| AASTROM BIOSCIENCES INC Item 1A Risk Factors Our business is subject to a number of uncertainties, including those discussed below |
| Our past losses and expected future losses cast doubt on our ability to operate profitably |
| We were incorporated in 1989 and have experienced substantial operating losses since inception |
| As of June 30, 2006, we have incurred a cumulative net loss totaling approximately dlra141 million |
| These losses have resulted principally from costs incurred in the research and development of our cell culture technologies and the AastromReplicell System, general and administrative expenses, and the prosecution of patent applications |
| We expect to incur significant operating losses at least until, and probably after, product sales increase, primarily owing to our research and development programs, including pre-clinical studies and clinical trials, and the establishment of marketing and distribution capabilities necessary to support commercialization efforts for our products |
| We cannot predict with any certainty the amount of future losses |
| Our ability to achieve profitability will depend, among other things, on successfully completing the development of our product candidates, obtaining regulatory approvals, establishing manufacturing, sales and marketing arrangements with third parties, maintaining supplies of key manufacturing components, and raising sufficient cash to fund our operating activities |
| In addition, we may not be able to achieve or sustain profitability |
| Failure to obtain and maintain required regulatory approvals would severely limit our ability to sell our products |
| We must obtain the approval of the FDA before commercial sales of our cell product candidates may commence in the US, which we believe will ultimately be the largest market for our products |
| We will also be required to obtain additional approvals from various foreign regulatory authorities to initiate sales activities of cell products in those jurisdictions, such as the EU If we cannot demonstrate the safety, reliability and efficacy of our cell product candidates, or of the cells produced in our device products, we may not be able to obtain required regulatory approvals |
| If we cannot demonstrate the safety and efficacy of our technologies and product candidates, or if one or more patients die or suffer severe complications, the FDA or other regulatory authorities could delay or withhold regulatory approval of our product candidates |
| Finally, even if we obtain regulatory approval of a product, that approval may be subject to limitations on the indicated uses for which it may be marketed |
| Even after granting regulatory approval, the FDA and regulatory agencies in other countries continue to review and inspect marketed products, manufacturers and manufacturing facilities, which may create additional regulatory burdens |
| Later discovery of previously unknown problems with a product, manufacturer or facility, may result in restrictions on the product or manufacturer, including a withdrawal of the product from the market |
| Further, regulatory agencies may establish additional regulations that could prevent or delay regulatory approval of our products |
| Any changes in the governmental regulatory classifications of our products could prevent, limit or delay our ability to market or develop our products |
| The FDA establishes regulatory requirements based on the classification of a product |
| Because our product development programs are designed to satisfy the standards applicable to biological licensure for our cellular products, any change in the regulatory classification or designation would affect our ability to obtain FDA approval of our products |
| The AastromReplicell System is used to produce different cell mixtures, and each of these cell mixtures (such as our TRCs) is, under current regulations, regulated as a biologic product, which requires a BLA New EU Directives (laws) have become effective, and have influenced the requirements for manufacturing cell products and the conduct of clinical trials |
| These changes have delayed or in some cases temporarily halted clinical trials of cellular products in the EU Recent changes and annexes to the European Union Medicinal Products Prime Directive shifted patient-derived cells to the medicinal products category, which will require MA(s) in order to market and sell these products |
| These new laws have delayed some of our current planned clinical trials with TRCs in the EU, and will require clinical trials with data submission and review by one or more European regulatory bodies |
| There is uncertainty about which clinical trial activities and data are required, and because of the recent 15 _________________________________________________________________ [65]Table of Contents nature of these new directives, laws and regulations, there is no established precedent to understand the timeline or other requirements for MA Our inability to complete our product development activities successfully would severely limit our ability to operate or finance operations |
| Commercialization in the US and the EU of our cell product candidates will require completion of substantial clinical trials, and obtaining sufficient safety and efficacy results to support required registration approval and market acceptance of our cell product candidates |
| We may not be able to successfully complete the development of our product candidates, or successfully market our technologies or product candidates |
| We, and any of our potential collaborators, may encounter problems and delays relating to research and development, regulatory approval and intellectual property rights of our technologies and product candidates |
| Our research and development programs may not be successful, and our cell culture technologies and product candidates may not facilitate the production of cells outside the human body with the expected result |
| Our technologies and cell product candidates may not prove to be safe and efficacious in clinical trials, and we may not obtain the requisite regulatory approvals for our technologies or product candidates and the cells produced in such products |
| If any of these events occur, we may not have adequate resources to continue operations for the period required to resolve the issue delaying commercialization and we may not be able to raise capital to finance our continued operation during the period required for resolution of that issue |
| We must successfully complete our clinical trials to be able to market certain of our products |
| To be able to market therapeutic cell products in the US and in the EU, we must demonstrate, through extensive preclinical studies and clinical trials, the safety and efficacy of our processes and product candidates |
| If our clinical trials are not successful, our products may not be marketable |
| Our ability to complete our clinical trials in a timely manner depends on many factors, including the rate of patient enrollment |
| Patient enrollment can vary with the size of the patient population, the proximity of suitable patients to clinical sites, perceptions of the utility of cell therapy for the treatment of certain diseases and the eligibility criteria for the study |
| We have experienced delays in patient accrual in our previous and current clinical trials |
| If we experience future delays in patient accrual, we could experience increased costs and delays associated with clinical trials, which would impair our product development programs and our ability to market our products |
| Furthermore, the FDA monitors the progress of clinical trials and it may suspend or terminate clinical trials at any time due to patient safety or other considerations |
| Our research programs are currently directed at improving TRC functionality for certain clinical indications, improving product shelf life, and decreasing the cost of manufacturing our TRC products |
| These production process changes may alter the functionality of our TRCs, and require various levels of experimental and clinical testing and evaluation |
| Any such testing could lengthen the time before these products would be commercially available |
| Even if successful clinical results are reported for a product from a completed clinical trial, this does not mean that the results will be sustained over time, or are sufficient for a marketable or regulatory approvable product |
| Even if we obtain regulatory approvals to sell our products, lack of commercial acceptance could impair our business |
| We will be seeking to obtain regulatory approvals to market our TRC cell products for tissue repair and regeneration treatments |
| Even if we obtain all required regulatory approvals, we cannot be certain that our products and processes will be accepted in the market place at a level that would allow us to operate profitably |
| Our TRCs will face competition from existing, and/or potential other new treatments in the future which could limit revenue potential |
| It may be necessary to increase the yield and/or cell type purity for certain of our AastromReplicell System cell processes to gain commercial acceptance |
| Our technologies or product candidates may not be employed in all potential applications being investigated, and any reduction in applications would limit the market acceptance of our technologies and product candidates, and our potential revenues |
| 16 _________________________________________________________________ [66]Table of Contents The market for our products will be heavily dependent on third party reimbursement policies |
| Our ability to successfully commercialize our product candidates will depend on the extent to which government healthcare programs, such as Medicare and Medicaid, as well as private health insurers, health maintenance organizations and other third party payors will pay for our products and related treatments |
| Reimbursement by third party payors depends on a number of factors, including the payor’s determination that use of the product is safe and effective, not experimental or investigational, medically necessary, appropriate for the specific patient and cost-effective |
| Reimbursement in the US or foreign countries may not be available or maintained for any of our product candidates |
| If we do not obtain approvals for adequate third party reimbursements, we may not be able to establish or maintain price levels sufficient to realize an appropriate return on our investment in product development |
| Any limits on reimbursement from third party payors may reduce the demand for, or negatively affect the price of, our products |
| For example, in the past, published studies have suggested that stem cell transplantation for breast cancer, that constituted a significant portion of the overall stem cell therapy market, at the time, may have limited clinical benefit |
| The lack of reimbursement for these procedures by insurance payors has negatively affected the marketability of our products in this indication in the past |
| Use of animal-derived materials could harm our product development and commercialization efforts |
| Some of the manufacturing materials and/or components we use in, and are critical to, our TRC manufacturing processes involve the use of animal-derived products, including fetal bovine serum |
| Suppliers or regulatory authorities may limit or restrict the availability of such compounds for clinical and commercial use |
| For example, the occurrence of so-called “mad cow disease” in New Zealand or in Australia may lead to a restricted supply of the serum currently required for the TRC manufacturing process |
| Any restrictions on these compounds would impose a potential competitive disadvantage for our products or prevent our ability to manufacture TRC cell products |
| Regulatory authorities in the EU are reviewing the safety issues related to the use of animal-derived materials, which we currently use in our production process |
| We do not know what actions, if any, the authorities may take as to animal derived materials specific to medicinal products distributed in the EU Our inability to develop or obtain alternative compounds would harm our product development and commercialization efforts |
| There are certain limitations in the supply of certain animal-derived materials, which may lead to delays in our ability to complete clinical trials or eventually to meet the anticipated market demand for our cell products |
| Given our limited internal manufacturing, sales, marketing and distribution capabilities, we need to develop increased internal capability or collaborative relationships to manufacture, sell, market and distribute our products |
| We have only limited internal manufacturing, sales, marketing and distribution capabilities |
| As market needs develop, we intend to establish and operate commercial-scale manufacturing facilities, which will need to comply with all applicable regulatory requirements |
| We expect to develop new configurations of our cell manufacturing system for these facilities to enable processes and cost efficiencies associated with large-scale manufacturing |
| Establishing these facilities will require significant capital and expertise |
| Any delay in establishing, or difficulties in operating, these facilities will limit our ability to meet the anticipated market demand for our cell products |
| We intend to get assistance to market our future cell products through collaborative relationships with companies with established sales, marketing and distribution capabilities |
| Our inability to develop and maintain those relationships would limit our ability to market, sell and distribute our products |
| Our inability to enter into successful, long-term relationships could require us to develop alternate arrangements at a time when we need sales, marketing or distribution capabilities to meet existing demand |
| We may market our TRCs through our own sales force |
| Our inability to develop and retain a qualified sales force could limit our ability to market, sell and distribute our cell products |
| We may not be able to raise the required capital to conduct our operations and develop our products |
| We will require substantial capital resources in order to conduct our operations and develop our products and cell manufacturing facilities |
| We expect that our available cash and interest income will be sufficient to finance currently planned activities at least through the end of fiscal year 2007 (ending June 30, 2007) |
| However, in order to grow and expand our business, and to introduce our new product candidates into the marketplace, we will need to 17 _________________________________________________________________ [67]Table of Contents raise additional funds |
| We will also need additional funds or a collaborative partner, or both, to finance the research and development activities of our product candidates for the expansion of additional cell types |
| Accordingly, we are continuing to pursue additional sources of financing |
| Our future capital requirements will depend upon many factors, including: • continued scientific progress in our research, clinical and development programs • costs and timing of conducting clinical trials and seeking regulatory approvals • competing technological and market developments • our ability to establish additional collaborative relationships • the effect of commercialization activities and facility expansions, if and as required Because of our long-term funding requirements, we intend to access the public or private equity markets if conditions are favorable to complete a financing, even if we do not have an immediate need for additional capital at that time, or whenever we require additional operating capital |
| This additional funding may not be available to us on reasonable terms, or at all |
| If adequate funds are not available in the future, we may be required to further delay or terminate research and development programs, curtail capital expenditures, and reduce business development and other operating activities |
| The issuance of additional common stock for funding has the potential for substantial dilution |
| As noted above, we will need additional equity funding to provide us with the capital to reach our objectives |
| At such time, we may enter into financing transactions at prices, which are at a substantial discount to market |
| Such an equity issuance would cause a substantially larger number of shares to be outstanding and would dilute the ownership interest of existing stockholders |
| Our stock price has been volatile and future sales of substantial numbers of our shares could have an adverse affect on the market price of our shares |
| The market price of shares of our common stock has been volatile, ranging in closing price between dlra1dtta11 and dlra3dtta49 during the twelve month period ended June 30, 2006 |
| The price of our common stock may continue to fluctuate in response to a number of events and factors, such as: • clinical trial results • the amount of our cash resources and our ability to obtain additional funding • announcements of research activities, business developments, technological innovations or new products by us or our competitors • entering into or terminating strategic relationships • changes in government regulation • disputes concerning patents or proprietary rights • changes in our revenues or expense levels • public concern regarding the safety, efficacy or other aspects of the products or methodologies we are developing • news or reports from other stem cell, cell therapy or tissue engineering companies • reports by securities analysts • status of the investment markets • concerns related to management transitions 18 _________________________________________________________________ [68]Table of Contents Any of these events may cause the price of our shares to fall, which may adversely affect our business and financing opportunities |
| In addition, the stock market in general and the market prices for biotechnology companies in particular have experienced significant volatility that often has been unrelated to the operating performance or financial conditions of such companies |
| These broad market and industry fluctuations may adversely affect the trading price of our stock, regardless of our operating performance or prospects |
| Our stock may be delisted from Nasdaq, which could affect its market price and liquidity |
| We are required to meet certain qualitative and financial tests (including a minimum bid price for our common stock of dlra1dtta00) to maintain the listing of our common stock on the Nasdaq Capital Market |
| In May 2003 and in July 2004, we received notification from Nasdaq of potential delisting as a result of our stock trading below dlra1dtta00 for more than thirty consecutive business days |
| While in each case our stock price recovered within the permitted grace periods and Nasdaq notified us that we were again in full compliance, we cannot provide any assurance that our stock price would again recover within the specified times if future closing bid prices below dlra1dtta00 triggered another potential delisting |
| The qualitative tests we must meet address various corporate governance matters, including Audit Committee and Board composition |
| Over the last year, we have experienced director resignations and are devoting increased resources to Board member recruitment and retention |
| If we do not maintain compliance with the Nasdaq requirements within specified periods and subject to permitted extensions, our common stock may be recommended for delisting (subject to any appeal we would file) |
| If our common stock were delisted, it could be more difficult to buy or sell our common stock and to obtain accurate quotations, and the price of our stock could suffer a material decline |
| Delisting would also impair our ability to raise capital |
| Failure of third parties to manufacture component parts or provide limited source supplies, or imposition of additional regulation, would impair our new product development and our sales activities |
| We rely solely on third parties such as Astro, Moll and Cambrex to manufacture or supply certain of our devices/manufacturing equipment, as well as component parts and other materials used in the cell product manufacturing process |
| We would not be able to obtain alternate sources of supply for many of these items on a short-term basis |
| If any of our key manufacturers or suppliers fail to perform their respective obligations or if our supply of components or other materials is limited or interrupted, we would not be able to conduct clinical trials or market our product candidates on a timely and cost-competitive basis, if at all |
| Finally, we may not be able to continue our present arrangements with our suppliers, supplement existing relationships, establish new relationships or be able to identify and obtain the ancillary materials that are necessary to develop our product candidates in the future |
| Our dependence upon third parties for the supply and manufacture of these items could adversely affect our ability to develop and deliver commercially feasible products on a timely and competitive basis |
| Manufacturing our cell products in centralized facilities may increase the risk that we will not have adequate quantities of our cell products for clinical programs |
| We rely on a third party manufacturer, Fraunhofer Institute for Interfacial Engineering and Biotechnology in Stuttgart, Germany, to supply of TRC-based cell products for certain EU clinical trials |
| Reliance on third party manufacturers entails risks including regulatory compliance and quality assurance and the possible breach of the manufacturing agreement by the third party |
| We are subject to similar regulatory and compliance risks at our site in Ann Arbor, Michigan |
| Both sites are subject to ongoing, periodic, unannounced inspection by regulatory agencies to ensure strict compliance with cGMP regulations and other governmental regulations and corresponding foreign standards |
| Our present and future manufacturers might not be able to comply with these regulatory requirements |
| We do not have redundant cell manufacturing sites, in the event our cell manufacturing facilities are damaged or destroyed, our clinical trial programs and other business prospects would be adversely affected |
| 19 _________________________________________________________________ [69]Table of Contents If we do not keep pace with our competitors and with technological and market changes, our products may become obsolete and our business may suffer |
| The markets for our products are very competitive, subject to rapid technological changes, and vary for different candidates and processes that directly compete with our products |
| Our competitors may have developed, or could in the future develop, new technologies that compete with our products or even render our products obsolete |
| As an example, in the past, published studies have suggested that hematopoietic stem cell therapy use for bone marrow transplantation, following marrow ablation due to chemotherapy, may have limited clinical benefit in the treatment of breast cancer, which was a significant portion of the overall hematopoietic stem cell transplant market |
| This resulted in the practical elimination of this market for our cell-based product for this application |
| Our cell manufacturing system, the AastromReplicell System, is designed to improve and automate the processes for producing cells used in therapeutic procedures |
| Even if we are able to demonstrate improved or equivalent results, the cost or process of treatment and other factors may cause researchers and practitioners to not use our products and we could suffer a competitive disadvantage |
| Finally, to the extent that others develop new technologies that address the targeted application for our products, our business will suffer |
| We have experienced significant management turnover, and if we cannot attract and retain key personnel, then our business will suffer |
| Our success depends in large part upon our ability to attract and retain highly qualified scientific and management personnel |
| We face competition for such personnel from other companies, research and academic institutions and other entities |
| Further, in an effort to conserve financial resources, we have implemented reductions in our work force on two previous occasions |
| As a result of these and other factors, we may not be successful in hiring or retaining key personnel |
| Our inability to replace any key employee could harm our operations |
| On December 28, 2005, we announced that we would begin a search for a new Chief Executive Officer to succeed Dr |
| Armstrong, who announced his intention to transition out of day-to-day management of the Company |
| On July 17, 2006 we announced that George W Dunbar had joined the Company as CEO, President and a Director, and that Dr |
| Armstrong will continue in his role as Chairman of the Board for the remainder of his term |
| We also announced that James A Cour, former President and COO, had left the Company to pursue other opportunities |
| If our patents and proprietary rights do not provide substantial protection, then our business and competitive position will suffer |
| Our success depends in large part on our ability to develop or license and protect proprietary products and technologies |
| However, patents may not be granted on any of our pending or future patent applications |
| Also, the scope of any of our issued patents may not be sufficiently broad to offer meaningful protection |
| In addition, our issued patents or patents licensed to us could be successfully challenged, invalidated or circumvented so that our patent rights would not create an effective competitive barrier |
| Furthermore, we rely on exclusive, world-wide licenses relating to the production of human cells granted to us by the University of Michigan for certain of our patent rights |
| If we materially breach such agreements or otherwise fail to materially comply with such agreements, or if such agreements expire or are otherwise terminated by us, we may lose our rights under the patents held by the University of Michigan |
| The first of these underlying patents will expire on March 21, 2012 |
| We also rely on trade secrets and unpatentable know-how that we seek to protect, in part, by confidentiality agreements with our employees, consultants, suppliers and licensees |
| These agreements may be breached, and we might not have adequate remedies for any breach |
| If this were to occur, our business and competitive position would suffer |
| Intellectual property litigation could harm our business |
| Our success will also depend in part on our ability to develop commercially viable products without infringing the proprietary rights of others |
| Although we have not been subject to any filed infringement claims, other patents could exist or could be filed which would prohibit or limit our ability to market our products or maintain our competitive position |
| In the event of an intellectual property dispute, we may be forced to litigate |
| Intellectual property litigation would divert management’s attention from developing our products and would force us to incur 20 _________________________________________________________________ [70]Table of Contents substantial costs regardless of whether we are successful |
| An adverse outcome could subject us to significant liabilities to third parties, and force us to curtail or cease the development and sale of our products and processes |
| The government maintains certain rights in technology that we develop using government grant money and we may lose the revenues from such technology if we do not commercialize and utilize the technology pursuant to established government guidelines |
| Certain of our and our licensors’ research have been or are being funded in part by government grants |
| As a result of such funding, the US Government has established guidelines and have certain rights in the technology developed with the grant |
| If we fail to meet these guidelines, we would lose our exclusive rights to these products, and we would lose potential revenue derived from the sale of these products |
| Potential product liability claims could affect our earnings and financial condition |
| We face an inherent business risk of exposure to product liability claims in the event that the use of the AastromReplicell System and/or TRCs during clinical trials, or after commercialization, results in adverse events |
| As a result, we may incur significant product liability exposure, which could exceed existing insurance coverage |
| We may not be able to maintain adequate levels of insurance at reasonable cost and/or reasonable terms |
| Excessive insurance costs or uninsured claims would increase our operating loss and affect our financial condition |
| Our corporate documents and Michigan law contain provisions that may make it more difficult for us to be acquired |
| Our Board of Directors has the authority, without shareholder approval, to issue additional shares of preferred stock and to fix the rights, preferences, privileges and restrictions of these shares without any further vote or action by our shareholders |
| This authority, together with certain provisions of our charter documents, may have the affect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire control of our company |
| This affect could occur even if our shareholders consider the change in control to be in their best interest |
| We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could have a negative market reaction |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), we are required to furnish a report by our management on our internal control over financial reporting |
| That report must contain, among other matters, an assessment of the design and operating effectiveness of our internal controls over financial reporting as of the end of the fiscal year |
| This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management |
| That report must also contain a statement that our independent registered public accounting firm has issued an attestation report on management’s assessment of such internal controls and independent registered public accounting firm’s assessment of the design and operating effectiveness of our system of internal accounting controls over financial reporting |
| If in the future we are unable to assert that our internal control over financial reporting is effective as of the end of the then current fiscal year (or, if our independent registered public accounting firm is unable to attest that our management’s report is fairly stated or they are unable to express an unqualified opinion on the design and operating effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a negative effect on our stock price and our ability to raise capital |
| Forward-looking statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act |
| These forward-looking statements include statements regarding: • potential strategic collaborations with others 21 _________________________________________________________________ [71]Table of Contents • future capital needs • adequacy of existing capital to support operations for a specified time • product development and marketing plan • clinical trial plans and anticipated results • anticipation of future losses • replacement of manufacturing sources • commercialization plans • revenue expectations and operating results These statements are subject to risks and uncertainties, including those set forth in this Risk Factors section, and actual results could differ materially from those expressed or implied in these statements |
| All forward-looking statements included in this registration statement are made as of the date hereof |
| We assume no obligation to update any such forward-looking statement or to update any reason why actual results might differ |