to the development of INGN 241 and (2) expenses
associated with the restructuring of the Aventis collaboration, including (a)
$826,000 related to the write-off of accounts receivable, inventory and deferred
revenue, (b) $2.2 million related to the assumption of responsibility for Phase
II and III clinical trials for ADVEXIN gene therapy and (c) no costs being
capitalized as inventory subsequent to December 31, 2000, as a result of the
Aventis collaboration restructuring, which eliminated future inventory sales to
Aventis. These increases were offset by a decreased level of early-stage
research and development performed by us prior to the restructuring of the
Aventis agreement relative to products based on the p53 gene, as such products
had evolved into later-stage development, which Aventis performed at that time
prior to restructuring of that collaboration. The 34% increase between 2000 and
1999 was due to the increase in research and development activities for our
pipeline of gene therapy product candidates. Under our restructured
collaboration with Aventis, we assumed responsibility for the worldwide
development of all p53 products. As a result, we expect our research and
development expenses to increase in the future. In addition, we believe that
continued investment in research and development is critical to attaining our
strategic objectives, and we expect these expenses to continue to increase in
the future.
General and Administrative. General and administrative expenses, excluding
amortization of deferred stock compensation of $1.1 million in 2001, $2.1
million in 2000 and $387,000 in 1999, were $3.7 million in 2001, $2.6 in 2000
and $2.6 in 1999. The 42% increase between 2001 and 2000 was due primarily to
the additional, ongoing costs associated with operating as a public company
subsequent to our initial public offering in October 2000 and costs associated
with the Aventis collaboration restructuring. These expenses were unchanged
between 2000 and 1999 because our general and administrative activities and
resources in place in 1999 were adequate to meet the general and administrative
needs of our operations in 2000, both of which were years during which we
operated as a private company.
Amortization of Deferred Compensation. Amortization of deferred stock
compensation was $1.6 million in 2001, $2.1 million in 2000 and $387,000 in
1999. The 23% decrease between 2001 and 2000 was due primarily to 2000 including
a one-time compensation charge related to the accelerated vesting of options
held by a member of our Board of Directors concurrent with the individual's
resignation from our Board. The increase between 2000 and 1999 was due to
pre-initial public offering fiscal 2000 grants of additional options to purchase
our common stock at exercise prices below the deemed fair value of the common
stock. For options currently outstanding, we expect to record amortization
expense for deferred compensation of $1.6 million
30
during fiscal 2002, $1.3 million during fiscal 2003, $428,000 during fiscal 2004
and $4,100 during fiscal 2005. The amount of deferred compensation expense to be
recorded in future periods may decrease if unvested options for which deferred
compensation has been recorded are subsequently forfeited or may increase if
additional options are issued at prices below the deemed fair value of the
common stock.
Interest Income and Interest Expense. Interest income was $1.2 million in
2001, $722,000 in 2000 and $681,000 in 1999. The 70% increase in 2001 compared
to 2000 was primarily due to higher average cash and investment balances in 2001
on which interest was earned as a result of our initial public offering in
October 2000. The 6% increase in 2000 compared to 1999 was primarily due to
interest rate fluctuations between years. Interest expense was $849,000 in 2001,
$582,000 in 2000 and $5,000 in 1999. The 46% increase in 2001 compared to 2000
was primarily due to balances under notes payable to finance our new facilities
and equipment being outstanding for all of 2001 as compared to being outstanding
for only a portion of 2000. The increase between 2000 and 1999 was primarily due
to there being substantially no debt outstanding during 1999 as compared to
there being debt outstanding related to our new facilities during a portion of
2000.
Other Income. Other income was $354,000 in 2001 compared to zero in 2000
and 1999 due to 2001 being the first year in which we earned rental income
related to our sublease to M.D. Anderson Cancer Center of research laboratories
in our facilities.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred annual operating losses since our inception, and at
December 31, 2001, we had an accumulated deficit of $47.5 million. Since
inception through December 31, 2001, we have financed our operations using $49.7
million of collaborative research and development payments from Aventis, $32.2
million of net proceeds from our initial public offering in October 2000, $39.4
million of private equity sales to Aventis, $14.6 million of private equity
sales, net of offering costs, to others, $7.5 million of sales of ADVEXIN gene
therapy product to Aventis for use in later-stage clinical trials, $9.2 million
in mortgage financing from banks for our facilities, $4.3 million in leases from
commercial leasing companies to acquire equipment pledged as collateral for
those leases and $5.1 million from interest income earned on cash and short- and
long-term investments.
From our inception through December 31, 2001, we have acquired facilities
in the aggregate amount of $11.6 million and capital equipment in the aggregate
amount of $5.3 million through a combination of cash purchases and financings
under notes payable and lease arrangements. We have debt obligations under notes
payable and capital leases totaling approximately $10.5 million at December 31,
2001. These notes payable and capital leases finance the facilities we occupy,
tenant improvements for laboratory space we sublease to M.D. Anderson Cancer
Center and a significant portion of the equipment we use, all of which are
pledged as collateral for this debt. We make monthly principal and interest
payments on this debt. Our buildings and a portion of the related debt are owned
and held by TMX Realty Corporation, our wholly-owned subsidiary.
At December 31, 2001, we had cash, cash equivalents and short-term
investments of $48.8 million. During the six months ended December 31, 2001, we
used $10.4 million of cash for operating activities. For at least the next two
years, our primary activity will be conducting Phase III clinical studies,
conducting data analysis, preparing regulatory documentation including FDA
submissions and conducting pre-marketing activities for ADVEXIN gene therapy. We
will also continue to expand our research and development of various other gene
therapy technologies. Most of our expenditures over this period will relate to
the clinical studies of ADVEXIN gene therapy. We expect these activities will
increase, perhaps significantly, the rate at which we use cash in the future as
compared to the cash we used for operating activities during the six months
ended December 31, 2001. We believe our existing working capital can fund our
operations for approximately the next two years, although unforeseen events
related to our clinical trials and research and development activities could
shorten that time period. Our existing resources may not be sufficient to
support the commercial introduction of any of our product candidates. We may
need to raise additional funds through public or private equity offerings, debt
financings or additional corporate collaboration and licensing arrangements. We
do not know whether such additional financing will be available when needed, or
on terms favorable to us or our stockholders.
During the six months ended December 31, 2001, we purchased $127,000 of
property and equipment. While we have no obligations at this time to purchase
significant larger amounts of additional property or
31
equipment, our needs may change. It may be necessary for us to purchase larger
amounts of property and equipment to support our clinical programs and other
research, development and manufacturing activities. We may need to obtain debt
or lease financing to facilitate such purchases. If that financing is not
available, we may need to use our existing resources to fund those purchases,
which could result in a reduction in the cash, cash equivalents and short-term
investments available to fund operating activities.
We have fixed debt service and lease payment obligations under notes
payable and capital leases for which the liability is reflected on our balance
sheet. We used the proceeds from these notes payable and leases to finance
facilities and equipment. Aggregate payments due under these obligations are as
follows:
TOTAL DEBT SERVICE AND LEASE PAYMENTS DUE DURING THE YEAR
ENDING DECEMBER 31:
2002...................................................... $ 2,292,602
2003...................................................... 2,218,278
2004...................................................... 1,440,121
2005...................................................... 1,312,536
2006...................................................... 860,280
Thereafter.................................................. 9,670,332
-----------
Total debt service and lease payments....................... 17,794,149
Less portion representing interest........................ (7,271,185)
-----------
Total principal balance at December 31, 2001.............. $10,522,964
===========
PRINCIPAL BALANCE PRESENTED ON THE DECEMBER 31, 2001 BALANCE
SHEET AS LIABILITIES IN THESE CATEGORIES:
Current portion of obligations under capital leases and
notes payable.......................................... $ 1,486,376
Capital lease obligations, net of current portion......... 957,467
Notes payable, net of current portion..................... 8,079,121
-----------
Total principal balance at December 31, 2001.............. $10,522,964
===========
We have a fixed rent obligation under a ground lease for the land on which
we built our facilities. Since this is an operating lease, there is no liability
reflected on our balance sheet for this item, which is in accordance with
generally accepted accounting principals. We make total annual rent payments of
$136,188 under this lease which will continue until the expiration of the
initial term of this lease in September 2026. We have other operating leases
expiring in 2002 with significantly smaller rent payments that we also account
for as operating leases. Future annual rental payments due under all operating
leases are as follows:
YEAR ENDING DECEMBER 31,
2002...................................................... $ 198,230
2003...................................................... 136,188
2004...................................................... 136,188
2005...................................................... 136,188
2006...................................................... 136,188
Thereafter................................................ 2,689,713
-----------
Total minimum lease payments under operating leases......... $ 3,432,695
===========
In the normal course of business, we enter into various long-term
agreements with vendors to provide services to us. Some of these agreements
require up-front payment prior to services being rendered, some require periodic
monthly payments and some provide for the vendor to bill us for their services
as they are rendered. In substantially all cases, we may cancel these agreements
at any time with minimal or no penalty and pay the vendor only for services
actually rendered. Regardless of the timing of the payments under these
agreements, we record the expenses incurred in the periods in which the services
are rendered.
We pay consulting fees of approximately $175,000 per annum to a company
owned by the Chairman of our Board of Directors and which formerly employed one
of our directors. We are obligated to continue paying this fee until we
terminate the services of that company at our option.
32
We have a consulting agreement with an individual primarily responsible for
the creation of one of our technologies, who is also a stockholder of Introgen.
This agreement provides for payments of $165,000 per annum until September 30,
2002, $181,500 per annum from October 1, 2002 through September 30, 2003, and
$200,000 per annum through the end of its term on September 30, 2009, with such
future payments subject to adjustment for inflation. We may terminate this
agreement at our option upon one year's advance notice. Had we terminated this
agreement as of December 31, 2001, we would have been obligated to make final
payments to this individual totaling $169,125.
COMPARISON OF SIX-MONTH PERIODS ENDED DECEMBER 31, 2001 AND 2000
At December 31, 2001, we had cash and short-term investments of
approximately $48.8 million, compared with $36.4 million at December 31, 2000.
Net cash used by operating activities was $10.4 million and $1.7 million for the
six-month period ended December 31, 2001 and the six-month period ended December
31, 2000, respectively. The increase in cash used by operating activities
between 2001 and 2000 was primarily due to a higher net loss from operations and
payment of accrued liabilities, offset partially by a smaller increase in
accounts receivable and the absence of a decrease in inventory during 2001 as
compared to 2000. The payment of accrued liabilities was higher due to the
increased level of activity associates with our Phase III clinical trials of
ADVEXIN gene therapy. The smaller increase in accounts receivable and the
absence of the decrease in inventory was due to the elimination of sales of
ADVEXIN gene therapy to Aventis as a result of the restructuring of our
collaboration with them.
Net cash provided by investing activities was $9.2 million for the
six-month period ended December 31, 2001, and net cash used in investing
activities was $30.0 million for the six-month period ended December 31, 2000.
During the six-month period ended December 31, 2000, we invested a portion of
our cash in short-term investments with maturities in excess of 90 days. During
the six-month period ended December 31, 2001, we modified our investment policy
and concentrated our investing activities in instruments with maturities shorter
than 90 days. This change in policy resulted in a decrease in cash used by
investing activities. We also purchased less property and equipment in the 2001
period compared to the 2000 period since the 2000 period included our activities
related to the finish-out of a portion of our facilities for lease to M.D.
Anderson Cancer Center.
Net cash provided by financing activities was $24.3 million for the
six-month period ended December 31, 2001 and $34.6 million for the six-month
period ended December 31, 2000. The decline in 2001 compared to 2000 was
primarily due to the proceeds from our initial public offering of common stock
in October 2000 being greater than the proceeds from our sale of preferred stock
to Aventis in July 2001, and a decline in the amount of new notes payable in
2001 compared to 2000 due to the leasehold improvements related to our sublease
of space to M.D. Anderson Cancer Center being completed and all financing
related thereto in place in early 2001. At December 31, 2001, we had $8.8
million outstanding under notes payable for our facilities and $1.8 million
outstanding under capital leases to finance the purchase of equipment.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999
At June 30, 2001, we had cash and short-term investments of approximately
$35.0 million, compared with $11.8 million at June 30, 2000. Net cash used by
operating activities was $8.8 million, $5.6 million and $2.0 million for the
years ended June 30, 2001, 2000 and 1999, respectively. The increase in cash
used by operating activities between 2001 and 2000 was primarily due to a higher
net loss from operations and a decrease in deferred revenue, offset partially by
an increase in accrued liabilities. Deferred revenue decreased as a result of no
longer receiving collaborative research revenue from Aventis as a result of the
restructuring of our collaboration agreement with them. The increase in accrued
liabilities arose from our assumption of responsibility for the Phase III
clinical trials for ADVEXIN gene therapy under that collaboration restructuring.
The increase in 2000 compared to 1999 was primarily due to higher net loss from
operations, and a decrease in accounts payable, offset partially by an increase
in deferred revenue and non-cash depreciation and stock option compensation.
Accounts payable decreased due to normal variations in the timing of payment of
operating expenses. Deferred revenue increased due to a higher level of ADVEXIN
gene therapy in production for sale to Aventis in 2000 compared to 1999.
Non-cash depreciation increased due to
33
our existing facilities being in full use in 2000 versus under construction in
1999. Non-cash stock option compensation increased due to a grant of options to
purchase our common stock to all employees in February 2000.
Net cash provided by investing activities was $14.4 million for the year
ended June 30, 2001, and $2.6 million for the year ended June 30, 2000, and net
cash used in investing activities was $5.4 million for the year ended June 30,
1999. The change in 2001 compared to 2000 is primarily due to a higher level of
purchases of short-term investments due to the availability of funds from our
initial public offering in October 2000. The change in 2000 compared to 1999 is
primarily due to a reduction in property and equipment additions during 2000 as
a result of the completion of our existing facilities in September 1999.
Net cash provided by financing activities was $35.5 million, $2.6 million
and $8.3 million for the years ended June 30, 2001, 2000 and 1999, respectively.
The increase in 2001 compared to 2000 was primarily due to the receipt of
proceeds from our initial public offering of common stock in October 2000 offset
by a decline in the amount of new notes payable and capital lease borrowings
since our new facilities and related equipment were complete, outfitted and
initially financed in 2000. The decrease in 2000 compared to 1999 was primarily
due to the sale of Series B preferred stock in 1999. At June 30, 2001, we had
$9.1 million outstanding under notes payable for our facilities and $2.1 million
outstanding under capital leases to finance the purchase of equipment.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended June 30, 2000 and 2001 and the six-month period ended
December 31, 2001. This information has been prepared on the same basis as the
Consolidated Financial Statements and all necessary adjustments have been
included in the amounts stated below to present fairly the selected quarterly
information when read in conjunction with the Consolidated Financial Statements
and Notes thereto. Historical quarterly financial results and trends may not be
indicative of future results.
QUARTER ENDED
----------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 2000 2000 2000 2000
--------- --------- --------- --------- --------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue from collaborations.... $ 1,379 $ 2,537 $ 1,298 $ 990 $ 1,506 $ 1,509
--------- --------- --------- --------- --------- ----------
Revenue from product sales to
affiliate..................... 1,289 432 12 354 -- 1,500
Cost of product sales.......... 865 288 -- 323 116 2,372
--------- --------- --------- --------- --------- ----------
Gross margin on product
sales......................... 424 144 12 31 (116) (872)
--------- --------- --------- --------- --------- ----------
Other revenue.................. -- 65 -- 32 138 253
Operating costs and expenses
Research and development....... 1,617 4,487 2,306 1,665 2,333 2,821
General and administrative..... 853 1,546 1,292 1,010 1,111 929
--------- --------- --------- --------- --------- ----------
Loss from operations........... (667) (3,287) (2,288) (1,622) (1,914) (2,860)
Interest income (expense),
net........................... 173 36 (34) (34) (28) 431
Other income................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ----------
Net loss....................... $ (493) $ (3,253) $ (2,322) $ (1,656) $ (1,943) $ (2,429)
========= ========= ========= ========= ========= ==========
Basic and diluted net loss per
share......................... $ (0.12) $ (0.82) $ (0.57) $ (0.41) $ (0.47) $ (0.13)
========= ========= ========= ========= ========= ==========
Shares used in computing basic
and diluted net loss per
share......................... 3,955,423 3,972,630 4,060,586 4,060,586 4,165,985 18,092,257
========= ========= ========= ========= ========= ==========
QUARTER ENDED
-------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
2001 2001 2001 2001
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue from collaborations.... $ -- $ -- $ -- $ --
---------- ---------- ---------- ----------
Revenue from product sales to
affiliate..................... -- -- -- --
Cost of product sales.......... -- -- -- --
---------- ---------- ---------- ----------
Gross margin on product
sales......................... -- -- -- --
---------- ---------- ---------- ----------
Other revenue.................. 24 269 15 283
Operating costs and expenses
Research and development....... 3,784 6,077 5,045 5,018
General and administrative..... 1,204 1,631 1,685 1,841
---------- ---------- ---------- ----------
Loss from operations........... (4,964) (7,439) (6,715) (6,576)
Interest income (expense),
net........................... (116) 95 375 70
Other income................... 162 191 237 281
---------- ---------- ---------- ----------
Net loss....................... $ (4,918) $ (7,153) $ (6,103) $ (6,225)
========== ========== ========== ==========
Basic and diluted net loss per
share......................... $ (0.23) $ (0.34) $ (0.28) $ (0.29)
========== ========== ========== ==========
Shares used in computing basic
and diluted net loss per
share......................... 21,268,187 21,335,576 21,435,044 21,445,212
========== ========== ========== ==========
34
FACTORS AFFECTING FUTURE OPERATING RESULTS
WE MAY ENCOUNTER DELAYS OR DIFFICULTIES IN CLINICAL TRIALS FOR OUR PRODUCT
CANDIDATES, WHICH MAY DELAY OR PRECLUDE REGULATORY APPROVAL OF SOME OR ALL OF
OUR PRODUCT CANDIDATES.
In order to commercialize our product candidates, we must obtain regulatory
approvals. Satisfaction of regulatory requirements typically takes many years,
and involves compliance with requirements covering research and development,
testing, manufacturing, quality control, labeling and promotion of drugs for
human use. To obtain regulatory approvals, we must, among other requirements,
complete clinical trials demonstrating that our product candidates are safe and
effective for a particular cancer indication or other disease.
We are conducting Phase III clinical trials of our lead product candidate,
ADVEXIN(R) gene therapy (formerly known as INGN 201), for the treatment of head
and neck cancer, and are conducting six Phase I clinical trials of ADVEXIN gene
therapy for other cancer indications. We are conducting a Phase I clinical trial
of INGN 241, our product candidate based on the mda-7 gene. We do not have
significant clinical trial experience with other product candidates. Current or
future clinical trials may demonstrate that ADVEXIN gene therapy, INGN 241 and
our other product candidates are neither safe nor effective.
Any delays or difficulties we encounter in our clinical trials, in
particular the Phase III clinical trials of ADVEXIN gene therapy for the
treatment of head and neck cancer, may delay or preclude regulatory approval.
Any delay or preclusion could also delay or preclude the commercialization of
ADVEXIN gene therapy or any other product candidates. In addition, we or the FDA
might delay or halt any of our clinical trials of a product candidate at any
time for various reasons, including:
- failure of the product candidate to be more effective than current
therapies;
- presence of unforeseen adverse side effects of a product candidate,
including its delivery system;
- longer than expected time required to determine whether or not a product
candidate is effective;
- death of patients during a clinical trial, even though the product
candidate may not have caused those deaths;
- failure to enroll a sufficient number of patients in our clinical trials;
or
- our inability to produce sufficient quantities of a product candidate to
complete the trials.
We may encounter delays or rejections in the regulatory approval process
because of additional government regulation from future legislation or
administrative action or changes in FDA policy during the period of product
development, clinical trials and FDA regulatory review. Failure to comply with
applicable FDA or other applicable regulatory requirements may result in
criminal prosecution, civil penalties, recall or seizure of products, total or
partial suspension of production or injunction, as well as other regulatory
action against our product candidates or us.
Outside the United States, our ability to market a product is contingent
upon receiving clearances from the appropriate regulatory authorities. This
foreign regulatory approval process includes all of the risks associated with
FDA clearance described above.
WE MAY ENCOUNTER FAILURES OR DELAYS IN PERFORMING CLINICAL TRIALS FOR INGN 241
AND OUR OTHER NON-ADVEXIN GENE THERAPY PRODUCT CANDIDATES, WHICH WOULD INCREASE
OUR PRODUCT DEVELOPMENT COSTS.
While we are conducting a Phase I clinical trial with INGN 241, a product
candidate based on the mda-7 gene, our most significant clinical trial activity
and experience has been with ADVEXIN gene therapy. We will need to continue
conducting significant research and animal testing, referred to as pre-clinical
testing, to support performing clinical trials for our other non-ADVEXIN gene
therapy and non-INGN 241 product candidates. It will take us many years to
complete pre-clinical testing and clinical trials, and failure could occur at
any stage of testing. Acceptable results in early testing or trials may not be
repeated later. Moreover, not all product candidates in pre-clinical testing or
early-stage clinical trials will receive timely, if any, regulatory approval.
Our product development costs will increase if we experience delays in testing
or regulatory approvals or if we need to perform more or larger clinical trials
than planned. If the delays are
35
significant, the increased development costs will negatively affect our
financial results, and these delays could delay our commercialization efforts.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO INCUR SIGNIFICANT
ADDITIONAL OPERATING LOSSES.
We have generated operating losses since we began operations in June 1993.
As of December 31, 2001, we had an accumulated deficit of approximately $47.5
million. We expect to incur substantial additional operating expenses and losses
over the next several years as our research, development, pre-clinical testing
and clinical trial activities increase. We have no products that have generated
any commercial revenue. Presently, we earn minimal revenue from contract
manufacturing activities and grants. In the past, we earned revenue from Aventis
under collaborative agreements for research and development and sales of ADVEXIN
gene therapy for use in its clinical trials, neither of which revenues we will
receive in the future under our restructured agreements with Aventis. We do not
expect to generate revenues from the commercial sale of products in the
foreseeable future, and we may never generate revenues from the sale of
products.
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR A PERIOD LONGER THAN WE
ANTICIPATE AND FAIL TO OBTAIN THE CAPITAL NECESSARY TO FUND OUR OPERATIONS, WE
WILL BE UNABLE TO ADVANCE OUR DEVELOPMENT PROGRAM AND COMPLETE OUR CLINICAL
TRIALS.
Developing a new drug and conducting clinical trials for multiple disease
indications is expensive. We expect that we will fund our capital expenditures
and operations over at least the next two years with our current working
capital, resulting primarily from the net proceeds from our initial public
offering in October 2000, the sale of Series A Non-Voting Convertible Preferred
Stock to Aventis in July 2001, income from contract manufacturing and research
grants, debt financing of equipment acquisitions and interest on invested funds.
We may need to raise additional capital sooner, however, due to a number of
factors, including:
- an acceleration of the number, size or complexity of our clinical trials;
- slower than expected progress in developing ADVEXIN gene therapy, INGN
241 or other product candidates;
- higher than expected costs to obtain regulatory approvals;
- higher than expected costs to pursue our intellectual property strategy;
- higher than expected costs to further develop our manufacturing
capability; and
- higher than expected costs to develop our sales and marketing capability.
We do not know whether additional financing will be available when needed,
or on terms favorable to us or our stockholders. We may raise any necessary
funds through public or private equity offerings, debt financings or additional
corporate collaboration and licensing arrangements. To the extent we raise
additional capital by issuing equity securities, our stockholders will
experience dilution. If we raise funds through debt financings, we may become
subject to restrictive covenants. To the extent that we raise additional funds
through collaboration and licensing arrangements, we may be required to
relinquish some rights to our technologies or product candidates, or grant
licenses on terms that are not favorable to us.
AS A RESULT OF THE RESTRUCTURING OF OUR COLLABORATIVE RELATIONSHIP WITH
AVENTIS, OUR PRODUCT DEVELOPMENT MAY BE DELAYED.
In the past, we relied to a significant extent on Aventis to fund and
support the development of products based on the p53 and K-ras genes, including
ADVEXIN gene therapy. In July 2001, we restructured our collaborative
relationship with Aventis. Under this restructuring, we assumed responsibility
for the worldwide development of all p53 and K-ras products. Our development and
commercialization efforts for these products could be delayed if we are unable
to commit the necessary resources to fund the development of the p53 and K-ras
programs.
36
Historically, Aventis agreed on an annual basis whether, and to what
extent, it would continue to fund our early-stage development in North America
of products based on the p53 or K-ras genes, which includes pre-clinical
research and development and Phase I clinical trials. Since we assumed
responsibility for the development of all p53 and K-ras products under the terms
of the restructuring, if we decide to continue this development, we would have
to fund this development ourselves or obtain funding from other sources. If we
are unable to commit the necessary resources to fund this development, then our
development and commercialization effort could be delayed.
Under the terms of the prior collaboration agreements with Aventis, once we
had completed Phase I clinical trials of a product candidate based on the p53
and K-ras genes, Aventis could have elected to pursue later-stage clinical
development of that product candidate, which includes conducting Phase II and
Phase III clinical trials, commercializing the product, making all further
submissions to existing IND, applications and preparing all product license
applications. However, under the terms of the restructuring, we are responsible
for later-stage clinical development. If we are unable to commit the necessary
resources to fund this development, then our development and commercialization
effort could be delayed.
IF WE CANNOT MAINTAIN OUR OTHER CORPORATE AND ACADEMIC ARRANGEMENTS AND ENTER
INTO NEW ARRANGEMENTS, PRODUCT DEVELOPMENT COULD BE DELAYED.
Our strategy for the research, development and commercialization of our
product candidates may require us to enter into contractual arrangements with
corporate collaborators, academic institutions and others. We have entered into
sponsored research and/or collaborative arrangements with several entities,
including M.D. Anderson Cancer Center, ICRT, the National Cancer Institute and
Corixa Corporation. Our success depends upon our collaborative partners
performing their responsibilities under these arrangements. We cannot control
the amount and timing of resources our collaborative partners devote to our
research and testing programs or product candidates, which can vary because of
factors unrelated to such programs or product candidates. These relationships
may in some cases be terminated at the discretion of our collaborative partners
with only limited notice to us. We may not be able to maintain our existing
arrangements, enter into new arrangements or negotiate current or new
arrangements on acceptable terms, if at all. Some of our collaborative partners
may also be researching competing technologies independently from us to treat
the diseases targeted by our collaborative programs.
IF WE ARE NOT ABLE TO CREATE EFFECTIVE COLLABORATIVE MARKETING RELATIONSHIPS,
WE MAY BE UNABLE TO MARKET ADVEXIN GENE THERAPY SUCCESSFULLY OR IN A
COST-EFFECTIVE MANNER.
To effectively market our products, we will need to develop sales,
marketing and distribution capabilities. In order to develop or otherwise obtain
these capabilities, we may have to enter into marketing, distribution or other
similar arrangements with third parties in order to successfully sell, market
and distribute our products. To the extent that we enter into any such
arrangements with third parties, our product revenues are likely to be lower
than if we directly marketed and sold our products, and any revenues we receive
will depend upon the efforts of such third parties. We have no experience in
marketing or selling pharmaceutical products and we currently have no sales,
marketing or distribution capability. We may be unable to develop sufficient
sales, marketing and distribution capabilities to successfully commercialize our
products.
SERIOUS UNWANTED SIDE EFFECTS ATTRIBUTABLE TO GENE THERAPY MAY RESULT IN
GOVERNMENTAL AUTHORITIES IMPOSING ADDITIONAL REGULATORY REQUIREMENTS OR A
NEGATIVE PUBLIC PERCEPTION OF OUR PRODUCTS.
Serious unwanted side effects attributable to treatment, which physicians
classify as treatment-related adverse events, occurring in the field of gene
therapy may result in greater governmental regulation of our product candidates
and potential regulatory delays relating to the testing or approval of our
product candidates. The death in 1999 of a patient undergoing gene therapy using
an adenoviral vector to deliver a gene for disease treatment in a clinical trial
that was unrelated to our clinical trials, was widely publicized. As a result of
this death, the United States Senate held hearings concerning the adequacy of
regulatory oversight of gene therapy clinical trials and to determine whether
additional legislation is required to protect volunteers and patients who
participate in such clinical trials. The Recombinant DNA Advisory Committee, or
RAC,
37
which acts as an advisory body to the National Institutes of Health, or NIH,
evaluated and continues to evaluate the use of adenoviral vectors in gene
therapy clinical trials. The RAC has made recommendations to the NIH director
concerning prospective review of study designs and adverse event reporting
procedures, and the FDA has requested that sponsors of clinical trials provide
detailed procedures for supervising clinical investigators and clinical study
conduct. In addition, the FDA has recently begun to conduct more frequent
inspections at clinical trial sites. Implementation of any additional review and
reporting procedures or other additional regulatory measures could increase the
costs of or prolong our product development efforts or clinical trials.
Following routine procedure, we report to the FDA and the NIH serious
adverse events, whether treatment-related or not, that occur in our clinical
trials, including deaths. In one of our Phase I studies conducted from 1995 to
1997, we reported two deaths for which the clinical investigator involved could
not unequivocally rule out the possibility that the deaths were related to our
gene therapy treatment; however, there was no evidence that our gene therapy was
responsible for the deaths. We have not received any correspondence from any
regulatory body or experienced any increased scrutiny of our clinical or other
activities as a result of these deaths. However, reporting of serious adverse
events that are determined to be treatment-related in gene therapy clinical
trials conducted by us or by others could result in additional regulatory review
or measures, which could increase the cost of or prolong our clinical trials.
To date no governmental authority has approved any gene therapy product for
sale in the United States or internationally. The commercial success of our
products will depend in part on public acceptance of the use of gene therapies,
which are a new type of disease treatment for the prevention or treatment of
human diseases. Public attitudes may be influenced by claims that gene therapy
is unsafe, and gene therapy may not gain the acceptance of the public or the
medical community. Negative public reaction to gene therapy could also result in
greater government regulation and stricter clinical trial oversight.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR
COMPETITORS MAY BE ABLE TO TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT
EFFORTS TO DEVELOP COMPETING DRUGS.
Our commercial success will depend in part on obtaining patent protection
for our products and other technologies and successfully defending these patents
against third party challenges. Our patent position, like that of other
biotechnology and pharmaceutical companies, is highly uncertain. One uncertainty
is that the United States Patent and Trademark Office, or PTO, or the courts,
may deny or significantly narrow claims made under patents or patent
applications. This is particularly true for patent applications or patents that
concern biotechnology and pharmaceutical technologies, such as ours, since the
PTO and the courts often consider these technologies to involve unpredictable
sciences. Another uncertainty is that any patents that may be issued or licensed
to us may not provide any competitive advantage to us and they may be
successfully challenged, invalidated or circumvented in the future. In addition,
our competitors, many of which have substantial resources and have made
significant investments in competing technologies, may seek to apply for and
obtain patents that will prevent, limit or interfere with our ability to make,
use and sell our potential products either in the United States or in
international markets.
Our ability to develop and protect a competitive position based on our
biotechnological innovations, innovations involving genes, gene therapy, viruses
for delivering the genes to cells, formulations, gene therapy delivery systems
that do not involve viruses, and the like, is particularly uncertain. Due to the
unpredictability of the biotechnological sciences, the PTO, as well as patent
offices in other jurisdictions, has often required that patent applications
concerning biotechnology-related inventions be limited or narrowed substantially
to cover only the specific innovations exemplified in the patent application,
thereby limiting their scope of protection against competitive challenges.
Similarly, courts have invalidated or significantly narrowed many key patents in
the biotechnology industry. Thus, even if we are able to obtain patents that
cover commercially significant innovations, our patents may not be upheld or our
patents may be substantially narrowed.
Through our exclusive license from The University of Texas System for
technology developed at M.D. Anderson Cancer Center, we are currently seeking
patent protection for adenoviral p53, including ADVEXIN gene therapy, and its
use in cancer therapy. Further, in February 2001, we were issued a United States
patent for our adenovirus production technology. We also control, through
licensing arrangements, two issued United States patents for combination therapy
involving the p53 gene and conventional chemotherapy or radiation,
38
and one issued United States patent covering the use of adenoviral p53 in cancer
therapy. Our competitors may challenge the validity of one or more of our
combination therapy, our adenoviral process technology or our adenoviral p53
therapy patents in the courts or through an administrative procedure known as an
interference. The courts or the PTO may not uphold the validity of our patents,
we may not prevail in such interference proceedings regarding our patents and
none of our patents may give us a competitive advantage.
The PTO has notified us that one of our patent applications, which involves
the use of retrovirus, not adenovirus (which retroviral technologies do not
relate to any of our current product candidates) has been allowed, but that its
issuance is being suspended for the possible institution of interference
proceedings. An interference proceeding is instituted by the PTO to determine,
as between two or more parties claiming the same patentable invention, which
party has the right to the patent. If any of these or other patent applications
become involved in an interference proceeding, there is a likelihood that it
will take many years to resolve. Resolution of any such interference will
require that we expend time, effort and money. Only the application directed to
the adenoviral p53 technology is relevant to our current potential products. If
an interference is declared with respect to the adenoviral p53 application, and
if the opponent ultimately prevails in the interference, the opponent will have
a patent that could cover our potential ADVEXIN gene therapy product or its
clinical use. The patent application that is currently involved in an ongoing
interference proceeding does not relate to any of our product candidates. While
the resolution of this interference will require that we expend time, effort and
money, its outcome is not expected to affect any of our current
commercialization efforts.
THIRD-PARTY CLAIMS OF INFRINGEMENT OF INTELLECTUAL PROPERTY COULD REQUIRE US
TO SPEND TIME AND MONEY TO ADDRESS THE CLAIMS AND COULD LIMIT OUR INTELLECTUAL
PROPERTY RIGHTS.
The biotechnology and pharmaceutical industry has been characterized by
extensive litigation regarding patents and other intellectual property rights,
and companies have employed intellectual property litigation to gain a
competitive advantage. We are aware of a number of issued patents and patent
applications that relate to gene therapy, the treatment of cancer and the use of
the p53 and other tumor suppressor genes. Schering-Plough Corporation, including
its subsidiary Canji, Inc., controls various United States patent applications
and a European patent and applications, some of which are directed to therapy
using the p53 gene, and others to adenoviruses that contain the p53 gene, or
adenoviral p53, and to methods for carrying out therapy using adenoviral p53. In
addition, Canji controls an issued United States patent and its international
counterparts, including a European patent, involving a method of treating
mammalian cancer cells lacking normal p53 protein by introducing a p53 gene into
the cancer cell.
While we believe that our potential products do not infringe any valid
claim of the Canji p53 patents, Canji or Schering-Plough could assert a claim
against us. We may also become subject to infringement claims or litigation
arising out of other patents and pending applications of our competitors, if
they issue, or additional interference proceedings declared by the PTO to
determine the priority of inventions. The defense and prosecution of
intellectual property suits, PTO interference proceedings and related legal and
administrative proceedings are costly and time-consuming to pursue, and their
outcome is uncertain. Litigation may be necessary to enforce our issued patents,
to protect our trade secrets and know-how or to determine the enforceability,
scope and validity of the proprietary rights of others. An adverse determination
in litigation or interference proceedings to which we may become a party could
subject us to significant liabilities, require us to obtain licenses from third
parties, or restrict or prevent us from selling our products in certain markets.
Although patent and intellectual property disputes are often settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include ongoing royalties. Furthermore, the necessary
licenses may not be available to us on satisfactory terms, if at all. In
particular, if we were found to infringe a valid claim of the Canji p53 issued
United States patent, our business could be materially harmed.
We are currently involved in three opposition proceedings before the
European Patent Office, or EPO, in which we are seeking to have the EPO revoke
three different European patents owned or controlled by Canji. These European
patents relate to the use of a p53 gene, or the use of tumor suppressor genes,
in the preparation of therapeutic products. In one opposition involving the use
of a p53 gene, the European patent at
39
issue was upheld following an initial hearing. A second hearing to determine
whether this patent should be revoked will be upcoming. The other two
oppositions are in earlier stages. If we do not ultimately prevail in one or
more of these oppositions, our competitors could seek to assert by means of
litigation any patent surviving opposition against European commercial
activities involving our potential products. If our competitors are successful
in any such litigation, it could have a significant detrimental effect on our or
our collaborators' ability to commercialize our potential commercial products in
Europe.
COMPETITION AND TECHNOLOGICAL CHANGE MAY MAKE OUR PRODUCT CANDIDATES AND
TECHNOLOGIES LESS ATTRACTIVE OR OBSOLETE.
We compete with pharmaceutical and biotechnology companies, including Canji
and Onyx Pharmaceuticals, Inc., which are pursuing other forms of treatment for
the diseases ADVEXIN gene therapy and our other product candidates target. We
also may face competition from companies that may develop internally or acquire
competing technology from universities and other research institutions. As these
companies develop their technologies, they may develop competitive positions
which may prevent or limit our product commercialization efforts.
Some of our competitors are established companies with greater financial
and other resources than we have. Other companies may succeed in developing
products earlier than we do, obtaining FDA approval for products more rapidly
than we do or developing products that are more effective than our product
candidates. While we will seek to expand our technological capabilities to
remain competitive, research and development by others may render our technology
or product candidates obsolete or non-competitive or result in treatments or
cures superior to any therapy developed by us.
EVEN IF WE RECEIVE REGULATORY APPROVAL TO MARKET ADVEXIN GENE THERAPY, INGN
241 OR OTHER PRODUCT CANDIDATES, WE MAY NOT BE ABLE TO COMMERCIALIZE THEM
PROFITABLY.
Our profitability will depend on the market's acceptance of ADVEXIN gene
therapy, INGN 241 and our other product candidates. The commercial success of
our product candidates will depend on whether:
- they are more effective than alternative treatments;
- their side effects are acceptable to patients and doctors;
- we produce and sell them at a profit; and
- we market ADVEXIN gene therapy, INGN 241 and other product candidates
effectively.
IF WE ARE UNABLE TO MANUFACTURE OUR PRODUCTS IN SUFFICIENT QUANTITIES OR
OBTAIN REGULATORY APPROVALS FOR OUR MANUFACTURING FACILITY, OR IF OUR
MANUFACTURING PROCESS IS FOUND TO INFRINGE A VALID PATENTED PROCESS OF ANOTHER
COMPANY, THEN WE MAY BE UNABLE TO MEET DEMAND FOR OUR PRODUCTS AND LOSE
POTENTIAL REVENUES.
The completion of our clinical trials and commercialization of our product
candidates requires access to, or development of, facilities to manufacture a
sufficient supply of our product candidates. We use a manufacturing facility in
Houston, Texas, which we constructed and own, to manufacture ADVEXIN gene
therapy for our currently planned clinical trials and eventually for the initial
commercial launch of ADVEXIN gene therapy. We manufacture INGN 241 and other
product candidates in a separate, leased facility. We have no experience
manufacturing ADVEXIN gene therapy, INGN 241 or any other product candidates in
the volumes that will be necessary to support commercial sales. If we are unable
to manufacture our product candidates in clinical or, when necessary, commercial
quantities, then we will need to rely on third-party manufacturers to
manufacture compounds for clinical and commercial purposes. These third-party
manufacturers must receive FDA approval before they can produce clinical
material or commercial product. Our products may be in competition with other
products for access to these facilities and may be subject to delays in
manufacture if third parties give other products greater priority than ours. In
addition, we may not be able to enter into any necessary third-party
manufacturing arrangements on acceptable terms. There are very few contract
manufacturers who currently have the capability to produce ADVEXIN gene therapy,
INGN 241 or our other product candidates, and the inability of any of these
contract manufacturers to deliver our required
40
quantities of product candidates timely and at commercially reasonable prices
would negatively affect our operations.
Before we can begin commercially manufacturing ADVEXIN gene therapy, INGN
241 or any other product candidate, we must obtain regulatory approval of our
manufacturing facility and process. Manufacturing of our product candidates for
clinical and commercial purposes must comply with the FDA's current Good
Manufacturing Practices requirements, commonly known as CGMP, and foreign
regulatory requirements. The CGMP requirements govern quality control and
documentation policies and procedures. In complying with CGMP and foreign
regulatory requirements, we will be obligated to expend time, money and effort
in production, record keeping and quality control to assure that the product
meets applicable specifications and other requirements. We must also pass a
pre-approval inspection prior to FDA approval.
Our manufacturing facilities have not yet been subject to an FDA or other
regulatory inspection. Failure to pass a pre-approval inspection may
significantly delay FDA approval of our products. If we fail to comply with
these requirements, we would be subject to possible regulatory action and may be
limited in the jurisdictions in which we are permitted to sell our products.
Further, the FDA and foreign regulatory authorities have the authority to
perform unannounced periodic inspections of our manufacturing facility to ensure
compliance with CGMP and foreign regulatory requirements. Our facilities in
Houston, Texas are our only manufacturing facilities. If these facilities were
to incur significant damage or destruction, then our ability to manufacture
ADVEXIN gene therapy or any other product candidates would be significantly
hampered. This, in turn, could result in delays in our pre-clinical testing,
clinical trials or commercialization efforts.
Canji, Inc. controls a United States patent and corresponding international
applications, including a European counterpart, relating to the purification of
viral or adenoviral compositions. While we believe that our manufacturing
process does not infringe upon this patent, Canji could still assert a claim
against us. We may also become subject to infringement claims or litigation if
our manufacturing process infringes upon other patents of our competitors. The
defense and prosecution of intellectual property suits and related legal and
administrative proceedings are costly and time-consuming to pursue, and their
outcome is uncertain.
WE RELY ON ONLY ONE SUPPLIER FOR SOME OF OUR MANUFACTURING MATERIALS. ANY
PROBLEMS EXPERIENCED BY ANY SUCH SUPPLIER COULD NEGATIVELY AFFECT OUR
OPERATIONS.
We rely on third-party suppliers for some of the materials used in the
manufacturing of ADVEXIN gene therapy, INGN 241 and our other product
candidates. Some of these materials are available from only one supplier or
vendor. Any significant problem that one of our sole source suppliers
experiences could result in a delay or interruption in the supply of materials
to us until that supplier cures the problem or until we locate an alternative
source of supply. Any delay or interruption would likely lead to a delay or
interruption in our manufacturing operations, which could negatively affect our
operations.
The CellCube(TM) Module 100 bioreactor, which Corning (Acton, MA)
manufactures, and Benzonase(R), which EM Industries (Hawthorne, NY)
manufactures, are currently available only from these suppliers. Any significant
interruption in the supply of either of these items would require a material
change in our manufacturing process. We maintain inventories of these items, but
we do not have a supply agreement with either manufacturer.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY
INCUR SUBSTANTIAL DAMAGES AND
DEMAND FOR THE PRODUCTS MAY BE REDUCED.
The testing and marketing of medical products is subject to an inherent
risk of product liability claims. Regardless of their merit or eventual outcome,
product liability claims may result in:
- decreased demand for our product candidates;
- injury to our reputation and significant media attention;
- withdrawal of clinical trial volunteers;
41
- costs of litigation; and
- substantial monetary awards to plaintiffs.
We currently maintain product liability insurance with coverage of $5.0
million per occurrence with a $15.0 million annual limit. This coverage may not
be sufficient to protect us fully against product liability claims. We intend to
expand our product liability insurance coverage to include the sale of
commercial products if we obtain marketing approval for any of our product
candidates. Our inability to obtain sufficient product liability insurance at an
acceptable cost to protect against product liability claims could prevent or
limit the commercialization of our products.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS, AND ANY CLAIMS RELATING TO
IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD HARM OUR
BUSINESS.
Our business involves the use of a broad range of hazardous chemicals and
materials. Environmental laws impose stringent civil and criminal penalties for
improper handling, disposal and storage of these materials. In addition, in the
event of an improper or unauthorized release of, or exposure of individuals to,
hazardous materials, we could be subject to civil damages due to personal injury
or property damage caused by the release or exposure. A failure to comply with
environmental laws could result in fines and the revocation of environmental
permits, which could prevent us from conducting our business.
OUR STOCK PRICE MAY FLUCTUATE SUBSTANTIALLY.
The market price for our common stock will be affected by a number of
factors, including:
- the announcement of new products or services by us or our competitors;
- quarterly variations in our or our competitors' results of operations;
- failure to achieve operating results projected by securities analysts;
- changes in earnings estimates or recommendations by securities analysts;
- developments in our industry; and
- general market conditions and other factors, including factors unrelated
to our operating performance or the operating performance of our
competitors.
In addition, stock prices for many companies in the technology and emerging
growth sectors have experienced wide fluctuations that have often been unrelated
to the operating performance of such companies. Many factors may have a
significant adverse effect on the market price of our common stock, including:
- results of our pre-clinical and clinical trials;
- announcement of technological innovations or new commercial products by
us or our competitors;
- developments concerning proprietary rights, including patent and
litigation matters;
- publicity regarding actual or potential results with respect to products
under development by us or by our competitors;
- regulatory developments; and
- quarterly fluctuations in our revenues and other financial results.
ANY ACQUISITION WE MIGHT MAKE MAY BE COSTLY AND DIFFICULT TO INTEGRATE, MAY
DIVERT MANAGEMENT RESOURCES OR DILUTE STOCKHOLDER VALUE.
As part of our business strategy, we may acquire assets or businesses
principally relating to or complementary to our current operations, and we have
in the past evaluated and discussed such opportunities
42
with interested parties. Any acquisitions that we undertake will be accompanied
by the risks commonly encountered in business acquisitions. These risks include,
among other things:
- potential exposure to unknown liabilities of acquired companies;
- the difficulty and expense of assimilating the operations and personnel
of acquired businesses;
- diversion of management time and attention and other resources;
- loss of key employees and customers as a result of changes in management;
- the incurrence of amortization expenses; and
- possible dilution to our stockholders.
In addition, geographic distances may make the integration of businesses
more difficult. We may not be successful in overcoming these risks or any other
problems encountered in connection with any acquisitions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our fixed rate long-term debt and short-term investments in investment grade
securities, which consist primarily of federal and state government obligations,
commercial paper and corporate bonds. Investments are classified as
held-to-maturity and are carried at amortized costs. We do not hedge interest
rate exposure or invest in derivative securities.
At December 31, 2001, the fair value of our fixed-rate debt approximated
its carrying value based upon discounted future cash flows using current market
prices.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in our Financial
Statements and Notes thereto beginning at page F-2 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 6, 2002, we dismissed Arthur Andersen LLP as our independent
public accountants, effective upon completion of Arthur Andersen LLP's services
in connection with the filing of this Annual Report on Form 10-K for the
six-month transition period ended December 31, 2001.
Arthur Andersen LLP's reports on our financial statements for each of the
years ended June 30, 2000 and 2001 and for the six-month transition period ended
December 31, 2001 did not contain an adverse opinion or a disclaimer of opinion,
and were not qualified or modified as to uncertainty, audit scope or accounting
principles.
The decision to change independent public accountants was recommended by
the Audit Committee of our Board of Directors and was approved by our Board of
Directors.
During each of the two years ended June 30, 2000 and 2001 and for the
six-month transition period ended December 31, 2001, there were no disagreements
with Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would
have caused it to make reference to the subject matter of the disagreement in
connection with its report.
During each of the two years ended June 30, 2000 and 2001 and for the
six-month transition period ended December 31, 2001, Arthur Andersen LLP did not
advise us of any "reportable events" as described in Item 304(a)(1)(v) of
Regulation S-K under the Securities Act of 1933, as amended.
On March 6, 2002, we engaged Ernst & Young LLP as our principal accountants
to audit our financial statements.
43
During each of the two years ended June 30, 2000 and 2001 and for the
six-month transition period ended December 31, 2001, we did not consult Ernst &
Young LLP on any matters described in Items 304(a)(2)(i) or 304(a)(2)(ii) of
Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information under the sections captioned "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" contained in the 2002 Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the section captioned "Executive Compensation" contained in
the 2002 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the sections captioned "Security Ownership" contained in the
2002 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the sections captioned "Certain Relationships and Related
Transactions" and "Compensation Committee Interlocks and Insider Participation"
contained in the 2002 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
PAGE
----
Report of Independent Public Accountants.................... F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Statements of Stockholders' Equity............. F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are not
applicable or not required, or because the required information is included in
the consolidated financial statements or notes thereto.
3. EXHIBITS
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1(a) -- Certificate of Incorporation as currently in effect
3.1(b) -- Amendment to Certificate of Incorporation, effective as of
December 21, 2001
44
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.2(4) -- Bylaws of Introgen as currently in effect
4.1(2) -- Specimen Common Stock Certificate
4.2(5) -- Certificate of Designations of Series A Non-Voting
Convertible Preferred Stock
10.1(1) -- Form of Indemnification Agreement between Introgen and each
of its directors and officers
10.2(1) -- 1995 Stock Plan and form of stock option agreement
thereunder
10.3(3) -- 2000 Stock Option Plan and forms of stock option agreements
thereunder
10.4(3) -- 2000 Employee Stock Purchase Plan and forms of agreements
thereunder
10.5(1) -- Form of Series C Preferred Stock Purchase Agreement among
Introgen and certain investors
10.6(1) -- Registration Rights Agreement, dated October 31, 1997
10.7(a)(1) -- Assignment of Leases, dated November 23, 1998, by TMX Realty
Corporation and Riverway Bank, and other related agreements
10.7(b)(1) -- Lease Agreement, dated June 7, 1996, by and between Introgen
and Plaza del Oro Business Center
10.7(c)(2) -- Amendment No. 1 to Lease Agreement, effective as of May 9,
1997
10.7(d)(2) -- Amendment No. 2 to Lease Agreement, effective as of July 31,
1998
10.7(e)(2) -- Amendment No. 3 to Lease Agreement, effective as of June 29,
2000
10.8(a)+(1) -- Patent and Technology License Agreement, effective as of
July 20, 1994, by and between the Board of Regents of The
University of Texas System, M.D. Anderson Cancer Center and
Introgen
10.8(b)+(1) -- Amendment No. 1 to Patent License Agreement, effective as of
September 1, 1996
10.9+(3) -- Sponsored Research Agreement for Clinical Study, No. CS
93-27, dated February 11, 1993, between Introgen and M.D.
Anderson, as amended
10.10 -- [RESERVED]
10.11+(3) -- Sponsored Research Agreement No. SR 93-04, dated February
11, 1993 between M.D. Anderson and Introgen, as amended
10.12 -- [RESERVED]
10.13+(3) -- Sponsored Research Agreement No. SR 96-004 between Introgen
and M.D. Anderson, dated January 17, 1996
10.14 -- [RESERVED]
10.15+(3) -- License Agreement, dated March 29, 1996 between Introgen and
SKCC
10.16(1) -- Consulting Agreement between Introgen and Jack A. Roth,
M.D., effective as of October 1, 1994
10.17(1) -- Consulting Agreement between EJ Financial Enterprises, Inc.
and Introgen, effective as of July 1, 1994
10.18(a)(1) -- Employment Agreement dated as of August 1, 1996 between
Introgen and David G. Nance
10.18(b)(1) -- Amendment No. 1 to Employment Agreement, effective as of
August 1, 1998
10.18(c)(1) -- Amendment No. 2 to Employment Agreement, effective as of
February 15, 2000
10.19(1) -- Service Agreement, effective as of July 1, 1994, between
Introgen and Domecq Technologies, Inc.
10.20(a)+(1) -- Collaboration Agreement (p53 Products), effective as of
October 7, 1994, between Introgen and RPR, as amended
10.20(b)+(3) -- Addendum No. 1 to Collaboration Agreement (p53 Products),
dated January 23, 1996, between Introgen and RPR
10.20(c)+(1) -- 1997 Agreement Memorandum, effective as of July 22, 1997,
between Introgen and RPR
10.20(d)+(3) -- Letter Agreement, dated April 19, 1999, from Introgen to RPR
regarding manufacturing process for ADVEXIN gene therapy
45
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.21(a)+(1) -- Collaboration Agreement (K-ras Products), effective as of
October 7, 1994, between Introgen and RPR, as amended
10.21(b)(1) -- Amendment No. 1 to Collaboration Agreement (K-ras Products),
effective as of September 27, 1995, between Introgen and RPR
10.22+(3) -- Collaborative Research and Development Agreement dated
October 30, 1998 between Introgen, RPR and NCI
10.23+(1) -- Non-Exclusive License Agreement, effective as of April 16,
1997, by Introgen and Iowa Research Foundation
10.24+(3) -- Option Agreement, effective as of June 1, 1998, by Introgen
and Imperial Cancer Research Technology Limited ("ICRT")
10.25+(3) -- Option Agreement, effective as of January 1, 1999, by
Introgen and ICRT
10.26+(3) -- Exclusive License Agreement, effective as of July 19, 1999,
by Introgen and Corixa Corporation
10.27(a) -- [RESERVED]
10.27(b)(1) -- Letter dated January 28, 2000, from Introgen to LXR
Biotechnology ("LXR"), notifying LXR of its exercise of its
option
10.27(c)+(2) -- Exclusive License Agreement, effective as of May 16, 2000,
by and between Introgen and LXR
10.28+(3) -- Administrative Services and Management Agreement, effective
as of January 1, 1999, by and between Introgen and Gendux,
Inc.
10.29+(3) -- Research and Development Agreement, effective as of January
1, 1999, by and between Introgen and Gendux, Inc.
10.30+(3) -- Delivery Technology License Agreement, effective as of
January 1, 1999, by and between Introgen and Gendux, Inc.
10.31+(3) -- Target Gene License Agreement, effective as of January 1,
1999, by and between Introgen and Gendux, Inc.
10.32+(1) -- Non-Exclusive License Agreement, effective as of August 17,
1998, by and between Introgen and National Institutes of
Health
10.33 -- [RESERVED]
10.34(2) -- Master Lease Agreement, effective as of August 4, 1999, by
and between Introgen and Finova Capital Corporation
10.35(2) -- Construction Loan Agreement, effective as of July 24, 2000,
by and between Introgen and Compass Bank
10.36+(5) -- Restated p53 and K-ras Agreement, effective as of June 30,
2001, by and among Introgen, Aventis Pharmaceuticals Inc.
("API") and Aventis Pharma S.A. ("Aventis")
10.37(5) -- p53 Assignment Agreement, effective as of June 30, 2001, by
and among Introgen, API and Aventis
10.38(5) -- K-ras Assignment Agreement, effective as of June 30, 2001,
by and among Introgen, API and Aventis
10.39(5) -- Registration Rights Agreement, effective as of June 30,
2001, by and among Introgen, API and RPR
10.40(5) -- Voting Agreement, effective as of June 30, 2001, by and
among Introgen, API and RPR
21.1(1) -- List of subsidiaries of Introgen
23.1 -- Consent of Arthur Andersen LLP, independent public
accountants
24.1 -- Power of Attorney (See page 48)
99.1 -- Letter re: Arthur Andersen LLP Representations
---------------
(1) Incorporated by reference to the same-numbered exhibit filed with Introgen's
Registration Statement on Form S-1 (No. 333-30582) filed with the Securities
and Exchange Commission on February 17, 2000.
46
(2) Incorporated by reference to the same-numbered exhibit filed with Amendment
No. 2 to Introgen's Registration Statement on Form S-1 (No. 333-30582) filed
with the Securities and Exchange Commission on September 8, 2000.
(3) Incorporated by reference to the same-numbered exhibit filed with Amendment
No. 3 to Introgen's Registration Statement on Form S-1 (No. 333-30582) filed
with the Securities and Exchange Commission on October 4, 2000.
(4) Incorporated by reference to the same-numbered exhibit filed with Introgen's
Quarterly Report on Form 10-Q, for the quarter ended December 31, 2000,
(File No. 000-21291), filed with the Securities and Exchange Commission on
February 14, 2001.
(5) Incorporated by reference to the same-numbered exhibit filed with Introgen's
Annual Report on Form 10-K for the fiscal year ended June 30, 2001 (File No.
000-21291), filed with the Securities and Exchange Commission on September
19, 2001.
+ Confidential treatment has been granted for portions of this exhibit.
(b) REPORTS ON FORM 8-K
We filed a Current Report on Form 8-K on October 11, 2001 in connection
with the change of our fiscal year end from June 30 to December 31.
(c) EXHIBITS
See Item 14(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(2) above.
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this Report on Form 10-K to be signed on
its behalf by the undersigned thereunto duly authorized in the City of Austin,
Texas, this March 20, 2002.
INTROGEN THERAPEUTICS, INC.
By: /s/ DAVID G. NANCE
------------------------------------
David G. Nance
President, Chief Executive Officer
and Director
(Principal Executive Officer)
By: /s/ JAMES W. ALBRECHT, JR.
------------------------------------
James W. Albrecht, Jr.
Chief Financial Officer
(Principal Financial and Accounting
Officer)
48
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints David G. Nance and James W.
Albrecht, Jr. and each of them acting individually, as his or her
attorney-in-fact, each with full power of substitution, for him or her in any
and all capacities, to sign any and all amendments to this Report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-K has been signed on behalf of the Registrant by
the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID G. NANCE President, Chief Executive March 20, 2002
------------------------------------------------ Officer, and Director (Principal
(David G. Nance) Executive Officer)
/s/ JAMES W. ALBRECHT, JR. Chief Financial Officer (Principal March 20, 2002
------------------------------------------------ Financial and Accounting Officer)
(James W. Albrecht, Jr.)
/s/ JOHN N. KAPOOR, PH.D. Chairman of the Board and Director March 20, 2002
------------------------------------------------
(John N. Kapoor, Ph.D.)
/s/ WILLIAM H. CUNNINGHAM, PH.D. Director March 20, 2002
------------------------------------------------
(William H. Cunningham, Ph.D.)
/s/ CHARLES E. LONG Director March 20, 2002
------------------------------------------------
(Charles E. Long)
/s/ MAHENDRA G. SHAH, PH.D. Director March 20, 2002
------------------------------------------------
(Mahendra G. Shah, Ph.D.)
/s/ ELISE T. WANG Director March 20, 2002
------------------------------------------------
(Elise T. Wang)
49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Introgen Therapeutics, Inc.:
We have audited the accompanying consolidated balance sheets of Introgen
Therapeutics, Inc. (a Delaware corporation), and subsidiaries as of June 30,
2000 and 2001 and December 31, 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended June 30, 2001 and for the six months ended December 31, 2001.
These financial statements are the responsibility of Introgen Therapeutics,
Inc.'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 Introgen Therapeutics, Inc.,
and subsidiaries as of June 30, 2000 and 2001 and December 31, 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2001 and the six months ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Austin, Texas
January 18, 2002
F-1
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
--------------------------- ------------
2000 2001 2001
------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 1,788,612 $ 14,199,948 $ 37,396,627
Receivable from sale of preferred stock.......... -- 25,000,000 --
Short-term investments........................... 9,976,469 20,776,581 11,427,915
Other current assets............................. 4,808 511,640 811,421
Inventory........................................ 1,734,329 -- --
------------ ------------ ------------
Total current assets..................... 13,504,218 60,488,169 49,635,963
------------ ------------ ------------
Property and equipment, net of accumulated
depreciation of $2,988,387, $5,214,554 and
$6,405,884, respectively......................... 10,152,572 11,507,385 10,443,017
Other assets....................................... 1,197,733 351,719 345,477
------------ ------------ ------------
Total assets............................. $ 24,854,523 $ 72,347,273 $ 60,424,457
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 262,977 $ 376,187 $ 944,395
Accrued liabilities.............................. 1,026,330 4,402,121 4,029,808
Deferred revenues from affiliate................. 1,205,655 -- --
Current portions of capital lease obligations and
notes payable................................. 746,192 1,413,635 1,486,376
------------ ------------ ------------
Total current liabilities................ 3,241,154 6,191,943 6,460,579
Capital lease obligations, net of current
portion.......................................... 2,149,281 1,370,221 957,467
Notes payable, net of current portion.............. 5,871,750 8,427,900 8,079,121
Deferred revenue, long-term........................ -- 288,000 361,467
Commitments and Contingencies
Stockholders' Equity:
Convertible preferred stock, $.001 par value;
8,308,523 shares authorized, 6,419,896 shares
issued and outstanding at June 30, 2000....... 6,419 -- --
Series A non-voting convertible preferred stock,
$.001 par value; 100,000 shares authorized,
issued and outstanding at June 30, 2001 and
December 31, 2001............................. -- 100 100
Common stock, $.001 par value; 50,000,000 shares
authorized; 4,134,180; 21,391,125 and
21,446,363 shares issued and outstanding,
respectively.................................. 4,134 21,391 21,446
Additional paid-in capital....................... 36,536,575 94,574,836 94,544,109
Deferred compensation............................ (4,210,412) (3,340,939) (2,485,220)
Accumulated deficit.............................. (18,744,378) (35,186,179) (47,514,612)
------------ ------------ ------------
Total stockholders' equity............... 13,592,338 56,069,209 44,565,823
------------ ------------ ------------
Total liabilities and stockholders'
equity................................. $ 24,854,523 $ 72,347,273 $ 60,424,457
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------------- --------------------------
1999 2000 2001 2000 2001
----------- ----------- ------------ ----------- ------------
(Unaudited)
Collaborative research and
development revenues from
affiliate................... $ 6,713,653 $ 6,204,061 $ 3,015,655 $ 3,015,655 $ --
----------- ----------- ------------ ----------- ------------
Product sales to affiliate.... 1,475,282 2,086,600 1,500,000 1,500,000 --
Cost of product sales......... 993,748 1,475,790 2,487,783 (2,487,783) --
----------- ----------- ------------ ----------- ------------
Gross margin on product
sales.................... 481,534 610,810 (987,783) (987,783) --
----------- ----------- ------------ ----------- ------------
Other revenue................. -- 97,000 684,344 391,031 297,697
Costs and expenses:
Research and development.... 7,539,514 10,074,755 15,013,840 5,152,785 10,062,421
General and
administrative........... 2,976,955 4,700,841 4,875,086 2,040,090 3,526,244
----------- ----------- ------------ ----------- ------------
Loss from operations........ (3,321,282) (7,863,725) (17,176,710) (4,773,972) (13,290,968)
Interest income............... 680,748 722,352 1,229,944 782,914 911,959
Interest expense.............. (5,363) (582,453) (848,605) (380,087) (467,032)
Other income.................. -- -- 353,570 -- 517,608
----------- ----------- ------------ ----------- ------------
Net loss............ $(2,645,897) $(7,723,826) $(16,441,801) $(4,371,145) $(12,328,433)
=========== =========== ============ =========== ============
Net loss per share, basic and
diluted..................... $ (0.66) $ (1.89) $ (1.02) $ (0.39) $ (0.58)
=========== =========== ============ =========== ============
Shares used in computing basic
and diluted net loss per
share....................... 4,005,893 4,095,623 16,163,027 11,120,670 21,440,380
=========== =========== ============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES A
SERIES A, B, C AND D NON-VOTING
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ---------------- -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------- ------- ------ ---------- ------- -----------
BALANCE, JUNE 30, 1998...................... 5,941,662 $ 5,941 -- $ -- 3,954,906 $ 3,955 $25,083,813
Issuance of Series B preferred stock in June
1999 in accordance with stock purchase
agreement with affiliate.................. 478,234 478 -- -- -- -- 5,102,279
Issuance of common stock in connection with
exercise of stock options and warrants.... -- -- -- -- 51,329 51 21,203
Deferred compensation relating to issuance
of stock options, net of reversals........ -- -- -- -- -- -- 1,767,864
Amortization of deferred compensation and
stock-based compensation.................. -- -- -- -- -- -- --
Net loss....................................
---------- ------- ------- ---- ---------- ------- -----------
BALANCE, JUNE 30, 1999...................... 6,419,896 6,419 -- -- 4,006,235 4,006 31,975,159
Issuance of common stock in connection with
exercise of stock options and warrants.... -- -- -- -- 127,945 128 58,398
Deferred compensation relating to issuance
of stock options, net of reversals........ -- -- -- -- -- -- 3,929,018
Amortization of deferred compensation and
stock-based compensation.................. -- -- -- -- -- -- 574,000
Net loss....................................
---------- ------- ------- ---- ---------- ------- -----------
BALANCE, JUNE 30, 2000...................... 6,419,896 6,419 -- -- 4,134,180 4,134 36,536,575
Issuance of common stock in connection with
initial public offering, net of offering
costs of $4,574,538....................... -- -- -- -- 4,600,000 4,600 32,220,862
Conversion of preferred stock to common
stock..................................... (6,419,896) (6,419) -- -- 12,326,173 12,326 (5,907)
Issuance of common stock in connection with
exercise of stock options and warrants.... -- -- -- -- 330,772 331 203,804
Issuance of preferred stock in June 2001 in
accordance stock purchase agreement with
affiliate, net of offering costs of
$100,000.................................. -- -- 100,000 100 -- -- 24,899,900
Deferred compensation relating to issuance
of stock options, net of reversals........ -- -- -- -- -- -- 719,602
Amortization of deferred compensation and
stock-based compensation.................. -- -- -- -- -- -- --
Net loss....................................
---------- ------- ------- ---- ---------- ------- -----------
BALANCE JUNE 30, 2001....................... -- -- 100,000 100 21,391,125 21,391 94,574,836
Issuance of common stock in connection with
exercise of stock options and warrants.... -- -- -- -- 55,238 55 25,502
Deferred compensation relating to issuance
of stock options, net of reversals........ -- -- -- -- -- -- (56,229)
Amortization of deferred compensation and
stock-based compensation.................. -- -- -- -- -- -- --
Net loss....................................
---------- ------- ------- ---- ---------- ------- -----------
BALANCE DECEMBER 31, 2001................... -- $ -- 100,000 $100 21,446,363 $21,446 $94,544,109
========== ======= ======= ==== ========== ======= ===========
DEFERRED ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ------------ ------------
BALANCE, JUNE 30, 1998...................... $ (397,338) $ (8,374,655) $ 16,321,716
Issuance of Series B preferred stock in June
1999 in accordance with stock purchase
agreement with affiliate.................. -- -- 5,102,757
Issuance of common stock in connection with
exercise of stock options and warrants.... -- -- 21,254
Deferred compensation relating to issuance
of stock options, net of reversals........ (1,767,864) -- --
Amortization of deferred compensation and
stock-based compensation.................. 387,041 -- 387,041
Net loss.................................... (2,645,897) (2,645,897)
----------- ------------ ------------
BALANCE, JUNE 30, 1999...................... (1,778,161) (11,020,552) 19,186,871
Issuance of common stock in connection with
exercise of stock options and warrants.... -- -- 58,526
Deferred compensation relating to issuance
of stock options, net of reversals........ (3,929,018) -- --
Amortization of deferred compensation and
stock-based compensation.................. 1,496,767 -- 2,070,767
Net loss.................................... (7,723,826) (7,723,826)
----------- ------------ ------------
BALANCE, JUNE 30, 2000...................... (4,210,412) (18,744,378) 13,592,338
Issuance of common stock in connection with
initial public offering, net of offering
costs of $4,574,538....................... -- -- 32,225,462
Conversion of preferred stock to common
stock..................................... -- -- --
Issuance of common stock in connection with
exercise of stock options and warrants.... -- -- 204,135
Issuance of preferred stock in June 2001 in
accordance stock purchase agreement with
affiliate, net of offering costs of
$100,000.................................. -- -- 24,900,000
Deferred compensation relating to issuance
of stock options, net of reversals........ (719,602) -- --
Amortization of deferred compensation and
stock-based compensation.................. 1,589,075 -- 1,589,075
Net loss.................................... (16,441,801) (16,441,801)
----------- ------------ ------------
BALANCE JUNE 30, 2001....................... (3,340,939) (35,186,179) 56,069,209
Issuance of common stock in connection with
exercise of stock options and warrants.... -- -- 25,557
Deferred compensation relating to issuance
of stock options, net of reversals........ 56,229 -- --
Amortization of deferred compensation and
stock-based compensation.................. 799,490 -- 799,490
Net loss.................................... (12,328,433) (12,328,433)
----------- ------------ ------------
BALANCE DECEMBER 31, 2001................... $(2,485,220) $(47,514,612) $ 44,565,823
=========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------------- ---------------------------
1999 2000 2001 2000 2001
----------- ----------- ------------ ----------- ------------
(Unaudited)
Cash flows from operating activities:
Net loss...................................... $(2,645,897) $(7,723,826) $(16,441,801) $(4,371,145) $(12,328,433)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................ 14,167 1,710,559 2,226,167 1,065,687 1,191,330
Compensation related to issuance of certain
stock options............................. 387,041 2,070,767 1,589,075 745,615 799,490
Changes in assets and liabilities:
Decrease (increase) in receivable from
affiliate............................... 66,468 -- -- (709,262) --
Decrease (increase) in inventory.......... (1,158,642) (109,718) 1,734,329 984,329 --
Decrease (increase) in other assets....... (246,311) (908,000) (436,629) (370,562) (293,539)
Increase (decrease) in accounts payable... 1,757,701 (1,751,836) 113,210 582,480 568,208
Increase (decrease) in accrued
liabilities............................. 51,037 762,542 3,375,791 479,044 (372,313)
Increase (decrease) in deferred revenue... (176,181) 407,468 (917,655) (154,655) 73,467
----------- ----------- ------------ ----------- ------------
Net cash used in operating activities... (1,950,617) (5,542,044) (8,757,513) (1,748,469) (10,361,790)
----------- ----------- ------------ ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment........... (7,441,013) (1,021,904) (3,580,980) (2,954,291) (126,962)
Purchases of short-term investments........... (24,644,122) (21,585,141) (83,142,612) (47,076,268) (19,399,809)
Maturities of short-term investments.......... 26,691,096 25,224,000 72,342,500 20,075,103 28,748,475
----------- ----------- ------------ ----------- ------------
Net cash provided by (used in) investing
activities............................ (5,394,039) 2,616,955 (14,381,092) (29,955,456) 9,221,704
----------- ----------- ------------ ----------- ------------
Cash flows from financing activities:
Proceeds from sale of preferred and common
stock, net of offering costs................ 5,124,011 58,526 33,105,408 33,070,059 25,025,557
Proceeds from issuance of note payable........ 3,185,993 2,814,007 3,262,833 1,931,602 --
Principal payments under capital lease
obligations and notes payable............... (5,162) (304,508) (818,300) (386,685) (688,792)
----------- ----------- ------------ ----------- ------------
Net cash provided by financing
activities............................ 8,304,842 2,568,025 35,549,941 34,614,976 24,336,765
----------- ----------- ------------ ----------- ------------
Net increase (decrease) in cash......... 960,186 (357,064) 12,411,336 2,911,051 23,196,679
Cash, beginning of period....................... 1,185,490 2,145,676 1,788,612 1,788,612 14,199,948
----------- ----------- ------------ ----------- ------------
Cash, end of period............................. $ 2,145,676 $ 1,788,612 $ 14,199,948 $ 4,699,663 $ 37,396,627
=========== =========== ============ =========== ============
Supplemental disclosure of cash flow
information:
Cash paid for interest.................. $ 45,555 $ 607,959 $ 917,471 $ 280,173 $ 459,304
=========== =========== ============ =========== ============
Supplemental disclosure of non-cash investing
and financing activities:
Purchases of equipment under capital lease
obligations................................. $ 296,411 $ 2,780,482 $ -- $ -- $ --
=========== =========== ============ =========== ============
Retirement of fully-depreciated assets........ $ -- $ 483,678 $ -- $ -- $ --
=========== =========== ============ =========== ============
Receivable for issuance of preferred stock.... $ -- $ -- $ 25,000,000 $ -- $ --
=========== =========== ============ =========== ============
Offering costs deferred in 2000, netted
against initial public offering proceeds in
2001........................................ $ -- $ -- $ 775,811 $ 775,811 $ --
=========== =========== ============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(INCLUDING AMOUNTS RELATED TO THE UNAUDITED PERIOD
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000)
1. FORMATION AND BUSINESS OF THE COMPANY
Introgen Therapeutics, Inc., a Delaware corporation, and its subsidiaries
(Introgen) develop gene therapy products for the treatment of cancer. Introgen's
lead product candidate, ADVEXIN(R) gene therapy (formerly known as INGN 201),
combines the naturally occurring p53 tumor suppressor gene with its adenoviral
delivery system. Introgen is conducting Phase III clinical studies of ADVEXIN
gene therapy in head and neck cancer, has completed a Phase II clinical trial in
non-small cell lung cancer and is conducting several Phase I clinical trials in
additional cancer indications. Introgen is developing additional cancer gene
therapy product candidates, notably those based on the mda-7 and PTEN genes, as
well as associated vector technologies for delivering the gene-based products
into target cells. Introgen's INGN 241 product candidate, which combines the
mda-7 gene with Introgen's gene delivery system, is undergoing safety testing in
a Phase I clinical study. Introgen is developing therapies for cancer and other
diseases based on restoring normal cellular function through gene therapy, which
may offer safer and more effective treatments than are currently available.
Introgen manufactures its own gene therapy-based products for use in
clinical trials. Introgen has not yet generated any significant revenues from
unaffiliated third parties, nor is there any assurance of future product
revenues. Introgen's research and development activities involve a high degree
of risk and uncertainty, and its ability to successfully develop, manufacture
and market its proprietary products is dependent upon many factors. These
factors include, but are not limited to, the need for additional financing, the
reliance on collaborative research and development arrangements with corporate
and academic affiliates, and the ability to develop manufacturing, sales and
marketing experience. Additional factors include uncertainties as to patents and
proprietary technologies, competitive technologies, technological change and
risk of obsolescence, development of products, competition, government
regulations and regulatory approval, and product liability exposure. As a result
of the aforementioned factors and the related uncertainties, there can be no
assurance of Introgen's future success.
Since its inception in 1993, Introgen has used its resources primarily to
conduct research and development activities, primarily for ADVEXIN gene therapy
and, to a lesser extent, for other product candidates. At December 31, 2001,
Introgen had an accumulated deficit of approximately $47.5 million. Introgen
anticipates that it will incur losses in the future that are likely to be
greater than cumulative losses incurred in prior years. Introgen expects that
cash needed for operating activities will increase as it continues to expand its
research and development of various gene therapy technologies. Since inception,
Introgen's only significant revenues have been payments from Aventis Pharma
(Aventis) under collaborative research and development agreements for Aventis'
early-stage development work on ADVEXIN gene therapy and Aventis' purchases of
ADVEXIN gene therapy product Introgen manufactured for Aventis' use in
later-stage clinical trials it previously performed. Introgen has also earned
revenue from federal research grants, contract manufacturing and process
development activities and interest income on cash placed in short-term
investments.
Prior to June 30, 2001, Introgen developed therapeutics based on p53 and on
K-ras pathway inhibition under two collaboration agreements originally entered
into in October 1994 with Rhone-Poulenc Rorer Pharmaceuticals Inc., which
ultimately became part of Aventis. In June 2001, Introgen and Aventis
restructured this collaborative relationship. Under this restructuring, Introgen
assumed responsibility for the worldwide development of all p53 and K-ras
products, and acquired additional marketing and commercialization rights with
respect to those products. Introgen assumed the control and performance of
ongoing clinical trials for p53- and K-ras-based products and is now fully
responsible for all pre-clinical research and development and clinical trials
for new gene therapy products. In connection with this restructuring, Aventis
F-6
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchased $25.0 million of non-voting preferred stock from Introgen. During the
quarter ended September 30, 2001, Introgen made a one-time payment of $2.0
million to Aventis in consideration for internal costs they incurred in
facilitating the transition of control and performance of these clinical trials
from Aventis to Introgen. As of December 31, 2001, Introgen owed Aventis $1.2
million for external costs relating to payments Aventis made to third parties in
facilitating the completion of the transition of these clinical trials from
Aventis to Introgen.
Under the restructured p53 and K-ras collaboration agreement, Introgen is
primarily responsible for the further development and commercialization of gene
therapy products for the delivery of the p53 and K-ras inhibitor genes. Aventis
licensed to Introgen all p53 and K-ras patents and delivery patents, as well as
all proprietary Aventis targeting technologies, and agreed, for a period of
seven years, not to conduct any activities directed to the development or
commercialization of any gene therapy products using the p53 or K-ras genes.
Introgen now has the exclusive, worldwide right to market and manufacture the
products developed under each of the prior collaboration agreements, as well as
any new p53- or K-ras-based gene therapy products. Aventis transferred to
Introgen all trademarks and goodwill associated with the developed p53-based
gene therapy products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Introgen and all of its subsidiaries. Intercompany transactions and balances are
eliminated in consolidation. In October 2001, Introgen announced a change in the
ending date of its accounting year from June 30 to December 31.
Interim Financial Information
The interim statements of operations and cash flows for the six months
ended December 30, 2000 are unaudited, and certain information and footnote
disclosures related thereto which would normally be included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations and cash flows with respect to interim
financial statements have been included. The results of operations for the
interim period are not necessarily indicative of the results for the entire
fiscal year.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include amounts on deposit with financial
institutions and investments with original maturities of 90 days or less.
Short-Term Investments
Our short-term investments consisted of investments in short-term,
investment-grade securities, which consist primarily of federal and state
government obligations, commercial paper and/or corporate bonds with various
maturity dates not exceeding one year. All short-term investments have been
classified as held-to-maturity and are carried at amortized cost. At any point
in time, amortized costs may be greater or less than
F-7
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value. If investments are sold prior to maturity, we could incur a realized
gain or loss based on the fair market value of the investments at the date of
sale. Additionally, Introgen could incur future losses on investments if the
investment issuer becomes impaired or the investment is downgraded.
Inventory
Inventory at June 30, 2000, consisted of vials of gene therapy-based
product manufactured for sale to Aventis and for their use in clinical trials
under the terms of Introgen's original collaboration agreements with them. This
inventory was stated at the lower of cost or market. Cost was determined based
upon direct materials used and an allocation of direct and indirect labor and
overhead. Under the restructured collaboration agreements, Introgen no longer
sells clinical materials to Aventis. Accordingly, all inventory on hand at June
30, 2000 was expensed during the year ended June 30, 2001.
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation.
Maintenance, repairs and minor replacements are charged to expense as incurred.
Significant renewals and betterments are capitalized. Depreciation is provided
generally using accelerated methods based on useful lives of fifteen years for
research, manufacturing and administrative facilities and five to seven years
for equipment. Interest incurred during construction of facilities is
capitalized as a cost of those facilities.
Property and equipment consisted of the following as of June 30, 2000 and
2001 and December 31, 2001:
JUNE 30, DECEMBER 31,
------------------------- ------------
2000 2001 2001
----------- ----------- ------------
Facility...................................... $ 8,431,389 $11,597,922 $11,569,737
Laboratory equipment.......................... 4,709,570 5,124,017 5,279,164
----------- ----------- -----------
Total property and equipment................ 13,140,959 16,721,939 16,848,901
Less accumulated depreciation................. (2,988,387) (5,214,554) (6,405,884)
----------- ----------- -----------
Net property and equipment.................. $10,152,572 $11,507,385 $10,443,017
=========== =========== ===========
As of June 30, 2000 and 2001 and December 31, 2001, $3,076,893 of equipment
was held under capital lease obligations and is being depreciated over the
applicable lease term (see Note 7).
Accrued Liabilities
Accrued liabilities consist of the following significant items:
JUNE 30, DECEMBER 31,
------------------------ ------------
2000 2001 2001
---------- ---------- ------------
Clinical costs due Aventis.................... $ -- $2,000,000 $1,162,944
Pre-clinical costs due unrelated parties...... -- 997,791 959,735
Clinical costs due unrelated parties.......... -- -- 365,444
Legal fees.................................... 80,000 550,000 500,000
Vacation...................................... 112,662 158,469 217,996
Property taxes................................ 144,047 162,694 212,549
Other......................................... 689,621 533,167 611,140
---------- ---------- ----------
Total accrued liabilities................... $1,026,330 $4,402,121 $4,029,808
========== ========== ==========
F-8
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conducting our pivotal Phase III clinical trials of ADVEXIN gene
therapy, we procure services from multiple third party vendors. The cost of
these services constitutes a significant portion of the cost of these trials and
of our research and development expenses in general. These vendors do not
necessarily bill us for their services on a regular basis and, accordingly, make
it difficult for us to determine the costs we have incurred relative to their
services for any given accounting period. As a result, we make significant
accounting estimates as to the amount of costs we have incurred relative to
these vendors in each accounting period. These estimates are based on many
factors, including, among others, costs set forth in our contracts with these
vendors, the period of time over which the vendor has rendered the services and
the rate of enrollment of patients in our clinical trials. Using these
estimates, we record expenses and accrued liabilities in each accounting period
that we believe fairly represent our obligations to these vendors. Actual
results could differ from these estimates resulting in increases or decreases in
the amount of expense recorded and the related accrual.
Revenue Recognition
Collaborative research payments received prior to the restructuring of the
Aventis collaboration were recognized as revenue as Introgen performed its
obligations related to such research agreements. Deferred revenue was recorded
for cash received for which the related expenses had not been incurred. Introgen
has not received such payments subsequent to December 31, 2000.
Prior to the restructuring of the Aventis collaboration, Introgen sold
gene-therapy based product to Aventis at specified prices and payment terms with
no rights to return delivered and accepted product. Revenue from product sales
to the affiliate was recognized upon completion of production and delivery
requirements and acceptance by Aventis and when collection was reasonably
assured. Deferred revenue was recorded for cash received for product which had
not been delivered to and accepted by Aventis. Introgen has not sold product to
Aventis subsequent to December 31, 2000.
Rental income from the sublease of laboratory space to third parties under
leases that have variable monthly rent amounts over the term of the lease is
recognized on a straight-line basis over the term of the lease. Any cash
payments received in excess of rental income recognized is recorded as deferred
revenue. Rental income is included in other income in the accompanying
consolidated statement of operations.
Research and Development Costs
Research and development costs include the costs of conducting basic
research, developing product applications, conducting pre-clinical
investigations and performing clinical trials to obtain data for regulatory
filings for product approvals. Research and development costs are expensed as
incurred.
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Due to losses incurred in all periods presented,
the shares associated with stock options, warrants and non-voting convertible
preferred stock are not included because they are anti-dilutive.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of outstanding preferred stock into shares of Introgen's common stock
effective upon the closing of Introgen's initial public offering as if such
conversion occurred on the dates of original issuance (See Note 3).
F-9
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the computation of basic and dilutive, and
pro forma basic and dilutive, net loss per share:
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------------- --------------------------
1999 2000 2001 2000 2001
----------- ----------- ------------ ----------- ------------
(Unaudited)
Numerator:
Net loss.............................. $(2,645,897) $(7,723,826) $(16,441,801) $(4,371,145) $(12,328,433)
=========== =========== ============ =========== ============
Denominator:
Weighted average common shares........ 4,005,893 4,095,623 16,163,027 11,120,670 21,440,380
----------- ----------- ------------ ----------- ------------
Denominator for basic and diluted
calculation........................... 4,005,893 4,095,623 16,163,027 11,120,670 21,440,380
Weighted average effect of pro forma
securities
Series A convertible preferred
stock............................... 5,781,925 5,781,925 1,726,659 3,501,281 --
Series B convertible preferred
stock............................... 2,455,352 3,373,560 1,007,447 2,042,879 --
Series C convertible preferred
stock............................... 1,058,689 1,058,689 316,162 641,106 --
Series D convertible preferred
stock............................... 2,111,999 2,111,999 630,707 1,278,933 --
----------- ----------- ------------ ----------- ------------
Denominator for pro forma basic and
diluted calculation................... 15,413,858 16,421,796 19,844,002 18,584,869 21,440,380
=========== =========== ============ =========== ============
Net loss per share:
Basic and diluted..................... $ (0.66) $ (1.89) $ (1.02) $ (0.39) $ (0.58)
=========== =========== ============ =========== ============
Pro forma basic and diluted........... $ (0.17) $ (0.47) $ (0.83) $ (0.24) $ (0.58)
=========== =========== ============ =========== ============
Other Comprehensive Loss
Introgen's other comprehensive loss consists of net loss.
3. STOCKHOLDERS' EQUITY
Stock Split
In August 2000, Introgen's Board of Directors approved a stock dividend to
effect a stock split of 1.6 shares for every one share of common stock
outstanding. An amount equal to the increased par value of the common shares has
been reflected as a transfer from additional paid-in capital to common stock.
Retroactive effect has been given to the stock split in stockholders' equity and
in all share and per share data as of the earliest date presented in the
accompanying consolidated financial statements.
Initial Public Offering
In October 2000, Introgen completed an initial public offering of 4,600,000
newly-issued shares of its common stock at a price of $8.00 per share. Introgen
received $32.2 million in cash proceeds from the initial public offering, net of
underwriting discounts, commissions and other offering costs.
Convertible Preferred Stock
Simultaneous with the closing of the initial public offering, Introgen's
convertible preferred stock then outstanding, consisting of 3,011,423 shares of
Series A Convertible Preferred Stock, 1,757,063 shares of Series B Convertible
Preferred Stock, 551,410 shares of Series C Convertible Preferred Stock and
F-10
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1,100,000 shares of Series D Convertible Preferred Stock, was automatically
converted into 12,326,173 shares of common stock.
Series A Non-Voting Convertible Preferred Stock
In connection with the restructuring of the Aventis collaboration and
pursuant to a stock purchase agreement with Aventis executed on June 30, 2001,
Introgen issued 100,000 unregistered shares of a new class of $0.001 par value,
Series A Non-Voting Convertible Preferred Stock in exchange for $25.0 million.
Introgen received the cash payment for these shares in July 2001 and as of June
30, 2001, Introgen had a receivable due from Aventis of $25.0 million reflected
in Introgen's consolidated financial statements. These shares are convertible at
any time, at the option of either Introgen or Aventis, into 2,343,721 shares of
common stock. Under a voting agreement, Aventis must vote these shares in the
same manner as the shares voted by a majority of the other stockholders on any
corporate action put to a vote of Introgen's stockholders. This voting
requirement terminates at the earliest of the tenth anniversary of the voting
agreement, registration of these shares with the Securities and Exchange
Commission or the sale of these shares to an Aventis non-affiliate, as defined
in the voting agreement. A registration rights agreement grants the holder of a
majority of the common stock issuable upon conversion of the Series A
Non-Convertible Preferred Stock three demand registrations and three piggyback
registrations.
Employee Stock Purchase Plan
Under Introgen's 2000 Employee Stock Purchase Plan (the Stock Purchase
Plan), 779,806 shares of common stock are reserved for purchase by eligible
employees, at 85 percent of the appropriate market price. The Stock Purchase
Plan provides for an increase on each July 1 in the number of shares available
for issuance, in an amount equal to the lesser of 480,000 shares, 1.5 percent of
the outstanding shares of common stock on the date of the annual increase or
such lesser amount as may be determined by the Board of Directors. The Stock
Purchase Plan provides that eligible employees may authorize payroll deductions
of up to 10 percent of their qualified compensation. The maximum number of
shares that an employee may purchase in a single offering period is 10,000
shares. The Stock Purchase Plan will terminate in 2010 and may be amended or
terminated by the Board of Directors. During the year ended June 30, 2001,
22,561 shares of common stock were purchased by employees under this plan. There
were no common stock purchases during the six months ended December 31, 2001, as
the Company has suspended operation of the Stock Purchase Plan until further
notice by the Board of Directors.
Stock Option Plans
The 2000 Stock Option Plan (the Stock Option Plan) was initiated in October
2000 and all stock option grants since that time have been under this plan. The
Stock Option Plan provides for the granting of options, either incentive or
non-statutory, or stock purchase rights to employees, directors and consultants
of Introgen to purchase shares of Introgen's common stock. At December 31, 2001,
there were 4,790,758 shares of common stock reserved for option grants under
this plan. This plan provides for annual increases in the number of shares
available for issuance beginning in fiscal 2001, equal to the lesser of
1,600,000 shares, 5 percent of the outstanding shares on the date of the annual
increase, or a lesser amount determined by the Board of Directors. The exercise
price for all option grants shall be no less than the fair value of Introgen's
common stock at the date of grant, with the exception of incentive stock options
granted to holders of shares representing more than 10 percent of Introgen's
voting power, in which case the exercise price shall be no less than 110 percent
of the fair value. In the event of a merger, reorganization or change in
controlling ownership of Introgen, all options outstanding under the Stock
Option Plan become fully vested and immediately exercisable unless the successor
corporation assumes or substitutes other options in their place. The Stock
Option Plan will terminate in 2010 and may be amended or terminated by the Board
of Directors.
F-11
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to October 2000, stock options were granted under the Introgen 1995
Stock Plan. Introgen no longer issues options under this plan. The terms of this
plan are substantially the same as the Stock Option Plan. No shares of common
stock were reserved for option grants under this plan at December 31, 2001.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows companies to adopt one of two methods for
accounting for stock options. Introgen has elected the method that requires
disclosure only of stock-based compensation. Because of this election, Introgen
continues to account for its employee stock-based compensation plans under
Accounting Principles Board (APB) Opinion No. 25 and the related
interpretations. Accordingly, deferred compensation is recorded for stock-based
compensation grants based on the excess of the fair market value of the common
stock on the measurement date over the exercise price. The deferred compensation
is amortized over the vesting period of each unit of stock-based compensation
grant, generally four years. If the exercise price of the stock-based
compensation grants is equal to the estimated fair value of Introgen's stock on
the date of grant, no compensation expense is recorded.
Introgen records the fair value of options issued to non-employee
consultants at the fair value of the options issued. Introgen has not incurred
significant compensation expense relating to non-employee consultant grants. Any
expense is recognized over the service period or at the date of issuance if the
options are fully vested and no performance obligation exists.
Aggregate deferred compensation recorded related to stock options was
$1,919,358, $4,177,281 and $792,392 during the years ended June 30, 1999, 2000
and 2001, respectively, and $600,049 and zero during the six months ended
December 31, 2000 and 2001, respectively.
Amortization to expense of deferred compensation related to stock options
was $387,041, $1,496,767 and $1,589,075 during the years ended June 30, 1999,
2000 and 2001, respectively, and $745,615 and $799,490 for the six months ended
December 31, 2000 and 2001, respectively.
Reversals of deferred compensation and additional paid-in capital for
unamortized deferred compensation related to the forfeiture of non-vested
options by terminated employees was $151,494, $248,263 and $72,790 for the years
ended June 30, 1999, 2000 and 2001, respectively, and $56,161 and $56,229 for
the six months ended December 31, 2000 and 2001, respectively. For each
respective year, total amortization expense was revised to the extent
amortization had previously been recorded for non-vested options.
In December 1999, Introgen accelerated the vesting of options held by a
member of the Board of Directors concurrent with the individual's resignation
from Introgen's Board of Directors. Introgen accelerated these options in
recognition of the individual's contributions to the Board of Directors and
recognized approximately $574,000 of compensation expense for the fair value of
the previously unvested options as of the re-measurement date.
The fair value of options granted for all periods presented was estimated
on the applicable grant dates using the Black-Scholes option pricing model.
Significant weighted average assumptions used to estimate fair value for all
years include: risk-free interest rates ranging from 4.8 percent to 6.7 percent;
expected lives of seven to ten years; no expected dividends; and volatility
factors ranging from 58.0 percent to 110.8 percent.
F-12
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation expense been determined consistent with the provisions of SFAS
No. 123, Introgen's net loss would have been increased to the following pro
forma amounts:
SIX MONTHS
ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------------- ------------
1999 2000 2001 2001
----------- ----------- ------------ ------------
Net loss --
As reported.................. $(2,645,897) $(7,723,826) $(16,441,801) $(12,328,433)
=========== =========== ============ ============
Pro forma.................... $(2,714,932) $(7,781,545) $(16,736,027) $(13,222,487)
=========== =========== ============ ============
Basic and diluted EPS --
As reported.................. $ (0.66) $ (1.89) $ (1.02) $ (0.58)
=========== =========== ============ ============
Pro forma basic and
diluted................... $ (0.68) $ (1.90) $ (1.04) $ (0.62)
=========== =========== ============ ============
Because SFAS No. 123 does not apply to options granted prior to July 1,
1995, the resulting pro forma compensation costs may not be representative of
the costs to be expected in future years.
The following is a summary of option activity under these plans:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
----------- ----------------
BALANCE, JUNE 30, 1998.................................... 1,363,819 $0.42
Granted................................................. 1,351,440 0.52
Exercised............................................... (51,329) 0.41
Cancelled............................................... (232,819) 0.51
---------
BALANCE, JUNE 30, 1999.................................... 2,431,111 0.47
Granted................................................. 399,306 0.94
Exercised............................................... (108,745) 0.46
Cancelled............................................... (124,517) 0.51
---------
BALANCE, JUNE 30, 2000.................................... 2,597,155 0.55
Granted................................................. 704,498 4.30
Exercised............................................... (308,212) 0.42
Cancelled............................................... (17,357) 0.74
---------
BALANCE, JUNE 30, 2001.................................... 2,976,084 1.27
Granted................................................. 379,300 4.35
Exercised............................................... (55,238) 0.44
Cancelled............................................... (38,350) 1.21
---------
BALANCE, DECEMBER 31, 2001................................ 3,261,796 1.80
=========
EXERCISABLE AT DECEMBER 31, 2001.......................... 1,864,934 0.83
=========
The weighted average fair value of options granted during the years ended
June 30, 1999, 2000 and 2001 was $1.80, $11.18 and $5.61, respectively. All
options granted during the six months ended December 31, 2000 and 2001, were
granted at fair value as of date of grant.
F-13
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------- ------------------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF OUTSTANDING AS OF CONTRACTUAL LIFE WEIGHTED AVERAGE EXERCISABLE AS OF WEIGHTED AVERAGE
EXERCISE PRICE DECEMBER 31, 2001 (IN YEARS) EXERCISE PRICE DECEMBER 31, 2001 EXERCISE PRICE
-------------- ----------------- ---------------- ---------------- ----------------- ----------------
$0.39-$1.25 2,229,121 5.87 $0.57 1,702,266 $0.51
2.00- 3.50 203,500 9.21 3.12 50,000 2.00
3.75- 4.80 375,800 9.78 4.36 56,668 4.57
5.00- 5.88 453,375 9.17 5.13 56,000 5.88
--------- ----- --------- -----
3,261,796 1.80 1,864,934 0.83
========= =========
Warrants
In connection with the issuance of the Series C Preferred Stock, Introgen
issued warrants to purchase 163,600 shares of common stock at a weighted average
exercise price of $4.96 per share to third parties who assisted in the sale of
the Series C Preferred Stock. The warrants expired in March 2001.
In connection with the issuance of the Series D Preferred Stock, Introgen
issued warrants to purchase 132,000 shares of common stock at exercise prices
ranging from $6.25 per share to $7.81 per share to third parties who assisted in
the sale of the Series D Preferred Stock. The warrants expired in October 1999.
4. FEDERAL INCOME TAXES
Introgen recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized differently between
the financial statements and tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of liabilities and assets
using enacted tax rates and laws in effect in the years in which the differences
are expected to reverse. Deferred tax assets are evaluated for realization based
on a more-likely-than-not criteria in determining if a valuation should be
provided.
The reconciliation of the statutory federal income tax rate to Introgen's
effective income tax rate is as follows:
SIX MONTHS
ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------- ------------
1999 2000 2001 2001
----- ----- ----- ------------
Statutory rate................................. (34.0)% (34.0)% (34.0)% (34.0)%
Increase in deferred tax valuation allowance... 29.8 24.8 30.6 32.9
Stock option compensation not deductible....... 5.0 9.1 3.3 2.2
Research and development tax credits........... (1.4) -- -- (1.4)
Other.......................................... 0.6 0.1 0.1 0.3
----- ----- ----- -----
--% --% --% --%
===== ===== ===== =====
F-14
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of Introgen's deferred tax assets are as follows:
JUNE 30, DECEMBER 31,
-------------------------- ------------
2000 2001 2001
----------- ------------ ------------
Net operating loss carryforwards............ $ 3,702,400 $ 7,932,000 $ 11,708,500
Research and development tax credits........ 49,200 49,200 226,900
Technology license.......................... 58,000 52,800 50,200
Tax basis of property and equipment in
excess of book basis...................... 1,158,000 1,366,400 1,578,400
Accrued liabilities......................... 29,500 656,000 432,500
Capital leases.............................. 137,900 137,900 137,900
Inventory................................... 60,200 -- --
Other....................................... 51,100 89,800 209,000
----------- ------------ ------------
Total deferred tax assets......... 5,246,300 10,284,100 14,343,400
Less -- Valuation allowance................. (5,246,300) (10,284,100) (14,343,400)
----------- ------------ ------------
Net deferred tax assets........... $ -- $ -- $ --
=========== ============ ============
As of December 31, 2001, Introgen has generated net operating loss (NOL)
carryforwards of approximately $34.4 million and research and development
credits of approximately $226,900 available to reduce future income taxes. These
carryforwards begin to expire in 2007. A change in ownership, as defined by
federal income tax regulations, could significantly limit Introgen's ability to
utilize its carryforwards. Introgen's ability to utilize its current and future
NOLs to reduce future taxable income and tax liabilities may be limited.
Additionally, because United States tax laws limit the time during which these
carryforwards may be applied against future taxes, Introgen may not be able to
take full advantage of these attributes for federal income tax purposes. As
Introgen has had cumulative losses and there is no assurance of future taxable
income, a valuation allowance has been established to fully offset the deferred
tax asset. The valuation allowance increased $788,300, $1.9 million and $5.0
million for the years ended June 30, 1999, 2000 and 2001, respectively, and $4.1
million for the six months ended December 31, 2001 primarily due to losses from
operations.
5. NOTES PAYABLE
Introgen has notes payable with banks to finance its facilities, which are
pledged as security for these notes. There are two notes with the following
terms:
- Note payable with an original principal balance of $6,000,000 and an
outstanding balance of $5,958,769 and $5,872,300 at June 30, 2000 and
2001, respectively, and $5,826,401 at December 31, 2001. Interest is
fixed at 7.5 percent until November 2004, at which time it is subject to
a one-time adjustment to a rate equal to the then-current rate of the
five-year United States Treasury bond note plus 2 percent, with such
adjusted interest rate not to exceed 8.5 percent. Interest plus principal
based on a 25-year amortization period are payable monthly until November
2009, at which time the remaining outstanding principal is due and
payable.
- Note payable with an original principal balance of $3,262,833 and an
outstanding balance of zero and $3,217,231 at June 30, 2000 and 2001,
respectively, and $2,938,172 at December 31, 2001. Interest is at prime,
adjustable annually. Principal and interest, fully amortized over a
five-year period, is payable monthly through June 2006.
Interest was capitalized as a cost of facilities during the time those
facilities to which those notes relate were under construction. Interest
capitalized was $40,192, $103,119 and $83,690 during the years ended
F-15
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1999, 2000 and 2001, respectively, and $60,076 and zero during the six
months ended December 31, 2000 and 2001, respectively.
Aggregate annual maturities on notes payable as of December 31, 2001, are
as follows:
Year ending December 31,
2002...................................................... $ 685,452
2003...................................................... 735,642
2004...................................................... 789,505
2005...................................................... 847,316
2006...................................................... 449,116
Thereafter................................................ 5,257,542
----------
Total............................................. $8,764,573
==========
Introgen believes the fair market value of its debt approximates its
carrying value as of all balance sheet dates presented herein.
6. LICENSE AND RESEARCH AGREEMENTS
Patent and Technology License Agreement With The University of Texas System
Introgen has a license agreement with the Board of Regents of The
University of Texas System (the System) and M.D. Anderson Cancer Center, a
component institution of the System, whereby Introgen has an exclusive,
worldwide license to use certain technology. Beginning with the first commercial
sale of a product incorporating the licensed technologies, Introgen will pay
M.D. Anderson Cancer Center, for the longer of fifteen years or the life of the
patent, a royalty based on net sales by Introgen or its affiliates or by
sublicense agreement of products incorporating any of such technologies.
Introgen is obligated by the agreement to reimburse any of M.D. Anderson Cancer
Center's costs that may be incurred in connection with obtaining patents related
to the licensed technologies.
Other Technology Option and License Agreements
Introgen has technology option and license agreements with various other
third parties and, in particular, agreements related to the mda-7 and PTEN
genes. These agreements require Introgen to make milestone and license payments
to these parties if and when Introgen achieves certain prescribed clinical study
and product development milestones. Introgen has technology option and license
agreements with two additional third parties covering certain enabling
technologies, both of which require annual payments of $20,000 until cancelled
at Introgen's option.
Sponsored Research
Introgen funds certain research performed by M.D. Anderson Cancer Center to
further the development of technologies that could have potential commercial
viability. By sponsoring and funding this research, Introgen has the right to
include certain patentable inventions arising therefrom under its patent and
technology license agreement with The University of Texas System. The expense
for this research was approximately $820,000, $815,600 and $634,200 during the
years ended June 30, 1999, 2000 and 2001, respectively, and $230,094 and
$631,924 during the six months ended December 31, 2000 and 2001, respectively.
F-16
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
Introgen is obligated under various capital and operating leases for land,
office and laboratory space and equipment that expire at various dates through
September 2026. The amounts payable under capital leases were drawn under two
lease lines of credit with commercial leasing companies which were used to
finance equipment acquisitions. Amounts drawn under both lines are payable
monthly over 48 months from the time of the draw. The lines of credit bear
interest at fixed interest rates ranging from 11.3% to 13.25% at December 31,
2001. The lease lines of credit are secured by the equipment being financed.
Operating leases consist primarily of a ground lease for the land on which
Introgen's new facility is located. The annual rent due under this lease is
$136,188. The primary term of this lease continues through September 2026.
Lease expense was $688,300, $380,200 and $314,900 for the years ended June
30, 1999, 2000 and 2001, respectively, and $157,395 and $154,793 for the six
months ended December 31, 2000 and 2001, respectively. Future minimum lease
payments under non-cancelable operating leases and the present value of future
minimum capital lease payments as of December 31, 2001, are as follows:
OPERATING CAPITAL
LEASES LEASES
---------- ----------
Year ending December 31,
2002...................................................... $ 198,230 $ 980,066
2003...................................................... 136,188 905,742
2004...................................................... 136,188 127,585
2005...................................................... 136,188 --
2006...................................................... 136,188 --
Thereafter................................................ 2,689,713 --
---------- ----------
Total minimum lease payments...................... $3,432,695 2,013,393
----------
Less -- amount representing interest........................ (255,002)
----------
Capital lease obligations......................... $1,758,391
==========
Insurance and Litigation
On January 12, 2001, Introgen received notice that it had been named as a
defendant in a first amended complaint filed on January 11, 2001 by Canji, Inc.
in an action entitled, Canji, Inc. v. Sidney Kimmel Cancer Center, Introgen
Therapeutics, Inc., and Does 2 through 25 (Case No. GIC745643, in the California
Superior Court for the County of San Diego, Central District). Canji, Inc. filed
the original complaint against the Sidney Kimmel Cancer Center or SKCC, on March
24, 2000. On February 9, 2001, the action was removed to the United States
District Court for the Southern District of California. On August 29, 2001, the
case was remanded to California State Superior Court in San Diego County. The
claims against Introgen in Canji's first amended complaint arise out of SKCC's
grant of an exclusive license to us to patent rights resulting from gene therapy
technology developed by SKCC under a sponsored research agreement between SKCC
and Introgen. Canji contends that SKCC developed the technology using materials
provided by Canji to SKCC under a Material Transfer Agreement, or MTA. Canji
also contends that under the MTA, Canji had the right of first refusal to an
exclusive license to any patent rights arising out of the technology developed
by SKCC using these materials and that SKCC was prohibited from disclosing to
Introgen the results of any research using Canji's materials. Canji also alleges
that Introgen wrongfully obtained rights in intellectual property derived
F-17
INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from SKCC's use of Canji's materials and that Introgen knew of, or consciously
disregarded, the existence of the MTA.
In its answer, SKCC, who was a party to the MTA, stated that Canji's
representations were false and made with the intent to defraud SKCC, and that
SKCC would not have given its consent to the contract had it not been for
Canji's fraudulent action. As relief against Introgen, Canji seeks (1) a
declaratory judgment that Introgen are not entitled to the intellectual property
rights conveyed by SKCC to Introgen, and that instead those rights belong to
Canji, (2) the imposition of a constructive trust on the patent rights granted
to Introgen and (3) injunctive relief to restore Canji to the position that it
was in prior to SKCC's grant of intellectual property rights to Introgen. While
Canji is not seeking an award of damages, it has requested reasonable attorney
fees and costs. Management believes that Canji's allegations are without merit
and Introgen intends to vigorously defend the action. The SKCC intellectual
property is not material to Introgen's business.
Introgen is also subject to numerous risks and uncertainties because of the
nature and status of its operations, and it is subject to claims and legal
actions arising in the normal course of business. Introgen maintains insurance
coverage for events and in amounts that it deems appropriate. Management
believes that uninsured losses, if any, would not be materially adverse to
Introgen's financial position or results of operations.
Employment Agreement
Introgen has an employment agreement with its president and chief executive
officer that provides for a base salary and bonuses through July 31, 2003. In
addition to options previously granted under this agreement, it provides for the
grant on August 1, 2002 of an option to purchase 50,000 shares of common stock
at a price equal to the fair market value of the Company's common stock on that
date.
8. RELATED PARTIES
The Chairman of Introgen's Board of Directors owns, and another member of
its Board of Directors is a former employee of, a company to which Introgen pays
consulting fees of approximately $175,000 per year and is obligated to continue
paying this fee until such time as Introgen, at its option, terminates the
services of that company. As of December 31, 2001, these two individuals hold
options to purchase 348,544 shares of Introgen's common stock.
Introgen has a consulting agreement with an individual primarily
responsible for the creation of one of its technologies, who is also a
stockholder of Introgen. Under this consulting agreement, Introgen paid this
individual fees of $145,800, $150,000 and $150,000 during the years ended June
30, 1999, 2000 and 2001, respectively, and $75,000 and $78,750 during the six
months ended December 31, 2000 and 2001, respectively. This consulting
agreement, which we may terminate at our option upon one year's advance notice,
provides for payments of $165,000 per annum until September 30, 2002, $181,500
per annum from October 1, 2002, through September 30, 2003, and $200,000 per
annum through the end of its term on September 30, 2009, with such future
payments subject to adjustment for inflation.
Introgen subleases a portion of its facilities to M.D. Anderson Cancer
Center under a lease with a non-cancelable term that expires in 2009. M.D.
Anderson Cancer Center is obligated to pay Introgen rent of approximately
$76,000 per month until February 2006 and $13,053 per month thereafter. This
lease began in February 2001, after which time rental income related to this
lease is included in other revenue. Rental income was $353,570 for the year
ended June 30, 2001, and $517,608 for the six months ended December 31, 2001.
F-18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1(a) -- Certificate of Incorporation as currently in effect
3.1(b) -- Amendment to Certificate of Incorporation, effective as of
December 21, 2001
23.1 -- Consent of Arthur Andersen LLP, independent public
accountants
24.1 -- Power of Attorney (See page 48)
99.1 -- Letter re: Arthur Andersen LLP Representations