S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on December 23, 2009.

Registration No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TENGION, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   2836   20-0214813

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

2900 Potshop Lane, Suite 100

East Norriton, PA 19403

(610) 292-8364

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Steven Nichtberger, MD

President and Chief Executive Officer

Tengion, Inc.

2900 Potshop Lane, Suite 100

East Norriton, PA 19403

(610) 292-8364

 

 

Copies to:

 

Kevin T. Collins, Esq.

Martin C. Glass, Esq.

Jason M. Casella, Esq.

Goodwin Procter LLP

The New York Times Building

620 Eighth Avenue

New York, NY 10018

Telephone: (212) 813-8300

Facsimile: (212) 355-3333

 

Joseph W. La Barge, Esq.

Executive Director and Corporate Counsel

Tengion, Inc.

2900 Potshop Lane, Suite 100

East Norriton, PA 19403

(610) 292-8364

 

David W. Pollak, Esq.

David C. Schwartz, Esq.

Morgan, Lewis & Bockius LLP

101 Park Avenue

New York, NY 10178

Telephone: (212) 309-6000

Facsimile: (212) 309-6001

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    ¨    Accelerated filer                    ¨
Non-accelerated filer    x  (Do not check if a smaller reporting company)    Smaller reporting company ¨

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of
Securities to Be Registered
  Proposed
Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee

Common Stock, par value $0.001 per share

  $40,250,000   $2,870

 

 

(1)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933.

(2)

Includes shares of common stock that the underwriter has an option to purchase to cover over allotments, if any.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated December 23, 2009

 

 

 

            Shares

 

 

TENGION, INC.

 

 

  LOGO

Common Stock

 

$             per share

 

 

 

•   Tengion, Inc. is offering              shares.

 

•   We anticipate that the initial public offering price will be between $             and $             per share.

  

•   This is our initial public offering, and no public market currently exists for our shares.

 

•   Proposed trading symbol: Nasdaq Global Market—TNGN

 

 

 

This investment involves risk. See “Risk Factors” beginning on page 9.

 

 

 

 

 

     Per Share    Total

Public offering price

   $                $            

Underwriting discount

   $    $

Proceeds, before expenses, to Tengion

   $    $

 

 

 

 

The underwriter has a 30-day option to purchase up to              additional shares of common stock from us to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved of anyone’s investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Piper Jaffray

 

The date of this prospectus is                     , 2010


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TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   9

Special Note Regarding Forward-Looking Statements

   28

Use of Proceeds

   29

Dividend Policy

   30

Capitalization

   31

Dilution

   32

Selected Financial Data

   34

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   36

Business

   50

Management

   75

Certain Transactions With Related Persons

   98

Principal Stockholders

   100

Description of Capital Stock

   102

Shares Eligible For Future Sale

   107

Underwriting

   109

Legal Matters

   112

Experts

   112

Change in Accountants

   112

Where You Can Find More Information

   113

Index to Financial Statements

   F-1

 

 

 

Unless otherwise stated, all references to “us,” “our,” “Tengion,” “we,” the “Company” and similar designations refer to Tengion, Inc. Tengion® and the Tengion logo® are our registered trademarks and Tengion Neo-Bladder Augment, Tengion Neo-Urinary Conduit, Tengion Neo-Bladder Replacement, Tengion Neo-Vessel and Tengion Neo-Kidney are our trademarks. Other names are for informational purposes only and may be trademarks of their respective owners.

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not authorized anyone to provide you with additional or different information. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Tengion

We believe we are the only regenerative medicine company focused on discovering, developing, manufacturing and commercializing a range of replacement organs and tissues, or neo-organs and neo-tissues. We currently create these functional neo-organs and neo-tissues using a patient’s own cells, or autologous cells, in conjunction with our Organ Regeneration Platform. We believe our proprietary product candidates harness the intrinsic regenerative pathways of the body to regenerate organs and tissues that are native-like, or substantially similar to native organs and tissues. We manufacture our product candidates in our scalable facilities using efficient and repeatable proprietary processes and we have implanted our neo-organs in clinical trials. We intend to develop our technology to address unmet medical needs in urologic, renal, gastrointestinal and vascular diseases.

Our lead product candidate, the Neo-Urinary Conduit, is an autologous implant that catalyzes regeneration of native-like bladder tissue for bladder cancer patients requiring a urinary diversion following bladder removal, or cystectomy. This tubular conduit passively transports urine from the ureters, through a hole in the abdomen, or stoma, into a removable, disposable bag, or ostomy bag. We have an effective investigational new drug application, or IND, and expect to start a Phase I clinical trial for this product candidate in the first half of 2010 in bladder cancer patients. We have also applied our technology in two Phase II clinical trials for our Neo-Bladder Augment for the treatment of neurogenic bladder, or dysfunctional bladder due to some form of neurological disease or condition. Our Neo-Urinary Conduit leverages recent advances in our technology platform that enable us to produce this product candidate more quickly and efficiently, and less expensively, than our Neo-Bladder Augment, enabling us to address larger market opportunities. Our product pipeline includes several candidates in early stage development, such as our Neo-Kidney Augment for patients with advanced chronic kidney disease, or CKD.

Our Organ Regeneration Platform

Our Organ Regeneration Platform is based on extensive work that began in the early 1990s at Children’s Hospital Boston and Massachusetts Institute of Technology, and continued at the Wake Forest Institute for Regenerative Medicine and our company. This platform involves the following steps:

 

   

Isolation and expansion.    We receive a small tissue sample, generally by routine biopsy, and isolate the necessary committed progenitor cells, which are relevant to a specific organ or tissue type. Committed progenitor cells have not yet developed into a single cell type and retain the ability to promote regeneration. We then use our proprietary cell growth process to grow, or expand, the progenitor cells.

 

   

Seeding and growth.    We place, or seed, these expanded cell populations on a bioabsorbable scaffold and put the seeded structure in a bioreactor, or a closed container used for enhancing biological growth under controlled conditions.

 

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Implantation.    The neo-organ or neo-tissue is shipped by a standard overnight courier service and implanted by a surgeon using standard surgical procedures.

 

   

Regeneration.    Based on clinical and preclinical data, we believe that our implanted product candidates serve as templates for the body to regenerate native-like organs and tissues. Blood vessels and nerves grow into the implanted neo-organ or neo-tissue and the scaffold is gradually absorbed by the body. In preclinical tests, we have observed that the newly grown tissue integrates with its surroundings and becomes substantially indistinguishable over time from the native organ. Clinical results indicate that the body regulates the growth and development of the organ to ensure that it is not under- or over-developed.

Our Strategy

Our goal is to become the leading regenerative medicine company focused on the development and commercialization of neo-organs and neo-tissues for a variety of diseases. To achieve this objective, we intend to:

 

   

Rapidly advance our Neo-Urinary Conduit.

 

   

Leverage our Organ Regeneration Platform to develop additional neo-organs and neo-tissues, such as our Neo-Kidney Augment.

 

   

Become a fully integrated company with discovery, development, manufacturing and marketing capabilities.

Initial Market Opportunities

Bladder Cancer. According to the National Cancer Institute, bladder cancer is the sixth most common form of cancer in the United States with approximately 10,000 cases annually requiring complete removal of the bladder. Following bladder removal, patients require some form of urinary diversion. Most patients are currently treated by using a segment of bowel tissue to construct a conduit for urine to exit from the body into an ostomy bag. In its simplest form, the reconstruction involves creating a tubular structure out of bowel tissue and then connecting it to the ureters at one end and the skin at the other. The other diversionary option for patients is the creation of a continent reservoir out of bowel tissue.

Neurogenic Bladder. Current treatments for neurogenic bladder include medical management through a combination of medication and clean intermittent catheterization and, in advanced cases, surgery. Based upon our analysis of various hospital inpatient and discharge databases, we believe there are approximately 1,200 bladder augmentations using bowel tissue to augment the bladder, or enterocystoplasy, performed in the United States each year and approximately 1,100 in the European Union.

Limitations of Current Therapies

While there is variation across procedures and patient types, there are risks and complications common to all procedures that rely on harvesting bowel tissue and placing it in the urinary tract.

 

   

Bowel complications.  Complications related to the bowel surgery typically consist of leaks, fistulas and obstructions. The loss of bowel tissue can also result in anemia and neurologic abnormalities.

 

   

Absorption issues.  Use of bowel tissue often leads to electrolyte and metabolic imbalances.

 

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Infection.  Persistent and recurrent infections are common in patients with bowel tissue reconstruction.

 

   

Mucus.  Bowel tissue repositioned in the urinary tract secretes mucus into the urine.

 

   

Cancer.  Malignancy, although rare, is a well-recognized complication following enterocystoplasty.

Our Solutions

The Tengion Neo-Urinary Conduit

Our lead product candidate, the Neo-Urinary Conduit, is intended to replace the use of bowel tissue in bladder cancer patients requiring a non-continent urinary diversion after bladder removal. We expect that this product candidate will avoid complications such as urine absorption, infection and mucus secretion associated with the use of bowel tissue in the urinary tract, as well as the issues that may arise from the surgical procedure involved in harvesting bowel tissue. Our Neo-Urinary Conduit is produced using smooth muscle cells from a routine fat biopsy and not cells from the diseased bladder, eliminating the risk of reintroducing cancerous cells from the bladder into the patient. We have an effective IND and expect to begin a single-center Phase I clinical trial in the first half of 2010 in bladder cancer patients. This trial will be an open-label, single-arm study in up to five patients, which will allow optimization of the surgical procedure and post-surgical care in a controlled setting. While we have not explored later stage development with the Food and Drug Administration, or FDA, we believe that if this first study is successful, we may be able to move directly to a pivotal study as the next step in our regulatory pathway for our Neo-Urinary Conduit.

Principal observations of our Neo-Urinary Conduit in preclinical animal models have shown:

 

   

Implantation of our Neo-Urinary Conduit results in the formation of a functional conduit.

 

   

By three months post-implantation, the scaffold is replaced by native-like bladder tissue consisting of urothelium, submucosa and smooth muscle cells.

 

   

There is no evidence of abnormal cell growth, tissue development or immune response, or adverse systemic effects.

 

   

Our Neo-Urinary Conduit regenerates native-like bladder tissue with complete mucosal lining at the ureteral and skin junctions.

These studies suggest that our Neo-Urinary Conduit may be safe and effective for treating patients who are undergoing cystectomy.

Development of our Neo-Urinary Conduit came as a natural extension of our clinical development experience with our Organ Regeneration Platform in two Phase II studies for our Neo-Bladder Augment. Important improvements in our Organ Regeneration Platform, made concurrently with the development of our Neo-Bladder Augment, greatly simplify the development of our Neo-Urinary Conduit and enhance its commercialization prospects. Only one cell type, smooth muscle cells, is needed for our Neo-Urinary Conduit, compared to two cell types used in our Neo-Bladder Augment, simplifying the procedure and reducing both cost and production time by approximately 50%. We can now produce our Neo-Urinary Conduit in four weeks or less, enabling us to meet the typical clinical timeline for bladder cancer patients undergoing cystectomy. Patients receiving a

 

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conduit represent a market approximately ten times larger than that for neurogenic bladder augmentation. As a result, we are devoting a significant portion of our resources to completing the development of our Neo-Urinary Conduit.

The Tengion Neo-Bladder Replacement

We believe that our Neo-Bladder Replacement, similar to our Neo-Urinary Conduit, will enable patients to avoid the complications associated with removal of bowel tissue and its subsequent use as a bladder replacement. Our Neo-Bladder Replacement, when implanted in the body, is intended to serve as a template that recruits other cells to develop a regenerated bladder. Principal observations of our Neo-Bladder Replacement in large animal models were consistent with those of our Neo-Urinary Conduit, and also showed:

 

   

All animals demonstrate continence upon removal of the catheter 21 days after surgery.

 

   

Implantation of our Neo-Bladder Replacement results in the formation of a compliant and functional bladder, with demonstrated nerve growth into the tissue.

 

   

The regenerated bladder achieves volumes typical of a native bladder and demonstrates an increase in capacity to accommodate animal growth.

Based upon these preclinical studies, we believe our Neo-Bladder Replacement may provide patients with a functioning replacement bladder, thus enabling them to void urine with no need for a stoma or ostomy bag. We believe we have completed all preclinical development necessary to prepare an IND for our Neo-Bladder Replacement.

The Tengion Neo-Bladder Augment

Our Neo-Bladder Augment is intended to supplement the patient’s existing bladder and promote regeneration of healthy bladder tissue in patients suffering from neurogenic bladder. Based upon the long-term data obtained as part of an academic clinical experience published in The Lancet, a leading medical journal, and the results of our Phase II clinical trials, we believe our Neo-Bladder Augment may provide the benefits of enterocystoplasty without the associated complications. We currently create our Neo-Bladder Augment by seeding a combination of urothelium and smooth muscle cells cultured by our scientists from the patient’s bladder onto our proprietary bioabsorbable scaffold.

We have conducted two open-label, multi-center Phase II clinical trials of our Neo-Bladder Augment for the treatment of neurogenic bladder in pediatric and adult patients. In February 2009, the FDA placed our IND on clinical hold as a result of certain serious adverse events, or SAEs. We submitted a complete response in June 2009 and the FDA released the clinical hold in July 2009 with no recommended changes to our protocol, product candidate or implantation procedure.

These trials confirmed that we can translate the academic experience underlying our platform technology into standardized and repeatable processes that we believe are scalable to commercial manufacturing processes. Based upon our experience with our Neo-Urinary Conduit, we now have the ability to develop urologic neo-organs and neo-tissues using only smooth muscle cells. We intend to explore the application of this and other enhancements to our Neo-Bladder Augment.

 

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Other Product Opportunities

We are leveraging our Organ Regeneration Platform to develop a range of additional neo-organs.

 

   

Neo-Kidney Augment. Our Neo-Kidney Augment is designed to prevent or delay the need for dialysis or kidney transplant by improving renal function in patients with advanced CKD. We intend to use the patient’s kidney cells, procured by a needle biopsy, to create a product candidate that is implanted into the failing kidney and catalyzes the regeneration of functional kidney tissue. We have demonstrated the ability to prevent renal failure in animals and we have also isolated and characterized the necessary cells from healthy and diseased human kidneys, which we believe supports translation of this approach to human patients. We expect to begin a proof-of-concept study of our Neo-Kidney Augment in large animals in early 2010.

 

   

Neo-GI Augment. Our Neo-GI Augment is composed of smooth muscle cells seeded on our proprietary bioabsorbable scaffold, intended to be used as a tubular or patch implant. Our objective is to demonstrate that our product candidate regenerates native-like esophagus and intestinal tissues.

 

   

Neo-Vessel Replacement. Our Neo-Vessel Replacement is intended to regenerate a native-like blood vessel as an alternative to synthetic arterio-venous grafts and for use in other vascular applications.

Selected Risk Factors

Investing in our common stock involves substantial risk. Before participating in this offering, you should carefully consider all of the information in this prospectus, including risks discussed in “Risk Factors” beginning on page 9. Some of our most significant risks are:

 

   

Our recurring losses from operations have raised substantial doubt regarding our ability to continue as a going concern.

 

   

We have a history of operating losses and we may not achieve or sustain profitability.

 

   

We have a substantial amount of debt that exposes us to risks that could adversely affect our business, operating results and financial condition.

 

   

If we do not successfully develop our product candidates and obtain the necessary marketing approvals to commercialize them, we will not generate sufficient revenues to continue our business operations.

 

   

Our product development programs are based on novel technologies and are inherently risky.

 

   

Our clinical trials may not be successful.

 

   

We cannot market and sell our product candidates in the United States or in other countries if we fail to obtain the necessary marketing approvals or licensure.

 

   

We have only limited experience manufacturing our product candidates. We may not be able to manufacture our product candidates in quantities sufficient for our clinical trials and/or any commercial launch of our product candidates.

 

   

If we are unable to obtain and maintain protection for our intellectual property, the value of our technology and product candidates will be adversely affected.

 

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The Offering

 

Common stock offered                 shares of common stock (or              shares if the underwriter exercises its over-allotment option in full).
Common stock to be outstanding after this offering   

             shares of common stock (or              shares if the underwriter exercises its over-allotment option in full).

Use of proceeds    We expect to use the net proceeds from this offering to fund our research and development activities, including clinical trials, to maintain our manufacturing facilities, to service and repay our debt and for working capital and other general corporate purposes.
Proposed Nasdaq Global Market symbol    TNGN

The number of shares of common stock to be outstanding after this offering is based on              shares outstanding as of                     , 2009 and excludes:

 

   

             shares of common stock issuable upon the exercise of options outstanding as of                     , 2009 at a weighted average exercise price of $             per share;

 

   

             shares of common stock issuable upon the exercise of warrants outstanding as of                     , 2009 at a weighted average exercise price of $             per share; and

 

   

             shares of our common stock reserved for future issuance under our 2004 Stock Incentive Plan.

Except as otherwise indicated, all information in this prospectus assumes:

 

   

the conversion of all outstanding shares of our redeemable convertible preferred stock, or preferred stock, into 81,954,127 shares of common stock;

 

   

no exercise of the underwriter’s over-allotment option;

 

   

our planned             -for-             reverse stock split of our common stock and preferred stock to be effected on              2010 has not yet occurred; and

 

   

the filing of an amended and restated certificate of incorporation and the adoption of our amended and restated bylaws prior to the closing of the offering.

Corporate Information

We were founded in July 2003 as a Delaware corporation. Our corporate offices are located at 2900 Potshop Lane, Suite 100, East Norriton, PA 19403, and our telephone number is (610) 292-8364. Our website address is www.tengion.com. Information on our website is not incorporated into this prospectus and should not be relied upon in determining whether to make an investment in our common stock.

 

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Summary Financial Data

The following summary financial data should be read in conjunction with “Selected Financial Information and Other Data,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus. Our summary statement of operations data for the years ended December 31, 2006, 2007 and 2008, for the nine months ended September 30, 2009 and for the period from July 10, 2003 (inception) through September 30, 2009 have been derived from our audited financial statements included elsewhere in this prospectus. The summary statement of operations data for the nine months ended September 30, 2008 have been derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments necessary to fairly state the results of operations for the nine months ended September 30, 2008. The pro forma balance sheet data reflect the automatic conversion of all outstanding shares of preferred stock into common stock and the reclassification of the preferred stock warrant liability to stockholders’ equity (deficit) upon the completion of this offering.

The pro forma as adjusted balance sheet data reflect the pro forma balance sheet data at September 30, 2009 adjusted for the sale of             shares of our common stock in this offering at the initial offering price of $              per share (the mid-point of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts, commissions and offering expenses payable by us.

 

    Year Ended December 31,     Nine Months Ended
September 30,
    July 10, 2003
(inception)

through
September 30,
 
     
     
    2006     2007     2008     2008     2009     2009  
    (in thousands, except share and per share data)  

Statement of Operations Data:

           

Operating expenses:

           

Research and development

  $ 15,552      $ 22,335      $ 27,947      $ 21,680      $ 14,460      $ 88,220   

General and administrative

    4,584        5,290        7,467        4,830        4,499        27,643   

Depreciation

    1,675        3,678        4,716        3,507        3,702        13,913   
                                               

Operating loss

    (21,811     (31,303     (40,130     (30,017     (22,661     (129,776

Interest income (expense) and change in fair value of preferred stock warrants, net

    938        315        (2,263     (1,514     (650     (886
                                               

Net loss

    (20,873     (30,988     (42,393     (31,531     (23,311   $ (130,662
                 

Accretion of redeemable convertible preferred stock to redemption value

    (5,640     (8,742     (11,754     (8,387     (10,358  
                                         

Net loss attributable to common stockholders

  $ (26,513   $ (39,730   $ (54,147   $ (39,918   $ (33,669  
                                         

Basic and diluted net loss attributable to common stockholders per share

  $ (2.72   $ (4.15   $ (5.53   $          (4.08   $ (3.33  
                                         

Weighted average common shares outstanding basic and diluted

    9,751,565        9,575,796        9,793,724        9,788,434        10,100,557     
                                         

Unaudited pro forma net loss

        (42,393       (23,311  
                       

Unaudited basic and diluted pro forma net loss per share

      $ (0.51     $            (0.25  
                       

Unaudited basic and diluted pro forma weighted average common stock outstanding

        82,442,589          92,054,684     
                       

 

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     As of September 30, 2009
     Actual     Pro Forma(1)    Pro Forma As
Adjusted(1)(2)
     (unaudited)
     (in thousands)

Balance Sheet Data:

       

Cash, cash equivalents and short-term investments

   $ 25,888      $ 25,888    $ —  

Working capital

     11,183        11,183      —  

Total assets

     44,282        44,282      —  

Long-term debt

     11,891        11,891      —  

Redeemable convertible preferred stock

     184,215        —        —  

Total stockholders’ equity (deficit)

     (167,954     16,536      —  

 

(1)

On a pro forma basis to give effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock and the reclassification of the preferred stock warrant liability to stockholders’ equity (deficit) upon the completion of this offering.

(2)

On a pro forma as adjusted basis to reflect the sale of             shares of our common stock in this offering at an assumed initial offering price to the public of $             per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) additional cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ equity (deficit) by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition, results of operations or growth prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Financial Position and Need for Additional Capital

Our recurring losses from operations have raised substantial doubt regarding our ability to continue as a going concern.

Our recurring losses from operations raise substantial doubt about our ability to continue as a going concern, and as a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the nine months ended September 30, 2009 with respect to this uncertainty. Future reports on our financial statements may include an explanatory paragraph with respect to this uncertainty. We are a development stage company and have not generated revenues or been profitable since inception, and it is possible we will never achieve profitability. We have devoted our resources to developing our Organ Regeneration Platform and certain product candidates, but such product candidates cannot be marketed until governmental approvals have been obtained. Accordingly, there is no current source of revenues much less profits, to sustain our present activities, and no revenues will likely be available until, and unless, our product candidates are approved by the FDA or comparable regulatory agencies in other countries and successfully marketed, either by us or a partner, an outcome which may not occur. If we successfully complete this offering, based upon our currently expected level of operating and expenditures, we expect to be able to fund our operations through mid-2011. This period could be shortened if there are any significant increases in planned spending on development programs or more rapid progress of development programs than anticipated. The perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.

We have a history of operating losses and may not achieve or sustain profitability.

We have incurred losses in each year since our inception and expect to experience losses for the foreseeable future. As of September 30, 2009, we had an accumulated deficit of $171.4 million. These losses resulted principally from costs incurred in our clinical trials, research and development programs, construction of our research laboratories and commercial manufacturing facility and from our general and administrative expenses. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity, total assets and working capital.

We expect to continue to incur significant operating expenses and anticipate that our expenses and losses will increase in the foreseeable future as we seek to further develop our product candidates, technology and manufacturing capabilities. Our expenses are expected to relate to the following:

 

   

commencing our Phase I clinical trial for our Neo-Urinary Conduit for patients with bladder cancer who require removal of their bladder;

 

   

continuing our preclinical development of our Neo-Bladder Replacement for bladder cancer patients requiring removal of their bladder and desiring a continent urinary diversion;

 

   

continuing research and development efforts relating to our Neo-Kidney Augment;

 

   

advancing our Neo-Bladder Augment;

 

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researching and developing our Neo-GI Augment, Neo-Vessel Replacement and other product candidates;

 

   

maintaining, expanding, protecting and enforcing our intellectual property portfolio and assets and potentially challenging the intellectual property of others;

 

   

validating, certifying and staffing our commercial manufacturing facility if and when our product candidates advance into later-stage clinical trials;

 

   

expanding our manufacturing capabilities to support commercialization of our current and future product candidates; and

 

   

servicing and repaying indebtedness.

The extent of our future operating losses is highly uncertain, and we may never achieve or sustain profitability. If we are unable to achieve and then maintain profitability, the market value of our common stock will decline and you could lose all or part of your investment.

In order to fund our operations, we will need to raise significant amounts of capital. We may not be able to raise additional capital when necessary or on acceptable terms to us, if at all.

Our future capital requirements will depend on many factors, including:

 

   

the scope and results of our clinical trials, particularly regarding the number of patients required and the required duration of follow up for our clinical trials in support of our product candidates;

 

   

the time, complexity and costs involved in obtaining marketing approvals for our product candidates, which could take longer and be more costly than obtaining approval for a new conventional drug candidate, given the FDA’s limited experience with clinical trials and marketing approval for products derived from a patient’s own cells;

 

   

the scope and results of our research and preclinical development programs;

 

   

the costs of operating our research and development facility to support our research and early clinical activities;

 

   

the costs of validating, certifying and staffing our manufacturing facility to support later-stage clinical trials and also in anticipation of commercialization activities, if any;

 

   

the costs of maintaining, expanding, protecting and enforcing our intellectual property portfolio, including potential dispute and litigation costs and any associated liabilities and potentially challenging the intellectual property of others;

 

   

the costs of entering new markets outside the United States; and

 

   

the level of debt service payments we are obligated to make.

As a result of these factors, among others, we will need to seek additional funding prior to our being able to generate positive cash flow from operations. We would likely seek funding through public or private sales of our securities, commercial loan facilities, or some combination of both. We also might seek funding through collaborative arrangements. Additional funding may not be available to us on acceptable terms, or at all. If we obtain capital through collaborative arrangements, these arrangements could require us to relinquish some rights to our technologies or product candidates. If we raise capital through the sale of equity, or securities convertible into equity, dilution to our then-existing stockholders would result. If we obtain funding through the incurrence of debt, we would likely become subject to covenants restricting our business activities, and holders of debt instruments would have rights and privileges senior to those of our equity investors. In addition, servicing the interest and repayment obligations under our current and future borrowings would divert funds that would otherwise be available to support research and development, clinical or commercialization activities.

 

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If we are unable to obtain adequate financing on a timely basis, we may be required to delay, reduce the scope of or eliminate one or more of our development programs, and reduce our personnel, any of which could have a material adverse effect on our business, financial condition and results of operations.

We have a substantial amount of debt that exposes us to risks that could adversely affect our business, operating results and financial condition.

We have approximately $24.3 million of debt outstanding as of September 30, 2009 which is secured by liens on substantially all of our assets. The level and nature of our indebtedness could, among other things:

 

   

make it difficult for us to obtain any necessary financing in the future;

 

   

limit our flexibility in planning for or reacting to changes in our business;

 

   

reduce funds available for use in our operations;

 

   

impair our ability to incur additional debt because of financial and other restrictive covenants or the liens on our assets which secure our current debt;

 

   

hinder our ability to raise equity capital because in the event of a liquidation of the business, debt holders receive a priority before equity holders;

 

   

make us more vulnerable in the event of a downturn in our business; or

 

   

place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources.

Unless we raise substantial additional capital or generate substantial revenue from a license or strategic partnership involving one of our product candidates, we may not be able to service or repay our debt when it becomes due, in which case our lenders could seek to accelerate payment of all unpaid principal and foreclose on our assets. Any such event would have a material adverse effect on our business, operating results and financial condition.

Our short operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

We are a development stage company. We commenced operations in July 2003. Our operations to date have been limited to organizing and staffing our company, acquiring and developing our technology and undertaking preclinical studies and clinical trials of our product candidates. We have not demonstrated an ability to successfully complete large-scale clinical trials, obtain marketing approvals for product registration, manufacture a commercial-scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. As a result, we have a limited operating history from which you can evaluate our business and prospects.

In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors. If we are successful in obtaining marketing approval for any of our product candidates, we will need to transition from a company with a research focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

If we fail to properly manage our growth, our business could be adversely affected.

We have substantially increased the scale of our operations since our inception in 2003. We anticipate further increasing the scale of our operations as we develop our product candidates. If we are unable to manage our growth effectively, our operations and financial condition could be adversely affected. The management of our growth will depend, among other things, upon our ability to improve our operational, financial and management controls, reporting systems and procedures. Furthermore, we

 

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may have to make investments in and hire and train additional personnel for our operations and manufacturing, which would result in additional burdens on our systems and resources and require additional capital expenditures.

If we do not successfully develop our product candidates and obtain the necessary marketing approvals to commercialize them, we will not generate sufficient revenues to continue our business operations.

In order to obtain marketing approval of our product candidates so that we can generate revenues once they are commercialized, we must conduct extensive preclinical studies and clinical trials to demonstrate that our product candidates are safe and effective and obtain and maintain approval of our manufacturing facilities. Our early stage product candidates, including our Neo-Urinary Conduit, for which we have an effective IND and for which we expect to commence a single-center Phase I clinical trial in the first half of 2010, may fail to perform as we expect. Moreover, our Neo-Urinary Conduit and our other product candidates may ultimately fail to demonstrate the necessary safety and efficacy for marketing approval. We will need to conduct additional research and development, and devote significant additional financial resources and personnel to develop commercially viable products and obtain the necessary marketing approvals, and if we fail to do successfully, we may cease operations altogether.

Risks Related to the Development of Our Product Candidates

Our product development programs are based on novel technologies and are inherently risky.

We are subject to the risks of failure inherent in the development of products based on new technologies. The novel nature of our Organ Regeneration Platform creates significant challenges with respect to product development and optimization, manufacturing, government regulation and approval, third-party reimbursement and market acceptance. For example, the FDA has relatively limited experience with the development and regulation of autologous neo-organs and neo-tissues and, therefore, the pathway to marketing approval for our product candidates may accordingly be more complex, lengthy and uncertain than for a more conventional new drug candidate. The FDA may not approve our product candidates or may approve them with certain restrictions that may limit our ability to market our product candidates, and our product candidates may not be successfully commercialized, if at all.

Our clinical trials may not be successful.

We will only obtain marketing approval to commercialize a product candidate if we can demonstrate to the satisfaction of the FDA or the applicable non-United States regulatory authority, in clinical trials, that the product candidate is safe and effective, and otherwise meets the appropriate standards required for approval for a particular indication. Clinical trials are lengthy, complex and extremely expensive processes with uncertain results. A failure of one or more of our clinical trials may occur at any stage of testing. To date, we have conducted two Phase II clinical trials for our Neo-Bladder Augment, involving 16 pediatric and adult patients. During these trials, three patients experienced SAEs that at the time of their occurrence were deemed by the respective clinical investigator to be clinically significant and probably related to our product candidate or implantation procedure. Each of the SAEs involved rupture of the bladder. As a result of these SAEs, the FDA placed our IND related to these clinical trials on hold. We submitted a complete response in June 2009 and the FDA released the clinical hold in July 2009 with no recommended changes to our protocol, product candidate or implantation procedure.

We have limited experience in conducting and managing the preclinical development activities and clinical trials necessary to obtain marketing approvals necessary for marketing our product candidates, including approval by the FDA.

Our efforts to develop all of our product candidates are at an early stage. We may be unable to progress our product candidates that are undergoing preclinical testing into clinical trials. Success in preclinical

 

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testing and early clinical trials does not ensure that later clinical trials will be successful, and favorable initial results from a clinical trial do not necessarily predict final results. The indications of use for which we are pursuing development may have clinical effectiveness endpoints that have not previously been reviewed or validated by the FDA, which may complicate or delay our effort to ultimately obtain FDA approval. We cannot assure you that our clinical trials will ultimately be successful.

We have not obtained marketing approval or commercialized any of our product candidates. We may not successfully design or implement clinical trials required for marketing approval to market our product candidates. We might not be able to demonstrate that our product candidates meet the appropriate standards for marketing approval, particularly as our technology may be the first of its kind to be reviewed by the FDA. If we are not successful in conducting and managing our preclinical development activities or clinical trials or obtaining marketing approvals, we might not be able to commercialize our product candidates, or might be significantly delayed in doing so, which will materially harm our business.

We may find it difficult to enroll patients in our clinical trials.

Our initial product candidates are designed to treat diseases that affect relatively few patients. This could make it difficult for us to enroll the number of patients that may be required for the clinical trials we would be required to conduct in order to obtain marketing approval for our product candidates.

In addition, we may have difficulty finding eligible patients to participate in clinical trials because a patient may require a concomitant surgical procedure that would prevent them from receiving our product candidates, may be using alternative therapies, or the extent of a patient’s overall medical condition may render such patient ineligible to participate in our trials. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials would result in significant delays and could require us to abandon one or more clinical trials altogether.

If we are not able to retain qualified management and scientific personnel, we may fail to develop our technologies and product candidates.

Our future success depends to a significant extent on the skills, experience and efforts of the principal members of our scientific and management personnel. These members include Steven Nichtberger, MD, our President and CEO, and Timothy Bertram, DVM, PhD, our Senior Vice President, Science and Technology. The loss of either or both of these individuals could harm our business and might significantly delay or prevent the achievement of research, development or business objectives. Competition for personnel is intense. We may be unable to retain our current personnel or attract or integrate other qualified management and scientific personnel in the future.

We rely on third parties to conduct certain preclinical development activities and our clinical trials, and those third parties may not perform satisfactorily.

We do not conduct in our facilities certain preclinical development activities of our product candidates, such as preclinical studies in animals, nor do we conduct clinical trials for our product candidates ourselves. We rely on, or work in conjunction with, third parties, such as contract research organizations, medical institutions and clinical investigators, to perform these functions. Our reliance on these third parties for preclinical and clinical development studies reduces our control over these activities. We are responsible for ensuring that each of our preclinical development activities and our clinical trials is conducted in accordance with the applicable U.S. federal and state laws and foreign regulations, general investigational plan and protocols. However, other than our contracts with these third parties, we have no direct control over these researchers or contractors, as they are not our employees. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, or GCP, for conducting, recording and reporting the results of our clinical trials to

 

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assure that data and reported results are credible and accurate and that the rights, safety and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Furthermore, these third parties also may have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our preclinical development activities or our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates. These third parties may be warned, suspended or otherwise sanctioned by the FDA or other government or regulatory authorities for failing to meet the applicable requirements imposed on such third parties. As a result, the third parties may not be able to fulfill their contractual obligations, and the results obtained from the preclinical and clinical research using their services may not be accepted by the FDA to support the marketing approval of our product candidates. If the third parties or their employees become debarred by the FDA, we cannot use the research data derived from their services to support the marketing approval of our product candidates. Finally, these third parties may be bought by other entities, change their business plans or strategies or they may go out of business, thereby preventing them from meeting their contractual obligations to us. Moreover, these third parties may be bought by other entities, change their business plans or strategies or they may go out of business, thereby preventing them from meeting their contractual obligations.

We may not be able to secure and maintain relationships with research institutions and clinical investigators that are capable of conducting and have access to necessary patient populations for the conduct our clinical trials.

We rely on research institutions and clinical investigators to conduct our clinical trials. Our reliance upon research institutions, including hospitals and clinics, provides us with less control over the timing and cost of clinical trials and the ability to recruit subjects. If we are unable to reach agreement with suitable research institutions and clinical investigators on acceptable terms, or if any resulting agreement is terminated because, for example, the research institution and/or clinical investigators lose their licenses or permits necessary to conduct our clinical trials, we may be unable to quickly replace the research institution and/or clinical investigator with another qualified research institution and/or clinical investigator on acceptable terms. We may not be able to secure and maintain agreement with suitable research institutions to conduct our clinical trials.

Compliance with governmental regulations regarding the treatment of animals used in research could increase our operating costs, which would adversely affect the commercialization of our technology.

The Animal Welfare Act, or AWA, is the federal law that covers the treatment of certain animals used in research. Currently, the AWA imposes a wide variety of specific regulations that govern the humane handling, care, treatment and transportation of certain animals by producers and users of research animals, most notably relating to personnel, facilities, sanitation, cage size, feeding, watering and shipping conditions. Third parties with whom we contract are subject to registration, inspections and reporting requirements. Furthermore, some states have their own regulations, including general anti-cruelty legislation, which establish certain standards in handling animals. If we or any of our contractors fail to comply with regulations concerning the treatment of animals used in research, we may be subject to fines and penalties and adverse publicity, and our operations could be adversely affected.

Public perception of ethical and social issues may limit or discourage the type of research we conduct.

Our clinical trials involve people, and we and third parties with whom we contract also do research involving animals. Governmental authorities could, for public health or other purposes, limit the use of human or animal research or prohibit the practice of our technology. Public attitudes may be influenced by claims that our technology or that regenerative medicine generally is unsafe for use in research or is

 

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unethical and akin to cloning. In addition, animal rights activists could protest or make threats against our facilities, which may result in property damage and subsequently delay our research. Ethical and other concerns about our methods, particularly our use of human subjects in clinical trials or the use of animal testing, could adversely affect our market acceptance.

Risks Related to the Manufacturing of Our Product Candidates

We have only limited experience manufacturing our product candidates. We may not be able to manufacture our product candidates in quantities sufficient for our clinical trials and/or any commercial launch of our product candidates.

We may encounter difficulties in the production of our product candidates. Construction of neo-organs and neo-tissues from autologous live human cells involves strict adherence to complex manufacturing and storage protocols and procedures. Early stage clinical manufacturing is conducted in our pilot facility and, while we have supported clinical manufacturing from this location, future difficulties may arise which limit our production capability and delay progress in our clinical trials. We have built a commercial-scale manufacturing facility, which is based on our pilot manufacturing facility and processes used in that facility, which we believe will support late phase clinical trials and the initial commercial launch of our product candidates. Operations at this facility were temporarily halted in March 2009 and we are maintaining the facility in a condition that will enable us to resume operations. We expect resumption of operations, including recertification and hiring additional staff, to cost approximately $1 million. Any unexpected difficulty in resuming operations would increase cost or delay late-stage clinical or commercial manufacturing.

We may encounter technical or logistical difficulties as we seek to commence, and subsequent increase, production at our commercial-scale manufacturing facility. These difficulties could increase our costs or cause delays in the production of our product candidates necessary for any Phase III clinical trial and/or any anticipated commercial launch of our product candidates, any of which could damage our reputation and harm our business. Moreover, we have limited experience in manufacturing our product candidates for human patients and we are not aware of any party that manufactures products similar to ours. As a result, if we are not able to successfully manufacture our product candidates, we may be unable to utilize the manufacturing services of a third-party manufacturer.

The current manufacture of our product candidates involves the use of regulated animal tissues, and future product candidates may also use animal-sourced materials.

We currently utilize several bovine-derived products, such as growth media, in the manufacture of our Neo-Urinary Conduit and Neo-Bladder Augment. Bovine-sourced materials are strictly regulated in the United States and other jurisdictions due to their capacity to transmit the prion disease Bovine Spongiform Encephalopathy, or BSE, which manifests itself in humans as Creutzfeldt-Jakob Disease. Although we obtain our supply of bovine-based materials from closed herds in jurisdictions that are not currently known to carry BSE, there can be no assurance that these herds will remain BSE-free or that a future outbreak or presence of other unintended and potentially hazardous agents would not adversely affect our product candidates or patients that may receive them. Further, our future product candidates may involve the use of bovine-sourced or other animal-based materials, which could increase the risk of transmission of other diseases carried by such animals.

If a natural or man-made disaster strikes our manufacturing facility, we would be unable to manufacture our product candidates for a substantial amount of time, which would harm our business.

Our manufacturing facility and manufacturing equipment would be difficult to replace and could require substantial replacement lead-time and additional funds if we lost use of either the facility or equipment. Our facility may be affected by natural disasters, such as floods. We do not currently have commercial-scale back-up capacity, so in the event our facility or equipment was affected by man-made or natural

 

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disasters, we would be unable to manufacture any of our product candidates until such time as our facility could be repaired or rebuilt. Although we currently maintain global property insurance for damage to our property and the disruption of our business from fire and other casualties, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.

Our business involves the use of hazardous materials that could expose us to environmental and other liability.

Our research and development processes and our operations involve the controlled storage, use and disposal of hazardous materials including, but not limited to, biological hazardous materials. We are subject to federal, state and local regulations governing the use, manufacture, storage, handling and disposal of these materials and waste products. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by law and regulation, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our insurance. Moreover, we may not be able to maintain insurance to cover these risks on acceptable terms, or at all. We could also be required to incur significant costs to comply with current or future laws and regulations relating to hazardous materials.

Risks Related to Marketing Approval and Other Government Regulations

We cannot market and sell our product candidates in the United States or in other countries if we fail to obtain the necessary marketing approvals or licensure.

We cannot sell our product candidates until regulatory agencies grant marketing approval, or licensure. The process of obtaining such marketing approval is lengthy, expensive and uncertain. It is likely to take many years to obtain the required marketing approvals for our product candidates or we may never gain the necessary approvals. Any difficulties that we encounter in obtaining marketing approval may have a substantial adverse impact on our operations and cause our stock price to decline significantly. Any adverse events in our clinical trials for one of our product candidates could negatively impact the clinical trials and approval process for our other product candidates.

To obtain marketing approvals in the United States for our product candidates, we must, among other requirements, complete carefully controlled and well-designed clinical trials sufficient to demonstrate to the FDA that the product candidate is safe and effective for each indication for which we seek approval. Several factors could prevent completion or cause significant delay of these trials, including an inability to enroll the required number of patients or failure to obtain marketing approval to commence a clinical trial. Negative or inconclusive results from or adverse events during a preclinical safety study or clinical trial could cause the preclinical study or clinical trial to be repeated or a program to be terminated, even if other studies or trials relating to the program are successful. The FDA can place a clinical trial on hold if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and significant risk of illness or injury. If safety concerns develop, we, an Institution Review Board, or IRB, or the FDA could stop our trials before completion. The populations for which we are developing our product candidates may have other medical complications that would affect their experience in our trials and would affect their experience with our product candidates, if approved. A serious adverse event is an event that results in significant medical consequences, such as hospitalization or prolonged hospitalization, disability or death, and if unexpected must be reported to the FDA. We cannot assure you that other safety concerns regarding our product candidates will not develop. For example, in February 2009, the FDA placed our IND for our Neo-Bladder Augment on clinical hold following certain serious adverse events that occurred with respect to patients in our Phase II clinical trials. We submitted a complete response in June 2009 and the FDA released the clinical hold in July 2009, with no recommended changes to our protocol, product candidate or implantation procedure.

 

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The pathway to marketing approval for our product candidates may be more complex and lengthy than for approval of a conventional new drug or biologic. Similarly, to obtain approval to market our product candidates outside of the United States, we will need to submit clinical data concerning our product candidates and receive marketing approval from governmental agencies, which in certain countries includes approval of the price we intend to charge for our product. We may encounter delays or rejections if changes occur in regulatory agency policies, or if reports from preclinical and clinical testing on similar technology or products raise safety and/or efficiency concerns, during the period in which we develop a product candidate or during the period required for review of any application for marketing approval. If we are not able to obtain marketing approvals for use of our product candidates under development, we will not be able to commercialize such products and, therefore, may not be able to generate sufficient revenues to support our business.

The FDA may impose requirements on our clinical trials that are difficult to comply with, which could harm our business.

The requirements the FDA may impose on clinical trials for our product candidates are uncertain. As a result, we cannot assure you that we will be able to comply with such requirements. For example, the FDA may require endpoints in our late-stage clinical trials that are different from or in addition to the endpoints in our early-stage clinical trials or the endpoints which we may propose. The endpoints or other study elements, including sample size, the FDA requires may make it less likely that our Phase III clinical trials are successful or may delay completion of the trials. If we are unable to comply with the FDA’s requirements, we will not be able to get approval for our product candidates and our business will suffer.

If we are not able to conduct our clinical trials properly and on schedule, marketing approval by the FDA and other regulatory authorities may be delayed or denied.

Our clinical trials may be delayed or terminated for many reasons, including, but not limited to, if:

 

   

the FDA does not grant permission to proceed and places the trial on clinical hold;

 

   

subjects do not enroll or remain in our trials at the rate we expect;

 

   

we fail to manufacture necessary amounts of product candidate;

 

   

either of our manufacturing facilities is ordered by the FDA or other government or regulatory authorities to temporarily or permanently shut down due to violations of current Good Manufacturing Practice, or cGMP, or other applicable requirements, or infections or cross-contaminations of product candidates in the manufacturing process;

 

   

subjects choose an alternative treatment for the indications for which we are developing our product candidates, or participate in competing clinical trials;

 

   

subjects experience an unacceptable rate or severity of adverse side effects;

 

   

reports from preclinical or clinical testing on similar technologies and products raise safety and/or efficacy concerns;

 

   

third-party clinical investigators lose their license or permits necessary to perform our clinical trials, do not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol, Good Clinical Practice and regulatory requirements, or other third parties do not perform data collection and analysis in a timely or accurate manner;

 

   

inspections of clinical trial sites by the FDA or IRBs find regulatory violations that require us to undertake corrective action, suspend or terminate one or more sites, or prohibit us from using some or all of the data in support of our marketing applications;

 

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third-party contractors become debarred or suspended or otherwise penalized by FDA or other government or regulatory authorities for violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or any of the data produced by such contractors in support of our marketing applications; or

 

   

one or more IRBs refuses to approve, suspends or terminates the trial at an investigational site, precludes enrollment of additional subjects, or withdraws its approval of the trial.

If we are unable to conduct our clinical trials properly and on schedule, the FDA may delay or deny marketing approval.

Final marketing approval of our product candidates by the FDA or other regulatory authorities for commercial use may be delayed, limited, or denied, any of which would adversely affect our ability to generate operating revenues.

Any of the following factors may cause final marketing approval for our product candidates to be delayed, limited or denied:

 

   

our product candidates require significant preclinical and clinical testing to demonstrate safety and efficacy before applications for marketing approval can be filed with the FDA;

 

   

the manufacturing processes for our product candidates need to consistently demonstrate their safety, purity and potency;

 

   

data obtained from preclinical studies and clinical trials is inconclusive or can be interpreted in different ways, and the FDA may not agree with our analysis or interpretations;

 

   

it may take many years to complete the testing of our product candidates, and failure can occur at any stage of the process;

 

   

negative or inconclusive results or adverse side effects during a clinical trial could cause us to delay or terminate development efforts for a product candidate;

 

   

the FDA may seek the advice of an Advisory Committee of physician and patient representatives that may view the risks of our product as outweighing the benefits;

 

   

the FDA imposes post-marketing restrictions; or

 

   

commercialization may be delayed if the FDA requires us to expand the size and scope of the clinical trials.

Our development costs will increase if we have material delays in our clinical trials, or if we are required to modify, suspend, terminate or repeat a clinical trial. If marketing approval for our product candidates is delayed, limited or denied, our ability to market products, and our ability to generate product sales, would be adversely affected.

Any product for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if any of them are approved.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and comparable regulatory authorities, including through periodic inspections. These requirements include, but are not limited to, submissions of safety and other post-marketing information and reports, registration requirements, cGMP and Quality System Regulations, or QSR, requirements relating to quality control, quality assurance and corresponding maintenance of records and documents. Even if marketing

 

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approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly and time consuming post-marketing testing and surveillance to monitor the safety or efficacy of the product. Discovery after approval of previously unknown problems with our product candidates or manufacturing processes, or failure to comply with regulatory requirements, may result in actions such as:

 

   

restrictions on such products’ manufacturers or manufacturing processes;

 

   

restrictions on the marketing or distribution of a product, including refusals to permit the import or export of products;

 

   

warning letters or untitled letters;

 

   

warning labels on the products;

 

   

withdrawal of the products from the market;

 

   

refusal to approve pending applications or supplements to approved applications that we submit;

 

   

suspension of any ongoing clinical trials;

 

   

recall of products;

 

   

fines, restitution or disgorgement of profits or revenue;

 

   

suspension or withdrawal of marketing approvals;

 

   

product seizure;

 

   

injunctions; or

 

   

imposition of civil or criminal penalties.

In addition, if any of our product candidates are approved, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions.

Current or future legislation may make it more difficult and costly for us to obtain marketing approval of our product candidates.

In 2007, the Food and Drug Administration Amendments Act of 2007, or the FDAAA, became law. This legislation grants significant new powers to the FDA, many of which are aimed at assuring the safety of drugs and biologics after approval. For example, FDAAA granted the FDA new authority to impose post-approval clinical study requirements, require safety-related changes to product labeling and require the adoption of risk management plans, referred to as risk evaluation and mitigation strategies, or REMS. The REMS may include requirements for special labeling or medication guides for patients, special communication plans to health care professionals, and restrictions on distribution and use. Pursuant to FDAAA, if the FDA makes the requisite findings, it might require that a new product be used only by physicians with specified specialized training, only in specified designated health care settings, or only in conjunction with special patient testing and monitoring. The legislation also included requirements for disclosing clinical study results to the public through a clinical study registry, and renewed requirements for conducting clinical studies to generate information on the use of products in pediatric patients. Under the FDAAA, companies that violate the new law are subject to substantial civil monetary penalties. The requirements and changes imposed by the FDAAA may make it more difficult, and more costly, to obtain and maintain approval of new biological products.

 

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In addition, the FDA’s regulations, policies or guidance may change and new or additional statutes or government regulations may be enacted that could prevent or delay marketing approval of our product candidates or further restrict or regulate post-approval activities. For example, proposals have been made to further expand post-approval requirements and restrict sales and promotional activities. It is impossible to predict whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes or the marketing approvals of our product candidates, if any, may be.

Risks Related to the Commercialization of Our Product Candidates

If we fail to educate and train physicians as to the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our product candidates, our sales will not grow.

Acceptance of our product candidates depends, in large part, on our ability to train physicians in the proper implantation of our neo-organs and neo-tissues, which will require significant expenditure of our resources. Convincing physicians to dedicate the time and energy necessary to properly train to use new products and techniques is challenging, and we may not be successful in these efforts. If physicians are not properly trained, they may ineffectively implant our product candidates. Such misuse or ineffective implantation may result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us. Accordingly, even if our product candidates are superior to alternative treatments, our success will depend on our ability to gain and maintain market acceptance for our product candidates. If we fail to do so, our sales will not grow and our business, financial condition and results of operations will be adversely affected. We may not have adequate resources to effectively educate the medical community and/or our efforts may not be successful due to physician resistance or perceptions regarding our product candidates.

We face uncertainty related to pricing, reimbursement and health care reform, which could reduce our revenue.

Sales of our product candidates, if approved for commercialization, will depend in part on the availability of coverage and reimbursement from third-party payors such as government insurance programs, including Medicare and Medicaid, private health insurers, health maintenance organizations and other health care related organizations. If our product candidates are approved for commercialization, pricing and reimbursement may be uncertain. Both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation affecting coverage and reimbursement policies, which are designed to contain or reduce the cost of health care. Further federal and state proposals and health care reforms are likely which could limit the prices that can be charged for the product candidates that we develop and may further limit our commercial opportunity. There may be future changes that result in reductions in current coverage and reimbursement levels for our products, if commercialized, and we cannot predict the scope of any future changes or the impact that those changes would have on our operations.

Adoption of our product candidates by the medical community may be limited if doctors and hospitals do not receive full reimbursement for our products, if commercialized. Cost control initiatives may decrease coverage and payment levels for our product candidates and, in turn, the price that we will be able to charge for any product. We are impacted by efforts by public and private third-party payors to control costs. We are unable to predict all changes to the coverage or reimbursement methodologies that will be applied by private or government payors to our product candidates. Any denial of private or government payor coverage or inadequate reimbursement for procedures performed using our products, if commercialized, could harm our business and reduce our revenue.

 

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We could be adversely affected if healthcare reform measures substantially change the market for medical care or healthcare coverage in the United States.

The U.S. Congress is currently considering important legislation regarding health insurance. If adopted, substantial changes could be made to the current system for paying for healthcare in the United States, including changes made in order to extend medical benefits to those who currently lack insurance coverage. Extending coverage to a large population could substantially change the structure of the health insurance system and the methodology for reimbursing medical services, drugs and devices. These structural changes could entail modifications to the existing system of private payors and government programs, such as Medicare, Medicaid and State Children’s Health Insurance Program, creation of a government-sponsored healthcare insurance source, or some combination of both, as well as other changes. Restructuring the coverage of medical care in the United States could impact the reimbursement for prescribed drugs, biopharmaceuticals, medical devices, or our product candidates. If reimbursement for our approved product candidates, if any, is substantially less that we expect in the future, or rebate obligations associated with them are substantially increased, our business could be materially and adversely impacted.

Extending medical benefits to those who currently lack coverage will likely result in substantial cost to the U.S. federal government, which may force significant changes to the healthcare system in the United States. Much of the funding for expanded healthcare coverage may be sought through cost savings. While some of these savings may come from realizing greater efficiencies in delivering care, improving the effectiveness of preventive care and enhancing the overall quality of care, much of the cost savings may come from reducing the cost of care. Cost of care could be reduced by decreasing the level of reimbursement for medical services or products, or by restricting coverage and, thereby, utilization of medical services or products. In either case, a reduction in the utilization of, or reimbursement for, any product for which we receive marketing approval in the future could have a materially adverse impact on our financial performance.

There is substantial uncertainty regarding the exact provisions of healthcare reform that may be enacted, if at all. This uncertainty limits our ability to forecast changes that may occur in the future and to manage our business accordingly.

We may face competition from companies and institutions that may develop products that make ours less attractive or obsolete through both new technologies that may be similar to ours, or more traditional pharmaceutical or medical device treatments.

Many of our competitors have greater resources or capabilities than we have, or may already have or succeed in developing better products or in developing products more quickly than we do, and we may not compete successfully with them.

The medical device, pharmaceutical and biotechnology industries are highly competitive. We compete for funding. If our product candidates become available for commercial sale, we will compete in the marketplace. For funding, we compete primarily with other companies which, like us, are focused on discovering and developing novel products or therapies for the treatment of human disease based on regenerative medicine technologies or other novel scientific principles.

In the marketplace, we may eventually compete with other companies and organizations that are marketing or developing therapies for our targeted disease indications, based on traditional pharmaceutical, medical device or other, non-cellular therapies and technologies.

We also face competition in the cell therapy field from academic institutions and governmental agencies. Many of our current and potential competitors have greater financial and human resources than we have, including more experience in research and development and more established sales, marketing and distribution capabilities.

 

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We anticipate that competition in our industry will increase. In addition, the health care industry is characterized by rapid technological change, resulting in new product introductions and other technological advancements. Our competitors may develop and market products that render our current product or any future product non-competitive or otherwise obsolete.

The use of our product candidates in human subjects may expose us to product liability claims, and we may not be able to obtain adequate insurance.

We face an inherent risk of product liability claims. Our Neo-Bladder Augment, which has undergone Phase II clinical trials, has not been used over an extended period of time in a large number of patients and, therefore, our long-term safety and efficacy data are limited. Patients in our Phase II clinical trials have experienced SAEs. We will need to increase our insurance coverage if and when we begin commercializing any of our product candidates. We may not be able to obtain or maintain product liability insurance on acceptable terms with adequate coverage, or at all. If we are unable to obtain insurance, or if claims against us substantially exceed our coverage, then our business could be adversely impacted. Regardless of whether we are ultimately successful in any product liability litigation, such litigation could consume substantial amounts of our financial and managerial resources and could result in among others:

 

   

significant awards against us;

 

   

substantial litigation costs;

 

   

injury to our reputation and the reputation of our product candidates;

 

   

withdrawal of clinical trial participants; and

 

   

adverse regulatory action.

Any of these results would substantially harm our business.

We have never marketed a product before, and if we are unable to establish an effective focused sales force and marketing infrastructure, we will not be able to commercialize our product candidates successfully.

We intend to explore building the necessary marketing and sales infrastructure to market and sell our current product candidates, if they receive marketing approval. We currently do not have internal sales, distribution and marketing capabilities. The development of a sales and marketing infrastructure for our domestic operations will require substantial resources, will be expensive and time consuming and could negatively impact our commercialization efforts, including delay of any product launch. These costs may be incurred in advance of any approval of our product candidates. In addition, we may not be able to hire a focused sales force in the United States that is sufficient in size or has adequate expertise in the medical markets that we intend to target, including surgery. If we are unable to establish our focused sales force and marketing capability for our product candidates, we may not be able to generate any product revenue, may generate increased expenses and may never become profitable.

If we are unable to establish development or marketing collaborations with third parties, we may not be able to develop, commercialize or distribute our products successfully.

We may need to establish development or marketing collaborations with third parties in order to complete development of our product candidates or for the commercialization or distribution of our product candidates. We expect to face competition in our efforts to identify appropriate collaborators or partners to help develop or commercialize our product candidates in our target commercial areas. If we are unable to establish adequate collaborations, our ability to develop or market our product candidates could be adversely affected. Further, to the extent third parties with whom we collaborate fail to perform, our ability to achieve our development or marketing goals may be adversely affected, and our business could suffer.

 

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Risks Related to Intellectual Property

If we are unable to obtain and maintain protection for our intellectual property, the value of our technology and products will be adversely affected.

Our success will depend in large part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property covering or incorporated into our technology and products. The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves complex legal, technical, scientific and factual questions. We may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents issued to us or our licensors may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, or determined not to cover our product candidates or our competitors’ products, which could limit our ability to stop competitors from marketing identical or similar products or reduce the term of patent protection we may have for our product candidates. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

 

   

we or our licensors were the first to make the inventions covered by each of our pending patent applications;

 

   

we or our licensors were the first to file patent applications for these inventions;

 

   

others will not independently develop similar or alternative technologies or duplicate any of our technologies;

 

   

any patents issued to us or our licensors will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be successfully challenged by third parties;

 

   

we will continue developing additional proprietary technologies that are patentable;

 

   

we will file patent applications for new proprietary technologies promptly or at all;

 

   

our patents will not expire prior to or shortly after commencing commercialization of a product;

 

   

our licensors will enforce the rights of the patents we license; or

 

   

the patents of others will not have a negative effect on our ability to do business.

In addition, we cannot assure you that any of our pending patent applications will result in issued patents. If patents are not issued in respect of our pending patent applications, we may not be able to stop competitors from marketing products similar to ours.

Our patents also may not afford us protection against competitors with identical or similar technology.

Because patent applications in the United States and many other jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind the actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in our or their issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications. If a third party has also filed a United States patent application covering our product candidates or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the United States Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts could be unsuccessful, resulting in a loss of our United States patent position. If a third party believes we or our licensor were not entitled to the grant of one or more patents, such third party may challenge such patents in an interference or re-examination proceeding in the United States, or opposition or similar proceeding in another country.

 

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If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.

We are a party to license agreements with Children’s Hospital Boston and Wake Forest University Health Sciences pursuant to which we license the key intellectual property relating to our product candidates. We may enter into additional licenses in the future. Our existing licenses impose, and we expect that future licenses will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we might not be able to market any product that is covered by the licensed patents.

If we are unable to protect the confidentiality of our proprietary information, trade secrets and know-how, the value of our technology and product candidates could be adversely affected.

Our proprietary information, trade secrets and know-how are important components of our intellectual property, particularly in connection with the manufacturing of our product candidates. We seek to protect our proprietary information, trade secrets, know-how and confidential information, in part, by confidentiality agreements with our employees, corporate partners, outside scientific collaborators, sponsored researchers, consultants and other advisors. We also have confidentiality and invention or patent assignment agreements with our employees and our consultants. If our employees or consultants breach these agreements, we may not have adequate remedies for any of these breaches. In addition, our proprietary information, trade secrets and know-how may otherwise become known to or be independently developed by others. Enforcing a claim that a party illegally obtained and is using our proprietary information, trade secrets and know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Costly and time consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary information, trade secrets and know-how, and failure to obtain or maintain protection of proprietary information, trade secret and know-how could adversely affect our competitive business position.

If we infringe or are alleged to infringe the intellectual property rights of third parties, our business could suffer.

Our research, development and commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or be accused of infringing one or more claims of an issued patent or may fall within the scope of one or more claims in a published patent application that may subsequently issue and to which we do not hold a license or other rights. Third parties may own or control these patents or patent applications in the United States and abroad. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit. No assurance can be given that patents do not exist, have not been filed, or could not be filed or issued, which contain claims covering our product candidates, technology or methods.

In order to avoid or settle potential claims with respect to any of the patent rights described above or any other patent rights of third parties, we may choose or be required to seek a license from a third party and be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our future collaborators were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing one or more product candidates, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This could harm our business significantly.

 

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Others may sue us for infringing their patent or other intellectual property rights or file nullity, opposition, re-examination or interference proceedings against our patents, even if such claims or proceedings are without merit, which would similarly harm our business. Furthermore, during the course of litigation, confidential information may be disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. Disclosure of our confidential information and our involvement in intellectual property litigation could materially adversely affect our business.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the United States Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our product candidates and technology. Even if we prevail, the cost to us of any patent litigation or other proceeding could be substantial.

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from any litigation could significantly limit our ability to continue our operations. Patent litigation and other proceedings may also absorb significant management time. Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We try to ensure that our employees do not use the proprietary information, trade secrets or know-how of others in their work for us. However, we may be subject to claims that we or these employees have inadvertently or otherwise used or disclosed intellectual property, trade secrets, know-how or other proprietary information of any such employee’s former employer. Litigation may be necessary to defend against these claims and, even if we are successful in defending ourselves, could result in substantial costs to us or be distracting to our management. If we fail to defend any such claims, in addition to paying monetary damages, we may jeopardize valuable intellectual property rights, disclose confidential information or lose personnel.

Risks Related to this Offering

There has been no prior market for our common stock, and it may trade at prices below the initial public offering price.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which a trading market for our common stock will develop or be sustained after this offering. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters based on factors that may not be indicative of future performance, and may not bear any relationship to the price at which our common stock will trade upon completion of this offering. You may be unable to sell your shares of common stock at or above the initial public offering price.

The trading price of the shares of our common stock could be highly volatile, and purchasers of our common stock could incur substantial losses.

Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

 

   

our ability to enroll patients in our clinical trials;

 

   

results of clinical trials of our product candidates or those of our competitors;

 

   

regulatory developments in the United States and foreign countries;

 

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variations in our financial results or those of companies that are perceived to be similar to us;

 

   

changes in the structure of healthcare payment systems, especially in light of current proposed reforms to the U.S. healthcare system;

 

   

announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

market conditions in the pharmaceutical and biotechnology sectors and issuance of securities analysts’ reports or recommendations;

 

   

sales of substantial amounts of our stock by existing stockholders;

 

   

sales of our stock by insiders and 5% stockholders;

 

   

general economic, industry and market conditions;

 

   

additions or departures of key personnel;

 

   

intellectual property, product liability or other litigation against us;

 

   

expiration or termination of our relationships with our collaborators; and

 

   

the other factors described in this “Risk Factors” section.

In addition, in the past, stockholders have initiated class action lawsuits against biotechnology and pharmaceutical companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.

Purchasers in this offering will suffer immediate dilution and may experience additional dilution in the future.

If you purchase common stock in this offering, you may pay more for your shares than the amounts paid by existing stockholders for their shares. In addition, the net tangible book value of your shares based upon our actual book value will immediately be less than the offering price you paid.

The future sale of our common stock could negatively affect our stock price.

If our existing stockholders sell a large number of shares of common stock, or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. These stockholders may sell their shares of our common stock starting at various times following this offering. We have agreed, under certain circumstances, to register the resale of shares held by our existing stockholders. In addition, we intend to register approximately              shares of common stock that are reserved for issuance under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to lock-up agreements and restrictions on our affiliates.

Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

Upon completion of this offering, our executive officers, directors and beneficial owners of 5% or more of our common stock and their affiliates will, in the aggregate, beneficially own approximately     % of our outstanding common stock, after giving effect to the conversion of all outstanding shares of our preferred stock into shares of our common stock and the exercise of warrants for              shares of common stock, but assuming no exercise of the underwriters’ over-allotment option. These persons, acting together, will be able to significantly influence all matters requiring stockholder approval,

 

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including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with our interests or the interests of other stockholders.

Certain provisions of Delaware law and of our charter documents contain provisions that could delay and discourage takeover attempts and any attempts to replace our current management by stockholders.

Certain provisions of our certificate of incorporation and bylaws, and applicable provisions of Delaware corporate law, may make it more difficult for or prevent a third party from acquiring control of us or changing our board of directors and management. These provisions include:

 

   

the ability of our board of directors to issue preferred stock with voting or other rights or preferences;

 

   

the inability of stockholders to act by written consent;

 

   

a classified board of directors with staggered three-year terms;

 

   

requirements that special meetings of our stockholders may only be called by the chairman of our board of directors, upon request of stockholders holding at least 20% of our capital stock issued and outstanding, or upon a resolution adopted by, or an affirmative vote of, a majority of our board of directors; and

 

   

requirements that our stockholders comply with advance notice procedures in order to nominate candidates for election to our board of directors or to place stockholders’ proposals on the agenda for consideration at meetings of stockholders.

We will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless prior board or stockholder approval was obtained.

Any delay or prevention of a change of control transaction or changes in our board of directors or management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares.

Our management has broad discretion over the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.

Our management will have broad discretion over the use of proceeds from this offering. You may not agree with management’s decisions, and our use of the proceeds may not yield any return on your investment in us. The failure of our management to apply the net proceeds of this offering effectively could have a material adverse effect on our business, financial condition and results of operations.

We do not expect to pay cash dividends on our common stock in the foreseeable future. As a result, you must rely on stock appreciation for any return on your investment.

We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Accordingly, you will have to rely on capital appreciation, if any, to earn a return on your investment in our common stock. Currently, we are subject to contractual restrictions on the payment of dividends under certain of our debt instruments. Furthermore, we may become subject to additional contractual restrictions or prohibitions on the payment of dividends.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate,” or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this prospectus include, among other things, statements about:

 

   

our plans to develop and commercialize our product candidates;

 

   

our ongoing and planned preclinical studies and clinical trials;

 

   

the timing of and our ability to obtain and maintain marketing approvals for our product candidates;

 

   

the rate and degree of market acceptance and clinical utility of our products;

 

   

our plans to leverage our Organ Regeneration Platform to discover and develop product candidates;

 

   

our ability to quickly and efficiently identify and develop product candidates;

 

   

our commercialization, marketing and manufacturing capabilities and strategy;

 

   

our intellectual property position;

 

   

our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; and

 

   

other risks and uncertainties, including those listed under the caption “Risk Factors.”

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect.

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $             million from the sale of the shares of common stock offered in this offering, based on an assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriter’s over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $             million.

We are undertaking this offering in order to access the public capital markets and to increase our liquidity. We expect to use the net proceeds of this offering for the following purposes:

 

   

approximately $             to fund our research and development activities, including clinical trials for our development programs;

 

   

approximately $             for maintaining our research and manufacturing facilities;

 

   

approximately $             for the servicing and repayment of debt; and

 

   

the balance for working capital and other general corporate purposes.

As of September 30, 2009, we had $24.3 million of debt outstanding, consisting of working capital notes totaling $18.4 million, with payments due through September 2011 and bearing an average interest rate of 12.26%, equipment and supplemental working capital notes totaling $4.8 million, with payments due through April 2012 and bearing an average interest rate of 11.68%, and a machinery and equipment note of $1.1 million, with payments due through January 2012 and bearing an interest rate of 5.0%.

The amounts and timing of our actual expenditures will depend on numerous factors, including the progress in, and costs of, our preclinical and clinical programs and the amount and timing of revenues, if any, from our collaborations. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the net proceeds. Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.

 

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DIVIDEND POLICY

We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. In addition, in certain circumstances, we are prohibited by various borrowing arrangements from paying cash dividends without the prior written consent of the lenders. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our board.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments and our capitalization as of September 30, 2009:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the automatic conversion of the preferred stock into 81,954,127 shares of common stock; and

 

   

on a pro forma as adjusted basis to reflect the sale of shares of our common stock and our receipt of the estimated net proceeds from this offering, based on an assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and the repayment of $             of outstanding indebtedness.

The pro forma information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.

 

     As of September 30, 2009
      Actual     Pro Forma     Pro Forma
As Adjusted
     (in thousands)

Debt outstanding, net of discount

   $ 23,753      $ 23,753      $  —  

Warrant liability

     275        —          —  

Redeemable convertible preferred stock

     184,215        —          —  

Stockholders' (deficit) equity

      

Common stock, $0.001 par value: 111,187 shares authorized; shares issued and outstanding: 10,143 actual; 92,097 pro forma;                      pro forma as adjusted

     10        92        —  

Additional paid-in capital

     3,391        187,799        —  

Deficit accumulated during the development stage

     (171,355     (171,355     —  
                      

Total Capitalization

   $ 40,289      $ 40,289     
                      

The number of pro forma as adjusted common shares shown as issued and outstanding in the table is based on the number of shares of our common stock outstanding as of September 30, 2009, assumes the conversion of all outstanding shares of preferred stock into                      shares of common stock, and excludes:

 

   

             shares of common stock issuable upon the exercise of options outstanding as of September 30, 2009 at a weighted average exercise price of $             per share;

 

   

             shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2009 at a weighted average exercise price of $             per share; and

 

   

             shares of our common stock reserved for future issuance under our 2004 Stock Incentive Plan.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering. As of September 30, 2009, our pro forma net tangible book value was $16.5 million, or $0.18 per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares of our common stock outstanding as of September 30, 2009, after giving effect to the conversion of our preferred stock into common stock upon completion of this offering. After giving effect to our sale in this offering of             shares of our common stock at an assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, of our pro forma net tangible book value as of September 30, 2009 would have been $             million, or $             per share of our common stock. This represents an immediate increase of net tangible book value of $             per share to our existing stockholders and an immediate dilution of $             per share to investors purchasing shares in this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

  $                        

Pro forma net tangible book value per share as of September 30, 2009, before giving effect to this offering

  0.18

Increase in pro forma net tangible book value per share attributable to investors purchasing shares in this offering

 

Pro forma net tangible book value per share after giving effect to this offering

 
   

Dilution in pro forma net tangible book value per share to investors in this offering

  $
   

If the underwriter exercises its over-allotment option in full, the pro forma net tangible book value per share after giving effect to this offering would be $             per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $             per share.

The following table summarizes, as of September 30, 2009, the differences between the number of shares of common stock purchased from us, after giving effect to the conversion of our preferred stock into common stock, the total effective cash consideration paid, and the average price per share paid by our existing stockholders and by our new investors purchasing stock in this offering at an assumed initial public offering price of $             per share (the mid-point of the price range set forth on the cover page of this prospectus) before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
     Number    Percent     Amount    Percent    

Existing stockholders before this offering

                     $                      %   $             

Investors participating in this offering

            
                      

Total

      100      100  
                      

The tables and calculations above are based on the number of shares of common stock outstanding after the completion of this offering. To the extent the options are exercised, there will be further dilution to new investors.

 

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If the underwriter exercises its over-allotment option in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding after this offering.

The above information assumes no exercise of stock options or warrants outstanding as September 30, 2009. As of September 30, 2009, there were:

 

   

             shares of common stock issuable upon the exercise of options outstanding as of September 30, 2009 at a weighted average exercise price of $             per share;

 

   

             shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2009 at a weighted average exercise price of $             per share; and

 

   

             shares of our common stock reserved for future issuance under our 2004 Stock Incentive Plan.

 

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SELECTED FINANCIAL DATA

The selected financial data for the years ended December 31, 2006, 2007 and 2008, and the nine months ended September 30, 2009 and as of December 31, 2007, 2008, and September 30, 2009 have been derived from our audited financial statements included elsewhere in this prospectus. The selected financial data for the years ended December 31, 2004 and 2005 and as of December 2004, 2005, and 2006 have been derived from our audited financial statements not included in this prospectus. The selected financial data for the nine months ended September 30, 2008 have been derived from our unaudited interim financial statements included in this prospectus. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments necessary to fairly state our results of operations for the nine months ended September 30, 2008.

The information in the following table should be read together with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus.

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2004     2005     2006     2007     2008     2008     2009  
    (in thousands, except share and per share data)  

Statement of Operations Data:

             

Operating expense:

             

Research and development

  $ 868      $ 6,849      $ 15,552      $ 22,335      $ 27,947      $ 21,680      $ 14,460   

General and administrative

    1,631        3,349        4,584        5,290        7,467        4,830        4,499   

Depreciation

    5        138        1,675        3,678        4,716        3,507        3,702   
                                                       

Operating loss

    (2,504     (10,336     (21,811     (31,303     (40,130     (30,017     (22,661

Interest income (expense) and change in fair value of preferred stock warrants, net

    65        709        938        315        (2,263     (1,514     (650
                                                       

Net loss

    (2,439     (9,627     (20,873     (30,988     (42,393     (31,531     (23,311

Accretion of redeemable convertible preferred stock to redemption value

    (1,035     (3,164     (5,640     (8,742     (11,754     (8,387     (10,358
                                                       

Net loss attributable to common stockholders

  $ (3,474   $ (12,791   $ (26,513   $ (39,730   $ (54,147   $ (39,918   $ (33,669
                                                       

Basic and diluted net loss attributable to common stockholders per share

  $ (0.53   $ (1.36   $ (2.72   $ (4.15   $ (5.53   $ (4.08   $ (3.33
                                                       

Weighted average common shares outstanding basic and diluted

    6,569,974        9,385,282        9,751,565        9,575,796        9,793,724        9,788,434        10,100,557   
                                                       

Unaudited pro forma net loss

            (42,393       (23,311
                         

Unaudited basic and diluted pro forma net loss per share

          $ (0.51     $ (0.25
                         

Unaudited basic and diluted pro forma weighted average common stock outstanding

            82,442,589          92,054,684   
                         

 

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    As of December 31,     As of
September 30,

2009
 
  2004     2005     2006     2007     2008    
  (in thousands)  

Balance Sheet Data:

           

Cash, cash equivalents and short-term investments

  $ 30,762      $ 31,468      $ 67,256      $ 66,554      $ 50,601      $ 25,888   

Working capital

    30,203        25,814        58,878        63,075        41,379        11,183   

Total assets

    30,947        38,791        88,766        91,313        72,276        44,282   

Long-term debt

    —          5,938        21,681        25,650        21,137        11,891   

Redeemable convertible preferred stock

    34,723        43,110        98,790        140,751        173,857        184,215   

Total stockholders’ equity (deficit)

    (4,394     (16,392     (43,177     (82,277     (135,079     (167,954

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data” and our financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We believe we are the only regenerative medicine company focused on discovering, developing, manufacturing and commercializing a range of replacement neo-organs and neo-tissues. Our Organ Regeneration Platform enables us to create proprietary product candidates that are intended to harness the intrinsic regenerative pathways of the body to produce a range of native-like organs and tissues. Our product candidates eliminate the need to utilize other tissues of the body for a purpose to which they are poorly suited, procure donor organs or administer anti-rejection medications. We produce neo-organs and neo-tissues in our scalable manufacturing facilities using efficient and repeatable proprietary processes, and have implanted neo-organs in our clinical trials. We intend to develop our technology to address unmet medical needs in urologic, renal, gastrointestinal and vascular diseases and disorders.

To date, we have devoted substantially all of our resources to the development of our Organ Regeneration Platform and product candidates, as well as to our facilities that we employ to manufacture our neo-organs and neo-tissues. Since our inception in July 2003, we have had no revenue from product sales, and have funded our operations principally through the private placement of equity securities and debt financings. We have never been profitable and, as of September 30, 2009, we have an accumulated deficit of $171.4 million. We expect to continue to incur significant operating losses for the foreseeable future as we advance our product candidates from discovery through preclinical studies and clinical trials and seek marketing approval and eventual commercialization.

Financial Operations Overview

Research and Development Expense

Our research and development expense consists of expenses incurred in developing and testing our product candidates and are expensed as incurred. Research and development expense consists of:

 

   

personnel related expenses, including salaries, benefits, travel, and other related expenses, including stock-based compensation;

 

   

payments made to third-party contract research organizations for preclinical studies, investigative sites for clinical trials, and consultants;

 

   

costs associated with regulatory filings and the advancement of our product candidates through preclinical studies and clinical trials;

 

   

laboratory and other supplies;

 

   

manufacturing development costs; and

 

   

facility maintenance.

Preclinical study and clinical trial costs for our product candidates are a significant component of our current research and development expenses. We track and record information regarding external research and development expenses on a per study basis. Preclinical studies are currently coordinated with third-party contract research organizations and expense is recognized based on the percentage

 

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completed by study at the end of each reporting period. Clinical trials are currently coordinated through a number of contracted sites and expense is recognized based on a number of factors including actual and estimated patient enrollment and visits, direct pass-through costs and other clinical site fees. We utilize internal employees, resources and facilities across multiple product candidates. We do not allocate internal research and development expenses among product candidates.

From our inception in July 2003 through September 30, 2009, we have incurred research and development expense of $88.2 million. We expect that a large percentage of our research and development expense in the future will be incurred in support of our current and future preclinical and clinical development programs. These expenditures are subject to numerous uncertainties in timing and cost to completion. We expect to continue to test our product candidates in preclinical studies for toxicology, safety and efficacy, and to conduct additional clinical trials for each product candidate. If we are not able to engage a partner prior to the commencement of later stage clinical trials, we may fund these trials ourselves. As we obtain results from clinical trials, we may elect to discontinue or delay clinical trials for certain product candidates or programs in order to focus our resources on more promising product candidates or programs. Completion of clinical trials by us or our future collaborators may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

 

   

the number of sites included in the trials;

 

   

the length of time required to enroll suitable patients;

 

   

the number of patients that participate in the trials;

 

   

the duration of patient follow-up;

 

   

the development stage of the product candidate; and

 

   

the efficacy and safety profile of the product candidate.

None of our product candidates has received FDA or foreign regulatory marketing approval. In order to grant marketing approval, the FDA or foreign regulatory agencies must conclude that clinical data establishes the safety and efficacy of our product candidates. Furthermore, our strategy includes entering into collaborations with third parties to participate in the development and commercialization of our product candidates. In the event that third parties have control over the clinical trial process for a product candidate, the estimated completion date would largely be under control of that third party rather than under our control. We cannot forecast with any degree of certainty which of our product candidates will be subject to future collaborations or how such arrangements would affect our development plan or capital requirements.

As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our development projects or when and to what extent we will receive cash inflows from the commercialization and sale of an approved product candidate.

General and Administrative Expense

General and administrative expense consists primarily of salaries, benefits and other related costs, including stock-based compensation, for persons serving in our executive, finance, legal, marketing planning and human resource functions. Our general and administrative expense includes facility-related costs not otherwise included in research and development expense, professional fees for legal services, including patent-related expense, tax and accounting services and other consulting services and general corporate expenses. We expect that our general and administrative expenses will increase with the development and potential commercialization of our product candidates, and are subject to the reporting obligations applicable to public companies.

 

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Depreciation Expense

Depreciation expense is the amortization of capitalized property and equipment that is recognized over the estimated useful lives of the assets using the straight-line method. We use a life of three years for computer equipment; five years for laboratory, office and warehouse equipment; seven years for furniture and fixtures; and the lesser of the useful life of the asset or the remaining life of the underlying facility lease for leasehold improvements. Expenditures for maintenance, repairs, and betterments that do not prolong the useful life of the asset are charged to expense as incurred.

Interest Income, Interest Expense and Change in Fair Value of Preferred Stock Warrants

Interest income consists of interest earned on our cash and cash equivalents and short-term investments. Interest expense consists primarily of cash and non-cash interest costs related to our outstanding debt, as well as amounts related to the change in the fair value of our preferred stock warrants.

Net Operating Losses and Tax Loss Carryforwards

As of September 30, 2009, we had net operating loss carryforwards available to offset future federal and state taxable income of $89.6 million and $96.2 million, respectively, as well as $4.0 million of research and development tax credits. The net operating loss carryforwards and credits expire at various dates through 2029. The Tax Reform Act of 1986 (the Act) provides for a limitation on the annual use of net operating loss and research and development tax credit carryforwards following certain ownership changes (as defined by the Act) that could limit our ability to utilize these carryforwards. We have not completed a study to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since our formation, due to the significant costs and complexities associated with a study. We may have experienced various ownership changes, as defined by the Act, as a result of past financings. Accordingly, our ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes; therefore, we may not be able to take full advantage of these carryforwards for federal or state income tax purposes.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make significant judgments and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Management bases these significant judgments and estimates on historical experience and other assumptions it believes to be reasonable based upon information presently available. Actual results could differ from those estimates under different assumptions, judgments or conditions.

All of our significant accounting policies are discussed in Note 3, Summary of Significant Accounting Policies, to our financial statements, included elsewhere in this prospectus. We have identified the following as our critical accounting polices and estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions, judgments or conditions. Management has reviewed these critical accounting policies and estimates with the Audit Committee of our board of directors.

Impairment of Long-lived Assets

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized by

 

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the amount by which the carrying amount of the asset exceeds the fair value of the asset. As of December 31, 2007 and 2008 and September 30, 2009, we believe that no modification of the remaining useful lives or write-down of long-lived assets is required.

Preclinical and Clinical Trial Costs

A substantial portion of our ongoing research and development activities are performed under agreements we enter into with external service providers who conduct many of our research and development activities. We estimate the costs incurred under these contracts based on factors such as work performed, milestones achieved, patient enrollment and costs historically incurred for similar contracts. As actual costs become known, we adjust our estimates. To date, our estimates have been within management’s expectations, and no material adjustments to research and development expense has been recognized. We may expand the level of research and development activity to be performed by external service providers in which case our estimates would be more material to our future operations. Subsequent changes in estimates may result in a material change in our accruals, which could also materially affect our results of operations.

Stock-Based Compensation

The fair value of our common stock underlying stock options granted during 2006, 2007, 2008, and the nine months ended September 30, 2009 was determined by our compensation committee pursuant to authority delegated by our board of directors. In the absence of a public trading market for our common stock, our compensation committee was required to estimate the fair value of our common stock at each option grant date. Our compensation committee utilized methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, or the AICPA Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, considering numerous objective and subjective factors to determine common stock fair market value at each option grant date, including but not limited to the following factors:

 

   

arm’s length private transactions involving our preferred stock, including the sale of our Series A preferred stock at $1.61683 per share in 2004 and 2005, sale of our Series B preferred stock at $1.82 per share in 2006 and sale of our Series C preferred stock at $1.82 per share in 2007 and 2008, all with superior rights and preferences to our common stock;

 

   

our financial and operating performance;

 

   

market conditions;

 

   

developmental milestones achieved;

 

   

business risks; and

 

   

management and board experience.

Beginning in January 2006, our compensation committee commenced periodic contemporaneous assessments of the valuation of our common stock. These valuations were performed concurrently with the achievement of significant milestones or with major financing events as of January 31, 2006; June 23, 2006; December 31, 2006; September 24, 2007; February 1, 2008; July 31, 2008; October 15, 2008; January 15, 2009; February 13, 2009; and July 31, 2009. In performing these valuation analyses, we utilized pricing indications implied from our most recent sales of preferred securities, market pricing information from companies that we considered to be comparable or that we believed would be priced in a similar fashion; discounted cash flow models, assessment of milestones achieved, risks reduced and market conditions, as well as pricing from initial public offerings in the life sciences industry. With the exception of the value indication from our latest preferred round of securities, each method produced a future value. These future value indications were discounted back to a present value using a risk-adjusted rate of return appropriate for an early-stage, pre-revenue company. For the 2006 and July 31, 2009

 

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valuations the determined equity value was allocated using an option pricing model, based on the Black-Scholes option pricing formula. From September 2007 through February 2009, we used a probability-weighted equity return model to allocate our equity value to the various equity securities in our capital structure. The July 2009 valuation utilized an option pricing model due to the relatively low probability of an initial public offering transaction at the time.

From January 2006 to June 22, 2006, we granted options to purchase 988,205 shares of common stock at an exercise price of $0.40, which our compensation committee estimated to be the per share fair market value of the common stock underlying the stock options.

From June 23, 2006 to December 2006, we granted options to purchase 2,178,853 shares of common stock at an exercise price of $0.44, which our compensation committee estimated to be the per share fair market value of the common stock underlying the stock options.

From January 2007 to August 2007, we granted options to purchase 1,001,028 shares of common stock at an exercise price of $1.18, which our compensation committee estimated to be the per share fair market value of the common stock underlying the stock options.

From September 2007 to January 2008, we granted options to purchase 1,849,440 shares of common stock at an exercise price of $1.28, which our compensation committee estimated to be the per share fair market value of the common stock underlying the stock options.

From February 2008 to July 30, 2008, we granted options to purchase 1,161,995 shares of common stock at an exercise price of $1.71, which our compensation committee estimated to be the per share fair market value of the common stock underlying the stock options.

From July 31, 2008 to October 14, 2008, we granted options to purchase 557,000 shares of common stock at an exercise price of $1.39, which our compensation committee estimated to be the per share fair market value of the common stock underlying the stock options.

From October 15, 2008 to January 14, 2009, we granted options to purchase 44,000 shares of common stock at an exercise price of $0.81, which our compensation committee estimated to be the per share fair market value of the common stock underlying the stock options.

From January 15, 2009 to February 12, 2009, we granted options to purchase 36,500 shares of common stock at an exercise price of $0.69, which our compensation committee estimated to be the per share fair market value of the common stock underlying the stock options.

From February 13, 2009 to July 30, 2009, we granted options to purchase 4,000 shares of common stock at an exercise price of $0.14, which our compensation committee estimated to be the per share fair market value of the common stock underlying the stock options.

From July 31, 2009 to September 2009, we granted options to purchase 4,498,651 shares of common stock at an exercise price of $0.03, which our compensation committee estimated to be the per share fair market value of the common stock underlying the stock options.

On August 26, 2009, we modified the exercise price for all options outstanding held by active employees to $0.03 resulting in an incremental value expense which was partially recognized as compensation in the third quarter of 2009. The remaining charge will be recognized over the remaining vesting period of the options that were modified.

 

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Prior to January 1, 2006, we applied the intrinsic-value method of accounting prescribed in previous Financial Accounting Standards Board, or FASB, accounting guidance that was later superseded, and related interpretations to account for its stock options issued to employees and directors. Under this method, compensation expense was recorded on the date of grant only if the current fair market value of the underlying stock exceeded the exercise price.

On January 1, 2006, we adopted the revised accounting standards for stock-based compensation which was adopted prospectively to new awards and to awards modified, repurchased, or canceled after December 31, 2005. This current guidance requires companies to measure and recognize compensation expense for all employee stock-based payments at fair value, net of estimated forfeitures, over the vesting period of the underlying share-based awards. In addition, we account for stock-based compensation to non-employees in accordance with the FASB accounting guidance for equity instruments that are issued to other than employees.

We use the Black-Scholes option-pricing model to value our stock option awards. The Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. Since we have been operating as a private company, we do not have sufficient historical volatility for the expected term of the options; therefore, we use comparable public companies as a basis for our expected volatility to calculate the fair value of option grants. We intend to continue to consistently apply this process using comparable companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available. The expected term is based on the simplified method provided by SEC guidance. The risk-free interest rate is based on U.S. Treasury yield curve with a remaining term equal to the expected life assumed at grant. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimate and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different in the future.

The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period in which estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

Results of Operations

Nine Months Ended September 30, 2008 compared to the Nine Months Ended September 30, 2009

Research and Development Expense. Research and development expense for the nine months ended September 30, 2008 and 2009 were comprised of the following:

 

     September 30,    Increase
(Decrease)
 
   2008    2009    $     %  
   (in thousands)        

Compensation and related expense

   $ 8,698    $ 7,492    $ (1,206   (14 )% 

External services – direct third parties

     8,301      3,137      (5,164   (62 )% 

External services – other

     839      792      (47   (6 )% 

Research materials and related expense

     1,851      1,355      (496   (27 )% 

Facilities and related expense

     1,991      1,684      (307   (15 )% 
                        

Total research and development expense

   $ 21,680    $ 14,460    $ (7,220   (33 )% 
                        

 

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Research and development expense decreased primarily due to a decrease in external services related to direct third-party expense of $4.2 million for preclinical studies and $1.0 million for other costs in 2009 associated with our Phase II clinical trials for our Neo-Bladder Augment. Compensation and related expense decreased primarily due to the reduction of headcount in our Pennsylvania manufacturing facility. The decrease in these programs led to a decrease in the demand for lab supplies and other services related to our product candidates.

General and Administrative Expense.    General and administrative expense decreased by $0.3 million, or 7%, from $4.8 million for the nine months ended September 30, 2008 to $4.5 million for the nine months ended September 30, 2009. The decrease in general and administrative expense was due to a decrease in corporate personnel-related costs of $0.3 million primarily related to the reduction of headcount in our executive, finance, legal and human resource functions.

Depreciation Expense.    Depreciation expense increased by $0.2 million, or 6%, from $3.5 million for the nine months ended September 30, 2008 to $3.7 million for the nine months ended September 30, 2009. The increase was primarily due to additional capital investments in lab equipment in our North Carolina facility.

Interest Income / Expense and Change in Fair Value of Preferred Stock Warrants.    Interest income decreased $1.0 million, or 85%, from $1.2 million for the nine months ended September 30, 2008 to $0.2 million for the nine months ended September 30, 2009 due to lower investment balances and lower rates of return on our investments. Interest expense and change in fair value of preferred stock warrants decreased by $1.9 million, or 69%, from $2.7 million for the nine months ended September 30, 2008 to $0.8 million for the nine months ended September 30, 2009, primarily due to the decline in the estimated fair value of the preferred stock warrants.

Year Ended December 31, 2007 compared to Year Ended December 31, 2008

Research and Development Expense.    Research and development expense for the years ended December 31, 2007 and 2008 was comprised of the following:

 

     Year Ended
December 31,
   Increase
(Decrease)
 
     2007    2008    $     %  
     (in thousands)        

Compensation and related expense

   $ 8,857    $ 11,664    $ 2,807      32

External services – direct third parties

     8,376      9,812      1,436      17

External services – other

     1,341      1,150      (191   (14 )% 

Research materials and related expense

     1,785      2,516      731      41

Facilities and related expense

     1,976      2,805      829      42
                        

Total research and development expense

   $ 22,335    $ 27,947    $ 5,612      25
                        

Research and development expense increased primarily due to an increase of $2.8 million in compensation and related expenses primarily due to personnel costs associated with increased headcount, which was due to the start of the clinical trials and other pipeline projects that were initiated in 2007. The increase in external services related to direct program costs primarily related to increased preclinical studies. Research materials and related expenses increased primarily due to increased demand for lab supplies and services for preclinical and clinical studies. We also incurred increased facility costs due to increased rent and non-capitalized maintenance costs associated with our Pennsylvania manufacturing facility.

 

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General and Administrative Expense.    General and administrative expense increased by $2.2 million, or 41%, from $5.3 million in 2007 to $7.5 million in 2008. The increase in general and administrative expense was primarily due to increased personnel related costs and outside professional services, totaling $1.4 million, and an increase of $0.8 million in legal costs associated with our patents.

Depreciation Expense.    Depreciation expense increased by $1.0 million, or 28%, from $3.7 million in 2007 to $4.7 million in 2008. The increase was primarily due to additional purchases of lab equipment and a full year of depreciation expense recognized on our capital investments in leasehold improvements for our Pennsylvania manufacturing facility as compared to nine months in 2007.

Interest Income / Expense and Change in Fair Value of Preferred Stock Warrants.    Interest income decreased $1.6 million, or 53%, from $3.0 million in 2007 to $1.4 million in 2008 due to lower investment balances as compared to 2007 and lower rates and returns. Interest expense and change in fair value of preferred stock warrants increased $1.0 million, or 37%, from $2.7 million in 2007 to $3.7 million in 2008 due to additional loans of $1.1 million and the 2007 extension of our refinancing of interest-only payments through the end of 2008 on our existing working capital and equipment notes.

Year Ended December 31, 2006 compared to the Year Ended December 31, 2007

Research and Development Expense.    Research and development expense for the years ended December 31, 2006 and 2007 were comprised of the following:

 

     Year Ended
December 31,
   Increase
(Decrease)
 
   2006    2007    $    %  
  

(in thousands)

      

Compensation and related expense

   $ 6,229    $ 8,857    $ 2,628    42

External services – direct program costs

     5,441      8,376      2,935    54

External services – other

     788      1,341      553    70

Research materials and related expense

     1,453      1,785      332    23

Facilities and related expense

     1,641      1,976      335    20
                       

Total research and development expense

   $ 15,552    $ 22,335    $ 6,783    44
                       

Research and development expense increased primarily due to an increase in external services related to direct program costs for preclinical studies of $1.5 million and a $1.4 million increase in direct program cost associated with our Phase II clinical trials for the Neo-Bladder Augment. Compensation and related expenses increased due to an increase in headcount necessary to support ongoing clinical trials and other pipeline projects that included kidney augment and vessel replacement. These programs also increased the demand for lab supplies and other services related to our product candidates. We also incurred increased facility cost due to the completion of construction on our Pennsylvania manufacturing facility and the beginning of construction on additional space in our North Carolina facility.

General and Administrative Expense.    General and administrative expense increased by $0.7 million, or 15%, from $4.6 million in 2006 to $5.3 million in 2007. The increase in general and administrative expense was primarily due to increased personnel related costs of $0.6 million and legal costs of $0.1 million.

Depreciation Expense.    Depreciation expense increased by $2.0 million, or 120%, from $1.7 million in 2007 to $3.7 million in 2007. The increase is primarily due to the capital investments in leasehold improvements in our Pennsylvania manufacturing site that were substantially completed and placed into service in March 2007.

 

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Interest Income / Expense and Change in Fair Value of Preferred Stock Warrants.    Interest income increased $0.5 million in 2007, or 20%, from $2.5 million in 2006 to $3.0 million in 2007 due to higher investment returns and available investment balances resulting from cash proceeds of $33.2 million received in the Series C preferred stock offering in September 2007. Interest expense and change in fair value of preferred stock warrants increased $1.1 million, or 72%, from $1.6 million in 2006 to $2.7 million in 2007 due to additional loans of $3.3 million and the extension of our refinancing of interest-only payments through the end of 2008 on our existing working capital and equipment notes.

Liquidity and Capital Resources

Source of Liquidity

We have incurred losses since our incorporation in 2003 as a result of our significant research and development expenditures and the lack of any approved products to generate product sales. We have a deficit accumulated during the development stage of $171.4 million as of September 30, 2009. We anticipate that we will continue to incur additional losses until such time that we can generate significant sales of our product candidates currently in development or we enter into cash flow positive business transactions. We have funded our operations principally with proceeds from redeemable convertible preferred stock offerings. The following table summarizes our funding sources as of September 30, 2009:

 

Issue

   Year    No. Shares    Net Proceeds
(in thousands)(1)

Series A Redeemable Convertible Preferred Stock

   2004, 2005    24,190,672    $ 38,910

Series B Redeemable Convertible Preferred Stock

   2006    27,637,363      50,040

Series C Redeemable Convertible Preferred Stock

   2007, 2008    30,126,092      54,571
              
      81,954,127    $ 143,521
              

 

(1)

Net proceeds represent gross proceeds received net of legal costs associated with each series.

We have also funded our operations through the use of proceeds received from our long-term debt totaling $34.7 million through September 30, 2009. We currently have a working capital note with an outstanding principal of $18.4 million as of September 30, 2009, which borrowings were used for our general working capital needs. In addition, we have loans to fund equipment and other asset purchases with outstanding principal of $5.9 million as of September 30, 2009.

Cash, cash equivalents and short-term investments at September 30, 2009 were $25.9 million, representing 58.5% of total assets. Working capital as of September 30, 2009 was $11.2 million.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for each of the past three years and the nine months ended September 30, 2008 and 2009:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
    
     2006     2007     2008     2008     2009  
     (in thousands)  

Statement of Cash Flows Data:

          

Total cash provided by (used in):

          

Operating activities

   $ (19,482   $ (26,726   $ (34,901   $ (27,064   $ (21,476

Investing activities

     (41,071     1,925        25,270        20,494        3,423   

Financing activities

     67,266        35,310        21,842        194        (3,001
                                        

Increase (decrease) in cash and cash equivalents

   $ 6,713      $ 10,509      $ 12,211      $ (6,376   $ (21,054
                                        

 

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Operating Activities

Cash used in operating activities decreased $5.6 million in the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, primarily due to a decrease in our net loss of $8.2 million, driven mainly by our decrease in research and development expense of $7.2 million associated with our preclinical and clinical studies, and higher depreciation expense of $0.2 million, offset by a increase in operating assets and liabilities of $0.6 million, and lower stock-based compensation and noncash-interest expense of $2.2 million.

Cash used in operating activities increased $8.2 million in 2008, compared to 2007, primarily due to an increase in our net loss of $11.4 million, driven by an increase in research and development expense of $5.6 million associated with our preclinical and clinical studies, offset by a decrease in operating assets and liabilities of $0.8 million and higher stock-based compensation and noncash-interest expense of $1.1 million and higher depreciation expense of $1.0 million.

Cash used in operating activities increased $7.2 million in 2007, compared to 2006, primarily due to an increase in our net loss of $10.1 million, driven by an increase in research and development expense of $6.8 million associated with our preclinical and clinical studies, offset by a decrease in operating assets and liabilities of $0.9 million and higher depreciation expense of $2.0 million as a result of the completion of leasehold improvements on our Pennsylvania manufacturing site in March 2007.

Investing Activities

Cash provided by investing activities decreased $17.1 million in the nine months ended September 30, 2009, compared to cash provided by investing activities in the nine months ended September 30, 2008, primarily due to lower net sales and redemptions of short-term investments of $19.1 million, offset by a decrease of $2.0 million for cash paid for property and equipment.

Cash provided by investing activities increased $23.3 million in 2008, compared to 2007, primarily due to higher net sales and redemptions of short-term investments of $16.6 million and a decrease of $6.7 million for cash paid for property and equipment.

Cash provided by investing activities was $1.9 million in 2007, compared to cash used in investing activities of $41.1 million in 2006, primarily due to higher net sales and redemptions of short-term investments of $40.3 million and a decrease of $2.7 million for cash paid for property and equipment.

Financing Activities

Cash used in financing activities was $3.0 million for the nine months ended September 30, 2009, compared to cash provided by financing activities of $0.2 million for the nine months ended September 30, 2008, due to an increase in payments of long-term debt of $3.7 million primarily resulting from the end of interest-only payments in December 2008.

Cash provided by financing activities decreased $13.5 million in 2008, compared to 2007, primarily due to the issuance of our Series C redeemable convertible preferred stock, net of transaction costs, of $21.4 million, a decrease of $11.8 million from 2007. In addition to the issuance of preferred stock, financing activities also decreased due to a decrease of $2.2 million in proceeds from debt financing of $1.1 million in 2008 as compared to $3.3 million in 2007, offset by a decrease in debt payments of $0.5 million in 2008.

Cash provided by financing activities decreased $32.0 million in 2007, compared to 2006, primarily due to the issuance of our Series C redeemable convertible preferred stock, net of transaction costs, of $33.2 million, a decrease of $16.8 million from 2006. In addition to issuance of preferred stock, financing activities also decreased due to a decrease of $15.2 million in proceeds from debt financing of $3.3 million in 2007 as compared to $18.5 million in 2006.

 

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If we are unable to complete this offering, our ability to meet our obligations in the normal course of business up through and beyond mid-June 2010 will be dependent on controlling our expenses and securing additional external financing. There can be no assurance that such financing will be available in amounts or terms acceptable to us, if at all. These conditions raise substantial doubt about our ability to continue as a going concern. Our independent registered public accounting firm has modified its audit report on our financial statements to include an explanatory paragraph regarding this uncertainty.

Based on our current operating plans, we expect the proceeds of this offering, together with our existing resources, to be sufficient to fund our planned operations, including our continued product candidate development, through mid-2011. However, we may require significant additional funds earlier than we currently expect to conduct additional clinical trials and seek marketing approval of our product candidates, or in connection with future business development and/or licensing activities. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials.

Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities or by selling debt securities, if convertible, further dilution to our existing stockholders may result. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, collaboration agreements, debt financings or licensing arrangements.

If adequate funds are not available, we may be required to terminate, significantly modify or delay our development programs, reduce our planned commercialization efforts, or obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently. We may elect to raise additional funds even before we need them if the conditions for raising capital are favorable.

Potential Future Milestone Payments

In 2003, we executed a license agreement with Children’s Medical Center Corporation, or CMCC, whereby CMCC granted to us the utilization of certain patent rights. We are obligated to make payments to CMCC upon the occurrence of various clinical milestones. During the fourth quarter of 2006, we achieved two of our clinical milestones for the first licensed product launched, as defined in the agreement, and paid $350,000, which was recorded as research and development expense for the year ended December 31, 2006. No further milestones payments were made during 2007, 2008 or the first nine months of 2009. Upon the successful completion of certain milestones, we will be obligated, under our current agreement, to make future milestone payments for the first licensed product. As of September 30, 2009, we had no payment obligations to CMCC under this agreement. In addition, upon commercialization of the licensed product, we will pay CMCC royalties based on net sales of products covered by the license by us, our affiliates and our sublicensees in all countries, except for those for which there is no valid patent claim, until the later of the expiration, on a country-by-country basis, of the last patent right and October 2018.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

 

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Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2008:

 

     Payments due by period

Contractual Obligations (1)

   Total    2009    2010 and 2011    2012 and 2013    2014 and
thereafter

Debt obligations

   $ 27,308,432    $ 5,773,011    $ 21,491,117    $ 44,304    $ —  

Interest payments on debt

     5,016,836      2,786,813      2,229,024      999      —  

Operating lease obligations

     5,659,079      571,784      1,470,616      1,693,337      1,923,342
                                  

Total

   $ 37,984,347    $ 9,131,608    $ 25,190,757    $ 1,738,640    $ 1,923,342
                                  

 

(1)

This table does not include any milestone payments which may become payable to third parties under license agreements as the timing and likelihood of such payments are not known.

In October 2008, we refinanced the terms of the working capital note with a then principal amount of $20 million, which was previously refinanced in 2006 and 2007 (see Note 8 in the notes to our financial statements). Under the refinancing, the repayment terms of $14.2 million principal amount of the working capital note were extended to add an additional six-month period of interest-only payments through July 2009 followed by 24 monthly payments of principal and accrued interest at an annual interest rate of 12.26%. The repayment of $5.8 million of the working capital note were extended to add a 14-month period of interest-only payments through January 2010 followed by 20 monthly payments of principal and accrued interest at an annual interest rate of 12.26%. The working capital note is secured by a blanket lien on all of our assets and a negative pledge on our licensed and owned intellectual property.

We also have an additional $9.8 million loan with another lender to fund equipment and other asset purchases. The loan consists of a $7.4 million note to purchase equipment, or the equipment note, and a $2.4 million note for other soft costs, or supplemental working capital note, for purchases from July 2005 through December 2009. In October 2007, we refinanced the equipment and supplemental working capital notes with a then carrying amount of $4.6 million. Under the terms of the refinanced equipment and supplemental working capital notes, we had a 12-month period of interest-only payments through October 2008 followed by 24 monthly payments of principal and accrued interest at an annual interest rate of 10.44%. In the fourth quarter of 2007, we executed an additional loan in the amount of $0.9 million on the equipment and supplemental working capital notes. During 2008, we executed an additional loan in the amount of $1.1 million on the equipment and supplemental working capital notes. During the first nine-months of 2009, we executed an additional loan in the amount of $0.5 million on the equipment and supplemental working capital notes. The equipment note bears interest at an average rate of 11.69% and matures over 36 to 48 months. The supplemental working capital note bears interest at an average rate of 11.67% and matures over 36 months. The equipment note and the supplemental working capital note are secured by a first priority lien on equipment and assets purchased with the proceeds from the notes.

In December 2007, we executed a $1.65 million agreement with the Commonwealth of Pennsylvania to fund machinery and equipment and other asset purchases through December 31, 2009. On December 31, 2007 we borrowed $1.3 million under the loan to fund equipment purchases. In March 2009, we borrowed an additional $0.3 million under the loan to fund equipment purchases. Under the terms of the loan, we have a four year period of payments of principal and accrued interest at an annual interest rate of 5%. The loan is secured by a first priority lien on equipment and assets purchased with the proceeds from the loan.

 

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In June 2005, we entered into a six-year, non-cancelable lease agreement for laboratory space for our research and development projects in Winston-Salem, North Carolina. The lease agreement includes the right to lease additional space, which we executed in February 2007. The lease for both facilities will expire by its terms in September 2011.

In 2006, we entered into a ten-year, non-cancelable lease agreement for space for our corporate offices and full-scale manufacturing facility located in East Norriton, Pennsylvania. Under the lease agreement, we will lease an additional space in the same building in March 2011. The lease will expire by its terms in February 2016.

We have entered into agreements with consultants and clinical research organizations which are partially responsible for conducting and monitoring our clinical trials for our product candidates. We have also entered into agreements with consultants and clinical research organizations that are responsible for work in our preclinical studies, public relations and other areas in the ordinary course of our business. These contractual obligations have been excluded from the table above, because we may terminate these at any time without penalty.

Recent Accounting Pronouncements

We adopted new accounting guidance on fair value measurements effective January 1, 2008, for financial assets and liabilities. In addition, effective January 1, 2009, we adopted this guidance as it relates to nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on at least an annual basis. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability, referred to as the exit price, in an orderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. See additional disclosures in Note 4 to our financial statements related to the adoption of this fair value guidance.

In June 2008, the FASB issued new guidance related to assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock for the purposes of determining whether such equity-linked financial instrument (or embedded feature) is subject to derivative accounting. We adopted this new guidance effective January 1, 2009. The adoption of this guidance did not have a material impact on our results of operations or financial condition.

In May 2009, the FASB issued new guidance on subsequent events. The standard provides guidance on management’s assessment of subsequent events and incorporates this guidance into accounting literature. The standard is effective prospectively for interim and annual periods ending after June 15, 2009 and we adopted this guidance commencing with the issuance of the September 30, 2009 financial statements. The implementation of this standard did not have a material impact on our financial position and results of operations. We have evaluated subsequent events through December 23, 2009, the date of issuance of our September 30, 2009 financial statements.

In April 2009, the FASB issued a staff position requiring fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. The guidance is effective for interim and annual periods ending after June 15, 2009, and we adopted this guidance commencing with the issuance of the September 30, 2009 financial statements. The implementation of this standard did not have a material impact on our balance sheet and results of operations.

In June 2009, FASB Accounting Standards Codification, or Codification, was issued, effective for financials statements issued for interim and annual periods ending after September 15, 2009. The

 

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Codification supersedes literature of the FASB, Emerging Issues Task Force and other sources. The Codification did not change U.S. generally accepted accounting principles. The implementation of this standard did not have a material impact on our balance sheet and results of operations.

Quantitative and Qualitative Disclosures about Market Risk

The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. Due to the nature of these investments, we believe that we are not subject to any material market risk exposure. As of September 30, 2009, we had cash and cash equivalents and short term investments of $25.9 million.

 

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BUSINESS

Overview

We believe we are the only regenerative medicine company focused on discovering, developing, manufacturing and commercializing a range of replacement neo-organs and neo-tissues. We currently create these functional neo-organs and neo-tissues using a patient’s own cells, or autologous cells, in conjunction with our Organ Regeneration Platform. We believe our proprietary product candidates harness the intrinsic regenerative pathways of the body to regenerate a range of native-like organs and tissues. Our neo-organs and neo-tissues are designed to avoid the need to substitute other tissues of the body for a purpose to which they are poorly suited. In addition, our product candidates eliminate the need for donor organs and the administration of anti-rejection medications. We produce neo-organs and neo-tissues in our scalable manufacturing facilities using efficient and repeatable proprietary processes, and have implanted neo-organs in our clinical trials. Building on our clinical and preclinical experience, we are initially leveraging our Organ Regeneration Platform to develop our Neo-Urinary Conduit for bladder cancer patients. We intend to develop our technology to address unmet medical needs in urologic, renal, gastrointestinal and vascular diseases and disorders.

Regenerative medicine is an interdisciplinary field combining expertise in developmental biology, medicine and engineering with the goal of restoring native-like organ and tissue function. The premise of regenerative medicine is that the body has the intrinsic capacity to heal and regenerate. Liver tissue, for example, will naturally regenerate following partial resection. In many situations, however, the appropriate conditions that facilitate the regenerative process in the body may not be present for reasons such as the absence of appropriate gene expression or the presence of an underlying disease process. Regenerative medicine seeks to provide the necessary stimulus, environment or foundation to promote the body’s innate regenerative capacity. While the FDA has approved regenerative medicine products for skin applications and repair of selected cartilage defects, we believe that we are the only company using regenerative medicine to harness the body’s ability to regenerate a range of functional, native-like organs and tissues.

Our Organ Regeneration Platform has enabled us to develop our product candidates from proof of concept to first-in-man clinical trials in as short as 24 months. Our technology has been applied in two Phase II clinical trials for our Neo-Bladder Augment. Recent advances in our platform technology have enabled us to significantly simplify our process of manufacturing neo-organs and neo-tissues, which we believe will allow us to address new and larger market opportunities. Our lead product candidate, our Neo-Urinary Conduit, is intended to replace the use of bowel tissue in bladder cancer patients requiring a non-continent urinary diversion after bladder removal surgery, or cystectomy. We are able to manufacture our Neo-Urinary Conduit in a proprietary process that takes four weeks or less and uses only smooth muscle cells derived from a routine fat biopsy. We have an effective IND and expect to commence a Phase I clinical trial for our Neo-Urinary Conduit in bladder cancer patients in the first half of 2010.

Our Organ Regeneration Platform

Our Organ Regeneration Platform is based on extensive work that began in the early 1990s at Children’s Hospital Boston and Massachusetts Institute of Technology, and continued at the Wake Forest Institute for Regenerative Medicine and our company. Our proprietary approach involves the use of a combinatorial method, testing different combinations of cell type and scaffold material. We believe this approach enables us to accurately identify the combination of various cell types and scaffold materials for a specific organ necessary to elicit a regenerative response and guides our decisions for subsequent rounds of testing. We own or license over 30 U.S. patents and patent applications and over 100 international patents and filings related to our Organ Regeneration Platform and product candidates.

 

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The organ regeneration process enabled by our proprietary Organ Regeneration Platform involves the following steps:

 

   

Isolation and expansion of progenitor cells.    Our autologous organ regeneration process begins with our receipt of a small tissue sample, generally obtained by a routine biopsy of the patient. This sample is then sent to our pilot manufacturing facility in North Carolina where our scientists engage in a specialized process to isolate the necessary committed progenitor cells, of one or more types as needed, that form the basis of the target organ’s or tissue’s essential function. Committed progenitor cells have been programmed by the body to become specific cell types, but are not yet developed into a single cell type, retaining the ability to promote regeneration. We obtain the requisite progenitor cells from various sources. For example, for our Neo-Urinary Conduit, we select smooth muscle progenitor cells from a small sample of adipose, or fat tissue. In the case of our Neo-Kidney Augment product candidate, we obtain a tissue sample through a small gauge needle biopsy of the kidney. We then use our proprietary cell growth process to grow, or expand, the specifically isolated progenitor cells ex vivo, or outside of the body, until an adequate number of cells are produced.

 

   

Seeding and growth.    Once we have completed our cell expansion process, we separately place, or seed, these cell populations on a bioabsorbable scaffold. Depending upon the type of neo-organ or neo-tissue being created, we use biomaterials for the scaffold that, when combined with the isolated and expanded cell populations, promote the desired regenerative outcome. We select the type of material based upon our knowledge of the organ or tissue we are seeking to regenerate and extensive testing to determine the optimal material characteristics, treatment and shape that will encourage cell growth and catalyze the body’s regenerative power. Composition and design of the biomaterials are important elements of our technology that help to ensure native-like tissue regeneration and ease of delivery through, where possible, minimally invasive surgical procedures.

We then place the bioabsorbable scaffold, seeded with the cell populations, in a bioreactor, or a closed container used for enhancing biological growth under controlled conditions. Further manipulation and handling of the neo-organ or neo-tissue is done without removal from the bioreactor, which greatly reduces the risk of contamination. The expanded cell populations attach to the biomaterials and begin to form appropriate cellular and tissue layers for the neo-organ or neo-tissue, until ready for implantation.

 

   

Implantation.    The neo-organ or neo-tissue is typically shipped from our manufacturing facility via a standard overnight courier service and delivered directly to the patient’s surgeon in as short as four weeks after we receive the patient’s biopsy. Each surgeon implanting our neo-organs or neo-tissues will be trained and provided with specific procedures and protocols based on general surgical techniques to implant the neo-organ or neo-tissue in the patient.

 

   

Regeneration.    Based on data from preclinical and clinical studies, we believe that the neo-organ or neo-tissue serves as a template for the body to regenerate native-like organs and tissues. Blood vessels and nerves grow into the implanted neo-organ or neo-tissue and the scaffold is gradually absorbed by the body. In preclinical tests, we have observed that the newly grown tissue integrates with its surroundings and becomes substantially indistinguishable over time from the native organ. The clinical results we have observed indicate that, in this regenerative process, the body regulates the growth and development of the organ to ensure that it is not under- or over-developed.

 

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Our Strategy

Our goal is to become the leading regenerative medicine company focused on the development and commercialization of neo-organs and neo-tissues for a variety of diseases and disorders. To achieve this objective, we intend to:

 

   

Rapidly advance the Tengion Neo-Urinary Conduit.    We are devoting a significant portion of our resources and business efforts to completing the development of our lead product candidate, the Neo-Urinary Conduit. We have an effective IND and expect to initiate a Phase I clinical trial in the first half of 2010 in bladder cancer patients who require removal of their bladders.

 

   

Leverage our Organ Regeneration Platform to develop additional neo-organs and neo-tissues.    We believe our technology is broadly applicable to other indications including certain types of urologic, renal, gastrointestinal and vascular diseases. We have generated significant proprietary know-how and intellectual property in the development and manufacture of our various product candidates. We plan to continue to apply our technologies to other neo-organs and neo-tissues as treatments for other conditions, such as our Neo-Kidney Augment for patients with advanced chronic kidney disease, or CKD.

 

   

Become a fully integrated company, developing, manufacturing and commercializing neo-organs and neo-tissues.    We believe our scalable manufacturing facilities will position us well for the commercialization of our product candidates. We believe a small direct sales force will be sufficient to market to the specialty surgeons for our targeted indications in North America and Europe. We may also consider strategic partnership opportunities.

Product Pipeline

Leveraging our Organ Regeneration Platform, we are currently developing the following product candidates with potential applications in urologic, renal, gastrointestinal and vascular diseases:

LOGO

 

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Urologic Product Candidates

We believe that there will be numerous opportunities for our technology across a variety of medical conditions. We are currently focusing a substantial portion of our resources on the development of product candidates to target urologic applications where the current standard of care involves surgical procedures to replace or augment diseased bladder tissue through the use of bowel tissue harvested from the patient. According to the Agency for Healthcare Research and Quality in the United States and similar government data sources in Europe, we estimate that there is a total of approximately 28,000 such procedures performed every year in the United States and the European Union. We have developed a portfolio of product candidates in this area, with clinical experience in two Phase II clinical trials.

We currently have two product candidates for the treatment of patients who require removal of their bladder in connection with the treatment of bladder, abdominal or pelvic cancer, or other severe bladder disease. Our Neo-Urinary Conduit, for which we have an effective IND and expect to commence a Phase I clinical trial in the first half of 2010, is a combination of bioabsorbable materials and autologous smooth muscle cells cultured by our scientists. When clinically tested, we believe our Neo-Urinary Conduit will develop into physiologically functional tissue with a structure, diverting urine from the ureters to an ostomy bag. Similarly, our Neo-Bladder Replacement, for which we believe we have completed all preclinical development necessary to prepare an IND, is a combination of bioabsorbable materials and autologous smooth muscle cells cultured by our scientists that we believe will serve as a functioning bladder, eliminating the need for an ostomy bag, for patients who have their bladders removed due to cancer. We also have a product candidate, our Neo-Bladder Augment, for the treatment of neurogenic bladder, or dysfunctional bladder due to some form of neurologic disease or condition, for which treatment often requires an augmentation of the bladder in order to relieve high bladder pressure and incontinence. Our Neo-Bladder Augment, which has completed two Phase II clinical trials, regenerates bladder tissue to supplement the patient’s existing bladder.

Based on multiple market research studies and discussions with leading physicians in the field, we believe that our urologic product candidates, which use autologous cells and develop into functional bladder tissue, will avoid many of the complications associated with using bowel tissue in urologic procedures.

Market Overview

The table below indicates the number of urologic surgical procedures performed per year in the United States and the European Union for our targeted indications.

 

Estimated Surgical Procedures Per Year

     United States(1)      European Union(2)

Urinary Conduit

         

Cancer

     9,300      10,800

Other

     1,700      2,300
             

Total

     11,000      13,100

Bladder Replacement

     700      900

Bladder Augment

         

Spina Bifida

     380      350

Spinal Cord Injury

     140      130

Other

     680      620
             

Total

     1,200      1,100
             

Total Surgical Procedures

     12,900      15,100
             

 

Sources:

(1) US: Agency for Healthcare Research and Quality.

(2) EU: Government data sources for the United Kingdom, France and Germany; other EU countries estimated from population census.

 

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Bladder Cancer

According to the National Cancer Institute, bladder cancer is the sixth most common form of cancer in the United States. The American Cancer Society estimates there were 71,000 new cases of bladder cancer diagnosed in the United States in 2009, and 14,000 deaths. The European Cancer Observatory estimates that there were over 100,000 new cases of bladder cancer in Europe in 2006. In the United States, upon initial diagnosis, approximately 10,000 cases annually involve bladder cancer that has invaded the muscle and is typically treated with complete removal of the bladder.

Following removal of a bladder, patients require some form of urinary diversion. Most patients are currently treated by using a segment of bowel tissue to construct a conduit for urine to exit from the body. In its simplest form, the reconstruction involves creating a tubular structure out of bowel tissue and then connecting it to the ureters at one end and the skin at the other in a procedure that was pioneered in the 1930s. Urine output is not controlled and the patient wears a collection device at all times.

The other diversionary option for patients is the creation of a continent reservoir which is most commonly a bladder-shaped pouch fashioned from bowel tissue, to which the ureters and urethra are connected. We believe that less than 10% of the urinary diversions performed after bladder removal are bladder replacements and the remaining diversions are urinary conduits. There are multiple factors that affect the decision concerning which form of post-bladder removal urinary diversion is optimal for a given patient, including stage of disease, health and mental status, manual dexterity, physique and, importantly, patient preference.

The graphic below illustrates two urinary diversion options for patients who require bladder removal.

LOGO

Neurogenic Bladder

Based upon our analysis of various hospital inpatient and discharge databases, we believe there are approximately 1,200 bladder augmentations performed in the United States each year, and approximately 1,100 in the European Union. Patients who have dysfunctional bladders due to some form of neurological disease or neurologic condition, such as spina bifida, or spinal cord injury are referred to as having neurogenic bladder. These patients often have a thickened bladder wall, which inhibits the bladder’s ability to expand properly to accommodate normal volumes of urine. Neurogenic bladder may lead to elevated bladder pressure, frequently leading to incontinence, urinary tract infections and, if proper medical intervention is not received, kidney failure as a result of urine backing into the renal tract.

 

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Current treatments for neurogenic bladder include management through a combination of medication and clean intermittent catheterization and, in advanced cases, surgery. Medicating with anticholinergics, which are drugs that can help relax the bladder and limit unwanted contractions, is often insufficient to control the bladder in neurogenic bladder patients, and a range of side effects limit their use. Clean intermittent catheterization can help patients with neurogenic bladder by regularly allowing the bladder to empty. This can be an effective means of treatment for some patients, but requires the regular insertion and removal of a catheter through the urethra as frequently as every one to two hours and can increase the chance of urinary tract infections. Surgical bladder augmentation is often considered when other less-invasive treatments fail to adequately lower bladder pressure or reduce the frequency of incontinent episodes. This procedure, enterocystoplasty, involves removing a section of the patient’s bowel and using that tissue to enlarge the existing bladder seeking to increase compliance and capacity, which can also lead to less frequent catheterization.

Limitations of Current Therapies — Urologic Procedures Using Bowel Tissue

While there is variation across procedures and patient types, there are risks and complications common to all procedures that rely on harvesting bowel tissue and placing it in the urinary tract. These complications may include:

 

   

Bowel complications.    Bowel surgery required to harvest tissue for reconstructive use can result in complications, such as leaks, fistulas and obstructions. Because vitamin B12 is absorbed in the bowel tissue, the loss of tissue can result in anemia and neurologic abnormalities. Additionally, malabsorption of salts and lipids can lead to diarrhea. Patients with neurogenic bladder are prone to bowel movement problems even before surgery and the removal of bowel tissue may either exacerbate existing conditions or create new motility problems. These conditions further contribute to the substantial physical and psychological morbidity in these patients.

 

   

Absorption issues.    Use of bowel tissue often leads to electrolyte and metabolic imbalances, which can cause bone loss. Certain drugs taken by the patient may be reabsorbed by the implanted bowel tissue, potentially leading to unintended toxic levels. The exposure of intestinal surface to urine also results in the inappropriate absorption of ammonium, chloride and hydrogen ions as well as potassium loss, leading to chronic metabolic imbalances or abnormalities.

 

   

Infection.    Persistent and recurrent infections are common in patients with bowel tissue reconstruction. For example, as many as 23% of patients with bowel tissue conduits have recurrent urinary tract infections, or UTIs, and approximately 10% to 17% of bowel tissue conduit patients have UTIs that reach the kidney. Bacteria normally found in bowel tissue can serve as a source of infection and septic complications when repositioned into the urinary tract. One of the consequences of persistent infection is the development of stones, hard masses which can cause pain, bleeding, obstruction of urine or infections.

 

   

Mucus.    Bowel tissue repositioned in the urinary tract secretes mucus into the urine. Mucus increases the risk of stone formation and the viscosity of urine, and in the case of bladder augments, may require bladder irrigation and more frequent catheterization.

 

   

Cancer.    Malignancy, although rare, is a well-recognized complication following enterocystoplasty and other reconstructive surgeries that incorporate bowel segments into the genitourinary tract. This is of greatest concern in the population of spina bifida patients receiving a bladder augment because of the young age of the patients at the time of surgery.

Patients requiring some form of urinary diversion or augmentation with today’s standard of care are at risk of complications associated with the use of bowel tissue as well as those associated with the surgery to harvest the bowel tissue.

 

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Our Solutions

Our Neo-Urinary Conduit and Neo-Bladder Replacement are being developed to address unmet needs in patients who require removal of their bladder in connection with treatment for bladder, abdominal or pelvic cancer or other severe bladder diseases. Our Neo-Bladder Augment seeks to supplement the patient’s existing bladder and promote regeneration of healthy bladder tissue for the treatment of patients with neurogenic bladder. We believe our product candidates have the potential to be the clinical treatment of choice for the majority of these conditions.

The Tengion Neo-Urinary Conduit

Our Neo-Urinary Conduit is a combination of autologous cells and bioabsorbable scaffold that catalyzes regeneration of a native bladder tissue conduit, passively transporting urine from the ureters, through a stoma, or hole in the abdomen, into a standard ostomy bag. We expect that it will be a safe and effective alternative to the creation of a urinary diversion from bowel tissue after bladder removal. Our Neo-Urinary Conduit is intended to avoid complications such as bowel obstruction, urine absorption, infection and mucus secretion associated with the use of bowel tissue in the urinary tract, as well as the potential surgical issues that arise from the procedure involved in harvesting bowel tissue. We produce our Neo-Urinary Conduit using smooth muscle cells from a routine fat biopsy and not cells from the diseased bladder, eliminating the risk of reintroducing cancerous cells from the bladder into the patient.

We intend to produce our Neo-Urinary Conduit at our cGMP qualified clinical production facility using our Organ Regeneration Platform. We expect that we will be able to deliver our Neo-Urinary Conduit in four weeks or less after we receive the patient’s fat biopsy. This timing is consistent with the clinical practice of bladder removal in these patients. To create our Neo-Urinary Conduit, we isolate the smooth muscle cells from the biopsy, expand the cells ex vivo and then seed them onto a bioabsorbable scaffold, which is composed of biomaterials similar to those used in bioabsorbable sutures. Each surgeon implanting one of our Neo-Urinary Conduits will be trained in and receive specific procedures and protocols based on routine surgical techniques to implant our Neo-Urinary Conduit in the patient. We have an effective IND and expect to begin a single-center Phase I clinical trial in the first half of 2010 for the treatment of bladder cancer patients who require bladder removal.

Preclinical History and Background of the Tengion Neo-Urinary Conduit

Our preclinical studies utilized various large animal models for bladder removal and implantation of our product candidate. In these studies, animals receiving our product candidate underwent bladder removal and the animals’ ureters were attached to one end of our Neo-Urinary Conduit using bioabsorbable sutures and the other end was connected to the skin in the abdominal wall, providing an outlet for urine to flow out of the body.

Principal observations of our Neo-Urinary Conduit in preclinical animal models have shown that:

 

   

Implantation of our Neo-Urinary Conduit created from fat-derived smooth muscle cells results in the formation of a functional conduit.

 

   

By three months post-implantation the scaffold is no longer present and is replaced by a tri-layered native-like bladder tissue consisting of urothelium, submucosa and smooth muscle cells.

 

   

There is no evidence of abnormal cell growth, tissue development or immune response, or adverse systemic effects in response to the biomaterials, autologous cells, or our Neo-Urinary Conduit.

 

   

Our Neo-Urinary Conduit regenerates native-like bladder tissue with complete mucosal lining at the ureteral and skin junctions. The function of the regenerated bladder tissue is

 

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similar to native bladder tissue in that it allows elimination of urine in a water-tight fashion and does not absorb urine or secrete mucus or electrolytes.

These studies suggest that by using current standards of clinical care and specific surgical and post-operative procedures associated with urinary conduits, our Neo-Urinary Conduit may be safe and effective for treating patients who have had their bladders removed.

Clinical Support

While there are some notable differences between our Neo-Urinary Conduit and our Neo-Bladder Augment, which we have studied in two Phase II Clinical trials, the premise of the product candidate, autologous cells seeded onto a bioabsorbable scaffold, as well as the application of the technology in reconstructive urology and the regeneration of bladder tissue in the patient, are the same. Our development of our Neo-Urinary Conduit came as a natural extension of our clinical development experience with our Neo-Bladder Augment. Important improvements in our Organ Regeneration Platform allowed us to pursue development of our Neo-Urinary conduit, a product that addresses the approximately 25,700 bladder removal procedures performed in connection with bladder cancer annually in the United States and European Union, compared to approximately 2,300 bladder augmentation procedures associated with neurogenic bladder.

Our Neo-Urinary Conduit has several advantages that enhance its commercialization prospects:

 

   

Streamlined Process.    Only one cell type, smooth muscle cells, is needed for our Neo-Urinary Conduit, compared to two cell types, smooth muscle and urothelial cells, used in our Neo-Bladder Augment Phase II clinical trials. Smooth muscle cells can be obtained from a routine fat biopsy, thus avoiding the need to biopsy the bladder, which may also carry the risk of re-introducing cancerous cells in the case of bladder cancer.

 

   

Faster Manufacturing.    The use of a single cell type reduced production time for our Neo-Urinary Conduit by about 50% to four weeks or less from receipt of biopsy and also reduced the cost to produce our Neo-Bladder Conduit by approximately 50%.

 

   

Simpler Function.    Our Neo-Urinary Conduit does not store urine and thus does not require significant post-surgical manipulation or catheterization for optimum performance.

Clinical Development Plan

We have an effective IND for our Neo-Urinary Conduit and expect to initiate a single center Phase I study in the first half of 2010. The program is designed to provide data to support the use of our Neo-Urinary Conduit in patients undergoing bladder removal for treatment of bladder cancer.

This trial will be an open-label, single-arm study in up to five patients, which will allow optimization of the surgical procedure and post-surgical care in a controlled setting. A single center will be utilized to minimize variations in surgical technique and provide the most controlled setting in which the surgical approach is optimized through working with a clinical investigator. We will work with a clinical investigator who has expertise in the surgical treatment of bladder cancer and significant experience performing bladder removals and urinary diversions. This study will not have a control group as the surgical procedure, post-operative care and other clinical parameters preclude the possibility of blinding treatment options.

There will be at least a four-week interval between procedures on each patient to allow for close observation and assessment of any treatment and/or procedure-related complications, post-operative recovery, tolerability and safety before proceeding to the next patient. The surgical procedure may be modified in subsequent patients based on the experience gained by the prior patient(s) enrolled.

 

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The primary safety and efficacy assessment of our Neo-Urinary Conduit will be made at 12 months post-implantation and patients will be followed for an additional 48 months in order to assess long term safety and durability. During this first year, however, patients will be seen frequently by the study investigator and/or designated clinical team: every one to two weeks after hospital discharge through week eight, and then at month 3, 6, 9 and 12. Imaging, either CT scan or ultrasound, will be performed at three-month intervals for the first year to examine the neo-organ’s structure, patency and identify any obstructions or other abnormalities. This frequent evaluation and the open-label nature of this study will provide significant ongoing feedback throughout the study. While we have not explored later stage development with the FDA, we believe that if this first study is successful, we may be able to move directly to a pivotal study as the next step in our regulatory pathway for our Neo-Urinary Conduit.

The Tengion Neo-Bladder Replacement

Like our Neo-Urinary Conduit, we believe that our Neo-Bladder Replacement will enable patients to avoid the complications associated with removal of bowel tissue and its subsequent use as a bladder replacement. In today’s practice, a continent reconstructed bladder, made from bowel tissue, is attempted in fewer than 10% of patients undergoing bladder removal, or cystectomy. The approach is limited by the various complications associated with using bowel tissue, as well as patient considerations, including the risk of requiring chronic catheterization, and the high frequency of urinary leakage and night time incontinence. Our Neo-Bladder Replacement, when implanted in the body, is intended to serve as a template that recruits other cells to develop a regenerated bladder.

Preclinical History and Background of the Tengion Neo-Bladder Replacement

We have conducted preclinical studies of our Neo-Bladder Replacement in large animals to serve as an autologous urinary reservoir. Animals receiving our product candidate underwent urethral-sparing bladder removal. The urethra and ureters were attached using bioabsorbable sutures to our Neo-Bladder Replacement. Principal observations of our Neo-Bladder Replacement in large animal models have shown that:

 

   

All animals demonstrate continence upon removal of the urethral catheter 21 days after surgery.

 

   

Implantation of our Neo-Bladder Replacement created from only smooth muscle cells results in the formation of a compliant and functional bladder, with demonstrated nerve growth into the tissue.

 

   

The regenerated bladder capacity achieves volumes that were typical of native-bladder volumes, and in instances where there was significant growth of the animal, the regenerated bladder capacity increases to accommodate the animal’s body size.

 

   

By three months post-implantation, the bioabsorbable scaffold is no longer present and is replaced by a tri-layered native-like bladder tissue consisting of urothelium, submucosa and smooth muscle cells.

 

   

By six months post-implantation, the functionality of the neo-bladder tissue is consistent with native bladder tissue as demonstrated by functional imaging, physiological assessments of bladder capacity and compliance, and response to pharmacological stimuli in a manner consistent with native bladder tissue.

 

   

There is no evidence of abnormal cell growth, tissue development, immune response or adverse systemic effects in response to the biomaterials, autologous cells, or our Neo-Bladder Replacement.

Based on the results of our preclinical studies, we believe that our Neo-Bladder Replacement may provide patients with a functional replacement bladder enabling them to void urine, with no need for a stoma or ostomy bag.

 

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The Tengion Neo-Bladder Augment

Our Neo-Bladder Augment is intended to supplement the patient’s existing bladder and promote regeneration of healthy bladder tissue in patients suffering from neurogenic bladder. Based upon the long-term data obtained as part of an academic clinical experience, and published in The Lancet, a leading medical journal, and the results of our Phase II clinical trials, we believe our Neo-Bladder Augment may provide the benefits of enterocystoplasty without the associated complications. Our Neo-Bladder Augment is a combination of bioabsorbable materials used to form a scaffold shaped like a bladder, which is seeded with the requisite bladder cells cultured by our scientists from the patient’s bladder. When our Neo-Bladder Augment is implanted into the body, it serves as a template to regenerate native-like bladder tissue.

While our Neo-Bladder Augment does not cure the underlying condition that causes neurogenic bladder or create a normal, fully functional bladder, we believe it will provide a practical medical solution affording significant clinical benefits to patients while also serving to enhance overall quality of life. For example, if catheterization is required prior to implanting our Neo-Bladder Augment, it will still be necessary after implantation, but we believe that, as with enterocystoplasty, it will be needed less frequently. With the use of our Neo-Bladder Augment, we believe we can achieve the desired outcome of increased urine capacity without having to use bowel tissue. We believe that our Neo-Bladder Augment will provide an effective and safe solution for many patients requiring interventional therapy, as it does not possess the same level of risk as other invasive treatment alternatives such as enterocystoplasty.

Phase II Clinical Trials

We have conducted two open-label, multi-center Phase II clinical trials of our Neo-Bladder Augment for the treatment of neurogenic bladder resulting from spina bifida in pediatric patients and neurogenic bladder resulting from spinal cord injury in adult patients. The primary objective of each of these two Phase II clinical trials was to evaluate the safety and efficacy of our Neo-Bladder Augment.

We initiated our first Phase II clinical trial in December 2006 and implanted our Neo-Bladder Augment in 10 patients ranging in age from 3 to 16 years, who have neurogenic bladder resulting from spina bifida. The primary endpoint of this trial was the change in bladder compliance at maximum capacity at 12 months, compared to the baseline level established prior to implantation. Compliance was defined as the ratio of bladder volume in milliliters divided by bladder pressure in centimeters of water. In December 2009, we received final data from this trial. We obtained data at 12 months from all 10 patients implanted with our Neo-Bladder Augment, and these patients are being monitored as part of our long-term follow-up. The data demonstrate the following change in bladder compliance at maximum capacity at 12 months:

 

   

48% average increase, with a p-value of 0.006

 

   

1.6 ml/cm-of-water average increase, with a p-value of 0.1

A p-value measures the probability that a difference between a patient’s result at 12 months and that patient’s baseline measurement is due to chance alone. A p-value of less than 0.05 is considered statistically significant since the possibility that the difference is due to random chance is less than 5%.

One of the criteria for inclusion into this clinical trial was the ability of patients to cycle, or fill, hold and evacuate urine in their bladder. Cycling is necessary to develop compliant bladder tissue and the process represents the natural series of events that, if interrupted, can lead to a hypertonic, or high tension, and shrunken bladder. In this trial, only 6 out of the 10 patients were able to cycle. All six of these patients had improved outcomes and were identified as responders by clinical investigators at the 12 month assessment. Four out of the 10 patients were determined, after inclusion into our trial, to be unable to cycle for reasons we have identified. All four of these patients were identified as non-responders by

 

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clinical investigators. Based on this experience, we believe we will be able to exclude those patients who are unable to cycle from future trials for our Neo-Bladder Augment.

While measurements such as compliance and pressure were chosen as the primary means of assessing efficacy in these trials, the primary endpoint did not correlate to clinical response as identified by the investigators. We designed these trials to be exploratory and, thus, we collected multiple additional parameters to evaluate the efficacy of our product candidates, including radiographic studies, and functional capacity and continence as reported by each patient in a voiding volume diary. The clinical investigators provided us with assessments of each patient’s functional bladder capacity in relation to his or her daily activities and their clinical assessment of the patient and the patient’s satisfaction after receiving our Neo-Bladder Augment. Based on this experience, we are considering the use of a more clinically meaningful endpoint than compliance at maximum capacity in future trials. We will be required to submit a study protocol to the FDA for its approval before beginning a Phase III trial.

We initiated our second Phase II clinical trial in November 2007 and implanted our Neo-Bladder Augment in six patients ranging in age from 17 to 42, who have neurogenic bladder resulting from spinal cord injury. The primary endpoint of this trial was change in maximum bladder pressure, as assessed by standardized measurements at 12 months. We have not yet received final data from this trial.

Principal observations from our Phase II clinical trials can be summarized as follows:

 

   

Confirmed that we can successfully translate the academic experience underlying our platform technology into standardized and repeatable processes that we believe are scalable to commercial manufacturing processes.

 

   

Helped us to refine the criteria for inclusion in any future clinical trials, notably to include only patients who are able to follow a standard bladder cycling process in the post-implantation period.

 

   

Informed us of the limitations of urodynamic evaluations, for example, that measurements of bladder pressure at peak capacity achieved during a urodynamic test were not necessarily predictive of a patient’s clinical status. Bladder capacity versus pressure measurements are more relevant if tested at several intervals over a safe bladder pressure range.

 

   

Responder analysis, including focusing on voided volume diaries and physician’s clinical assessment of their patient’s sense of well-being and satisfaction after having received our Neo-Bladder Augment are more clinically relevant parameters to be used in designing our Phase III clinical trials.

Three patients in our Phase II clinical trials experienced serious adverse events, or SAEs, that, at the time of their occurrence, were deemed by the respective clinical investigator to be clinically relevant and probably related to our product candidate or the implantation procedure. In February 2009, the FDA placed our IND on clinical hold. In July 2009, the FDA released the clinical hold with no recommended changes to our protocol, product candidate or implantation procedure.

Two of the SAEs involved pediatric patients who experienced small bowel obstruction and bladder perforation, or rupture of the bladder. We conducted a thorough review of the safety events of these patients including the details of each event, the background medical history of these patients, the timing of the events relative to the implantation of our Neo-Bladder Augment and the background rate of bladder ruptures in patients receiving the current standard of care, enterocystoplasty. We submitted a complete response to the clinical hold setting forth our analysis in June 2009 and the FDA released the clinical hold in July 2009. We also noted that bladder perforations and bowel obstructions are known complications of enterocystoplasty, the current standard of care for patients with neurogenic bladder requiring bladder augmentation. The third SAE, which occurred in October 2009, involved an adult

 

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patient who experienced a bladder perforation that occurred during a urodynamic evaluation being performed as part of our clinical study. A urodynamic evaluation involves the insertion of catheters into the bladder, which are then used to fill the bladder with fluid to assess its capacity. We have submitted a report of this SAE to the FDA.

The patients experiencing the first and third SAEs have fully recovered medically. The patient experiencing the second SAE developed a bacterial infection and continues, as of November 2009, to have an indwelling catheter but has otherwise recovered medically.

Based on our experience in developing urologic neo-organs using only smooth muscle cells, we intend to apply this technological advancement to our Neo-Bladder Augment at the appropriate time. We believe using a single cell approach for our Neo-Bladder Augment will allow us to simplify the production and eliminate the need for a full-thickness bladder biopsy as was conducted in our Phase II studies. In addition, we have completed preclinical work delivering our Neo-Bladder Augment via laparoscopic surgery. We also intend to explore this and other enhancements to our Neo-Bladder Augment.

Other Product Opportunities

The Tengion Neo-Kidney Augment

Our Neo-Kidney Augment is designed to prevent or delay dialysis by increasing renal function in patients with advanced CKD. Our Neo-Kidney Augment is based on our proprietary technology, which uses the patient’s cells, procured by a needle biopsy of the patient’s kidney, to create an implantable product candidate that can catalyze the regeneration of functional kidney tissue.

Market Overview and Limitations of Current Therapies

In 2008 there were over 20 million people in the United States with CKD, including over 500,000 with end stage renal disease, or ESRD, according to the United States Renal Data System, or the USRDS, which is funded by the National Institutes of Health, or NIH. Patients with ESRD have CKD which has progressed to a point of little to no kidney function and these patients require dialysis or a kidney transplant to survive. According to the USRDS, over $22 billion in Medicare costs each year are attributable just to ESRD patients. ESRD is associated with an approximate 20% mortality rate per year, with the average life expectancy of a patient initiating dialysis of approximately four years. In addition, bone loss and anemia is a common complication of advanced CKD, mainly due to an inability of the kidneys to produce enough Vitamin D and erythropoietin, a hormone that controls red blood cell production.

Dialysis extends the lives of patients with ESRD, but has many limitations, including infections, hernias and the need to undergo the procedure up to three times per week. Kidney transplantation remains the most desirable and cost-effective form of kidney therapy at this time; however, there is a chronic shortage of organs with only 18,000 kidneys available for transplant in 2008. In addition to the high cost of organ procurement and the subsequent surgery, kidney transplant patients also require a lifetime of drug therapy to prevent organ rejection. There is a clear need for a product that can prevent or delay the need for dialysis or kidney transplant in patients with advanced CKD.

Our Solution

Through our Organ Regeneration Platform, we have isolated and characterized the effects of different kidney cells and combinations of cells on various aspects of kidney function. We have optimized our Neo-Kidney Augment consisting of autologous cells and a bioabsorbable material. We obtain cells through a routine needle biopsy of the kidney and using our Organ Regeneration Platform, we are able to produce our Neo-Kidney Augment grown from these cells in as short as four weeks from biopsy receipt. This product candidate has been implanted in animals to date and we have also isolated and

 

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characterized the necessary cells from healthy and diseased human kidneys, which we believe supports translation of this approach to human patients.

Preclinical data demonstrate that our Neo-Kidney Augment promotes regeneration of glomeruli, the primary filtration unit of the kidney, and kidney tubules in vivo, which combine to form nephrons. Regeneration of nephrons prevents renal failure, excessive bone loss and anemia while increasing the survival time of the animal. We have isolated, propagated and characterized the key cellular components that catalyze regeneration in animal kidneys across multiple species, including humans. We have conducted preclinical studies of our Neo-Kidney Augment in a chronic disease model with small animals in which approximately 80% of their kidneys had been surgically removed, to assess its regenerative capabilities. These studies extend up to six months and have demonstrated that animals implanted with our Neo-Kidney Augment have extended survival and weight gain with no additional supportive care. Stabilization and improvement in renal function are evident within several weeks after implantation. In these studies, we have seen improvement or stabilization of various biomarkers including certain proteins, lipids, bone remodeling and vitamin levels. These benefits have extended to improvements in weight gain, blood pressure, exercise tolerance and survival.

In late 2009, we began a preclinical study in a natural disease renal model. We expect to begin a study of our Neo-Kidney Augment in large animals in early 2010 as a proof-of-concept study to demonstrate the feasibility of creating a human Neo-Kidney Augment to address the problem of CKD and anemia associated with reduced kidney function.

The Tengion Neo-GI Augment

Leveraging our cumulative learnings from producing tubular neo-organs, such as our Neo-Urinary Conduit, we have begun early development work on our Neo-GI Augment. This product candidate is composed of smooth muscle cells, obtained from a routine fat biopsy, seeded on one of our proprietary bioabsorbable scaffolds, that can be used as a tubular or patch implant to accommodate patient needs. Our objective is to demonstrate that our Neo-GI Augment regenerates esophageal and intestinal tissues.

Market Overview and Limitations of Current Therapies

In the United States, there are over 3,000 surgical procedures per year in which part or all of a patient’s esophagus is removed, or esophagectomy, due to esophageal cancer. In the case of a small cancerous segment in the esophagus, cancer cells are typically removed and other tissue from the patient, either bowel or skin, is used to graft a replacement. As with certain urologic procedures involving the use of bowel tissue, today’s standard of care for esophageal cancer introduces similar complications as tissues will be harvested for uses for which they were not intended. In more advanced cancers, the current standard of care involves a procedure in which all or most of the entire esophagus is removed and the stomach is pulled up into the chest and attached to what remains of the esophagus, or a piece of bowel tissue is formed into a tube to replace the esophagus. This procedure has multiple surgical complications, including infections and leaks which can be life-threatening because of the proximity to the heart and lungs and the fact that donor material may not be sterile and may contain stomach acid.

Our Solution

We have defined in-vitro testing models for our Neo-GI Augment, as well as the necessary cell function assays. Using our combinatorial approach we have also identified potential scaffold prototypes. We have observed extended survival times in animals with esophageal damage following implantation of our Neo-GI Augment. We believe our Neo-GI Augment may offer benefits in other gastrointestinal diseases and we expect to begin an intestinal proof-of-concept study in mid-2010 and a preclinical study in large animals in 2011.

 

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The Tengion Neo-Vessel Replacement

We are developing our Neo-Vessel Replacement for various blood vessel applications including vascular access grafts, or arterio-venous, or AV, shunts, for patients with ESRD undergoing hemodialysis treatment, and for vessel replacement for patients undergoing coronary or peripheral artery bypass procedures. Our technology uses smooth muscle cells isolated from fat tissue and endothelial cells isolated from blood samples, which are expanded ex vivo and then seeded onto a bioabsorbable scaffold in the shape of a blood vessel.

Market Overview and Limitations of Current Therapies

Hemodialysis treatment for kidney failure requires repeated needle punctures for dialysis access, usually three times per week. There are three types of vascular access: AV fistula, AV graft and a venous catheter. Each of these can have complications that require further treatment or surgery. In patients with small veins that will not develop properly into an enlarged vein, or a fistula, that can withstand repeated needle punctures, a common option is to obtain a vascular access that connects an artery to a vein using a synthetic tube, or synthetic graft, implanted under the skin. The graft becomes an artificial vein that can be used repeatedly for needle placement and blood access during hemodialysis. Compared with properly formed fistulas, grafts tend to have more problems with clotting and infection and need replacement sooner.

In the United States, approximately 340,000 patients with ESRD are treated with hemodialysis. Over half of these patients rely on synthetic grafts which are associated with complications such as thrombosis and stenosis, ultimately leading to graft failure. Approximately half of synthetic grafts are replaced within three years of implantation. Complications with vascular access are the leading cause of hospitalization for patients with ESRD. These complications account for approximately 17% to 25% of all dialysis patient hospitalizations.

Similarly, coronary bypass surgery is a relatively common procedure, with nearly 450,000 performed annually in the United States. This procedure requires harvesting healthy blood vessels from other parts of the patient’s body to bypass blocked coronary arteries. There are no other options currently used to replace the need for healthy blood vessels taken from other parts of the patient’s body. To bypass blocked arteries in other parts of the body, approximately 85,000 peripheral artery bypass procedures are performed each year in the United States.

Our Solution

We believe our Neo-Vessel Replacement may prove to be a better alternative to artificial AV grafts. In preclinical studies, our Neo-Vessel Replacement has shown similarities to natural blood vessels and does not become infected to the same extent as synthetic AV graft materials. Further, our Neo-Vessel Replacement may prove to be a superior treatment for patients undergoing a coronary or peripheral artery bypass. This product candidate may eliminate the need to harvest arteries or veins from elsewhere in the patient’s body which will simplify the surgical procedure and avoid potential complications arising from operating on healthy tissue.

In preclinical studies using our Neo-Vessel Replacement as an AV graft, the regenerated vessel has shown similarities to natural blood vessels and reduced rates of infections compared to synthetic AV graft materials. Our Neo-Vessel Replacement has been tested in large mammals as an AV graft for the purposes of renal dialysis access. In six-month studies using clinically relevant protocols, we have observed that our Neo-Vessel Replacement retained a native-like ability to remodel, maintained its structural integrity and did not become infected to the same extent as synthetic AV graft materials. In large animal studies, our Neo-Vessel Replacements have also been shown to remain open and resist blood clotting when used for carotid artery reconstruction. In addition, we have observed that this

 

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product candidate responds to pharmacologic stimuli and expands and contracts in a similar manner to normal blood vessels.

Manufacturing

We believe our product manufacturing capability provides us with a competitive advantage. We manufacture our product candidates in facilities specifically designed for the production of patient-specific materials and have implemented quality control systems to ensure our manufacturing processes and facilities comply with applicable cGMP, current Good Tissue Practices, or cGTP, and medical device QSR standards. We have exercised these manufacturing and quality control processes while producing materials for preclinical and clinical studies and have established a significant knowledge base relating to the manufacture of our product candidates. This knowledge base is maintained in a set of standard operating procedures that detail the techniques and standards for manufacturing. All of our production technicians are trained and certified in these procedures to ensure consistency in manufacturing.

Manufacturing of product candidates for our existing preclinical and clinical studies is conducted in our pilot manufacturing facility in Winston-Salem, North Carolina. The pilot manufacturing facility contains approximately 38,400 square feet of laboratories, offices, and clean room manufacturing space. We expect to manufacture early stage product candidates through Phase II clinical trials at this facility. We have also designed and constructed a commercial manufacturing facility, which is located at our headquarters in East Norriton, Pennsylvania. This facility contains approximately 30,000 square feet of technical and manufacturing space and 15,000 square feet of office space. We expect to manufacture product candidates for Phase III clinical trials in this facility and to license this facility for commercial manufacturing of our product candidates. We anticipate this commercial manufacturing facility can become fully operational following completion of all necessary validation, certification and staffing requirements, which we believe can be accomplished in approximately 12 months. In March 2011, we will lease an additional 35,000 square feet of space for further expansion in the same building.

Both facilities are designed to segregate the manufacturing and laboratory areas from the administrative portions of the building. The facilities are also designed to prevent cross-contamination of patient specific materials and to provide physical segregation while processing these materials. Our products are manufactured as individual units using disposable processing materials for storage and containment of the product. We do not face many of the traditional challenges of biopharmaceutical companies in maintaining batch quality as manufacturing is scaled up to commercial quantities because our batch size remains consistent at one unit and because the core manufacturing processes remain consistent regardless of production volume. We believe our existing facility infrastructure is sufficient to meet the initial commercial demand for our products and we can increase production capacity by installing additional equipment into existing space and by constructing additional manufacturing space within our existing facilities.

Sales and Marketing

We believe the product candidates we are currently developing will be used primarily by a relatively small number of specialty surgeons at hospitals in North America and the European Union. We intend to explore building the necessary marketing and sales infrastructure necessary to market and sell our current product candidates, if approved by the FDA, as well hire other personnel to train physicians on the surgical techniques used with our product candidates. We will also explore the possibility of entering into strategic partnerships for the development and marketing our product candidates.

Intellectual Property

We have established a patent position surrounding our product candidates in autologous-based regenerative medicine. As of September 30, 2009, we owned or had licenses to 19 issued U.S. patents, 17

 

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of which are exclusive and two of which are nonexclusive, 13 U.S. patent applications and over 100 international patents and patent applications. A core group of these patents and pending applications covers the composition, design and methods of manufacture of our Neo-Urinary Conduit, Neo-Bladder Replacement and Neo-Bladder Augment. Certain of these patents and applications relate to technological advances associated with our Neo-Vessel and Neo-Kidney Augment development programs. Also included within our portfolio are patents that address an array of regenerative medicine and tissue engineering technologies and product candidates outside the scope of our current product pipeline. In addition to our patent portfolio, we have developed proprietary information, trade secrets and know-how in the development and manufacture of autologous neo-organs and neo-tissues. We are committed to protecting our intellectual property position and to aggressively pursue our patent portfolio as well as the protection of our proprietary information, know-how and trade secrets.

We require our employees, consultants and members of our scientific advisory board to execute confidentiality agreements upon the commencement of employment, consulting or collaborative relationships with us. These agreements provide that all confidential information developed or made known during the course of the relationship with us be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions resulting from work performed for us, utilizing our property or relating to our business and conceived or completed by the individual during employment shall be our exclusive property to the extent permitted by applicable law.

License Agreements and Research Agreements

Exclusive License Agreement with Children’s Medical Center Corporation

In October 2003, we entered into a license agreement with Children’s Medical Center Corporation, or CMCC, for the license of certain patent rights and intellectual property rights owned or controlled by CMCC related to autologous tissue engineering technology. The CMCC patent rights include patent rights owned by CMCC, as well as CMCC’s right to sublicense certain patent rights owned or controlled by Massachusetts Institute of Technology, or MIT. CMCC’s sublicense of the MIT patent rights is either exclusive or non-exclusive depending on the particular subfield. Under the terms of this license agreement, CMCC has granted us exclusive worldwide, sublicensable licenses under certain of CMCC’s patent rights related to implantable matrices for the development and commercialization of tissue engineered products for human and animal therapeutics in the subfields of genitourinary, vascular tissue, nervous tissue, trachea and other subfields later agreed upon by us and CMCC parties. Our license to CMCC’s patent rights related to implantable cartilaginous structures, implantable genitourinary cell-seeded matrices, and mammalian urothelial cell preparation is non-exclusive, except in the genitourinary subfield where the license is exclusive. Our license to CMCC’s patent rights relating to organ decellularization is non-exclusive for all subfields covered by the license agreement. Under the license agreement, we were also granted a non-exclusive, non-sublicensable, non-transferable license to certain CMCC biological materials and know-how related to unpatented manufacturing and scientific information, except that such license may be sublicensed or transferred to our affiliates and contractors for purposes specified in the license agreement. CMCC has retained a royalty-free, non-exclusive right to practice, use and license to other academic and nonprofit research organizations to practice and/or use the patent rights and licensed products for research, educational, clinical and/or charitable purposes only.

Under the license agreement, we are required to make payments to CMCC for accrued and continuing patent prosecution costs and also upon the achievement of certain development and sales milestones as well as certain consideration received from a sublicensee. We have previously paid certain development milestones to CMCC and as of September 30, 2009, we did not owe any milestone payments to CMCC under the license agreement. In addition, we must pay CMCC royalties based on net sales of licensed products as defined in the agreement by us, our affiliates and our sublicensees, which royalties will be reduced for certain amounts we are required to pay to license patents or intellectual property from third

 

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parties. No royalties will be payable with respect to sales of licensed products in countries where there is no valid patent claim, unless we advised CMCC not to file for patent protection and later choose to market and sell licensed products in such country, until the later of the expiration, on a country-by-country basis, of the last patent right and October 2018.

Our license terminates when our obligation to pay royalties terminates. Either party may terminate the license agreement upon 90 days prior written notice upon a material, unremedied breach or default of the other party. CMCC may terminate the agreement immediately upon our insolvency or as otherwise provided in the agreement and also upon 45 days prior written notice for our failure to pay royalties due in a timely manner. We may terminate at any time, with or without cause, upon six months prior written notice and payment to CMCC of accrued amounts due and a $50,000 termination fee.

Wake Forest University Health Sciences License Agreement

In January 2006 we entered into a license agreement with Wake Forest University Health Sciences, or WFUHS, which was amended in May 2007, for the license of WFUHS’s intellectual property (including know-how) related to research performed by WFUHS employee, Dr. Anthony Atala, a former employee of the Children’s Hospital Boston, an affiliate of CMCC, and inventor or co-inventor on inventions and patents held by CMCC.

Under the terms of this amended license agreement, WFUHS has granted us a worldwide, exclusive, sublicensable license to make, use and sell products covered by certain of WFUHS’s patent rights that relate to improvements of the existing inventions and patents included in the patent rights licensed to us under our license agreement with CMCC, or the improvement patents, and to new development inventions and patents arising out of the performance of a separate agreement, the WFUHS Research Agreement, or the new development patents, in the fields of human and animal organs, tissues and tissue-engineered and regenerative medicine directed to their functions in the subfields of genitourinary tissue, kidney tissue, cardiovascular tissue and nervous tissue. This license agreement also granted us a non-exclusive, worldwide, sublicensable license to certain know-how related to unpatented manufacturing and scientific information provided by WFUHS. Our license to certain patents may be terminated at any time by WFUHS following expiration or other termination of the WFUHS Research Agreement.

Under the license agreement, we also issued WFUHS a warrant to purchase shares of our common stock and are required to pay WFUHS a percentage of certain consideration received from a sublicensee. In addition, we are required to pay WFUHS royalties based on net sales of licensed products in all countries. With respect to any product covered by an improvement patent, our obligation to pay royalties to WFUHS terminates upon the later of the expiration, on a product-by-product basis, of the last to expire patent covering such product and the date that is 15 years from the first commercial sale of such product, provided that no such royalty is payable more than seven years after expiration of the last-to-expire patent covering such product.

With respect to any other product not covered by an improvement patent, our obligation to pay royalties to WFUHS terminates, on a product-by-product basis, on the date that is five years from the first commercial sale of such product, provided that the first commercial sale occurs prior to January 1, 2021 (for each day after January 1, 2021 that the first commercial sale does not occur, the five-year period is reduced by one day).

The agreement continues in effect on a country-by-country basis until the later of the expiration of the last to expire new improvement patent and January 1, 2021, unless earlier terminated as provided in the agreement. We may terminate the license agreement at any time, with or without cause, upon 90 days prior written notice. WFUHS may terminate the license agreement upon our default in paying a license

 

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fee or providing a report required to be provided under the license agreement, our material breach or our making a knowingly false report, upon 45 days prior written notice, provided that we may cure such default or breach within the 45-day period.

Wake Forest University Health Sciences Research Agreement

In January 2006, we entered into a research agreement with WFUHS, which was amended in September 2006.

Under the Research Agreement, WFUHS agreed to perform sponsored research in return for quarterly payments. As of September 30, 2009, we were obligated to make payments of $800,000 with respect to the 2010 research activities of WFUHS under this agreement. The sponsored research involves the experiments and studies set out in annual research plans and milestones established under the agreement.

The agreement expires December 31, 2010 but the agreement may be extended for up to an additional three-year period. Either party may terminate the agreement upon a material, uncured breach by the other party upon 30 days written notice. We may terminate the agreement at any time, with or without cause, upon 90 days prior written notice. If we terminate the agreement, we are required to pay to WFUHS all reasonable direct costs and all noncancelable obligations incurred by WFUHS, provided that such liability is limited to $625,000.

Competition

Our industry is subject to rapid and intense technological change. While we do not believe we currently have any commercial competitors who are developing autologous organs and tissues for the target populations that we are addressing, we face, and will continue to face, intense competition from medical device, pharmaceutical, biopharmaceutical and biotechnology companies, as well as numerous academic and research institutions and governmental agencies who are generally engaged in tissue engineering and regenerative medicine activities or funding, both in the United States and abroad. In addition, there are companies and academic institutions developing drugs, medical devices and surgical techniques to treat many of the medical conditions our product candidates are designed to treat.

Regenerative Medicine

While we are, to our knowledge, the only regenerative medicine company presently developing a range of neo-organs and neo-tissues for implant that regenerate into functional organs and tissues, there are some companies that are researching and developing regenerative cell-based products or therapies, which may seek to address the medical indications that our neo-organ and neo-tissue product candidates seek to address. The companies include Cytograft, Tissue Engineering, Inc., Osiris Therapeutics, Inc., Integra Life Sciences, Inc., Pervasis Therapeutics, Inc., LifeCell (a division of Kinetic Concepts, Inc.) and Genzyme.

Bladder Treatment

We expect that our Neo-Urinary Conduit and Neo-Bladder Replacement will compete with the current standard of care, which is the use of bowel tissue to create a urinary diversion.

Companies that are researching, developing and marketing products to treat bladder dysfunction include Allergan, which is developing Botox for bladder dysfunction; Speywood Biopharma, which is developing Dysport for bladder dysfunction; and Medtronic, which is marketing Interstim for bladder dysfunction. Further, many large pharmaceutical companies market anticholinergenic medications, such as Detrol and Ditropan, which can be used to treat bladder dysfunction.

Many of the companies competing against us have financial and other resources substantially greater than our own. In addition, many of our competitors have significantly greater experience in testing

 

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therapeutic products, obtaining FDA and other marketing approvals of products, and marketing and selling those products. Accordingly, our competitors may succeed more rapidly than we will in obtaining FDA approval for products and achieving widespread market acceptance.

We expect to compete based upon, among other things, our intellectual property portfolio, substantial process know-how with respect to scalable manufacturing capabilities and the efficacy and safety profile of our product candidates. Our ability to compete successfully will depend, in part, on our continued ability to attract and retain skilled and experienced scientific, clinical development and executive personnel, to develop viable autologous neo-organs and neo-tissues.

Government Regulation

Regulation by governmental authorities in the United States and other countries is a significant factor in the development, manufacture, commercialization and reimbursement of our neo-organs and neo-tissues. All of the products we are seeking to develop will require marketing approval, or licensure, by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical testing, approval and marketing regulations promulgated by the FDA and similar regulatory authorities in other countries. Various governmental statutes and regulations also govern or influence testing, manufacturing, quality control, safety, labeling, packaging, storage and record keeping related to such products and their marketing. State, local and other authorities may also regulate manufacturing facilities used for our neo-organs and neo-tissues. The process of obtaining these approvals and the subsequent compliance with appropriate statutes and regulations require the expenditure of substantial time and money, and there can be no guarantee that approvals will be granted.

FDA Approval Process

Our neo-organs and neo-tissues will require approval from the FDA and corresponding agencies in other countries before they can be marketed. The FDA regulates human therapeutic products in one of three broad categories: biologics, drugs, or medical devices. Our product candidates that are currently under development are combination products having features of both a biologic and a medical device. The FDA has determined that the primary mode of action for our Neo-Bladder Augment is as a biological product and we currently believe other neo-organs and neo-tissues that we develop will also require approval of a Biologics License Application, or BLA. The FDA regulates biological products under both the Federal Food, Drug and Cosmetic Act and the Public Health Service Act, and implementing regulations for both statutes. The FDA generally requires the following steps for pre-market approval or licensure of a new biological product:

 

   

preclinical laboratory and animal tests conducted in compliance with FDA’s Good Laboratory Practice, or GLP, requirements and applicable requirements for the humane use of laboratory animals, to assess a product’s biological activity, biocompatibility and to identify potential safety problems and to characterize and document the product’s manufacturing controls and stability;

 

   

submission to the FDA of an IND application, which must become effective before clinical testing in humans can begin;

 

   

development of clinical protocols to establish the safety and efficacy of the product in humans in clinical trials;

 

   

obtaining approval of clinical protocols by IRBs of clinical sites in order to introduce the product into humans in clinical trials;

 

   

adequate and well-controlled human clinical trials to establish the safety and efficacy of the product for its intended indication conducted in compliance with the FDA’s Good Clinical Practice, or GCP, requirements, as well as any additional requirements for the protection of human research subjects and their health information;

 

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compliance with cGMP and if applicable, cGTP and QSR, regulations and standards concerning quality and the use of human somatic cellular and tissue products;

 

   

submission to the FDA of a BLA, for marketing approval that includes substantive evidence of safety and effectiveness from adequate results of preclinical testing and clinical trials;

 

   

FDA review of the marketing application in order to determine, among other things, whether the product is safe, pure and effective for its intended uses; and

 

   

obtaining FDA approval of the BLA, including inspection and approval of the product manufacturing facility as compliant with cGMP and if applicable, cGTP and QSR, requirements, prior to any commercial sale or shipment of the product.

Once a biological product is identified for development, it enters the preclinical testing stage. An IND sponsor must submit the results of the preclinical tests together with manufacturing information, analytical data and any available clinical data or literature to the FDA as part of the IND. The sponsor also will include a protocol detailing, among other things, the objectives of the initial clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the initial clinical trial lends itself to an efficacy evaluation. Some preclinical testing may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical trial on a clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Clinical holds also may be imposed by the FDA at any time before or during trials due to safety concerns or non-compliance with regulatory requirements.

All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCP regulations. These regulations include the requirement that all research subjects provide informed consent. Further, an IRB must review and approve the plan for any clinical trial before it commences at any institution. An IRB considers, among other things, whether the risks to individuals participating in the trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the information regarding the clinical trial and the consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completion.

Each new clinical protocol and any amendments to the protocol must be submitted to the IND for FDA review, and to the IRBs for approval. Protocols detail, among other things, the objectives of the clinical trial, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety.

Typically, clinical testing involves a three-phase process although the phases may overlap. Generally, Phase I clinical trials are conducted in a small number of healthy volunteers or patients and are designed to provide information about product safety. In Phase II, clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine optimal dose, preliminary efficacy and expanded evidence of safety. Phase III clinical trials are generally large-scale, multi-center, comparative trials conducted with patients afflicted with a target disease in order to provide statistically valid proof of efficacy, as well as safety and potency. In some circumstances, the FDA may require Phase IV or post-marketing trials if it feels that additional information needs to be collected about the product after it is on the market, particularly for long term safety follow up. During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data and clinical trial investigators. Progress reports detailing the results of clinical trials must be submitted at least annually to the FDA. The FDA may, at its discretion, re-evaluate, alter, suspend, or terminate the testing based upon the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the patient. Monitoring all aspects of clinical trials to minimize risks is a continuing obligation and process. All adverse events must be reported to the FDA in IND safety reports.

 

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The results of the preclinical and clinical testing are submitted to the FDA along with descriptions of the manufacturing process. In the case of vaccines, gene and cell therapies and products such as our current product candidates, the results of clinical trials are submitted as a BLA. Under the Pediatric Research Equity Act of 2003, or PREA, which was reauthorized under the FDAAA, a BLA or a supplement to a BLA must contain data to assess the safety and effectiveness of the biological product for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any biological product for an indication for which orphan designation has been granted.

The FDA reviews all BLAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. The FDA may request additional information rather than accept a BLA for filing. In this event, the BLA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, FDA begins an in-depth substantive review. The FDA reviews a BLA to determine, among other things, whether the product is safe, has an acceptable purity profile and is adequately potent, and whether its manufacturing meets standards designed to assure the product’s continued identity, safety, purity, and potency.

The FDA may grant marketing approval, request additional clinical data or deny approval if the FDA determines that the application does not satisfy its marketing approval criteria. FDA review of a BLA typically takes nine months, but may last longer, especially if the FDA asks for more information or clarification of information already provided. The FDA may refer the BLA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved and under what conditions. An advisory committee is a panel of experts who provide advice and recommendations when requested by the FDA on matters of importance that come before the agency. The FDA is not bound by the recommendations of the advisory committee, but it generally follows such recommendations.

The process of obtaining marketing approval is lengthy, uncertain, and requires the expenditure of substantial resources. Each BLA must be accompanied by a user fee, pursuant to the requirements of the Prescription Drug User Fee Act, or PDUFA, and its amendments. The FDA adjusts the PDUFA user fees on an annual basis. According to the FDA’s fee schedule, effective through September 30, 2010, the user fee for an application requiring clinical data, such as a BLA, is $1,405,500. PDUFA also imposes an annual product fee for biologics ($79,720), and an annual establishment fee ($457,200) on facilities used to manufacture prescription biologics. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business. Additionally, no user fees are assessed on BLAs for products designated as orphan drugs, unless the drug also includes a non-orphan indication. We intend to seek orphan designation for our Neo-Bladder Augment.

Before approving a BLA, all facilities and manufacturing techniques used for the manufacture of products must comply with applicable FDA regulations governing cGMP. Among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final product. A local field division of the FDA is responsible for completing the pre-approval inspection and providing recommendation for or against approval. This effort is intended to assure appropriate facility and process design to avoid potentially lengthy delays in product approvals due to inspection deficiencies. Similarly, before approving a BLA, the FDA also may conduct pre-licensing inspections of a company, its contract research organizations and/or its clinical trial sites to ensure that clinical, safety, quality control and other regulated activities are compliant with GCP. To assure such cGMP and GCP compliance, the applicants must incur significant expenditure of time, money and effort in the area of training, record keeping, production, and quality control. Following approval, the manufacture, holding, and distribution of a product continues to require significant resources in order for the sponsor to

 

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maintain full compliance in these areas. For human cellular products, cGTP requirements apply. For a biologic/device combination product, the product must be manufactured also in compliance with QSR requirements for the device component.

After marketing approval has been obtained, the FDA will require post-marketing reporting to monitor the side effects of the product. Further studies may be required to provide additional data on the product’s risks, benefits, and optimal use, and further clinical trials will be required to gain approval for the use of the product as a treatment for clinical indications other than those for which the product was initially tested. Results of post-marketing programs may limit or expand the further marketing of the product. Further, if there are any modifications to the product, including changes in indication, labeling, or a change in the manufacturing process or manufacturing facility, a BLA supplement may be required to be submitted to the FDA.

Other FDA Regulatory Requirements

Maintaining substantial compliance with applicable federal, state and local statutes and regulations requires the expenditure of substantial time and financial resources. Any biological products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including:

 

   

record-keeping requirements;

 

   

reporting of adverse experiences with the biologic;

 

   

providing the FDA with updated safety and efficacy information;

 

   

reporting of cGMP deviations that may affect the safety, purity or potency of a distributed product;

 

   

reporting on advertisements and promotional labeling; and

 

   

complying with electronic record and signature requirements.

In addition, the FDA strictly regulates labeling, advertising, promotion and other types of information on products that are placed on the market. There are numerous regulations and policies that govern various means for disseminating information to health-care professionals as well as consumers, including to industry sponsored scientific and educational activities, information provided to the media and information provided over the Internet. Prescription biologics may be promoted only for the approved indications and in accordance with the provisions of the approved label. Biological product manufacturers and other entities involved in the manufacturing and distribution of approved biological products are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws.

The FDA has very broad enforcement authority and the failure to comply with applicable regulatory requirements can result in administrative or judicial sanctions being imposed on us or on the manufacturers and distributors of our approved products, including, without limitation, warning or untitled letters, refusals of government contracts, clinical holds, civil penalties, injunctions, restitution, disgorgement of profits, recall or seizure of products, total or partial suspension of production or distribution, withdrawal of approvals, refusal to approve pending applications, and criminal prosecution resulting in fines and incarceration. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability. In addition, even after marketing approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market.

 

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FDA Amendments Act

On September 27, 2007, the President signed into law the Food and Drug Administration Amendments Act of 2007, or the FDAAA. This new legislation grants significant new powers to the FDA, many of which are aimed at assuring the safety of drugs and biologics after approval. In particular, the new law authorizes the FDA to, among other things, require post-approval studies and clinical trials, mandate changes to drug and biologic labeling to reflect new safety information, and require risk evaluation and mitigation strategies for certain drugs and biologics. In addition, the new law significantly expands the federal government’s clinical trial registry and results databank and creates new restrictions on the advertising and promotion of drugs and biologics. Under the FDAAA, companies that violate these and other provisions of the new law are subject to substantial civil monetary penalties.

The requirements and changes imposed by the FDAAA may make it more difficult, and more costly, to obtain and maintain approval for new biologics, or to produce, market and distribute existing products. In addition, the FDA’s regulations, policies and guidance are often revised or reinterpreted by the agency or the courts in ways that may significantly affect our business and our products. It is impossible to predict whether additional legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of such changes, if any, may be.

Follow-on Biologics, or Biosimilars

In the past few years, there have been a number of legislative initiatives that intended to create a regulatory pathway for approval of follow-on biologics, or biosimilars. The proposed legislation differed in several aspects, including the length and scope of intellectual property protection, and the clinical testing standards. At this time it is not possible to predict whether any of the biosimilar proposals will be enacted and become law, and if so, which version of the proposals will be enacted. However, if a regulatory pathway is established for biosimilars in the future pursuant to the enactment of biosimilar legislation, our business may be adversely affected, although the extent of the impact will depend on the details of the biosimilar law.

Expedited Development and Review Programs

A Fast Track product is defined as a new drug or biologic intended for the treatment of a serious or life-threatening condition that demonstrates the potential to address unmet medical needs for this condition. Under the Fast Track program, the sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a Fast Track product at any time during the clinical development of the product. This designation assures access to FDA personnel for consultation throughout the development process and provides an opportunity to request priority review of a marketing application providing a six-month review timeline for the designated product. If a preliminary review of the clinical data suggests that a Fast Track product may be effective, the FDA may initiate review of sections of a marketing application for a Fast Track product before the sponsor completes the application. This rolling review is available if the applicant provides a schedule for submission of remaining information and pays applicable user fees. However, the time periods specified under PDUFA concerning goals to which the FDA has committed to reviewing an application do not begin until the sponsor submits the complete application. Products that receive Fast Track designation may also be eligible for accelerated approval, or approval based on a clinical endpoint or on a surrogate endpoint that is reasonably likely to predict clinical benefit.

Orphan Drug Designations

The Orphan Drug Act provides incentives to manufacturers to develop and market drugs and biologics for rare diseases and conditions affecting fewer than 200,000 persons in the United States at the time of application for orphan drug designation, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making a drug or biological product available in the United States for this type of disease or condition will be recovered from sales of

 

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the product. Orphan product designation must be requested before submitting a new drug application, or NDA, or BLA. After the FDA grants orphan product designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan product designation does not convey any advantage in or shorten the duration of the regulatory review and approval process. The first developer to receive FDA marketing approval for an orphan biologic is entitled to a seven year exclusive marketing period in the United States for that product as well as a waiver of the BLA user fee study design assistance and eligibility for grant funding from the FDA during its development. The exclusivity prevents FDA approval of another application for the same product for the same indication for a period of seven years, except in limited circumstances where the second product has been shown to be clinically superior to the first.

Legislation similar to the Orphan Drug Act has been enacted in other jurisdictions, including the European Union. The orphan legislation in the European Union is available for therapies addressing conditions that affect five or fewer out of 10,000 persons. The marketing exclusivity period is for ten years, although that period can be reduced to six years if, at the end of the fifth year, available evidence establishes that the product is sufficiently profitable not to justify maintenance of market exclusivity. We have received orphan designation in the EU for our Neo-Bladder Augment for the treatment of spina bifida.

Human Cellular and Tissue-Based Products

Human cells or tissue intended for implantation, transplantation, infusion, or transfer into a human recipient is regulated by the FDA as human cells, tissues, and cellular and tissue-based product, or HCT/ Ps. HCT/Ps are regulated differently from drug or biologic products because they are minimally manipulated tissues intended for homologous use in the patient’s body, are not combined with a drug, device or biologic, and do not have systemic or metabolic effects on the body. The FDA does not require pre-market approval for HCT/Ps, however, it does require strict adherence to federally mandated current Good Tissue Practice, or cGTP, regulations. These regulations are analogous to the cGMP regulations described above in terms of manufacturing standards. In addition, the FDA’s regulations include other requirements to prevent the introduction, transmission and spread of communicable disease. Specifically, the FDA’s regulations require tissue establishments to register and list their HCT/Ps with the FDA and to evaluate donors through screening and testing. Our product candidates are not currently regulated by the FDA as HCT/Ps, but they may be in the future.

Privacy Law

Federal and state laws govern our ability to obtain and, in some cases, to use and disclose data we need to conduct research activities. Through the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (as incorporated in the American Recovery and Reinvestment Act of 2009) Congress required the Department of Health and Human Services to issue a series of regulations establishing standards for the electronic transmission of certain health information. Among these regulations were standards for the privacy of individually identifiable health information. Most health care providers were required to comply with the Privacy Rule as of April 14, 2003.

HIPAA does not preempt, or override, state privacy laws that provide even more protection for individuals’ health information. These laws’ requirements could further complicate our ability to obtain necessary research data from our collaborators. In addition, certain state privacy and genetic testing laws may directly regulate our research activities, affecting the manner in which we use and disclose individuals’ health information, potentially increasing our cost of doing business, and exposing us to liability claims. In addition, patients and research collaborators may have contractual rights that further limit our ability to use and disclose individually identifiable health information. Claims that we have violated individuals’ privacy rights or breached our contractual obligations, even if we are not found

 

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liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business.

Other Regulations

In addition to privacy law requirements and regulations enforced by the FDA, we also are subject to various local, state and federal laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances. These laws include, but are not limited to, the Occupational Safety and Health Act, the Toxic Test Substances Control Act and the Resource Conservation and Recovery Act.

Foreign Regulation

We will most likely have to obtain approval for the manufacturing and marketing of each of our products from regulatory authorities in foreign countries prior to the commencement of marketing of the product in those countries. The approval procedure varies among countries, may involve additional preclinical testing and clinical trials, and the time required may differ from that required for FDA approval or licensure. Although there is now a centralized European Union approval mechanism in place, this applies only to certain specific medicinal product categories. In respect of all other medicinal products each European country may impose certain of its own procedures and requirements in addition to those requirements set out in the appropriate legislation, many of which could be time-consuming and expensive.

Employees

As of September 30, 2009, we had 68 employees, including 65 full-time employees, of which 12 were engaged in manufacturing and operations, 42 were engaged in research and development and clinical trials and 14 were engaged in administration, facilities and finance. We currently employ two medical doctors and 16 individuals with PhDs. All of our employees have entered into non-disclosure agreements with us regarding our intellectual property, trade secrets and other confidential information. None of our employees are represented by a labor union or covered under a collective bargaining agreement, nor have we experienced any work stoppages.

Facilities

Our corporate headquarters are located in East Norriton, Pennsylvania, where we currently occupy approximately 45,000 square feet of office, laboratory and manufacturing space. The term of our current lease expires in February 2011 and we also entered into a lease commencing in March 2011 to lease all 80,000 square feet of space. This lease expires in February 2016. We also occupy approximately 38,400 square feet of office, laboratory and manufacturing space in Winston-Salem, North Carolina. The term of the lease expires in September 2011. We believe that the facilities that we currently lease are adequate for our needs for the immediate future and that, should it be needed, additional space can be leased to accommodate any future growth.

Legal Proceedings

We are not a party to or engaged in any material legal proceedings.

 

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MANAGEMENT

Executive Officers, Key Employees and Directors

The following table sets forth certain information about our executive officers, key employees and directors as of the date of this prospectus.

 

Name

   Age   

Position(s)

Executive Officers

     

Steven Nichtberger, MD

   48    President and Chief Executive Officer, Director

Linda Hearne

   44    Vice President, Finance and Principal Financial Officer

Timothy Bertram, DVM, PhD.

   54    Senior Vice President, Science and Technology

Mark Stejbach

   46    Vice President and Chief Commercial Officer

Key Employees

     

Frans Dubois

   56    Vice President, Quality

Jason Krentz

   37    Executive Director, Technical Operations

Joseph W. La Barge, Esq.

   38    Executive Director and Corporate Counsel

Drew Sansone, MS

   39    Executive Director, Regulatory Affairs

Directors

     

David I. Scheer(1)(2)

   57    Chairman of the Board of Directors

Carl-Johan Dalsgaard, MD, PhD

   53    Director

Brenda D. Gavin, DVM(1)

   61    Director

Gary J. Kurtzman, MD

   54    Director

James Nahirny(1)(2)(3)

   43    Director

Brian J. G. Pereira, MD

   50    Director

Lorin J. Randall(1)(3)

   66    Director

 

(1)

Member of the Compensation Committee.

(2)

Member of the Nominating and Corporate Governance Committee.

(3)

Member of the Audit Committee.

Steven Nichtberger, MD, is one of our co-founders and has served as our President and Chief Executive Officer since May 2004. He has also served as one of our directors since May 2004. Dr. Nichtberger has over 15 years experience in the pharmaceutical and biotechnology industries. Prior to joining us, Dr. Nichtberger was at Merck & Co., Inc., a large multi-national pharmaceutical company, or Merck, from 1995 to 2004, holding a number of senior management positions including serving in the leadership of the global marketing organization with responsibility for developing marketing strategy for all Merck brands globally, leading marketing interactions with the research and manufacturing divisions, operational leadership and responsibility for profits and losses with regard to a U.S. product portfolio and leadership of the new product planning function. He was also involved in several corporate licensing, divestiture and product acquisition deals. Previously, Dr. Nichtberger founded and developed a privately-held company that licenses intellectual property in the field of internet-based paperless couponing. He is a board certified internist and cardiologist trained at Mount Sinai Medical Center. Dr. Nichtberger currently serves as a member of the board of overseers of the University of Pennsylvania School of Arts and Sciences, as the chairman-elect of the board of directors of Pennsylvania Bio, as a member of the board of directors of BioAdvance, the external advisory board of the Center for Bioethics at the University of Pennsylvania and as a member of the board of the Montgomery County Association for Retarded Citizens. He received a BA in Biology from the University of Pennsylvania, a BS in Economics from the Wharton School and an MD from the School of Medicine and Biosciences, SUNY at Buffalo.

 

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Linda Hearne has served as our Vice President, Finance and our Principal Financial Officer since June 2009 and prior to such time she served as our Controller from August 2004 to June 2009. Ms. Hearne brings over 20 years of corporate finance, treasury and accounting experience. Since joining us in 2004 as Corporate Controller, she has developed processes for financial reporting, budgeting, payroll, fixed assets, procurement, accounts payable and stock option administration. Prior to joining us, Ms. Hearne was employed at Merck as Director, Vaccine Division Financial Evaluation and Analysis. During her 12-year career with Merck, she also served as Director of Merck Vaccine Planning and Reporting, Director of International Treasury Services – Japan / Canada, and Senior Analyst of Foreign Exchange Hedging. Prior to her work at Merck, she held positions at Citicorp N.A. and Ernst & Young. Ms. Hearne received a BS from Miami University (Ohio) and an MBA from the Fuqua School of Business at Duke University. She is a Certified Public Accountant.

Timothy Bertram, DVM, PhD, has served as our Senior Vice President, Science and Technology since August 2004 and is responsible for leading our research and development efforts. Prior to joining us, Dr. Bertram served as a senior scientific executive at Pfizer, a large multi-national pharmaceutical company, from 1999 to 2004, and held a similar position at SmithKline Beecham Pharmaceuticals, a large multi-national pharmaceutical and healthcare company, from 1996 to 1999, and Procter & Gamble Co., a large multi-national company that manufactures consumer goods, from 1989 to 1996. He was a faculty member at the University of Illinois from 1984 to 1987 and was a visiting scientist to the National Institutes of Health from 1987 to 1989. Dr. Bertram received a DVM and PhD from Iowa State University and completed post-doctoral studies in cell signaling pathways.

Mark Stejbach has served as our Vice President and Chief Commercial Officer since June 2009 and prior to such time he served as our Vice President, Marketing and Commercial Planning from August 2008 to June 2009. His current responsibilities include business development, marketing, public affairs, human resources, legal and IT. Mr. Stejbach joined us from Merck where he served as Vice President of Managed Care Marketing in Merck’s United States Pharmaceutical Division from 2005 until 2008 and was responsible for marketing across all public and private payor segments, including contracting strategy, program development and economic affairs. From 2004 to 2005, Mr. Stejbach served as a Vice President, Sales Services, at Merck and was responsible for sales information management and development, customer services, e-business strategy and field communications. Mr. Stejbach started his pharmaceutical career at Merck in 1987, where he went on to lead marketing campaigns for VASOTEC and PROSCAR. From 1994 to 1997, Mr. Stejbach worked for Biogen, Inc., a biotechnology company, and was responsible for the development and execution of the launch marketing plan for AVONEX, a product for multiple sclerosis. Mr. Stejbach then rejoined Merck in 1997 and over the following 11 years held numerous senior leadership positions including Senior Director roles in market development, specialty sales, marketing, and investor relations. Mr. Stejbach received his MBA from The Wharton School, University of Pennsylvania, and a BS in mathematics from Virginia Tech. He was recently named a 2008 Emerging Pharma Leader by Pharmaceutical Executive magazine.

Frans Dubois has served as our Vice President, Quality since September 2009. Mr. Dubois brings over 25 years of experience in the industry, the last 10 of which he spent at Johnson & Johnson, a large multi-national pharmaceutical, medical devices and consumer packaged goods manufacturer, most recently from October 2008 until August 2009 as Vice President of Global External Manufacturing and Supplier Quality Operations. In this role at Johnson & Johnson, Mr. Dubois was responsible for quality operations at its external sites and established a global team that was responsible for the supply chain. From April 2006 until October 2008, Mr. Dubois served as the Vice President of Worldwide Quality, Centocor Inc., a biotechnology company, and was responsible for quality at all of its Global Biologics Supply Chain worldwide sites as well as its contract manufacturing operations. From 2002 until April 2006, Mr. Dubois served as Executive Director of Quality and Compliance for Centocor BV in Leiden, the Netherlands, and was responsible for quality control quality assurance and batch release. Mr. Dubois received a Master’s degree in pharmacy from Leiden University, the Netherlands. 

 

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Jason Krentz has served as our Executive Director, Technical Operations since July 2009 and prior to such time, he served as our Senior Director of Manufacturing from August 2008 to July 2009. Mr. Krentz brings over 15 years of operations leadership and process engineering experience to our company. Since joining us in 2007 as Director of Manufacturing, Mr. Krentz led completion of the commercial manufacturing center in East Norriton, PA and is responsible for operation and maintenance of all of our facilities. Prior to joining us, Mr. Krentz was employed at Johnson & Johnson, a large multi-national pharmaceutical, medical devices and consumer packaged goods manufacturer, within the Global Biologics Supply Chain organization as Associate Director of Cell Culture Operations from May 2005 to May 2007 and was responsible for upstream manufacturing of REMICADE, a monoclonal antibody indicated for treatment of numerous inflammatory disorders. From February 2004 to May 2005, Mr. Krentz served as an Operations Excellence (Lean Six Sigma) Specialist at Johnson & Johnson within the Global Biologics Supply Chain. While at Johnson & Johnson, Mr. Krentz worked throughout the supply chain organization on the REMICADE process and implemented process applications to increase production efficiency and reduce costs. He also completed certification as a Six Sigma Black Belt while leading and training process improvement teams within the manufacturing, logistics, and quality organizations. Prior to his work at Johnson & Johnson, Mr. Krentz held various engineering roles at Lucent Technologies, a technology company, and was a Submarine Officer in the U.S. Navy. Mr. Krentz received a BS in Materials Science and Engineering from the University of Michigan and an MBA from Saint Joseph’s University.

Joseph W. La Barge, Esq. has served as our Executive Director and Corporate Counsel since June 2009. Prior to such time, Mr. La Barge served as our Associate General Counsel from November 2006 to June 2009. Prior to joining our company, Mr. La Barge was Assistant Vice President, Assistant General Counsel and Assistant Secretary at PMA Capital Corporation, a holding company whose operating subsidiaries provide specialized risk management solutions and services to customers in the United States, from October 2004 to November 2006. Mr. La Barge was an associate at Ballard Spahr, LLP from 1999 to 2004. Mr. La Barge received a BA from Bucknell University and a JD from Temple University.

Drew Sansone, MS, has served as our Executive Director, Regulatory Affairs since January 2006. Prior to joining us, from May 2002 to December 2005, Mr. Sansone led regulatory operations and regulatory affairs at Vicuron Pharmaceuticals, a biopharmaceutical company, until it was acquired by Pfizer, a large multi-national technology company. Mr. Sansone eventually managed and led all of Vicuron’s FDA submissions and international regulatory submissions. From 1995 to 2002, Mr. Sansone held various roles in the Regulatory Affairs department at AstraZeneca, an international pharmaceutical company. Mr. Sansone received a BA from Siena College and an MS in Regulatory Affairs and Quality Assurance from the Temple University School of Pharmacy.

David I. Scheer is one of our co-founders and has served as Chairman of our board of directors since July 2003. Since 1981, Mr. Scheer has served as President of Scheer & Company, Inc., a company that provides corporate strategic advisory services in the life sciences industry. Mr. Scheer had been involved in the founding, and served on the boards, of ViroPharma, Inc., OraPharma, Inc. (acquired by a unit of Johnson & Johnson) and Esperion Therapeutics (acquired by Pfizer). He serves as the Chairman of the boards of Aegerion, Inc., a biopharmaceutical company, and Optherion, Inc., a biotechnology company, and has served on the board of Achillion Pharmaceuticals, Inc., a publicly-held company, since its inception. Among his not-for-profit affiliations, he serves as Chair of the Executive Committee of the Unfinished Agenda in Infectious Diseases, a global health initiative at the Harvard School of Public Health. He has also been a member of the Advisory Board to the Harvard Malaria Initiative and the Leadership Council for the Harvard School of Public Health. For the past five years, he has also served on the board of Trustees of the Long Wharf Theatre of New Haven, most recently as Vice-Chair, and as a member of the Executive Committee of the board of Connecticut Union for Research Excellence (CURE). Mr. Scheer received an AB from Harvard College and an MS from Yale University.

 

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Carl-Johan Dalsgaard, MD, PhD, has served as a director of our company since August 2004. Dr. Dalsgaard has also been a Partner in Health Cap Venture Capital, a venture capital fund that invests in life science companies, or HealthCap, from June 2000 to the present and serves as Chief Executive Officer of certain companies in which HealthCap has invested. He received an MD from the Karolinska Institute in Sweden, and a PhD in neurobiology and post-doctoral experience from Harvard Medical School. Dr. Dalsgaard has fulfilled specialist training for board certificate in plastic and reconstructive surgery at Karolinska Hospital.

Brenda D. Gavin, DVM has served as a director of our company since June 2006. She was a founding partner of Quaker BioVentures, a venture capital firm that invests in life science companies, and has been a partner at Quaker BioVentures from 2003 to the present. Dr. Gavin received her BS from Baylor University, DVM from the University of Missouri and an MBA from the University of Texas, San Antonio.

Gary J. Kurtzman, MD, has served as a director of our company since November 2008. Since June 2006, Dr. Kurtzman has served as a Managing Director in the Life Sciences Group at Safeguard Scientifics, Inc., a provider of growth capital for entrepreneurial and innovative life sciences and technology companies that is publicly traded on the New York Stock Exchange, where he is responsible for identifying and partnering with companies focused on molecular diagnostics, medical devices, regenerative medicine and specialty pharmaceuticals services. As part of Safeguard’s Life Sciences Group, Dr. Kurtzman brings more than 18 years of experience in operations and investments. From July 2002 to June 2006, Dr. Kurtzman served as Managing Director and Chief Operating Officer of BioAdvance, a state initiative committed to funding early stage life science companies. Prior to July 2002, Dr. Kurtzman held various positions at Pluvita Corporation, Genovo, Inc., Avigen, Inc., and Gilead Sciences, Inc. Dr. Kurtzman currently serves on the board of directors for Safeguard Scientifics’ partner companies: Advanced BioHealing, Alverix, Avid Radiopharmaceutics, Garnet Biotherapeutics, Molecular Biometrics and NuPathe. Dr. Kurtzman was previously managing director of BioAdvance, an early stage life sciences investor, and held various positions at Pluvita Corporation, Genovo, Inc., Avigen, Inc. and Gilead Sciences, Inc. Dr. Kurtzman is currently a lecturer in Health Care Management at The Wharton School of the University of Pennsylvania where he teaches bioentrepreneurship. Dr. Kurtzman received a BS from Stanford University and an MD from Washington University and completed post-doctoral training at the National Heart, Lung and Blood Institute and Stanford University. He is a board-certified internist with a hematology sub-specialty.

James Nahirny has served as a director of our company since June 2006. Since December 2000, Mr. Nahirny has served as a managing director of Bain Capital Venture Partners, LLC, the venture capital arm of Bain Capital, which focuses its investments in business services, consumer, healthcare, internet, mobile and software companies. Prior to joining Bain Capital Ventures Partners, LLC, Mr. Nahirny was a partner at McKinsey & Company, a global management consulting firm, where he worked with the senior management and boards of his clients on a broad range of strategic and operational issues. Before joining McKinsey, Mr. Nahirny was in the mergers and acquisitions group at the investment bank First Boston. Mr. Nahirny also serves on the boards of Nanosphere, Inc., Humedica, Inc., Quanterix Corporation, Ricera Biosciences, LLC, Ameritox, Ltd. and Servigistics, Inc. Mr. Nahirny received an MBA from Harvard Business School and a BA from Yale University.

Brian J. G. Pereira, MD, has served as a director of our company since September 2008. Dr. Pereira joined AMAG Pharmaceuticals as President in November 2005, and was appointed Chief Executive Officer in November 2006. Prior to joining AMAG Pharmaceuticals, he was President and Chief Executive Officer of New England Health Care Foundation, a physician’s group at Tufts Medical Center, from 2001 to 2005, and held various other positions at Tufts Medical Center from 1993 to 2001. From 2002 to 2004, he served as president of the National Kidney Foundation. Dr. Pereira is the editor of the textbook Chronic Kidney Disease, Dialysis and Transplantation and has over 200 scientific papers to his

 

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credit. He is a professor of medicine at Tufts University School of Medicine and at the Sackler School of Biomedical Sciences of Tufts University. Dr. Pereira currently serves on the board of directors of the National Kidney Foundation, Satellite Health Care Inc. and Biodel, Inc., and is the Chairman of the board of the Harvard-MIT Biomedical Enterprise Program. Dr. Pereira received his medical degree from St. John’s Medical College, Bangalore, India and an MBA from the Kellogg Business School, Northwestern University.

Lorin J. Randall has served as a director of our company since February 2008. Mr. Randall, a financial consultant, most recently served as Interim Chief Financial Officer at Adnexus Therapeutics, Inc., a developer of oncology biologics which was acquired by Bristol-Myers in 2007, from May 2007 to October 2007. Previously, Mr. Randall was Senior Vice President and Chief Financial Officer of Eximias Pharmaceutical Corporation, a development-stage drug development company, from December 2004 to October 2006, and from 2002 to 2004, Mr. Randall served as the Senior Vice President and Chief Financial Officer of i-STAT Corporation, a publicly-traded manufacturer of medical diagnostic devices which was acquired by Abbott Laboratories in 2004. He currently serves on the boards of directors of Nanosphere, Inc., Athersys, Inc. and Acorda Therapeutics, Inc. Mr. Randall received a BS in accounting from Pennsylvania State University and an MBA from Northeastern University.

Board Composition

Our board of directors may establish from time to time by resolution the authorized number of directors. Currently, 10 directors are authorized, of which two seats are currently vacant. Seven members are independent directors and the other director serves as our chief executive officer. In accordance with our amended and restated certificate of incorporation to be in effect upon the closing of this offering, our board of directors will be divided into three classes with staggered three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. After the completion of this offering, our directors will be divided among the three classes as follows:

 

   

the Class I directors will be             ,              and             , and their terms will expire at the annual meeting of stockholders to be held in 2011;

 

   

the Class II directors will be             ,              and             , and their terms will expire at the annual meeting of stockholders to be held in 2012; and

 

   

the Class III directors will be              and             , and their terms will expire at the annual meeting of stockholders to be held in 2013.

Our amended and restated certificate of incorporation will provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consists of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change of control at our company.

Board Committees

Our board of directors has the following committees: an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board.

 

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Audit Committee

Our audit committee oversees our corporate accounting and financial reporting process. Among other matters, the audit committee evaluates the independent auditors’ qualifications, independence and performance; determines the engagement of the independent auditors; reviews and approves the scope of the annual audit and the audit fee; discusses with management and the independent auditors the results of the annual audit and the review of our quarterly financial statements; approves the retention of the independent auditors to perform any proposed permissible non-audit services; monitors the rotation of partners of the independent auditors on our engagement team as required by law; reviews our critical accounting policies and estimates; oversees our internal audit function; and annually reviews the audit committee charter and the audit committee’s performance. The current members of our audit committee are Lorin J. Randall, who is the chair of the committee, and James Nahirny. We expect to add a third member to our audit committee prior to the completion of this offering. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the Nasdaq Global Market. Our board has determined that Mr. Randall is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication as defined under the applicable rules and regulations of Nasdaq Global Market. Messrs. Randall and Nahirny are independent directors as defined under the applicable rules and regulations of the SEC and Nasdaq Global Market. The audit committee operates under a written charter that satisfies the applicable standards of the SEC and Nasdaq Global Market.

Compensation Committee

Our compensation committee reviews and recommends policies relating to compensation and benefits of our officers and employees. The compensation committee reviews and approves corporate goals and objectives relevant to compensation of our chief executive officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives, and sets the compensation of these officers based on such evaluations. The compensation committee also administers the issuance of stock options and other awards under our stock plans. The compensation committee reviews and evaluates, at least annually, the performance of the compensation committee and its members, including compliance of the compensation committee with its charter. The current members of our compensation committee are David Scheer, who is the chair of the committee, Brenda D. Gavin, James Nahirny and Lorin J. Randall. Each of the members of our compensation committee are independent under the applicable rules and regulations of the SEC, Nasdaq Global Market and the Internal Revenue Service.

Nominating and Corporate Governance Committee

The nominating and corporate governance committee is responsible for making recommendations to our board of directors regarding candidates for directorships and the size and composition of our board. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to our board concerning governance matters. The current members of our nominating and corporate governance committee are James Nahirny, who is the chair of the committee, and David Scheer. Each of the members of our nominating and corporate governance committee are independent under the applicable rules and regulations of the SEC and Nasdaq Global Market.

There are no family relationships among any of our directors or executive officers.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee has at any time during the prior three years been an officer or employee of ours. None of our executive officers currently serves or in the prior three years has served as a member of the board of directors or compensation committee, or other committee serving

 

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an equivalent function, of any entity that has one or more executive officers serving on our board or compensation committee.

Code of Business Conduct and Ethics

We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The code of business conduct and ethics will be available on our website at www.tengion.com. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website.

Director Compensation

Each of our non-employee directors, other than those affiliated with a stockholder who holds more than 5% of our outstanding common stock, are entitled to receive an annual cash retainer of $25,000, except that a non-employee chairperson of the board will be entitled to receive an annual cash retainer of $45,000. Non-employee chairpersons of the audit committee, the compensation committee and the nominating and corporate governance committee will each be entitled to receive an additional annual retainer of $12,500, $10,000 and $10,000, respectively. Non-employee members of each of the audit committee, the compensation committee and the governance and nominating committee will be entitled to receive an additional annual retainer of $5,000. We reimburse our non-employee directors for travel, lodging and other reasonable expenses incurred in attending board and committee meetings.

In addition, each non-employee director first appointed or elected on or after February 7, 2008, has, or will automatically receive upon appointment, an option to purchase 40,000 shares of our common stock exercisable at the fair market value of our common stock on the date of grant. These options vest quarterly over a three-year period such that 50% of options will be fully vested after one year and 25% of options will fully vest in each of the subsequent two years, subject to the non-employee director’s continued service on the board through the vesting dates.

Our non-employee director compensation plan provides that, on the date of each annual stockholder meeting commencing in 2009, each continuing non-employee director will automatically receive an option to purchase 10,000 shares of our common stock exercisable at the fair market value of our common stock on the date of grant, the compensation committee determined not to award these options to our directors in 2009. When granted, these options vest quarterly over a two-year period, subject to the non-employee director’s continued service on the board through the vesting dates.

All option grants are subject to the terms and conditions of our 2004 Stock Incentive Plan or other stockholder approved equity compensation plan in effect at the time of grant.

When board membership of a non-employee director terminates, all vested options will remain exercisable for three months (or such longer period as the board may determine in its discretion on or after the date of grant of such option, to the extent consistent with Section 409A of the Internal Revenue Code). If a non-employee director leaves the board before the end of a quarter, any unvested options will be vested through the quarter anniversary of the date of grant of such option following the date of termination of service. All unvested options shall be cancelled as of the last date of service on the board.

 

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The following table sets forth information regarding compensation earned by our non-employee directors during the fiscal year ended December 31, 2009.

 

Name

   
 
 

 

Fees Eared
or Paid in
Cash

($)

   
 
 
Stock
Awards
($)
  Option
Awards
($)
  Non-Equity
Incentive Plan
Compensation
($)
  Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings

($)

  All Other
Compensation
($)
    Total ($)

David I. Scheer

  $ 60,000     —     —     —     —     —     $ 60,000

Carl-Johan Dalsgaard, MD, PhD

    —       —     —     —     —     —       —  

Brenda D. Gavin, DVM

    —       —     —     —     —     —       —  

Gary J. Kurtzman, MD

    —       —     —     —     —     —       —  

James Nahirny

    —       —     —     —     —     —       —  

Brian J. G. Pereira, MD

  $ 25,000   $ 20,147   —     —     —     —     $ 45,147

Lorin J. Randall

  $ 40,632   $ 16,675   —     —     —     —     $ 57,307

Executive Compensation

Compensation Discussion and Analysis

Objectives and Philosophy of Executive Compensation

The primary objective of our executive compensation program, as established by the compensation committee of our board of directors, is to attract, retain and motivate individuals who possess knowledge, experience and skill that we believe are important to the advancement of our business of developing and commercializing neo-organs and neo-tissues. Our compensation programs also seek to create an environment that fosters and rewards executive officers who efficiently deliver consistent results to advance our business objectives, on time and on budget, while exhibiting the following behaviors: emulate our core values; strive for and achieve excellence in our pursuit of bringing innovative products to patients in need; and maintain the highest ethical standards.

The compensation committee oversees our compensation and benefit plans and policies, administers our equity incentive plans and reviews and approves annually all compensation decisions relating to all executive officers. Specifically, our compensation programs are designed to:

 

   

attract and retain individuals of superior ability and managerial talent;

 

   

ensure executive officer compensation is aligned with our corporate strategies, business objectives and the long-term interests of our stockholders; and

 

   

increase the incentive to achieve key strategic and financial performance measures by linking incentive award opportunities to the achievement of performance goals in these areas and by providing a portion of total compensation opportunities for executive officers in the form of direct ownership in our company.

To achieve these objectives, we seek to provide a competitive compensation package that ties a substantial portion of the executive’s overall compensation to both our corporate objectives, including clinical, regulatory, commercial and operational performance, and the executive’s individual performance. Base salary increases and performance bonuses are primarily tied to these corporate and individual objectives, while equity awards are primarily tied to promoting long-term employee retention.

 

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Corporate Objectives

Corporate objectives for each fiscal year are established during the fourth quarter of the preceding year or the first quarter of the year and are the basis for determining corporate performance for the year. The key strategic corporate, financial and operational goals that are established by our compensation committee include:

 

   

clinical trial progress;

 

   

preclinical product candidate development;

 

   

establishment of manufacturing infrastructure;

 

   

continued intellectual property development; and

 

   

implementation of appropriate financing or business development strategies.

Individual Objectives

Individual objectives also are established for each executive officer, other than the chief executive officer, by the chief executive officer at approximately the same time as the corporate objectives are established. The individual performance objectives of our chief executive officer, which are recommended by the compensation committee and approved by the board of directors (without Dr. Nichtberger’s participation), are generally the same as the corporate objectives, with strong consideration given to how, within the compensation committee’s and board’s opinion, Dr. Nichtberger’s leadership impacted our ability to achieve our objectives. These objectives represent significant milestones to be met by each executive, along with, in certain circumstances, dates for achieving those milestones. Factors are identified and specified that will be used to measure success in reaching the goal or objective. Objectives are established based on the executive’s principal areas of responsibility. For example, our scientific executives will have measurable objectives established for areas such as key research or scientific milestones and our clinical executives will be measured by clinical trial progress. Our compensation committee also retains the discretion to consider an executive’s accomplishments other than enumerated objectives when evaluating an executive’s performance.

Evaluations

Toward the end of each fiscal year, the compensation committee assesses individual and corporate performance against stated goals for the year. When discussing performance evaluations and setting new compensation levels, the compensation committee considers recommendations from Dr. Nichtberger, our chief executive officer, regarding the compensation for executive officers other than himself. Dr. Nichtberger does not participate in determining the amount of his own compensation. With the exception of our chief executive officer, the compensation committee has the final authority regarding the overall compensation structure for the executive officers. In the case of Dr. Nichtberger, the compensation committee evaluates Dr. Nichtberger’s performance, with significant input and recommendations from the chairman of the compensation committee and recommends compensation levels to the board of directors.

The compensation committee evaluates individual executive performance with the goal of setting target compensation at levels the committee believes are in approximately the mid-point of the range for companies of similar size and stage of development operating in the biotechnology industry, taking into account the executive’s prior experience, our relative performance and our own strategic goals. In order to ensure that we continue to remunerate our executives appropriately and consistently with market information, we will participate in, and review data from, certain compensation surveys, and may confer with outside compensation consultants.

 

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Elements of Executive Compensation

Executive compensation consists of the following elements:

Base Salary.    Base salaries for our executive officers are generally established based on the scope of their responsibilities and the amount and type of work experience prior to joining us, taking into account competitive market compensation paid by other companies for similar positions and recognizing cost of living considerations. As with total executive compensation, we believe that our executive officer base salaries should be targeted at approximately the mid-point of the range of salaries for executives in similar positions and with similar responsibilities in comparable biotechnology companies. In general, base salaries are reviewed annually and adjusted to realign salaries with market levels and adjust for inflation, generally increasing between zero and seven percent each year. Our compensation committee did not utilize any new benchmarking data in establishing 2009 base salaries or other elements of executive officer compensation. Base salaries may be adjusted from time to time during the year in connection with promotions that may occur or in order to adjust a named executive officer’s salary in light of market conditions. For the 2010 fiscal year, the compensation committee approved base salary increases for our named executive officers as set forth in the table below:

Annual Base Salary

 

Named Executive Officer

   2009 Actual
Base Salary
   2010 Approved
Base Salary
   2010 Percentage
Increase

Steven Nichtberger, MD

   $ 390,000      

Linda B. Hearne

   $ 192,519      

Timothy Bertram, DVM, PhD

   $ 293,244      

Mark Stejbach

   $ 263,974      

Annual Performance Bonus.    The compensation committee has the authority to award annual performance bonuses to our executive officers. Each of our executive officers is eligible to receive an annual performance bonus based upon a targeted percentage of base salary. The targeted bonus level for a particular executive is determined by the executive officer’s title, with each level differentiated as follows:

 

Position

   2009 Targeted
Bonus % of
Base Salary
 

President and Chief Executive Officer

   30

Senior Vice Presidents and Vice Presidents reporting to the President and Chief Executive Officer

   20

Our executive officers’ annual performance bonus is generally determined based on our achievement of our company objectives and the executive officers’ achievement of individual objectives. If we and/or the executive officer exceeds the objectives established at the beginning of the year, or if our performance or the performance of the executive officer, whether through achievement of pre-established objectives or other significant accomplishments, is extraordinary, then the bonus payable to the executive officer could exceed the targeted percentages of base salary. Generally, if an executive officer’s performance does not meet objectives established for the year and the executive fails to achieve other significant accomplishments, then the bonus payable to the executive officer will not meet the targeted percentages. In addition, if the company objectives are not met, the amount of bonus paid to our executives can be substantially reduced or not paid at all.

The performance objectives are generally objectively determinable and measurable and their outcomes are substantially uncertain at the time established. When we set the 2009 goals, we considered them to be ambitious, but attainable and designed to cause bonus payments to reflect meaningful performance

 

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requirements. The compensation committee authorizes bonuses to the executive officers, other than the chief executive officer, in amounts that are commensurate with each executive officer’s target bonus and the result achieved by the end of the year. At the close of the performance period, our chief executive officer assesses the achievement of the objectively determinable targets of the executive officers (other than himself), reports his findings to the compensation committee and submits recommendations for bonus payouts for the approval of the compensation committee. The compensation committee reviews our chief executive officer’s analysis and in its sole discretion may accept or deny, in whole or in part, the recommendations of Dr. Nichtberger.

For our chief executive officer, the compensation committee assesses the achievement of the objectively determinable performance targets and reports its findings and bonus recommendations to the board of directors. In its sole discretion, the board of directors may accept or deny, in whole or in part, the bonus recommendations of the compensation committee. For 2009, the board of directors reviewed and accepted the compensation committee’s bonus recommendations with respect to Dr. Nichtberger.

The named executive officers each met their individual performance objectives, other than securing a product partnership and providing a net non-dilutive financing. Following the March 2009, reduction in force, the compensation committee approved in July 2009 the minimum funding of the 2009 company bonus pool at 70% because of the satisfaction of certain individual performance objectives and to promote employee retention. The final percentage funding of the pool was to be determined by the compensation committee at year-end based on the achievement of our objectives.

In December 2009, the compensation committee approved the final funding of the 2009 bonus pool at 70%, with certain company objectives concerning potential partnerships and non-dilutive financings having not been met but determined that the other company objectives were met.

 

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In 2009, the business objectives, potential awards, results and actual payouts, which will be paid in on January 2010, were as follows:

Name and Title

  

Individual Performance Objectives

  Target
(% of
Base
Salary)
  Payout
(% of
Target)
  Payout
($)

Steven Nichtberger, MD

President and Chief Executive Officer

  

Secure product partnership to provide net non-dilutive financing; file IND for lead product candidate; advance preclinical programs; lead management team.

  30%   70%   $81,900

Linda B. Hearne

Vice President, Finance and Principal Financial Officer

   Ensure appropriate investment of resources by monitoring and understanding cash requirements; secure product partnership to provide net non-dilutive financing; maintain investor and banker relationships; maintain and enhance internal appropriate financial controls.   20%   70%   $29,400

Timothy Bertram, DVM, PhD

Senior Vice President, Science and Technology

  

File IND for Neo-Urinary Conduit; advance preclinical programs in renal and GI; secure product partnership to provide net non-dilutive financing.

  20%   80%   $46,919

Mark Stejbach

Vice President, Chief Commercial Officer

   Secure product partnership to provide net non-dilutive financing; develop marketing assessments, pricing, sales forecasts based on evolving market understanding and clinical results; maintain HR and IT infrastructure; ensure efficient and effective legal support.   20%   70%   $38,500

 

+ Aside from leading the management team, Dr. Nichtberger’s objectives were identical to the company’s objectives.

The chief executive officer recommended to the compensation committee bonus payouts to executive officers commensurate with the 70% bonus funding and individual objectives achieved by the end of the year.

The compensation committee approved paying Ms. Hearne and Mr. Stejbach 70% of their respective target performance bonus, and paying Dr. Bertram 80% of his target performance in recognition of the achievement of the Neo-Urinary Conduit IND acceptance.

After reviewing Dr. Nichtberger’s objectives, the compensation committee recommended, and the board of directors approved in its discretion, paying Dr. Nichtberger 70% of his target performance bonus.

 

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Long-Term Incentive Program.    We believe that long-term performance will be enhanced through stock and equity awards that reward our executives for maximizing stockholder value over time and that align the interests of our employees and management with those of stockholders. The compensation committee believes that the use of equity awards offers the best approach to achieving our compensation goals because equity ownership ties a significant portion of an executive’s compensation to the performance of our stock. We have historically elected to use stock options and, to a more limited degree, restricted stock, as the primary long-term equity incentive vehicle.

We expect to continue to use stock options as a long-term incentive vehicle because we believe that:

 

   

Stock options and the vesting period of stock options attract and retain executives.

 

   

Stock options are inherently performance based. Because all the value received by the recipient of a stock option is based on the growth of the stock price, stock options enhance the executives’ incentive to increase our stock price and maximize stockholder value.

 

   

Stock options help to provide a balance to the overall executive compensation program as base salary and our annual performance bonus program focus on short-term compensation, while stock options reward executives for increases in stockholder value over the longer term.

Stock Options.    Our Amended and Restated 2004 Stock Incentive Plan, or the 2004 Stock Incentive Plan, authorizes us to grant options to purchase shares of common stock to our employees, directors and consultants. Our board of directors has delegated oversight of the administration of our stock option plans to our compensation committee. The compensation committee has adopted policies and procedures regarding the granting of options and, subject to those policies and procedures, also has delegated to the president and chief executive officer the authority and power to grant stock options to non-executive officer employees and consultants.

Stock option grants are made at the commencement of employment and typically annually in connection with the achievement of corporate and personal objectives. Additionally, stock option grants may be made in connection with special recognition of a particularly important corporate accomplishment in which the executive played an important role and following a significant change in job responsibilities or to meet other special retention objectives. The compensation committee considers and approves stock option awards to executive officers based upon a review of competitive compensation data, its assessment of individual performance, a review of each executive’s existing long-term incentives, and retention considerations.

The exercise price of options is the fair market value of our common stock as determined by our compensation committee on the date of grant. Our stock options typically vest over a four-year period with 25% vesting 12 months after the vesting commencement date and the remainder vesting ratably each quarter thereafter in equal installments over a three-year period subject to continued employment or association with us and generally expire ten years after the date of grant. Incentive stock options also include certain other terms necessary to assure compliance with the applicable provision of the Internal Revenue Code.

In August 2009, all active employee common stock options were repriced to $0.03 per share, the fair market value as determined by the compensation committee on such date. The compensation committee decided to reprice such stock options due in part to the significant downturn in macroeconomic conditions in the United States that it believed negatively impacted our ability to raise non-dilutive financing and ultimately impacted the fair market value of our common stock. Such decrease in the value of our common stock made all of our previous stock option grants significantly out of the money, so the compensation committee decided it was in our best interest to retain and incentivize our employees by

 

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repricing all active employee stock options to the fair market value on the date of the repricing. All of the other terms of such options remained the same. The compensation committee also issued certain options at such time in connection with the promotion of certain employees, including Linda Hearne, who was promoted to our Principal Financial Officer.

Restricted Stock.    Our 2004 Stock Incentive Plan authorizes us to grant restricted stock. Additionally, prior to 2004, we granted restricted stock pursuant to certain restricted stock purchase agreements between the named executive officer receiving the restricted stock and us. To date, we have granted 1,850,585 shares of restricted stock to Dr. Nichtberger and 305,272 shares of restricted stock to Dr. Bertram. These shares of restricted stock were generally issued in connection with each executive officer’s commencement of employment. While we have no current plans to grant additional restricted stock under our 2004 Stock Incentive Plan, we may choose to do so in order to implement the long-term incentive goals of the compensation committee.

Severance and Change in Control Benefits.    As more fully described in the sections entitled “Potential Payments Upon Termination or Change in Control,” below, we have entered into offer letters with our named executive officers that provide for certain payments and benefits upon a qualifying termination of employment or a change in control, including salary and benefits continuation, payment of pro-rata bonuses and acceleration of certain unvested equity awards.

Other Compensation.    We maintain broad-based benefits and perquisites that are available to all eligible employees, including health insurance, life and disability insurance, dental insurance, vision insurance, flexible spending accounts and a 401(k) plan. Additionally, under certain circumstances, we will use cash sign-on bonuses as an incentive for individuals to join our team. These bonuses are awarded on a case-by-case basis and are typically offered to off-set compensation that was forfeited upon termination of prior employment, to assist with relocation expenses or to off-set a variance in total compensation from the individual’s prior employment to joining us. Consistent with our compensation philosophy, we intend to continue to maintain these benefits for our executive officers; however, the compensation committee in its discretion may revise, amend or add to the officer’s benefits if it deems it advisable.

Relationship of Elements of Compensation.    Our compensation structure is primarily weighted toward three of the elements discussed: base salary, annual performance bonus and stock options. We utilize stock options as a substantial component of compensation because we currently have no revenue or earnings and expect this to be the case for the foreseeable future. Our mix of cash and non-cash compensation balances our need to limit cash expenditures with the expectations of those we hope to recruit and retain as employees. In the future, we may adjust the mix of cash and non-cash compensation if required by competitive market conditions for attracting and retaining skilled personnel.

We manage the expected impact of salary increases and performance bonuses by requiring that the size of such salary increases and bonuses be tied to the attainment of corporate and individual objectives. For example, the size of each employee’s bonus is determined not only by individual performance, but also by whether we have met corporate objectives.

We view the award of stock options as a primary long-term retention benefit. We make the award of stock options a significant component of total compensation and also tie the earning of these awards to long-term vesting schedules, generally four years. If an employee leaves our employ before the completion of the vesting period, then that employee would not receive any benefit from the non-vested portion of his award. We believe this feature makes it more attractive to remain as our employee and these arrangements do not require substantial cash payments by us.

 

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Tax Considerations

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction for compensation in excess of $1.0 million paid to our chief executive officer and our four other most highly paid executive officers. Qualifying performance-based compensation is not subject to the deduction limitation if specified requirements are met. We generally intend to structure the performance-based portion of our executive compensation, when feasible, to comply with exemptions in Section 162(m) so that the compensation remains tax deductible to us. However, our board of directors may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent.

Summary Compensation Table

The following table summarizes the compensation that we paid to (i) our Principal Executive Officer, (ii) current Principal Financial Officer, (iii) our former Principal Financial Officer who served during our last fiscal year, (iv) our two other most highly compensated executive officers and (v) two additional individuals who, had they been serving as executive officers at the end of the year ended December 31, 2009, would have been required to be disclosed. We refer to these officers as our named executive officers in this prospectus.

 

Name and Principal Position

  Year   Salary
($)
  Bonus
($)
    Stock
Awards
($)(1)
  Options
Awards
($)(2)
  Non-Equity
Incentive Plan
Compensation
($)(3)
  All Other
Compensation
($)
    Total
($)

Steven Nichtberger, MD

President and Chief Executive

Officer

  2009   $ 390,000   $
 
81,900
 
  
  
  $ —     $ 309,579   $ —     $ 13,613 (4)    $ 795,092

Linda B. Hearne

Vice President, Finance and Principal Financial Officer

  2009   $ 192,519   $ 29,400      $ —     $ 20,201   $ —     $ 13 (5)    $ 242,133

Gary L. Sender(6)

Former Chief Financial Officer, Vice President Finance and Administration

  2009   $ 151,098   $ —        $ —     $ 38,649   $ —     $ 12,879 (7)    $ 202,626

Timothy Bertram, DVM, PhD

Senior Vice President,

Science and Technology

  2009   $ 293,244   $ 46,919      $ —     $ 108,925   $ —     $ 45 (5)    $ 449,133

Mark Stejbach

Vice President and Chief Commercial Officer

  2009   $ 263,974   $ 63,500 (8)    $ —     $ 100,563   $ —     $ 27 (5)    $ 428,064

Elyse Seltzer, MD(9)

Former Chief Medical Officer, Vice President Clinical and Medical Affairs

  2009   $ 193,297   $ —        $ —     $ 66,090   $ —     $ 16,743 (6)    $ 276,130

Gary Arlen Smith, Esq.(10)

Former Vice President, General Counsel and Secretary

  2009   $ 187,953   $ —        $ 9,294   $ 53,839   $ —     $ 69,420 (11)    $ 320,506

 

(1)

Calculated in accordance with current FASB guidance accounting standards for stock-based compensation without consideration of forfeitures. Valuation assumptions used to determine the fair value of the stock awards are described in the notes to the financial statements appearing elsewhere in this prospectus.

(2)

Calculated in accordance with current FASB guidance accounting standards for stock-based compensation without consideration of forfeitures. Valuation assumptions used to determine the fair value of the option awards are described in the notes to the financial statements appearing elsewhere in this prospectus.

 

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(3)

Amounts shown in “Non-Equity Incentive Plan Compensation” column reflect the annual incentive award granted and earned during fiscal 2009, and to be paid in fiscal year 2010. These annual awards are described in further detail under “Compensation Discussion and Analysis for Named Executive Officers – Annual Cash Incentive Compensation”.

  (4)

Dr. Nichtberger’s other compensation includes life and disability insurance of $9,013 and tax reimbursements of $4,599.

  (5)

All other compensation consists of tax reimbursements.

  (6)

Mr. Sender left our company in July 2009.

  (7)

All other compensation consists of unused vacation pay.

  (8)

Bonus paid to Mr. Stejbach includes $25,000, which consists of $12,500 payable at six month anniversary of employment and $12,500 payable at twelve month anniversary of employment, as stipulated in Mr. Stejbach’s offer letter.

  (9)

Dr. Seltzer left our company in August 2009.

(10)

Mr. Smith left our company in September 2009.

(11)

All other compensation consists of severance paid to Mr. Smith.

Grants of Plan-Based Awards Table

All options granted to our named executive officers are incentive stock options, to the extent permissible under the Internal Revenue Code. The exercise price per share of each option granted to our named executive officers prior to this offering, was determined in good faith by our compensation committee, to be equal to the fair market value of our common stock as determined by our compensation committee on the date of the grant. All options were granted under our 2004 Stock Incentive Plan, as described below in the section entitled “Employee Benefit and Stock Plans – 2004 Stock Incentive Plan.”

The following table shows information regarding grants of compensation in the form of plan-based awards during the year ended December 31, 2009 to each of our named executive officers.

 

Name and Principal Position

  Grant
Date
  Number of
Securities
Underlying
Options
Granted(1)
  Exercise Price
($/Share)(2)
    Grant Date Fair
Value of Stock
and Option
Awards(3)
 

Steven Nichtberger, MD

  —     —       —          —     

President and Chief Executive Officer

  09/28/09   704,224   $ 0.03      $ 12,676   

Linda B. Hearne

  —     —       —          —     

Vice President, Finance and Principal Financial Officer

  01/09/09   10,000     0.03 (4)       4,975 (5)  
  09/28/09   558,411     0.03        10,051   

Timothy Bertram, DVM, PhD

  —     —       —          —     

Senior Vice President, Science and Technology

  09/28/09   685,186     0.03        12,333   

Mark P. Stejbach

  —     —       —          —     

Vice President and Chief Commercial Officer

  09/28/09   613,639     0.03        11,046   

Gary Arlen Smith

  —     —       —          —     

Former Vice President, General Counsel and Secretary

       

Elyse Seltzer, MD

  —     —       —          —     

Former Chief Medical Officer, Vice President Clinical and Medical Affairs

       

 

(1)

The options have a term of ten years and vests in accordance with the following schedule: 25% of the total number of shares vest on the first anniversary of the grant date and 1/16th of the total number of shares vest on the first day of each quarter following the grant date.

(2)

Represents the per share fair market value of our common stock, as determined by the compensation committee pursuant to authority delegated to it by the board of directors.

(3)

The value of option awards granted to our named executive officers was computed in accordance with current FASB guidance. Valuation assumptions used to determine the fair value of the option awards are described in the notes to the financial statements appearing elsewhere in this prospectus.

(4)

This option award was originally granted with an exercise price of $0.81 and was modified when all active employees grants were repriced on August 26, 2009.

(5)

The fair value of this option awards is equal to the original fair value of the award plus the incremental cost of $158 associated with the modification on August 26, 2009.

 

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Outstanding Equity Awards at Fiscal Year-End

The following table shows grants of stock options and grants of unvested stock awards outstanding on December 31, 2009, the last day of our fiscal year to each of our named executive officers.

 

    Option Awards   Stock Awards(2)

Name

  Number of
Securities
Underlying
Unexercised
Options
Exercisable
  Number of
Securities
Underlying
Unexercised
Options
Unexercisable(1)
  Exercise
Price
($/Share)
  Expiration
Date
  Number of
Shares or
Units of
Stock that
have not
Vested

(#)
    Market
Value of
Shares of
Units
that
have not
Vested
(#)

Steven Nichtberger, MD

  56,250   —     $ 0.03   2/15/2015   —          —  

President and Chief Executive Officer

  187,500   12,500   $ 0.03   2/27/2016    
  537,450   101,875   $ 0.03   6/23/2016    
  137,500   62,500   $ 0.03   2/27/2017    
  297,500   297,500   $ 0.03   12/19/2017    
  87,500   112,500   $ 0.03   2/7/2018    
  —     704,224   $ 0.03   9/28/2019    

Linda B. Hearne

  13,000   —     $ 0.03   10/11/2016   —          —  

Vice President, Finance and Principal Financial Officer

  10,000   —     $ 0.03   2/15/2015    
  5,625   375   $ 0.03   2/27/2016    
  43,750   6,250   $ 0.03   6/23/2016    
  2,031   469   $ 0.03   8/2/2016    
  5,843   2,657   $ 0.03   2/27/2017    
  1,500   1,500   $ 0.03   10/29/2017    
  15,000   15,000   $ 0.03   12/19/2017    
  4,156   5,344   $ 0.03   2/6/2018    
  2,500   7,500   $ 0.03   10/2/2018    
  —     10,000   $ 0.03   1/9/2019    
  —     558,411   $ 0.03   9/28/2019    

Timothy Bertram, DVM, PhD

  9,375   —     $ 0.03   2/15/2015   —          —  

Senior Vice President, Science and

Technology

  35,000   4,375   $ 0.03   2/27/2016    
  39,375   8,750   $ 0.03   6/23/2016    
  10,000   5,000   $ 0.03   11/1/2016    
  55,000   25,000   $ 0.03   2/27/2017    
  5,000   5,000   $ 0.03   10/25/2017    
  120,000   120,000   $ 0.03   12/19/2017    
  37,187   47,813   $ 0.03   2/7/2018    
  —     685,186   $ 0.03   9/28/2019    

Mark P. Stejbach

  140,625   309,375   $ 0.03   8/1/2018   —          —  

Vice President and Chief Commercial Officer

  —     613,639   $ 0.03   9/28/2009    

Elyse Seltzer, MD

  —     —     $ —     —     —        $ —  

Former Chief Medical Officer, Vice President Clinical and Medical Affairs

  —     —          

Gary Arlen Smith, Esq.

  —     —     $ —       6,250 (4)    $ —  

Former Vice President, General Counsel and Secretary

  —     —          

 

(1)

25% of the total number of shares subject to the option vest at the end of the first year, the remainder vest 1/16th per quarter thereafter.

(2)

Represents the shares of common stock subject to repurchase by us as of December 31, 2009.

 

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(3)

Assumes a price per share of our common stock of $            , which represents the mid-point of the estimated price range on the cover of this prospectus.

(4)

These shares of restricted stock were not repurchased by us when Mr. Smith left our company.

Option Exercises and Stock Vested Table

None of our active named executive officers exercised shares in 2009 and all their restricted stock is fully vested.

Pension Benefits

None of our named executive officers participates in or has account balances in qualified or non-qualified defined benefit plans sponsored by us.

Nonqualified Deferred Compensation

None of our named executive officers participate in or have account balances in non-qualified defined contribution plans or other deferred compensation plans maintained by us. The compensation committee, which is comprised solely of independent directors, may elect to provide our named executive officers and other employees with non-qualified defined contribution or deferred compensation benefits if the compensation committee determines that doing so is in our best interests.

Potential Payments Upon Termination or Change in Control

Steven Nichtberger, MD.    On May 25, 2004, we entered into an offer letter with Dr. Nichtberger providing for his at-will employment. At any time, in the event Dr. Nichtberger is terminated by us without cause as defined in the offer letter, or he resigns under certain specified conditions, each as described in the offer letter, including being assigned to a position inconsistent with the position of President, Chief Executive Officer or a board member, a move of our principal office more than 40 miles from his current residence, our failure to pay his salary when due, a material breach of the offer letter or his death. Dr. Nichtberger will be entitled to receive (i) continued payment of his base salary for 12 months, (ii) continuation of his benefits, for 12 months, and (iii) a pro-rata portion of his bonus for the year of termination, determined in the sole discretion of the board. Dr. Nichtberger’s severance will be subject to set-off for income obtained through other employment during the severance period. In the event that Dr. Nichtberger is terminated for cause, Dr. Nichtberger will not be entitled to the payments and benefits described above.

Linda Hearne.    On September 22, 2004, we entered into an offer letter with Ms. Hearne providing for her at-will employment. At any time, in the event Ms. Hearne’s employment is terminated by us without cause as defined in the offer letter, subject to her signing of a form of Release and Non-disparagement Agreement, Ms. Hearne will be entitled to receive (i) continued payment of her base salary for six months and (ii) continuation of her benefits, for six months. Ms. Hearne’s severance will be subject to set-off for income obtained through other employment during the severance period. In the event that Ms. Hearne does not execute the Release and Non-disparagement Agreement described above, her severance will be reduced to one month’s salary and benefits continuation. In the event that Ms. Hearne is terminated for cause, Ms. Hearne will not be entitled to the payments and benefits described above.

Timothy Bertram, DVM, PhD.    On July 28, 2004, we entered into an offer letter with Dr. Bertram providing for his at-will employment. At any time, in the event Dr. Bertram’s is terminated by us without cause as defined in the offer letter, Dr. Bertram will be entitled to receive (i) continued payment of his base salary for six months, (ii) continuation of his benefits, for six months, and (iii) a pro-rata portion of his bonus for the year of termination, determined in the sole discretion of the board. Dr. Bertram’s severance will be subject to set-off for income obtained through other employment during the severance

 

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period. In the event that Dr. Bertram is terminated for cause, Dr. Bertram will not be entitled to the payments and benefits described above.

Mark Stejbach.    On June 24, 2008, we entered into an offer letter with Mr. Stejbach providing for his at-will employment. Mr. Stejbach was eligible to receive an initial signing bonus of $37,500, of which $25,000 was payable upon commencement of employment, and the remaining $12,500 was payable on the six month anniversary of the commencement date. We are also required to pay Mr. Stejbach $12,500 in bonus payments on each of the 12 and 18 month anniversaries of his employment. At any time, in the event Mr. Stejbach’s employment is terminated by us without cause as defined in the offer letter, subject to his signing of a form of Release and Non-disparagement Agreement, Mr. Stejbach will be entitled to receive (i) continued payment of his base salary for nine months and (ii) continuation of his benefits, for nine months. Mr. Stejbach’s severance will be subject to set-off for income obtained through other employment during the severance period. In the event that Mr. Stejbach is terminated for cause, Mr. Stejbach will not be entitled to the payments and benefits described above.

In addition, the offer letter for Mr. Stejbach provides that in the event of termination by us without cause within one month prior to or nine months following a change in control of our company, Mr. Stejbach’s restricted stock awards or stock options, as the case may be, shall immediately vest.

 

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The following table sets forth the payments that would be made to our named executive officers if his or her employment had been terminated by us without cause (or if applicable, by the executive for good reason) on December 31, 2009 or in the event a change in control of our company occurred on December 31, 2009, as applicable.

 

Name

   Termination Without
Cause (or With Good
Reason)

($)
   Termination Without
Cause (or With Good
Reason) in Connection
with a Change in
Control

($)

Steven Nichtberger, MD

     

Cash Severance

   390,000    390,000

Continued Health Benefits

   15,902    15,902

Pro-Rata Bonus

   81,900    81,900

Acceleration of Restricted Stock

   —      —  

Acceleration of Stock Options

   —      —  

Total:

     

Linda B. Hearne

     

Cash Severance

   105,000    105,000

Continued Health Benefits

   7,386    7,386

Acceleration of Restricted Stock

   —      —  

Acceleration of Stock Options

   —      —  

Total:

     

Timothy Bertram, DVM, PhD

     

Cash Severance

   146,622    146,622

Continued Health Benefits

   7,647    7,647

Pro-Rata Bonus

   46,919    46,919

Acceleration of Restricted Stock

   —      —  

Acceleration of Stock Options

     

Total:

     

Mark Stejbach

     

Cash Severance

   206,250    206,250

Continued Health Benefits

   11,385    11,385

Acceleration of Restricted Stock

   —      —  

Acceleration of Stock Options

     

Total:

     

Dr. Seltzer and Messrs. Sender and Smith were no longer employed by us as of December 31, 2009. Pursuant to the terms of their employment with us, Dr. Seltzer and Mr. Sender are not entitled to any severance payments from us. As of December 31, 2009, Mr. Smith is entitled to severance payments of his base salary until June 30, 2010 payable in a manner consistent with his prior payroll receipts.

 

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Proprietary Information and Inventions Agreement

Each of our named executive officers has also entered into a standard form agreement with respect to proprietary information and inventions. Among other things, this agreement obligates each named executive officer to refrain from disclosing any of our proprietary information received during the course of employment and, with some exceptions, to assign to us any inventions conceived or developed during the course of employment.

Amended and Restated 2004 Stock Incentive Plan

We maintain our 2004 Stock Incentive Plan, which provides flexibility to use various equity-based incentive awards as compensation tools to promote the success of the business of the Company.

We have initially reserved 15,410,800 shares of our common stock for the issuance of awards under the 2004 Stock Incentive Plan. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. The maximum number of shares available for issuance under the 2004 Stock Incentive Plan will automatically increase in the event the we exercise our right to repurchase shares of restricted stock held by certain employees in connection with such employees’ termination of employment, provided that this increase will not exceed 3,009,174 shares.

The shares we issue under our 2004 Stock Incentive Plan will be authorized but unissued shares or treasury shares. The shares of common stock underlying any awards that are forfeited, canceled, repurchased, expire or are otherwise terminated (other than by exercise) under our 2004 Stock Incentive Plan are added back to the shares of common stock available for issuance under our 2004 Stock Incentive Plan.

Our 2004 Stock Incentive Plan is administered by either our Board or a committee of the Board, which we refer to as the administrator. The administrator has full power to select, from among the individuals eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants, and to determine the specific terms and conditions of each award, subject to the provisions of the 2004 Plan. Persons eligible to participate in our 2004 Stock Incentive Plan will be those officers, employees, directors and consultants of the Company and its subsidiaries as selected from time to time by the administrator in its discretion.

Our 2004 Stock Incentive Plan permits the granting of (1) options to purchase common stock intended to qualify as incentive stock options under Section 422 of the Code and (2) options that do not so qualify. The option exercise price of each option will be determined by the administrator but may not be less than 100% of the fair market value of the common stock on the date of grant. The term of each option will be fixed by the administrator and may not exceed ten years from the date of grant. The administrator will determine at what time or times each option may be exercised.

The administrator may award restricted shares of common stock to participants subject to such conditions and restrictions as the administrator may determine. These conditions and restrictions may include the achievement of certain performance goals and/or continued employment with us through a specified restricted period. Shares of restricted stock may be subject to repurchase by us on such terms specified by the administrator.

The administrator may grant other stock-based awards under our 2004 Stock Incentive Plan to participants, subject to such conditions and restrictions as the administrator may determine, including the grant of share of common stock based upon certain conditions, the grant of securities convertible into shares of common stock, the grant of performance units or performance shares, and the grant of stock appreciation rights.

 

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Our 2004 Stock Incentive Plan permits the administrator, in its discretion, to undertake “exchange transactions” whereby, with the consent of affected participants, outstanding awards may be exchanged for the same or a different type of award and/or cash, and/or the exercise price of outstanding awards is increased or decreased. The administrator shall determine the terms and conditions of any such exchange transaction.

Our 2004 Stock Incentive Plan provides that upon the occurrence of a “Reorganization Event” as defined in the 2004 Plan, unless the parties to the Reorganization Event agree that such awards will be assumed or continued by the successor entity, either (i) all stock options will automatically become fully exercisable prior to the Reorganization Event, and, to the extent not exercised, will terminate immediately prior to the consummation of the Reorganization Event, or (ii) in the case of a Reorganization Event in which our stockholders will receive cash consideration, all outstanding options will terminate in exchange for the right to receive an amount equal to the difference between the per share cash consideration and the exercise price of the options.

As of November 2009, there were (a) 10,554,258 options to purchase shares of our common stock (of which were vested and exercisable), and (b) 55,000 shares of restricted stock issued and outstanding under the 2004 Plan.

Limitation on Liability and Indemnification Matters

Our amended and restated certificate of incorporation and amended and restated bylaws, each to be effective upon the completion of this offering, will provide that we will indemnify our directors and officers, and may indemnify our employees and other agents, to the fullest extent permitted by the Delaware General Corporation Law, which prohibits our amended and restated certificate of incorporation from limiting the liability of our directors for the following:

 

   

any breach of the director’s duty of loyalty to us or to our stockholders;

 

   

acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

 

   

unlawful payment of dividends or unlawful stock repurchases or redemptions; and

 

   

any transaction from which the director derived an improper personal benefit.

If Delaware law is amended to authorize corporate action further eliminating or limiting the personal liability of a director, then the liability of our directors will be eliminated or limited to the fullest extent permitted by Delaware law, as so amended. Our amended and restated certificate of incorporation does not eliminate a director’s duty of care and, in appropriate circumstances, equitable remedies, such as injunctive or other forms of non-monetary relief, remain available under Delaware law. This provision also does not affect a director’s responsibilities under any other laws, such as the federal securities laws or other state or federal laws. Under our amended and restated bylaws, we will also be empowered to enter into indemnification agreements with our directors, officers, employees and other agents and to purchase insurance on behalf of any person whom we are required or permitted to indemnify.

In addition to the indemnification required in our amended and restated certificate of incorporation and amended and restated bylaws, we entered into indemnification agreements with each of our current directors, officers, and some employees before the completion of this offering. These agreements provide for the indemnification of our directors, officers, and some employees for all reasonable expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were our agents. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain directors’ and officers’ liability insurance.

 

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The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. There is no pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.

Rule 10b5-1 Sales Plans

Our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from them. The director or officer may amend or terminate the plan in some circumstances. Our directors and executive officers may also buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material, nonpublic information.

 

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CERTAIN TRANSACTIONS WITH RELATED PERSONS

We describe below transactions and series of similar transactions, since January 1, 2007, to which we were a party or will be a party, in which:

 

   

the amounts involved exceeded or will exceed $120,000; and

 

   

a director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest.

We believe that all of the transactions described below were made on terms no less favorable to us than could have been obtained from unrelated third parties on an arms-length basis.

Issuance of Series C Convertible Preferred Stock

In September 2007 and October 2008, we issued an aggregate of 18,332,965 shares and 11,793,127 shares, respectively, of our Series C convertible preferred stock at a price per share of $1.82 for an aggregate purchase price of approximately $54.8 million. The table below sets forth the number of Series C convertible preferred shares sold to our directors, executive officers and 5% stockholders and their affiliates.

 

Name

   Number of Shares of
Series C Convertible
Preferred Stock
   Approximate Aggregate
Purchase Price

($)

Oak Investment Partners XI, Limited Partnership

   5,117,638    9,314,101

Safeguard Delaware, Inc.(1)

   4,120,879    7,500,000

Johnson & Johnson Development Corporation

   3,823,817    6,959,347

HealthCap Venture Capital(2)

   3,732,480    6,793,114

Brookside Capital Partners Fund, L.P.(3)

   2,250,328    4,095,597

Bain Capital Venture Entities(4)

   2,227,825    4,054,642

Quaker BioVentures(5)

   2,176,858    3,961,882

L Capital Partners SBIC, L.P. 

   1,594,797    2,902,531

Eileen More(6)

   93,407    170,001

Lorin J. Randall

   54,945    100,000

Mark Stejbach

   27,500    50,050

Timothy Bertram, DVM, PhD

   5,494    9,999

Steven Nichtberger, MD

   2,747    5,000

 

(1)

Gary J. Kurtzman, MD, one of our directors, is an officer and a Managing Director in the Life Sciences Group at Safeguard Scientifics, Inc., the parent company of Safeguard Delaware, Inc., which holds these shares.

(2)

Carl-Johan Dalsgaard, one of our directors, is a Partner at HealthCap Venture Capital, which is the general partner of HealthCap IV KB, HealthCap IV, L.P., HealthCap IV BIS, L.P. and OFCO Club IV, which hold these shares.

(3)

Shares include 2,250,328 shares owned by Brookside Capital Partners Fund, L.P., whose sole general partner is Brookside Capital Investors, L.P. (“Brookside Investors”), whose sole general partner is Brookside Capital Management, LLC (“Brookside Management”). Each of Brookside Investors and Brookside Management disclaim beneficial ownership of any shares except to the extent of their pecuniary interest therein.

(4)

Shares include (i) 1,945,106 shares owned by Bain Capital Venture Fund 2005, L.P., whose sole general partner is Bain Capital Venture Partners 2005, L.P. (“BCVP”), whose sole general partner is Bain Capital Venture Investors, LLC (“BCVI”); (ii) 276,629 shares owned by BCIP Associates III, LLC, whose manager is BCIP Associates III, LLC, whose sole managing general partner is Bain Capital Investors, LLC (“BCI”) and whose attorney-in-fact with respect to such shares is BCVI; (iii) 6,090 shares owned by BCIP Associates III-B, LLC, whose manager is BCIP Associates III-B, whose sole managing partner is BCI and whose attorney-in-fact with respect to such shares is BCVI. The address of each listed entity and individual is 111 Huntington Avenue, Boston, MA 02199. James Nahirny, one of our directors, is a Managing Director of BCVI, which is the general partner of BCVP, which is the general partner of Bain Capital Venture Fund 2005, LP. BCVI is also the attorney-in-fact for BCI, which is the managing member of each of BCIP Associates III and BCIP Associates III-B. BCIP Associates III is the sole member of BCIP Associates III, LLC and BCIP Associates III-B is the sole member of BCIP Associates III-B, LLC. Each of BCIP Associates III, LLC and BCIP Associates III-B, LLC hold 276,629 and 6,090 of these shares, respectively.

 

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(5)

Brenda D. Gavin, DVM, one of our directors, is a Partner at Quaker BioVentures, the managing partner of Quaker BioVentures, L.P., BioAdvance Ventures, L.P. and Quaker BioVentures Tobacco Fund, L.P., which hold these shares.

(6)

Eileen More is one of our former directors who was a director at the time of the issuance of the Series C convertible preferred stock.

Common Stock Issuances and Repurchases

We are party to restricted stock purchase agreements with certain of our executive officers, pursuant to which such executive officers were granted the right to purchase shares of our common stock. For a more detailed description of these issuances, see “Management – Offer Letters.”

We entered into stock repurchase agreements with our former Chief Medical Officer, Paul Chang, MD, and our former Vice President, Business Development, George Landau, pursuant to which we repurchased certain vested shares of restricted stock at a purchase price equal to the fair market value of such shares on the repurchase date and unvested shares of restricted stock at a purchase price per share equal to the par value of such share.

Investor Rights Agreement

We are a party to an investor rights agreement which provides that holders of our convertible preferred stock have the right to demand that we file a registration statement or request that their shares be covered by a registration statement that we are otherwise filing in certain situations. For a more detailed description of these registration rights, see “Description of Capital Stock – Registration Rights.”

Other Transactions

We have granted stock options to our executive officers and certain of our directors. For a description of these options, see “Management – Grants of Plan-Based Awards Table.”

We will enter into indemnification agreements with each of our current directors, officers and some employees before the completion of this offering. See “Management – Limitation on Liability and Indemnification Matters.”

We have entered into an indemnification agreement with Dr. Nichtberger with respect to expenses potentially incurred as a result of his personal guarantees of our obligations under certain contracts.

Each of our executive officers’ offer letters contain certain severance and change of control benefits. For a description of these agreements, see “Management – Offer Letters.”

Policies and Procedures for Related Party Transactions

Our audit committee charter provides that our audit committee must review and approve in advance any related party transaction. All of our directors, officers and employees are required to report to our audit committee any such related party transaction prior to its completion.

 

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PRINCIPAL STOCKHOLDERS

The following table sets forth information about the beneficial ownership of our common stock at for:

 

   

each named executive officer;

 

   

each of our directors;

 

   

each person known to us to be the beneficial owner of more than 5% of our common stock; and

 

   

all of our executive officers and directors as a group

Unless otherwise noted below, the address of each beneficial owner listed on the table is c/o Tengion, Inc. 2900 Potshop Lane, Suite 100, East Norriton, PA 19403. We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the tables below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws. We have based our calculation of the percentage of beneficial ownership on 92,096,977 shares of common stock outstanding on September 30, 2009, which assumes the automatic conversion of 81,954,127 shares of preferred stock to common stock upon the completion of our initial public offering.

In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options or warrants held by that person that were exercisable as of September 30, 2009 or exercisable within 60 days of September 30, 2009. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Beneficial ownership representing less than 1% is denoted with an asterisk (*).

 

     Beneficial Ownership Prior
to the Offering
    Beneficial Ownership
After the Offering

Name and Address of Beneficial Owner

   Shares    Percentage     Shares    Percentage

5% Stockholders:

          

Oak Investment Partners XI, Limited Partnership

   18,034,824    19.6