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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22025
AASTROM BIOSCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MICHIGAN 94-3096597
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
24 FRANK LLOYD WRIGHT DRIVE
P. O. BOX 376
ANN ARBOR, MI 48106
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (313) 930-5555
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The approximate aggregate market value of the registrant's Common Stock, no
par value ("Common Stock"), held by non-affiliates of the registrant (based on
the closing sales price of the Common Stock as reported on the Nasdaq National
Market) on September 15, 1997 was $27,338,000. Excludes shares of Common Stock
held by directors, officers and each person who holds 5% or more of the
outstanding shares of Common Stock, since such persons may be deemed to be
affiliates of the registrant. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of September 15, 1997, 13,285,511 shares of Common Stock, no par value,
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT FORM 10-K REFERENCE
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Proxy Statement for the Annual Meeting of
Shareholders scheduled for November 12,
1997 Items 10, 11, 12 and 13 of Part III
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AASTROM BIOSCIENCES, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
NO.
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PART I.................................................................... 3
Item 1. BUSINESS....................................................... 3
Item 2. PROPERTIES..................................................... 23
Item 3. LEGAL PROCEEDINGS.............................................. 23
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 23
PART II................................................................... 23
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS........................................................ 23
Item 6. SELECTED FINANCIAL DATA........................................ 24
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 36
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 36
PART III.................................................................. 37
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 37
Item 11. EXECUTIVE COMPENSATION......................................... 37
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 37
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 37
PART IV................................................................... 38
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.......................................................... 38
SIGNATURES................................................................ 53
EXHIBIT INDEX............................................................. 54
2
Except for the historical information presented, the matters discussed in
this Report include forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed under the caption "Business Risks" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
OVERVIEW
Aastrom Biosciences, Inc. ("Aastrom" or the "Company") is developing
proprietary process technologies and devices for a range of cell therapy
applications, including stem cell therapies and gene therapy. The Company's
lead product under development, the Aastrom Cell Production System (the
"Aastrom CPS"), consists of a clinical cell culture system with disposable
cassettes and reagents for use in the rapidly growing stem cell therapy
market. The Company believes that the Aastrom CPS method will be less costly,
less invasive and less time-consuming than currently available stem cell
collection methods. The Aastrom CPS is designed as a platform product which
implements the Company's pioneering stem cell replication technology. The
Company also believes that the Aastrom CPS can be modified to produce a wide
variety of other cell types for new, emerging therapies being developed by
others. Prior to commencement of multiple-site pivotal trials, the Company is
conducting limited "pre-pivotal" trials of the Aastrom CPS under
Investigational Device Exemptions ("IDEs") for use in stem cell therapy. The
Company has entered into a strategic collaboration for the marketing,
distribution and customer service of the Aastrom CPS in stem cell therapy with
Cobe BCT, Inc. (collectively with Cobe Laboratories, Inc., "Cobe"), a
subsidiary of Gambro AB and a leading provider of blood cell processing
products. Additionally, Aastrom is developing products and processes for the
delivery of ex vivo gene therapy that are designed to address the production
of gene-modified cells.
CELL THERAPY
Cell therapy is the use of human cells to treat a medical disorder. The most
common types of cell therapy, blood and platelet transfusions, have been
widely used for many decades. More recently, bone marrow-derived cells have
been used to restore the bone marrow and the blood and immune system cells
which are damaged by chemotherapy and radiation therapy during the treatment
of many cancers. Transplantation of these cells is known as stem cell therapy.
Other cell therapies have recently been used for generating skin and cartilage
tissue and additional cell therapies are being developed by various companies
and researchers to restore immune system cells, as well as bone, kidney,
liver, vascular and neuronal tissues.
Cell therapies require the collection of cells, either from the patient or a
suitably matched donor. These cells are typically processed and stored for
administration to the patient. Although cell therapy is being developed for
use in an increasing number of diseases, widespread application of new cell
therapies remains limited by the difficulties and expense associated with
current cell collection and processing procedures. The problems of current
cell collection techniques are exemplified in the area of stem cell therapy
where the patient or donor undergoes invasive, time-consuming and costly
procedures to collect the large volume of cells currently required for
effective treatment. The Company believes an alternative to collecting the
required therapeutic dose of cells is to grow these cells ex vivo from a small
starting volume. However, ex vivo cell expansion, when biologically possible,
has typically required costly techniques, facilities and operations to comply
with U.S. Food and Drug Administration ("FDA") good manufacturing practices
("GMP"), which are not generally available in hospitals. As a result, cells
needed for such therapies often require specialized cell production facilities
which use labor-intensive, manual cell culture techniques.
There are numerous forms of cell therapy at an early stage of development.
One such example is ex vivo gene therapy, in which genes are introduced into
target cells in order to selectively correct or modulate disease conditions,
or to modify cells for production of a therapeutic protein. The Company
believes that the successful
3
practice of ex vivo gene therapy will require the development of processes and
products for the reliable, high-efficiency transfer of genes into cells and a
means to produce the necessary dose of the genetically modified cells under
GMP conditions.
STEM CELL THERAPY
Stem cell therapy is used to treat cancer patients who undergo chemotherapy
or radiation therapy at dose levels that are toxic to the hematopoietic
system, which is comprised of the bone marrow and the cells of the blood and
immune systems. The objective of stem cell therapy is to restore the
hematopoietic system via the infusion and subsequent engraftment of healthy
cells to replace bone marrow and result in the rapid recovery of neutrophils
and platelets that have been destroyed by chemotherapy and radiation therapy.
Stem cell therapy reduces the risk of life-threatening infections and bleeding
episodes following cancer treatments. In order to treat many cancers, high
intensity chemotherapy or radiation is often required, which may severely
destroy ("myeloablation") or partially destroy ("myelosuppression") the
patient's hematopoietic system.
Cells required for effective stem cell therapy include stem cells, to
replenish depleted bone marrow and provide a long-term ongoing source of the
multilineage progenitor cells of the blood and immune systems, and early and
late stage hematopoietic progenitor cells, to provide for rapid neutrophil and
platelet recoveries. Stromal accessory cells are believed to further augment
the growth of bone marrow. In the adult, all of these cell types originate in
the bone marrow. These cells are currently collected from the donor or patient
directly through multiple syringe aspirations under anesthesia, known as bone
marrow collection, or through blood apheresis following treatment with drugs
which cause cells to be released or mobilized from the bone marrow into the
blood. This latter technique is known as a peripheral blood progenitor cell
("PBPC") collection. See "--Current Stem Cell Collection Methods." Recently,
it has been demonstrated that the blood cells found in the umbilical cord of
newborn infants include cells effective for stem cell therapy. This source of
cells is being explored by physicians as a significant new development in stem
cell therapy, but is currently limited by difficulties in obtaining sufficient
quantities of these cells and by prolonged engraftment times for the cells
once transplanted into the patient.
Once collected, the stem cell mixture is infused intravenously and the stem
and stromal accessory cells migrate into the bone cavity where they engraft to
form a new marrow. The hematopoietic progenitor cell components of the cell
mixture provide early restoration of circulating white blood cells and
platelets. The replenished bone marrow will normally provide long-term
hematopoietic function, but complete restoration of bone marrow may take years
following myeloablative cancer therapy. When the patient's hematopoietic
system is malignant, such as in the case of leukemia, cells from a suitable
donor are generally required in order to avoid reintroducing the disease
during cell infusion. Such donor derived transplants are termed "allogeneic"
transplants. Procedures using cells derived from the patient are termed
"autologous" transplants.
STEM CELL THERAPY MARKET OPPORTUNITY
The benefits of stem cell therapy in the treatment of cancer patients have
been well established over the past two decades. Stem cell therapy, in the
form of bone marrow transplantation, was originally used in patients who had
received treatment for blood and bone marrow cancers such as leukemia, and
genetic diseases of the blood. However, because stem cell therapy has been
shown to promote the rapid recovery of hematopoietic function, it is now being
increasingly used to enable patients with other forms of cancer to receive
high dose or multicycle chemotherapy and radiation treatments. These high-
intensity therapies have a greater probability of eradicating dose-sensitive
cancers but, because of their hematopoietic toxicity, cannot generally be
given without stem cell therapy. As a result, some patients are treated with
lower and less effective doses, and fewer cycles, of therapy than might
otherwise be used.
According to an industry source, approximately 32,000 stem cell therapy
procedures were completed worldwide in 1995, and, according to another
industry source, the number of such procedures utilizing donor-derived and
patient-derived cells has been growing annually by approximately 15% and 20%,
respectively. This growth has been driven by encouraging clinical results in
the treatment of dose-sensitive solid tumors, such as
4
breast and ovarian cancers. The Company expects that the number of stem cell
therapy procedures will continue to grow due to increased incidence and
prevalence of cancer, continued clinical demand for myelotoxic cancer
treatment, and the increased cost effectiveness of stem cell therapy
treatments.
Stem cell therapy may also enhance the effectiveness of blood cell growth
factors. The timing and extent of additional cycles of chemotherapy is often
limited by the recovery of a patient's white blood cells and platelets because
a delayed recovery of these cells can leave the patient susceptible to life-
threatening infection and bleeding episodes, and this limitation may allow for
the regrowth of residual tumor cells. Many cancer patients are routinely
treated with growth factors including G-CSF, such as Neupogen and GM-CSF, such
as Leukine, which enhance the development of mature circulating white blood
cells and platelets from the early progenitor bone-marrow derived cells,
thereby decreasing the time between cycles of therapy and the probability of
infection. However, during high dose or multicycle therapy, the stem and
progenitor cells on which these growth factors act are often depleted. Without
these cells, growth factors have a limited or negligible effect. Stem cell
therapy generally enhances the effectiveness of growth factors by introducing
target stem and progenitor cells for growth factors to act upon such that
patients generally exhibit a more rapid and consistent hematopoietic recovery.
CURRENT STEM CELL COLLECTION METHODS
Currently, the bone marrow-derived cells required for stem cell therapy are
collected primarily either through the bone marrow harvest method or the PBPC
collection method.
Bone Marrow Harvest
A traditional bone marrow harvest is a costly and invasive surgical
procedure in which a physician removes approximately one liter of bone marrow
from a patient or donor. This volume of bone marrow is removed using needles
inserted into the cavity of the hip bone. The bone marrow harvest procedure
typically requires between two to four hours of operating room time, with the
physician often making more than 90 separate puncture sites in the hip bone to
collect the necessary amount of bone marrow. Due to the length of the
procedure and the trauma to the patient, general surgical anesthesia is
administered and the patient is often hospitalized for a day. Frequently, the
patient suffers pain from the procedure for several days after being
discharged from the hospital. Furthermore, complications resulting from the
general anesthesia or invasive nature of the procedure occur in a small
percentage of patients. Bone marrow harvest provides a reliable source of stem
and stromal accessory cells and has been the preferred source of cells in
allogeneic transplants.
PBPC Mobilization and Collection
PBPC mobilization is a newer technique in which bone marrow-derived cells
are harvested from a patient's or donor's circulating blood, rather than from
bone marrow. In a PBPC mobilization procedure, the patient receives multiple
injections of growth factors or cytotoxic drugs, or both, over the course of a
week or more, which cause stem and progenitor cells resident in the bone
marrow to mobilize into the circulating blood. The mobilized cells are then
collected by connecting the patient to a blood apheresis device, which draws
and returns large volumes of the patient's or donor's blood in order to
selectively remove the therapeutic volume of stem and progenitor cells. Each
collection procedure typically lasts for two to six hours and is typically
repeated on two to five consecutive days. Specialized laboratory testing over
the period of mobilization and cell harvesting is necessary to determine that
a sufficient quantity of desired cells has been collected, adding to the cost
of the procedure. The PBPC process has become the predominant procedure in
autologous stem cell therapy.
Procedure Considerations
Although stem cell therapy is being utilized to treat more patients for a
broader range of diseases, its availability continues to be limited by the
high costs of procuring cells, the invasive nature of traditional cell
procurement techniques, and by the technical difficulties related to those
collection procedures. The Company believes that current charges for bone
marrow harvest, processing and infusion are approximately $10,000 to
5
$15,000 per procedure, with considerable variability between institutions. The
Company believes that current charges for PBPC collection, including
mobilization and infusion, are approximately $12,000 to $20,000 for a two to
three cycle procedure, with considerable variability between institutions
depending on the mobilization regimen and the total volume, time and number of
aphereses required.
Overall costs of stem cell therapy include the costs of the cell collection
and infusion procedures, and the costs associated with supporting the patient
during post-transplant recovery. Post-transplant costs include hospitalization
time, antibiotic support, management of adverse reactions to the large volume
cell infusions, and infusions of platelets and red blood cells. Any new stem
cell therapy process will generally need to provide similar recovery endpoints
to be competitive with the current procedures. In this regard, PBPC procedures
have gained popularity compared with bone marrow harvests because the number
of platelet transfusions is reduced for some patients.
Recently, products to implement a cell isolation method known as CD34
selection have been developed by other companies in conjunction with bone
marrow harvest and PBPC collections. CD34 selection is a process designed to
isolate specific types of cells in order to decrease storage and infusion
problems associated with the large volume of fluids collected in bone marrow
or multiple apheresis procedures. CD34 selection is used after the initial
collection of stem and progenitor cells and, therefore, does not address the
difficulties or costs associated with the basic cell collection procedures. A
future objective of CD34 selection is to assist in depleting tumor cells from
the transplant cells collected, thereby expanding the availability of stem
cell therapy to new patient populations.
UMBILICAL CORD BLOOD
Umbilical cord blood ("UCB"), which is collected directly from the umbilical
cord after delivery, without pain or risk to the infant or the mother, is
emerging as a new source of cells for stem cell therapy. UCB has been reported
to have stem cell concentrations that are much higher than that typically
obtained from traditional bone marrow and PBPC collection methods. After
collection, UCB is frozen for later use in a stem cell therapy procedure.
Storage of UCB samples involves small volumes of cells, compared to typical
bone marrow or PBPC storage. Accordingly, the costs of collection and storage
of UCB cells are comparatively low. This source of cells is also "tumor-free,"
such that UCB would be preferred for many current stem cell therapy procedures
in metastatic cancer patients. Before UCB can become a major supply source for
stem cell therapy, a coordinated UCB banking system must emerge. In this
regard, several UCB banking institutions have been established to date, and
the group is growing in both number and size. The establishment of these UCB
banking institutions is an initial step which may lead to a coordinated UCB
banking system.
Current disadvantages of UCB include the relatively low number of available
cells which may contribute to prolonged engraftment times for the cells once
transplanted into the patient. Unlike bone marrow or PBPC harvest, where the
collection of more cells to meet a particular treatment is typically
achievable, the number of cells available from a UCB donor is limited. This
problem is exacerbated by the required cryopreservation of the cells, which
causes significant cell loss. The resultant low cell number is believed to be
responsible for the longer hematopoietic recovery times observed with UCB
transplants, as compared with bone marrow or PBPC transplants. Further,
because of the low cell number, UCB transplants are typically restricted to
small patients. Therefore, increasing the number of therapeutic cells from a
UCB sample may facilitate the more widespread use of UCB transplants. Aastrom
believes that providing the transplant site with the capability to carry out
the UCB cell expansion will be a major factor in the increased use of UCB for
stem cell therapy and a significant business opportunity.
AASTROM TECHNOLOGY
Aastrom is developing proprietary process technologies that are pioneering
the ex vivo production of human stem and progenitor cells. The Company has
also developed a proprietary cell culture device that mimics the biological
and physical environment necessary for the growth of certain human cells and
tissues, including bone marrow. The Company's initial product candidate, the
Aastrom CPS, utilizes the Company's process technology
6
and is designed to enable the ex vivo production of human stem and progenitor
cells as an alternative to the bone marrow harvest and PBPC mobilization
methods and as an enhancement to the UCB collection method. The Company
believes that the Aastrom CPS may be used for other cell production processes
which are being developed by third parties and, in combination with the
Company's proprietary gene transfer process, may have application in the
developing field of ex vivo gene therapy.
CORE TECHNOLOGY
Stem Cell Growth Process
Aastrom has developed proprietary process technologies for ex vivo
production of therapeutic stem and progenitor cells as well as other key cells
found in human bone marrow. The Company's proprietary process entails the
placement of a stem cell mixture in a culture environment that mimics the
biology and physiology of natural bone marrow. This process enables the stem
and early and late-stage progenitor cells needed for an effective stem cell
therapy procedure to be concurrently expanded. Growth factors can be added to
stimulate specific cell lineages to grow or to increase cell growth to meet a
particular therapeutic objective. The stem cell growth process can best be
completed with little or no additional stem cell selection or purification
procedures. This stem cell replication process can also enable or augment the
genetic modification of cells by providing the cell division step needed for
new genes to integrate into the stem cell DNA. Currently available cell
culture methods tend to result in a loss of stem cells, either through death
or through differentiation into mature cells. The Company has exclusive
licenses to two U.S. patents and additional applications that cover these
processes. See "--Additional Stem Cell and Other Cell Therapies."
Aastrom Cell Culture Chamber
Aastrom has developed a proprietary cell culture chamber to implement the
Company's process technology. The culture chamber produces cells on a clinical
scale, and allow for simple, sterile recovery of the cells for therapeutic
use. The Company believes that the Aastrom cell culture chamber may also be
used for growing other human therapeutic cells, such as T-Cells used for
lymphocyte therapies, chondrocytes for cartilage replacement, and mesenchymal
tissues for bone and cartilage replacement. The Company holds exclusive
licenses to two U.S. patents and additional applications for its cell culture
chamber device technology. See "--Additional Stem Cell and Other Cell
Therapies."
Efficient Gene Transfer
Aastrom has developed proprietary processes and device technology that may
enable increased efficiency of vector-mediated gene transfer into cells as
compared to conventional procedures. This directed-motion gene transfer or
gene loading technology is being pursued by the Company for application in
most cell and tissue types and most vector technologies. The Company intends
to develop products based upon its gene loading technology. Development of
additional products will require the Company to raise additional funds or to
seek collaborative partners, or both, to finance related research and
development activities, as to which there can be no assurance. Furthermore,
due to the uncertainties involved, the Company is unable to estimate the
length of time such development may take. If successfully developed into
products, the Company believes that such products would facilitate the
advancement of numerous gene therapy protocols into the clinic and ultimately
the market. The Company is the exclusive licensee of a U.S. Patent, and has
additional applications pending, for this technology. See "--Aastrom Product
Candidates For Ex Vivo Gene Therapy."
THE AASTROM CPS
The Aastrom CPS is the Company's lead product under development. While
potentially applicable to multiple cell therapy applications, the Aastrom CPS
is being developed initially by the Company for stem cell therapy. The Aastrom
CPS is a proprietary system that the Company believes will enable the large
scale ex vivo production of a variety of therapeutic cells at health care
facilities, independent laboratories, transplant centers and blood banks, and
has been designed to implement Aastrom's stem cell growth process as well as
processes for the production of other cell types.
7
The Aastrom CPS is comprised of several components, including single-use
disposable Cell Cassettes and reagents and microprocessor-controlled
instruments, which are at various stages of development. The Cell Cassette is
a single-use disposable cartridge which contains the Aastrom cell culture
chamber and the related media supply waste reservoirs and harvest bag. The
microprocessor-controlled instruments include the Incubator which controls the
culture conditions for the operation of the Cell Cassette, and the Processor
which automates the priming and harvesting of the cells from the Cell
Cassette. The System Manager is a user interface computer that is being
developed to simultaneously track and monitor the cell production process in
over thirty CPS Incubators and record relevant process variables and operator
actions. Prototype components of the Aastrom CPS are currently being used in
clinical trials and ongoing development activities are directed at completing
other production level components of the Aastrom CPS.
The Aastrom CPS is designed to be operated with minimal operator activity by
a medical or laboratory technician and can implement clinical scale cell
production at the patient care site. The end product of the Aastrom CPS
process is a blood-bag container with the cell product. The control and
documentation features of the Aastrom CPS have been designed to meet GMP
requirements for the therapeutic production of cells.
AASTROM CPS FOR STEM CELL THERAPY
The Company's initial application for the Aastrom CPS is expected to be in
the growing field of stem cell therapy, where the Company believes that the
Aastrom CPS may address many of the limitations of existing procedures. The
Aastrom CPS is based on a comparatively simple process in which a small volume
of bone marrow cells are collected from the patient or donor using a needle
aspiration procedure typically under a local anesthetic or sedative. This cell
mixture is quantified, and an appropriate volume of cells is then inoculated
into one or more Cell Cassettes with the necessary growth media. Growth-
factor-stimulated cells are produced using the Aastrom CPS in approximately 12
to 13 days, with no further patient involvement. Depending upon the cell
quantity necessary for a therapeutic application, single or multiple Cell
Cassettes may be required, with a different volume requirement of starting
cells taken from the patient at the initial visit. The Aastrom CPS has been
designed to minimize operator involvement during the cell production process,
and the steps required before and after the Aastrom CPS are standard
laboratory procedures.
Potential Advantages of Aastrom CPS
The Company believes that the Aastrom CPS, if approved for commercial sale
by the FDA and foreign regulatory agencies, may provide certain improvements
and efficiencies over traditional cell collection and infusion processes. The
following table, which sets forth estimates based on a 1996 survey conducted
by the Company of 11 stem cell transplant physicians at different transplant
institutions throughout the United States, compares estimated patient care
episodes, procedure time and needle sticks for currently established cell
collection and infusion techniques with the Aastrom CPS method of cell
procurement:
PROCEDURE
CARE TIME NEEDLE
CELL SOURCE EPISODES(1) (HOURS)(1) STICKS(2)
- ----------- ----------- ---------- ---------
Bone Marrow Harvest(3)......................... 8 16 103
PBPC Mobilization and Collection(4)............ 21 39 22
Aastrom CPS(5)................................. 2 1-3 4-10
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(1) Includes all outpatient, inpatient, and home care episodes.
(2) Includes bone marrow aspirates, blood samples, catheter placements and
other venous access, and subcutaneous injections.
(3) Includes operating room procedure and all preparatory and recovery
procedures.
(4) Based on an average of three rounds of apheresis following cell
mobilization injections.
(5) Projections, based on data accumulated during the Company's pre-clinical
research and clinical trials.
8
Reduced Cost. The Company believes the Aastrom CPS has the potential to
replace more costly, labor intensive and invasive cell collection and infusion
procedures currently employed for stem cell therapy and to reduce physician,
staff and patient time requirements.
Reduced Patient and Physician Burden. Cell production with the Aastrom CPS
is expected to require the collection of a small volume of starting material
compared to current collection procedures, eliminating the requirement for
general surgical anesthesia, multiple drug injections and blood apheresis.
Patient benefits are expected to include fewer needle sticks than with current
cell collection and infusion methods and a reduction in overall patient
procedure time. Additionally, Aastrom's process for cell expansion is expected
to minimize the time requirement for physicians compared with bone marrow
harvest.
Enhanced Multicycle High-Dose Chemotherapy. The long restoration period for
the hematopoietic system following myeloablative therapy effectively limits
patients to one opportunity for cell collection prior to cancer therapy. The
Aastrom CPS may enhance the practice of multicycle, high-dose chemotherapy by
providing the ability to produce a therapeutic dose of cells from a small
starting volume. The initial cell collection can be divided into multiple
samples and stored frozen until expansion at a later time is required.
Reduced Quantity of Lymphocytes. The Company believes its approach to stem
cell therapy may provide an additional benefit over current methods by
depleting potentially harmful cells such as T-cells and B-cells. These cells
are believed to be primarily responsible for graft-versus-host disease, a
common manifestation of allogeneic transplants in which the grafted donor's
cells attack the host's tissues and organs.
Tumor Cell Purging. Cancer patients with tumor metastases, in which the
cancer has spread to the blood and bone marrow, have not traditionally been
candidates for autologous stem cell transplants because transplant may
reintroduce cancer cells into the patient. Additionally, patients may have
undetected tumor cells in their marrow or PBPC transplant, which can
reestablish the cancer in the patient following transplant. The Aastrom CPS
process may offer benefits for these groups of patients. The Company and other
investigators have shown that some primary human tumor cells die or do not
grow during hematopoietic cell culture. Further, the smaller volume of
starting cells used for the Aastrom CPS compared with bone marrow harvest or
PBPC transplants may provide approximately 10 to 70 fold less tumor cells in a
transplant. This combination of passive depletion during culture with the
lower starting volume of tumor cells may result in a tumor-free or tumor-
reduced cell product for transplant. The benefit of such tumor depletion, if
any, will vary depending upon the type of cancer and state of disease.
CLINICAL DEVELOPMENT
The Company's clinical development plan is initially to obtain regulatory
approval in the United States to market the Aastrom CPS for autologous stem
cell therapy and in Europe for more general cell therapy applications. The
Company also intends to pursue approval of the Aastrom CPS for additional
clinical indications.
The Company believes that the Aastrom CPS for stem cell therapy will be
regulated as a medical device and that the Company will be required to submit
a Pre-Market Approval ("PMA") application to, and obtain approval from, the
FDA to allow it to market this product in the United States. In order to
obtain PMA approval, the Company will be required to complete clinical trials
under an IDE. See "--Government Regulation--Devices."
In a dose-ranging study conducted by the University of Michigan (the
"University") in 1993, ex vivo produced cells utilizing the Company's
proprietary cell production technology were infused into seven patients with
non-Hodgkin's lymphoma after they received myeloablative chemotherapy. These
patients also received cells obtained from either an autologous bone marrow
harvest or PBPC procedure. No safety issues attributable to the infused cells
were observed in this trial and the patients exhibited recovery profiles
consistent with traditional transplantation techniques.
9
Aastrom completed the first feasibility trial of its cell production system
technology under an IDE at the M.D. Anderson Cancer Center in October 1995. In
this trial, ten breast cancer patients, who were subjected to myeloablative
chemotherapy, were treated with cells obtained from a bone marrow harvest and
with cells produced from a sample of such cells with a predecessor of the
Aastrom CPS. The patients exhibited standard clinical recoveries, providing
evidence of the clinical safety of cells obtained from the Company's cell
production process and of the feasibility of cell production with a
predecessor of the Aastrom CPS by clinical personnel at an investigational
site.
Aastrom is currently conducting a pre-pivotal stem cell therapy clinical
trial under an IDE submitted to the FDA. This clinical trial is designed to
demonstrate that cells produced using the Aastrom CPS can provide
hematopoietic recovery in accordance with trial endpoints in breast cancer
patients who have received myeloablative chemotherapy. Bone marrow or
mobilized PBPC obtained from the patients by traditional methods will be
available for precautionary reasons at defined clinical stages. The results
from the five patients accrued at the first trial site have provided evidence
of the clinical safety of the Aastrom CPS-produced cells in patients and that
the hematopoietic recovery endpoints specified for the trial are achievable.
The patients at this trial site were Stage IV breast cancer patients who had
received significant prior cytotoxic therapies for their cancer. Four of these
five patients received the precautionary bone marrow pursuant to the trial
protocol. Preliminary results from the first trial site were reviewed with the
FDA, and the IDE was amended to expand the trial to a second site. The amended
IDE provided for the enrollment of Stage II, III and IV patients, and a
delayed use of the precautionary bone marrow. Patient data from the initial
six patients in this second site trial have been presented and demonstrate
that cells produced in the Aastrom CPS from a small initial amount of material
can lead to engraftment of stem cells in the patient within a recovery time
frame that is comparable with that of conventional bone marrow transplantation
following ablative chemotherapy. These patients started to recover their white
blood cell counts within a median time of seven days post-transplant and
reached safe levels of neutrophils at 16 days and platelets at 23 days.
Following further review by the FDA, the IDE was amended to expand the trial
to additional sites and patient accrual in this clinical trial is now ongoing
at four U.S. sites. The Company has initiated clinical trials under an IDE
submitted to the FDA to evaluate the use of the Aastrom CPS to expand cells
obtained from UCB for use in cancer patients who have received myeloablative
radiation or chemotherapy.
The objective of the current and anticipated future trials is to establish
the protocols for pivotal trials of the Aastrom CPS in stem cell therapy.
Provided that these pre-pivotal trials provide further evidence of the
feasibility and safety of cells produced in the Aastrom CPS, the Company
anticipates initiating pivotal clinical trials at multiple sites no earlier
than late 1997, with patient enrollment typical to support a PMA filing,
although this schedule is subject to numerous risks and uncertainties. See
"Business Risks--Uncertainties Related to Clinical Trials."
Aastrom, in partnership with Cobe, has initiated two clinical trials in
Europe, the first of which began in February 1997, to evaluate the use of
Aastrom CPS cells to promote hematopoietic recovery in breast cancer patients
undergoing aggressive myelosuppressive or myelotoxic chemotherapy. Assuming
the successful completion of these and other clinical trials, the Company
intends to seek approval to market the Aastrom CPS in Europe through CE Mark
Registration. See "--Government Regulation--Regulatory Process in Europe."
The preliminary results of the Company's pre-pivotal trial may not be
predictive of results that will be obtained from subsequent patients in the
trial or from more extensive trials. Further, there can be no assurance that
the Company's pre-pivotal or pivotal trial will be successful, or that PMA
approval or required foreign regulatory approvals for the Aastrom CPS will be
obtained in a timely fashion, or at all.
ADDITIONAL STEM CELL AND OTHER CELL THERAPIES
The Company believes that the Aastrom CPS hardware and disposables may be
developed to serve as platform products for application in a variety of other
emerging cell therapies in addition to stem cell therapy. The Company believes
that the Aastrom CPS has the potential to supplant current manual cell culture
methods to produce therapeutic quantities of cell types such as T-cells,
chondrocytes, mesenchymal cells, keratinocytes, neuronal cells and dendritic
cells. Other than a limited application of chondrocyte therapy, novel cell
therapies
10
are still in early stages of development by third parties and no assurance can
be given that such other cell therapies will be successfully developed.
Potential advantages of the Aastrom CPS in these therapies may include: (i)
reducing labor and capital costs; (ii) enhancing process reliability; (iii)
automating quality assurance; (iv) reducing the need for specialized,
environmentally controlled facilities; and (v) providing greater accessibility
of these procedures to care providers and patients.
Modification of such processes and application of the Company's products to
the expansion of other cell types may require substantial additional
development of specialized cell culture environments which may need to be
incorporated within the Company's existing Cell Cassettes. Such modifications
may require the Company to raise substantial additional funds, or to seek
additional collaborative partners, or both. There can be no assurance that the
Company will be able to successfully modify or develop existing or future
products to enable such additional cell production processes. The Company's
business opportunity is dependent upon successful development and regulatory
approval of these novel cell therapies. No assurance can be given that such
novel therapies will be successfully developed by other companies or approved
by applicable regulatory authorities, or that the Company's processes or
product candidates will find successful application in such therapies. In
addition, the Company may be required to obtain license rights to such
technologies in order to develop or modify existing or future products for use
in such therapies. No assurance can be given that the Company will be able to
obtain such licenses or that such licenses, if available, could be obtained on
commercially reasonable terms. See "--Clinical Development" and "Business
Risks--Future Capital Needs; Uncertainty of Additional Funding."
Immunotherapies
Immunotherapy involves using cells of the immune system to eradicate a
disease target. T-cell lymphocytes and dendritic cells are being actively
investigated by other companies for this purpose, and the Company anticipates
that many of these procedures will require ex vivo cell production.
T-cells, a class of lymphocyte white blood cells, play a critical role in
the human immune system and are responsible for the human immune response in a
broad spectrum of diseases, including cancers and infectious diseases.
Cytotoxic T-lymphocytes ("CTLs") is a new process that involves collecting T-
cells from a patient and culturing them in an environment resulting in T-cells
with specificity for a particular disease target. Clinical trials by third
parties have been initiated to demonstrate CTL effectiveness. The ex vivo
production of these cells under conditions for use in medical treatment
represents a critical step in the advancement of this therapy.
Dendritic cells (the potent antigen presenting cells) are believed to play
an important role in the function of the immune system. Researchers believe
that cultured dendritic cells could augment the natural ability of a patient
to present antigens from the infectious agents to the immune system and aid in
the generation of a cytotoxic T-cell response to the infectious agent.
Solid Tissue Cell Therapies
One of the newest areas of cell therapy involves the production of
chondrocytes for the restoration of cartilage. Chondrocyte therapy involves
the surgical removal of a small amount of tissue from the patient's knee and a
therapeutic quantity of chondrocytes is produced from this surgical biopsy.
The cells are then implanted into the patient's knee. Published reports
indicate that such cells then reestablish mature articular cartilage.
Currently, this cell production process is completed in highly specialized
laboratory facilities using trained scientists and manual laboratory
procedures. The Company believes that the Aastrom CPS may have the potential
to reduce costs associated with the cell production procedure and, if
successfully developed by the Company for this application, may eventually
facilitate the transfer of the cell production capability away from
specialized facilities directly to the clinical care sites.
Other Stem Cell Therapies
Autoimmune Diseases. Stem cell therapy is under clinical investigation by
third parties for the treatment of other diseases. Clinical studies have
suggested a potential role for stem cell therapy in treatment of autoimmune
11
diseases such as rheumatoid arthritis, multiple sclerosis and lupus
erythematosus. The generic cause of these diseases is a malfunctioning immune
system, including T-lymphocytes. Clinical trials in which the patient receives
treatment resulting in immune ablation (usually involving myelotoxic cancer
drugs or radiation), followed by stem cell therapy to restore the bone marrow
and cells of the blood and immune system, have demonstrated remission of the
autoimmune disease in some patients.
Organ Transplantation. Recently, a number of academic and corporate
researchers and companies have identified the potential use of stem cell
therapy to facilitate successful solid organ and tissue transplants between
human donors and recipients, as well as using organs from non-human species
for transplantation into humans. These proposed applications are based on the
observation that donor-specific bone marrow, infused concurrent with or prior
to the organ transplant, can provide for reduction of the normal immune
rejection response by the transplant recipient (e.g. heart, lung, liver or
kidney transplants).
A major limitation to the use of stem cell therapy in solid organ transplant
is the limited availability of sufficient amounts of bone marrow to obtain a
desired therapeutic response of immune tolerization. This limitation is
particularly problematic when cadaveric donor organs are used, which has
traditionally been the source of cells for these procedures. Bone marrow is
also often available from the cadaveric donor, but only in a limited amount.
Normally this amount may be sufficient for one transplant, but a donor might
provide multiple organs for transplant into multiple recipients. Aastrom
believes that the ability to expand the available bone marrow ex vivo will
enhance the use of stem cell therapy for such transplant procedures and may
pursue development of its products for application in such therapy in the
future.
AASTROM PRODUCT CANDIDATES FOR EX VIVO GENE THERAPY
A novel form of cell therapy is ex vivo gene therapy. For this type of cell
therapy, cells procured from the patient or a donor are genetically modified
prior to their infusion into the patient. Analogous to other cell therapies,
the ability to produce a therapeutic dose of these gene-modified cells is a
major limitation to the commercialization of these cell therapies. This
limitation is further exacerbated by the additional requirement that the cells
be genetically modified under conditions that are sterile and comply with GMP.
Gene therapy is a therapeutic modality that holds the potential to
significantly impact the delivery of healthcare and the delivery of
therapeutically useful protein-based drugs within the body. Gene therapies are
generally targeted at the introduction of a missing normal gene into otherwise
defective human tissue, or the introduction of novel biologic capability into
the body via the introduction of a gene not ordinarily present (for example,
genes providing for the enhanced recognition and destruction or inhibition of
the HIV-1 virus). The major developmental focus of the ex vivo gene therapy
industry has been to identify the therapeutic gene of interest, insert it into
a suitable vector that can be used to transport and integrate the gene into
the DNA of the target cell, and then cause the gene to become expressed. The
Company believes that for ex vivo gene therapy to progress to clinical
applications, a process to produce a sufficient quantity of therapeutic cells
is required as is an efficient means to insert the gene vector into target
cells. Gene therapy is still in an early stage of development by third
parties. The Company's business opportunity is dependent upon the successful
development and regulatory approval of individual gene therapy applications.
No assurance can be given that such applications will be developed or approved
or that the Company's processes or product candidates will find successful
applications in such therapies. Successful development of the Company's
processes and product candidates for application in ex vivo gene therapy will
require substantial additional research and development, including clinical
testing, and will be subject to the Company's ability to finance such
activities on acceptable terms, if at all. See "Business Risks--Future Capital
Needs; Uncertainty of Additional Funding."
THE AASTROM CPS FOR GENE THERAPY (GT-CPS)
The Aastrom CPS has been designed to produce cells for therapy and the
Company believes that the Aastrom CPS may be useful in many potential ex vivo
gene therapy applications. Further, the Company anticipates that its
proprietary stem cell production process technology implemented by the Aastrom
CPS may provide the conditions for clinical scale stem cell division, and
enable or enhance the introduction of therapeutic
12
genes into stem cell DNA. The Company believes that its technology may also
enable expansion of more mature progeny of these stem cells to create a gene
therapy cell product with potential short and long term therapeutic effect.
The Company has two principal objectives for the development of Aastrom GT-
CPS: (i) the enablement of stem cell gene therapies for a variety of
hematologic and other disorders, based on the GT-CPS's ability to enable large
scale stem cell division ex vivo; and (ii) the enablement of gene transfer and
therapeutic cell production by local and regional primary patient care
facilities and ancillary service laboratories.
THE AASTROM GENE LOADER
The Aastrom Gene Loader product technology, which is under development, is
being designed to enhance the efficiency and reliability of the transfer of
new therapeutic genes, which are carried by vectors, into the target cell.
This process, which is typically inefficient in many human cells inhibits many
ex vivo gene therapies from moving forward in the clinic. The Aastrom Gene
Loader is being designed to incorporate the Company's proprietary directed
motion gene transfer technology. Complete product development is expected to
require additional funding sources or collaborations with others, or both.
The Company believes that these issues represent a general bottleneck for
other companies pursuing ex vivo gene therapy clinical applications. The
Company's technology under development may favorably influence these gene
therapy applications, the development of which are impeded due to low
transduction efficiencies and the resultant need for use of extreme quantities
of gene vectors and/or target "delivery" tissues.
STRATEGIC RELATIONSHIPS
On October 22, 1993, the Company entered into a Distribution Agreement (the
"Distribution Agreement") with Cobe for Cobe to be the Company's exclusive,
worldwide distributor of the Aastrom CPS for stem cell therapy applications
(the "Stem Cell Therapy Applications"). Under the terms of the Company's
Distribution Agreement with Cobe, other than with respect to sales to
affiliates, the Company is precluded from selling the Aastrom CPS to customers
for stem cell therapy applications. The Company has, however, reserved the
right to sell the Aastrom CPS for: (i) all diagnostic or other non-therapeutic
clinical applications; (ii) all gene therapy or gene transfer applications,
including those for stem cells; (iii) all non-human applications; (iv) certain
permitted clinical research applications; and (v) all applications that are
labeled not for human use. The Company has also reserved the unconditional
right to sell other products under development, including but not limited to
products based upon its gene loading technology. The initial term of the
Distribution Agreement expires on October 22, 2003, and Cobe has the option to
extend the term for an additional ten-year period. The Company is responsible
for the expenses to obtain FDA and other regulatory approval in the United
States, while Cobe is responsible for the expenses to obtain regulatory
approval in foreign countries to allow for worldwide marketing of the Aastrom
CPS for Stem Cell Therapy Applications. See "Business Risks--Consequences of
Cobe Relationship."
Under the terms of the Distribution Agreement, the Company will realize
approximately 58% to 62% of the net sales price at which Cobe ultimately sells
the Aastrom CPS for Stem Cell Therapy Applications, subject to certain
negotiated discounts and volume-based adjustments and subject to the
obligation of the Company to make aggregate royalty payments of up to 5% to
certain licensors of its technology. The Company is also entitled to a premium
on United States sales in any year in which worldwide sales exceed specified
levels.
The Distribution Agreement may be terminated by Cobe upon twelve months
prior notice to the Company in the event that any person or entity other than
Cobe beneficially owns more than 50% of the Company's outstanding Common Stock
or voting securities. The Distribution Agreement may also be terminated by
Cobe at any time after December 31, 1997 if Cobe determines that
commercialization of the Aastrom CPS for stem cell therapy on or prior to
December 31, 1998 is unlikely.
In conjunction with the Distribution Agreement, the Company also entered
into a Stock Purchase Agreement with Cobe (the "Cobe Stock Agreement"),
whereby Cobe acquired certain option, registration, preemptive and
13
other rights pertaining to shares of the Company's stock. Pursuant to such
preemptive rights, Cobe elected to purchase 714,200 shares of Common Stock in
the Company's initial public offering in February 1997.
MANUFACTURING
The Company has no current intention of internally manufacturing its product
candidates and, accordingly, is developing relationships with third party
manufacturers which are FDA registered as suppliers for the manufacture of
medical products.
On May 10, 1994, the Company entered into a Collaborative Product
Development Agreement with SeaMED Corporation, ("SeaMED"). Pursuant to this
agreement, the Company and SeaMED will collaborate on the further design of
certain instrument components in the Aastrom CPS, and enable SeaMED to
manufacture pre-production units of the instrument components for laboratory
and clinical evaluation. The Company is paying SeaMED for its design and pre-
production work on a "time and materials" basis, utilizing SeaMED's customary
hourly billing rates and actual costs for materials. Subject to certain
conditions, the Company has committed to enter into a manufacturing agreement
with SeaMED for commercial manufacture of the instrument components for three
years after shipment by SeaMED of the first commercial unit pursuant to a
pricing formula set forth in the agreement. The Company retains all
proprietary rights to its intellectual property which is utilized by SeaMED
pursuant to this agreement.
On November 8, 1994, the Company entered into a Collaborative Product
Development Agreement with Ethox Corporation ("Ethox"). Pursuant to this
agreement, the Company and Ethox will collaborate on the further design of
certain bioreactor assembly and custom tubing kit components of the Aastrom
CPS, and enable Ethox to manufacture pre-production units of such components
for laboratory and clinical evaluation. The Company is paying Ethox for its
design and production work on a "time and materials" basis, utilizing Ethox's
customary hourly billing rates and actual costs for materials. The Company
retains all proprietary rights to its intellectual property which are utilized
by Ethox pursuant to this Agreement.
In March 1996, the Company entered into a five-year License and Supply
Agreement with Immunex Corporation ("Immunex") to purchase and resell certain
cytokines and ancillary materials for use in conjunction with the Aastrom CPS.
The agreement required the Company to pay Immunex an initial up-front fee of
$1,500,000 to be followed by subsequent annual renewal payments equal to
$1,000,000 per year during the term of the agreement in addition to payment
for supplies purchased by the Company. In August 1997, the Company and Immunex
amended the agreement to expand the Company's territorial rights to use and
sell such materials to a worldwide basis. Unless earlier terminated or renewed
by the Company for an additional 5-year term, the agreement will expire in
April 2001. The agreement may be terminated by either party effective
immediately upon written notice of termination to the other party in the event
that such party materially breaches the agreement and such breach continues
unremedied after notice and expiration of a specified cure period or in the
event that a bankruptcy proceeding is commenced against a party and is not
dismissed or stayed within a 45-day period. In addition, Immunex has the right
to cease the supply to the Company of cytokines and ancillary materials if the
Company fails to purchase a minimum amount of its forecasted annual needs from
Immunex after notice to the Company and expiration of a specified cure period.
The Company also has the right to terminate the agreement at any time subject
to the payment to Immunex of a specified amount for liquidated damages. In the
event that Immunex elects to cease to supply to the Company cytokines and
ancillary materials or is prevented from supplying such materials to the
Company by reason of force majeure, limited manufacturing rights will be
transferred to the Company under certain circumstances. There is, however, no
assurance that the Company could successfully manufacture the compounds itself
or identify others that could manufacture these compounds to acceptable
quality standards and costs, if at all.
On December 16, 1996, the Company entered into a Collaborative Supply
Agreement with Anchor Advanced Products, Inc., Mid-State Plastics Division
("MSP"). Under this agreement, MSP will conduct both pre-production
manufacturing development and commercial manufacturing and assembly of the
Cell Cassette component of the Aastrom CPS for the Company. During the initial
phase of the seven-year agreement, the
14
Company will pay MSP for its development activities on a time and materials
basis. Upon reaching certain commercial manufacturing volumes, MSP will be
paid by the Company on a per unit basis for Cell Cassettes delivered to the
Company under a pricing formula specified in the agreement. Throughout the
term of this agreement, the Company has agreed to treat MSP as its preferred
supplier of Cell Cassettes, using MSP as its supplier of at least 60% of its
requirements for Cell Cassettes.
There can be no assurance that the Company will be able to continue its
present arrangements with its suppliers, supplement existing relationships or
establish new relationships or that the Company will be able to identify and
obtain the ancillary materials that are necessary to develop its product
candidates in the future. The Company's dependence upon third parties for the
supply and manufacture of such items could adversely affect the Company's
ability to develop and deliver commercially feasible products on a timely and
competitive basis. See "Business Risks--Manufacturing and Supply
Uncertainties; Dependence on Third Parties."
PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability, and the ability of its
licensors, to obtain patent protection for its products and processes. The
Company and its licensors are seeking patent protection for technologies
related to (i) human stem and progenitor cell production processes; (ii)
bioreactors and systems for stem and progenitor cell production and production
of other cells; and (iii) gene transfer devices and processes. The Company has
exclusive license rights to seven issued U.S. patents and two patents with
respect to which the Company has received notice of allowance that present
claims to (i) certain methods for ex vivo stem cell division as well as ex
vivo human hematopoietic stem cell stable genetic transformation and expanding
and harvesting a human hematopoietic stem cell pool; (ii) certain apparatus
for cell culturing, including a bioreactor suitable for culturing human stem
cells or human hematopoietic cells; (iii) certain methods of infecting or
transfecting target cells with vectors; and (iv) a cell composition containing
human stem cells or progenitor cells, or genetically modified stem cells, when
such cells are produced in an ex vivo medium exchange culture. Patents
equivalent to two of these U.S. patents have also been issued in other
jurisdictions: one in Australia and another in Canada and under the European
Patent Convention. These ten issued patents, in addition to the two patents
with respect to which the Company has received notice of allowance, are due to
expire beginning in 2006, through 2014. In addition, the Company and its
exclusive licensors have filed applications for patents in the United States
and equivalent applications in certain other countries claiming other aspects
of the Company's products and processes, including five U.S. patent
applications and corresponding applications in other countries related to
various components of the Aastrom CPS.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain.
No assurance can be given that any patents based on pending patent
applications or any future patent applications of the Company or its licensors
will be issued, that the scope of any patent protection will exclude
competitors or provide competitive advantages to the Company, that any of the
patents that have been or may be issued to the Company or its licensors will
be held valid if subsequently challenged or that others will not claim rights
in or ownership of the patents and other proprietary rights held or licensed
by the Company. Furthermore, there can be no assurance that others have not
developed or will not develop similar products, duplicate any of the Company's
products or design around any patents that have been or may be issued to the
Company or its licensors. Since patent applications in the United States are
maintained in secrecy until patents issue, the Company also cannot be certain
that others did not first file applications for inventions covered by the
Company's and its licensors' pending patent applications, nor can the Company
be certain that it will not infringe any patents that may issue to others on
such applications.
The Company relies on certain licenses granted by the University of Michigan
and Dr. Cremonese for the majority of its patent rights. If the Company
breaches such agreements or otherwise fails to comply with such agreements, or
if such agreements expire or are otherwise terminated, the Company may lose
its rights under the patents held by the University of Michigan and Dr.
Cremonese, which would have a material adverse effect on the Company's
business, financial condition and results of operations. See "--University of
Michigan Research Agreement and License Agreement" and "--License Agreement
with J.G. Cremonese."
15
The Company also relies on trade secrets and unpatentable know-how which it
seeks to protect, in part, by confidentiality agreements. It is the Company's
policy to require its employees, consultants, contractors, manufacturers,
outside scientific collaborators and sponsored researchers, and other advisors
to execute confidentiality agreements upon the commencement of employment or
consulting relationships with the Company. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific limited
circumstances. The Company also requires signed confidentiality or material
transfer agreements from any company that is to receive its confidential data.
In the case of employees, consultants and contractors, the agreements
generally provide that all inventions conceived by the individual while
rendering services to the Company shall be assigned to the Company as the
exclusive property of the Company. There can be no assurance, however, that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets or unpatentable
know-how will not otherwise become known or be independently developed by
competitors.
The Company's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. The Company has not conducted freedom of use patent searches and no
assurance can be given that patents do not exist or could not be filed which
would have an adverse effect on the Company's ability to market its products
or maintain its competitive position with respect to its products. If the
Company's technology components, devices, designs, products, processes or
other subject matter are claimed under other existing United States or foreign
patents or are otherwise protected by third party proprietary rights, the
Company may be subject to infringement actions. In such event, the Company may
challenge the validity of such patents or other proprietary rights or be
required to obtain licenses from such companies in order to develop,
manufacture or market its products. There can be no assurances that the
Company would be able to obtain such licenses or that such licenses, if
available, could be obtained on commercially reasonable terms. Furthermore,
the failure to either develop a commercially viable alternative or obtain such
licenses could result in delays in marketing the Company's proposed products
or the inability to proceed with the development, manufacture or sale of
products requiring such licenses, which could have a material adverse effect
on the Company's business, financial condition and results of operations. If
the Company is required to defend itself against charges of patent
infringement or to protect its own proprietary rights against third parties,
substantial costs will be incurred regardless of whether the Company is
successful. Such proceedings are typically protracted with no certainty of
success. An adverse outcome could subject the Company to significant
liabilities to third parties and force the Company to curtail or cease its
development and sale of its products and processes.
Certain of the Company's and its licensors' research has been or is being
funded in part by the Department of Commerce and by a Small Business
Innovation Research Grant obtained from the Department of Health and Human
Services. As a result of such funding, the U.S. Government has certain rights
in the technology developed with the funding. These rights include a non-
exclusive, paid-up, worldwide license under such inventions for any
governmental purpose. In addition, the government has the right to require the
Company to grant an exclusive license under any of such inventions to a third
party if the government determines that (i) adequate steps have not been taken
to commercialize such inventions, (ii) such action is necessary to meet public
health or safety needs or (iii) such action is necessary to meet requirements
for public use under federal regulations. Additionally, under the federal Bayh
Dole Act, a party which acquires an exclusive license for an invention that
was partially funded by a federal research grant is subject to the following
government rights: (i) products using the invention which are sold in the
United States are to be manufactured substantially in the United States,
unless a waiver is obtained; (ii) if the licensee does not pursue reasonable
commercialization of a needed product using the invention, the government may
force the granting of a license to a third party who will make and sell the
needed product; and (iii) the U.S. Government may use the invention for its
own needs.
UNIVERSITY OF MICHIGAN RESEARCH AGREEMENT AND LICENSE AGREEMENT
In August 1989, the Company entered into a Research Agreement (the "Research
Agreement") with the University, pursuant to which the Company funded a
research project at the University under the direction of Stephen G. Emerson,
M.D., Ph.D., as the principal inventor, together with Michael F. Clarke, M.D.,
and
16
Bernhard O. Palsson, Ph.D., as co-inventors. Pursuant to the Research
Agreement, the Company was granted the right to acquire an exclusive,
worldwide license to utilize all inventions, know-how and technology derived
from the research project. By Extension Agreements, the Company and the
University extended the scope and term of the Research Agreement through
December 1994.
In March 1992, the Company and the University entered into the License
Agreement, as contemplated by the Research Agreement. There have been
clarifying amendments to the License Agreement, in March 1992, October 1993
and June 1995. Pursuant to this License Agreement, (i) the Company acquired
exclusive worldwide license rights to the patents and know-how for the
production of blood cells and bone marrow cells as described in the
University's research project or which resulted from certain further research
conducted through December 1994, and (ii) the Company is obligated to pay to
the University a royalty equal to 2% of the net sales of products which are
covered by the University's patents. Unless it is terminated earlier at the
Company's option or due to a material breach by the Company, the License
Agreement will continue in effect until the latest expiration date of the
patents to which the License Agreement applies.
LICENSE AGREEMENT WITH J. G. CREMONESE
In July 1992, the Company entered into a License Agreement with Joseph G.
Cremonese pursuant to which the Company obtained exclusive worldwide license
rights for all fields of use, to utilize U.S. Patent No. 4,839,292, entitled
"Cell Culture Flask Utilizing a Membrane Barrier," which patent was issued to
Dr. Cremonese on June 13, 1989, and to utilize any other related patents that
might be issued to Dr. Cremonese. Pursuant to the License Agreement, the
Company has reimbursed Dr. Cremonese for $25,000 of his patent costs. Under
the terms of the License Agreement, the Company is to pay to Dr. Cremonese a
royalty of 3% of net sales of the products which are covered by said patent,
subject to specified minimum royalty payments ranging from $20,000 to $50,000
per year, commencing in calendar year 1997. Unless earlier terminated, the
License Agreement will continue in effect until the latest expiration date of
the patents to which the License Agreement applies, which latest expiration
date is currently August 2009. The License Agreement may be terminated by
either party upon default by the other party of any of its obligations under
the agreement without cure after expiration of a 30-day notice period. The
Company also has the right to terminate the License Agreement at any time
without cause upon 30 days prior written notice to Dr. Cremonese.
GOVERNMENT REGULATION
The Company's research and development activities and the manufacturing and
marketing of the Company's products are subject to the laws and regulations of
governmental authorities in the United States and other countries in which its
products will be marketed. Specifically, in the United States the FDA, among
other activities, regulates new product approvals to establish safety and
efficacy of these products. Governments in other countries have similar
requirements for testing and marketing. In the United States, in addition to
meeting FDA regulations, the Company is also subject to other federal laws,
such as the Occupational Safety and Health Act and the Environmental
Protection Act, as well as certain state laws.
REGULATORY PROCESS IN THE UNITED STATES
To the Company's knowledge, it is the first to develop a cell culture system
for ex vivo human cell production to be sold for therapeutic applications.
Therefore, to a certain degree, the manner in which the FDA will regulate the
Company's products is uncertain.
The Company's products are potentially subject to regulation as medical
devices under the Federal Food, Drug, and Cosmetic Act, and as biological
products under the Public Health Service Act, or both. Different regulatory
requirements may apply to the Company's products depending on how they are
categorized by the FDA under these laws. To date, the FDA has indicated that
it intends to regulate the Aastrom CPS product for stem cell therapy as a
Class III medical device through the Center for Biologics Evaluation and
Research. However, there can be no assurance that FDA will ultimately regulate
the Aastrom CPS as a medical device.
17
Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the Aastrom CPS. The FDA is still in the process of
developing its requirements with respect to somatic cell therapy and gene cell
therapy products and has recently issued a draft document concerning the
regulation of umbilical cord blood stem cell products. If the FDA adopts the
regulatory approach set forth in the draft document, the FDA may require
separate regulatory approval for such cells in some cases. The FDA also
recently proposed a new type of license, called a biologic license application
("BLA"), for autologous cells manipulated ex vivo and intended for structural
repair or reconstruction. This proposal may indicate that the FDA will extend
a similar approval requirement to other types of autologous cellular
therapies, such as autologous cells for stem cell therapy. Any such additional
regulatory or approval requirements could significantly delay the introduction
of the Company's product candidates to the market, and have a material adverse
impact on the Company.
Approval of new medical devices and biological products is a lengthy
procedure leading from development of a new product through preclinical and
clinical testing. This process takes a number of years and the expenditure of
significant resources. There can be no assurance that the Company's product
candidates will ultimately receive regulatory approval.
Regardless of how the Company's product candidates are regulated, the
Federal Food, Drug, and Cosmetic Act and other Federal statutes and
regulations govern or influence the research, testing, manufacture, safety,
labeling, storage, recordkeeping, approval, distribution, use, reporting,
advertising and promotion of such products. Noncompliance with applicable
requirements can result in civil penalties, recall, injunction or seizure of
products, refusal of the government to approve or clear product approval
applications or to allow the Company to enter into government supply
contracts, withdrawal of previously approved applications and criminal
prosecution.
DEVICES
In order to obtain FDA approval of a new medical device, sponsors must
generally submit proof of safety and efficacy. In some cases, such proof
entails extensive clinical and preclinical laboratory tests. The testing,
preparation of necessary applications and processing of those applications by
the FDA is expensive and may take several years to complete. There can be no
assurance that the FDA will act favorably or in a timely manner in reviewing
submitted applications, and the Company may encounter significant difficulties
or costs in its efforts to obtain FDA approvals which could delay or preclude
the Company from marketing any products it may develop. The FDA may also
require postmarketing testing and surveillance of approved products, or place
other conditions on the approvals. These requirements could cause it to be
more difficult or expensive to sell the products, and could therefore restrict
the commercial applications of such products. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. For patented technologies, delays
imposed by the governmental approval process may materially reduce the period
during which the Company will have the exclusive right to exploit such
technologies.
If human clinical trials of a proposed device are required and the device
presents significant risk, the manufacturer or distributor of the device will
have to file an IDE submission with the FDA prior to commencing human clinical
trials. The IDE submission must be supported by data, typically including the
results of pre-clinical and laboratory testing. If the IDE is granted, human
clinical trials may commence at a specified number of investigational sites
with the number of patients approved by the FDA.
The FDA categorizes devices into three regulatory classifications subject to
varying degrees of regulatory control. In general, Class I devices require
compliance with labeling and recordkeeping regulations, GMPs, 510(k) pre-
market notification, and are subject to other general controls. Class II
devices may be subject to additional regulatory controls, including
performance standards and other special controls, such as postmarket
surveillance. Class III devices, which are either invasive or life-sustaining
products, or new products never before marketed (for example, non-
"substantially equivalent" devices), require clinical testing to demonstrate
safety and effectiveness and FDA approval prior to marketing and distribution.
The FDA also has the authority to require clinical testing of Class I and
Class II devices.
18
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, the manufacturer or distributor
must submit a PMA application to the FDA. A PMA application must be supported
by extensive data, including preclinical and human clinical trial data, to
prove the safety and efficacy of the device. Upon receipt, the FDA conducts a
preliminary review of the PMA application. If sufficiently complete, the
submission is declared filed by the FDA. By regulation, the FDA has 180 days
to review a PMA application once it is filed, although PMA application reviews
more often occur over a significantly protracted time period, and may take
approximately one year or more from the date of filing to complete.
Some of the Company's products may be classified as Class II or Class III
medical devices. The Company has submitted several IDEs for the Aastrom CPS,
and is currently conducting pre-pivotal clinical studies under these IDEs. The
Company believes that the Aastrom CPS product will be regulated by the FDA as
a Class III device, although there can be no assurance that the FDA will not
choose to regulate this product in a different manner.
The Company and any contract manufacturer are required to be registered as a
medical device manufacturer with the FDA. As such, they will be inspected on a
routine basis by the FDA for compliance with the FDA's GMP regulations. These
regulations will require that the Company and any contract manufacturer
manufacture products and maintain documents in a prescribed manner with
respect to manufacturing, testing, distribution, storage, design control and
service activities, and that adequate design and service controls are
implemented. The Medical Device Reporting regulation requires that the Company
provide information to the FDA on deaths or serious injuries alleged to be
associated with the use of its devices, as well as product malfunctions that
are likely to cause or contribute to death or serious injury if the
malfunction were to recur. In addition, the FDA prohibits a company from
promoting an approved device for unapproved applications and reviews company
labeling for accuracy.
BIOLOGICAL PRODUCTS
For certain of the Company's new products which may be regulated as
biologics, the FDA requires (i) preclinical laboratory and animal testing,
(ii) submission to the FDA of an investigational new drug ("IND") application
which must be effective prior to the initiation of human clinical studies,
(iii) adequate and well-controlled clinical trials to establish the safety and
efficacy of the product for its intended use, (iv) submission to the FDA of a
product license application ("PLA") and establishment license application
("ELA") and (v) review and approval of the PLA and ELA as well as inspections
of the manufacturing facility by the FDA prior to commercial marketing of the
product.
Preclinical testing covers laboratory evaluation of product chemistry and
formulation as well as animal studies to assess the safety and efficacy of the
product. The results of these tests are submitted to the FDA as part of the
IND. Following the submission of an IND, the FDA has 30 days to review the
application and raise safety and other clinical trial issues. If the Company
is not notified of objections within that period, clinical trials may be
initiated. Clinical trials are typically conducted in three sequential phases.
Phase I represents the initial administration of the drug or biologic to a
small group of humans, either healthy volunteers or patients, to test for
safety and other relevant factors. Phase II involves studies in a small number
of patients to assess the efficacy of the product, to ascertain dose tolerance
and the optimal dose range and to gather additional data relating to safety
and potential adverse effects. Once an investigational drug is found to have
some efficacy and an acceptable safety profile in the targeted patient
population, multi-center Phase III studies are initiated to establish safety
and efficacy in an expanded patient population and multiple clinical study
sites. The FDA reviews both the clinical plans and the results of the trials
and may request the Company to discontinue the trials at any time if there are
significant safety issues.
The results of the preclinical tests and clinical trials are submitted to
the FDA in the form of a PLA for marketing approval. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all.
Additional animal studies or
19
clinical trials may be requested during the FDA review period that may delay
marketing approval. After FDA approval for the initial indications, further
clinical trials may be necessary to gain approval for the use of the product
for additional indications. The FDA requires that adverse effects be reported
to the FDA and may also require post-marketing testing to monitor for adverse
effects, which can involve significant expense.
Under current requirements, facilities manufacturing biological products
must be licensed. To accomplish this, an ELA must be filed with the FDA. The
ELA describes the facilities, equipment and personnel involved in the
manufacturing process. An establishment license is granted on the basis of
inspections of the applicant's facilities in which the primary focus is on
compliance with GMP and the ability to consistently manufacture the product in
the facility in accordance with the PLA. If the FDA finds the inspection
unsatisfactory, it may decline to approve the ELA, resulting in a delay in
production of products. Although reviewed separately, approval of both the PLA
and ELA must be received prior to commercial marketing of a cellular biologic.
As part of the approval process for human biological products, each
manufacturing facility must be registered and inspected by FDA prior to
marketing approval. In addition, state agency inspections and approvals may
also be required for a biological product to be shipped out of state.
REGULATORY PROCESS IN EUROPE
The Company believes that the Aastrom CPS will be regulated in Europe as a
Class IIb medical device, under the authority of the new Medical Device
Directives ("MDD") being implemented by European Union ("EU") member
countries. This classification applies to medical laboratory equipment and
supplies including, among other products, many devices that are used for the
collection and processing of blood for patient therapy. Certain ancillary
products (e.g., biological reagents) used with the Aastrom CPS may be
considered Class III medical devices.
The MDD regulations vest the authority to permit affixing of the "CE Mark"
with various "Notified Bodies." These are private organizations which operate
under license from the EU to certify that appropriate quality assurance
standards and compliance procedures are followed by developers and
manufacturers of medical device products or, alternatively, that a
manufactured medical product meets a more limited set of requirements.
Notified Bodies are also charged with responsibility for determination of the
appropriate standards to apply to a medical product. Receipt of permission to
affix the CE Mark enables a company to sell a medical device in all EU member
countries. Other registration requirements may also need to be satisfied in
certain countries, although there is a general trend among EU member countries
not to impose additional requirements beyond those specified for CE Mark
certification.
COMPETITION
The biotechnology and medical device industries are characterized by rapidly
evolving technology and intense competition. The Company's competitors include
major pharmaceutical, medical device, medical products, chemical and
specialized biotechnology companies, many of which have financial, technical
and marketing resources significantly greater than those of the Company. In
addition, many biotechnology companies have formed collaborations with large,
established companies to support research, development and commercialization
of products that may be competitive with those of the Company. Academic
institutions, governmental agencies and other public and private research
organizations are also conducting research activities and seeking patent
protection and may commercialize products on their own or through joint
ventures. The Company's product development efforts are primarily directed
toward obtaining regulatory approval to market the Aastrom CPS for stem cell
therapy. That market is currently dominated by the bone marrow harvest and
PBPC collection methods. The Company's clinical data, although early, is
inconclusive as to whether or not cells expanded in the Aastrom CPS will
enable hematopoietic recovery within the time frames currently achieved by the
bone marrow harvest and PBPC collection methods. In addition, the bone marrow
harvest and PBPC collection methods have been widely practiced for a number of
years and, recently, the patient costs associated with these procedures have
begun to decline. There can be no assurance that the Aastrom CPS method, if
20
approved for marketing, will prove to be competitive with these established
collection methods on the basis of hematopoietic recovery time, cost or
otherwise. The Company is aware of certain other products manufactured or
under development by competitors that are used for the prevention or treatment
of certain diseases and health conditions which the Company has targeted for
product development. In particular, the Company is aware that competitors such
as Amgen, Inc., CellPro, Incorporated, Systemix, Inc., Baxter Healthcare Corp.
and Rhone-Poulenc Rorer Inc. ("RPR") are in advanced stages of development of
technologies and products for use in stem cell therapy and other market
applications currently being pursued by the Company. In addition, Cobe, a
significant shareholder of the Company, is a market leader in the blood cell
processing products industry and, accordingly, a potential competitor of the
Company. There can be no assurance that developments by others will not render
the Company's product candidates or technologies obsolete or noncompetitive,
that the Company will be able to keep pace with new technological developments
or that the Company's product candidates will be able to supplant established
products and methodologies in the therapeutic areas that are targeted by the
Company. The foregoing factors could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's products under development are expected to address a broad
range of existing and new markets. The Company believes that its stem cell
therapy products will, in large part, face competition by existing procedures
rather than novel new products. The Company's competition will be determined
in part by the potential indications for which the Company's products are
developed and ultimately approved by regulatory authorities. In addition, the
first product to reach the market in a therapeutic or preventive area is often
at a significant competitive advantage relative to later entrants to the
market. Accordingly, the relative speed with which the Company or its
corporate partners can develop products, complete the clinical trials and
approval processes and supply commercial quantities of the products to the
market are expected to be important competitive factors. The Company's
competitive position will also depend on its ability to attract and retain
qualified scientific and other personnel, develop effective proprietary
products, develop and implement production and marketing plans, obtain and
maintain patent protection and secure adequate capital resources. The Company
expects its products, if approved for sale, to compete primarily on the basis
of product efficacy, safety, patient convenience, reliability, value and
patent position.
EMPLOYEES
As of August 31, 1997, the Company employed approximately 72 individuals
full-time. A significant number of the Company's management and professional
employees have had prior experience with pharmaceutical, biotechnology or
medical product companies. None of the Company's employees are covered by
collective bargaining agreements, and management considers relations with its
employees to be good.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, and their respective ages as of
August 31, 1997, are as follows:
NAME AGE POSITION
---- --- --------
R. Douglas Armstrong, Ph.D..... 44 President and Chief Executive Officer
James Maluta................... 50 Vice President, Product Development
Todd E. Simpson................ 36 Vice President, Finance &
Administration, Chief Financial
Officer, Secretary and Treasurer
Walter C. Ogier................ 40 Vice President, Marketing
Thomas E. Muller, Ph.D......... 61 Vice President, Regulatory Affairs
Alan K. Smith, Ph.D............ 42 Vice President, Research
R. Douglas Armstrong, Ph.D. joined the Company in June 1991 as a director
and as its President and Chief Executive Officer. From 1987 to 1991, Dr.
Armstrong served in different capacities, including as Executive Vice
21
President and a Trustee of the La Jolla Cancer Research Foundation ("LJCRF"),
a 250-employee scientific research institute located in San Diego, California.
Dr. Armstrong received his doctorate in Pharmacology and Toxicology from the
Medical College of Virginia, and has held faculty and staff positions at Yale
University, University of California, San Francisco, LJCRF and University of
Michigan. Dr. Armstrong also serves on the Board of Directors of Nephros
Therapeutics, Inc.
James Maluta joined the Company in August 1992 as Vice President, Product
Development. Mr. Maluta has a broad background in the development and
manufacturing of medical devices, with 25 years of experience in the industry,
principally with OHMEDA and with Cobe BCT, Inc. While with Cobe BCT, Inc., Mr.
Maluta was Program Manager for the Cobe Spectra Apheresis System, a device for
blood cell processing and apheresis. Mr. Maluta held other engineering
management positions and also was director of Quality Assurance for Cobe BCT.
Mr. Maluta received his degree in electrical engineering from the University
of Wisconsin.
Todd E. Simpson joined the Company in January 1996 as Vice President,
Finance and Administration and Chief Financial Officer and is also the
Company's Secretary and Treasurer. Prior to that, Mr. Simpson was Treasurer of
Integra LifeSciences Corporation ("Integra"), a biotechnology company, which
acquired Telios Pharmaceuticals, Inc. ("Telios") in August 1995 in connection
with the reorganization of Telios under Chapter 11 of the U.S. Bankruptcy
Code. Mr. Simpson served as Vice President of Finance and Chief Financial
Officer of Telios up until its acquisition by Integra and held various other
financial positions at Telios after joining that company in February 1992.
Telios was a publicly-held company engaged in the development of
pharmaceutical products for the treatment of dermal and ophthalmic wounds,
fibrotic disease, vascular disease, and osteoporosis. From August 1983 through
February 1992, Mr. Simpson practiced public accounting with the firm of Ernst
& Young, LLP. Mr. Simpson is a Certified Public Accountant and received his
B.S. degree in Accounting and Computer Science from Oregon State University.
Walter C. Ogier joined the Company in March 1994 as Director of Marketing
and was promoted to Vice President, Marketing during 1995. Prior to that, Mr.
Ogier was at Baxter Healthcare Corporation's Immunotherapy Division, where he
served as Director, Business Development from 1992 to 1994 and as Manager,
Marketing and Business Development in charge of the company's cell therapy
product lines from 1990 to 1992. Mr. Ogier previously held positions with
Ibbottson Associates and with the Business Intelligence Center at SRI
International (formerly Stanford Research Institute). Mr. Ogier received his
B.A. degree in Chemistry from Williams College in 1979 and his Masters of
Management degree from the Yale School of Management in 1987.
Thomas E. Muller, Ph.D. joined the Company in May 1994 as Vice President,
Regulatory Affairs. Prior to that, Dr. Muller was Director, Biomedical Systems
with W.R. Grace & Company in Lexington, Massachusetts. Prior to this, Dr.
Muller was Vice President, Engineering and Director of Research and
Development with the Renal Division of Baxter Healthcare in Deerfield,
Illinois. Dr. Muller has also served as Adjunct Professor at Columbia
University and as Visiting Professor at the University of Gent, Belgium. Dr.
Muller graduated from the Technical University in Budapest, Hungary, in 1956
with a B.S. in Chemical Engineering. Dr. Muller received his M.S. degree in
1959 and was awarded a Ph.D. in 1964, both in Polymer Chemistry, from McGill
University.
Alan K. Smith, Ph.D. joined the Company in November 1995 as Vice President,
Research. Previously, Dr. Smith was Vice President of Research and Development
at Geneic Sciences, Inc., a developmental stage bone marrow transplantation
company. Prior to that, Dr. Smith held the position of Director, Cell
Separations Research and Development of the Immunotherapy Division of Baxter
Healthcare Corporation. In this capacity, he was responsible for the research
and development activities for a stem cell concentration system approved for
clinical use in Europe and currently in pivotal clinical trials in the United
States. Dr. Smith has also held positions as Research and Development Manager
at BioSpecific Technologies, as Director of Biochemistry at HyClone
Laboratories and as a member of the Board of Directors of Dallas Biomedical.
Dr. Smith received his B.S. degree in Chemistry from Southern Utah State
College in 1976 and a Ph.D. in Biochemistry from Utah State University in
1983.
22
ITEM 2. PROPERTIES
The Company leases approximately 20,000 square feet of office and research
and development space in Ann Arbor, Michigan under a lease agreement expiring
in May 1998. The lease is renewable at the option of the Company for up to an
additional five-year term. The Company believes that its facilities will be
adequate for its currently anticipated needs. Contract manufacturing or
additional facilities will be required in the future to support expansion of
research and development and to manufacture products.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings, although from
time to time it may become involved in disputes in connection with the
operation of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the Company's fiscal year ended June 30, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company effected an initial public offering of its Common Stock during
February 1997 at a price of $7.00 per share. Commencing on February 4, 1997,
the Company's Common Stock has been quoted on the Nasdaq National Market under
the symbol "ASTM." The following table sets forth, for the periods indicated,
the high and low sales prices per share of Common Stock as reported on the
Nasdaq National Market:
YEAR ENDED JUNE 30, 1997 HIGH LOW
------------------------ ----- -----
3rd Quarter (from February 4, 1997)............................ 7 5/8 5 3/4
4th Quarter.................................................... 8 1/2 3 1/2
As of August 31, 1997, there were approximately 140 shareholders of record
of the Common Stock. The Company has never declared or paid any cash dividends
on its Common Stock and does not anticipate paying such cash dividends in the
foreseeable future. The Company currently anticipates that it will retain all
future earnings, if any, for use in the development of its business.
23
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data presented below for the five years ended
June 30, 1997 and for the period from the Company's inception on March 24,
1989 ("Inception") to June 30, 1997 and the balance sheet data at June 30,
1993, 1994, 1995, 1996 and 1997, were derived from the audited financial
statements of the Company.
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto appearing elsewhere in this Report.
YEAR ENDED JUNE 30, INCEPTION TO
---------------------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1997
----------- ----------- ----------- ----------- ------------ ------------
STATEMENT OF OPERATIONS
DATA:
Revenues:
Research and development
agreements............ $ -- $ 49,000 $ 396,000 $ 1,342,000 $ 230,000 $ 2,017,000
Grants................. 784,000 823,000 121,000 267,000 148,000 2,143,000
----------- ----------- ----------- ----------- ------------ ------------
Total revenues....... 784,000 872,000 517,000 1,609,000 378,000 4,160,000
Costs and expenses:
Research and development 2,600,000 5,627,000 4,889,000 10,075,000 13,357,000 38,432,000
General and
administrative........ 1,153,000 1,565,000 1,558,000 2,067,000 1,953,000 9,042,000
----------- ----------- ----------- ----------- ------------ ------------
Total costs and
expenses............ 3,753,000 7,192,000 6,447,000 12,142,000 15,310,000 47,474,000
----------- ----------- ----------- ----------- ------------ ------------
Loss from operations.... (2,969,000) (6,320,000) (5,930,000) (10,533,000) (14,932,000) (43,314,000)
----------- ----------- ----------- ----------- ------------ ------------
Other income (expense):
Interest income........ 148,000 245,000 279,000 678,000 676,000 2,252,000
Interest expense....... (26,000) (65,000) (66,000) (62,000) (32,000) (251,000)
----------- ----------- ----------- ----------- ------------ ------------
Net loss................ $(2,847,000) $(6,140,000) $(5,717,000) $(9,917,000) $(14,288,000) $(41,313,000)
=========== =========== =========== =========== ============ ============
Net loss per share(1)... $ (.52) $ (.82) $ (.66) $ (.98) $ (1.26)
=========== =========== =========== =========== ============
Weighted average number
of shares
outstanding(1)......... 5,480,000 7,461,000 8,644,000 10,103,000 11,315,000
=========== =========== =========== =========== ============
JUNE 30,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $ 3,085,000 $ 6,730,000 $ 11,068,000 $ 10,967,000 $ 17,007,000
Working capital......... 2,744,000 6,187,000 10,319,000 9,851,000 15,600,000
Total assets............ 4,156,000 8,227,000 12,551,000 12,673,000 18,410,000
Long-term capital lease
obligations............ 311,000 425,000 412,000 189,000 65,000
Deficit accumulated
during the development
stage.................. (5,251,000) (11,391,000) (17,108,000) (27,025,000) (41,313,000)
Total shareholders'
equity................. 3,268,000 6,985,000 11,186,000 10,850,000 16,583,000
- --------
(1) See Note 1 of Notes to Financial Statements for information concerning the
computation of net loss per share and shares used in computing pro forma
net loss per share.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section of this Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The Company's actual results may differ materially from those discussed in the
forward looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under the caption
"Business Risks."
OVERVIEW
Since its Inception, the Company has been in the development stage and
engaged in research and product development, conducted both on its own behalf
and in connection with various collaborative research and development
agreements with other entities. The Company expects that its revenue sources
for at least the next several years will continue to be limited to grant
revenues and research funding, milestone payments and licensing fees from
potential future corporate collaborators. The timing and amount of such future
cash payments and revenues, if any, will be subject to significant
fluctuations, based in part on the success of the Company's research
activities, the timing of the achievement of certain milestones and the extent
to which associated costs are reimbursed under grant or other arrangements.
Substantially all of the Company's revenues from product sales, if any, will
be subject to the Company's obligation to make aggregate royalty payments of
up to 5% to certain licensors of its technology. Further, under the Company's
Distribution Agreement with Cobe, Cobe will perform marketing and distribution
activities and in exchange will receive approximately 38% to 42% of the
Company's product sales in the area of stem cell therapy, subject to
negotiated discounts and volume based adjustments. Research and development
expenses are expected to increase as product development programs and
applications of the Company's products progress through research and
development stages. Under the Company's License Agreement with Immunex, annual
renewal fees of $1,000,000 are payable in each of the next three fiscal years.
Under the Company's Distribution Agreement with Cobe, regulatory approval
activities for the Company's products for stem cell therapies outside of the
United States will be conducted, and paid for, by Cobe. As a result of these
and other factors, the Company's results of operations have fluctuated and are
expected to continue to fluctuate significantly from year to year and from
quarter to quarter and therefore may not be comparable to or indicative of the
results of operations for other periods.
Over the past several years, the Company's net loss has primarily increased,
consistent with the growth in the Company's scope and size of operations. In
the near term, the Company plans additional moderate growth in employee
headcount necessary to address increasing requirements in the areas of product
development, research, clinical and regulatory affairs and administration.
Assuming capital is available to finance such growth, the Company's operating
expenses will continue to increase as a result. At least until such time as
the Company enters into arrangements providing research and development
funding, the net loss will continue to increase as well. The Company has never
been profitable and does not anticipate having net income for at least the
next several years. Through June 30, 1997, the Company had an accumulated
deficit of $41,313,000. There can be no assurance that the Company will be
able to achieve profitability on a sustained basis, if at all.
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Total revenues were $378,000 in 1997, $1,609,000 in 1996 and $517,000 in
1995. Grant revenues decreased to $148,000 in 1997 from $267,000 in 1996 and
were $121,000 in 1995, reflecting the timing of grant awards and related
research activities, to the extent that such associated costs are reimbursed
under the grants. Grant revenues accounted for 39%, 17% and 23% of total
revenues for the years ended June 30, 1997, 1996 and 1995, respectively, and
are recorded on a cost-reimbursement basis. Revenues from research and
development agreements totaled $230,000 in 1997, $1,342,000 in 1996 and
$396,000 in 1995, reflecting research funding received by the Company under
its collaboration with RPR which commenced in September 1995 and ended in
September 1996. Revenues from RPR accounted for 52%, 83% and 48% of such
revenue in 1997, 1996 and 1995, respectively.
25
Total costs and expenses were $15,310,000 in 1997, $12,142,000 in 1996 and
$6,447,000 in 1995. The increases in costs and expenses in 1996 and 1997 are
primarily the result of increases in research and development expense to
$13,357,000 in 1997 from $10,075,000 in 1996 and $4,889,000 in 1995. Research
and development expense includes charges of $1,000,000 and $1,500,000 for the
years ended June 30, 1997 and 1996, respectively, representing license fee
payments pursuant to the Company's supply agreement with Immunex. The increase
in research and development expense reflects an increase in research, clinical
development and product development activities. General and administrative
expenses were $1,953,000 in 1997, $2,067,000 in 1996 and $1,558,000 in 1995.
General and administrative expenses, which decreased slightly in 1997 compared
to 1996, are expected to increase as a result of increasing finance, legal and
other administrative and marketing expenses in support of the Company's
increasing product development and research activities.
Interest income was $676,000 in 1997, $678,000 in 1996 and $279,000 in 1995.
The fluctuations in interest income are due primarily to corresponding changes
in the levels of cash, cash equivalents and short-term investments for such
periods. Interest expense was $32,000 in 1997, $62,000 in 1996 and $66,000 in
1995, reflecting decreasing amounts outstanding under capital leases during
these periods.
The Company's net loss was $14,288,000 in 1997, $9,917,000 in 1996 and
$5,717,000 in 1995. The Company expects to report substantial net losses for
at least the next several years.
The Company has not generated any profits to date and therefore has not paid
any federal income taxes since its Inception. At June 30, 1997, the Company's
federal tax net operating loss and tax credit carryforwards were $40,420,000
and $971,000, respectively, which will expire from 2004 through 2012, if not
utilized. The Company underwent an ownership change in October 1993, which has
resulted in a limitation under which the Company can utilize a portion of its
net operating loss carryforward amounting to $1,153,000 per year. As of June
1997, the portion of the Company's net operating loss that remains subject to
this limitation is $2,490,000 and therefore is not expected to ultimately
effect the Company's ability to utilize this benefit. If certain changes in
ownership should occur again in the future, the Company's ability to utilize
its net operating loss and tax credit carryforwards may become subject to
further annual limitation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since Inception primarily through
public and private sales of its equity securities, which, from Inception
through June 30, 1997, have totaled approximately $57,906,000, and, to a
lesser degree, through grant funding, payments received under research
agreements and collaborations, interest earned on cash, cash equivalents, and
short-term investments, and funding under equipment leasing agreements. These
financing sources have historically allowed the Company to maintain adequate
levels of cash and other liquid investments. Under the Company's primary
equipment leasing agreement, the lessor is granted a security interest in all
of the Company's property and assets.
The Company's combined cash, cash equivalents and short-term investments
totaled $17,007,000 at June 30, 1997, an increase of $6,040,000 from June 30,
1996. The primary uses of cash, cash equivalents and short-term investments
during the year ended June 30, 1997 included $13,214,000 to finance the
Company's operations and working capital requirements, $424,000 in capital
equipment additions and $223,000 in scheduled debt payments. On February 7,
1997, the Company completed an underwritten initial public offering of
3,000,000 shares of its Common Stock at an offering price of $7.00 per share.
On March 5, 1997, the underwriters elected to purchase an additional 250,000
shares of Common Stock pursuant to the underwriters' over-allotment option
(the "Option") at a price of $7.00 per share. The Option, which has expired,
granted the underwriters the right to purchase up to 450,000 shares of Common
Stock at the initial public offering price. Proceeds from the offering, net of
underwriters' commissions and expenses, were $19,885,000. The Company plans to
continue its policy of investing excess funds in short-term, investment-grade,
interest-bearing instruments.
The Company's future cash requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the scope and results of clinical trials, the time and costs
26
involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patents, competing technological and market
developments and the cost of product commercialization. The Company does not
expect to generate a positive cash flow from operations for several years due
to the expected increase in spending for research and development programs and
the expected cost of commercializing its product candidates. The Company
intends to seek additional funding through research and development agreements
with suitable corporate collaborators, grants and through public or private
financing transactions. The Company expects that its primary sources of
capital for the foreseeable future will be through collaborative arrangements
and through the public or private sale of its debt or equity securities. There
can be no assurance that such collaboration arrangements, or any public or
private financing, will be available on acceptable terms, if at all, or can be
sustained on a long-term basis. Several factors will affect the Company's
ability to raise additional funding, including, but not limited to, market
volatility of the Company's Common Stock and economic conditions affecting the
public markets generally or some portion or all of the technology sector. If
adequate funds are not available, the Company may be required to delay, reduce
the scope of, or eliminate one or more of its research and development
programs, which may have a material adverse effect on the Company's business.
See "Business Risks--Future Capital Needs; Uncertainty of Additional Funding"
and Notes to Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENT
During March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128),
which amends the standards for computing earnings per share previously set
forth in Accounting Principles Board Opinion No. 15, "Earnings per Share" (APB
15). SFAS 128, which will be adopted by the Company for the periods ending
December 31, 1997, will not have a material effect on the computation of the
Company's historical net loss per share amounts.
27
BUSINESS RISKS
The Company's business is subject to a number of risks and uncertainties,
including those discussed below.
UNCERTAINTIES RELATED TO PRODUCT DEVELOPMENT AND MARKETABILITY
The Company has not completed the development or clinical trials of any of
its cell culture technologies or product candidates and, accordingly, has not
begun to market or generate revenue from their commercialization. Furthermore,
the Company's technologies and product candidates are based on cell culture
processes and methodologies which are not widely employed. Commercialization
of the Company's lead product candidate, the Aastrom CPS, will require
substantial additional research and development by the Company as well as
substantial clinical trials. There can be no assurance that the Company will
successfully complete development of the Aastrom CPS or its other product
candidates, or successfully market its technologies or product candidates,
which lack of success would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company or its collaborators may encounter problems and delays relating
to research and development, regulatory approval and intellectual property
rights of the Company's technologies and product candidates. There can be no
assurance that the Company's research and development programs will be
successful, that its cell culture technologies and product candidates will
facilitate the ex vi