STRESSGEN BIOTECHNOLOGIES CORP - 10-K Annual Report

STRESSGEN BIOTECHNOLOGIES CORPORATION
(Exact Name of Registrant as Specified in its Charter)

Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act: None

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 and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o

As of June 30, 2002 and February 5, 2003, the common shares held by non-affiliates of the Registrant had an aggregate market value of approximately U.S. $148,535,255 and $68,829,330, respectively. These amounts respectively represented approximately Cdn. $225,506,250 (based on the June 30, 2002 closing price of Cdn. $3.75 per common share, as reported on The Toronto Stock Exchange, and approximately 60,135,000 outstanding common shares) and $104,222,120 (based on the February 5, 2003 closing price of Cdn. $1.73 per common shares as reported on The Toronto Stock Exchange and approximately 60,244,000 outstanding common shares). These numbers are provided only for the purposes of this report and do not represent an admission by either the Registrant or any non-affiliate as to the status of any person.

The Company's accounts are maintained in Canadian dollars. In this Annual Report on Form 10-K, all dollar amounts are stated in Canadian dollars except where otherwise indicated.

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our forward-looking statements, which are typically indicated by words such as "intend," "plan," "anticipate" and "expect," include statements regarding the results of on-going research, development efforts and the scope of future operations. Such statements are only predictions. Actual results may differ materially from those implied by our forward-looking statements, due to factors including uncertainties associated with product development, the risk that products do not demonstrate statistically significant results in clinical trials, our dependence upon collaborative partners, our need for additional financing and the risk that we will not obtain approval to market our products. These and other risks are discussed in this Form 10-K, including under the caption "Factors that May Affect Future Performance." We disclaim any obligation to update forward-looking statements as circumstances change.

We are a biopharmaceutical company focused on the commercialization, development and research of proprietary immunotherapeutics to treat human diseases. Our platform technology involves using recombinant DNA methods to covalently link together heat shock proteins (Hsp), also known as stress proteins, to proteins such as viral or cancer antigens. The resulting CoVal™ fusion proteins are designed to stimulate immune responses to the disease-specific antigen present in the fusion. By targeting immune responses to a specific antigen, CoVal™ fusions use the body's immune system to combat infectious diseases or cancer.

Most of our resources are devoted to developing our lead product candidate, which we call HspE7. HspE7 is a fusion between a Hsp and a human papillomavirus (HPV) antigen called E7. The product is in development for indications caused by HPV including genital warts, recurrent respiratory papillomatosis (RRP), cervical intraepithelial neoplasia (CIN), cervical cancer and anal intraepithelial neoplasia (AIN). In June 2002 we entered into a collaboration agreement with F.Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. (together, Roche) to develop HspE7.

If HspE7 is approved, it could be useful to treat a large number of patients and a broad spectrum of HPV diseases. There are approximately 5.5 million new genital HPV infections each year. More than 20 million people in the U.S. are currently infected with the virus. An analysis of healthcare costs associated with sexually transmitted diseases showed that the costs of HPV-related diseases ranked second only to the costs of HIV. Unlike currently available topical and surgical treatments, HspE7 has the potential to reduce or eliminate recurrence, treat chronic conditions in people already infected with HPV, and address multiple types of HPV.

HspE7 is important not only as a potential treatment for HPV-related indications but also as a demonstration of the efficacy of CoVal™ fusions. We believe that clinical results will show that fusions developed with our proprietary technology safely and effectively stimulate the immune system to recognize and fight specific diseases. The type of immune responses induced by CoVal™ fusions, as demonstrated in preclinical research, indicates that the Hsp fusion platform technology may apply to the immunotherapy of a wide spectrum of diseases, including cancer and bacterial, fungal and parasitic infections. Robust preclinical and encouraging clinical data from the HspE7 program has led us to concentrate our current efforts on the treatment of viral diseases. We are performing research studies on potential treatments for hepatitis B (HBV) and herpes simplex and are evaluating fusion proteins to treat infections caused by hepatitis C (HCV) and the human immunodeficiency virus (HIV).

In addition to our biopharmaceutical business, we have a profitable bioreagent business. We supply stress proteins, antibodies and other bioreagents globally for use in academic, medical and commercial research. The production and sale of bioreagents enhances our business strategy by building a market presence in stress proteins and strengthening strategic relationships with other companies, academic institutions and stress response researchers.

Our business objective is to be a leader in the development and commercialization of novel immunotherapeutics for the treatment of virally-induced human disease. Our strategy includes the following elements:

Our technology uses Hsp covalently fused to antigens to activate the immune system.

The human immune system is the body's natural defense mechanism to prevent and combat disease. The immune system protects the body by specifically recognizing and destroying invading viruses, bacteria and other pathogens. In addition, the immune system is capable of recognizing and eliminating abnormal cells from the body, such as cells infected with viruses and to some degree precancerous and cancerous cells.

Scientists currently describe the human immune system as using two complementary mechanisms to respond to pathogens, labeled innate and adaptive immunity. Innate immunity, which is a "front-line" defense, includes dendritic cells, macrophages, natural killer cells and gamma delta T cells. These cells typically recognize structural components, including antigens, common to disease-causing organisms and generate a prompt, but relatively non-specific response. Adaptive or acquired immunity, which can be triggered by an innate immune response or operate independently, involves B cells and T cells. Adaptive immunity generates a "tailor-made" or antigen-specific response.

B cells make antibodies that prevent infection by attaching to invading pathogens and aiding in their disposal before they can infect cells. T cell responses are useful not only for helping antibody production, but also for eradicating existing infected or diseased cells. These two types of immune defenses are called humoral (B cell) and cellular (T cell) immunity. While both types of immune defenses may cooperate to defend against infection, scientists believe that once infection has been established, cellular immunity is required to eradicate such diseased cells.

Induction of a cellular immune response begins with the processing and presentation of antigens by specialized immune system cells called antigen presenting cells, such as dendritic cells. Once inside dendritic cells, protein antigens are broken down into small fragments, called peptides. These peptides are then presented on the dendritic cell surface. T cells continually scan the surface of dendritic cells for these peptides. When T cells recognize displayed peptides as being foreign, they replicate rapidly and then search for and kill diseased cells displaying those same peptides on their surface.

Peptides are presented to T cells through two distinct pathways designated as the class I and class II pathways. Presentation of such peptides by the class I and class II pathways activate different T cell subsets referred to as CD8+ T cells and CD4+ T cells. CD4+ T cells, which are also known as T helper (Th) cells, are further subdivided into Th1 and Th2 cells. Activated Th1 and Th2 cells release molecules known as cytokines, which trigger other immune cells to produce either a predominantly cellular (Th1) or antibody-mediated (Th2) immune response. Immune responses mediated by the cellular side of the immune system are characterized by the induction of CD8+ T cells called cytotoxic T lymphocytes (CTLs) or killer T-cells. Killer T cells are capable of directly killing pathogen-infected cells and cancerous cells.

Hsp are present in cells of all organisms from bacteria to mammals. The structure and function of Hsp are similar across these diverse life forms. Hsp play a major role in the generation of immune responses and appear to activate both innate and adaptive immunity. Some scientists refer to Hsp as molecular chaperones due to their role in transporting peptides within intracellular compartments. Hsp appear to activate both innate and adaptive immunity by interacting with newly identified Hsp receptors on antigen presenting cells such as dendritic cells. Interaction of Hsp with such receptors may have at least two important consequences: cytokine secretion by the dendritic cell that promotes cellular immunity and internalization of the Hsp and bound polypeptides by the dendritic cell into the class I pathway of antigen presentation.

Dendritic cells express receptors that specifically recognize Hsp. As a result, they can capture and process Hsp fusions, which are Hsp covalently linked to antigens. The Hsp fusions then induce cellular immune responses to the antigen present in the fusions, such as a viral protein. Preclinical data from both in vitro and in vivo models demonstrate that Hsp fusions trigger innate immune responses; the cells from the innate response signal the adaptive immune system to use its protection mechanisms. Stressgen seeks to develop a new class of therapeutic products based on this ability of Hsp fusions to induce antigen-specific CTL responses.

We call Hsp fusions "immunotherapeutics" based on their ability to stimulate the body's own immune system to attack a pathogen, as does a vaccine. Unlike existing preventative vaccines, Hsp fusions trigger the immune system to respond to infected cells and cancers already present in the body. Since preclinical research has shown that Hsp fusions induce CD8+ CTL responses in CD4+-deficient animals, even immunosuppressed individuals such as HIV+ patients and transplant recipients, may be treated effectively with our platform technology.

Potentially, Hsp fusions can be created with any number of disease-specific protein antigens. Our most developed product, HspE7, is a recombinant fusion protein composed of the HPV protein E7 and a bacterial Hsp. In all types of HPV infection, whether "low risk," including warts or "high risk," including pre-cancer and cancer, the E7 protein theoretically provides a precise target by which the immune system can recognize and attack HPV-infected cells. Induction of E7-specific cellular immunity by Hsp fusions offers a new approach to the immunotherapy of HPV-associated diseases.

In pre-clinical studies conducted using an animal model, administration of HspE7 has been shown to prevent the growth of, and cause the destruction of, tumors that express the HPV E7 protein. Only the fusion protein induces significant tumor regression and long-term survival in these studies. Neither the E7 antigen nor the Hsp alone, nor a mixture of the two, is effective. The requirement for a covalent attachment between the Hsp and the E7 protein may be explained by the presence of Hsp receptors on dendritic cells. By virtue of its covalent attachment to the Hsp, the E7 protein is targeted to the dendritic cell, internalized and presented as E7 peptides by the class I pathway to activate killer T cells. These E7-specific killer T cells may then be able to survey for and destroy E7 containing cancer cells.

Clinical observations made in phase II trials for AIN and genital warts indicate that treatment with HspE7 leads to disease improvement or clearance that is not restricted to lesions containing a specific type of HPV. These original and surprising findings demonstrate the potential for HspE7 to treat diseases caused by multiple HPV types. Although the E7 protein present in HspE7 was derived from HPV type 16, which is known to be associated with about half of all cervical cancers and about 20% of pre-cancerous lesions known as anogenital dysplasias, our clinical data strongly suggests that HspE7 can induce cross-reactive T cell responses in genital warts, which primarily are caused by HPV types 6 and 11.

HPV indications can be easily recognizable, like genital warts, or latent. Infected individuals with no visible symptoms may not be aware that they have a persistent viral infection, increasing their risk of developing complications and of transmitting the virus to others. HPV is highly contagious and can be spread even when condoms are used. Fifty to 75% of sexually active men and women acquire genital HPV infection at some point in their lives.

Although there are over 100 different types of HPV, most research focuses on the approximately one-third infecting genital epithelial tissue and primarily spread through sexual contact. Researchers differentiate among the HPV types using letter and number designations. The E7 protein from high-risk HPV types (associated with a high risk of cancer) is involved in the malignant transformation of infected epithelial cells. These HPV types cause premalignant and cancerous cervical and anal conditions, including high-grade and low-grade dysplasias and cancer. Low-risk types of HPV typically cause internal and external genital warts.

Approximately two-thirds of people who have sexual contact with a partner with genital warts develop warts themselves, usually within three months of contact, according to the U.S. National Institute of Allergy and Infectious Diseases (the NIAID). The incidence of genital warts is an estimated 1 million new cases in the U.S. each year, according to a July 1999 NIAID Fact Sheet. Of those patients, an estimated 67% are women. Although the lesions may spontaneously regress, recurrence is typical. The lesions also frequently reappear after treatment.

Recurrent Respiratory Papillomatosis is caused by the same types of papillomavirus that cause genital warts. In fact, the term papilloma means wart. Rather than infecting genital tissue, the papillomas in RRP occur primarily on the vocal cords of children born to mothers infected with HPV. The papillomas can spread into the trachea and lungs. Over 2,000 new cases of pediatric RRP and over 3,500 new cases of adult RRP are diagnosed annually in the U.S., according to a study published in 1995 based upon a survey of members of the American Society of Pediatric Otolaryngology, members of the American Bronchoesophagological Association and certified U.S. otolaryngologists. Patients with RRP can die from airway obstruction, cancerous transformation, overwhelming spread of the disease, growth of papillomas in the lungs or complications of surgical treatments. There are no drugs or immunotherapies approved for RRP in the U.S. Pediatric patients tend to have about 5 surgeries per year and some children have hundreds of procedures during their lifetime.

Cervical Intraepithelial Neoplasia, also known as cervical dysplasia, is characterized by the presence in the cervix of abnormal cells that often precede cervical cancer. The abnormal cells are associated with the malignant transformation of epithelial cells infected with HPV virus. Such cells can be detected through regular Pap smear screening. In the U.S. more than 1.2 million women a year are diagnosed with low-grade cervical dysplasia, according to National Cancer Institute estimates. Another 200,000 to 300,000 are diagnosed with high-grade cervical dysplasia in the U.S. each year, according to a December 1999 report of the Centers for Disease Control. Worldwide, the incidence is much larger. The current treatment for CIN, which involves local surgical techniques, is not always effective because it may not remove all dysplastic cells and does not treat the underlying viral infection. In addition, surgical treatments can result in complications such as reduced fertility.

CIN often precedes cervical cancer, a worldwide public health problem particularly in countries where routine Pap smears are not practiced. American Cancer Society estimates for 2002 predicted that approximately 13,000 women in the U.S. would be diagnosed with invasive cervical cancer and that about 4,100 patients would die from the disease. Globally there are approximately 500,000 new cases of cervical cancer identified each year, resulting in nearly 300,000 deaths. Cervical cancer is the second most important cancer in women after breast cancer, according to a World Health Organization February 1999 press release. Although death rates from cervical cancer have been decreasing, invasive cervical cancer continues to be associated with extreme morbidity.

Anal Intraepithelial Neoplasia is characterized by the presence of abnormal cells that may precede anal cancer. Data extrapolated from studies of homosexual and bisexual men and the anal cancer population suggests that there may be 500,000 new cases per year in the U.S. Patients are not commonly screened for AIN; however, there is increasing awareness of the condition. Current treatments for AIN, including surgical approaches, radiotherapy and chemotherapy, are ineffective.

All of the indications described above are associated with HPV, so are candidates for treatment with HspE7. We are also using our platform technology to create fusions of heat shock proteins with antigens from other sources. We are testing CoVal™ fusions of heat shock proteins with antigens from the viruses described below to determine whether to advance treatments for those indications into pre-clinical testing and clinical trials.

Chronic hepatitis B is a disease of the liver caused by the hepatitis B virus. Infection with HBV is characterized by jaundice, fatigue, abdominal pain and other symptoms, with many patients developing liver cirrhosis and cancer. Although safe and effective preventative vaccines exist, there are estimated to be 1,000,000 to 1,250,000 cases of chronic hepatitis B in the U.S., according to the Centers for Disease Control and Prevention. In addition, there are between 140,000 and 320,000 new cases of hepatitis B in the U.S. each year, resulting in 4,000 to 5,000 deaths according to the American Social Health Association. Worldwide, about 1,000,000 deaths are attributable to HBV infection and its complications annually, according to the World Health Organization. Due to the large infected population and small percentage of the public being vaccinated for the disease, the need for new and effective therapies for chronic hepatitis B virus infection remains great.

Hepatitis C causes symptoms similar to those of hepatitis B, but is caused by the hepatitis C virus. Chronic hepatitis C can cause cirrhosis, liver failure, and liver cancer. HCV is spread through contact with blood and other bodily fluids. Currently, there are six known hepatitis C genotypes, and more than 50 subtypes. The relative prevalence of different genotypes differs by geographic region. It is estimated that 3.9 million people in the U.S. (1.8% of the population) have been infected with HCV and that 2.7 million are chronically infected. Worldwide there is an estimated 200 million cases. In the U.S. 8,000 to 10,000 deaths each year are currently attributed to HCV. Although about 80% of patients are currently asymptomatic, researchers predict that over the next 10 to 20 years chronic hepatitis C will become a major burden on the health care system as patients progress to end-stage liver disease. The efficacy of current treatments varies depending upon the genotype of the virus, but no currently available therapy can eradicate the virus or do more than delay the progression of the disease. No vaccine is available.

Herpes Simplex Virus causes genital herpes. The prevalence of herpes simplex type-2 (HSV-2) has increased by 30% since the late 1970s and is now detectable in about one in five persons 12 years of age or older in the US, according to the NIAID. An estimated 45 million Americans are already infected with genital herpes, and there are an additional 500,000 to 1,000,000 new cases each year, the NIAID has written. Since HSV remains dormant in infected persons for their lifetime, genital herpes is a recurrent disease, consisting of alternating episodes of virus reactivation with virus shedding, followed by resolution of the outbreak and return to virus dormancy. Some episodes of reactivation are associated with skin blistering in the genital region, causing physical and psychological discomfort. Because most episodes of the infection are asymptomatic, people having an outbreak may not be aware that they are transmitting herpes. As a result, HSV-2 is expected to continue to spread rapidly. Except in newborns, genital herpes is not life-threatening. Nonetheless, it is distressing and can contribute to the spread of other sexually transmitted diseases, including HIV.

An estimated 850,000 to 950,000 people are infected with the Human Immunodeficiency Virus in the U.S. alone, according to Centers for Disease Control and Prevention estimates. There are approximately 40,000 new U.S. cases each year, according to the National Institutes of Health. Although there has been substantial progress in the management of HIV in recent years, significant issues remain regarding viral resistance to current drug therapies and drug toxicity. As a result, researchers and physicians are actively seeking novel therapeutics to manage this disease.

We are dedicating most of our resources to our HPV program to commercialize HspE7 as quickly as we can. The focus of our HspE7 development program has evolved over time to take advantage of the results from clinical trials, to ensure we are addressing the broadest potential market for the product, and to capitalize upon the resources of third-parties interested in using HspE7 to treat specific indications. We originally tested HspE7 as a non-surgical approach to reducing the risk of progression of CIN to cervical cancer. Because surgical treatments exist for CIN and cervical cancer, we realized that it would be easier to obtain regulatory approval for other HPV indications. We began focusing on AIN and anal cancer based on the advice of scientific advisors, the similarities of those conditions to CIN and cervical cancer, the clear unmet medical needs for the conditions and the lack of widely accepted standard treatments for them. The U.S. National Cancer Institute recognized the potential of HspE7 to prevent cancers caused by HPV. As a result, in 1999 its Division of Cancer Treatment and Diagnosis signed a Clinical Trials Agreement with us to sponsor clinical trials using HspE7.

Our cancer-related research indirectly led us to explore HspE7 for the treatment of genital warts. In the course of an AIN clinical trial, we discovered that genital warts regressed in patients with both AIN and genital warts. The size of the genital warts market made it more attractive commercially than AIN or CIN. To further accelerate the time to market, we sought a location in the body in which genital warts occurred for which we could receive orphan drug status. Since RRP is essentially genital warts of the upper airways, we evaluated the use of HspE7 for this life-threatening condition. As we had hoped, the U.S. Food and Drug Administration granted orphan drug status for HspE7 for the treatment of RRP. We continued to accrue clinical trials data regarding AIN and genital warts while we began an RRP trial.

Our AIN and genital warts data drew the interest of potential collaborators. In June 2002 we signed a collaboration agreement with Roche for the development of HspE7. We also signed a second agreement with the U.S. National Cancer Institute, in this case with the Division of Cancer Prevention, to sponsor additional clinical trials.

Currently, we are running an open-label RRP trial in pediatric patients requiring frequent surgery, Roche is designing additional genital warts trials, and the AIDS Malignancy Consortium of the National Cancer Institute is evaluating HspE7 in HIV-positive patients with high-grade anal dysplasia. Several other trials with HspE7 are planned. Based on our findings from the clinical trials we have run to date, advice from a Clinical Advisory Board, market research, and our experience with the regulatory approval process, we are targeting genital warts and RRP, as the first major markets for HspE7. We hope to expand the indications for HspE7 to AIN, anal cancer, CIN, and cervical cancer after the product is approved for genital warts.

Our clinical trials are conducted in the U.S., with the exception of a now discontinued trial in 14 patients with advanced cervical cancer that we began in Brazil. Our trials have generally used a 500 ug dose of HspE7 given once a month for three months. A low 3x100 ug dose was used in some early clinical trials. Various trials are on-going. We have released findings based on data from clinical trials including:

The results suggest that the 3x500 ug dose of HspE7 is active against multiple types of HPV. Data from these studies showed that:

Results from a double blind placebo controlled phase II trial in measurable external warts showed that, at six months:

Observations of complete response in genital warts patients during the time period 12 to 24 months from treatment, and of few or no recurrences to date, contrasts with the data for treatment of warts with surgery or topical therapy in which rapid recurrence is common.

Safety data for treatment with HspE7 continue to be accumulated. The predominant adverse experience noted from HspE7 treatment at various doses and schedules is injection site reaction, mild to moderate in severity, clearing in hours to days without treatment. Mild to moderate flu-like symptoms are also observed in some patients.

We are using our proprietary technology of fusing heat shock proteins to antigens to create Hsp fusions with antigens other than E7. Our most active early stage programs involve therapies for chronic hepatitis B infection and herpes simplex virus. We are compiling preclinical data to support an Investigational New Drug filing for a fusion of an Hsp and a selected HBV antigen. In mice our HBV fusions have been shown to elicit cytotoxic T lymphocytes (CTL) that recognize the HBV antigen, suggesting such T cells would be capable of killing HBV-infected cells. The T cells have also shown to produce the cytokine interferon gamma, which is known to have anti-viral activity. The results of these preclinical studies demonstrate the potential efficacy of Hsp-HBV antigen fusions in the immunotherapy of chronic HBV infection. We believe that our HBV program could offer hope in countering the disease's significant worldwide impact on human health.

We are assessing the development of Hsp fusion proteins for the immunotherapy of genital herpes. Presently, we are including a number of HSV-2 proteins in Hsp fusions. We will then test the Hsp-HSV antigen fusions in animal models for induction of immune responses to the HSV antigens. An immunotherapy that can induce cellular immunity specific for HSV-2 antigens may lead to a treatment for genital herpes to reduce the number or duration of reactivation episodes or prevent them entirely.

Compounds made with our fusion technology, which we have exclusively licensed from the Whitehead Institute for Biomedical Research, are also being tested for its potential to treat HIV. Whitehead scientists have demonstrated that an Hsp-HIV antigen fusion generates a humoral and cellular immune response to the specific HIV antigen in mice. Investigators at Whitehead Institute, the Massachusetts Institute of Technology (MIT) and Harvard University have applied for and received funding from the U.S. National Institute of Health to conduct further animal studies of this therapeutic.

Our intellectual property protection policy is to file and prosecute patent applications relevant to the inventions that we consider meaningful to our business. We also rely upon unpatented trade secrets, know-how and continuing technological innovation to develop and maintain a competitive position. We devote substantial management attention and resources to maintaining patents and licenses and conducting an assertive patent prosecution strategy.

We have a worldwide, exclusive license agreement with the Whitehead Institute for our core fusion technology, giving us rights to various patents, pending applications, continuation-in-part applications and their foreign counterparts. Pursuant to the license agreement we fund the prosecution of the patent applications, which currently include applications in the U.S., Canada, Europe and Japan. Two U.S. patents and a European patent based on these Whitehead applications were granted in January 2002; we are vigorously defending challenges to these patents, which cover Hsp fusions with viral (such as HIV) or cancer-associated antigens and their use as immunotherapeutics. Independently, we have filed additional patent applications directed to Hsp fusions with other viral antigens, including HPV E6 and E7, and their use as immunotherapeutics. We also hold issued U.S. patents related to the detection of elevated levels of Hsp expression. Our issued and exclusively licensed patents will expire on various dates between 2007 and 2020. Some of the U.S. patent applications received pre-GATT filing status, meaning that their terms extend for 17 years after the date of grant, rather than 20 years from the earliest date of filing.

Interpretation and evaluation of biopharmaceutical or biotechnology patent claims present complex and often novel legal and factual questions. We cannot be sure that our pending applications will result in issued patents, that the issued patents will be held valid and enforceable if challenged, or that a competitor will not be able to circumvent an issued patent by the development or adoption of a competitive non-infringing product or process.

We have two clinical trials agreements with the U.S. National Cancer Institute for the co-development of our lead product, HspE7, in the treatment of cancer. The NCI is the U.S. Government's principal institute for cancer research and training. Over 80% of all agents approved for the treatment of cancer by the FDA have been tested or developed under an NCI-sponsored program. The clinical trials agreements allow the NCI to collaborate with us to develop a general plan for clinical development of HspE7 for cancer-related indications, solicit clinical research protocols from independent investigators and cooperative research groups, and sponsor and fund their studies. The first clinical trial sponsored by the NCI, testing HspE7 in HIV-positive patients with high-grade anal dysplasia, began in December 2002. We are expected to provide clinical grade HspE7 for the investigators to use in their studies but do not provide funding. The collaboration with the NCI enables studies of HspE7 for the treatment of dysplasias and cancer to progress, while Roche and we focus on genital warts and RRP.

A third-party investigator from a university is running a phase I/II trial of HspE7 in cervical dysplasia. As with the NCI trials, we have access to data from the trial in return for providing HspE7.

We have a number of collaborative or sponsored research agreements that we believe provide us with important sources of research data and could lead to technology development opportunities. We have entered into an agreement with the National Institute of Allergy and Infectious Diseases to test our hepatitis B candidate in preclinical models. We are also sponsoring academic institutions to evaluate our hepatitis B candidate in animal models and to perform herpes simplex research with our CoVal™ fusions.

Roche has undertaken to provide clinical trial supplies of HspE7. In addition, we have a quantity of HspE7 that is sufficient to complete our on-going clinical trials. We are currently transferring process development and related manufacturing responsibilities to Roche from various independent contractors, in accordance with our HspE7 collaboration agreement. A quality controlled and quality assured process for producing HspE7, based on a set of standard operating procedures, analytical methods and specifications, will allow HspE7 to be manufactured in commercial quantities in accordance with current good manufacturing practice and other regulations. We expect to contract with third-parties for the process development and manufacture of additional heat shock proteins that we develop.

Our bioreagent business supplies biomedical research reagents to researchers in not-for-profit research organizations and commercial institutions worldwide. The primary products of the business involve antibodies, proteins, DNA products, ELISA kits, lysates and extracts, for use in studying cellular stress response pathways, including oxidative stress, apoptosis, neurobiology and more. Although we contract with third-party distributors in thirty-five countries, our primary markets are in North America, Europe and Asia. Sales have been approximately 65% from the U.S., 5% from Canada, 20% from Europe and 10% from the rest of the world, in each of the last three years. We do not believe that any single customer is material to our bioreagent business. Demand for our products tends to increase slightly when academic institutions in the Northern Hemisphere are in session.

We manufacture products for inventory and ship products shortly after the receipt of orders, and anticipate that we will continue to do so in the future. Accordingly, we currently do not have a significant backlog and do not anticipate that we will develop a material backlog in the future. We believe the quantity of inventory we maintain is adequate to ensure reasonable customer service while limiting the volatility of inventory levels. Inventory quantities can fluctuate significantly as we balance varying customer demand against fluctuating supplies of reagents available to us. We buy materials for our products from many suppliers, and we are not dependent on any one supplier or group of suppliers. Raw materials are generally readily available at competitive prices from a number of suppliers. We believe that we will be able to continue to acquire and produce our products in quantities sufficient to meet our customers' current requirements.

We require patent licenses to sell many of our products. Because our sales are spread over more than 400 products, with no class of products accounting for more than 10% of consolidated revenues in the last three years, we believe that no individual patent or license is material to our bioreagent business.

In the U.S. the Food and Drug Administration (FDA) regulates drugs and biological products. In Canada the Food and Drug Act (Canada), and the rules and regulations promulgated thereunder, govern the production and manufacturing of our products and our research and development activities; the Health Products and Food Branch (HPFB) Inspectorate enforces these rules and regulations. In

these and other jurisdictions, applicable drug licensing laws require carefully controlled research and testing of products, governmental review and approval of results prior to marketing therapeutic products, licensure of manufacturing facilities and adherence to good manufacturing practices during production.

The principal activities which must be completed before obtaining approval for marketing in the U.S. and Canada are the completion of (1) development of a well-controlled process of manufacturing, (2) preclinical studies of safety and pharmacology, and (3) studies of safety and efficacy in humans. Pre-clinical studies are conducted to test chemistry, pharmacology and efficacy. Successful pre-clinical results, which entail achieving potentially valuable pharmacological activity combined with an acceptably low level of toxicity, enable the manufacturer of the new drug to file an investigational new drug application to begin clinical trials involving humans. An investigational new drug application must be filed with and accepted by the FDA or HPFB, as applicable, before human clinical trials may begin.

Phase I clinical trials consist of testing a product in a small number of humans for its safety (toxicity), dose tolerance and pharmacokinetic properties including absorption, distribution, metabolism and elimination. Phase II clinical trials usually involve a larger patient population than is required for phase I trials and are conducted to evaluate the effectiveness of a product in patients having the disease or medical condition for which the product is indicated. These trials also serve to identify possible common short-term side effects and risks in a larger group of patients. Potential dosing regimens may also be evaluated during Phase II trials. Phase III clinical trials involve conducting tests in an expanded patient population at geographically dispersed sites to establish clinical safety and effectiveness. These trials usually involve comparison to a standard treatment or to no treatment. These trials also generate information from which the overall benefit-risk relationship relating to the drug can be determined and provide a basis for drug labeling.

Two key factors influencing the rate of progression of clinical trials are the rate at which patients can be accrued to participate in the research program and whether effective treatments are currently available for the disease the drug is intended to treat. Patient accrual is largely dependent upon the incidence and severity of the disease and the alternative treatments available.

Upon completion of all clinical studies, the results of these studies are submitted to the U.S. FDA as part of a biologics license application, in the case of a biological product, or to Canada's HPFB as part of a new drug submission, to obtain approval to commence marketing the product. In addition, we will need to file an application for an establishment license application for approval by the FDA or HPFB to produce a product. Preparing any of these regulatory submissions involves considerable data collection, verification and analysis. There can be no assurances that any submissions or applications will be approved on a timely basis or at all.

Even after a marketing approval is obtained, further studies, including post-market studies, may be required to provide additional data on safety and efficacy necessary to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. Also, the FDA or HPFB may require post-market surveillance programs to monitor a product's side effects. Results of post-marketing programs may limit or expand the further marketing of products. A serious problem with the safety or effectiveness of an approved drug or medical device may result in FDA or HPFB action requiring withdrawal of the product from the market and possible civil action. If we sought to have our product candidates approved as human prophylactic vaccines, the requirements would be even more onerous.

As well as receiving pre-licensing approval, manufacturing facilities must conform on an ongoing basis with Good Manufacturing Practices, or GMP. In complying with GMP, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full compliance. After the establishment is licensed for the manufacture of any product, manufacturers are subject to periodic inspections by regulatory authorities.

Whether or not FDA or HPFB approval has been obtained, approval of a product by comparable regulatory authorities in Europe and other countries will likely be necessary prior to commencement of marketing the product in such countries. Regulatory authorities in each country may impose their own requirements and may refuse to grant, or may require additional data before granting, an approval even though the relevant product has been approved by another authority. The regulatory authorities in developed countries have lengthy approval processes for pharmaceutical products. There can be no assurance that approvals will be granted on a timely basis, if at all, for any of our products.

We are also subject to various federal, state, local and international laws, regulations and recommendations relating to safe working conditions, laboratory manufacturing practices and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research work. We cannot predict whether additional government regulations material to our business might result from future legislation or administrative action.

We are subject to competition from products that use a different approach or means of accomplishing a therapeutic effect than our CoVal™ fusion products. Many, if not all, major pharmaceutical companies have research and product development programs targeting HPV, hepatitis B virus, herpex simplex virus or HIV. Many pharmaceutical companies are developing vaccines or immunotherapies that seek to stimulate the body's immune system to prevent or treat infectious disease or cancer. For example, in November 2002 Merck published positive results from a clinical trial for a vaccine against HPV type 16 and indicated it is working on a preventative vaccine against four strains of HPV. In the same month GlaxoSmithKline published positive results from a clinical trial for a herpes simplex vaccine for use in women who did not have antibodies to either HSV-1 and HSV-2—the vaccine did not work in women who had antibodies to HSV-1 or in men.

Various potential competitors are performing research and developing therapeutic products based on the intrinsic nature of stress proteins to assist the body in fighting infection and related cancers. While our technology focuses on heat shock proteins covalently fused to antigens, there are other ways to use heat shock proteins. Companies including Antigenics Inc., Peptor Ltd. and Mojave Therapeutics, Inc. are using stress protein-related approaches to stimulate or modulate the body's immune system. For example, Antigenics is injecting non-covalent Hsp-peptide complexes that have been isolated from individual patient's cancer cells to treat the specific cancer of that patient. In addition, Antigenics has initiated a phase I clinical trial to treat genital herpes with non-covalent complexes of a synthetic herpes virus peptide and a recombinant heat shock protein. Peptor is testing peptide fragments of the Hsp60 molecule to suppress T cells that are involved with autoimmune diseases like rheumatoid arthritis. Mojave is using complexes of antigens and recombinant heat shock proteins; its current clinical trials involve skin cancer and prostate cancer.

The competition in our industry may increase over time due to rapid and substantial change. Many of our competitors have greater human and financial resources dedicated to product development and human clinical testing than we do, as well as substantial marketing and financial resources. Acquisitions of, or investments in, competing biotechnology companies by large pharmaceutical companies could increase such competitors' financial, marketing and other resources. Technological developments could render our proposed products or technologies non-competitive.

To win market share our therapeutic products need to perform better than existing and new alternatives. The diseases we are targeting are currently managed through a variety of approaches. For example, genital warts are treated by topical creams and ointments, cryosurgery, freezing, electro-cauterization and laser treatment. Papillomas and cancers caused by RRP, AIN and CIN are treated with surgeries.

In the stress protein bioreagent market current competition is limited. A few companies have a broad line of competing products, such as Affinity Bioreagents Inc.; several larger companies have introduced a limited range of competing products. Many of our product licenses are non-exclusive, so competition from other suppliers could increase in the future.

As of January 31, 2003 we employed approximately 90 personnel, of which over 50 were engaged in, directly or indirectly, research and development efforts. Of the scientific persons employed, two hold an M.D., thirteen hold Ph.D.s, and the balance hold either M.Sc. or B.Sc. degrees or other diplomas. Our employees are not covered by any collective bargaining agreement. All employees are required to execute confidentiality and assignment of invention agreements as a condition of their employment.

Our annual report on Form 10-K and quarterly reports on Form 10-Q are available on our website, www.stressgen.com, free of charge, as soon as reasonably practicable after such material is filed with the U.S. and Canadian securities regulatory authorities. Our website also provides links for users to find our filings on the websites maintained by the U.S. and Canadian securities regulatory authorities. We consider those sites to be the appropriate sources for reports that are filed with the securities regulatory authorities of only the U.S. or only Canada, rather than with both countries. Paper copies of our most recent filings are available from our Investor Relations department free of charge upon request.

Before investing in our common stock you should carefully consider the following risk factors, the other information included herein and the information included in our other reports and filings. Our business, financial condition, and the trading price of our common stock could be adversely affected by these and other risks.

Our biotechnology business is still at an early stage of development. Significant additional research and development and clinical trials must be completed before our technology can be commercialized. We have not completed the development of any therapeutic products and, therefore, have not begun to market or generate revenues from the commercialization of any therapeutic products. We have undertaken only limited human clinical trials for some of our product candidates and we cannot assure you that the results obtained from laboratory or research studies will be replicated in human studies or that such human studies will not identify undesirable side effects. We cannot assure you that any of our products will meet applicable health regulatory standards, obtain required regulatory approvals or clearances, be produced in commercial quantities at reasonable costs, be successfully marketed or be profitable enough that we will recoup the investment made in such product candidates. None of our therapeutic product candidates are expected to be commercially available for several years. There is no precedent for the successful commercialization of products based on our CoVal™ fusion technology. It is possible that we will not successfully develop any therapeutic products.

We have not recorded any revenues from the sale of therapeutic products and have accumulated substantial net losses. We expect to incur continued losses for at least the next several years as we continue research and development, and clinical trials. To become profitable, we, either alone or with one or more partners, must develop, manufacture and successfully market our product candidates.

Our revenues from the production and sale of bioreagents, and the projected revenues and expense reimbursements from our HspE7 collaboration are not adequate to support all of the therapeutic product development programs in our business plan. We will need substantial additional funds to pursue further research and development; carry out clinical trials; obtain regulatory approvals; file, prosecute, defend and enforce our intellectual property rights and market our products. We will seek additional funds through public or private equity or debt financing, strategic transactions and/or from other sources. We could enter into collaborative arrangements for the development of particular products that would lead to our relinquishing some or all of our rights to the related technology or products.

Although we expect to seek additional funding when there are market opportunities, future funding may not be available on favorable terms or at all. If additional funding were not obtained, we would reduce, defer or cancel development programs, planned initiatives or overhead expenditures, to the extent necessary. The failure to fund our capital requirements would have a material adverse effect on its business, financial condition and results of operations.

Our Success Depends On Collaborative Partners, Licensees and Other Third Parties Over Whom We Have Limited Control

Due to the complexity of the process of developing therapeutics, our core business depends on our arrangements with pharmaceutical companies, corporate and academic collaborators, licensors, licensees and others for the research, development, clinical testing, manufacturing, marketing and commercialization of our products. We are transitioning a number of functions to Roche as a result of our June 2002 collaboration for the development and commercialization of HspE7. In addition, we have various research collaborations and outsource many other business functions such as clinical trials and manufacturing. We may not be able to establish or maintain collaborations that are important to our business on favorable terms, if at all, and such collaborations may not be successful.

There are a number of risks associated with our dependence on collaborative agreements with third parties. Our product development and commercialization efforts could be adversely affected if any collaborative partner terminates its agreement with us, causes delays, fails to timely develop or manufacture in adequate quantities a substance we need in order to conduct clinical trials, fails to adequately perform clinical trials, determines not to develop, manufacture or commercialize an end product to which it has or we have rights, or otherwise fails to meet its contractual obligations. Our collaborative partners could pursue other technologies or develop alternative products that could compete with our future products.

In both our therapeutic and our bioreagent businesses, we hold licenses from third parties for technologies and materials. We plan to acquire additional licenses from other companies and academic institutions. Pursuant to the terms of our license agreements, we could be obligated to diligently bring potential products to market, make milestone payments that, in some instances, could be substantial, and incur the costs of filing and prosecuting patent applications. We cannot assure you that these licenses will not terminate or that they will be renewed. In addition, we cannot assure you that these licenses will remain in good standing. Our licensors may attempt to terminate our licenses for their own business reasons.

The Profitability of Our Products Will Depend On Our Ability to Protect Our Proprietary Rights and Operate Without Infringing The Proprietary Rights of Others

The profitability of our products will depend in part on our ability to obtain and maintain patents and licenses, and preserve trade secrets, and the period our intellectual property remains exclusive. We must also operate without infringing the proprietary rights of third parties and without third parties

circumventing our rights. We have received U.S. and European patents and have filed and are actively pursuing applications for additional U.S. and other patents. The patent positions of pharmaceutical and biotechnology enterprises, including ours, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. For example, no consistent policy has emerged regarding the breadth of biotechnology patent claims that are granted by the U.S. Patent and Trademark Office or enforced by the U.S. federal courts. In addition, the scope of the originally claimed subject matter in a patent application can be significantly reduced before a patent is issued. The biotechnology patent situation outside the U.S. is even more uncertain, is currently undergoing review and revision in many countries, and may not protect our intellectual property rights to the same extent as the laws of the U.S. Because patent applications are maintained in secrecy in some cases, we cannot be certain that we or our licensors are the first creators of inventions described in our pending patent applications or patents or the first to file patent applications for such inventions.

Other companies may independently develop similar products and design around any patented products we develop. We cannot assure you that any of our patent applications will result in the issuance of patents, that we will develop additional patentable products, that the patents we have been issued will provide us with any competitive advantages, that the patents of others will not impede our ability to do business or that third parties will not be able to circumvent our patents. On October 22, 2002 Antigenics Inc. announced that it had filed an opposition in the European Patent Office to a European patent and requests for re-examination in the U.S. Patent Office of two U.S. patents we have licensed. Until we receive final results from the opposition and re-examination processes, we will not be able to assure you of the success of our planned vigorous defense of these patents.

A number of pharmaceutical, biotechnology, research and academic companies and institutions have developed technologies, filed patent applications or received patents on technologies that may relate to our business. If these technologies, applications or patents conflict with ours, the scope of our current or future patents could be limited or our patent applications could be denied. Our business may be adversely affected if competitors independently develop competing technologies, especially if we do not obtain, or only obtain narrow, patent protection. If patents that cover our activities are issued to other companies, we may not be able to obtain licenses at a reasonable cost, or at all, or develop alternative technology. If we are blocked from using our current technologies we may not be able to introduce, manufacture or sell our planned products.

Patent litigation is becoming widespread in the biotechnology industry. Such litigation may affect our efforts to form collaborations, to conduct research or development, to conduct clinical testing or to manufacture or market any products under development. We cannot assure you that our patents would be held valid or enforceable by a court or that competitor's technology or product would be found to infringe our patents. Our business could be materially affected by an adverse outcome to such litigation. Similarly, we may participate in interference proceedings declared by the U.S. Patent and Trademark Office or equivalent international authorities to determine priority of invention. We could incur substantial costs and devote significant management resources to defend our patent position or seek a declaration that the patents of others are invalid.

Much of our know-how and technology may not be patentable, though it may constitute trade secrets. We cannot assure you that we will be able to meaningfully protect our trade secrets. We cannot assure you that any of the existing confidentiality agreements with our employees, consultants, advisors or collaborators will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Collaborators, advisors or consultants may dispute the ownership of proprietary rights to our technology, for example by asserting that they developed it independently.

We Could Need to Conduct More Clinical Trials or Take More Time to Complete Our Clinical Trials Than We Originally Plan

Clinical trials vary in design by factors including their dosage, end points, length, controls, and numbers and types of patients enrolled. We may need to conduct a series of trials to demonstrate the safety and efficacy of our products. In addition, we may be required to determine whether our products delay or prevent disease recurrence. Clinical trials to show that a disease does not recur take longer to complete than clinical trials that end when patients stop having specific symptoms. The actual schedules for our clinical trials could vary dramatically from the forecasted schedules due to factors including conflicts with the schedules of participating clinicians and clinical institutions, delayed patient accrual and changes affecting supplies for clinical trials.

We have limited experience in conducting clinical trials. We rely on corporate collaborators, academic institutions and clinical research organizations to conduct, supervise, monitor and design some or all aspects of clinical trials involving our products. In addition, the NCI is sponsoring some HspE7 clinical trials. Since these trials depend on governmental participation and funding, we have less control over their timing and design. Delays in or failure to commence or complete any planned clinical trials could delay the ultimate timelines for product release. In addition, such delays could reduce investors' confidence in our ability to develop products, likely causing our stock price to decrease.

We May Not Be Able to Obtain the Regulatory Approvals or Clearances That Are Necessary to Commercialize Our Products

The U.S., Canada and other countries impose significant statutory and regulatory obligations upon the manufacture and sale of human therapeutic products. In order for our products to obtain marketing approval and clearance for each indication, our preclinical and clinical data and manufacturing facilities will need to meet complex criteria establishing the safety and efficacy of the ultimate products.

Our product candidates, some of which are currently in the early stages of development, will require significant additional development and pre-clinical and clinical testing prior to their commercialization. These steps and the process of obtaining required approvals and clearances can be costly and time-consuming. If our potential products are not successfully developed, do not prove to be safe and effective in clinical trials, or do not receive applicable regulatory approvals and clearances, or if there are delays in the process:

Governmental and regulatory authorities may approve a product candidate for fewer indications or narrower circumstances than we request or may condition approval on the performance of post-marketing studies for a product candidate. Even if we receive regulatory approval and clearance, our product candidates may later exhibit adverse side effects that limit or prevent their widespread use or that force us to withdraw those product candidates from the market. In addition, any marketed product and its manufacturer will continue to be subject to strict regulation after approval. Any unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including its withdrawal from the market.

If we fail to comply with applicable regulatory requirements at any stage during the regulatory process, we or our contract manufacturers may be subject to sanctions, including fines, product recalls or seizures, injunctions, refusal of regulatory agencies to review pending market approval applications

or supplements to approval applications, total or partial suspension of production, civil penalties, withdrawals of previously approved marketing applications and criminal prosecution.

The manufacturers of our products will be required to comply with applicable good manufacturing practices regulations, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance records and documentation. If the manufacturers cannot comply with regulatory requirements including applicable good manufacturing practice requirements, we may not be allowed to develop or market product candidates.

Competitors May Develop and Market Drugs That Are Less Expensive, More Effective or Safer, Making Our Products Obsolete or Uncompetitive

Many of our competitors and potential competitors have substantially greater product development capabilities and financial, scientific, marketing and human resources than ours. Technological competition from pharmaceutical companies and biotechnology companies is intense and is expected to increase. Other companies have developed technologies that could be the basis for competitive products. Some of these products have an entirely different approach or means of accomplishing the desired therapeutic effect than products being developed by us and may be more effective and less costly than the products developed by us. Competitors may succeed in developing products earlier than us, obtaining approvals and clearances for such products more rapidly than us, or developing products that are more effective than ours. In addition, other forms of medical treatment may be competitive with our products. Our technology or products may become obsolete or uncompetitive.

Our products may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any product that we may develop will depend on a number of factors, including establishment and demonstration of clinical efficacy and safety, cost effectiveness of the products, their potential advantage over alternative products and marketing and distribution support for the products.

Our sales experience is limited to the sale of our bioreagents. To directly market and distribute any pharmaceutical products we may develop, we or our collaborators, will need a substantial marketing and sales force with appropriate technical expertise and supporting distribution capabilities. We may not be able to establish sales, marketing and distribution capabilities of our own or enter into arrangements with third parties on terms that are acceptable to us. If marketing and sales through partnering arrangements is not successful and we do not successfully develop internal marketing and sales expertise, our ability to generate revenue from product sales will be limited.

We May Encounter Difficulties in Developing Manufacturing Capabilities and Facilities or Entering into Contracts for Manufacturing with Third Parties

Our manufacturing experience in bioreagents is not directly applicable to the manufacture of therapeutic products. We have not yet introduced any therapeutic products and have no manufacturing experience for immunotherapies. Before our products can be profitable, they need to be produced in commercial quantities in a cost-effective manufacturing process that complies with regulatory requirements. We do not have facilities for the production of the products we are developing so depend on the manufacturing capabilities of collaborators. Currently, we anticipate that Roche will manufacture our HspE7 product. If this situation changes and we cannot contract for large-scale manufacturing capabilities on acceptable terms, or if there are delays or difficulties in manufacturing, we may not obtain regulatory approval or there may be shortages of our products.

If we chose to develop our own commercial manufacturing facilities, we would need substantial more funds than we currently have. We would also need to hire additional management and technical personnel with experience conducting manufacturing in accordance with applicable regulations of the U.S. Food and Drug Administration and Health Canada's Health Products and Food Branch Inspectorate. Efforts to develop facilities for commercial production might not be successful.

Production of our products could require raw materials which are scarce or which can be obtained from a limited number of sources. If our manufacturers were unable to obtain adequate supplies of such raw materials, the development, regulatory approval and marketing of our products could be delayed.

Our Operations Involve Risks Which Could Subject Us to Damages Resulting from Accidental Contamination or Injury

We conduct human clinical trials, including trials in children, which may have unforeseen long-term health implications. We have only limited amounts of product liability insurance for our clinical trials. We may not correctly anticipate or be able to maintain on acceptable terms the level of insurance coverage that would adequately cover potential liabilities from proposed clinical trials. This type of insurance is expensive, difficult to obtain and may not be available in the future. If we cannot obtain sufficient insurance coverage or other protection against potential product liability claims, we may not be able to commercialize potential products. If any liabilities from a claim exceed the limit of our insurance coverage, we may not have the resources to pay them.

Our research and development processes involve the controlled use of hazardous and radioactive materials. We are subject to federal, provincial and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. The risk of accidental contamination or injury from handling and disposing of such materials cannot be completely eliminated. In the event of or an accident involving hazardous or radioactive materials, we could be held liable for any damages that result. We are not insured with respect to this liability. Such liability could exceed our resources. In the future we may be required to incur significant costs to comply with environmental laws and regulations.

Our Success Depends On Our Ability To Attract and Retain Qualified Personnel

We depend on a core management and scientific team. The loss of any of these individuals may prevent us from achieving our business objective of commercializing our product candidates. Our future success will also depend in large part on our continued ability to attract and retain other highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical testing and government regulation. We face competition for personnel from other companies, universities, public and private research institutions, government entities and other organizations. If we are unsuccessful in our recruitment and retention efforts, our business operations will suffer.

We Will Depend Upon the Availability of Reimbursement From Third-Party Payors Who Are Increasingly Challenging the Price and Examining the Cost Effectiveness of Medical Products and Services

Sales of our products will depend in part upon the availability of reimbursement from third-party payors, including government health administration authorities, managed care providers, private health insurers and other organizations. These third-party payors increasingly attempt to contain costs by challenging the price of products and services and limiting the coverage and level of reimbursement for pharmaceutical products. Third-party reimbursement for our products may be inadequate to enable us to maintain prices that provide a return on our product development investment. Governments continue to propose and pass legislation designed to reduce healthcare costs. This legislation could

further limit reimbursement. If government and third-party payors do not adequately reimburse patients for our products, there may not be a market for the products.

As is typical for biotechnology companies without a Food and Drug Administration approved product on the market, our share price has been highly volatile in the past and is likely to continue to be volatile. The price of our shares could be materially affected by factors including the announcement of technological innovations, the release of publications, the announcement of clinical trials results by us or our competitors, the development of new commercial products, changes affecting patents or exclusive licenses, changes in regulations, the release of financial results, public concerns over risks relating to biotechnology, future issuances of shares by us, sales of shares by our shareholders and changes in analyst recommendations.

The volatility of our stock may be heightened while it is traded primarily on the Toronto Stock Exchange, which attracts primarily Canadian shareholders. Because some institutional investors invest in Toronto Stock Exchange companies in proportion to their weight on that index, changes within the S&P/TSX Composite Index may also increase volatility in our share price. We continue to explore a cross-listing on the Nasdaq or a U.S. exchange, but can provide no assurances regarding the timing or ultimate results of such a transaction.

Most of our executive, clinical research, development, regulatory affairs and financial functions are provided by our subsidiary, Stressgen Biotechnologies, Inc., which has offices in San Diego, California and Collegeville, Pennsylvania. Our principal research facilities are in Victoria, British Columbia, together with our Stressgen Bioreagents Limited Partnership operations. We lease approximately 5,500 square feet of office space in San Diego under a lease that expires in January 2004. Our Collegeville lease approximates 5,000 square feet and expires in December 2004. In Victoria we have approximately 25,000 square feet of office, research and manufacturing space under a lease that expires at the end of 2005.

As of the date hereof, we are not a party to any material legal proceedings. From time to time we are involved in certain litigation arising out of our operations.

We did not submit any matters to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2002.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common shares are listed and posted for trading in Canada on The Toronto Stock Exchange under the symbol "SSB". The following table sets forth, for the periods indicated, the high and low sales prices of the common shares, as reported. All amounts following are expressed in Canadian dollars unless otherwise indicated.

		High	Low
2002
	Fourth Quarter	2.75	1.25
	Third Quarter	4.05	2.26
	Second Quarter	4.59	3.25
	First Quarter	5.79	3.92
2001
	Fourth Quarter	4.85	3.15
	Third Quarter	5.80	2.77
	Second Quarter	6.92	4.55
	First Quarter	7.19	4.30

On January 31, 2003, the closing price of the Company's common shares as reported by The Toronto Stock Exchange was $1.71 per share. We had 113 registered holders, 25 of whom were residents of the U.S. Of the approximately 60,244,000 common shares outstanding, the portion held by registered holders in the U.S. was approximately 6,417,000 or 11%.

There were approximately 9,000 holders of our common shares as of the most recent annual general meeting of shareholders in June 2002.

We have not declared or paid any dividends on our common shares since inception. We anticipate that all available cash will be needed to finance the expansion of our business and have no plans to pay dividends in the foreseeable future.

As of December 31, 2002 we had two equity compensation plans, a 1996 Share Incentive Plan and a 2001 Equity Incentive Plan. Both plans were approved by our shareholders. The following table aggregates the data from the two plans:

Number of securities to be issued upon exercise of outstanding options (a)		Weighted-average exercise price of outstanding options (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
4,304,563		$4.69		1,385,167

There is no law, governmental decree or regulation in Canada that restricts the export or import of capital, or which would affect our remittance of dividends or other payments to non-resident holders of our common shares, other than withholding tax requirements.

There is no limitation imposed by Canadian law or the charter or other constituent documents of Stressgen on the right of non-residents to hold or vote our common shares, other than those imposed by the Investment Canada Act (Canada), or the ICA.

The ICA requires each individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a "Canadian" as defined in the ICA who commences a new business activity in Canada or acquires control of an existing Canadian business, where the establishment or acquisition of control is not a reviewable transaction, to file a notification with Industry Canada. The ICA generally prohibits implementation of a reviewable transaction by a non-Canadian unless after review the minister responsible for the ICA is satisfied that the investment is likely to be of net benefit to Canada. An investment in our common shares by a non-Canadian would be reviewable under the ICA if it were an investment to acquire control of Stressgen and the value of our assets of was $5 million or more. Higher limits apply for acquisitions by or from World Trade Organization member country investors.

The acquisition of a majority of the voting interests of an entity or of a majority of the undivided ownership interests in the voting shares of an entity that is a corporation is deemed to be acquisition of control of that entity. The acquisition of less than a majority but one-third or more of the voting shares of a corporation or of an equivalent undivided ownership interest in the voting shares of the corporation is presumed to be acquisition of control of that corporation unless it can be established that, upon the acquisition, the corporation is not controlled in fact by the acquiror through the ownership of voting shares. The acquisition of less than one-third of the voting shares of a corporation or of an equivalent undivided ownership interest in the voting shares of the corporation is deemed not to be acquisition of control of that corporation. Certain transactions in relation to our common shares would be exempt from review from the ICA, including an:

The ICA was amended with the Act to Implement the Agreement Establishing the World Trade Organization (Canada) to provide for special review thresholds for World Trade Organization member country investors. Under the ICA, as amended, an investment in our common shares by an investor from a country which is a member of the WTO would be reviewable only if it were an investment to acquire control of the company and the value of the assets of the company was equal to or greater than a specified amount, which increases in stages. As at December 31, 2002, the review threshold was $218,000,000. This amount is subject to an annual adjustment on the basis of a prescribed formula in the ICA to reflect inflation and real growth within Canada.

The following is a summary of certain Canadian federal income tax considerations generally applicable to holders of common shares who, for purposes of the Income Tax Act (Canada) (the

"Canadian Tax Act"), deal at arm's length and are not affiliated with Stressgen, hold such shares as capital property, do not use or hold, and are not deemed to use or hold, the common shares in connection with a trade or business carried on, or deemed to be carried on, in Canada at any time, have not been at any time residents of Canada for purposes of the Canadian Tax Act and are residents of the United States of America ("U.S. Residents") under the Canada-U.S. Income Tax Convention (1980) (the "Convention"). The common shares will generally be considered to be capital property of holders unless such shares are held in the course of carrying on a business, or in an adventure or concern in the nature of trade. Furthermore, this summary does not apply to any holder which carries on an insurance business in Canada and elsewhere, in respect of the common shares that are effectively connected with the holder's Canadian insurance business or that are "designated insurance property" as defined in the Canadian Tax Act.

This summary is of a general nature only and is not intended to be, and should not be construed to be, legal, business or tax advice to any holder of common shares or prospective holder of common shares and no opinion or representation with respect to any tax consequences, including, but not limited to, Canadian federal, Canadian provincial or U.S. tax consequences, is made to any particular holder of common shares or prospective holder of common shares. Accordingly, holders of common shares and prospective holders of common shares should consult with their own tax advisers for advice with respect to the tax consequences to them having regard to their own particular circumstances, including any consequences of purchasing, owning or disposing of common shares arising under Canadian federal, Canadian provincial, U.S. Federal, U.S. state or local tax laws or tax laws of jurisdictions outside the U.S. or Canada. No advance income tax ruling has been requested or obtained from the Canada Customs and Revenue Agency to confirm the tax consequences of any of the transactions described herein.

This summary is based on the current provisions of the Canadian Tax Act and the regulations thereunder (the "Regulations"), proposed amendments to the Canadian Tax Act and/or Regulations publicly announced by the Minister of Finance (Canada) prior to the date hereof (the "Proposed Amendments"), and the provisions of the Convention as in effect on the date hereof. No assurance can be given that the Proposed Amendments will be entered into law in the manner proposed, or at all.

This summary is not exhaustive of all possible Canadian federal income tax consequences for U.S. Residents and does not take into account or anticipate any changes in law, whether by legislative, administrative, governmental or judicial decision or action, nor does it take into account Canadian provincial, U.S. or foreign tax considerations which may differ significantly from those discussed herein. No assurances can be given that subsequent changes in law or administrative policy will not affect or modify the opinions expressed herein.

A holder will not be subject to tax under the Canadian Tax Act in respect of any capital gain on a disposition or deemed disposition of common shares (including the death of the holder) unless at the time of such disposition such shares constitute taxable Canadian property of the holder for purposes of the Canadian Tax Act and such holder is not entitled to relief under an applicable tax treaty. The common shares will generally not constitute taxable Canadian property of a holder at the time of a disposition of such shares provided (1) such shares are listed on a prescribed stock exchange (which includes the Toronto Stock Exchange and would currently include the American Stock Exchange or Nasdaq), (2) the holder does not use or hold or is not deemed to use or hold, such shares in connection with carrying on a business in Canada, and (3) the holder, persons with whom such holder does not deal at arm's length, or the holder and such persons, has not owned (taking into account any interest in or option in respect of the shares) 25% or more of the issued shares of any class or series of our share capital at any time within the 5 years preceding the date of disposition. In any event, under the Convention, gains derived by a holder who is a resident of the U.S. (within the meaning of the Convention) from the disposition of common shares will generally not be taxable in Canada unless the value of the common shares is derived principally from real property situated in Canada. If the

common shares held by a holder do not constitute taxable Canadian property or if a capital gain in respect of the common shares would because of a tax treaty be exempt from tax under the Canadian Tax Act, any capital loss arising upon the disposition of the common shares will not be available to be used to offset a capital gain realized in respect of another property, which may be subject to tax under the Canadian Tax Act. To the extent the common shares disposed of constitute taxable Canadian property, the holder will be required to file a Canadian tax return, even if the gain arising from such a disposition is exempt from tax because of a tax treaty.

Amounts in respect of common shares paid or credited or deemed to be paid or credited as, on account or in lieu of payment of, or in satisfaction of, dividends to a U.S. Resident will generally be subject to Canadian non-resident withholding tax at the rate of 25%. Currently, under the Convention the rate of Canadian non-resident withholding tax will generally be reduced to: (i) 5% of the gross amount of dividends if the beneficial owner is a company (other than a limited liability company) that is resident in the U.S. and that owns at least 10% of our voting stock; or (ii) 15% of the gross amount of dividends if the beneficial owner is a resident of the U.S. but does not qualify for the 5% withholding rate.

The following summary is a general description of the material United States federal income tax consequences of the purchase, ownership and disposition of common shares by U.S. Holders (as defined below). The tax consequences of an investment in the common shares by persons who are not U.S. Holders may be expected to differ substantially from the tax consequences discussed herein. This summary does not address all potentially relevant U.S. federal income tax matters. This description is intended for general information purposes only and is based on the United States Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect on the date hereof and all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax considerations discussed herein. This summary does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation, which, if enacted, could be applied, possibly on a retroactive basis, at any time. The tax treatment of a holder of common shares may vary depending upon his particular situation. Certain holders (including, but not limited to, persons that are not U.S. Holders, banks, insurance companies, tax-exempt organizations, financial institutions, persons subject to the alternative minimum tax, real estate investment trusts, regulated investment companies, persons or entities that have a "functional currency" other than the U.S. dollar, shareholders who acquired their stock through the exercise of employer stock options, and broker-dealers) may be subject to special rules not discussed below. The following summary is limited to U.S. Holders who will hold the common shares as "capital assets" within the meaning of Section 1221 of the Code, and do not actually or constructively own 10% or more of our voting stock. The discussion below does not address the effect of any state, local or foreign tax law on a holder of the common shares.

This summary is for general information only and it is not intended to be, nor should it be construed to be, legal or tax advice to any particular U.S. Holder of common shares. No opinion or representation with respect to the United States federal income tax consequences to any such U.S. Holder is made. Accordingly, prospective investors should consult their own tax advisors about the federal, state, local, and foreign tax consequences of purchasing, owning and disposing of common shares.

As used herein, the term "U.S. Holder" means (i) an individual who is a citizen or resident of the United States, (ii) a partnership, corporation or other entity organized in or under (or treated for federal income tax purposes as organized in or under) the laws of the United States or any state thereof, (iii) an estate subject to United States federal income taxation without regard to the source of its income, and (iv) a trust if (a) a U.S. court is able to exercise primary supervision over the trust's administration and (b) one or more U.S. fiduciaries have the

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File No. 333-12570

Yukon Territory, Canada (State or Other Jurisdiction of Incorporation or Organization)		N/A (IRS Employer Identification No.)
350-4243 Glanford Avenue Victoria, British Columbia V8Z 4B9
Parent of Stressgen Biotechnologies, Inc. 10241 Wateridge Circle, Suite C-200 San Diego, California (Address of Principal Executive Offices)		92121 (Zip Code)

Item 1.	BUSINESS	1
Item 2.	PROPERTIES	20
Item 3.	LEGAL PROCEEDINGS	20
Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	20
Item 5.	MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	21
Item 6.	SELECTED FINANCIAL DATA	27
Item 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30
Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	35
Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	36
Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	57
Item 10.	OUR DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES	57
Item 11.	COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS	62
Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	67
Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	68
Item 14.	CONTROLS AND PROCEDURES	69
Item 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K	69