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|--------|

**** ****

****UNITEDSTATES****

****SECURITIESAND EXCHANGE COMMISSION**********Washington, D.C. 20549**

 

----

 

****FORM10-K****

 

----

 

| ****ý**** | ****ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**** |
|----------------|-----------------------------------------------------------------------------------------------|

**** ****

****For the fiscal year endedDecember 31, 2001****

**** ****

****OR****

 

| ****o**** | ****TRANSITION REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**** |
|-----------|---------------------------------------------------------------------------------------------------|

**** ****

****For the transition periodfrom____________to____________****

**** ****

****Commission File Number:0-22890****

**** ****

 

****SANGSTAT MEDICAL CORPORATION****(Exact name of registrant as specified in its charter)

 

| ****Delaware****                                                        |   | ****94-3076-069****                  |
|-------------------------------------------------------------------------|--------|--------------------------------------|
| (State or Other Jurisdiction of Incorporation or  Organization)         |   | (IRS Employer Identification Number) |
|                                                                    |   |                                 |
| ****6300 Dumbarton  Circle****                                          |
| ****Fremont,  California  94555****                                |
|                                                                    |   |                                 |
| (Address of principal executive offices, including  zip code)           |
|                                                                    |   |                                 |
| 510-789-4300 (Registrant’s telephone number,  including area code) |

 

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

 

Securities registered pursuant to Section 12(g) of the Act:

**** ****

****Common Stock($.001 par value)Preferred Share Purchase Rights****(Title of Class) 

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. YES  ý  NO  o

 

Indicate by acheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  o

 

The aggregatemarket value of voting stock held by non-affiliates of the Registrant, as ofMarch 18, 2002 was approximately $540,560,000 (based on the closing price forshares of the Registrant’s Common Stock as reported by the Nasdaq NationalMarket of $24.98 on that date). Shares of Common Stock held by each officer, director,and holder of 5% or more of the outstanding Common Stock have been excluded inthat such persons may be deemed to be affiliates. This determination ofaffiliate status is not necessarily a conclusive determination for otherpurposes.

 

On March 18, 2002approximately 26,348,115 shares of the Registrant’s Common Stock, $.001 parvalue, were outstanding.

Parts of the definitiveProxy Statement for the Registrant’s 2002 Annual Meeting of Stockholders to befiled with the Securities Exchange Commission pursuant to Regulation 14A notlater than 120 days after the end of the fiscal year covered by this Form 10-Kare incorporated by reference into Part III of this Form 10- K.

 
|   |
|--------|

 

 

****SANGSTAT MEDICALCORPORATION****

**** ****

****FORM 10-K****

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

**** ****

****TABLE OF CONTENTS****

**** ****
| ****PART I****                                                                                                             |
|----------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                       |   |
| Item 1.                                                                                                                    | Business |
|                                                                                                                       |   |
| Item 2.                                                                                                                    | Properties |
|                                                                                                                       |   |
| Item 3.                                                                                                                    | Legal Proceedings |
|                                                                                                                       |   |
| Item  4.                                                                                                                   | Submission  of Matters to a Vote of Security Holders |
|                                                                                                                       |
| ****PART II****                                                                                                            |
|                                                                                                                       |   |   |
| Item  5.                                                                                                                   | Market  for Registrant’s Common Stock and Related Stockholder Matters |   |
|                                                                                                                       |   |   |
| Item 6.                                                                                                                    | Selected  Consolidated Financial Data |   |
|                                                                                                                       |   |   |
| Item  7.                                                                                                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                                                                                                       |   |   |
| Item  7A.                                                                                                                  | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                                                                                                       |   |   |
| Item  8.                                                                                                                   | Financial  Statements and Supplementary Data |   |
|                                                                                                                       |   |   |
| Item  9.                                                                                                                   | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure |   |
|                                                                                                                       |
| ****PART  III****                                                                                                          |
|                                                                                                                       |
| The information  required by Items 10 through 13 is incorporated by reference from the  registrant’s proxy statement. |
|                                                                                                                       |
| ****PART IV****                                                                                                            |
|                                                                                                                       |   |
| Item 14.                                                                                                                   | Exhibits,  Financial Statement Schedules and Reports on Form 8-K |
|                                                                                                                       |
| ****SIGNATURES****                                                                                                         |
|                                                                                                                            |  |  |  |

 

2

 

****PART I****

 

****ITEM 1.********                                                     BUSINESS****

* *

*The following discussion andanalysis should be read in conjunction with “Selected Consolidated FinancialData” and our Consolidated Financial Statements and Notes thereto includedelsewhere in this Annual Report on Form 10-K. Except for the historical information contained herein, the discussioncontains forward-looking statements that involve risks and uncertainties, suchas statements of our plans, objectives, expectations, intentions**and future results. The cautionary statements madein this Annual Report on Form 10-K should be read as being applicable to all related forward-lookingstatements wherever they appear. Our actual results could differ materially fromthose discussed here. Factors that could cause or contribute to suchdifferences include those discussed in “Risk Factors,” as well as thosediscussed elsewhere herein. In particular, we have included forward-lookingstatements regarding the following: (i) our anticipated financial results for2002; (ii) the timeline and potential results of preclinical development andclinical trials; (iii) potential outcomes of our and Abbott’s litigation withNovartis; (iv) our plans for marketing a cyclosporine capsule in Europe; (v)anticipated expenditures and timing relating to FDA and foreign approval of ourproducts and facilities; and (vi) anticipated potential strategiccollaborations with others. **These forward-looking statements are based on our currentexpectations, and we disclaim any obligation to update theseforward-looking statements for subsequent events or to explain why actualresults differ.*

 

**Overview**

 

SangStat is a globalbiotechnology company expanding on its transplantation foundation to discover,develop and market high value therapeutic products in immunology,hematology/oncology and auto-immune disease. Since our incorporation in 1988,we have been dedicated to improving the outcome of organ and bone marrowtransplantation through the development and marketing of products to addressall phases of transplantation in the worldwide market. We are headquartered inFremont, California. We maintain a strong European and U.S. presence, includingdirect sales and marketing forces in all major European markets and the U.S.and distributors throughout the rest of the world.

 

Historically, ourbusiness was comprised of two segments: pharmaceutical products andtransplantation services. In October 2000, we implemented a new strategyfocused on growing a core business in high value therapeutics that builds onour expertise in transplantation but extends into new therapeutic areas. As aresult of this new strategy, we decided to dedicate significant resources toour pharmaceutical products segment, which consists of four marketed productsand three principal product candidates. Consequently, on April 20, 2001, wesold our transplantation services segment, The Transplant Pharmacy, toChronimed.

 

Our primary marketedproduct, Thymoglobulin, a treatment for acute rejection of a kidney transplant,was launched in February 1999. Thymoglobulin achieved worldwide sales of $30.6million in 1999, $37.9 million in 2000 and $51.4 million in 2001. The successof Thymoglobulin and its potential in areas beyond solid organ transplantationhas provided us with the ability to examine and develop new therapeuticopportunities outside of transplantation.

 

We are now focusing on avariety of therapeutic products and product candidates to address thepre-transplant, acute care and chronic phases of transplantation as well asproduct candidates in immunology, hematology/oncology and auto-immune disease.

 

We currently sell thefollowing products:

 

3

 

•    Thymoglobulin® (sold under thename Thymoglobuline® outside the U.S.); 

 

•    Gengraf® cyclosporine capsule(co-promoted with Abbott Laboratories in the U.S.); 

 

•    Lymphoglobuline® (outside theU.S.); and 

 

•   Celsior®. 

 

Our principal productsunder development include: 

 

•   A smaller-size cyclosporine capsule; 

 

•   ABX-CBL (anti-CD147 antibody in co-development withAbgenix, Inc.); and 

 

•    RDP58.

** **

**Background**

 

***Organ Transplantation***

 

Organ transplantation cansave or improve the lives of patients with organ failures. Transplantationinvolves surgically replacing the diseased or failed organ of a transplantrecipient with a healthy organ from a donor. Industry sources report that eachyear approximately 20,000 patients in the U.S. receive donated organs, and weestimate that there are approximately twice that number of patients worldwide.While the size of the transplant population is difficult to ascertain at anygiven time, industry participants believe the population of organ transplantsurvivors to be more than 200,000 worldwide. Currently, there are approximately260 transplant centers in the U.S.

 

In order to preventrejection of implanted organs, most recipients must begin a life-long regimenof immunosuppressive therapy immediately upon receiving a donated organ. Thisimmunosuppressive regimen usually requires daily therapy in order to preventorgan rejection and graft loss. Products that supplement immunosuppression canreduce the frequency and severity of rejection and infection episodes. Theseproducts can potentially enhance patient outcomes, while providing potentialcost savings in the treatment of transplantation and its associated sideeffects. Our product Gengraf, an immunosuppressant, is approved in the U.S. forthe prevention of kidney, liver and heart rejection.

* *

*The Transplant Immune Response*

 

The function of theimmune system is to protect the body from damage caused by invadingmicroorganisms or other foreign matter. Differences between a donor’s and arecipient’s antigens can lead to the recognition of the donor’s organ asforeign matter by the recipient’s immune system. Specifically, the donor organantigens are recognized by the immune system of the graft recipient as being“non-self,” triggering the immune system to attack and invade the graft. Whenthe recipient’s immune system attacks and invades the donated graft, rejectionand loss of the graft often occur. Thymoglobulin is approved for acute kidneygraft rejection in the U.S., and Thymoglobulin and Lymphoglobuline are approvedfor both prevention and treatment of acute graft rejection in various countriesoutside the U.S.

* *

*The Transplant Process*

 

A typical transplantpatient progresses through three phases: 

 

•    *The Pre-Transplant Phase*

 

A transplant candidate isregistered on a national computerized waiting list. A candidate usually waitsmonths or even years for a compatible organ. Organs harvested from donors arestored in a preservation solution such as Celsior to prevent deterioration.Each organ is cross-matched with potential recipients. The organ is thenshipped in

 

4

 

the same organpreservation solution to the recipient’s transplant center. 

 

•    *The Acute Phase (Surgery and First YearPost-Transplant)*

 

After transplantation,the physician must prevent graft rejection for the transplant to be a success.Consequently, the success of the transplant is highly dependent on theimmunosuppressive regimen that is initiated at the time of transplantation andcontinued daily for the rest of the patient’s life. Organ recipients must beregularly monitored to measure the body’s immune response and blood drug levelsand to help identify acute rejection episodes. Many patients undergo one ormore rejection episodes in the first year after transplant and requireadditional immunosuppressants. 

 

•   *The Chronic Phase (Lifetime Post-Transplant)*

 

The use ofimmunosuppressants such as cyclosporine, initiated during the acute phase, iscontinued daily throughout the patient’s lifetime to minimize or prevent theloss of the organ by rejection. These drugs impair the recipient’s immunesystem in order to reduce the immune response against the graft. Even with theuse of immunosuppressants, industry sources report that patients have anapproximate 20% to 50% risk of losing a donated organ during the first threeyears following transplantation, and approximately 20% to 65% after five years.These percentages differ depending on the type of transplant. Chronic use ofimmunosuppressants can also lead to serious side effects, includinglife-threatening infections, kidney or liver toxicity and cancer.

*** ***

***Aplastic Anemia***

 

Aplastic anemia, whichprimarily affects young people, is a disease in which the stem cells disappearfrom the bone marrow. Aplastic anemia has a high mortality rate and, even withtreatment, quality of life is poor. A lack of stem cells in the bone marrowinhibits the production of blood cells. As a result, patients with this diseaseare dependent on weekly blood transfusions that require frequent visits to thephysician’s offices. Both Thymoglobulin and Lymphoglobuline are approved incertain countries outside of the U.S. for treatment of aplastic anemia, and webelieve that the majority of sales of Lymphoglobuline in Japan are for thetreatment of aplastic anemia. Current treatments for severe aplastic anemiainclude immunosuppressants and, if necessary, bone marrow transplantation.

*** ***

***Myelodysplastic Syndrome (MDS)***

 

Myelodysplastic Syndrome,or MDS, also referred to as pre-leukemia, is a rare disease in which the bonemarrow functions abnormally and does not produce enough normal blood cells. Theincidence of MDS is not known, but it is believed that there are approximately10,000 to 20,000 new cases in the U.S. each year with the number increasing.Approximately 30% of patients with MDS may have their disease progress todevelop into acute leukemia, a form of cancer where the patient has too manywhite blood cells. Weekly blood transfusions remains the principal therapy forless advanced types of MDS. Current treatments for the advanced types of thedisease include chemotherapy and/or bone marrow transplantation. However, thesetherapies are ineffective or not available in the majority of cases.

 

We have orphan drugstatus for Thymoglobulin for the treatment of MDS and have a Phase IIb clinicalstudy ongoing.

 

***Bone Marrow or Stem Cell Transplantation***

 

Bone marrow or stem celltransplantation is a standard therapy for many disease states, primarily canceror pre-cancerous diseases. Stem cells, found in the peripheral blood or in thebone marrow, are given by an intravenous infusion to re-establish marrowfunction in a patient after ablation of the patient’s bone marrow.

 

Immunosuppressivetherapy, primarily anti-thymocyte globulin, or ATG, such as Lymphoglobuline andThymoglobulin, chemotherapeutic agents and/or irradiation are given as part ofa conditioning regimen. The goal of this regimen is threefold: to limit thepatient’s ability to mount an immune response to the new bone marrow or stemcells, to provide space for the new cells, and to destroy any residual cancerif the patient is being treated for a malignancy.

 

5

 

Some of these patientsexperience graft versus host disease, or GVHD. This is a condition in which thegraft (i.e. the new immune system) begins to reject the host (i.e. the body).GVHD is a life-threatening complication that frequently occurs following anallogeneic bone marrow transplant. An allogeneic bone marrow transplantprocedure involves transferring donor hemopoetic stem cells, the graft, from ahealthy person into an immunosuppressed patient, the host. The transplant isintended to restore normal circulating blood and immune cells to a patientwhose own hemopoetic and immune system has been ablated by the treatment of anunderlying disease such as cancer and the conditioning regimen. Often a portionof the donor graft recognizes the host’s own cells as foreign, becomesactivated and attacks them, resulting in GVHD. GVHD typically involves damageto multiple organ systems, including the skin, liver and intestines. ABX-CBL isinitially being developed to treat steroid-resistant GVHD.

*** ***

***Crohn’s Disease and Ulcerative Colitis***

 

Crohn’s disease andulcerative colitis are similar diseases that are often grouped together asinflammatory bowel disease. Industry sources estimate that there may be up to1,000,000 Americans who suffer from inflammatory bowel disease. Crohn’s diseaseis a chronic inflammatory disease of the gastrointestinal tract that usuallycauses diarrhea, abdominal pain, fever and rectal bleeding. Ulcerative colitisis a similar disease to Crohn’s disease, but only infects the large intestineand is characterized by inflammation and ulceration of the innermost lining ofthe colon. Symptoms include diarrhea and sometimes abdominal pain. We aredeveloping RDP58 for the treatment of both diseases.

** **

**Products and Product Candidates**

 

The following tablesummarizes our principal products and product candidates.

 
| **Marketed Product**          |   | **Indications/Potential**

**Clinical Use**                                                            |   | **Status**                                                                                                                                                                                                                                                             |   | **Marketing Rights**                             |
|-------------------------------|--------|--------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|
|                          |   |                                                                                                   |   |                                                                                                                                                                                                                                                                   |   |                                             |
| Thymoglobulin/ Thymoglobuline |   | Prevention and  treatment of acute graft rejection, severe aplastic anemia and steroid  resistant GVHD |   | U.S.: Approved for  treatment of acute kidney rejection episodes  EU: Approved for prophylaxis and rejection in kidney, pancreas, and liver  transplants; treatment of rejection crisis and acute GVHD in allogeneic bone  marrow transplantation; and aplastic anemia |   | SangStat                                         |
|                          |   |                                                                                                   |   |                                                                                                                                                                                                                                                                   |   |                                             |
| Gengraf                       |   | Chronic  immuosuppression (prevents organ rejection)                                                   |   | U.S.: Approved                                                                                                                                                                                                                                                         |   | SangStat and Abbott  Laboratories jointly (U.S.) |
|                          |   |                                                                                                   |   |                                                                                                                                                                                                                                                                   |   |                                             |
| Lymphoglobuline               |   | Prevention and  treatment of acute graft rejection, severe aplastic anemia and steroid  resistant GVHD |   | Over 45 countries other  than the U.S.: Approved                                                                                                                                                                                                                       |   | SangStat                                         |
|                          |   |                                                                                                   |   |                                                                                                                                                                                                                                                                   |   |                                             |
| Celsior                       |   | Preservation of organs  prior to transplantation                                                       |   | U.S.: Approved  only for cardiac transplantation                                                                                                                                                                                                                  |   | SangStat                                         |

 

6

 
| **Product Candidate**              |   | **Indications/Potential**

**Clinical Use**           |   | **Status**                    |   | **Commercialization Rights** |
|------------------------------------|--------|-------------------------------------------------------|--------|-------------------------------|--------|------------------------------|
|                               |   |                                                  |   |                          |   |                         |
| Smaller-Size  Cyclosporine Capsule |   | Chronic immunosuppression  (prevents organ rejection) |   | Bioequivalence study  ongoing |   | SangStat                     |
|                               |   |                                                  |   |                          |   |                         |
| ABX-CBL                            |   | Treatment of steroid  resistant GVHD                  |   | Phase II/III                  |   | SangStat  and Abgenix   |
|                               |   |                                                  |   |                          |   |                         |
| RDP58                              |   | Ulcerative colitis,  Crohn’s disease             |   | Phase IIb                     |   | SangStat                     |

** **

**MarketedProducts**

*** ***

***Thymoglobulin***

 

Thymoglobulin is apasteurized anti-thymocyte rabbit immunoglobulin that induces immunosuppressionas a result of T-cell depletion and immune modulation. Thymoglobulin is made upof a variety of antibodies that recognize key receptors on T-cells, the cellsof a transplant recipient’s immune system that recognize and ultimately rejectforeign objects such as transplanted organs. While the exact mechanism isunknown, researchers believe Thymoglobulin antibodies may inactivate and killthese T-cells, thus neutralizing the rejection process and allowing thetransplanted organ to recover. Thymoglobulin is also used to treat aplasticanemia and steroid resistant GVHD. Thymoglobulin is approved in the U.S. onlyfor treatment of kidney transplant acute rejection episodes.

* *

*Market*

 

We (or our distributors)market Thymoglobulin in 56 countries, with a majority of our revenues comingfrom Europe and the U.S. We launched Thymoglobulin in the U.S. in February1999. In the U.S., Thymoglobulin is currently approved for treatment of acuterejection in kidney transplant recipients. In other countries whereThymoglobulin is marketed, it generally has the following indications: 

 

•   prophylaxis and rejection in kidney, pancreas, andliver transplants; 

 

•   treatment of rejection crisis and acute GVHD inallogeneic bone marrow transplantation; and

 

•    aplastic anemia. 

 

We market and sellThymoglobulin outside Europe and North America through distributors. We have adistribution agreement with Aventis for most countries outside of Europe andNorth America where Thymoglobulin is marketed. We have also entered intodistribution agreements with distributors in certain Asian countries and arecurrently re-negotiating our distribution agreement with Aventis to obtain theright to distribute directly in certain territories.

 

*Additional Clinical Studies*

 

•    *Induction/Prevention*

 

We have initiated acomparative induction study of Thymoglobulin versus Simulect, a monoclonalantibody marketed by Novartis Pharmaceuticals Inc. (“Novartis”) in high-riskrenal transplant recipients. Our intent in this study is to generate datacomparing the clinical effects of Thymoglobulin with Simulect. It is not ourintent to use this trial, and the FDA has indicated that this trial will not besufficient, to support label indication changes or expansion. This prospective,randomized, open-label study is being conducted in over 20 transplant centersin the U.S. and Europe. Primary endpoints at 6 months will be graft survival,patient survival and incidence of acute rejection. We will also capture otherimportant clinical data such as infections and incidence of delayed graft

 

7

 

function. The study was closedearly in March 2002, with a total enrollment of 279 participants out of aplanned 340,after an interim analysis revealed significantly fewer acute rejectionsof implanted kidneys in patients treated with Thymoglobulin versus Simulect. Inthe interim analysis, the incidence of acute kidney rejection was 2.5 timesgreater among patients treated with Simulect compared to patients who receivedThymoglobulin and this was statistically significant.  Further, there was no statistically significant difference in therate of severe adverse events in either arm of the study.  These interim results are preliminary andsubject to change upon finalization of the study results. 

 

•    *Hematological Disorders and Malignancies*

 

We have also initiated anopen-label prospective, randomized, multi-center Phase IIb trial withThymoglobulin in MDS. SangStat received orphan drug designation forThymoglobulin for treatment of MDS in September 2000. Orphan drug designationis granted to applicants when the prevalence of the disease for which approvalis sought occurs in less than 200,000 patients in the U.S. The advantages ofthis designation include a waiver of the user fee, possible marketingexclusivity and tax credits for development costs. These advantages areintended to encourage sponsors to develop drugs for patients with rarediseases.

 

The standard of care forlow-risk MDS patients is weekly blood transfusions. The primary endpoint inthis trial is transfusion independence at six months post therapy. This is anopen-label randomized trial comparing observation (the control arm) totreatment with Thymoglobulin (3.25mg/kg for four days). Patient enrollmentbegan in October 2000. In part because this is a rare disease, as evidenced byits orphan drug status, patient enrollment to date has been relatively slow. Thereare currently 26 patients enrolled in the study. We continue to expand thenumber of centers participating in the study with the aim of completingenrollment of 72 patients into the study by the end of 2002.

*** ***

***Gengraf® Cyclosporine Capsules***

 

Cyclosporine, firstapproved in the U.S. in 1983, is a potent immunosuppressive agent. Cyclosporineinhibits the synthesis and release of the cytokine interleukin-2, which isessential to the body’s immune response to transplanted organs. Gengrafcyclosporine capsule, a product of Abbott Laboratories, Inc., is a genericversion of Neoral® capsules, which is marketed by Novartis. SangStatand Abbott co-promote and distribute Gengraf in the U.S. Gengraf is normallytaken daily over the lifetime of the organ recipient to prevent organrejection.

* *

*Cyclosporine Market*

 

Cyclosporine is theleading immunosuppressive drug used to prevent organ and graft rejection intransplantation. Industry sources report that each year approximately 20,000patients in the U.S. receive donated organs, and we estimate that there areapproximately twice that number of patients receiving donated organs worldwide.While the size of the transplant population is difficult to ascertain at anygiven time, industry participants believe the population of organ transplantsurvivors to be more than 200,000 patients worldwide. The majority of thesepatients are prescribed daily doses of cyclosporine for the rest of theirlives. Cyclosporine is also indicated for the treatment of rheumatoid arthritisand adult non-immunocompromised psoriasis patients. Worldwide sales ofcyclosporine are greater than $1 billion per year. The U.S. market isapproximately $500 million.

 

We entered into anagreement with Abbott in May 1999 for the co-promotion, distribution and researchin the U.S. of Gengraf and SangCya Oral Solution. SangCya Oral Solution, whichis a generic version of Neoral oral solution, was withdrawn from the U.S.market in July 2000 and is currently being sold on a limited basis only in theUnited Kingdom.

 

We launched Gengrafcyclosporine capsules in May 2000 in the U.S. through our combinedSangStat/Abbott sales force. Gengraf’s indications are identical to Neoral’sindications and include (i) the prophylaxis of organ rejection in kidney, liverand heart allogeneic transplants; (ii) the treatment of patients with severe,active rheumatoid arthritis where the disease has not adequately responded tomethotrexate; and (iii) the treatment of adult, non-immunocompromised patientswith severe (i.e. extensive and/or disabling), recalcitrant, plaque psoriasiswho have failed to respond to at least one systemic therapy (e.g. PUVA,retinoids or methotrexate), or in patients for whom either systemic therapiesare contraindicated or cannot be tolerated.

 

8

 

***Lymphoglobuline®***

 

Lymphoglobuline is ananti-thymocyte equine immunoglobulin that induces immunosuppression as a resultof T-cell depletion and immune modulation. In certain countries outside theU.S., it is approved for the prevention and treatment of rejection episodes inkidney, heart, pancreas, or liver transplantation. In hematology,Lymphoglobuline is approved in certain countries outside the U.S. for treatmentof aplastic anemia and in the treatment of steroid resistant GVHD.

* *

*Market*

 

We (or our distributors)market Lymphoglobuline in over 45 countries outside the U.S. Our sales forcemarkets this product in Europe and Canada. Outside these countries, we sellLymphoglobuline through our distribution agreement with Aventis or throughother distributors. Aventis markets this product in Japan, where we believe ahigh percentage of sales occur for treatment of aplastic anemia. We hope toaddress U.S. market opportunities for Lymphoglobuline with the sale ofThymoglobulin. Therefore, we have no plans to seek approval for Lymphoglobulinein the U.S.

*** ***

***Celsior®***

 

Celsior is a storagesolution for organs after removal from the donor and before transplantationinto the recipient. It is a sterile, nonpyrogenic, extracellular solution forhypothermic flushing and storage of hearts. Early graft loss remains asignificant problem associated with cardiac transplantation and damage to theheart tissue can occur due to inadequate preservation. Effective organpreservation includes initial flushing of the heart tissue during the recoveryprocess and cold storage while the donor heart is transported to the recipient.Celsior is the first and only flush and cold storage solution approved by theFDA for cardiac transplantation. It was designed specifically for cardiactransplantation to minimize myocardial edema, oxygen free radical-inducedreperfusion injury, and diastolic stiffness.

* *

*Market*

 

We sell Celsiorthroughout Europe, and we commenced marketing the product in the U.S. inSeptember 1999. Celsior is approved for marketing in the U.S. only inconnection with cardiac transplantation. Outside of Europe and North America,we sell Celsior through our distribution agreement with Aventis or throughother distributors. In 1999, industry sources report that there wereapproximately 4,000 cardiac and lung transplants worldwide.

** **

**Principal Products In Development**

 

Consistent with ourstrategic changes in October of 2000, we leveraged our success withThymoglobulin to expand our research and development initiatives to includeareas outside of transplantation, including immunology, hematology/oncology andauto-immune disease. Our research and development expenses were$14.5 million in 1999, $20.8 million in 2000, and $17.9 million in 2001.These expenses primarily relate to additional indications for marketed productsand new products in development.

 

We currently have threeprincipal products in development:

*** ***

***Cyclosporine Capsules***

 

We have an exclusivelicense to a pending patent application on a novel smaller-size cyclosporinecapsule formulation from Tris Pharma, a small U.S. research and developmentcompany. We expect that the capsule will be smaller than currently marketedcyclosporine capsules. We are conducting a bioequivalence trial in healthy volunteersto demonstrate the new capsule’s bioequivalence to Neoral cyclosporine capsulesin water. If the results of the bioequivalence trial and stability testing arepositive, we presently expect to file for marketing approval in a Europeancountry in late 2002. We have withdrawn our Marketing Authorization Applicationin the U.K. for our cyclosporine capsule product known as Sang-2000 in favor ofthis newer formulation. We intend to follow the European Community MutualRecognition Procedure for obtaining regulatory approval in multiple MemberStates.

 

9

 

***ABX-CBL***

 

In August 2000, weentered into a global co-development, supply and license agreement for ABX-CBLwith Abgenix under which we obtained an exclusive worldwide license for themarketing and sale of ABX-CBL. ABX-CBL is an anti-CD147 monoclonal antibody forthe treatment of steroid resistant GVHD. The CD147 antigen is selectivelyexpressed on activated immune cells including T cells, B cells and natural killercells. In allogeneic blood and marrow transplantation (BMT), these activatedimmune cells attack a host’s own cells as foreign, resulting in GVHD, where thetransplanted cells are attempting to “reject” the recipient. GVHD often leadsto damage to multiple organ systems, including the skin, liver and intestines.First line therapy is high dose corticosteroids, which have a success rate ofapproximately 50%. Steroid resistant GVHD has a high mortality rate. We believeABX-CBL has the ability to destroy activated immune cells without affecting therest of the immune system.

 

ABX-CBL is currently in amulti-center, randomized, and controlled Phase II/III study. The study isdesigned to demonstrate statistically significant efficacy of a single doselevel of ABX-CBL in comparison to a control group of patients. Many patientsthat undergo an allogeneic bone marrow transplant develop steroid resistantGVHD for which there is currently no standard approved therapy available.However, many physicians prescribe a treatment regimen using the polyclonalequine antibody, ATGAM. In this study, patients are randomized to receive ATGAM(30 mg/kg QOD for 6 doses) in the control group versus patients who receivedABX-CBL (0.1 mg/kg/d for 14 days followed by 12 infusions over the next 6weeks) in the treatment arm. Our primary endpoint of this study is patientsurvival at 180 days. As of March 1, 2002, we have enrolled 82 out of 92patients planned for this study and presently expect to complete the study bythe end of 2002.

 

We received orphan drugdesignation for ABX-CBL for the treatment of steroid resistant GVHD in November2000.

*** ***

***RDP58***

 

RDP58 is a novelinhibitor of TNF-alpha synthesis currently in Phase II clinical trials in theU.K. This is our first product candidate from our own research and developmentefforts to enter such a clinical trial. RDP58 was designed using our drugdesign approach, in collaboration with Synt:em, that integrates advancedbiology, biophysics, chemistry and information technology in a coordinatedeffort to design and develop potential therapeutic products. We areinvestigating the use of RDP58 for treatment of various auto-immune disorders.Ulcerative colitis and Crohn’s disease are the two auto-immune disorders beingexamined in the current Phase II study.

* *

*Overview*

 

Cytokines are proteinmessengers that coordinate the functions of immune cells and certain othercells and tissues. TNF-alpha is a cytokine that, when released in excess, cantrigger activation of immune responses and inflammation. Continuous excessiveTNF-alpha release can cascade into a variety of auto-immune diseases includinginflammatory bowel disease, rheumatoid arthritis and psoriasis. There arecurrently a number of therapeutic products that target inhibition of TNF-alpha release.TNF inhibitors, including Remicade and Enbrel, have been approved for treatmentsince 1998 and 1999, respectively. They are considered the standard of care inthe treatment of a variety of auto-immune diseases including Crohn’s diseaseand rheumatoid arthritis. These therapeutic agents are being examined as atreatment for a number of other auto-immune diseases, including psoriasis,psoriatic arthritis and ankylosing spondylitis.

 

Animal models, includingstudies in primates, suggest that RDP58 could decrease levels of TNF-alpha,reduce inflammation, and improve clinical outcomes. Currently marketedTNF-alpha inhibitors work by binding to TNF-alpha after synthesis and excretionby the cell, thus neutralizing TNF-alpha in the blood before it can participatein the inflammatory response. In contrast, we believe RDP58 prevents thetranslation of TNF-alpha RNA, thereby preventing the synthesis of TNF-alphaprotein within the cell. We believe that RDP58 could be a more efficientinhibitor of TNF-alpha as it prevents the synthesis of the protein as opposedto current therapy which attempts to inhibit the effects of its expressionpost-synthesis.

 

RDP58 is currently beingtested in an oral formulation consisting of D-isomer amino acids. This peptideis resistant to enzymatic break-down during the digestive process, which isimportant for any oral therapeutic agent. Current TNF-alpha inhibitors are onlyavailable in non-oral form, either through a subcutaneous injection or through

 

10

 

intravenousadministration.

* *

*Clinical Studies*

 

We filed for ClinicalTrial Exemption (CTX) with the U.K. Medicines Control Agency (the U.K.equivalent to the U.S. FDA) for RDP58 in September 2001 after successfulcompletion of a Phase I normal volunteer dose escalation safety study. In thePhase I study, three groups of nine healthy volunteers participated in a doseescalation study using 3 doses for a total of 28 days. Oral RDP58 was found tobe safe and well tolerated. The CTX allowed us to initiate Phase IIproof-of-principle clinical trials in the fourth quarter of 2001. The Phase IItrials are prospective, randomized, blinded trials in patients withmild-to-moderate ulcerative colitis or Crohn’s disease. We expect to completepatient enrollment and announce the results of these studies in the second halfof 2002. Pending the results of these studies, a clinical development andregulatory pathway will be defined and implemented.

* *

*Other Preclinical Developments*

 

RDP58 is the subject offour additional development programs: neurology, non-IBD gastro-intestinaldisorders, dermatology and pulmonary.

* *

*Neurology*.  RDP58has been studied in the experimental auto-immune encephalomyelitis model ofmultiple sclerosis in rodents. The model is the standard of preclinicalinvestigation for new therapeutic agents in the treatment of multiplesclerosis. The model requires animals to be injected with myelin basic proteinon day 0, thus developing a predictable paralysis of the tail and hind limbs thatbegins on day 10 (after injection), peaks on day 12-13 and is completelyresolved by day 18-20. The paralysis is used to simulate the mechanism ofaction found in multiple sclerosis. RDP58, when given as a single dose viaintra-thecal injection, diminishes the paralysis in a dose dependent manner inthis acute model (using doses of 15ug, 45ug and 150ug). At the highest dose,the paralysis appears to be completely eliminated. The timing of the treatmentalso has an impact on the disease progression. RDP58 can be given as a singledose on day 4, day 7 or day 10 after inoculation with myelin basic protein.

 

The currently approvedstandard of care for the treatment of multiple sclerosis is beta-interferon.Beta-interferon as a treatment regimen is most efficacious when commenced atthe earliest point in the disease’s progression, usually immediately afterdiagnosis and before any symptoms of the disease present themselves.Furthermore, beta interferon has been shown to be increasingly ineffective asthe disease progresses and has shown little efficacy in minimizing or haltingsymptoms, such as paralysis after they present themselves in a patient. Webelieve that RDP58 presents a unique opportunity in multiple sclerosis as ourpreclinical models demonstrate that disease progression may be halted after thepresentation of symptoms.

* *

*Non-IBD Gastro-intestinal disorders*.  Chemotherapy-induceddiarrhea and diarrhea related to HIV are two significant gastro-intestinaldisorders that affect thousands of people each year. CPT-11 is the most activedrug against colon adenaocarcinoma, a form of colon cancer. Diarrhea is themost common side effect that limits the amount of CPT-11 that patients cantolerate. Prevention of diarrhea will allow increases in the dosage of CPT-11,potentially increasing their response to this treatment. RDP58 has been shownto significantly decrease the incidence of diarrhea and mortality in a murinemodel of CPT-11 toxicity. In this model, 93% of mice given 200mg/kg of CPT-11developed diarrhea and had a 63% mortality rate. In the study, of the mice thatwere given RDP58 in their drinking water starting three days before treatmentwith CPT-11, only 33% developed diarrhea and 93% of the animals survived. Thesepreliminary experiments are being followed by studies to prove that RDP58 doesnot increase the rate of tumor growth and that RDP58 allows an increase in themaximally tolerated dose of CPT-11.

 

HIV-related diarrhea is amalabsorption syndrome that results in nutrient loss and poor drug absorption.This translates into increased weight loss and viral tiers in patients whosuffer from HIV-related colitis. Researchers at the University of California atDavis, with the support of scientists at SangStat, were awarded a NationalInstitute of Health grant to study the impact of RDP58 on the gastro-intestinalcomplications of HIV in the HIV primate model. In this study, RDP58 was foundto increase the CD4+ lymphocyte population of the gastrointestinal mucosa.We expect to explore this finding in a pilot clinical trial.

 

*Dermatology*. TNF-alphaappears to play an important role in psoriasis and possibly in atopicdermatitis. RDP58 has been fashioned into a topical gel that will be used todetermine efficacy in these two dermatologic diseases.

 

11

 

Animal toxicology studiesare underway. We expect to begin patient studies after completion of thetoxicology studies.

* *

*Pulmonary*.  RDP58is a powder formulation that may be used as an aerosol to provide inhalation therapyfor asthma, chronic obstructive pulmonary disease, sarcoidosis and otherpulmonary diseases. Preliminary animal experiments have been performed todemonstrate the feasibility of this approach. We are pursuing partners tocontinue development in this therapeutic arena.

** **

**Sales and Marketing**

 

In the U.S., we marketproducts through our direct sales force. As of December 31, 2001, we had 21account managers, supervised by three regional sales directors, who call on orsell primarily to the approximately 260 transplant centers in the U.S. Anumber of the account managers have backgrounds in transplantation, either fromselling other transplant products or with clinical backgrounds as nurses or astransplant coordinators in transplant centers. We also have two nationalaccount directors who call on group purchasing organizations and managed caregroups.

 

Sales to Cardinal HealthInc., McKesson Corporation, AmeriSource and Bergen Brunswig Drug Companyaccounted for 26%, 18%, 12% and 11%, respectively, of total revenues in 2001.Sales to Cardinal Health Inc. and McKesson Corporation accounted for 13% and15%, respectively, of total revenues in 2000. Sales to McKesson Corporationaccounted for approximately 11% of our total revenues in 1999.

 

We have approximately 32sales and marketing people throughout the major European markets.

 

**Strategic Relationships**

 

We evaluate on an ongoingbasis potential collaborative relationships with corporate and other partnerswhere such relationships may complement and expand SangStat’s research,development, sales and marketing capabilities.

*** ***

***Abbott Laboratories***

 

In May 1999, we signed amulti-year co-promotion, distribution and research agreement with Abbott forSangCya Oral Solution (which was withdrawn from the U.S. market in July 2000)and Gengraf in the U.S. We are the exclusive distributor for Gengraf and sharemarketing, promotional and development expenses as well as the profits from theco-promotion of the product with Abbott. The agreement ends December 31, 2004unless both companies agree to extend it. Pursuant to this agreement, Abbottmade an equity investment of $14 million during 1999 in exchange forapproximately 894,000 shares of common stock, representing a premium to fairmarket value at that time aggregating to $1.3 million. In addition, Abbott madea series of up-front and milestone payments totaling $20.8 million, including$6.9 million received in 2000, and a long-term loan of $16 million to usreceived during 1999. In January 2000, we made a milestone payment of $4.0million to Abbott under the terms of the agreement. No further milestonepayments are required from either company. All up-front and milestone paymentsreceived, net of milestone payments made, and the premium received on the saleof common stock to Abbott are recorded as deferred revenue and recognizedratably over the term of the agreement as revenue from collaborativeagreements. In May 2000, Abbott and we launched Gengraf, the cyclosporinecapsule developed by Abbott. In connection with the equity investment, Abbottand we entered into a Right of First Refusal Agreement and a RegistrationRights Agreement, and amended and restated our existing Supply Agreement.

*** ***

***Abgenix***

 

In August 2000, weentered into a global co-development, supply and license agreement withAbgenix, Inc., for ABX-CBL, an antibody developed by Abgenix. Under theagreement, we have an exclusive worldwide license for the marketing and sale ofABX-CBL. ABX-CBL is an anti-CD147 monoclonal antibody for the treatment ofsteroid resistant GVHD and is currently in a multicenter, randomized, andcontrolled Phase II/III study. Development costs will be shared equally, aswould any potential profits from the sales of collaboration products. We shareresponsibility for product development with Abgenix, including the ongoingPhase II/III clinical trial. We will market any potential products and Abgenixwill be responsible for manufacturing ABX-CBL. We also have the right, subjectto the terms and conditions of the agreement, to commercialize other anti-CD147antibodies developed

 

12

 

by Abgenix.

 

Under the terms of theagreement, we made an initial license fee payment of $1 million to Abgenix. Twoadditional milestone payments of $1 million are due to Abgenix under the termsof the agreement contingent on achievement of certain milestones. The licensefee payment and the milestone payments, if any are paid to Abgenix, will benon-refundable and non-creditable against any future obligations under thisagreement.

 

If ABX-CBL receivesregulatory approval and is launched, we will be required to pay Abgenix for ourshare of development expenses incurred prior to January 1, 2000. The amount hasnot been determined, but the agreement limits our obligation to $6,100,000. Wedo not have any obligation to reimburse Abgenix until the first anniversary ofthe launch of ABX-CBL and the timing of reimbursement varies depending onABX-CBL’s sales. We also must reimburse Abgenix for one-half of the developmentcosts incurred for ABX-CBL from January 1, 2000 to August 8, 2000, with ourshare being approximately $1.9 million. We have paid Abgenix $1.4 millionas of December 31, 2001 and the remaining $0.5 million is payable by the end ofJune 2002. The license fee and the initial reimbursement of developmentexpenses are recorded as research and development expenses.

*** ***

***Aventis***

 

We entered into aDistribution Agreement with Aventis in May 1999 with an initial expiration dateof March 31, 2002. The agreement automatically extends for additional one yearperiods unless either party gives notice of termination.  The current expiration date is March 31,2003.  Aventis is our exclusivedistributor for Thymoglobulin and Lymphoglobuline for most countries outside ofNorth America, Europe and Japan (where Thymoglobuline and Lymphoglobuline aredistributed by Aventis). Aventis sells these products either through its localsubsidiary or through a distributor that often distributes other Aventisproducts. We renegotiated this agreement in 2001 and have contracted directlywith distributors in Asia where Aventis has no direct presence (e.g. Israel andcertain Asian countries). We are also in negotiations to extend the currentcontract directly with Aventis subsidiaries in the countries where Aventis doeshave a direct presence and with current Aventis distributors in certain othercountries (e.g. Middle East and Africa).

 

Aventis also performscertain steps in the manufacturing process of Thymoglobulin andLymphoglobuline. In addition, pursuant to the purchase of IMTIX on September30, 1998, we pay Aventis royalties on Thymoglobulin and Lymphoglobulinecontingent upon the sales of these products. In 1999 and 2000, royalty paymentson Lymphoglobuline to Aventis totaled approximately $646,000 and $622,000respectively. For the year ended December 31, 2001, royalty payments onLymphoglobuline and Thymoglobulin totaled approximately $2,155,000. We expectthese royalty payments to increase in future years since we began payingroyalties on Thymoglobulin during the third quarter of 2001. The royaltypayments on Thymoglobulin increased on the third anniversary of the purchase ofIMTIX (October 1, 2001) and will decrease again three years thereafter.

*** ***

***Synt:em***

 

In July 2001, we enteredinto a three year research collaboration agreement for the discovery of nextgeneration RDP58 molecules with Synt:em, a French biopharmaceutical company.The aim of this collaboration is to design novel RDP58-like compounds for theinhibition of inflammation in new in vivo applications using Synt:em’sproprietary rational design technology, Acti:mapTM. The agreementbuilds on earlier development efforts between SangStat and Synt:em withAllotrap peptides which led to the original discovery of RDP58. Under the termsof the collaboration SangStat performs in vitro and in vivo testing of peptidesand novel rationally designed peptides while Synt:em uses its Acti:mapTMtechnology to perform the rational design work.

** **

**Competition**

 

The drug industry is verycompetitive. The drugs we market compete with existing and new drugs beingcreated by pharmaceutical, biopharmaceutical, and biotechnology companies anduniversities. Many of these entities have significantly greater research anddevelopment capabilities, as well as substantial marketing, manufacturing,financial and managerial resources and represent significant competition forus. Many of the competitors have developed or are in the process of developingtechnologies that are, or in the future may be, the basis for competitiveproducts. Some of these products may have an entirely different approach or meansof accomplishing the desired

 

13

 

therapeutic effect thanproducts we are developing or marketing and may be more effective and lesscostly. In addition, many of our competitors have significantly greater experiencethan we do in conducting clinical trials of pharmaceutical products andobtaining regulatory approvals of such products. This could cause ourcompetitors to succeed in commercializing products more rapidly than we can.The principal factors upon which our products compete are: 

 

•    product utility, 

 

•   therapeutic benefits,

 

•   ease of use, 

 

•   pricing, and 

 

•    effective marketing

 

We believe we competefavorably with respect to all of these factors.

*** ***

Competitive products withrespect to our material products include the following: 

*** ***
| **Our Products**                                       |   | **Competitive Products**               |   | **Competitor**                                  |
|--------------------------------------------------------|--------|----------------------------------------|--------|-------------------------------------------------|
|                                                   |   |                                   |   |                                            |
| Thymoglobulin/  Lymphoglobuline...............         |   | Orthoclone OKT®3             |   | Ortho Biotech                                   |
|                                                   |   |                                   |   |                                            |
|                                                   |   | ATGAM®                            |   | Pharmacia                                       |
|                                                   |   |                                   |   |                                            |
|                                                   |   | Simulect®                         |   | Novartis AG                                     |
|                                                   |   |                                   |   |                                            |
|                                                   |   | Zenapax®                          |   | Roche                                           |
|                                                   |   |                                   |   |                                            |
| Gengraf &  cyclosporine capsules.................. |   | Neoral                                 |   | Novartis AG                                     |
|                                                   |   |                                   |   |                                            |
|                                                   |   | Sandimmune                             |   | Novartis AG                                     |
|                                                   |   |                                   |   |                                            |
|                                                   |   | Prograf®                          |   | Fujisawa Pharmaceutical Co. Ltd. |
|                                                   |   |                                   |   |                                            |
|                                                   |   | Rapamune                               |   | Wyeth                                           |
|                                                   |   |                                   |   |                                            |
|                                                   |   | Generic cyclosporine capsule |   | Eon Labs                                        |
|                                                   |   |                                   |   |                                            |
|                                                   |   | Generic cyclosporine  capsule          |   | Sidmak                                          |

 

Competitive products withrespect to our product candidates include the following: 

 
| **Our Product Candidates**                                     |   | **Competitive Products** |   | **Competitor**          |
|----------------------------------------------------------------|--------|-------------------------------|--------|-------------------------|
|                                                           |   |                          |   |                    |
| ABX-CBL...................................................     |   | MEDI-507                      |   | Medimmune/BioTransplant |
|                                                           |   |                          |   |                    |
|                                                           |   | Nuvion (HuM291)               |   | Protein Design Labs     |
|                                                           |   |                          |   |                    |
| RDP58......................................................... |   | Enbrel®                  |   | Immunex-AHP             |
|                                                           |   |                          |   |                    |
|                                                           |   | Remicade®                |   | Johnson & Johnson   |

 

Gengraf and ourcyclosporine capsule in development are generic and compete against the brandedcyclosporine products as well as other generic cyclosporine products that havebeen or may be approved. These products also compete against Prograf, marketedby Fujisawa Pharmaceutical Co. Ltd, which was approved by the FDA to be takeninstead of cyclosporine. Roche’s Cellcept® is indicated as aconjunctive therapy, to be taken with cyclosporine

 

14

 

rather than instead ofcyclosporine. As noted above, Thymoglobulin competes with OKT3, ATGAM,Simulect, and Zenapax. In the U.S., Thymoglobulin has been successful inestablishing a market share against these products, which were all previouslyon the market. In Europe, Novartis and Roche have just started selling Simulectand Zenapax, respectively, and we believe that the launch of these two productsmay impact sales of Thymoglobulin and Lymphoglobuline in Europe.

 

ABX-CBL is expected tocompete against two products that are also in clinical trials for the treatmentof GVHD: Medimmune/BioTransplant’s MEDI-507 and Protein Design Labs’ Nuvion. Inaddition, other products are used for the prevention of GVHD and wouldtherefore eliminate the need to use ABX-CBL for treatment.

 

RDP58 is an inhibitor ofTNF-alpha synthesis. TNF-alpha is a cytokine released in excess in variousautoimmune disorders. For that reason, many companies are pursuing developmentof a TNF-alpha inhibitor and we believe there could be substantial competitionin this area. In addition, Immunex/AHP’s Enbrel and Johnson & Johnson’sRemicade are both TNF-alpha inhibitors that are currently approved forrheumatoid arthritis and Crohn’s disease, respectively.

** **

**Patents and Proprietary Technology**

 

We have twenty-sevenissued patents and nine pending patent applications in the U.S. and arepursuing corresponding patent applications in other countries with respect tothe products we are selling, the products we have in development and ourresearch areas. We aggressively seek patent protection on our inventions andour policy is to enforce our intellectual property rights. We have no issuedpatents covering Thymoglobulin and Lymphoglobuline, and rely on ourmanufacturing know-how to protect these products. We have issued patentscovering Celsior. With respect to our cyclosporine capsules, we havein-licensed a pending formulation patent application. The cyclosporine compoundis no longer patent-protected and there are several generics on the market inthe U.S. We are pursuing patent protection for RDP58 and we believe that anissued patent may give us a competitive advantage.

 

Our patents expire onvarious dates beginning in the year 2008 and ending in the year 2017.

 

In addition, as discussedabove, we have also licensed certain patents and patent technology from others.We have an exclusive, worldwide license from Stanford University for certainissued patents and pending patent applications in the HLA and peptide area. Wehave licensed from Abgenix certain patents and patent applications that relateto ABX-CBL. We have licensed additional patents relating to cyclosporine fromthe University of North Carolina and a pending application from Tris Pharma.The licensor for each of these licenses is primarily responsible forprosecution of these patents and patent applications.

 

Patent applications inthe U.S. are maintained in secrecy until patents are issued. Since publicationof discoveries in the scientific or patent literature tends to lag behindactual discoveries by several months, we cannot be certain that we were thefirst to discover compositions covered by our pending patent applications orthe first to file patent applications on such compositions. Our pending patentapplications may not result in issued patents, our issued patents may notafford protection against a competitor and our products may infringe on otherpatents.

 

We also rely on tradesecrets and proprietary know-how that we seek to protect, in part, byconfidentiality agreements with our employees and consultants.

 

We have registered orapplied for registration of the names of all of our marketed products and planto register the names of our products under development once a name has beenselected for the product candidate.

** **

**Manufacturing**

 

Manufacturingpharmaceutical products is a highly regulated process. The FDA and otherregulatory agencies require that manufacturing be done in accordance withcurrent Good Manufacturing Practices, or GMP. Additionally, products can onlybe manufactured in facilities approved by the applicable regulatoryauthorities.

 

When we acquired IMTIX in1998, we also acquired the manufacturing unit in Lyon, France that manufacturedThymoglobulin and Lymphoglobuline. Currently Aventis also performs certainsteps in the manufacturing process

 

15

 

of Thymoglobulin andLymphoglobuline under contract to us. We perform the remaining manufacturingsteps ourselves in manufacturing facilities that we lease from Aventis. Theseagreements with Aventis expire on dates ranging from 2008 to 2013. We believethat our facility currently complies with GMP. However, we likely would beunable to quickly and efficiently replace our manufacturing capacity if we wereunable to manufacture Thymoglobulin or Lymphoglobuline as a result ofsubsequent FDA or other regulatory inspections or otherwise, or if one of ourmanufacturers were unable to manufacture one of our other products for us.

 

We have no othermanufacturing facility and the Lyon facility could not be used for productsother than biologics. Therefore, we rely on third parties to manufacture ourother products, both those that we sell and those in development. We depend onsuch third parties to perform their obligations in compliance with allregulatory requirements and on a timely basis. If any of our contract manufacturersfail to perform, such failure may delay our clinical development or submissionof products for regulatory approval or result in product shortages with respectto our marketed products.

 

Abgenix is responsiblefor the manufacturing of ABX-CBL. If the supplier they have chosen is unwillingor unable to perform, it may delay our clinical development or submission ofproducts for regulatory approval, or result in product shortages with respectto our marketed products.

 

With respect to rawmaterials, we have agreements for commercial scale production of cyclosporinebulk material with Gensia Sicor and Abbott. Our Gensia Sicor agreement runsuntil December 31, 2005 and has an automatic one-year term renewal unless oneparty gives notice. Our Abbott agreement terminates December 31, 2004 and isautomatically renewed until one party gives notice. Bulk cyclosporine isdifficult to manufacture since it must be extracted from whole cells andcarefully purified. At December 31, 2001 there were no commitments to purchaseany bulk cyclosporine. We believe we have sufficient quantities of bulkcyclosporine to meet our current needs. We believe we also have sufficientquantities of raw materials for our other products and product candidates.

** **

**Warehousing and Distribution**

 

We use a logisticsprovider to store and distribute our products from one central warehousinglocation in Memphis, Tennessee. When our logistics provider receives a purchaseorder through electronic data input, phone, mail or facsimile, it sends theorder to the warehouse for shipment, usually within 24 hours, to the customerplacing the order. The logistics provider is also responsible for invoicing andcollections.

** **

**Government Regulation**

 

Our research anddevelopment activities, preclinical studies and clinical trials, and ultimatelythe manufacturing, marketing and labeling of our products, are subject toextensive regulation by the FDA and other regulatory authorities in the U.S.and other countries (“Regulatory Agencies”). The U.S. Federal Food, Drug, andCosmetic Act (the “Act”) and the regulations promulgated thereunder and otherfederal and state statutes and regulations govern, among other things, thetesting, manufacture, safety, efficacy, labeling, storage, record keeping,approval, advertising, promotion, import and export of our products and productcandidates. Preclinical study and clinical trial requirements and theregulatory approval process typically take years and require the expenditure ofsubstantial resources. Additional government regulation may be established thatcould prevent or delay regulatory approval of our product candidates. Delays orrejections in obtaining regulatory approvals would harm our ability tocommercialize any product candidates we develop and our ability to receiveproduct revenues. If regulatory approval of a product candidate is granted, theapproval may include significant limitations on the indicated uses for whichthe product may be marketed.

 

Our products in clinicaltrials during 2002 may include Thymoglobulin for expanded labeling, ABX-CBL,RDP58, and bioequivalence studies for our cyclosporine capsule product.

 

Our clinical trials maynot be completed successfully or within any specified time period. Either theFDA or we may suspend clinical trials at any time, if either of us concludesthat clinical subjects are being exposed to an unacceptable health risk, or forother reasons. The conduct of clinical trials is complex and difficult,especially in Phase III. The design or the performance of the Phase IIIclinical trial protocols may not be successful.

 

The results ofpreclinical studies and clinical trials, if successful, are submitted in anapplication to seek FDA

 

16

 

approval to market thedrug or biological product for a specified use. The testing and approvalprocess requires substantial time and effort, and there can be no assurancethat any approval will be granted for any product or that approval will begranted according to any schedule. The FDA may refuse to approve an applicationif it believes that applicable regulatory criteria are not satisfied. The FDAmay also require additional testing for safety and efficacy of the drug.Moreover, if regulatory approval of a drug product is granted, the approvalwill be limited to specific indications. Our product candidates may not receiveregulatory approvals for marketing, or if approved, that approval may not befor the indications that we requested.

 

Other Regulatory Agenciesfollow similar procedures to those required by the FDA and require that thesafety and efficacy of our pharmaceutical product candidates be supportedthrough adequate and well-controlled clinical trials. If the results of ourpivotal clinical trials submitted in application for approval do not establishthe safety and efficacy of our product candidate to the satisfaction of anyRegulatory Agency, we will not receive the approvals necessary to market ourproduct candidate in that country.

 

In the European Union, orEU, the registration process for products can be done through a decentralizedprocedure. Under this procedure, the holder of a national marketingauthorization for which mutual recognition is sought may submit an applicationto one or more Member States, certify that the dossier is identical to that onwhich the first approval was based or explain any differences and certify thatidentical dossiers are being submitted to all Member States from whichrecognition is sought. Within 90 days of receiving the application and assessmentreport, each Member State must decide whether to recognize the approval. Theprocedure encourages Member States to work with applicants and other regulatoryauthorities to resolve disputes concerning mutual recognition. If such disputescannot be resolved within the 90-day period provided for review, theapplication will be subject to a binding arbitration procedure.

 

Following approval,Regulatory Agencies continue to regulate our approved and marketed products. Wemust report adverse drug events associated with our products to RegulatoryAgencies. In addition, Regulatory Agencies also inspect on a regular basis theequipment and facilities used to manufacture our products. A Regulatory Agencymay suspend the manufacturing facilities (and order a recall of our productsmanufactured in that facility) if the Regulatory Agency believes that theproduct has not been manufactured in compliance with regulations.

** **

**Employees**

 

As of December 31, 2001,we employed 263 people worldwide, of which 101 are in the U.S. and Canada and162 are in Europe, which includes approximately 65 employees in ourmanufacturing facility in Lyon, France. Most of our employees in the Lyon,France, facility are represented by labor unions. We believe that we maintaingood relations with our employees.

** **

**Management**

 

Our executive officersand directors and their ages at December 31, 2001 are as follows: 

 
| **Name**                                                |   | **Age** |   | **Position**                                                            |
|---------------------------------------------------------|--------|---------|--------|-------------------------------------------------------------------------|
| Jean-Jacques  Bienaimé...........................  |   | 48      |   | Chairman of the Board,  Chief Executive Officer and President           |
|                                                    |   |    |   |                                                                    |
| Steve  Aselage......................................... |   | 50      |   | Senior Vice President,  North American Sales and Marketing              |
|                                                    |   |    |   |                                                                    |
| Roland Buelow,  Ph.D.............................       |   | 43      |   | Senior Vice President,  Discovery Research                              |
|                                                    |   |    |   |                                                                    |
| Stephen G. Dance...................................     |   | 50      |   | Senior Vice President,  Finance                                         |
|                                                    |   |    |   |                                                                    |
| Ralph E.  Levy......................................... |   | 53      |   | Senior Vice President,  Operations                                      |
|                                                    |   |    |   |                                                                    |
| Raymond J. Tesi,  M.D...........................        |   | 46      |   | Senior Vice President,  Clinical Development and Medical   Affairs |
|                                                    |   |    |   |                                                                    |
| Robert C. Floc’h,  Ph.D........................... |   | 53      |   | General Manager of  IMTIX-SangStat                                      |

 

17

 
| Fredric J. Feldman,  Ph.D........................    |   | 62     |   | Director |
|------------------------------------------------------|--------|--------|--------|----------|
|                                                 |   |   |   |     |
| Richard D.  Murdock...............................   |   | 55     |   | Director |
|                                                 |   |   |   |     |
| Andrew J. Perlman,  M.D., Ph.D.............          |   | 54     |   | Director |
|                                                 |   |   |   |     |
| Nicholas J. Simon  III.............................. |   | 47     |   | Director |
|                                                 |   |   |   |     |
| Vincent R.  Worms..................................  |   | 49     |   | Director |

 

Jean-Jacques Bienaimé hasbeen our President since June 1998 and became Chief Executive Officer inFebruary 1999. He also served as our Chief Operating Officer from June 1998 toFebruary 1999. He was elected to the Board of Directors in March 1999.Mr. Bienaimé became Chairman of the Board of Directors in October 2000.From September 1992 to May 1998 Mr. Bienaimé was with Rhone Poulenc Rorer,Inc., a pharmaceutical company, rising to the position of Senior VicePresident, Corporate Marketing and Business Development. He is currently amember of the board of Fox Chase Cancer Center and AeroGen Inc., a public drugdelivery company. Mr. Bienaimé received his degree in economics from EcoleSuperieure de Commerce de Paris in France and an M.B.A. from the WhartonSchool, University of Pennsylvania.

 

Steve Aselage joined usin February 1999 and currently is our Senior Vice President, North AmericanSales and Marketing. From 1995 to January 1999, Mr. Aselage was the Director ofSales and Marketing at Advanced Tissue Sciences, a tissue engineering company.Mr. Aselage received a B.S. in biology from the University of Notre Dame.

 

Roland Buelow, Ph.D.joined us in 1993 and currently is our Senior Vice President of DiscoveryResearch. Dr. Buelow received a Ph.D. in Biology from the Max-Planck Institutefor Biology in Tuebingen, Germany. Dr. Buelow visited the University of Texasas a Fulbright scholar and spent two years at Stanford Medical School.

 

Stephen G. Dance has beenour Senior Vice President, Finance since April 1999. From July 1998 to April1999, Mr. Dance was Director of Financial Accounting, Planning and Reporting atPlantronics, Inc., a telecommunications company. From 1983 to July 1998, Mr.Dance held various positions with Syntex Corporation, a pharmaceutical company,which was acquired by Roche Holding Ltd., also a pharmaceutical company, in1994, serving most recently as Controller, Syntex Laboratories, Inc. Mr. Danceholds a B.A. in French from Leeds University in England, is a Certified PublicAccountant in the State of California and a fellow of the Institute ofChartered Accountants in England and Wales.

 

Ralph E. Levy joined usin 1990 and currently is our Senior Vice President, Operations. Mr. Levyreceived a B.S. in chemistry from the City College of New York and an M.S. inchemistry from Seton Hall University.

 

Raymond J. Tesi, M.D.joined us in May 1997 and currently is our Senior Vice President, ClinicalDevelopment and Medical Affairs. From 1994 until 1997, Dr. Tesi was an associateprofessor of surgery and director of the extra-renal transplantation program atTulane Medical School in New Orleans, Louisiana. He was a transplantationsurgical fellow at the Ohio State University Hospital. Dr. Tesi received anM.D. from the Washington University School of Medicine in St. Louis, Missouri.

 

Robert C. Floc’h, Ph.D.has been the General Manager of our IMTIX-SangStat subsidiary since we acquiredIMTIX in September 1998. In addition, Dr. Floc’h has been General Manager atSangStat Atlantique, our previous operating subsidiary in France, since 1992.Dr. Floc’h received a doctor of pharmacy degree and a Ph.D. in medicalchemistry from the University of Nantes.

 

Fredric J. Feldman, Ph.D.has been a director since March 1992. He has been the President of FJFAssociates, a consultant to health care venture capital and emerging companies,since February 1992. From September 1995 to June 1996 he was the ChiefExecutive Officer of Biex, Inc. a women’s healthcare company. Dr. Feldmanreturned to his position as Chief Executive Officer of Biex from 1999 to 2000.He is a director of OrthoLogic Corporation and Ostex International, Inc., bothpublic medical device companies. Dr. Feldman received his Ph.D. in AnalyticalChemistry from the University of Maryland and his B.S. in Chemistry fromBrooklyn College of City University of New York.

 

18

 

Richard D. Murdock hasbeen a director since October 1993. Since October 2001, Mr. Murdock has beenthe President, Chief Executive Officer and Director of InPro Biotechnology, abiotechnology company involved in the diagnosis and treatment ofneurodegenerative diseases. From December 1998 until March 2001,Mr. Murdock was the President and Chief Executive Officer and a directorof Kyphon, Inc., an orthopedic medical device company. From September 1991 toOctober 1998, Mr. Murdock served as the Chief Executive Officer and a directorof CellPro, Incorporated, a public biotechnology company. Mr. Murdock receivedhis B.S. in Zoology from the University of California at Berkeley.

 

Andrew J. Perlman, M.D.,Ph.D. has been a director since December 1992. In February 2002, he becameChief Executive Officer and a director of Affymax, Inc., a privately heldbiopharmaceutical company. Prior to that, Dr. Perlman had been Executive VicePresident at Tularik, Inc., a public biotechnology company, since September1999. From November 1997 to September 1999, Dr. Perlman served as Tularik’sVice President, Medical Research and Corporate Development. From January 1993to November 1997, Dr. Perlman served as Tularik’s Vice President of MedicalResearch. Dr. Perlman received his M.D. and his Ph.D. in Physiology from NewYork University.

 

Nicholas J. Simon III hasbeen a director since July 2001. Mr. Simon is a General Partner at MPM Capital,a leading life sciences venture capital firm. Prior to joining MPM Capital, Mr.Simon was  CEO of Collabra Pharma, Inc.,a pharmaceuticals development company, from March 2000 until joining MPMCapital in October 2001. Mr. Simon joined Genentech, Inc. in December 1989 andfrom 1994 to April 2000 served as Vice President of Business and CorporateDevelopment. Mr. Simon is also Chairman of the Board of Deltagen, Inc., and adirector of InterMune, Inc. both public biotechnology companies. In addition,he serves on the board of directors of several private companies.Mr. Simon holds an M.B.A. from Loyola College.

 

Vincent R. Worms has beena director since October 1991. Mr. Worms has been a General Partner of PartechInternational, a venture capital management fund, since 1982. Mr. Worms ispresently a director of Informatica, a public software company. He received hisengineering degree from Ecole Polytechnique in Paris, and his M.S. degree fromthe Massachusetts Institute of Technology.

*** ***

**RiskFactors**

** **

**We have a history of operating lossesand our future profitability is uncertain.**

 

We were incorporated in1988 and have experienced significant operating losses since that date. As ofDecember 31, 2001, our accumulated deficit was $187.0 million. While thequarter ended December 31, 2001 was our first profitable quarter, we mayrecognize losses in subsequent quarters for a variety of reasons. If we areunable to maintain or increase sales of our existing products, particularlyThymoglobulin, and develop and subsequently market our products in development,our business and operating results will be adversely affected.

 

To date, our productrevenues have been primarily derived from sales of Thymoglobulin,Lymphoglobuline, and Gengraf. Revenues from Thymoglobulin were 69%, 60% and 54%of total revenues in 1999, 2000 and 2001, respectively. Revenues fromLymphoglobuline were 19%, 12% and 8% of total revenues in 1999, 2000 and 2001,respectively. In addition, revenues from Gengraf were 18% and 31% of totalrevenues in 2000 and 2001, respectively. Revenues from SangCya Oral Solutionwere immaterial in 1999, 2000 and 2001.

 

Our expectations withrespect to achieving positive cash flow and financial reporting profitabilityare subject to risk and uncertainty. While we recently had our first profitablequarter, we may not be able to establish positive cash flow or to maintain orincrease our financial reporting profitability on a quarterly or annual basis.Our ability to achieve positive cash flow and financial reporting profitabilitywill be significantly dependent upon our success in, among other things: 

 

•   maintaining and increasing revenues fromThymoglobulin, Lymphoglobuline and Gengraf, particularly Thymoglobulin; 

•   successfully commercializing our product candidates,especially ABX-CBL and RDP58; 

•   limiting our manufacturing and selling, general andadministrative expenses; and 

•   controlling research and development expenses. 

 

19

 

Our operating results mayalso be affected by the licensing of complementary products or the acquisitionof strategic companies we may effect in the future. Any such acquisition orlicensing could have the immediate effect of causing an operating loss infuture periods.

** **

**Fluctuations in quarterly and annualoperating results may decrease our stock price.**

 

Our quarterly and annualoperating results may fluctuate due to a variety of factors, and thesefluctuations may not match the expectations of investors and any securitiesanalysts. This could cause the trading price of our common stock to decline. Wetherefore believe that quarter-to-quarter comparisons of our operating resultsmay not be a good indication of our future performance, and you should not relyon them to predict our future performance or the future performance of ourstock. Our operating losses have been substantial each year since inception. Wealso expect our operating results to fluctuate significantly as a result of anumber of factors, including: 

 

•   the uncertainty in the timing and the amount ofrevenue we earn upon product sales; 

•   our achievement of research and developmentmilestones; 

•    expenses we incur for product development,clinical trials and marketing and sales activities; 

•   the licensing of new products or the acquisition ofother companies; 

•   the introduction of new products by our competition;

•   regulatory actions; 

•   market acceptance of our products; 

•   manufacturing capabilities; 

•   cost of litigation; and 

•   third-party reimbursement policies. 

 

Fluctuations in ouroperating results have affected our stock price in the past and are likely tocontinue to do so in the future.

** **

**Our future growth depends on sales ofkey products.**

 

We expect to derive mostof our future revenues from sales of Thymoglobulin, Lymphoglobuline, andGengraf. We have limited experience selling our products in the U.S. Our salesof Thymoglobulin began in the U.S. in February 1999. We began distributingGengraf in May 2000. We are marketing Gengraf in the U.S. under a co-promotionagreement with Abbott Laboratories. Abbott may not effectively market Gengraf,and its failure to do so may adversely impact sales of these products.

 

Because we expectThymoglobulin, Lymphoglobuline and Gengraf to be key revenue-generatingproducts, any factor decreasing sales of these products, particularlyThymoglobulin, would harm our financial results. In addition, a delay inregulatory approval of our cyclosporine capsule product would harm our futurefinancial results. The following factors could harm the sale or approval ofthese products: 

 

•    the timing of regulatory approval and marketentry relative to competitive products; 

•   the availability of alternative therapies; 

•   perceived clinical benefits and risks; 

•   competitive changes; 

 

20

 

•   regulatory issues; 

•   ease of use; 

•   changes in the prescribing practices of physicians; 

•    the availability of third-partyreimbursement; or 

•    product liability claims. 

 

In particular, withrespect to Thymoglobulin, the following factors may decrease sales: 

 

•    the price of our products relative toalternative therapies; 

•    manufacturing or supply interruptions; or 

•    competitive pressures from Novartis,Pharmacia and Roche. 

 

With respect to Gengrafand our proposed smaller-size cyclosporine capsule, the following factors may,in particular, decrease revenue: 

 

•    perceptions of both patients and physiciansregarding use of a generic version of a critical, life-saving therapeutic; 

•    perception of bioequivalence; 

•    number of contracts with managed careproviders and group purchasing organizations; 

•    pricing pressure from other genericcompetitors; 

•    intense competitive pressure from Novartis;and 

•    Novartis’s litigation with the Food and DrugAdministration, the Medicines Control Agency in the U.K. and Abbott. 

 

From time to time, wehave experienced seasonality in our product sales, which in the past hasresulted in weakness in our first quarter results. We may experience similarseasonality in this or other quarters in the future.

** **

**Four wholesalers account for a highpercentage of our revenues, and the failure to maintain or expand theserelationships could harm our business.**

 

A substantial portion ofdemand for our products is from customers such as hospitals and pharmacies whopurchase our products from wholesalers, including Cardinal Health Inc. andMcKesson Corporation. Approximately 13% and 15%, respectively, of totalrevenues in 2000 were derived from sales to customers who place orders throughthese two wholesalers, and in 2001, sales to Cardinal Health Inc., McKessonCorporation, AmeriSource and Bergen Brunswig Drug Company accounted forapproximately 26%, 18%, 12% and 11%, respectively, of total revenues. We expectthat we will continue to derive a substantial portion of our revenue fromCardinal Health Inc. and McKesson Corporation. The loss of either of thesewholesalers could harm our business and operating results.

** **

**We may not be able to manufacture orobtain sufficient quantities of our products, which could lead to productshortages and harm our business.**

 

Our manufacturingfacility in Lyon, France, must meet FDA standards of Good ManufacturingPractices and other regulatory guidelines. The FDA and other regulatoryauthorities inspect our manufacturing facility to ensure that it meetsregulatory standards. The FDA, as well as the Canadian and French healthauthorities, inspected our Lyon facility in February and March 2002. If the FDAor Canadian authority believes that we are not complying with its guidelines,it can issue a warning letter or prevent the import of Thymoglobulin into theU.S. or Canada, which would cause an immediate and significant adverse effecton our business and operating results. In addition,

 

21

 

Thymoglobulin andLymphoglobuline are biological products, which are more difficult tomanufacture than chemical compounds. We rely on Aventis for certain importantmanufacturing services, including quality assurance, quality control, andlyophilization, a step in the manufacturing process which involves removing thewater from the product, similar to freeze-drying. Aventis may not continue toeffectively and continuously provide us these critical manufacturing services.In addition, we may have difficulties manufacturing Thymoglobulin orLymphoglobuline in the future that may impair our ability to deliver productsto our customers, which could reduce our revenues.

 

Although we primarily useour own facilities to manufacture Thymoglobulin and Lymphoglobuline, we rely onthird parties to supply us with raw materials. These third parties may stopsupplying us with the materials we need at any time, and we may have to findnew suppliers. We have six suppliers of rabbit serum used for the manufacturingof Thymoglobulin. Werecently had a dispute with two former suppliers of rabbit serum. IFFA CREDOand Elevage Scientifique des Dombes, two affiliated suppliers, sued our Frenchsubsidiary for breach of contract after we reduced our orders of rabbit serumfrom them. As a result of a court ruling against us in this lawsuit, werecorded a charge of $3,250,000 to other expense—net for the year endedDecember 31, 2001, which, combined with reserves recorded in fiscal 2000, fullyprovided for the court award of $3,600,000.On March 22, 2002, the appeals court upheld the lower court decision andassessed interest against us of approximately $204,000 which has been recordedas a charge to other expense—net for the year ended December 31, 2001.

** **

**Our reliance on third parties formanufacturing may delay product approval or, once approved, result in a productshortage, which would reduce our revenues.**

 

Except for Thymoglobulinand Lymphoglobuline, third parties manufacture all of our products and productcandidates. We rely on Abbott Laboratories and Gensia Sicor for the manufactureof bulk cyclosporine. Abbott Laboratories manufactures Gengraf, and Federa(Fresenius Kabi France) manufactures Celsior for us. Some of the risks associatedwith using third parties for manufacturing are as follows: 

 

•             the manufacturer maynot pass a pre-approval inspection or, once approved, may not continue tomanufacture to the FDA’s and other regulatory authorities’ standards; 

 

•             the manufacturer maynot timely deliver adequate supplies of a sufficiently high quality product inthe timeline necessary to meet product demand; and 

 

•    we may not be able to obtain commercialquantities of a product at an economically viable price. 

 

In addition, we may notbe able to enter into commercial scale manufacturing contracts on a timely orcommercially reasonable basis, or at all, for our product candidates. Abgenix,from whom we have licensed ABX-CBL, is responsible for maintaining themanufacturing agreement for ABX-CBL with Lonza Biologics PLC, the third partymanufacturer of this product candidate. Similarly, we rely on AccucapsIndustries Limited to supply us with cyclosporine capsules and UCB S.A. tosupply us with bulk RDP58 for research and clinical purposes. For some of ourpotential products, we will need to develop our production technologies furtherfor use on a larger scale to conduct human clinical trials and produce suchproducts for sale at an acceptable cost.

 

If our manufacturers failto perform their obligations effectively and on a timely basis, these failuresmay delay clinical development or submission of products for regulatoryapproval or, once a product is approved, result in product shortages, whichcould harm our business and operating results. Additionally, because ourmanufacturers can only manufacture our products in facilities approved by theapplicable regulatory authorities, we may not be able to replace ourmanufacturing capacity quickly or efficiently in the event that our manufacturersare unable to manufacture our products.

** **

**Government regulation imposessignificant costs and restrictions on the development and commercialization ofour products, and we may not obtain regulatory approvals for our products.**

 

Our research, preclinicaldevelopment, clinical trials, manufacturing, marketing and distribution of ourproducts in the U.S. and other countries are subject to extensive regulation bynumerous governmental authorities including, but not limited to, the FDA. Inorder to obtain regulatory approval of a drug product, we must demonstrate toregulatory agencies, among other things, that the product is safe and effectivefor its intended uses and that the manufacturing

 

22

 

facilities are incompliance with Good Manufacturing Practices requirements. The process ofobtaining FDA and other required regulatory approvals is lengthy and willrequire the expenditure of substantial resources, and we do not know if we willobtain the necessary approvals for our product candidates. Further, for ourapproved products, the marketing, distribution and manufacture of our productsremains subject to extensive ongoing regulatory requirements administered bythe FDA and other regulatory bodies. Failure to comply with applicableregulatory requirements can result in, among other things, warning letters,fines, injunctions, civil penalties, recall or seizure of products, total orpartial suspension of production, refusal of the government to grant pre-marketclearance or pre-market approval, withdrawal of approvals and criminalprosecution of SangStat and our employees.

** **

**We may not achieve the anticipatedbenefits from the acquisition or licensing of other products or companies, andany such transaction could harm our business and operating results.**

 

We may use a portion ofour funds for the licensing of new products or the acquisition of othercompanies. We expect that the licensing or acquisition of products or companiesin an early stage of development would require substantial additionalinvestment prior to yielding anticipated returns. Moreover, we may fail toultimately realize any anticipated benefits for a variety of reasons includingrisks inherent to the research and development of early-stage products,competition, and integration risks related to new products, technology andhuman resources. Moreover, integration of new products or companies may strainour existing financial and managerial controls, reporting systems andprocedures. This may result in the diversion of management and financialresources from our core business objectives and needs. Because we only recentlyexpect to realize quarterly profitability, we would expect that any suchacquisition or licensing could have the immediate effect of causing anoperating loss in future periods. Furthermore, the licensing or acquisition ofnew products or companies for cash could limit our financial resources, and theissuance of our stock in such a transaction could result in substantialdilution to existing stockholders.

** **

**Significant movements in foreigncurrency exchange rates may harm our financial results.**

 

Many of our foreign salesare invoiced in local currencies, creating receivables denominated incurrencies other than the U.S. dollar, primarily in the Euro and the Japaneseyen but also in the U.K. pound. The risk due to foreign currency fluctuationsassociated with these receivables is partially reduced by local payablesdenominated in the same currencies, and presently we do not consider it necessaryto hedge these exposures. We may revise our hedging policy from time to time asour foreign operations change.

** **

**A change in marketing strategy and adelay in product approval have created excess perishable inventories that mayresult in significant reductions in our future gross margins.**

 

We have significantamounts of bulk cyclosporine active ingredient inventory that we are not usingto manufacture finished product in the amount anticipated. This inventory wasoriginally purchased for use in cyclosporine finished products to be sold inthe U.S. and Europe. However, since we are now distributing Gengraf in the U.S.and we have withdrawn SangCya Oral Solution from the U.S. market, we aredependent on the European market to use this inventory. We recalled SangCyaOral Solution from the U.S. in July 2000 in response to a study in healthyvolunteers that identified that SangCya is not bioequivalent to Neoral oralsolution when mixed with apple juice as recommended in its labeling. We are nolonger marketing this product. In addition, since our CycloTech product is onlyintended for use with the SangCya Oral Solution, we have discontinued thedistribution of CycloTech. Although we plan to obtain marketing approval for acyclosporine capsule product in Europe, the inherent uncertainty of theapproval process makes it very difficult to forecast a launch date for thisproduct. We currently expect to file for marketing approval of a cyclosporinecapsule product in a European country by the end of 2002. If the approval andproduct launch are delayed, we may not be able to convert all the inventoryinto finished product and sell it before its expiration date. As a result, wecould write off portions of our bulk active ingredient in the future, whichcould significantly reduce the gross margin reported for that future period.

** **

**If we do not develop and market newproducts, our business will be harmed.**

 

To maintain profitableoperations, we must successfully develop, obtain regulatory approval for,manufacture, introduce and market new products and product candidates. We maynot be able to successfully do this. Our product candidates will requireextensive development and testing, as well as regulatory approval beforemarketing to the

 

23

 

public. Our cyclosporinecapsule product candidate in Europe has been delayed and we do not anticipatefiling for approval of a cyclosporine capsule product in Europe until late2002. In addition, cost overruns and product approval delays could occur due tothe following: 

 

•   unanticipated regulatory delays or demands; 

 

•    unexpected adverse side effects; or 

 

•    insufficient therapeutic efficacy. 

 

These events wouldprevent or substantially slow down the development effort and ultimately wouldharm our business. Furthermore, there can be no assurance that our productcandidates under development will be safe, effective or capable of beingmanufactured in commercial quantities at an economical cost, or that ourproducts will not infringe the proprietary rights of others or will be acceptedin the marketplace.

** **

**If our preclinical and clinicaltesting of potential products is unsuccessful, our business will be harmed.**

 

Before obtainingregulatory approval for the sale of any of our product candidates, we mustsubject these product candidates to extensive preclinical and clinical testingto establish their safety and efficacy. If these tests are unsuccessful, wewill be unable to commercialize these products. Interim results of trials donot necessarily predict final results, and acceptable results in early trialsmay not be repeated in later trials. Success in preclinical testing and earlyclinical trials does not ensure that later clinical trials will be successful.For example, we have delayed our expected filing for our cyclosporine capsuleby approximately six months due to unanticipated results on an initial clinicaltrial for that product, and we could experience further delays in the futurefor this and other products. Moreover, preclinical and clinical data can beinterpreted in different ways, which could delay, limit or prevent regulatoryapproval. Negative or inconclusive results or adverse medical events during aclinical trial could cause a clinical trial to be repeated or a program to beterminated. We typically rely on third-party clinical investigators to conductour clinical trials and other third-party organizations to perform datacollection and analysis and, as a result, we may face additional delayingfactors outside our control. The rate of completion of clinical trials depends,in part, on the enrollment of patients, which in turn depends on many factorssuch as the size of the patient population, the proximity of target patients toclinical sites, the eligibility criteria for the trial, the trial design,perceived risks and benefits, availability of the study drug and the existenceof competitive experimental or approved therapies. Any delay in planned patientenrollment in our current or future clinical trials may result in increasedcosts, trial delays or both. Our product development costs will increase if wehave delays in testing or approval or if we need to perform more or largerclinical trials than planned. If the delays are significant, our financialresults and the commercial prospects for our products will be harmed.

** **

**Our business exposes us to the riskof product liability claims for which we may not be adequately insured.**

 

We face an inherentbusiness risk of exposure to product liability claims in the event that the useof our products is alleged to have resulted in adverse effects. Such riskexists even with respect to those products that are manufactured in licensedand regulated facilities or that otherwise received regulatory approval forcommercial sale. We could be subject to significant product liability claims.We currently have product liability insurance in the amount of $25 million perclaim and $25 million in the aggregate on a claims-made basis, which may not beadequate to cover potential liability exposures. In addition, adequateinsurance coverage may not be available in the future on commerciallyreasonable terms, if at all. The loss of insurance coverage or the assertion ofa product liability claim or claims could harm our operating results.

** **

**We may be unable to attract or retainkey personnel.**

*** ***

***Ourability to develop our business depends in part upon our attracting andretaining qualified management and scientific personnel. As the number ofqualified personnel is limited, competition for such personnel is intense. Wemay not be able to continue to attract or retain such people on acceptableterms, given the competition for such personnel among biotechnology,pharmaceutical and healthcare companies, universities and nonprofit researchinstitutions. The loss of our key personnel or the failure to recruitadditional key personnel could significantly impede attainment of ourobjectives and harm our financial condition and operating results.***

** **

24

 

**Our litigation with Novartis may beresolved adversely and could consume our time and resources.**

 

We are involved inlitigation with Novartis in the U.S., Italy and the U.K., which couldpotentially harm sales of Gengraf in the U.S. (due to the U.S. regulatory litigationwhich would impact the labeling for all generic cyclosporine products), andSangCya Oral Solution and our cyclosporine capsule product candidates inEurope. The course of litigation is inherently uncertain, and we may notachieve a favorable outcome. The litigation, whether or not resolved favorablyto us, is likely to be expensive, lengthy and time consuming, and divertmanagement’s attention.

** **

**Novartis’s patent lawsuit againstAbbott with respect to Gengraf may be resolved adversely.**

 

Novartis sued Abbott inAugust 2000 claiming that Gengraf infringes certain Novartis patents. The trialis scheduled for July 23,2002. Novartis’s complaint includes a plea for injunctive relief toprevent the sale of Gengraf in the U.S. The course of litigation is inherentlyuncertain: Novartis may choose to name us in this suit, Abbott may not prevail,or Abbott may choose to settle on terms adverse to our interests. If Novartisnames us in this suit, we may incur expenses before reimbursement, if any, byAbbott, who is obligated under our agreement to indemnify us against such suitsbut their indemnity may not cover lost sales, if any. Should Novartis succeedin obtaining a preliminary or permanent injunction, this injunction maytemporarily or permanently remove Gengraf from the market. If Abbott or we wereforced to remove Gengraf from the market before our co-promotion agreement withAbbott expires on December 31, 2004, our revenues would decrease materially.

** **

**Failure to protect our intellectualproperty will harm our competitive position.**

 

Our success depends inpart on our ability to obtain and enforce patent protection for our productsand to preserve our trade secrets. We hold patents and pending patentapplications in the U.S. and abroad. Some of our patents involve specificclaims and thus do not provide broad coverage. Our patent applications or anyclaims of these patent applications may not be allowed, valid or enforceable.These patents or claims of these patents may not provide us with competitiveadvantages for our products. Our competitors may successfully challenge orcircumvent our issued patents and any patents issued under our pending patentapplications. Further, although we received orphan drug designation forThymoglobulin for treatment of Myelodysplastic Syndrome, also known aspre-leukemia, we do not have patents on Thymoglobulin or Lymphoglobuline.Therefore, we are primarily dependent upon our trade secrets for theseproducts. We have not conducted extensive patent and prior art searches with respectto our product candidates and technologies, and we do not know if third-partypatents or patent applications exist or have been filed in the U.S., Europe orother countries. This would have an adverse effect on our ability to market ourproducts. We do not know if claims in our patent applications would be allowed,be valid or enforceable, or that any of our products would not infringe onothers’ patents or proprietary rights in the U.S. or abroad. We also havepatent licenses from third parties whose patents and patent applications aresubject to the same risks as ours.

 

We also rely on tradesecrets and proprietary know-how that we seek to protect, in part, byconfidentiality agreements with our employees and consultants. Our employeesand/or consultants, however, may breach these agreements. We may not haveadequate remedies for any such breach. In addition, our trade secrets may beindependently developed or misappropriated by competitors, which could harm ourbusiness and operating results.

 

We have registered orapplied for trademark registration of the names of all of our marketed productsand plan to register the names of our products under development once we selecta name for the product candidate. We have registered or applied for trademarkregistration of the names of most of our products under development orcommercialized for research and development use. However, we may fail to obtainthese trademark registrations or our competitors may challenge them.

** **

**We face substantial competition.**

 

Each of the drugs wedevelop competes with existing and new drugs being created by pharmaceutical,biopharmaceutical, biotechnology companies and universities. Many of theseentities have significantly greater research and development capabilities, aswell as substantial marketing, manufacturing, financial and managerialresources and represent significant competition. The principal factors uponwhich our products compete are product utility, therapeutic benefits, ease ofuse, effectiveness, marketing, distribution and price. With respect to our 

 

25

 

products, we arecompeting against large companies that have significantly greater financialresources and established marketing and distribution channels for competingproducts. A list of our key products and product candidates, identifyingprincipal competitive products as well as the relevant competitors, is includedin the Business section of this Annual Report on Form 10-K under Competition.

 

The drug industry is intenselyprice competitive, and we expect we will face this and other forms ofcompetition. Developments by others may render our products or technologiesobsolete or noncompetitive, and we may not be able to keep pace withtechnological developments. Many of our competitors have developed or are inthe process of developing technologies that are, or in the future may be, thebasis for products that compete with our own. Some of these products may havean entirely different approach or means of accomplishing the desiredtherapeutic effect than our products and may be more effective, more convenientor less costly. In addition, many of these competitors have significantlygreater experience than we do in undertaking preclinical testing and humanclinical trials of pharmaceutical products, obtaining regulatory approval ofsuch products and manufacturing them. Accordingly, our competitors may succeedin commercializing products more rapidly than we can.

 

Other treatments forproblems associated with transplantation that our products seek to address arecurrently available and under development. To the extent these products addressthe problems associated with the diseases on which we have focused, they mayrepresent significant competition.

** **

**We depend on collaborativerelationships and any failure by our strategic partners to perform may harm ourcompetitive position.**

 

We have several strategicrelationships for the development and distribution of our products. Inparticular, we have entered into a multi-year co-promotion, distribution andresearch agreement for Gengraf in the U.S. with Abbott. We are dependent uponAbbott for certain regulatory, manufacturing, marketing, and sales activitiesunder the agreement and for defending the Novartis patent lawsuit. Abbott maynot perform satisfactorily and any such failure may impair our ability todeliver products on a timely basis, or otherwise impair our competitiveposition, which would harm our business. We have also entered into aCo-Development, Supply and License Agreement with Abgenix, Inc. with respect tothe development, marketing and sale of ABX-CBL. We are dependent upon Abgenixfor certain development and manufacturing activities under the agreement.Abgenix may not perform satisfactorily and any such failure may delayregulatory approval, product launch, impair our ability to deliver products ona timely basis, or otherwise impair our competitive position, which would harmour business. We may enter into additional collaborative relationships withcorporate and other partners to develop and commercialize certain of ourpotential products. We may not be able to negotiate acceptable collaborativearrangements in the future, or such collaborations may not be available to uson acceptable terms or, if established, be scientifically or commerciallysuccessful.

** **

**Our stock price has historically beenvolatile, and you could lose some or all of your investment.**

 

The market prices forsecurities of pharmaceutical and biotechnology companies, including ours, arehighly volatile. For example, during 2001, the price of our common stock rangedfrom $7.50 to $24.87 per share. The stock market has from time to timeexperienced significant price and volume fluctuations that may be unrelated tothe operating performance of particular companies. The market price for ourcommon stock may fluctuate as a result of factors such as: 

 

•    announcements of new therapeutic products byus or our competitors; 

•    announcements regarding collaborativeagreements; 

•    governmental regulations; 

•    our clinical trial results or clinical trialresults from our competitors; 

•    fluctuations in our revenues orprofitability; 

•    the licensing or acquisition of new productsor other companies; 

 

26

 

•    developments in patent or other proprietaryrights; 

**•   **publicconcern as to the safety of drugs developed by us or others; 

•    comments made by securities analysts; and 

•    general market conditions. 

 

**Adverse economic conditions couldaffect our customers.**

 

A recession or otherdownturn in the U.S. or other regional economy could adversely affect ourcustomers, including wholesalers, which could reduce our sales or make it moredifficult to collect payments from them on a timely basis. Terrorist attacks inNew York, Washington, D.C. and Pennsylvania in September of 2001 disruptedcommerce throughout the U.S. and Europe. The continued threat of terrorismwithin the U.S. and Europe and any ongoing military action and heightenedsecurity measures in response to this threat may cause significant disruptionto commerce throughout the world. To the extent that this disruption results indelays or cancellations of orders, a general decrease in spending onpharmaceutical products or our inability to effectively market and ship ourproducts, our business and operating results could be harmed. In particular,our Thymoglobulin and Lymphoglobuline products are perishable and requireexpress shipping, which may be curtailed or delayed because of securityrestrictions and border inspections. We are unable to predict whether thethreat of terrorism or the responses thereto will result in any long-termcommercial disruptions or if such activities or responses will have a long-termadverse effect on our business or operating results.

** **

**The uncertainty of pharmaceuticalpricing and reimbursement may decrease the commercial potential of ourproducts.**

 

Our ability tosuccessfully commercialize our products may depend in part on the extent towhich adequate reimbursement for the cost of such products and relatedtreatment will be available from third-party payers, such as government healthadministration authorities, private health coverage insurers and otherorganizations. Third-party payers increasingly are challenging or seeking tonegotiate the pricing of medical services and products. In some cases,third-party payers will pay or reimburse a user or supplier of a prescriptiondrug product only a portion of the purchase price of the product. In the caseof our prescription products, payment or reimbursement by third-party payers ofonly a portion of the cost of such products could make such products lessattractive, from a cost perspective, to users, suppliers and prescribingphysicians. Reimbursement, if available, may not be adequate. If governmententities or other third-party payers for our products do not provide adequatereimbursement levels, our results of operations would be harmed. The pricing,availability of distribution channels and reimbursement status of newlyapproved healthcare products is highly uncertain.

 

Healthcare providers maypurchase Thymoglobulin, and other products, for off-label use (that is, a usenot specifically approved by the FDA or similar authority for other countries).Actions by the FDA or other authority to prevent off-label use or a decision bythird-party payers not to pay for off-label use would adversely affect sales.As a result, adequate third-party coverage may not be available for us tomaintain price levels sufficient for realization of an appropriate return onour investment in product development. In certain foreign markets, pricing orprofitability of healthcare products is subject to government control. In theU.S., there have been, and we expect that there will continue to be, a numberof federal and state proposals to implement similar governmental control. Inaddition, we believe that an increasing emphasis on managed care in the U.S.has increased, and will continue to increase, the pressure on pharmaceuticalpricing. While we cannot predict the adoption of any such legislative orregulatory proposals or the effect such proposals or managed care efforts mayhave on our business, the announcement of such proposals or efforts could harmour ability to raise capital, and the adoption of such proposals or effortscould harm our operating results. Further, to the extent that such proposals orefforts harm other pharmaceutical companies that are our prospective corporatepartners, this may reduce our ability to establish corporate collaborations. Wedo not know whether consumers, third-party payers and others will consider ourproducts and product candidates, if approved, cost effective or thatreimbursement to the consumer will be available or will be sufficient to allowus to sell our products on a competitive basis.

 

27

 

**Our use of hazardous materials couldresult in unexpected costs or liabilities.**

 

In connection with ourmanufacturing, research and development activities and operations, we aresubject to foreign, federal, state and local laws, rules, regulations andpolicies governing the use, generation, manufacture, storage, air emission,effluent discharge, handling and disposal of certain materials, biologicalspecimens and wastes. As a result, we may incur significant costs to complywith environmental and health and safety regulations. Our manufacturing,research and development involves the controlled use of hazardous materials,including but not limited to certain hazardous chemicals and infectiousbiological specimens. Although we believe that our safety procedures forhandling and disposing of such materials comply with the standards prescribedby foreign, state and federal regulations, we cannot eliminate the risk ofaccidental contamination or injury from these materials. In the event of suchan accident, we could be held liable for any damages that result and any suchliability could exceed our ability to pay.

** **

**Anti-takeover provisions could limitour share price and delay or deter a change in management.**

 

Certain provisions of ourCertificate of Incorporation and Bylaws contain provisions that couldsignificantly impede the ability of the holders of our common stock to changemanagement or delay or make it more difficult or even prevent a third partyfrom acquiring us without the approval of our incumbent Board of Directors.These provisions could limit or adversely affect the price that investors mightbe willing to pay in the future for shares of our common stock. Theseprovisions, among other things: 

 

•    limit the right of stockholders to callspecial meetings of stockholders; 

 

•             limit the right ofstockholders to present proposals, nominate directors for election or otherwiseraise matters at annual meetings of stockholders without giving advance notice;

 

•    eliminate the ability of stockholders totake action by written consent; 

 

•             prohibit cumulativevoting in any election of directors, which may make it more difficult for athird party to gain control of our Board of Directors; and 

 

•             authorize our Boardof Directors to issue up to five million shares of preferred stock in one ormore series and to determine the price, rights, preferences, privileges, andrestrictions of those shares without any further vote or action on the part ofstockholders. 

 

***Inaddition, we have adopted a stockholder rights plan. Under this plan we mayissue a dividend to stockholders who hold rights to acquire our shares or,under certain circumstances, the shares of an acquiring corporation, at lessthan half their fair market value. The plan could have the effect of delaying,deferring or preventing a change in control or management. The rights plan, iftriggered, could cause substantial dilution to a person or group that attemptsto acquire us on terms not approved by the Board of Directors.***

 

Further, we are subjectto the anti-takeover provisions of Section 203 of the Delaware GeneralCorporation Law, which will prohibit us from engaging in a “businesscombination” with an “interested stockholder” for a period of three years afterthe date of the transaction in which the person became an interestedstockholder, even if such combination is favored by a majority of stockholders,unless the business combination is approved in a prescribed manner. Theapplication of Section 203 also could have the effect of delaying or preventinga change of control or management.

** **

**ITEM2.****                                                     PROPERTIES**

 

Our global headquartersare located in Fremont, California. Floor space in Fremont is approximately44,000 square feet, including offices, laboratory space, storage area andspecialized areas for some pilot production and preclinical testing. The leasefor the Fremont building space will expire in 2005 and may be renewed forsubsequent years.

 

Our European headquartersare located in Lyon, France. We lease approximately 38,300 square feet fromAventis in Marcy L’Etoile (just outside of Lyon), France for administration andmanufacturing.  The leases fornon-manufacturing operations expire at various dates up to 2006 and may berenewed for subsequent years. The manufacturing lease expires in 2013 but maybe terminated at our option upon giving one year’s notice. In addition,

 

28

 

we lease 12,400 squarefeet in Lyon, France for sales, marketing, finance, clinical, andadministration, and lease administrative offices in various other countries.

 

We believe that ourcurrent facilities are suitable and adequate to meet our needs for theforeseeable future and anticipate that we will be able to expand our facilitiesto nearby locations as the need develops.

** **

**ITEM3.****                                                     LEGALPROCEEDINGS**

*** ***

***Novartis Patent Litigation With Respect to Gengraf***

 

Novartis sued Abbottclaiming that Gengraf® infringes its patents. Novartis’s complaintincludes a plea for injunctive relief to prevent the sale of Gengraf in theU.S., but to date Novartis has not moved for a preliminary injunction. Thetrial is scheduled for July 23, 2002. Abbott informed us that it does notbelieve it infringes the Novartis patents. We have not been named a defendantin this lawsuit, and we have only limited access to information about it. Underour agreement with Abbott, Abbott is obligated to indemnify us against suchsuits, but their indemnity may not cover lost sales, if any. The course oflitigation is inherently uncertain, however. Novartis may choose to name us inthis suit, Abbott may not prevail, or Abbott may choose to settle on termsadverse to our interests. Should we be named in this suit, we may incurexpenses prior to reimbursement (if any) by Abbott pursuant to its indemnityobligation. Should Novartis succeed in obtaining a preliminary or permanentinjunction, Gengraf may be temporarily or permanently removed from the market,or we and Abbott may be required to negotiate a license on unfavorable terms.

*** ***

***Novartis Regulatory Litigation***

* *

*U.S. Regulatory Litigation.* NovartisU.S. sued the FDA on February 11, 1999 in the United States District Court forthe District of Columbia (case number 1: 99CV-00323) alleging that the FDA didnot follow its own regulations in approving SangCya Oral Solution in October1998. The lawsuit alleges that because Neoral Oral Solution and SangCya OralSolution are based on different formulation technologies, they should beclassified as different dosage forms. Novartis initially asked the Court to (i)allow Novartis to keep its microemulsion labeling; (ii) declaremicroemulsion to be a separate dosage form; and (iii) rescind the AB ratingthat was given to SangCya Oral Solution. We intervened in this lawsuit. The Courtgranted our motion to dismiss the counts that relate specifically to theapproval of SangCya Oral Solution, but Novartis may appeal this decision. Weremain a party in the case. Novartis has filed motions related to the remainingissues in the case, and the Court has not yet ruled on Novartis’s motions.Because we permanently withdrew SangCya Oral Solution from the U.S. market inJuly 2000, we do not believe that this lawsuit will have any material impact onSangCya revenues but if the court declares microemulsion to be a separatedosage form, this ruling would require rescission of the AB rating for Gengraf,which would have a material impact on Gengraf revenues.

* *

*U.K. Regulatory Litigation—SangCyaOral Solution.* On October 18, 1999, Novartis U.K. was grantedleave to seek judicial review of the decision by the Medicines Control Agency,or MCA, to approve SangCya Oral Solution (Case No. HC-1969/99). On March 30,2000, the High Court in London dismissed Novartis’s application for judicialreview and ruled that the MCA acted properly in granting the SangCya OralSolution marketing authorization. Novartis appealed the High Court’s decision,and the hearing was held before the Court of Appeal on November 13 and 14,2000. The Court of Appeal has stayed ruling on this matter pending the answerof certain questions of law to be submitted to the European Court of Justice,or ECJ. No date has been set for the ECJ hearing, but it is likely to bescheduled sometime in early 2002, with a ruling approximately six monthsthereafter. Following the ECJ ruling, the parties would go back to the Court ofAppeal, which will then apply the ECJ ruling on the law to the facts of thiscase.

* *

*U.K. RegulatoryLitigation—Cyclosporine Capsules.* In November 1999,Novartis filed a request with the High Court in London for judicial review ofthe refusal by MCA to state that it would not reference Neoral data inapproving any generic copies of Novartis’s cyclosporine capsule. An agreementwas reached between the parties in which Novartis agreed to stay the judicialreview until the earlier of (i) the decision on the judicial review of SangCyaOral Solution or (ii) MCA’s approval of SangStat’s marketing authorization forits cyclosporine capsule product; in return, we agreed that we would not launchor commence mutual recognition procedures in relation to the cyclosporinecapsule marketing authorization (including a request to MCA to prepare anassessment report) for a

 

29

 

period of 28 dayscommencing on the day on which we notify Novartis’s solicitors of capsuleapproval. The parties have agreed to continue the stay until the appeal of theHigh Court decision with respect to the judicial review of SangCya OralSolution. The stay of this application for judicial review will remain in placepending the ECJ ruling on the questions of law and resulting Court of Appealjudgment.

 

Novartis has alsoindicated that it will seek an injunction to prevent our cyclosporine capsulefrom being sold in the United Kingdom until final resolution of the judicialreview relating to our cyclosporine oral solution. Because the High Court ruledin favor of the MCA with respect to the SangCya Oral Solution marketingauthorization and the Court of Appeal has referred questions of law to the ECJ,we believe that it is unlikely that a court would grant Novartis a preliminaryinjunction with respect to our cyclosporine capsule marketing authorization. Ifthe Court of Appeals reverses the High Court’s ruling following the ECJ’sdecisions on questions of law, either the MCA could still approve ourcyclosporine capsule as supra-bioavailable to Sandimmune without referencingNeoral data or the MCA could decide not to approve our cyclosporine capsulemarketing authorization until the expiration of the ten year data exclusivityperiod for Neoral capsules (May 2004).

* *

*Italian Regulatory/Trade SecretLitigation.* On May 5, 2000, Novartis Farma S.p.A.(“Novartis Italy”) served IMTIX-SangStat S.r.l., an Italian SangStatsubsidiary, and IMTIX-SangStat Ltd. with a summons to the Milan Tribunal.Novartis Italy alleges that by requesting mutual recognition from the ItalianHealth Authorities of the SangCya Oral Solution dossier approved by the MCA, weimplicitly requested that the Italian Health Authorities review the Neoraldossier. Novartis alleges that this request is an act of unfair competition inthat (i) the Neoral data has ten year exclusivity and (ii) the data issecret and by requesting mutual recognition, we are responsible for the HealthAuthorities act of unfair competition following use of the Neoral dossier inreviewing the SangCya Oral Solution dossier. While the summons acknowledgesthat the U.K. High Court did not invalidate the SangCya Oral Solution marketingauthorization, it does not acknowledge that the High Court ruled that the MCAcould review the Neoral data. To the best of our knowledge, Novartis Italy hasnot filed suit against the Italian Health Authorities. The initial appearanceof the parties before the Milan Tribunal was scheduled for January 2001. Wefiled our response to the complaint at that time, and the hearing has beenpostponed until June 2002.

 

We do not yet havemarketing approval for SangCya Oral Solution in Italy. Novartis Italy isseeking damages and an injunction to prevent the sale by SangStat of SangCyaOral Solution, or any other product for which we may obtain approval based upona reference to the Neoral dossier, which we believe is intended to block ourcyclosporine capsule from sale in Italy. We believe that resolution of thismatter will depend on the resolution of the U.K. regulatory litigation, sincethe MCA’s actions are the basis for the Italian lawsuit.

*** ***

***Summary***

 

Although we areoptimistic that these disputes will ultimately be resolved in our favor, thecourse of litigation is inherently uncertain. With respect to Novartis’slawsuit against Abbott, Novartis is seeking to remove Gengraf from the market.If Novartis succeeds, our revenues would be reduced. With respect to theEuropean regulatory and trade secret lawsuits, Novartis’s requested relief, ifgranted, could have a negative economic impact on us depending on how the MCAwould proceed with our Marketing Authorization Application (MAA) for ourcapsule product. The MCA could approve our MAA for cyclosporine capsule assupra-bioavailable to Sandimmune without referencing Neoral data or the MCAcould decide not to approve our MAA for our cyclosporine capsule until theexpiration of the ten year data exclusivity period for Neoral capsules (May2004). If we cannot obtain approval of our cyclosporine capsule in Europe until2004, this could have an adverse impact on our future revenues and results ofoperations. With respect to the FDA lawsuit, Novartis’s requested relief wouldmean that Gengraf and all other generic cyclosporine products that are notmicroemulsions would lose their AB rating. If Gengraf were no longer AB-ratedto Neoral capsules, pharmacists could not automatically substitute Gengraf forNeoral capsules and this would harm revenues. The litigation, if not resolvedfavorably to us, could have a material adverse effect on our business,financial condition, cash flows and operating results.

*** ***

***IFFA CREDO and Elevage Scientifique des Dombes Breach ofContract Suit***

 

In August 2000, twoaffiliated suppliers, IFFA CREDO and Elevage Scientifique des Dombes, sued ourFrench subsidiary, IMTIX-SangStat SAS, for breach of contract. On May 2, 2001we were notified that the Commercial Court of Lyon ruled against IMTIX-SangStatin the breach of contract suit and the court awarded the suppliers 26.5

 

30

 

million French Francs(approximately $3.6 million) for lost profits and reimbursement of capitalexpenditures. IMTIX-SangStat recorded a charge of $3,250,000 to otherexpense—net for the year ended December 31, 2001, which, combined with reservesrecorded in fiscal 2000, fully provided for the court award of $3,600,000. On March 22, 2002, the appeals court upheld thelower court decision and assessed interest against us of approximately $204,000which has been recorded as a charge to other expense—net for the yearended December 31, 2001.

 

Our rabbit serumrequirements are currently being met by our other suppliers.

 

**ITEM 4.****                                                     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None

 

**PART II**

** **

**ITEM 5.****                                                     MARKETFOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS**

 

Since1993, our common stock has traded on the Nasdaq National Market. We currentlytrade under the symbol “SANG.” The following table sets forth the high and lowreported sale prices for our common stock for the periods indicated as reportedon the Nasdaq National Market.

 
|                                     |   | **High** |   | **Low** |   |
|------------------------------------------|--------|----------|--------|---------|--------|
| **Fiscal  year ended December 31, 2001** |   |     |   |    |   |
| First Quarter                            |   | $        | 13.188 |    | $      | 7.500 |   |
| Second Quarter                           |   | 17.000   |   | 8.875   |   |
| Third Quarter                            |   | 19.060   |   | 12.350  |   |
| Fourth Quarter                           |   | 24.870   |   | 15.880  |   |
|                                     |   |     |   |    |   |
| **Fiscal  year ended December 31, 2000** |   |     |   |    |   |
| First Quarter                            |   | $        | 48.000 |    | $      | 25.875 |   |
| Second Quarter                           |   | 33.813   |   | 21.813  |   |
| Third Quarter                            |   | 29.875   |   | 12.813  |   |
| Fourth Quarter                           |   | 14.500   |   | 6.500   |   |

 

On March 18, 2002, thelast reported sale price of our common stock on the Nasdaq National Market was$24.98 per share. As of March 18, 2002, we had approximately 80 stockholders ofrecord.

** **

**DIVIDENDPOLICY**

 

We have never declared orpaid cash dividends on our common stock. We do not intend to declare or pay anycash dividends on our common stock in the foreseeable future. We plan to retainany earnings for use in the operation of our business and to fund futuregrowth.

 

#### **SALEOF UNREGISTERED SECURITIES**

 

Since January 1,2000 until December 31, 2001, we sold unregistered securities in relianceon the exemption from registration found in Regulation D and/or Section 4(2) ofthe Securities Act of 1933, as amended. The recipient of securities in eachtransaction was an accredited investor that represented its intentions toacquire the securities for investment only and not with a view to or for salein connection with any distribution thereof and appropriate legends wereaffixed to share certificates and other instruments issued in suchtransactions.

 

31

 

1.               In February 2000,BioPharma Equities Holding NV purchased 451,128 shares of our common stockfor approximately $15 million.

 

2.               In December 2000 andJanuary 2001, Narragansett I. LP, Narragansett Offshore, Ltd., Royal Bank ofCanada, SDS Merchant Fund, LP and S.A.C. Capital Associates, LLC purchased1,315,800 shares of our common stock for approximately $12.5 million.

 

3.               In June 2001,S.A.C. Capital Associates, LLC, Royal Bank of Canada, Narragansett I. LP,Narragansett Offshore, Ltd., and SociétéGénérale purchased 1,363,635 shares of our common stock forapproximately $15 million.

 

**ITEM 6.****                                                     SELECTEDCONSOLIDATED FINANCIAL DATA**

 

The selected consolidatedfinancial data set forth below with respect to our statements of operations foreach of the three years in the period ended December 31, 2001, and with respectto the balance sheets as of December 31, 2001 and 2000, are derived from ourConsolidated Financial Statements, which are included elsewhere in this AnnualReport on Form 10-K. The statement of operations data for the years endedDecember 31, 1998 and 1997 and the balance sheet data as of December 31, 1999,1998 and 1997, are derived from audited consolidated financial statements notincluded herein. The data set forth below should be read in conjunction with“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and our Consolidated Financial Statements and the Notes theretoincluded elsewhere in this Annual Report on Form 10-K. The table below has beenrestated to account for The Transplant Pharmacy as a discontinuedoperation.  See Note 16 of the Notes toConsolidated Financial Statements.

 

32

 
|                                                 |   | **Year Ended  December 31,**               |   |
|------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                 |   | **2001**                                   |   | **2000 (2)** |   | **1999** |   | **1998** |   | **1997** |   |
|                                                 |   | **(in  thousands, except per share data)** |   |
| **Consolidated  Statements of Operations Data**      |   |                                       |   |   |   |   |   |   |   |   |   |
| Revenues:                                            |   |                                       |   |   |   |   |   |   |   |   |   |
| Net  product sales                                   |   | $                                          | 91,302 |   | $ | 60,447 |   | $ | 42,243 |   | $ | 10,202 |   | $ | 2,456 |   |
| Revenue from  collaborative agreements               |   | 3,207                                      |   | 2,698 |   | 2,060 |   | 1,092 |   | 750 |   |
| Total revenues                                       |   | 94,509                                     |   | 63,145 |   | 44,303 |   | 11,294 |   | 3,206 |   |
|                                                 |   |                                       |   |   |   |   |   |   |   |   |   |
| Costs  and operating expenses:                       |   |                                       |   |   |   |   |   |   |   |   |   |
| Cost of product sales                                |   | 42,816                                     |   | 39,246 |   | 18,989 |   | 5,110 |   | 2,646 |   |
| Research and  development                            |   | 17,863                                     |   | 20,788 |   | 14,470 |   | 17,688 |   | 16,210 |   |
| Selling, general and  administrative                 |   | 33,782                                     |   | 41,766 |   | 39,170 |   | 23,707 |   | 9,442 |   |
| Acquired in-process  research and development        |   | —                                     |   | — |   | — |   | 3,218 |   | — |   |
| Amortization of  intangible assets                   |   | 1,922                                      |   | 1,392 |   | 1,398 |   | 351 |   | — |   |
| Total costs and  operating expenses                  |   | 96,383                                     |   | 103,192 |   | 74,027 |   | 50,074 |   | 28,298 |   |
| Loss from operations of  continuing operations       |   | (1,874                                     | )      | (40,047 | ) | (29,724 | ) | (38,780 | ) | (25,092 | ) |
|                                                 |   |                                       |   |   |   |   |   |   |   |   |   |
| Other income (expense)  - net                        |   | (6,368                                     | )      | (1,602 | ) | (913 | ) | 3,053 |   | 5,506 |   |
| Loss from continuing  operations before income taxes |   | (8,242                                     | )      | (41,649 | ) | (30,637 | ) | (35,727 | ) | (19,586 | ) |
| Income tax benefit  (provision)                      |   | 7                                          |   | (368 | ) | (345 | ) | (257 | ) | — |   |
| Net loss from  continuing operations                 |   | (8,235                                     | )      | (42,017 | ) | (30,982 | ) | (35,984 | ) | (19,586 | ) |
| Net loss from  operations of discontinued operation  |   | (763                                       | )      | (2,342 | ) | (2,025 | ) | (2,480 | ) | (1,394 | ) |
| Net loss from disposal  of discontinued operation    |   | (381                                       | )      | — |   | — |   | — |   | — |   |
| Net loss                                             |   | $                                          | (9,379 | ) | $ | (44,359 | ) | $ | (33,007 | ) | $ | (38,464 | ) | $ | (20,980 | ) |
| Net loss per share -  basic and diluted (1)          |   |                                       |   |   |   |   |   |   |   |   |   |
| Continuing operations                                |   | $                                          | (0.40  | ) | $ | (2.35 | ) | $ | (1.83 | ) | $ | (2.24 | ) | $ | (1.27 | ) |
| Discontinued operation                               |   | (0.06                                      | )      | (0.13 | ) | (0.12 | ) | (0.15 | ) | (0.09 | ) |
|                                                 |   | $                                          | (0.46  | ) | $ | (2.48 | ) | $ | (1.95 | ) | $ | (2.39 | ) | $ | (1.36 | ) |
|                                                 |   |                                       |   |   |   |   |   |   |   |   |   |
| Shares used in per  share computations (1)           |   | 20,216                                     |   | 17,910 |   | 16,888 |   | 16,080 |   | 15,376 |   |

 
|                                               |   | **December  31,**  | ** ** |
|----------------------------------------------------|--------|--------------------|------------|
|                                               |   | **2001**           |       | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                               |   | **(in thousands)** | ** ** |
| **Consolidated  Balance Sheet Data:**              |   |               |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents  and short-term investments |   | $                  | 32,822     |   | $ | 20,607 |   | $ | 26,519 |   | $ | 29,660 |   | $ | 92,036 |   |
| Working capital                                    |   | 33,266             |       | 39,774 |   | 63,991 |   | 46,828 |   | 93,812 |   |
| Total assets                                       |   | 114,559            |       | 114,316 |   | 117,297 |   | 107,327 |   | 104,354 |   |
| Long-term obligations,  excluding current portion  |   | 30,539             |       | 35,214 |   | 40,192 |   | 16,402 |   | 1,557 |   |
| Deferred revenue                                   |   | 6,317              |       | 9,475 |   | 9,304 |   | — |   | — |   |
| Accumulated deficit                                |   | (187,015           | )          | (177,636 | ) | (133,277 | ) | (100,270 | ) | (61,806 | ) |
| Total stockholders’  equity                   |   | 32,359             |       | 21,924 |   | 41,009 |   | 59,587 |   | 97,470 |   |
|                                                    |        |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

__________

 

(1) For adescription of the computation of net loss per common share see Note 1 of Notesto Consolidated Financial Statements.

 

(2)Includes product recall charges of $872,000, $11,774,000, $50,000 and $379,000for net product sales returns, cost of product sales, research and developmentexpenses and selling, general and administrative expenses respectively.

** **

**ITEM 7.****                                                     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

* *

*The following discussion andanalysis should be read in conjunction with “Selected Consolidated FinancialData” and our Consolidated Financial Statements and Notes thereto includedelsewhere in this Annual Report on Form 10-K. Except for the historicalinformation contained herein, the discussion contains forward-lookingstatements that involve risks and uncertainties, such as statements of ourplans, objectives, expectations ,intentions and future results. The cautionarystatements made in this Annual Report on Form 10-K should be read as beingapplicable t*

* *

33

 

*all related forward-lookingstatements wherever they appear. Our actual results could differ materiallyfrom those discussed here. Factors that could cause or contribute to suchdifferences include those discussed in “Risk Factors,” as well as thosediscussed elsewhere herein. In particular, we have included forward-lookingstatements regarding the following: (i) our anticipated financial results for2002; (ii) the timeline and potential results of preclinical development andclinical trials; (iii) potential outcomes of our and Abbott’s litigation withNovartis; (iv) our plans for marketing a cyclosporine capsule in Europe; (v)anticipated expenditures and timing relating to FDA and foreign approval of ourproducts and facilities; and (vi) anticipated potential strategiccollaborations with others. **These forward-looking statements are based on our currentexpectations, and we disclaim any obligation to update theseforward-looking statements for subsequent events or to explain why actualresults differ.*

 

SangStat is a globalbiotechnology company expanding on its transplantation foundation to discover,develop and market high value therapeutic products in immunology,hematology/oncology and auto-immune disease. Since 1988, we have been dedicatedto improving the outcome of organ and bone marrow transplantation through thedevelopment and marketing of products to address all phases of transplantationin the worldwide market. We are headquartered in Fremont, California. Wemaintain a strong European and U.S.presence, including direct sales andmarketing forces in all major European markets and the U.S. and distributors throughoutthe rest of the world.

 

Historically, ourbusiness was comprised of two segments: pharmaceutical products andtransplantation services. In October 2000, we implemented a new strategyfocused on growing a core business in high value therapeutics that builds onour expertise in transplantation but extends into new therapeutic areas. As aresult of this new strategy, we decided to dedicate significant resources toour pharmaceutical products segment, which consists of four marketed productsand three principal product candidates. On April 20, 2001, we sold ourtransplantation services segment, The Transplant Pharmacy, to Chronimed, forcash proceeds of $1.8 million. Consequently, the historical consolidatedstatements of operations and cash flows have been restated for all periodspresented to account for the transplantation services segment business as adiscontinued operation. Unless otherwise indicated, the following discussionrelates to our continuing operations and excludes our discontinued operation.

 

In February 2002, wecompleted a public offering of 5,175,000 shares of our common stock forconsideration net of underwriting discounts of $84,145,500.  We anticipate that the net proceeds fromthis offering will be used for repayment of existing indebtedness to AbbottLaboratories and general corporate purposes, including in-licensing andpartnering opportunities.

# *** ***

# ***CriticalAccounting Policies***

 

We have identified thepolicies below as critical to our business operations and the understanding ofour results of operations.

*** ***

***Revenue Recognition***

 

Revenue from productsales, net of estimated sales allowances and rebates, is recognized uponreceipt by the customer, when a purchase order has been received, the salesprice is fixed or determinable and collection of the resulting receivable isreasonably assured.** **Werecord estimated reductions to revenue for customer programs, includingcontract pricing agreements, promotions, other volume based incentives andestimated future returns, in the same period as the related revenues arerecorded. The estimates for returns are adjusted periodically based uponhistorical rates of return, and other related factors. The estimates andreserves for rebates and price protection are based on historical rates. Inaddition, our revenue recognition policy determines the timing of certainexpenses, such as commissions and royalties that are recorded in the sameperiod as the related revenue.  While webelieve we can make reliable estimates for these revenue adjustments, it is possiblethat actual amounts realized could vary from our estimates and that the amountsof such changes could affect our operating results.

 

Revenue fromcollaborative agreements is recognized in accordance with the related contractterms. Upfront or milestone payments received under such agreements aregenerally recognized as revenues ratably over the life of the agreement wheresignificant obligations for future services or the Company’s participationexist or as milestones are met and no significant obligation for futureservices exists.

** **

34

 

***Inventories***

 

Inventories are stated atthe lower of cost (first-in, first-out) or market. We classify inventory notexpected to be utilized within the next twelve months as long term assets. Weevaluate our inventory levels based on our estimates of marketing approval andforecasts of future sales, among other things. If these estimates or forecasts change at some time in the future we maybe required to record additional charges for the write-down of excess orobsolete inventories. At December 31, 2001 we classified approximately $15million of bulk cyclosporine raw materials inventory, net of reserves, as otherlong term assets.

* *

***Foreign currencygains and losses***

 

Many of our foreign salesare invoiced in local currencies, creating receivables denominated incurrencies other than the U.S. dollar, primarily in the Euro and the Japaneseyen but also in the U.K. pound. The risk due to foreign currency fluctuationsassociated with these receivables is partially reduced by local payablesdenominated in the same currencies, and presently we do not consider itnecessary to hedge these exposures. However, we may revise our hedging policyfrom time to time as our foreign operations change.  Gains and losses resulting from foreign currency transactions areincluded on other income (expense) – net in our statement of operations andwere not significant for any period presented.

* *

***Income taxes***

 

SangStat has operationsin several countries other than the United States, including France where wemanufacture Thymoglobulin.  This productis then sold to other SangStat entities in other countries, including theUnited States.  We believe that werecord these sales at an appropriate transfer price; however it is possiblethat the tax authorities could challenge these transfer prices and assessadditional taxes on prior period transactions. Any such assessment could require us to record an additional taxprovision in our statement of operations.

 

We have substantialdeferred tax assets that relate to prior period losses, primarily in the UnitedStates.  We evaluate these deferred taxassets in each tax jurisdiction by estimating the likelihood of the Companygenerating future profits to realize these assets.  In most cases, we have assumed that we will not be able togenerate sufficient future taxable income to realize these assets and havecreated valuation reserves to reduce the net asset values to zero.  If these estimates and assumptions change inthe future, we may be required to record additional valuation allowancesagainst the net deferred tax assets resulting in additional income tax expensein our consolidated statement of operations. Conversely, we may be able toreverse the valuation allowances in future periods should the Company generatetaxable income.  At December 31, 2001,we had approximately $75 million of valuation allowances related to our netdeferred tax assets.

** **

**Results of Operations**

*** ***

***Revenues.*** Total revenues for the yearended December 31, 2001 were $94,509,000, an increase of $31,364,000 or 50%over total revenues of $63,145,000 for the year ended December 31, 2000. Theincrease was due primarily to increased sales of  Gengraf and Thymoglobulin in the US, which accounted for$18,167,000 and $13,551,000 of the increase, respectively. This increase waspartially offset by lower sales of other products. It should be noted that netproduct sales in fiscal 2001 included a full year of sales of Gengraf, whichwas launched in the US in May 2000, compared with only eight months of sales infiscal 2000.

 

On June 29, 2000 we, indiscussions with the FDA that began on June 24, 2000, concluded that a recallof SangCya Oral Solution from the US market would be required. Followingfurther discussions with the FDA as to the type of recall and mechanism forconducting it, we announced this decision on July 10, 2000. As a result, netsales for the year ended December 31, 2000 were reduced by $872,000 for returnsof SangCya Oral Solution from customers following the product recall.

 

Total revenues for theyear ended December 31, 2000 were $63,145,000, an increase of $18,842,000 or43% over total revenues of $44,303,000 for the year ended December 31, 1999.The increase was due primarily to sales of Gengraf, which was launched in theUS in May 2000, and increased sales of Thymoglobulin in the US, which accountedfor $11,423,000 and $10,563,000 of the increase, respectively. This increasewas partially offset by lower sales outside the US.  In particular, sales in Europe for the year ended December 31,2000 were adversely affected

 

35

 

by weakening currencies.Had average exchange rates remained the same as in fiscal 1999, total revenuesin fiscal 2000 would have been higher by approximately $3,100,000.

 

Included in total revenues was revenue fromcollaborative agreements of $3,207,000 in 2001, an increase of $509,000 or 19%over revenue from collaborative agreements of $2,698,000 in 2000. Revenue from suchagreements in fiscal 2000 represented an increase of $638,000 or 31% overrevenue of $2,060,000 for the year ended December 31, 1999. In 2001, 2000 and1999, we recognized revenue of $3,157,000, $2,698,000 and $1,510,000 frommilestone payments from Abbott Laboratories under the co-promotion agreementfor cyclosporine. The unamortized portion of these milestone payments is shownas deferred revenue on our consolidated balance sheet and will be recognized asrevenue on a straight-line basis over the remaining term of the co-promotionagreement. We also recognized revenue from milestone payments of $550,000 in1999 from Amgen under the collaborative distribution agreement for ourcyclosporine products in certain territories outside the US.

*** ***

***Cost of sales.***Cost of sales were$42,816,000 for the year ended December 31, 2001, an increase of $3,570,000 or9% over cost of sales of $39,246,000 for the year ended December 31, 2000. Theincrease in cost of sales for the year ended December 31, 2001 was due to the overallincrease in sales and the higher cost of Gengraf compared to our otherproducts.

 

Cost of sales of $39,246,000 for the year endedDecember 31, 2000 represented an increase of $20,257,000 or 107% over cost ofsales of $18,989,000 for the year ended December 31, 1999. The increase for theyear ended December 31, 2000 was primarily due to the establishment ofinventory reserves resulting from the US recall of SangCya Oral Solution. Theseproduct recall charges, which totaled $11,774,000, included a 100 percentreserve for all SangCya Oral Solution and CycloTech finished goods andcomponents, as well as a partial reserve against our bulk cyclosporineinventories that we do not expect to use prior to lot expiration.  The remainder of the increase in cost ofsales for the year ended December 31, 2000 was due to the overall increase insales and the higher cost of Gengraf compared to our other products.

** **

***Research and development.***Research anddevelopment expenses were $17,863,000 for the year ended December 31, 2001, adecrease of $2,925,000 or 14% over research and development expenses of$20,788,000 for the year ended December 31, 2000. The decrease in spending onresearch and development mainly relates to payments to Abgenix for a licensefee payment and SangStat’s negotiated share of prior development costs incurredby Abgenix for ABX-CBL totaling $2,900,000 which did not recur in 2001, and adecrease in spending on SangCya Oral Solution and related products. Thisdecrease in spending was partially offset by an increase in spending on RDP58and the ongoing development of ABX-CBL for the year ended December 31, 2001.

 

Research and development expenses of $20,788,000for the year ended December 31, 2000 represented an increase of $6,318,000 or44% over research and development expenses of $14,470,000 for the year endedDecember 31, 1999. The increase in spending on research and development for theyear ended December 31, 2000 mainly relates to charges for a license fee andreimbursement of development costs for ABX-CBL totaling $3,400,000, clinicaltrials to pursue label expansion of Thymoglobulin and continued pre-clinicalwork on RDP58. The expenses for the year ended December 31, 2000 also included$50,000 to cover the cost of terminating SangCya Oral Solution clinical trialsfollowing the previously discussed product recall.

 

While we allocate scientists and track resourceswhen required pursuant to the terms of a partnering or similar arrangement,members of our research team typically work on a number of productsconcurrently, and our equipment and intellectual property resources often aredeployed over a range of products with a view to maximizing the benefit of ourinvestment.  Accordingly, the Company has not and does not intend toseparately track the costs for each of its research projects so as to enableaccurate disclosure of the actual costs incurred to date on a product byproduct basis.  For the year ended December 31, 2001, however, we estimatethat the majority of our research and development expense was associated withour three leading product candidates, RDP58, ABX-CBL and cyclosporinecapsules.  The balance of our expense was associated primarily withongoing development of our marketed products, primarily clinical trials forThymoglobulin, and early-stage product candidates.

 

We have completed Phase I clinical trials for RDP58and subsequently started a Phase IIa trial in October 2001.  We currently expect to announce results ofthis trial in the second half of 2002. We are also conducting a Phase II / III study for ABX-CBL, which weexpect to complete by the end of 2002. We are conducting bioequivalence and

 

36

 

stability studies for a cyclosporine capsule. Ifthe results from these studies are favorable, we expect to file for marketingapproval for this product in a major European country, which we currentlyestimate will occur in late 2002.  Wealso have under way two clinical trials involving Thymoglobulin. One trialcompares Thymoglobulin with Simulect. The study was closed early in March 2002,with a total enrollment of 279 participants out of a planned 340, after aninterim analysis revealed significantly fewer acute rejections of implantedkidneys in patients treated with Thymoglobulin versus Simulect. The secondtrial investigates the use of Thymoglobulin in myelodysplastic syndrome; we aimto complete enrollment of patients into this study by the end of  2002. The primary end-point is 180 daysafter enrollment. Of course our timeline is an estimate that is subject tochange from time to time. Due to the inherent risks and uncertaintiesassociated with the development of our proposed drugs, we are unable to furtherspecify with meaningful certainty the estimated completion date or estimated costof completion of our proposed products, or whether any of our products willeventually be successfully developed.  For a discussion of the risks anduncertainties surrounding the development and cost of these products andeffectively precluding such disclosure, see “Risk Factors -  If we do notdevelop and market new products, our business will be harmed.”

*** ***

***Selling, general and administrative*.**Selling,general and administrative expenses for the year ended December 31, 2001 were$33,782,000, a decrease of $7,984,000 or 19% over selling, general andadministrative expenses of $41,766,000 for the year ended December 31, 2000.The decrease in expenses for the year ended December 31, 2001 reflects theresults of SangStat’s cost control efforts through the continuation of itscost-containment program, including  areduction in launch and marketing expenses for Gengraf, a reduction inSangStat’s share of Phase IV Gengraf study expenses, and a reduction in legalexpenses associated with the Novartis lawsuits.

 

Selling, general andadministrative expenses for the year ended December 31, 2000 were $41,766,000,an increase of $2,596,000 or 7% over selling, general and administrativeexpenses of $39,170,000 for the year ended December 31, 1999. The increase wasdue primarily to expenses of $2,758,000 associated with the launch ofGengraf.  Expenses for the year endedDecember 31, 2000 also included $379,000 to cover the cost of managing theproduct recall of SangCya Oral Solution and terminating ongoing marketing programs.  These increases in expenses were partiallyoffset by an overall reduction in spending resulting from the cost containmentmeasures announced in October 2000.

*** ***

***Amortization of intangible assets.***Amortizationexpense for the IMTIX acquisition-related intangible assets was $1,922,000,$1,392,000 and $1,398,000 for the years ended December 31, 2001, 2000 and 1999,respectively. Amortization expense in 2001 includes the write-off of $482,000representing the net book value of the intangible asset related to distributionrights for Multitest and Celiptium, two minor products formerly sold in Europe.Sales of these two products were discontinued in the fourth quarter of 2001.

*** ***

***Interest income.***Interest income forthe year ended December 31, 2001 was $1,203,000 compared to $2,016,000 for theyear ended December 31, 2000, and $1,865,000 for the year ended December 31,1999. For both fiscal 2001 and 2000, the change in interest income versus theprior year primarily reflected the change in the average cash balancesavailable for investment.

*** ***

***Interest expense.***Interest expense forthe year ended December 31, 2001 was $4,830,000 compared to $4,368,000 for theyear ended December 31, 2000 and $3,034,000 for the year ended December 31,1999. The increase in interest expense in fiscal 2001 over 2000 reflected theeffects of the FINOVA loan termination agreement. We recorded a full year ofinterest expense in fiscal 2000 on the notes payable to Aventis, AbbottLaboratories and the convertible note and eight months’ expense on the FINOVAnote payable compared to twelve months for Aventis, six months for Abbott andten months for the convertible debt in fiscal 1999.

*** ***

***Other income (expense) - net*.**Otherincome (expense) - net for the year ended December 31, 2001 was an expense of$2,741,000 compared to income of $750,000 and $256,000, respectively, for theyears ended December 31, 2000 and 1999. The increase in other expense in fiscal2001 was due primarily to the expenses of $3,454,000 related to a breach ofcontract suit in Europe including $204,000 in interest and other charges thatwas assessed by the Appeals Court in Lyon, France on March 22, 2002, partiallyoffset by an $856,000 reimbursement claim we received from a supplier. Infiscal 2000 and 1999, income was provided primarily by gains on the sale ofequity securities of $437,000 and $223,000, respectively.

*** ***

37

 

***Income taxes.***For the years endedDecember 31, 2001, 2000 and 1999, we recorded a tax benefit of $7,000 and aprovision of $368,000 and $345,000 respectively, for European income taxesbased upon the financial results of our European affiliates.

*** ***

***Net loss from continuing operations.***Netloss from continuing operations for the year ended December 31, 2001 was $8,235,000,a decrease of $33,782,000 or 80% compared to the net loss of $42,017,000 forthe year ended December 31, 2000. The decrease in net loss for the year endedDecember 31, 2001 was primarily due to higher product sales and lower selling,general and administration and research and development expenses, partiallyoffset by higher cost of sales and manufacturing expenses, resulting primarilyfrom the higher product sales. In addition, the fiscal year ended December 31,2000 included product recall returns and charges totaling $13,075,000 that didnot recur in 2001. Net loss from continuing operations for the year endedDecember 31, 2000 was $42,017,000, an increase of $11,035,000 or 36% comparedto the net loss of $30,982,000 for the year ended December 31, 1999. Theincrease in net loss for fiscal 2000 was due primarily to the product recallreturns and charges totaling $13,075,000 and increases in research anddevelopment and selling, general and administrative expenses, partially offsetby the increase in net sales net of related cost of sales.

*** ***

***Net loss from operations of discontinued operation.*** Net sales of transplantation services for theyear ended December 31, 2001 were $5,233,000, a decrease of $12,269,000 or 70%from sales of $17,502,000 for the year ended December 31, 2000. The decrease innet sales reflects the sale of our transplantation services business, TheTransplant Pharmacy, that closed on April 20, 2001. Net sales oftransplantation services in fiscal 2000 represented an increase of $3,637,000or 26% over sales of $13,865,000 for the year ended December 31, 1999. Theincrease in net sales in fiscal 2000 was due primarily to an increase in thenumber of patients serviced by The Transplant Pharmacy. Net sales for allperiods consisted entirely of drug sales to transplant patients.

 

Net loss fortransplantation services for the year ended December 31, 2001 was $763,000,compared to a net loss of $2,342,000 for the year ended December 30, 2000. Thedecrease in net loss reflects the sale of our transplantation servicesbusiness, The Transplant Pharmacy, that closed on April 20, 2001. Net loss fortransplantation services for the year ended December 31, 2000 was $2,342,000,an increase of $317,000 or 16% compared to the net loss of $2,025,000 for theyear ended December 31, 1999. The increase in net loss for 2000 was dueprimarily to the increase in operating expenses, partially offset by anincrease in sales of The Transplant Pharmacy.

*** ***

***Net loss fromdisposal of discontinued operation*.**  Net loss ondisposal of discontinued operation of $381,000 represents sale proceeds of$1,800,000 less estimated expenses of $2,181,000 incurred for the discontinuedoperation. These expenses primarily related to the costs associated with theclosure of The Transplant Pharmacy operation including employee severance andthe estimated future lease obligations for the facilities supporting TheTransplant Pharmacy.

 

**Liquidityand Capital Resources**

 

From inception throughDecember 31, 2001, we financed our operations substantially from proceeds ofapproximately $137,977,000 from public offerings of our Common Stock,$76,398,000 from private placements of equity securities and $25,550,000 fromthe convertible note and the note payable to Abbott Laboratories. As of December31, 2001, we had cash, cash equivalents and short-term investments of$32,822,000 and total assets of $114,559,000.

 

During the year endedDecember 31, 2001, net cash provided by operating activities was approximately$4,407,000 as compared to net cash used in operating activities of $25,610,000and $39,885,000 respectively for the years ended December 31, 2000 and 1999.The decrease in net cash used in operating activities in fiscal 2001 was duesubstantially to a significant reduction in net loss and a reduction in othercurrent assets due to the reclassification of $5,000,000 to cash and cashequivalents. This cash had previously been treated as restricted since itserved as collateral for the loan with FINOVA. However, the loan was repaid inJune 2001 and therefore the cash is no longer restricted. Other factorscontributing to the net cash provided by operating activities included anincrease in accounts payable and accrued liabilities and a decrease in otherreceivables. Net cash used in operating activities in fiscal 2000 wassubstantially due to a reduction in net inventories and increases in accountspayable and accrued liabilities, partially offset by an increase in netloss.  The reduction in inventories is primarilydue to provisions of $11,774,000 relating to the SangCya Oral Solution productrecall, which resulted in a corresponding increase in net loss for fiscal

 

38

 

2000. Net cash used in2000 also included an increase in other current assets reflecting $5,000,000cash used as collateral for the note payable to FINOVA.  In fiscal year 1999, net cash used inoperating activities was primarily due to the amount of net loss incurred, aswell as an increase in inventories and a decrease in accounts payable over theprior year partially offset by deferred revenue of $13,730,000 representingmilestone payments from Abbott Laboratories in connection with our co-promotionagreement with Abbott.

 

Net cash provided byinvesting activities totaled $5,438,000, $3,694,000 and $4,245,000 during theyears ended December 31, 2001, 2000 and 1999 respectively. The amount forfiscal 2001 is primarily the result of a decrease in other assets, proceedsfrom the sale of The Transplant Pharmacy and maturities of short term investments,partially offset by purchases of property and equipment. In fiscal years 2000and 1999, cash was provided by maturities of short-term investments, partiallyoffset by purchases of property and equipment and purchases of short-terminvestments.

 

Net cash provided byfinancing activities totaled $7,699,000, $27,221,000, and $39,521,000 duringthe years ended December 31, 2001, 2000 and 1999 respectively. In fiscal year2001, net cash was provided primarily by the sale of common stock, partially offsetby repayments of notes and capital lease obligations. In both fiscal years 2000and 1999, cash was provided by the issuance of notes payable and the sale ofcommon stock which are described in more detail in the following paragraphs.

 

On April 21, 2000 wesigned an agreement with FINOVA to provide a line of credit of up to $30million (the Loan Agreement). At December 31, 2000 we had drawn down $5.0million under the line of credit and had set aside a corresponding compensatingbalance, which was included in Other Current Assets on our consolidated balancesheet. Subsequently, we repaid the loan balance of $5,000,000 on June 29, 2001,and terminated the Loan Agreement. Since the loan has been repaid, the$5,000,000 compensating cash balance previously classified as other currentassets has now been classified as cash in the accompanying consolidated balancesheet. In connection with this financing, we issued a warrant to purchase50,000 shares of our common stock at an exercise price of $23.438. This warrantwas valued using the Black-Scholes pricing model with the following weightedaverage assumptions: expected life, five years; stock volatility, 72%; riskfree interest rate, 6.0%; and no dividend payments during the expected term.  The calculated value of the warrant of$744,000 and the additional financing fees of $750,000 were reflected asadditional interest expense over the life of the loan.

 

In August 2000, weentered into a global co-development, supply and license agreement withAbgenix, Inc. for ABX-CBL, an antibody developed by Abgenix. The agreementprovides us with an exclusive worldwide license for the marketing and sale ofABX-CBL, an anti-CD147 monoclonal antibody for the treatment of steroidresistant graft versus host disease (GVHD). ABX-CBL is currently in amulticenter, randomized, and controlled Phase II/III study. We made an initiallicense fee payment of $1,000,000 and an additional payment to Abgenix of$1,000,000 as partial reimbursement of one-half of the development costs incurredby Abgenix between January 1, 2000 and August 8, 2000. The agreement requiresus to pay a further $900,000 as reimbursement of these development costs in twoequal installments at the end of June 2001 and 2002, the first of which hasbeen paid. Development costs incurred after August 8, 2000 are being sharedequally, as would any potential profits from future sales of collaborationproducts. We share responsibility for product development, including theongoing clinical trial. Abgenix will be responsible for manufacturing ABX-CBL.We also have the right, subject to the terms and conditions of the agreement,to commercialize other anti-CD147 antibodies developed by Abgenix. If ABX-CBLreceives regulatory approval and is launched, we will be required to pay Abgenixfor our share of development expenses incurred prior to January 1, 2000. Theamount has not been determined, but the agreement limits our obligation to$6,100,000. We do not have any obligation to reimburse Abgenix until the firstanniversary of the launch of ABX-CBL and the timing of reimbursement variesdepending on ABX-CBL’s sales.

 

In March 1999, we issueda $10 million convertible note due March 30, 2004. This note bears interest atthe rate of 6.5% through March 30, 2004 and thereafter at the rate of 8.5% onany overdue amount. The interest is payable semi-annually in September andMarch. The note, or any portion thereof, is convertible at the option of theholder at any time before March 30, 2004 into shares of our common stock at therate of 50.0773 shares of common stock for each $1,000 of principal amount. Wereceived net proceeds of $9,550,000.

 

In May 1999, we receiveda loan of $16 million from Abbott Laboratories. The loan bears interest at8.75%, payable annually. The loan matures on December 31, 2004, and can bepre-paid without penalty at any time prior to

 

39

 

maturity. In February2002, the Company repaid $8 million on the loan.

 

Notes payable include$8,273,000 and $13,293,000 at December 31, 2001 and 2000, respectively,representing the current accreted value of the non-interest bearing note issuedin connection with the acquisition of IMTIX. The note was discounted at a rateof 9.25% and the remaining unpaid balance of $9 million at December 31, 2001 ispayable as follows: $5 million in 2002, and $4 million in 2003.

 

In fiscal years 2001,2000 and 1999 we purchased $1,146,000, $3,790,000 and $4,020,000, respectively,of new property and equipment. In fiscal year 2001 purchases consistedprimarily of manufacturing and other equipment. In fiscal years 2000 and 1999this purchasing consisted primarily of manufacturing equipment, leaseholdimprovements for our new corporate headquarters in Fremont, California andexpenditures associated with the implementation of a global enterprise resourceplanning (ERP) system.

 

At December 31, 2001, wehad federal, state and foreign net operating loss (“NOL”) carryforwards ofapproximately $139,653,000, $12,916,000 and $2,048,000, respectively, availableto reduce future taxable income. Such carryforwards expire beginning in 2002through 2021. In addition, we had available research and experimentation creditcarryforwards of approximately $4,635,000 and $2,859,000 for federal and statetax purposes respectively. The federal tax credit carryforwards expirebeginning in 2004 through 2013 and the state tax credit carryforwards have noexpiration dates. Our ability to realize the benefits of the NOL and creditcarryforwards is dependent upon the generation of sufficient taxable income inthe respective taxing jurisdictions prior to their expiration. There can be noassurance that we will be able to generate sufficient taxable income to availourselves of such benefits. Furthermore, utilization of the net operatinglosses and credits may be subject to an annual limitation due to ownershipchange limitations provided by the Internal Revenue Code of 1986 and similarstate provisions. The annual limitation may result in the expiration of netoperating losses and credits before utilization.

 

We believe we havesufficient funds to continue operations for at least the next twelve months.However, we may need to raise additional funds through additional financings,including private or public equity and/or debt offerings and collaborativeresearch and development arrangements with corporate partners in order topursue new business opportunities. Our future capital requirements will dependon many factors, including our research and development programs, the scope andresults of clinical trials, the time and costs involved in obtaining regulatoryapprovals, the costs involved in obtaining and enforcing patents or anylitigation by third parties regarding intellectual property, the status ofcompetitive products, the maintenance of our manufacturing facility and theestablishment of third-party manufacturing arrangements, the maintenance ofsales and marketing capabilities, the establishment of collaborativerelationships with other parties, and the costs of manufacturing scale-up andworking capital requirements for inventory and financing of accountsreceivable.

** **

**Euro-Currency**

 

The Single EuropeanCurrency (Euro) was introduced on January 1, 1999 with complete transition tothis new currency required by January 2002. We have completed all necessarychanges to our internal systems and have fully transitioned to the Euro. Weexpect that use of the Euro may affect our foreign exchange activities and mayresult in increased fluctuations in foreign currency results.

** **

**Recently Issued AccountingPronouncements**

 

In June 1998, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (“SFAS”) No. 133, *Accountingfor Derivative Instruments and Hedging Activities.* This statementrequires companies to record derivatives on the balance sheet as assets orliabilities, measured at fair value. Gains or losses resulting from changes inthe values of those derivatives would be accounted for depending on the use ofthe derivative and whether it qualifies for hedge accounting. We adopted SFASNo. 133, as amended, effective January 1, 2001. The adoption of this statementdid not have a material effect on our financial position, operating results orcash flows, as we had no stand-alone or embedded derivatives at December 31,2000 and had not historically entered into any derivative transactions to hedgecurrency or other exposures.

 

In September 2000, theFASB issued SFAS No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*. SFAS No. 140 replacesSFAS No. 125, *Accounting for Transfers and Servicing*

* *

40

 

*of Financial Assets andExtinguishments of Liabilities*. It revises the standards foraccounting for securitizations and other transfers of financial assets andcollateral and requires certain disclosures, but carries over most of SFAS No.125’s provisions without reconsideration. We adopted the applicable disclosurerequirements of SFAS No. 140 in our consolidated financial statements as ofDecember 31, 2000 and adopted the remaining provision of SFAS No. 140 on April1, 2001.  We have concluded that theadoption of the remaining provisions of SFAS No. 140 after March 31, 2001 didnot have a significant impact on our financial position or results ofoperations.

 

In June 2001, the FASBissued SFAS No. 141, *Business Combinations*and SFAS No. 142, *Goodwill and Other**Intangible Assets*. SFAS No. 141requires that all business combinations initiated after June 30, 2001 be accountedfor under the purchase method and addresses the initial recognition andmeasurement of goodwill and other intangible assets acquired in a businesscombination. SFAS No. 142 addresses the initial recognition and measurement ofintangible assets acquired outside of a business combination and the accountingfor goodwill and other intangible assets subsequent to their acquisition. SFASNo. 142 provides that intangible assets with finite useful lives be amortizedand that goodwill and intangible assets with indefinite lives not be amortized,but will rather be tested at least annually for impairment. We will adopt SFASNo. 142 for our fiscal year beginning January 1, 2002. We are in the process ofevaluating  existing goodwill andintangibles under the transitional impairment test in SFAS No. 142 and,accordingly, have not yet determined whether or not there will be an impairmentloss. Any transitional impairment loss will be recognized as a change inaccounting principle.

 

In July 2001, the FASBissued SFAS No. 143, *Accounting for AssetRetirement Obligations*. SFAS No. 143 addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs. Itapplies to legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development, and (or)the normal operation of a long-lived asset, except for certain obligations oflessees. The provisions of SFAS No. 143 will be effective for fiscal yearsbeginning after June 15, 2002; however early application is permitted. We arecurrently in the process of evaluating the impact of this Statement on ourfinancial condition and operating results.

 

In August 2001, the FASBissued SFAS No. 144, *Accounting forImpairment or Disposal of Long-Lived Assets*. SFAS No. 144 supersedesSFAS No. 121, *Accounting for the Impairmentof Long-Lived Assets and for Long-Lived Assets to be Disposed Of*,and addresses financial accounting and reporting for the impairment or disposalof long-lived assets. This statement is effective for fiscal years beginningafter December 15, 2001. We will adopt SFAS No. 144 on January 1, 2002. Theadoption of this statement is not expected to have a significant impact on our financial position orresults of operations.

** **

**ITEM 7A.               Quantitativeand Qualitative Disclosures About Market Risk**

 

We are exposed to marketrisk related to changes in interest rates, equity security prices and foreigncurrency exchange rates.

* *

*Interest Rate Sensitivity*. Wemaintain a short-term investment portfolio consisting mainly of government andcorporate bonds purchased with an average maturity of less than one year. Theseavailable-for-sale securities are subject to interest rate risk and will fallin value if market interest rates increase. If market rates were to increaseimmediately and uniformly by 10% from levels at December 31, 2001, the fairvalue of the portfolio would decline by an immaterial amount, which isconsistent with the estimated effects at December 31, 2000. We generally havethe ability to hold fixed income investments until maturity and therefore donot expect operating results or cash flows to be affected to any significantdegree by the effect of a sudden change in market interest rates on oursecurities portfolio.

 

Substantially all of ourlong-term obligations bear interest at fixed rates which are not subject tofuture increases in interest rates. The fair value of these long-termobligations, including current portion, at December 31, 2001 was $36.7million compared to book value of $35.8 million (see Note 9 to ConsolidatedFinancial Statements). The corresponding fair value at December 31, 2000 was$45.2 million compared to book value of $47.5 million. We therefore do notexpect operating results or cash flows to be affected to any significant degreeby the effect of a sudden change in market interest rates. If our notes payableand convertible debt were subject to rate fluctuation, a hypothetical interestrate increase of 1% would have added approximately $358,000 to our interestexpense for 2001 and $475,000 for 2000.

 

41

 
|                      |   | **December 31, 2001**      |   |
|---------------------------|--------|----------------------------|--------|
|                      |   | **Expected Maturity Date** |   |
|                      |   | **2002**                   |   | **2003** |   | **2004** |   | **Total** |   | **Fair Value** |   |
| **Liabilities**           |   |                       |   |   |   |   |   |   |   | **in thousands** |   |
| Long-term Debt            |   |                       |   |   |   |   |   |   |   |   |   |
| Fixed Rate denominated    |   | $                          | 4,424  |   | $ | 4,220 |   | $ | 25,993 |   | $ | 34,637 |   | $ | 35,489 |   |
| Average interest rate     |   | 7.3                        | %      | 7.0 | % | 6.6 | % | 7.0 | % |   |   |
| Variable Rate denominated |   | 1,191                      |   | — |   | — |   | 1,191 |   | 1,191 |   |
| Average interest rate     |   | 4.4                        | %      | — |   | — |   | 4.4 | % |   |   |
| Total                     |   | $                          | 5,615  |   | $ | 4,220 |   | $ | 25,993 |   | $ | 35,828 |   | $ | 36,680 |   |

 

*Equity Price Risk*. Followingthe sale of our portfolio of corporate equity securities in December 1999 andJanuary 2000 for a net gain of $660,000, we no longer hold any such securities.

* *

*Foreign Currency Risk*. Manyof our foreign sales are invoiced in local currencies, creating receivablesdenominated in currencies other than the U.S. dollar, primarily in the Euro andthe Japanese yen. The risk due to foreign currency fluctuation associated withthese receivables is partially reduced by local payables denominated in thesame currencies, and presently we do not consider it necessary to hedge theseexposures. We intend to re-assess our hedging policy from time to time as ourforeign operations change. A 10% movement in the currency exchange rate wouldnot have a material impact on our financial position or our results ofoperations.

 

All of the potentialchanges noted above are based on sensitivity analyses performed on ourfinancial positions at December 31, 2001 and 2000. Actual results may differmaterially.

** **

**ITEM 8.****                                                     FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

Reference is made to item14(a)(1) of this Annual Report on Form 10- K.

** **

**ITEM 9.****                                                     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

** **

**PART III**

 

The information requiredby Items 10 through 13 of Part III is incorporated by reference from theregistrant’s Proxy Statement, under the capti*ons“Election of Directors - Nominees,” “Security Ownership of Certain BeneficialOwners and Management,” “Executive Compensation,” “Compensation CommitteeInterlocks and Insider Participation,”* and *“Certain Transactio**ns*”, which Proxy Statementwill be mailed to stockholders in connection with the registrant’s annualmeeting of stockholders which is expected to be held in May 2002. Informationon the Executive Officers is contained in Item 1 under the heading, *“Management.”*

** **

**PART IV**

** **

**ITEM14.               EXHIBITS****, FINANCIALSTATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

(a)    The following documents are filed as a partof this Annual Report on Form 10-K:

 

1.    Financial Statements. 

 

42

 
| Independent Auditors’  Report                                                                          |
|-------------------------------------------------------------------------------------------------------------|
|                                                                                                        |
| Consolidated Balance Sheets  — December 31, 2001 and 2000                                              |
|                                                                                                        |
| Consolidated  Statements of Operations for the years ended December 31, 2001, 2000 and 1999                 |
|                                                                                                        |
| Consolidated  Statements of Comprehensive Loss for the years ended December 31, 2001,  2000  and 1999  |
|                                                                                                        |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2001,  2000 and 1999 |
|                                                                                                        |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999                 |
|                                                                                                        |
| Notes  to Consolidated Financial Statements for the years ended December 31, 2001,  2000 and 1999           |

 

2.    Financial Statement Schedule. 

 
| Schedule II —  Valuation and Qualifying Accounts |
|-------------------------------------------------------|

 

All other schedules areomitted because they are not required, are not applicable or the information isincluded in the consolidated financial statements and notes thereto.

 

3.     Exhibits. Reference is made to Item 14(c) of this Annual Reporton Form 10-K.

 

(b)           Reports on Form 8-K.

 

On October 9, 2001, wefiled a report on Form 8-K, reporting under Item 5 that the Board of Directorsof the Company had approved the First Amendment to Rights Agreement, dated asof October 8, 2001, by and among the Company, Fleet National Bank (f/k/a TheFirst National Bank of Boston) and EquiServe Trust Company, N.A. (the“Amendment”). The Amendment was adopted to appoint EquiServe Trust Company,N.A. as successor rights agent to the Rights Agreement, dated as of August 14,1995, between the Company and The First National Bank of Boston as RightsAgent, and to conform the Rights Agreement to current Delaware law regardingthe use of “continuing director” provisions.

 

On October 22, 2001, wefiled a report on Form 8-K, reporting under Item 5 that Carole L. Nuechterlein,Senior Vice President, General Counsel and Secretary of the Company, hadresigned and that Adrian Arima, Vice President and Associate General Counsel ofthe Company, would assume responsibility for the Company’s legal affairs.

 

43

 

(c)    Exhibits.

** **
| **Exhibits** |   | **Description  of Exhibit**                                                                                                                                                                                                                                                                                                                                                     |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.1          |   | Agreement and Plan of  Merger, dated as of July 24, 1995, between SangStat Delaware, Inc. and  SangStat Medical Corporation, a California corporation, as filed with the  Delaware Secretary of State on August 11, 1995 (filed as Exhibit 2.1 to the  Registrant’s Registration Statement on Form 8-B, filed on December 4, 1995,  and incorporated herein by reference). |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.2          |   | Master Agreement  between SangStat Medical Corporation and Pasteur Merieux Serums &  Vaccins, S.A., dated June 10, 1998, including Exhibit 8 thereto (filed as  Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed on October  15, 1998 and as amended on December 14, 1998, and incorporated herein by  reference).                                    |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1          |   | Certificate of  Incorporation of SangStat Delaware, Inc. (filed as Exhibit 3.1 to the  Registrant’s Registration Statement on Form 8-B, filed on December 4, 1995,  and incorporated herein by reference).                                                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2          |   | Certificate of  Amendment of the Certification of Incorporation, filed with the Delaware  Secretary of State on July 24, 2000 (filed as Exhibit 3.6 to the Registrant’s  Current Report on Form 8-K, filed on August 30, 2000, and incorporated herein  by reference).                                                                                                     |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.3          |   | Certificate of  Designation for the Series A Junior Participating Preferred Stock, filed with  the Delaware Secretary of State on August 16, 1995 (filed as Exhibit 3.4 to  the Registrant’s Current Report on Form 8-K, filed on September 1, 1995, and  incorporated herein by reference).                                                                               |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.4          |   | Second Amended and  Restated Bylaws of the Registrant (filed as Exhibit 3.5 to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended March 30, 2000, filed on  May 15, 2000, and incorporated herein by reference).                                                                                                                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1          |   | Specimen Common Stock  Certificate of Registrant (filed as Exhibit 4.5 to the Registrant’s  Registration Statement on Form S-1, file no. 033-70436, and incorporated  herein by reference).                                                                                                                                                                                |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.1*        |   | 1993 Stock Option/Stock  Issuance Plan (filed as Exhibit 10.7 to the Registrant’s Registration  Statement on Form S-1, file no. 033-70436, and incorporated herein by  reference).                                                                                                                                                                                         |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.2         |   | Form of Indemnification  Agreement between the Registrant and its directors, officers and certain other  employees (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form  10-Q for the quarter ended September 30, 2001, filed on November 14, 2001,  and incorporated herein by reference).                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.3**       |   | License Agreement,  dated November 15, 1993, between the Registrant and the Board of Trustees of  Leland Stanford Junior University (filed as Exhibit 10.19 to the Registrant’s Registration  Statement on Form S-1, file no. 033-70436, and incorporated herein by  reference).                                                                                           |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.4         |   | Rights Agreement, dated  as of August 14, 1995, between the Registrant and First National Bank of  Boston (filed as Exhibit 2 to the Registrant’s Registration Statement on Form  8-A, filed on August 25, 1995, and incorporated herein by reference).                                                                                                                    |

 

44

 
| **Exhibits** |   | **Description  of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.5         |   | First Amendment to  Rights Agreement, dated as of October 8, 2001, among the Registrant, Fleet  National Bank (f/k/a The First National Bank of Boston) and EquiServe Trust  Company, N.A. (filed as Exhibit 99.1 to the Registrant’s Current Report on  Form 8-K, filed on October 9, 2001, and incorporated herein by reference).                                                                                                                                                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.6         |   | Real Property  Sub-Lease, dated March 8, 1999, between the Registrant and Kelley-Clarke,  Inc. to the Real Property lease, dated September 1, 1988, between  Kelly-Clarke Inc. and Kaiser Development Company, as amended on February 26,  1990, May 1, 1990, May 5, 1990, and April 19, 1995 (filed as Exhibit 10.26 to  the Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 1998, filed on March 31, 1999, and incorporated herein by  reference). |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.7**       |   | Co-Promotion Agreement,  dated as of May 7, 1999, between the Registrant and Abbott Laboratories, Inc.  (filed as Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for  the fiscal year ended December 31, 2000, filed on March 30, 2001, and incorporated  herein by reference).                                                                                                                                                                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.8         |   | Right of First Refusal  Agreement, dated as of May 7, 1999, between the Registrant and Abbott  Laboratories, Inc. (filed as Exhibit 10.28 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 1999, filed on August 16,  1999, and  incorporated herein by reference).                                                                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.9         |   | Registration Rights  Agreement, dated as of May 7, 1999, between the Registrant and Abbott  Laboratories, Inc. (filed as Exhibit 10.29 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 1999, filed on August 16,  1999, and  incorporated herein by reference).                                                                                                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.10        |   | Convertible Promissory  Note, dated March 1999, for $10,000,000 with Warburg Dillon Read LLC  (filed as Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for  the fiscal year ended December 31, 1999, filed on April 14, 2000, and  incorporated herein by reference).                                                                                                                                                                                             |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.11**      |   | Co-Development, Supply  and License Agreement, dated as of August 8, 2000, between the Registrant and  Abgenix, Inc. (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2000, filed on November 14,  2000, and incorporated herein by reference).                                                                                                                                                                         |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.12        |   | Securities Purchase  Agreement, dated December 29, 2000, between the Registrant and Narragansett  I. LP, Narragansett Offshore, Ltd., Royal Bank of Canada, and SDS Capital  Partners, LLC (filed as Exhibit 10.35 to the Registrant’s Current Report on  Form 8-K, filed on January 8, 2001, and incorporated herein by reference).                                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.13        |   | Registration Rights  Agreement, dated December 29, 2000, between the Registrant and Narragansett  I. LP, Narragansett Offshore, Ltd., Royal Bank of Canada, and SDS Capital  Partners, LLC (filed as Exhibit 10.36 to the Registrant’s Current Report on  Form 8-K, filed on January 8, 2001, and incorporated herein by reference).                                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.14        |   | Securities Purchase  Agreement, dated as of June 20, 2001, between the Company and Narragansett I.  LP, Narragansett Offshore, Ltd., Royal Bank of Canada, S.A.C. Capital  Associates, LLC, and Société Générale (filed as Exhibit 10.39 to the  Registrant’s Current Report on Form 8-K, filed on June 21, 2001, and incorporated  herein by reference).                                                                                                        |

 

45

 
| **Exhibits** |   | **Description  of Exhibit**                                                                                                                                                                                                                                                                                                                                                        |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.15        |   | Registration Rights  Agreement, dated as of June 20, 2001, between the Company and Narragansett I.  LP, Narragansett Offshore, Ltd., Royal Bank of Canada, S.A.C. Capital  Associates, LLC, and Société Générale (filed as Exhibit 10.40 to the  Registrant’s Current Report on Form 8-K, filed on June 21, 2001, and  incorporated herein by reference). |
|         |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.16        |   | Registration Rights  Agreement, dated March 19, 1999, by and between Registrant and Warburg  Dillon Read LLC (filed as Exhibit 4.4 to the Registrant’s Registration  Statement on Form S-3, file no. 333-46578, and incorporated herein by  reference).                                                                                                                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 21.1         |   | Subsidiaries of  Registrant.                                                                                                                                                                                                                                                                                                                                                       |
|         |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 23.1         |   | Independent Auditors’  Consent.                                                                                                                                                                                                                                                                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 24.1         |   | Power of Attorney  (reference is made to the signature page hereof).                                                                                                                                                                                                                                                                                                               |

 

____________

 

* Management contract orcompensatory plan or arrangement.

 

**Confidential treatmenthas been granted for the deleted portions of this document.  The non-public information has been filed separately with the SEC.

 

46

 

**INDEPENDENT AUDITORS’ REPORT**

 

To the Board of Directorsand Stockholdersof SangStat Medical Corporation:

 

We have audited theaccompanying consolidated balance sheets of SangStat Medical Corporation andsubsidiaries (collectively, the “Company”) as of December 31, 2001 and2000, and the related consolidated statements of operations, comprehensiveloss, stockholders’ equity, and cash flows for each of the three years in theperiod ended December 31, 2001. Our audits also included the consolidatedfinancial statement schedule listed in Item 14(a)2. These financial statementsand financial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company at December 31, 2001 and 2000, and theresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2001 in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, suchconsolidated financial statement schedule referenced above, when considered inrelation to the basic consolidated financial statements as a whole, presentsfairly, in all material respects, the information set forth therein.

 

DELOITTE & TOUCHE LLP

 

San Jose, CaliforniaJanuary 21, 2002 (March 27, 2002 as to Note 5, the second paragraph of Note 10,the ninth paragraph of Note 19 and Note 20)

 

47

 

****SANGSTATMEDICAL CORPORATIONCONSOLIDATED BALANCE SHEETS****(in thousands, except  share data)

 
| **ASSETS**                                                                                                       |   |             | ** ** |     |   |
|------------------------------------------------------------------------------------------------------------------|--------|------------------|------------|----------|--------|
|                                                                                                             |   | **December 31,** |       |
|                                                                                                             |   | **2001**         |       | **2000** |   |
| CURRENT ASSETS:                                                                                                  |   |             |       |     |   |
| Cash and cash  equivalents                                                                                       |   | $                | 32,822     |     | $      | 19,046 |   |
| Short-term investments                                                                                           |   | —           |       | 1,561    |   |
| Accounts receivable  (net of allowance for doubtful accounts of $4,072 in 2001 and $3,128 in 2000)               |   | 19,872           |       | 17,569   |   |
| Other receivables                                                                                                |   | 480              |       | 2,333    |   |
| Inventories                                                                                                      |   | 22,942           |       | 40,056   |   |
| Prepaid expenses and  other current assets                                                                       |   | 2,494            |       | 6,912    |   |
|                                                                                                             |   |             |       |     |   |
| Total current assets                                                                                             |   | 78,610           |       | 87,477   |   |
|                                                                                                             |   |             |       |     |   |
| PROPERTY AND EQUIPMENT  — net                                                                               |   | 5,469            |       | 6,539    |   |
|                                                                                                             |   |             |       |     |   |
| INTANGIBLE ASSETS (net  of accumulated amortization of $4,324 in 2001 and $3,141 in 2000)                        |   | 9,220            |       | 11,142   |   |
| OTHER ASSETS                                                                                                     |   | 21,260           |       | 9,158    |   |
|                                                                                                             |   |             |       |     |   |
| TOTAL                                                                                                            |   | $                | 114,559    |     | $      | 114,316 |   |
|                                                                                                             |   |             |       |     |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                   |   |             |       |     |   |
|                                                                                                             |   |             |       |     |   |
| CURRENT LIABILITIES:                                                                                             |   |             |       |     |   |
| Accounts payable                                                                                                 |   | $                | 22,019     |     | $      | 17,553 |   |
| Accrued liabilities                                                                                              |   | 14,375           |       | 13,938   |   |
| Capital lease  obligations — current portion                                                                |   | 177              |       | 257      |   |
| Deferred revenue —  current portion                                                                         |   | 3,158            |       | 3,158    |   |
| Notes payable — current  portion                                                                            |   | 5,615            |       | 12,797   |   |
|                                                                                                             |   |             |       |     |   |
| Total current  liabilities                                                                                       |   | 45,344           |       | 47,703   |   |
|                                                                                                             |   |             |       |     |   |
| CAPITAL LEASE  OBLIGATIONS                                                                                       |   | 326              |       | 535      |   |
| DEFERRED REVENUE                                                                                                 |   | 6,317            |       | 9,475    |   |
| NOTES PAYABLE                                                                                                    |   | 30,213           |       | 34,679   |   |
|                                                                                                             |   |             |       |     |   |
| COMMITMENTS AND  CONTINGENCIES (Notes 10, 11 and 19)                                                             |   |             |       |     |   |
|                                                                                                             |   |             |       |     |   |
| STOCKHOLDERS’ EQUITY:                                                                                       |   |             |       |     |   |
| Preferred stock, $.001  par value 5,000 shares authorized; none outstanding                                      |   | —           |       | —   |   |
| Common stock. $.001 par  value, 35,000 shares authorized; outstanding: 2001, 20,961 shares; 2000,  18,942 shares |   | 222,521          |       | 201,766  |   |
| Accumulated deficit                                                                                              |   | (187,015         | )          | (177,636 | )      |
| Accumulated other  comprehensive loss                                                                            |   | (3,147           | )          | (2,206   | )      |
|                                                                                                             |   |             |       |     |   |
| Total stockholders’  equity                                                                                 |   | 32,359           |       | 21,924   |   |
|                                                                                                             |   |             |       |     |   |
| TOTAL                                                                                                            |   | $                | 114,559    |     | $      | 114,316 |   |

 

See notes to consolidated financial statements.

**** ****

****48****
********
**** ****

****SANGSTAT MEDICALCORPORATION****

**** ****

****CONSOLIDATEDSTATEMENTS OF OPERATIONS************(in thousands, except per share data)

 
|                                                                                                               |   | **Year Ended December 31,** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                                               |   | **2001**                    |   | **2000** | ** ** | **1999** |   |
| REVENUES:                                                                                                          |   |                        |   |   |   |   |   |
| Net  product sales                                                                                                 |   | $                           | 91,302 |   | $ | 61,319 |   | $ | 42,243 |   |
| Product  recall returns                                                                                            |   | —                      |   | (872 | ) | — |   |
| Revenue  from collaborative agreements (Note 10)                                                                   |   | 3,207                       |   | 2,698 |   | 2,060 |   |
| Total  revenues                                                                                                    |   | 94,509                      |   | 63,145 |   | 44,303 |   |
| COSTS AND OPERATING  EXPENSES:                                                                                     |   |                        |   |   |   |   |   |
| Cost  of sales:                                                                                                    |   |                        |   |   |   |   |   |
| Cost  of product sales                                                                                             |   | 42,816                      |   | 27,472 |   | 18,989 |   |
| Product  recall charges                                                                                            |   | —                      |   | 11,774 |   | — |   |
| Research  and development (incl. product recall expenses of $50 for the year ended  December 31, 2000)             |   | 17,863                      |   | 20,788 |   | 14,470 |   |
| Selling,  general and administrative (incl. product recall expenses of $379 for the  year ended December 31, 2000) |   | 33,782                      |   | 41,766 |   | 39,170 |   |
| Amortization  of intangible assets                                                                                 |   | 1,922                       |   | 1,392 |   | 1,398 |   |
| Total  costs and operating expenses                                                                                |   | 96,383                      |   | 103,192 |   | 74,027 |   |
|                                                                                                               |   |                        |   |   |   |   |   |
| Loss  from operations of continuing operations                                                                     |   | (1,874                      | )      | (40,047 | ) | (29,724 | ) |
|                                                                                                               |   |                        |   |   |   |   |   |
| OTHER INCOME (EXPENSE),  NET:                                                                                      |   |                        |   |   |   |   |   |
| Interest  income                                                                                                   |   | 1,203                       |   | 2,016 |   | 1,865 |   |
| Interest  expense                                                                                                  |   | (4,830                      | )      | (4,368 | ) | (3,034 | ) |
| Other  income (expense), net                                                                                       |   | (2,741                      | )      | 750 |   | 256 |   |
| Other  income (expense), net                                                                                       |   | (6,368                      | )      | (1,602 | ) | (913 | ) |
|                                                                                                               |   |                        |   |   |   |   |   |
| LOSS FROM CONTINUING  OPERATIONS BEFORE INCOME TAXES                                                               |   | (8,242                      | )      | (41,649 | ) | (30,637 | ) |
|                                                                                                               |   |                        |   |   |   |   |   |
| INCOME TAX BENEFIT  (PROVISION)                                                                                    |   | 7                           |   | (368 | ) | (345 | ) |
|                                                                                                               |   |                        |   |   |   |   |   |
| NET LOSS FROM  CONTINUING OPERATIONS                                                                               |   | (8,235                      | )      | (42,017 | ) | (30,982 | ) |
|                                                                                                               |   |                        |   |   |   |   |   |
| NET LOSS FROM  OPERATIONS OF DISCONTINUED OPERATION                                                                |   | (763                        | )      | (2,342 | ) | (2,025 | ) |
|                                                                                                               |   |                        |   |   |   |   |   |
| NET LOSS FROM DISPOSAL  OF DISCONTINUED OPERATION                                                                  |   | (381                        | )      | — |   | — |   |
|                                                                                                               |   |                        |   |   |   |   |   |   |   |   |
| NET LOSS                                                                                                           |   | $                           | (9,379 | ) | $ | (44,359 | ) | $ | (33,007 | ) |
|                                                                                                               |   |                        |   |   |   |   |   |
| NET LOSS PER  SHARE-Basic and diluted (Note 1)                                                                     |   |                        |   |   |   |   |   |
| Continuing  operations                                                                                             |   | $                           | (0.40  | ) | $ | (2.35 | ) | $ | (1.83 | ) |
| Discontinued  operation                                                                                            |   | (0.06                       | )      | (0.13 | ) | (0.12 | ) |
|                                                                                                               |   | $                           | (0.46  | ) | $ | (2.48 | ) | $ | (1.95 | ) |
|                                                                                                               |   |                        |   |   |   |   |   |
| WEIGHTED AVERAGE COMMON  SHARES                                                                                    |   | 20,216                      |   | 17,910 |   | 16,888 |   |

 

****CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE LOSS************(in thousands)

 
|                                                                                              |   | **Year Ended December 31,** |    |
|---------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                                              |   | **2001**                    |    | **2000** |   | **1999** |   |
| Net loss                                                                                          |   | $                           | (9,379  | ) | $ | (44,359 | ) | $ | (33,007 | ) |
| Reversal of unrealized  gain on marketable securities sold during the period                      |   | (6                          | )       | (644 | ) | — |   |
| Unrealized gains on  marketable securities classified as available for sale in the current period |   | —                      |    | 40 |   | 1078 |   |
| Foreign currency  translation adjustments                                                         |   | (935                        | )       | (898 | ) | (1,388 | ) |
| Total comprehensive  loss                                                                         |   | $                           | (10,320 | ) | $ | (45,861 | ) | $ | (33,317 | ) |

 

See notes to consolidated financial statements.

**** ****

****49****
********
**** ****

****SANGSTAT MEDICALCORPORATION****

**** ****

****CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY************(in thousands, except share data)

 
|                                                                              |   | **Common stock** |   | **Accumulated  Deficit** |    | **Accumulated  Other  Comprehensive  Loss** |   | **Total** |   |
|-----------------------------------------------------------------------------------|--------|------------------|--------|--------------------------|---------|---------------------------------------------|--------|-----------|--------|
| **Shares**                                                                        |   | **Amount**       |
| **Balances,  January 1, 1999**                                                    |   | 16,214,851       |   | $                        | 160,251 |                                        | $      | (100,270  | )      | $ | (394 | ) | $ | 59,587 |   |
|                                                                              |   |             |   |                     |    |                                        |   |      |   |   |   |
| Issuance of common  stock                                                         |   | 893,996          |   | 12,661                   |    | —                                      |   | —    |   | 12,661 |   |
| Exercise of stock  options                                                        |   | 244,927          |   | 1,859                    |    | —                                      |   | —    |   | 1,859 |   |
| Issuance of stock for  services                                                   |   | —           |   | 160                      |    | —                                      |   | —    |   | 160 |   |
| Stock option  compensation expense                                                |   | —           |   | 59                       |    | —                                      |   | —    |   | 59 |   |
| Foreign currency  translation adjustment                                          |   | —           |   | —                   |    | —                                      |   | (1,388    | )      | (1,388 | ) |
| Unrealized gain on  investments                                                   |   | —           |   | —                   |    | —                                      |   | 1,078     |   | 1,078 |   |
| Net loss                                                                          |   | —           |   | —                   |    | (33,007                                     | )      | —    |   | (33,007 | ) |
|                                                                              |   |             |   |                     |    |                                        |   |      |   |   |   |
| **Balances,  December 31, 1999**                                                  |   | 17,353,774       |   | 174,990                  |    | (133,277                                    | )      | (704      | )      | 41,009 |   |
|                                                                              |   |             |   |                     |    |                                        |   |      |   |   |   |
| Issuance of common  stock                                                         |   | 1,345,928        |   | 23,401                   |    | —                                      |   | —    |   | 23,401 |   |
| Exercise of stock  options                                                        |   | 242,644          |   | 2,631                    |    | —                                      |   | —    |   | 2,631 |   |
| Warrant issued in  connection with financing                                      |   | —           |   | 744                      |    | —                                      |   | —    |   | 744 |   |
| Foreign currency  translation adjustment                                          |   | —           |   | —                   |    | —                                      |   | (898      | )      | (898 | ) |
| Reversal of unrealized  gain on marketable securities sold during the period, net |   | —           |   | —                   |    | —                                      |   | (604      | )      | (604 | ) |
| Net loss                                                                          |   | —           |   | —                   |    | (44,359                                     | )      | —    |   | (44,359 | ) |
|                                                                              |   |             |   |                     |    |                                        |   |      |   |   |   |
| **Balances,  December 31, 2000**                                                  |   | 18,942,346       |   | 201,766                  |    | (177,636                                    | )      | (2,206    | )      | 21,924 |   |
|                                                                              |   |             |   |                     |    |                                        |   |      |   |   |   |
| Issuance of common  stock                                                         |   | 1,784,635        |   | 18,774                   |    | —                                      |   | —    |   | 18,774 |   |
| Exercise of stock  options                                                        |   | 233,693          |   | 1,931                    |    | —                                      |   | —    |   | 1,931 |   |
| Stock option  compensation expense                                                |   | —           |   | 50                       |    | —                                      |   | —    |   | 50 |   |
| Foreign currency  translation adjustment                                          |   | —           |   | —                   |    | —                                      |   | (935      | )      | (935 | ) |
| Reversal of unrealized  gain on marketable securities sold during the period, net |   | —           |   | —                   |    | —                                      |   | (6        | )      | (6 | ) |
| Net loss                                                                          |   | —           |   | —                   |    | (9,379                                      | )      | —    |   | (9,379 | ) |
|                                                                              |   |             |   |                     |    |                                        |   |      |   |   |   |
| **Balances,  December 31, 2001**                                                  |   | 20,960,674       |   | $                        | 222,521 |                                        | $      | (187,015  | )      | $ | (3,147 | ) | $ | 32,359 |   |

 

See notes to consolidated financial statements.

 

50

 

****SANGSTAT MEDICALCORPORATION****

**** ****

****CONSOLIDATEDSTATEMENTS OF CASH FLOWS************(in thousands)

 
|                                                                                                                              |   | **Year Ended December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                                                              |   | **2001**                    |   | **2000** |   | **1999** |   |
| OPERATING  ACTIVITIES:                                                                                                            |   |                        |   |   |   |   |   |
| Net  loss from continuing operations                                                                                              |   | $                           | (8,235 | ) | $ | (42,017 | ) | $ | (30,982 | ) |
| Adjustments  to reconcile net loss from continuing operations to net cash provided by  (used in) continuing operating activities: |   |                        |   |   |   |   |   |
| Depreciation  and amortization                                                                                                    |   | 3,777                       |   | 3,780 |   | 2,921 |   |
| Non-cash  interest expense                                                                                                        |   | 1,069                       |   | 1,365 |   | 1,476 |   |
| Loss  on disposal of property and equipment                                                                                       |   | 249                         |   | 836 |   | 167 |   |
| Stock  compensation expense                                                                                                       |   | 50                          |   | — |   | 219 |   |
| Deferred  income taxes                                                                                                            |   | 84                          |   | 130 |   | 88 |   |
| Changes  in assets and liabilities:                                                                                               |   |                        |   |   |   |   |   |
| Accounts  receivable                                                                                                              |   | (2,303                      | )      | (4,787 | ) | (1,819 | ) |
| Other  receivables                                                                                                                |   | 1,853                       |   | 573 |   | (465 | ) |
| Inventories                                                                                                                       |   | 1,784                       |   | 6,214 |   | (12,895 | ) |
| Prepaid  expenses and other current assets                                                                                        |   | 4,418                       |   | (4,606 | ) | (579 | ) |
| Accounts  payable                                                                                                                 |   | 4,466                       |   | 5,702 |   | (13,973 | ) |
| Accrued  liabilities                                                                                                              |   | 353                         |   | 8,297 |   | 2,227 |   |
| Deferred  revenue                                                                                                                 |   | (3,158                      | )      | (1,097 | ) | 13,730 |   |
| Net  cash provided by (used in) continuing operating activities                                                                   |   | 4,407                       |   | (25,610 | ) | (39,885 | ) |
| Net  cash used in discontinued operation                                                                                          |   | (2,944                      | )      | (2,223 | ) | (1,917 | ) |
|                                                                                                                              |   |                        |   |   |   |   |   |
| INVESTING  ACTIVITIES:                                                                                                            |   |                        |   |   |   |   |   |
| Purchases  of property and equipment                                                                                              |   | (1,146                      | )      | (3,790 | ) | (4,020 | ) |
| Maturities  of short-term investments                                                                                             |   | 1,556                       |   | 7,492 |   | 8,517 |   |
| Purchase  of short-term investments                                                                                               |   | —                      |   | — |   | (3,721 | ) |
| Proceeds  from the sale of discontinued operation                                                                                 |   | 1,800                       |   | — |   | — |   |
| Other  assets                                                                                                                     |   | 3,228                       |   | (8 | ) | 3,469 |   |
| Net  cash provided by investing activities                                                                                        |   | 5,438                       |   | 3,694 |   | 4,245 |   |
|                                                                                                                              |   |                        |   |   |   |   |   |
| FINANCING  ACTIVITIES:                                                                                                            |   |                        |   |   |   |   |   |
| Sale  of common stock                                                                                                             |   | 20,705                      |   | 26,032 |   | 14,520 |   |
| Notes  payable borrowings                                                                                                         |   | 465                         |   | 6,574 |   | 28,513 |   |
| Notes  payable repayments                                                                                                         |   | (13,182                     | )      | (4,834 | ) | (3,079 | ) |
| Repayment  of capital lease obligations                                                                                           |   | (289                        | )      | (551 | ) | (433 | ) |
| Net  cash provided by financing activities                                                                                        |   | 7,699                       |   | 27,221 |   | 39,521 |   |
|                                                                                                                              |   |                        |   |   |   |   |   |
| EFFECT  OF EXCHANGE RATE CHANGES ON CASH                                                                                          |   | (824                        | )      | (898 | ) | (1,388 | ) |
|                                                                                                                              |   |                        |   |   |   |   |   |
| NET  INCREASE IN CASH AND EQUIVALENTS                                                                                             |   | 13,776                      |   | 2,184 |   | 576 |   |
|                                                                                                                              |   |                        |   |   |   |   |   |
| CASH  AND EQUIVALENTS, Beginning of year                                                                                          |   | 19,046                      |   | 16,862 |   | 16,286 |   |
|                                                                                                                              |   |                        |   |   |   |   |   |
| CASH  AND EQUIVALENTS, End of year                                                                                                |   | $                           | 32,822 |   | $ | 19,046 |   | $ | 16,862 |   |
|                                                                                                                              |   |                        |   |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                                                                                 |   |                        |   |   |   |   |   |
| Cash  paid during the period for interest                                                                                         |   | $                           | 4,260  |   | $ | 1,158 |   | $ | 1,401 |   |
|                                                                                                                              |   |                        |   |   |   |   |   |
| NONCASH  INVESTING AND FINANCING ACTIVITIES:                                                                                      |   |                        |   |   |   |   |   |
| Warrants  issued in connection with financing                                                                                     |   | $                           | — |   | $ | 744 |   | $ | — |   |
|                                                                                                                              |   |                        |   |   |   |   |   |
| Property  acquired under capital leases                                                                                           |   | $                           | — |   | $ | 518 |   | $ | 493 |   |
|                                                                                                                              |   |                        |   |   |   |   |   |
| Unrealized  gain (loss) on investments                                                                                            |   | $                           | (5     | ) | $ | 604 |   | $ | 1,078 |   |

 

See notes to consolidated financial statements.

 

51

 

**SANGSTATMEDICAL CORPORATION**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTSYEARS ENDED DECEMBER 31, 2001, 2000 and 1999**

** **

**1. ORGANIZATION AND SIGNIFICANTACCOUNTING POLICIES**

*** ***

***Organization***- SangStat MedicalCorporation and subsidiaries (the Company) is a global biotechnology companybuilding on its foundation in transplantation to discover, develop and markethigh value therapeutic products in the transplantation, immunology andhematology/oncology areas.

*** ***

***Principles of Consolidation***- Theconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries. Intercompany accounts and transactions areeliminated.

*** ***

***Revenue Recognition***- Revenue fromproduct sales, net of estimated sales allowances and rebates, is recognizedupon receipt by the customer, when a purchase order has been received, thesales price is fixed or determinable and collection of the resulting receivableis reasonably assured. Revenue from collaborative agreements isrecognized in accordance with the related contract terms. Up-front or milestonepayments received under such agreements are generally recognized as revenuesratably over the life of the agreement where significant obligations for futureservices or Company participation exist or as milestones are met and nosignificant obligation for future services exists.

*** ***

***Research and Development***- Research anddevelopment costs are expensed as incurred and include expenses associated withnew product research, clinical trials of existing technologies, regulatoryaffairs activities associated with product candidates and costs incurred underour co-development agreements.

*** ***

***Advertising Expenses***- Advertisingcosts, which also include promotional expenses, are expensed as incurred.Advertising expenses for the years ended December 31, 2001, 2000 and 1999 wereapproximately $2.4 million, $4.5 million and $3.2 million, respectively.

*** ***

***Cash and Cash Equivalents***- The Companyconsiders all highly liquid debt instruments with a remaining maturity date ofthree months or less when purchased to be cash equivalents.

*** ***

***Short-Term Investments***- The Companyhas classified all of its investments as available-for-sale securities. Whilethe Company’s practice is to hold debt securities to maturity, the Company hasclassified all debt securities as available-for-sale securities, as the sale ofsuch securities may be required prior to maturity to implement managementstrategies. The carrying value of all securities is adjusted to fair marketvalue, with unrealized gains and losses, net of deferred taxes, being excludedfrom earnings and reported as a separate component of stockholders’ equity andincluded in accumulated other comprehensive loss. Cost is based on the specificidentification method for purposes of computing realized gains or losses.

*** ***

***Inventories***- Inventories are stated atthe lower of cost (first-in, first-out) or market. The Company classifiesinventory not expected to be utilized within the next twelve months as OtherAssets (See Notes 3 and 6).

*** ***

***Property and Equipment***- Property andequipment are stated at cost. Depreciation is calculated using thestraight-line method over estimated useful lives of three to ten years.Leasehold improvements and assets under capital leases are amortized over theshorter of their lease term or estimated useful life.

*** ***

***Valuation of Long-lived Assets***- Thecarrying value of the Company’s long-lived assets is reviewed for impairmentwhenever events or changes in circumstances indicate that an asset may not berecoverable. The Company looks to current and future undiscounted cash flows,excluding financing costs, as primary indicators of recoverability. If animpairment is determined to exist, any related impairment loss is calculatedbased on fair value.

*** ***

***Foreign Currency Translation***-Operations for the majority of the Company’s foreign subsidiaries are measuredusing local currency as the functional currency. Assets and liabilities of suchsubsidiaries are translated into US dollars at the exchange rates in effect asof the balance sheet dates, and results of operations for each subsidiary aretranslated using average rates in effect for the periods presented. Gains orlosses resulting from foreign currency

 

52

 

translation are includedas a component of accumulated other comprehensive loss.

 

The Company’s subsidiarySangStat Atlantique uses the US dollar as its functional currency. Foreigncurrency denominated assets and liabilities are translated at the year-endexchange rates except for inventories, prepaid expenses, and property andequipment, which are translated at historical exchange rates. Gains or lossesresulting from foreign currency translation and other foreign currencytransaction gains and losses are included in other income (expense) - net inthe consolidated statements of operations and were not significant for anyperiod presented.

*** ***

***Stock-Based Compensation***- The Companyaccounts for stock-based awards to employees using the intrinsic value methodin accordance with Accounting Principles Board (APB) No. 25, *Accounting for Stock Issued to Employees*(“APB 25”) *and* the Financial Accounting Standards Board (FASB)Interpretation No. 44, *Accounting for Certain Transactions Involving StockCompensation*. The Company accounts for stock based awards tonon-employees in accordance with Statement of Financial Accounting Standards(SFAS) No. 123, *Accounting for Stock-Based Compensation.*

*** ***

***Net Loss Per Share***- Basic EPS excludesdilution and is computed by dividing net loss by the weighted average number ofcommon shares outstanding for the period. Diluted EPS reflects the potentialdilution that would occur if securities or other contracts to issue commonstock were exercised or converted into common stock. Common share equivalentsincluding stock options and convertible notes payable, aggregating 337,875shares, 1,215,203 shares and 1,011,247 shares for the years ended December 31,2001, 2000 and 1999 , respectively, have been excluded from diluted EPS, astheir effect would be antidilutive.

 

The following is areconciliation of the numerators and denominators of the basic and diluted netloss per share computations:

 
|                                        |   | **Year Ended December 31,** |   |
|---------------------------------------------|--------|-----------------------------|--------|
|                                        |   | **2001**                    |   | **2000** |   | **1999** |   |
| Net loss (numerator)                        |   |                        |   |   |   |   |   |
| Continuing operations                       |   | $                           | 8,235  |   | $ | 42,017 |   | $ | 30,982 |   |
| Discontinued operation                      |   | 1,144                       |   | 2,342 |   | 2,025 |   |
|                                        |   | $                           | 9,379  |   | $ | 44,359 |   | $ | 33,007 |   |
|                                        |   |                        |   |   |   |   |   |
| Shares (denominator)                        |   |                        |   |   |   |   |   |
| Weighted average common  shares outstanding |   | 20,216                      |   | 17,910 |   | 16,888 |   |
|                                        |   |                        |   |   |   |   |   |
| Net loss per share -  basic and diluted     |   |                        |   |   |   |   |   |
| Continuing operations                       |   | $                           | 0.40   |   | $ | 2.35 |   | $ | 1.83 |   |
| Discontinued operation                      |   | 0.06                        |   | 0.13 |   | 0.12 |   |
|                                        |   | $                           | 0.46   |   | $ | 2.48 |   | $ | 1.95 |   |

 

***Certain Significant Risks and Uncertainties***-The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

The Company sells itsproducts primarily to organizations in the healthcare industry in the US,Canada and Europe, and does not require its customers to provide collateral orother security to support accounts receivable. The Company maintains allowancesfor estimated bad debt losses.

 

The Company participatesin the dynamic biopharmaceutical industry. The Company believes that changes inany of the following areas could have a negative impact on the Company in termsof its future financial position and results of operations: ability to obtainadditional financing; successful product development; manufacturing andmarketing capabilities; ability to negotiate acceptable collaborativerelationships; obtaining necessary FDA and foreign regulatory approvals;ability to attract and retain key personnel; litigation and other claimsagainst the Company, 

 

53

 

including, but notlimited to, patent claims; increased competition; uncertainty regarding healthcare reimbursement and reform; and potential exposure for product liability andhazardous materials.

*** ***

***Accumulated Other Comprehensive Loss***-The following are the components of accumulated other comprehensive loss (inthousands):

 
|                                      |   | **December 31,** |   |
|-------------------------------------------|--------|------------------|--------|
|                                      |   | **2001**         |   | **2000** |   | **1999** |   |
| Unrealized gain on  investments           |   | $                | — |   | $ | 6 |   | $ | 609 |   |
| Foreign currency  translation adjustments |   | (3,147           | )      | (2,212 | ) | (1,313 | ) |
|                                      |   |             |   |   |   |   |   |
| Total                                     |   | $                | (3,147 | ) | $ | (2,206 | ) | $ | (704 | ) |

 

***Recently Issued Accounting Pronouncements***-In June 1998, the FASB issued SFAS No. 133, *Accounting for Derivative Instrumentsand Hedging Activities*. This Statement requires companies to recordderivatives on the balance sheet as assets or liabilities, measured at fairvalue. Gains or losses resulting from changes in the values of thosederivatives would be accounted for depending on the use of the derivative andwhether it qualifies for hedge accounting. The Company adopted SFAS No. 133, asamended, effective January 1, 2001.  Theadoption of this Statement did not have a material effect on the Company’sfinancial position, results of operations or cash flows, as the Company had nostand-alone or embedded derivatives at December 31, 2000 and had nothistorically entered into any derivative transactions to hedge currency orother exposures.

 

In September 2000, theFASB issued SFAS No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*. SFAS No. 140 replacesSFAS No. 125, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities*. It revises the standards foraccounting for securitizations and other transfers of financial assets andcollateral and requires certain disclosures, but carries over most of SFAS No.125’s provisions without reconsideration. The Company adopted the applicabledisclosure requirements of SFAS No. 140 in its consolidated financialstatements as of December 31, 2000 and adopted the remaining provision of SFASNo. 140 on April 1, 2001.  The Companyhas concluded that the adoption of the remaining provisions of SFAS No. 140after March 31, 2001 did not have a significant impact on the Company’sfinancial position or results of operations.

 

In June 2001, the FASBissued SFAS No. 141, *Business Combinations* and SFAS No. 142, *Goodwill andOther Intangible Assets.*SFAS No. 141 requires that all businesscombinations initiated after June 30, 2001 be accounted for under the purchasemethod and addresses the initial recognition and measurement of goodwill andother intangible assets acquired in a business combination. SFAS No. 142addresses the initial recognition and measurement of intangible assets acquiredoutside of a business combination and the accounting for goodwill and otherintangible assets subsequent to their acquisition. SFAS No. 142 provides thatintangible assets with finite useful lives be amortized and that goodwill andintangible assets with indefinite lives not be amortized, but will rather betested at least annually for impairment. The Company will adopt SFAS No. 142for its fiscal year beginning January 1, 2002. The Company is in the processof  evaluating existing goodwill andintangibles under the transitional impairment test in SFAS No. 142 and,accordingly, has not yet determined whether or not there will be an impairmentloss. Any transitional impairment loss will be recognized as a change inaccounting principle.

 

In July 2001, theFinancial Accounting Standards Board issued SFAS No.143, *Accounting for Asset Retirement**Obligations*. SFAS No. 143 addressesfinancial accounting and reporting for obligations associated with the retirementof tangible long-lived assets and the associated asset retirement costs. Itapplies to legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development, and (or)the normal operation of a long-lived asset, except for certain obligations oflessees. The provisions of SFAS No. 143 will be effective for fiscal yearsbeginning after June 15, 2002; however early application is permitted. TheCompany is currently in the process of evaluating the impact of this Statementon its financial condition and results of operations.

 

In August 2001, the FASBissued SFAS No. 144, *Accounting forImpairment or Disposal of Long-Lived Assets*.

 

54

 

SFAS No. 144 supersedesSFAS No. 121, *Accounting for the Impairmentof Long-Lived Assets and for Long-Lived Assets to be Disposed Of*,  and addresses financial accounting andreporting for the impairment or disposal of long-lived assets. This Statementis effective for fiscal years beginning after December 15, 2001. The Companywill adopt SFAS No. 144 on January 1, 2002. Adoption of this Statement is notexpected to have a significant impact on the Company’s financial position orresults of operations.

** **

**2. INVESTMENTS**

 

At December 31, 2001there were no available-for-sale securities. At December 31, 2000 theavailable-for-sale securities consist of the following (in thousands):

 
|            |   | **December 31, 2000** |   |
|-----------------|--------|-----------------------|--------|
|            |   | **Amortized  Cost**   |   | **Unrealized  Gain on  Investments** |   | **Unrealized  Loss on  Investments** |   | **Estimated  Fair  Value** |   |
| Corporate bonds |   | $                     | 1,415  |   | $ | 6 |   | $ | — |   | $ | 1,421 |   |
| 1 year CD       |   | 140                   |   | — |   | — |   | 140 |   |
| Total           |   | $                     | 1,555  |   | $ | 6 |   | $ | — |   | $ | 1,561 |   |

 

**3. INVENTORIES**

 

Inventories consist of(in thousands):

 
|            |   | **December 31,** |   |
|-----------------|--------|------------------|--------|
|            |   | **2001**         |   | **2000** |   |
| Raw materials   |   | $                | 2,976  |   | $ | 18,860 |   |
| Work in process |   | 13,868           |   | 14,107 |   |
| Finished goods  |   | 6,098            |   | 7,089 |   |
| Total           |   | $                | 22,942 |   | $ | 40,056 |   |

 

In addition to theseinventories, the Company has classified approximately $15 million of rawmaterials inventory as other assets in the accompanying consolidated balancesheet at December 31, 2001, as it is not expected that any significant portionof the inventory will be utilized in operations during the next twelve months.

** **

**4. PROPERTY AND EQUIPMENT**

 

Property and equipmentconsist of (in thousands):

 
|                                       |   | **December 31,** |   |
|--------------------------------------------|--------|------------------|--------|
|                                       |   | **2001**         |   | **2000** |   |
| Machinery and equipment                    |   | $                | 8,176  |   | $ | 8,072 |   |
| Capitalized software                       |   | 3,135            |   | 3,011 |   |
| Furniture and fixtures                     |   | 401              |   | 392 |   |
| Projects in process                        |   | 249              |   | 107 |   |
| Leasehold improvements                     |   | 1,464            |   | 1,440 |   |
| Total                                      |   | 13,425           |   | 13,022 |   |
| Accumulated  depreciation and amortization |   | (7,956           | )      | (6,483 | ) |
| Property and equipment  - net              |   | $                | 5,469  |   | $ | 6,539 |   |

 

Included in machinery andequipment at December 31, 2001 and 2000 are assets leased under capitalleases of $2,236,000 and $2,287,000 (net of accumulated amortization of$1,784,000 and $1,584,000), respectively. Depreciation and amortization expenseof property and equipment totaled $1,774,000, $2,507,000 and $1,412,000

 

55

 

for the years endedDecember 31, 2001, 2000 and 1999, respectively.

** **

**5. INTANGIBLE ASSETS**

 

Intangible assets consistof (in thousands):

 
|                      |   | **December 31,** |   |
|---------------------------|--------|------------------|--------|
|                      |   | **2001**         |   | **2000** |   |
| Developed technology      |   | $                | 7,613  |   | $ | 7,613 |   |
| Avoided royalties         |   | 2,514            |   | 2,514 |   |
| Assembled workforce       |   | 1,653            |   | 1,653 |   |
| Distribution rights       |   | —           |   | 739 |   |
| Trademarks                |   | 762              |   | 762 |   |
| Customer list             |   | 1,002            |   | 1,002 |   |
|                      |   | 13,544           |   | 14,283 |   |
| Accumulated  amortization |   | (4,324           | )      | (3,141 | ) |
| Intangible assets - net   |   | $                | 9,220  |   | $ | 11,142 |   |

 

Intangibleassets are stated at cost. Amortization is calculated using the straight-linemethod over the estimated useful lives ranging from five to fourteen years.Amortization expense totaled $1,922,000, $1,392,000 and $1,398,000 for theyears ended December 31, 2001, 2000 and 1999, respectively. Amortizationexpense in 2001 includes the write-off of $482,000 representing the net bookvalue of the intangible asset related to distribution rights for Multitest andCeliptium, two minor products formerly sold in Europe. Sales of these twoproducts were discontinued in the fourth quarter of  2001. Intangible assetsresulted from the acquisition of IMTIX in 1998.

** **

**6. OTHER ASSETS**

 

Other assets consist of(in thousands):

** **
|                                       |   | **December 31,** |   |
|--------------------------------------------|--------|------------------|--------|
|                                       |   | **2001**         |   | **2000** |   |
| Inventory-raw materials  (Note 3)          |   | $                | 15,263 |   | $ | — |   |
| Advance - Gensia Sicor                     |   | 1,000            |   | 1,000 |   |
| Deferred income tax  benefits              |   | —           |   | 303 |   |
| Restricted cash                            |   | 4,000            |   | 6,000 |   |
| Finova warrant and  closing costs (Note 8) |   | —           |   | 1,284 |   |
| Other assets                               |   | 997              |   | 571 |   |
| Total                                      |   | $                | 21,260 |   | $ | 9,158 |   |

 

56

 

**7. ACCRUED LIABILITIES**

 

Accrued liabilitiesconsist of (in thousands):

 
|                                          |   | **December 31,** |   |
|-----------------------------------------------|--------|------------------|--------|
|                                          |   | **2001**         |   | **2000** |   |
| Salaries & related  benefits              |   | $                | 4,483  |   | $ | 3,689 |   |
| Interest payable                              |   | 186              |   | 1,894 |   |
| Research and  development expenses (Note 10)  |   | 1,550            |   | 2,420 |   |
| Marketing and  development expenses (Note 10) |   | 2,047            |   | 2,436 |   |
| Other accrued  liabilities                    |   | 6,109            |   | 3,499 |   |
| Total                                         |   | $                | 14,375 |   | $ | 13,938 |   |

 

**8. NOTESPAYABLE**

 

Notes payable consist of(in thousands):

 
|                                 |   | **December 31,** |   |
|--------------------------------------|--------|------------------|--------|
|                                 |   | **2001**         |   | **2000** |   |
| Note payable to Aventis              |   | $                | 9,000  |   | $ | 15,000 |   |
| Discount on note  payable to Aventis |   | (727             | )      | (1,707 | ) |
| Convertible note                     |   | 9,779            |   | 9,691 |   |
| Note payable to Abbott  Laboratories |   | 16,000           |   | 16,000 |   |
| Note payable to FINOVA               |   | —           |   | 5,000 |   |
| Other debt                           |   | 1,776            |   | 3,492 |   |
| Total                                |   | 35,828           |   | 47,476 |   |
| Less current portion                 |   | (5,615           | )      | (12,797 | ) |
| Long-term                            |   | $                | 30,213 |   | $ | 34,679 |   |

 

In connection with theacquisition of IMTIX from Aventis in September 1998, the Company issued a $21million non-interest bearing note payable over five years with remainingpayments due as follows: $5 million in 2002 and $4 million in 2003. The notepayable was discounted at a rate of 9.25%, which the Company believes wasconsistent with its normal borrowing rate. The resulting discount of approximately$4.8 million is being accreted as an addition to interest expense over the termof the note. During the years ended December 31, 2001, 2000 and 1999, $980,000,$1,282,000 and $1,418,000, respectively, of amortization was recognized. TheCompany had approximately $4.0 million and $6.0 million of restricted cash atDecember 31, 2001 and 2000, respectively, that serves as a collateral for astandby letter of credit in favor of Aventis.

 

In March 1999, theCompany issued a $10 million convertible note due March 30, 2004. This notebears interest at the rate of 6.5% through March 30, 2004 and thereafter at therate of 8.5% on any overdue amount. The interest is payable semi-annually inSeptember and March. The note, or any portion thereof, is convertible at theoption of the holder at any time before March 30, 2004 into shares of commonstock of the Company at the rate of 50.0773 shares of common stock for each$1,000 principal amount. The net proceeds received by the Company were$9,550,000. The note is being accreted to its face amount over the five yearterm. As of December 31, 2001 there has been no conversion into common stock.

 

In May 1999, the Companyreceived a loan of $16 million from Abbott Laboratories. The loan bearsinterest at 8.75%, payable annually, and is secured by a security interest inthe US marketing rights for SangCya Oral Solution. The loan matures on December31, 2004, and can be pre-paid by the Company without penalty at any time priorto maturity.

 

On April 21, 2000 theCompany signed an agreement with FINOVA to provide a line of credit of up to$30 million (the Loan Agreement).  TheLoan Agreement had an initial three year term. The line of credit consisted oftwo elements: a $15 million line of credit bearing interest at the prime rate(9.0% at December 31, 2000) and secured by 

 

57

 

a matching compensatingcash balance, and a $15 million line of credit bearing interest at the primerate plus 1.5% and based on eligible domestic accounts receivable andinventory, as defined in the Loan Agreement. Under the terms of the Loan Agreement, the Company was required tomaintain a loan balance of at least $5 million.  As collateral for the line of credit, the Company granted FINOVAa first priority security interest in certain of its tangible and intangibleassets and pledged the stock of its two French subsidiaries, IMTIX-SangStat SASand SangStat Atlantique SA.  Inaddition, the Company was required to meet certain financial covenants.  At December 31, 2000, the Company had drawndown $5.0 million under the line of credit and had set aside a correspondingcompensating balance, which is included in Other Current Assets on theconsolidated balance sheet. As of December 31, 2000, the Company was in defaultof the Tangible Net Worth covenant under the Loan Agreement as a result of thereserve the Company took against inventory due to the SangCya Oral Solutionrecall.  The Loan Agreement did notprovide for a cure period for such a default. The parties entered into an Amendment dated May 11, 2001, which providedthat the Loan Agreement would terminate as of December 31, 2001, the portion ofthe line of credit collateralized by accounts receivable and inventory would beeliminated, and FINOVA would waive the existing default and all earlytermination penalties with respect to the Loan Agreement. Subsequently, theCompany repaid the loan balance of $5,000,000 on June 29, 2001, therebyterminating the Loan Agreement. Since the loan has been repaid, the $5,000,000compensating cash balance previously classified as other current assets has nowbeen classified as cash in the accompanying consolidated balance sheet. Inconnection with this financing, the Company issued a warrant to purchase 50,000shares of the Company’s common stock at an exercise price of $23.438. Thiswarrant was valued using the Black-Scholes pricing model with the followingweighted average assumptions: expected life, five years; stock volatility, 72%;risk free interest rate, 6.0%; and no dividend payments during the expectedterm. The calculated value of the warrant of $744,000 and the additionalfinancing fees of $750,000 have been amortized as additional interest expense$1,327,000 in 2001 and $167,000 in 2000.

 

Other debt at December31, 2001 consisted primarily of borrowings by IMTIX against four revolvinglines of credit from French banks. These lines of credit, which arerenegotiable annually, bear interest at variable rates based on Eonia (EuroOver Night Index Average, 3.38% at December 31, 2001) plus 0.75% to 1.1%, andare secured by accounts receivable from unaffiliated customers. At December 31,2001, accounts receivable subject to such security totaled approximately  $3,103,000. At December 31, 2001,approximately $1.4 million remained available for borrowing under these creditlines. Interest rates on other debt at December 31, 2001 range between 3.55%and 8.25%.

 

As of December 31, 2001,future principal payments of notes payable (net of discounts) are as follows(in thousands):

**** ****
| **Years Ending December 31,** |   |   |   |
|-------------------------------|--------|--------|--------|
| 2002                          |   | $      | 5,615  |   |
| 2003                          |   | 4,220  |   |
| 2004                          |   | 25,993 |   |
| Total                         |   | $      | 35,828 |   |

 

****9. FINANCIAL INSTRUMENTS****

 

The following methods andassumptions were used to estimate the fair value of each class of financialinstruments for which it is practicable to estimate fair value.

 

Short-term investmentsand corporate equity securities are recorded at fair value based on quotedmarket prices (see Note 2).

 

The fair value of theconvertible note is based on market quotations, the major element of which is acomparison of the fixed conversion price and the closing price of the Company’scommon stock at December 31, 2001 and 2000. The fair value of the notes payableto Aventis and Abbott Laboratories is based on the present value of future cashflows discounted at an interest rate of 10.0% at December 31, 2001 and 2000,respectively. These estimates are approximate since no liquid market exists forthese notes. The fair value of the Company’s other debt is based on

 

58

 

carrying value as thoseobligations have short-term variable interest rates.

 

The estimated fair valuesof the Company’s debt, including current portion, are as follows (inthousands):

 
|                                 |   | **December 31, 2001** |   | **December 31, 2000** |   |
|--------------------------------------|--------|-----------------------|--------|-----------------------|--------|
|                                 |   | **Carrying  Amount**  |   | **Fair  Value**       |   | **Carrying  Amount** |   | **Fair  Value** |   |
| Note payable to Aventis              |   | $                     | 8,273  |                  | $      | 7,851 |   | $ | 13,293 |   | $ | 12,592 |   |
| Note payable to Abbott  Laboratories |   | 16,000                |   | 15,503                |   | 16,000 |   | 15,366 |   |
| Note payable to Finova               |   | —                |   | —                |   | 5,000 |   | 5,000 |   |
| Convertible debt                     |   | 9,779                 |   | 11,550                |   | 9,691 |   | 8,796 |   |
| Other debt                           |   | 1,776                 |   | 1,776                 |   | 3,492 |   | 3,492 |   |
| Total                                |   | $                     | 35,828 |                  | $      | 36,680 |   | $ | 47,476 |   | $ | 45,246 |   |

 

**10.COLLABORATIVE AGREEMENTS**

 

In May 1999, the Companyand Abbott Laboratories (“Abbott”) signed a multi-year co-promotion,distribution and research agreement for SangCya Oral Solution and cyclosporinecapsules (the products) in the US. The Company is the exclusive distributor forthe products and shares marketing, promotional and development expenses as wellas the profits from the co-promotion of the products with Abbott. The agreementends December 31, 2004 unless both parties agree to extend it. Pursuant to thisagreement, Abbott made an equity investment of $14 million during 1999 inexchange for approximately 894,000 shares of common stock, representing apremium to fair market value at that time aggregating to $1.3 million. Inaddition, Abbott made a series of up-front and milestone payments totaling$20.8 million through May 2000, and a long-term loan of $16 million (see Note8) to the Company. In January 2000, the Company made a milestone payment toAbbott of $4 million under the terms of the agreement. No further milestonepayments are required from either party. All up-front and milestone payments received, net of milestone paymentsmade, and the premium received on the sale of the common stock to Abbott arerecorded as deferred revenue and are being recognized ratably over the term ofthe agreement. For the years ended December 31, 2001, 2000 and 1999, the Companyamortized $3.2 million, $2.7 million and $1.5 million, respectively, torevenue. In May 2000, the Company and Abbott launched the cyclosporine capsuledeveloped by Abbott under the brand name Gengraf®.  In connection with the equity investment, Abbott and the Companyentered into a Right of First Refusal Agreement and a Registration RightsAgreement, and amended and restated their existing Supply Agreement.

 

As part of the agreementwith Abbott, the Company agreed to fund part of a phase IV clinical trial forGengraf during 2000 and 2001 up to a maximum of $2,475,000. In February 2002,the Company received notification from Abbott that the Company’s share of thesecosts incurred was approximately $449,000 less than originally estimated.

 

In August 2000, theCompany entered into a global co-development, supply and license agreement withAbgenix, Inc. for ABX-CBL, an antibody developed by Abgenix. The agreementprovides the Company with an exclusive worldwide license for the marketing andsale of ABX-CBL, an anti-CD147 monoclonal antibody for the treatment of steroidresistant graft versus host disease (GVHD). ABX-CBL is currently in amulticenter, randomized, and controlled Phase II/III study. Under the terms ofthe agreement, the Company made an initial license fee payment of $1,000,000and an additional payment to Abgenix of $1,000,000 as partial reimbursement ofone-half of the development costs incurred by Abgenix between January 1, 2000and August 8, 2000. The agreement requires the Company to pay a further$900,000 as reimbursement of these development costs in two equal installmentsat the end of June 2001 and 2002, the first of which installments has beenpaid. Development costs incurred after August 8, 2000 are being shared equally,as would any potential profits from future sales of collaboration products. TheCompany and Abgenix share responsibility for product development, including theongoing clinical trial. Abgenix will be responsible for manufacturing ABX-CBL.The Company also has the right, subject to the terms and conditions of theagreement, to commercialize other anti-CD147 antibodies developed by Abgenix.If ABX-CBL receives regulatory approval and is launched, the Company will berequired to pay Abgenix for one-half of the of development expenses incurredprior to January 1, 2000. The amount has not been determined, but the agreementlimits the Company obligation to $6,100,000. The Company shall have noobligation to reimburse Abgenix until the first anniversary of the launch ofABX-CBL and the timing of reimbursement varies depending on ABX-CBL’s sales.For the years ended December 31, 2001 and 2000, the Company paid approximately$2,800,000 and $1,500,000 as its share of the development costs incurred afterAugust 8, 2000.

 

59

 

The Company entered intoa Distribution Agreement with Aventis in May 1999 with an initial expirationdate of March 31, 2002. The agreement automatically extends for additional oneyear periods unless either party gives notice of termination. The currentexpiration date is March 31, 2003. Aventis is the Company’s exclusive distributor for Thymoglobulin andLymphoglobuline for most countries outside of North America and Europe. Aventissells these products either through its local subsidiary or through adistributor that often distributes other Aventis products. The companyrenegotiated this agreement in 2001 and has contracted directly withdistributors in Asia where Aventis has no direct presence (e.g. Israel andcertain Asian countries). The Company is also in negotiations to extend thecurrent contract directly with Aventis subsidiaries in the countries whereAventis does have a direct presence and with current Aventis distributors incertain other countries (e.g. Middle East and Africa).

 

Aventis also performscertain steps in the manufacturing process of Thymoglobulin andLymphoglobuline. Pursuant to the purchase of IMTIX on September 30, 1998, theCompany pays Aventis royalties on Thymoglobulin and Lymphoglobuline contingentupon the sales of these products. In the years ended December 31, 2001, 2000and 1999, royalty payments on Lymphoglobuline to Aventis totaled approximately$616,000, $622,000 and $646,000, respectively. The Company began payingroyalties on sales of Thymoglobulin commencing on the third anniversary of thepurchase of IMTIX (October 1, 2001). For the year ended December 31, 2001 theroyalty payments on Thymoglobulin to Aventis totaled approximately $1,539,000.

 

In December 1997, theCompany signed an agreement with Amgen Inc. (“Amgen”) for the exclusiveregistration, marketing and distribution of its cyclosporine products inselected territories in the Asia/Pacific Rim region. The licensing agreementincluded an initial $750,000 payment to the Company, which was received in1997, and other milestone and reimbursement payments based on key regulatorysubmissions and approvals. Payments and reimbursements under the agreement of$550,000  received in the year ended December31, 1999 are included in revenue from collaborative agreements in theConsolidated Statements of Operations. Amgen terminated the agreement effectiveAugust 15, 2001.

** **

**11. LEASING ARRANGEMENTS**

 

The Company leasesadministrative facilities under operating leases and machinery and equipmentunder capital leases expiring through 2013. The Company also leasesmanufacturing facilities from Aventis in Lyon, France under a lease thatexpires in 2013. This lease may be terminated at the Company’s option with oneyear’s notice. As of December 31, 2001, future minimum annual paymentsunder capital and operating leases are as follows (in thousands):

 
| **Years Ending December 31,**            |   | **Capital  Leases** |   | **Operating  Leases** | ** ** |
|------------------------------------------|--------|---------------------|--------|-----------------------|------------|
| 2002                                     |   | $                   | 205    |                  | $          | 1,482 |   |
| 2003                                     |   | 170                 |   | 1,455                 |       |
| 2004                                     |   | 167                 |   | 1,367                 |       |
| 2005                                     |   | —              |   | 971                   |       |
| 2006                                     |   | —              |   | 603                   |       |
| Thereafter                               |   | —              |   | 3,898                 |       |
| Total minimum lease  payments            |   | 542                 |   | $                     | 9,776      |   |
| Less amounts  representing interest      |   | (39                 | )      |                  |       |
| Present value of  minimum lease payments |   | 503                 |   |                  |       |
| Less current portion                     |   | (177                | )      |                  |       |
| Capital lease  obligations               |   | $                   | 326    |                  |       |   |

 

Rent expense for theyears ended December 31, 2001, 2000 and 1999 was $1,642,000, $1,493,000and $1,047,000, respectively.

 

60

 

**12. STOCKHOLDERS’ EQUITY**

*** ***

***Issuance of Common Stock*** – On January5, 2001, the Company completed a private placement of approximately 1.3 millionshares of common stock for aggregate proceeds of approximately $12.5 millionwith a group of institutional investors. Shares were purchased at a discount tothe closing market price on the date the agreements were signed. Thetransaction occurred in two tranches, of approximately $8.5 million (894,800shares) and $4.0 million (421,000 shares) respectively, the first of whichclosed December 29, 2000, the second of which closed January 5, 2001. TheCompany did not pay any investment banking fees and did not issue any warrantswith respect to this placement.

 

In June 2001, the Companysold 1,363,635 shares of common stock to the same group of investors for netproceeds of approximately $15 million.

*** ***

***Stockholder Rights Plan***– The Companyhas a stockholder rights plan to protect stockholders’ rights in the event of aproposed takeover of the Company. Under the plan a preferred share purchaseright (Right) is attached to each share of common stock. The Rights areexercisable only if a person or group acquires 15% or more of the Company’scommon stock or announces a tender offer, the consummation of which wouldresult in ownership by a person or group of 15% or more of the Company’s commonstock. Each Right will entitle stockholders to buy one one-hundredth of a shareof a new series of junior participating preferred stock at an exercise price of$45 upon certain events. If, after the Rights become exercisable, the Companyis acquired in a merger or other business combination transaction, or sells 50%or more of its assets or earnings power, each Right will entitle its holder topurchase, at the Right’s then-current price, a number of the acquiringcompany’s common shares having a market value at the time of twice the Right’sexercise price. If a person or group acquires 15% or more of the Company’soutstanding common stock, each Right will entitle its holder (other than suchperson or members of such group) to purchase, at the Right’s then-currentexercise price, a number of the Company’s common shares (or cash, othersecurities or property) having a market value twice the Right’s exercise price.At any time within ten days after a person or group has acquired beneficialownership of 15% or more of the Company’s common stock, the Rights areredeemable for $.01 per Right at the option of the Board of Directors. TheRights expire on August 25, 2005, unless earlier redeemed or exchanged. OnOctober 8, 2001, the plan was amended to appoint EquiServe Trust Company, N.A.,as successor rights agent to the plan and to conform the plan to currentDelaware law regarding the use of “continuing director” provisions.

*** ***

***Stock Option Plans***– The Company hastwo stock option plans:  the 1993 StockOption Plan (the 1993 Plan) and the 1996 Non-Employee Directors Stock OptionPlan (the Directors Plan).  Under theCompany’s stock option plans, incentive or non-statutory stock options topurchase up to 5,192,200 shares of common stock may be granted to employees,directors, and consultants. Incentive and non-statutory options must be grantedat not less than fair market value at the date of grant.

 

A summary of stock optionactivity is as follows:

 

61

 
|                                                                                                         |   | **Number of  Shares** |   | **Weighted  Average  Exercise  Price** |   |
|--------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|----------------------------------------|--------|
| Balances, January 1,  1999...............................                                                    |   | 2,555,643             |   | $                                      | 19.32  |   |
| Options granted  (weighted average fair value of $19.16).                                                    |   | 913,394               |   | 18.11                                  |   |
| Options  exercised...............................                                                            |   | (244,927              | )      | 7.59                                   |   |
| Options canceled................................                                                             |   | (413,151              | )      | 25.19                                  |   |
|                                                                                                         |   |                  |   |                                   |   |
| Balances, December 31,  1999 (1,258,563 vested at a weighted average exercise price of  $19.62)............. |   | 2,810,959             |   | 19.43                                  |   |
| Options granted  (weighted average fair value of $18.11).                                                    |   | 1,331,725             |   | 21.19                                  |   |
| Options  exercised...............................                                                            |   | (242,644              | )      | 10.84                                  |   |
| Options  canceled................................                                                            |   | (702,266              | )      | 23.15                                  |   |
|                                                                                                         |   |                  |   |                                   |   |
| Balances, December 31,  2000 (1,305,037 vested at a weighted average exercise price of $19.77).............  |   | 3,197,774             |   | 19.97                                  |   |
| Options granted  (weighted average fair value of $12.07).                                                    |   | 1,320,544             |   | 12.36                                  |   |
| Options  exercised...............................                                                            |   | (233,693              | )      | 8.26                                   |   |
| Options  canceled................................                                                            |   | (849,048              | )      | 19.13                                  |   |
|                                                                                                         |   |                  |   |                                   |   |
| Balances, December 31,  2001...............................                                                  |   | 3,435,577             |   | $                                      | 18.05  |   |

 

Under the 1993 Plan,options to purchase common stock generally vest over a period of four years,are exercisable upon vesting and expire ten years from the date of grant. As ofDecember 31, 2001, 277,390 shares were available under the 1993 Plan forfuture grants. During 1999, the Company recorded a charge of $160,000 relatedto certain fully vested non-employee options.

 

Under the Directors Plan,up to a total 500,000 options to purchase shares of the Company’s common stockmay be issued. Also in accordance with the Directors’ Plan, during 2001, 2000and 1999, each of the non-employee Directors was granted options to purchase8,000, 4,000 and 4,000 shares of the Company’s common stock, respectively. Alloptions granted under the Directors Plan are immediately exercisable, but theCompany may repurchase at the exercise price any unvested shares held by anon-employee Board member when his or her service terminates.  The first 25% of the shares acquired underthe Directors Plan vest when the non-employee director completes the first 12months of service after the date of grant, and the balance vests in equalmonthly installments as the non-employee director completes each of the next 36months of service.  The shares vest infull if the non-employee Board member’s service terminates due to death orpermanent disability or if the Company is subject to a change in control or a partyto a merger or certain other transactions. In addition, the Directors Plan permits non-employee directors toreceive all or part of his or her basic retainer payments from the Company inthe form of non statutory stock options. If a Board member makes an election toreceive options in lieu of cash retainer, then options will automatically begranted to him or her under the Directors Plan. As of December 31, 2001, therewere no outstanding shares subject to repurchase rights and 204,514 shares wereavailable under the Directors Plan for future grants.  Options granted under the Directors Plan are also included in theabove table.

 

Additional informationregarding options outstanding as of December 31, 2001 is as follows:

 

62

 
| **Options Outstanding**       |        | **Vested  Options**     |   |
|-------------------------------|-------------|-------------------------|--------|
| **Range of  Exercise Prices** |        | **Number  Outstanding** |   | **Weighted  Avg.  Remaining  Contractual  Life (yrs)** |   | **Weighted  Avg.  Exercise  Price** |   | **Number  vested** |   | **Weighted  Avg.  Exercise  Price** |   |
| $                             | 0.00 - 5.00 |                    | 45,700 |   | 2.0 |   | $ | 2.75 |   | 45,700 |   | $ | 2.75 |   |
| 5.01 - 10.00                  |        | 106,656                 |   | 6.7 |   | 7.40 |   | 51,246 |   | 6.58 |   |
| 10.01 - 15.00                 |        | 1,208,990               |   | 8.6 |   | 11.47 |   | 293,735 |   | 12.17 |   |
| 15.01 - 20.00                 |        | 887,346                 |   | 5.7 |   | 18.64 |   | 479,384 |   | 19.54 |   |
| 20.01 - 25.00                 |        | 613,221                 |   | 6.7 |   | 22.49 |   | 279,666 |   | 22.64 |   |
| 25.01 - 30.00                 |        | 344,226                 |   | 6.6 |   | 26.81 |   | 219,891 |   | 26.67 |   |
| 30.01 - 35.00                 |        | 207,772                 |   | 3.3 |   | 32.54 |   | 195,968 |   | 32.59 |   |
| 35.01 - 45.00                 |        | 21,666                  |   | 7.9 |   | 42.81 |   | 9,954 |   | 42.84 |   |
|                          |        | 3,435,577               |   | 6.8 |   | 18.05 |   | 1,575,544 |   | 20.57 |   |
|                               |             |                         |        |  |  |  |  |  |  |  |  |  |  |  |

 

***Additional Stock Plan Information***– SFAS No. 123requires the disclosure of pro forma net income (loss) and earnings (loss) pershare as though the Company had adopted the fair value method. UnderSFAS No. 123, the fair value of stock-based awards to employees iscalculated through the use of option pricing models, even though such modelswere developed to estimate the fair value of freely tradable, fullytransferable options without vesting restrictions, which significantly differfrom the Company’s stock option awards. These models also require subjectiveassumptions, including future stock price volatility and expected time toexercise, which greatly affect the calculated values. The Company’scalculations were made using the Black-Scholes option pricing model with thefollowing weighted average assumptions: expected life, five and a half years;stock volatility, 64% in 2001, 108% in 2000 and 72% in 1999; risk free interestrate, approximately 5.0% in 2001, 5.50% in 2000 and 1999; and no dividendpayments during the expected term. The Company’s calculations are based on a singleoption valuation approach and forfeitures are recognized as they occur. If thecomputed fair values of the plan awards had been amortized to expense over thevesting period of the awards, pro forma net loss would have beenapproximately as follows:

 
|                                         |   | **Year Ended  December 31,** |   |
|----------------------------------------------|--------|------------------------------|--------|
|                                         |   | **2001**                     |   | **2000** |   | **1999** |   |
| Net loss (numerator)                         |   |                         |   |   |   |   |   |
| Continuing operations                        |   | $                            | 10,159 |   | $ | 44,418 |   | $ | 36,148 |   |
| Discontinued operation                       |   | 1,144                        |   | 2,704 |   | 2,158 |   |
|                                         |   | $                            | 11,303 |   | $ | 47,122 |   | $ | 38,306 |   |
|                                         |   |                         |   |   |   |   |   |
| Shares (denominator)                         |   |                         |   |   |   |   |   |
| Weighted average common  shares outstanding  |   | 20,216                       |   | 17,910 |   | 16,888 |   |
|                                         |   |                         |   |   |   |   |   |
| Net loss per share – basic  and diluted |   |                         |   |   |   |   |   |
| Continuing operations                        |   | $                            | 0.50   |   | $ | 2.48 |   | $ | 2.14 |   |
| Discontinued operation                       |   | 0.06                         |   | 0.15 |   | 0.13 |   |
|                                         |   | $                            | 0.56   |   | $ | 2.63 |   | $ | 2.27 |   |

 

63

 

**13. INCOME TAXES**

 

Loss before income taxesand the provision for income taxes consists of the following (in thousands):

 
|                                                          |   | **December  31,** |   |
|---------------------------------------------------------------|--------|-------------------|--------|
|                                                          |   | **2001**          |   | **2000** |   | **1999** |   |
| Income (loss) from  continuing operations before income taxes |   |              |   |   |   |   |   |
| Domestic                                                      |   | $                 | 957    |   | $ | (38,448 | ) | $ | (28,023 | ) |
| Foreign                                                       |   | (9,199            | )      | (3,201 | ) | (2,614 | ) |
| Net loss from  discontinued operation                         |   |              |   |   |   |   |   |
| Domestic                                                      |   | (1,144            | )      | (2,342 | ) | (2,025 | ) |
| Income tax benefit  (provision)                               |   |              |   |   |   |   |   |
| Domestic                                                      |   | —            |   | — |   | — |   |
| Foreign                                                       |   | 7                 |   | (368 | ) | (345 | ) |
| Net Loss                                                      |   | $                 | (9,379 | ) | $ | (44,359 | ) | $ | (33,007 | ) |

 

No domestic income taxprovision (benefit) has been provided due to the Company’s continuing losses.The difference between the Company’s effective tax rate and the Federal statutoryrate of 35% is attributable primarily to the recording of valuation allowanceson net deferred tax assets during the respective periods.

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamount of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes, as well as operating loss and tax creditcarryforwards. Significant components of the Company’s deferred income taxassets are as follows (in thousands):

 
|                                                   |   | **December  31,** | ** ** |
|--------------------------------------------------------|--------|-------------------|------------|
|                                                   |   | **2001**          |       | **2000** | ** ** |
| Deferred tax assets:                                   |   |              |       |   |   |
| Net operating loss  carryforwards                      |   | $                 | 48,987     |   | $ | 47,999 |   |
| General business  credits                              |   | 7,536             |       | 5,604 |   |
| Deferred revenue                                       |   | 3,774             |       | 5,032 |   |
| Capitalized research  and development                  |   | 4,576             |       | 3,299 |   |
| Accruals and reserves  deductible in different periods |   | 8,607             |       | 8,524 |   |
| Depreciation                                           |   | 2,244             |       | 2,584 |   |
|                                                   |   | 75,724            |       | 73,042 |   |
| Valuation allowance                                    |   | (75,331           | )          | (72,739 | ) |
| Total                                                  |   | $                 | 393        |   | $ | 303 |   |

 

Based on its history ofUS operating losses, the Company has placed a valuation allowance of$75,331,000 and $72,739,000 against its otherwise recognizable domestic netdeferred tax assets at December 31, 2001 and 2000, respectively, due tothe uncertainty surrounding the realizability of these benefits.

 

At December 31,2001, the Company had federal, California and foreign net operating losscarryforwards of approximately $139,653,000, $12,916,000 and $2,048,000respectively, available to reduce future taxable income. Such carryforwardsexpire beginning in 2002 through 2021.

 

Also at December 31,2001, the Company had research and experimentation credit carryforwardsavailable of approximately $4,635,000 and $2,859,000 for federal and state taxpurposes, respectively. The federal tax credit carryforwards expire beginningin 2004 through 2013 and the state tax credit carryforwards have no expirationdate.

 

Included in the deferredtax assets at December 31, 2001 is approximately $5,109,000 of cumulative taxbenefit related to equity transactions which will be credited to stockholders’equity, if and when realized after the other tax deductions in thecarryforwards have been realized.

 

Utilization of the abovenet operating loss and credit carryforwards may be subject to an annuallimitation due to ownership change limitations provided by the Internal RevenueCode of 1986 and similar state provisions. The

 

64

 

annual limitation mayresult in the expiration of net operating loss and credit carryforwards beforeutilization.

** **

**14. EMPLOYEE BENEFIT PLAN**

 

The Company has a 401(k)tax-deferred savings plan, whereby eligible employees may contribute a portionof their eligible compensation. Company contributions are discretionary.Through December 31, 2001 the Company had not made any contributions.

** **

**15. MAJOR CUSTOMERS**

 

For the year endedDecember 31, 2001, the Company had four customers that accounted forapproximately 26%, 18%, 12% and 11%, respectively, of total revenues.  For the year ended December 31, 2000, theCompany had two customers that accounted for approximately 15% and 13%,respectively, of total revenues. For the year ended December 31, 1999, theCompany had one customer that accounted for approximately 11% of totalrevenues.

 

**16.DISCONTINUED OPERATION**

 

On March 13, 2001, theCompany committed to a formal plan to sell its division known as The TransplantPharmacy (“TTP”). On April 20, 2001, the Company closed the sale of TTP toChronimed for $1.8 million in cash. The Company retained the inventory andaccounts receivable related to the business and has converted these assets intocash. The disposition of TTP has been accounted for as a discontinued operationin accordance with Accounting Principles Board (“APB”) Opinion No. 30.Accordingly,  prior period consolidatedstatements of operations and cash flows have been restated to account for TTPas a discontinued operation. During the year ended December 31, 2001 theCompany recorded a loss on disposal of $381,000 for the discontinued operation,primarily related to estimated future lease obligations for facilities thatsupported TTP.

 

The consolidated balancesheets at December 31, 2001 and 2000, include the remaining assets andliabilities of TTP as follows (in thousands):

 
|                                                |   | **December 31,** |   |
|-----------------------------------------------------|--------|------------------|--------|
|                                                |   | **2001**         |   | **2000** |   |
| Accounts receivable -  net                          |   | $                | — |   | $ | 3,986 |   |
| Inventories                                         |   | 8                |   | 1,137 |   |
| Other Assets                                        |   | —           |   | 96 |   |
| Accounts payable &  accrued expenses            |   | (296             | )      | (601 | ) |
| Net assets  (liabilities) of discontinued operation |   | $                | (288   | ) | $ | 4,618 |   |

 

The historicalconsolidated statements of operations and cash flows have been restated for allperiods presented to account for TTP as a discontinued operation.  The financial data of TTP reflects thehistorical sales and expenses of the transplantation services segment.Discontinued operations include TTP net sales which totaled $5,233,000,  $17,502,000 and $13,865,000 for the yearsended December 31, 2001, 2000 and 1999, respectively.  Net loss from the operations of TTP was $763,000, $2,342,000 and$2,025,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

 

**17.BUSINESS SEGMENT DATA**

 

As stated in Note 16, theCompany has presented the results of TTP, which represents its previouslyreported transplantation services segment, as a discontinued operation. As aresult, the Company’s continuing operations are organized and operate in onebusiness segment: pharmaceutical products. Pharmaceutical products consistprimarily of therapeutic products for preventing and treating organ rejection.The Company’s segment information has been restated to reflect the results of suchdecision.

 

65

 

The Company is engaged inthe business of developing and marketing products in the areas of immunology,hematology/oncology and auto-immune disease. The Company’s operations in Europeprimarily relate to the manufacture, marketing and selling, research anddevelopment and clinical study of therapeutic products for transplantation. TheCompany’s operations in the rest of the world are principally sales andmarketing related.

 

Summarized data for theCompany’s domestic and foreign revenues and long-lived assets are as follows(in thousands):

 
|                                            |   | **United  States** |   | **Europe** |   | **Canada** |   | **Rest of  the  World** |   | **Consolidated** |       |
|-------------------------------------------------|--------|--------------------|--------|------------|--------|------------|--------|-------------------------|--------|------------------|------------|
| **Year  ended December 31, 2001:**              |   |               |   |       |   |       |   |                    |   |             |       |
| Sales to unaffiliated  customers                |   | $                  | 70,388 |       | $      | 15,820     |   | $                       | 1,372  |             | $          | 6,929 |   | $ | 94,509 |   |
|                                            |   |               |   |       |   |       |   |                    |   |             |       |
| Long-lived assets............... |   | $                  | 3,776  |       | $      | 10,910     |   | $                       | 3      |             | $          | — |   | $ | 14,689 |   |
|                                            |   |               |   |       |   |       |   |                    |   |             |       |
| **Year  ended December 31, 2000:**              |   |               |   |       |   |       |   |                    |   |             |       |
| Sales to unaffiliated  customers                |   | $                  | 41,272 |       | $      | 14,667     |   | $                       | 1,289  |             | $          | 5,917 |   | $ | 63,145 |   |
|                                            |   |               |   |       |   |       |   |                    |   |             |       |
| Long-lived assets............... |   | $                  | 5,003  |       | $      | 12,669     |   | $                       | 9      |             | $          | — |   | $ | 17,681 |   |
|                                            |   |               |   |       |   |       |   |                    |   |             | ** ** |
| **Year  ended December 31, 1999:**              |   |               |   |       |   |       |   |                    |   |             |       |
| Sales to unaffiliated  customers                |   | $                  | 18,094 |       | $      | 22,428     |   | $                       | 1,401  |             | $          | 2,380 |   | $ | 44,303 |   |
|                                            |   |               |   |       |   |       |   |                    |   |             |       |
| Long-lived assets............... |   | $                  | 4,909  |       | $      | 13,184     |   | $                       | 15     |             | $          | — |   | $ | 18,108 |   |

 

**18. RECALL OF SANGCYA ORAL SOLUTION**

 

On June 29, 2000, theCompany in discussions with the FDA, which began on June 24, 2000, concludedthat a recall of SangCya Oral Solution from the US market would be required.Following further discussions with the FDA as to the type of recall andmechanism for conducting it, this decision was announced on July 10, 2000. Therecall was a Class II recall and was limited to the wholesale level and notextended to the pharmacy or the patient. A study in healthy volunteers hadfound that, when SangCya Oral Solution is mixed with apple juice as recommendedin its labeling, it is not bioequivalent to Neoral® oral solution.The Company also announced at the same time its decision to voluntarilywithdraw SangCya Oral Solution from the US market.

 

In the UK, the Company isselling SangCya Oral Solution on a named patient only basis subject to anamendment to the labeling. The Company is working with the Medicines ControlAgency (“MCA”) to complete a labeling change.

 

The Company included inits financial results for the year ended December 31, 2000, charges to coverthe losses resulting from the recall. These charges, which are reported in theconsolidated statements of operations under revenues, cost of sales, researchand development expenses and selling, general and administrative expenses,include $872,000 for sales returns, $11,774,000 for the write-off of allSangCya Oral Solution and CycloTech finished goods and components and a partialwrite-down of bulk cyclosporine inventories, and $429,000 for costs toterminate ongoing marketing and clinical programs, and to administer therecall. The inventory reserves are non-cash in nature since the inventories inquestion have already been paid for.

** **

**19. LITIGATION**

*** ***

***Novartis Patent Litigation With Respect to Gengraf***

 

Novartis sued Abbottclaiming that Gengraf® infringes its patents. Novartis’s complaintincludes a plea for injunctive relief to prevent the sale of Gengraf in theU.S., but to date Novartis has not moved for a preliminary injunction. Thetrial is scheduled for July 23, 2002. Abbott has informed the Company that itdoes not believe it infringes the Novartis patents. The Company has not beennamed a defendant in this lawsuit, and the Company has only limited access toinformation about it. Under the Company’s agreement with Abbott, Abbott isobligated to indemnify the Company against such suits, but their indemnity maynot cover lost sales, if any. The course of litigation is inherently uncertain,however. Novartis may choose to name the Company in this suit. Abbott may not 

 

66

 

prevail, or Abbott maychoose to settle on terms adverse to the Company’s interests. Should theCompany be named in this suit, the Company may incur expenses prior toreimbursement (if any) by Abbott pursuant to its indemnity obligation. ShouldNovartis succeed in obtaining a preliminary or permanent injunction, Gengrafmay be temporarily or permanently removed from the market, or the Company andAbbott may be required to negotiate a license on unfavorable terms.

*** ***

***Novartis Regulatory Litigation***

* *

*U.S. Regulatory Litigation.* NovartisU.S. sued the FDA on February 11, 1999 in the United States District Court forthe District of Columbia (case number 1: 99CV-00323) alleging that the FDA didnot follow its own regulations in approving SangCya Oral Solution in October1998. The lawsuit alleges that because Neoral Oral Solution and SangCya OralSolution are based on different formulation technologies, they should beclassified as different dosage forms. Novartis initially asked the Court to (i)allow Novartis to keep its microemulsion labeling; (ii) declaremicroemulsion to be a separate dosage form; and (iii) rescind the AB ratingthat was given to SangCya Oral Solution. The Company intervened in thislawsuit. The Court granted the Company’s motion to dismiss the counts thatrelate specifically to the approval of SangCya Oral Solution, but Novartis mayappeal this decision. The Company may remain a party in the case. Novartis hasfiled motions related to the remaining issues in the case, and the Court hasnot yet ruled on Novartis’s motions. Because the Company permanently withdrewSangCya Oral Solution from the U.S. market in July 2000, the Company does notbelieve that this lawsuit will have any material impact on SangCya revenues butif the court declares microemulsion to be a separate dosage form, this rulingwould require rescission of the AB rating for Gengraf, which would have amaterial impact on Gengraf revenues.

* *

*U.K. Regulatory Litigation – SangCyaOral Solution.* On October 18, 1999, Novartis U.K. wasgranted leave to seek judicial review of the decision by the Medicines ControlAgency, or MCA, to approve SangCya Oral Solution (Case No. HC-1969/99). OnMarch 30, 2000, the High Court in London dismissed Novartis’s application forjudicial review and ruled that the MCA acted properly in granting the SangCyaOral Solution marketing authorization. Novartis appealed the High Court’sdecision, and the hearing was held before the Court of Appeal on November 13and 14, 2000. The Court of Appeal has stayed ruling on this matter pending theanswer of certain questions of law to be submitted to the European Court ofJustice, or ECJ. No date has been set for the ECJ hearing, but it is likely tobe scheduled sometime in early 2002, with a ruling approximatelysix months thereafter. Following the ECJ ruling, the parties would go backto the Court of Appeal, which will then apply the ECJ ruling on the law to thefacts of this case.

 

*U.K. Regulatory Litigation –Cyclosporine Capsules.* In November 1999, Novartis fileda request with the High Court in London for judicial review of the refusal byMCA to state that it would not reference Neoral data in approving any genericcopies of Novartis’s cyclosporine capsule. An agreement was reached between theparties in which Novartis agreed to stay the judicial review until the earlierof (i) the decision on the judicial review of SangCya Oral Solution or (ii)MCA’s approval of SangStat’s marketing authorization for its cyclosporinecapsule product; in return, the Company agreed that it would not launch orcommence mutual recognition procedures in relation to the cyclosporine capsulemarketing authorization (including a request to MCA to prepare an assessmentreport) for a period of 28 days commencing on the day on which the Companynotifies Novartis’s solicitors of capsule approval. The parties have agreed tocontinue the stay until the appeal of the High Court decision with respect tothe judicial review of SangCya Oral Solution. The stay of this application forjudicial review will remain in place pending the ECJ ruling on the questions oflaw and resulting Court of Appeal judgment.

 

Novartis has alsoindicated that it will seek an injunction to prevent the Company’s cyclosporinecapsule from being sold in the United Kingdom until final resolution of thejudicial review relating to the Company’s cyclosporine capsule. Because theHigh Court ruled in favor of the MCA with respect to the SangCya Oral Solutionmarketing authorization and the Court of Appeal has referred questions of lawto the ECJ, the Company believes that it is unlikely that a court would grantNovartis a preliminary injunction with respect to its cyclosporine capsulemarketing authorization. If the Court of Appeals reverses the High Court’sruling following the ECJ’s decisions on questions of law, either the MCA couldstill approve the Company’s cyclosporine capsule as supra-bioavailable toSandimmune without referencing Neoral data or the MCA could decide not toapprove the Company’s cyclosporine capsule marketing authorization until theexpiration of the ten year data exclusivity period for Neoral capsules (May2004).

 

67

 

*Italian Regulatory/Trade SecretLitigation.* On May 5, 2000, Novartis Farma S.p.A.(“Novartis Italy”) served IMTIX-SangStat S.r.l., an Italian SangStatsubsidiary, and IMTIX-SangStat Ltd. with a summons to the Milan Tribunal.Novartis Italy alleges that by requesting mutual recognition from the ItalianHealth Authorities of the SangCya Oral Solution dossier approved by the MCA,the Company implicitly requested that the Italian Health Authorities review theNeoral dossier. Novartis alleges that this request is an act of unfaircompetition in that (i) the Neoral data has ten year exclusivity and (ii)the data is secret and by requesting mutual recognition, the Company isresponsible for the Health Authorities act of unfair competition following useof the Neoral dossier in reviewing the SangCya Oral Solution dossier. While thesummons acknowledges that the U.K. High Court did not invalidate the SangCyaOral Solution marketing authorization, it does not acknowledge that the HighCourt ruled that the MCA could review the Neoral data. To the best of theCompany’s knowledge, Novartis Italy has not filed suit against the ItalianHealth Authorities. The initial appearance of the parties before the MilanTribunal was scheduled for January 2001. The Company filed its response to thecomplaint at that time, and the hearing has been postponed until June 2002.

 

The Company does not yethave marketing approval for SangCya Oral Solution in Italy. Novartis Italy isseeking damages and an injunction to prevent the sale by SangStat of SangCyaOral Solution, or any other product for which the Company may obtain approvalbased upon a reference to the Neoral dossier, which the Company believes isintended to block its cyclosporine capsule from sale in Italy. The Companybelieves that resolution of this matter will depend on the resolution of theU.K. regulatory litigation, since the MCA’s actions are the basis for theItalian lawsuit.

*** ***

***Summary***

 

Although the Company isoptimistic that these disputes will ultimately be resolved in its favor, thecourse of litigation is inherently uncertain. With respect to Novartis’slawsuit against Abbott, Novartis is seeking to remove Gengraf from the market.If Novartis succeeds, the Company’s revenues would be reduced. With respect tothe European regulatory and trade secret lawsuits, Novartis’s requested relief,if granted, could have a negative economic impact on the Company depending onhow the MCA would proceed with the Company’s Marketing Authorization Application(MAA) for its capsule product. The MCA could approve the Company’s MAA forcyclosporine capsule as supra-bioavailable to Sandimmune without referencingNeoral data or the MCA could decide not to approve the Company’s MAA for itscyclosporine capsule until the expiration of the ten year data exclusivityperiod for Neoral capsules (May 2004). If the Company cannot obtain approval ofits cyclosporine capsule in Europe until 2004, this could have an adverseimpact on the Company’s future revenues and results of operations. With respectto the FDA lawsuit, Novartis’s requested relief would mean that Gengraf and allother generic cyclosporine products that are not microemulsions would losetheir AB rating. If Gengraf were no longer AB-rated to Neoral capsules,pharmacists could not automatically substitute Gengraf for Neoral capsules andthis would harm revenues. The litigation, if not resolved favorably to theCompany, could have a material adverse effect on the Company’s business,financial condition, cash flows and operating results.

 

***IFFA CREDO and Elevage Scientifique des Dombes Breach ofContract Suit***

 

In August 2000, twoaffiliated suppliers, IFFA CREDO and Elevage Scientifique des Dombes, sued theCompany’s French subsidiary, IMTIX-SangStat SAS, for breach of contract. On May2, 2001 the Company was notified that the Commercial Court of Lyon ruledagainst IMTIX-SangStat in the breach of contract suit and the court awarded thesuppliers 26.5 million French Francs (approximately $3.6 million) for lost profitsand reimbursement of capital expenditures. IMTIX-SangStat recorded a charge of$3,250,000 to other expense—net for the year ended December 31, 2001, which,combined with reserves recorded in fiscal 2000, fully provided for the courtaward. On March 22, 2002,the appeals court upheld the lower court decision and assessed interest againstthe Company of approximately $204,000 which has been recorded as a charge toother expense—net for the year ended December 31, 2001. The Company also recorded a deferred taxbenefit related to such charge of $70,000 (see Note 13).

 

The Company’s rabbitserum requirements are currently being met by its other suppliers.

 

**20. SUBSEQUENT EVENTS**

 

OnFebruary 20, 2002, the Company completed the issuance of 5,175,000 shares of commonstock in a public

 

 

68

 

offeringfor proceeds net of underwriting discounts of approximately $84.1 million. TheCompany intends to use the proceeds for repayment of existing debt and generalcorporate purposes, including in-licensing and partnering opportunities. Inaddition, the Company may use a portion of the net proceeds to acquirecomplementary products, product candidates or businesses. On February 11, 2002the Company repaid $8 million of the Abbott Laboratories loan (see note 8).

** **

**21. UNAUDITED QUARTERLY FINANCIALINFORMATION**

 

Selected Quarterly Consolidated Financial Data:

 
|                                             |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |    |
|--------------------------------------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|---------|
|                                             |   |               |   |
| **Year  ended December 31, 2001:**               |   |               |   |                |   |               |   |                |    |
| Total revenues                                   |   | $                  | 20,325 |                | $      | 21,784             |   | $                   | 25,100  |   | $ | 27,300 |   |
| Gross profit                                     |   | 11,704             |   | 12,462              |   | 13,459             |   | 14,068              |    |
|                                             |   |               |   |                |   |               |   |                |    |
| Net income (loss):                               |   |               |   |                |   |               |   |                |    |
| Continuing operations                            |   | (5,709             | )      | (2,622              | )      | (329               | )      | 425                 |    |
| Discontinued operation                           |   | (763               | )      | —              |   | (381               | )      | —              |    |
|                                             |   | $                  | (6,472 | )                   | $      | (2,622             | )      | $                   | (710    | ) | $ | 425 |   |
| Net income (loss) per  share - basic and diluted |   |               |   |                |   |               |   |                |    |
| Continuing operations                            |   | $                  | (0.29  | )                   | $      | (0.13              | )      | $                   | (0.01   | ) | $ | 0.02 |   |
| Discontinued operation                           |   | (0.04              | )      | —              |   | (0.02              | )      | —              |    |
|                                             |   | $                  | (0.33  | )                   | $      | (0.13              | )      | $                   | (0.03   | ) | $ | 0.02 |   |
|                                             |   |               |   |                |   |               |   |                |    |
| **Year  ended December 31, 2000:**               |   |               |   |                |   |               |   |                |    |
| Total revenues                                   |   | $                  | 11,798 |                | $      | 15,991             |   | $                   | 16,894  |   | $ | 18,462 |   |
| Gross profit                                     |   | 7,509              |   | (3,519              | )      | 10,578             |   | 9,331               |    |
|                                             |   |               |   |                |   |               |   |                |    |
| Net (loss):                                      |   |               |   |                |   |               |   |                |    |
| Continuing operations                            |   | (7,094             | )      | (19,836             | )      | (10,366            | )      | (4,721              | )       |
| Discontinued operation                           |   | (695               | )      | (382                | )      | (512               | )      | (753                | )       |
|                                             |   | $                  | (7,789 | )                   | $      | (20,218            | )      | $                   | (10,878 | ) | $ | (5,474 | ) |
| Net (loss) per share -  basic and diluted        |   |               |   |                |   |               |   |                |    |
| Continuing operations                            |   | $                  | (0.40  | )                   | $      | (1.11              | )      | $                   | (0.57   | ) | $ | (0.26 | ) |
| Discontinued operation                           |   | (0.04              | )      | (0.02               | )      | (0.03              | )      | (0.04               | )       |
|                                             |   | $                  | (0.44  | )                   | $      | (1.13              | )      | $                   | (0.60   | ) | $ | (0.30 | ) |
|                                                  |        |                    |        |                     |        |                    |        |                     |         |  |  |  |  |  |

 

69

 

****Schedule II****

**** ****

****SANGSTATMEDICAL CORPORATIONValuation and Qualifying Accounts****

 

(In thousands)

 
|                             |   | **Balance  at  begininng of  period** |   | **Additions  charged  to  costs and  expenses** |   | **Deductions** |   | **Other** |   | **Balance  at  end of  period** |   |
|----------------------------------|--------|---------------------------------------|--------|-------------------------------------------------|--------|----------------|--------|-----------|--------|---------------------------------|--------|
| 1999                             |   |                                  |   |                                            |   |           |   |      |   |                            |   |
| Allowance for doubtful  accounts |   | $                                     | 929    |                                            | $      | 1,125          |   | $         | 585    | (1)                             | $      | — |   | $ | 1,469 |   |
|                             |   |                                  |   |                                            |   |           |   |      |   |                            |   |
| 2000                             |   |                                  |   |                                            |   |           |   |      |   |                            |   |
| Allowance for doubtful  accounts |   | $                                     | 1,469  |                                            | $      | 3,789          |   | $         | 2,130  | (1)                             | $      | — |   | $ | 3,128 |   |
|                             |   |                                  |   |                                            |   |           |   |      |   |                            |   |
| 2001                             |   |                                  |   |                                            |   |           |   |      |   |                            |   |
| Allowance for doubtful  accounts |   | $                                     | 3,128  |                                            | $      | 6,611          |   | $         | 5,667  | (1)                             | $      | — |   | $ | 4,072 |   |

 

(1) Accounts written off, netof recoveries

 

 

70

 

****SANGSTAT MEDICALCORPORATION****

**** ****

****SIGNATURES****

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| Date: March | 31 , 2002 | SANGSTAT MEDICAL  CORPORATION                    |
|-------------|-----------|--------------------------------------------------|
|        |      |                                             |
|        | By:       |                                             | /s/ Jean-Jacques  Bienaimé |   |
|        |      | Jean-Jacques Bienaimé                       |
|        |      | Chairman, President and  Chief Executive Officer |
|             |           |                                                  |  |  |  |  |

 

**POWER OFATTORNEY**

 

KNOW ALL PERSONSBY THESE PRESENTS, that each person whose signature appears below constitutesand appoints Jean-Jacques Bienaimé and Stephen G. Dance, and each of them, ashis true and lawful attorneys-in-fact and agents, with full power ofsubstitution and resubstitution, for him and in his name, place and stead, in anyand all capacities, to sign any and all amendments to this Report on Form 10-K,and to file the same, with all exhibits thereto, and other documents inconnection therewith, with the Securities and Exchange Commission, grantingunto said attorneys-in-fact and agents, and each of them, full power andauthority to do and perform each and every act and thing requisite andnecessary to be done in connection therewith, as fully to all intents andpurposes as he might or could do in person, hereby ratifying and confirming allthat said attorneys-in-fact and agents, or any of them, or their or hissubstitute or substitutes, may lawfully do or cause to be done by virtuehereof.

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**                  |   | **Title**                                |   | **Date** |
|--------------------------------|--------|------------------------------------------|--------|----------|
|                           |   |                                     |   |     |
| /s/ Jean-Jacques Bienaimé |   |                                     |   |     |   |   |
| Jean-Jacques Bienaimé     |   | Chairman of the Board  of Directors,     |   | March    | 31 | , 2002 |
|                           |   | President & Chief  Executive Officer |   |     |
|                           |   | (Principal Executive  Officer)           |   |     |
|                           |   |                                     |   |     |
| /s/ Stephen G. Dance           |   | Senior Vice President,  Finance          |   | March    | 31 | , 2002 |
| Stephen G. Dance, CPA, FCA.    |   | (Principal Financial  Officer and        |   |     |
|                           |   | Principal Accounting  Officer)           |   |     |
|                           |   |                                     |   |     |
| /s/ Fredric J. Feldman         |   | Director                                 |   | March    | 31 | , 2002 |
| Fredric J. Feldman, Ph.D.      |   |                                     |   |     |
|                           |   |                                     |   |     |
| /s/ Richard D. Murdock         |   | Director                                 |   | March    | 31 | , 2002 |
| Richard D. Murdock             |   |                                     |   |     |
|                           |   |                                     |   |     |
| /s/ Andrew Perlman             |   | Director                                 |   | March    | 31 | , 2002 |
| Andrew Perlman, M.D., Ph.D.    |   |                                     |   |     |
|                           |   |                                     |   |     |
| /s/ Nicholas J. Simon          |   | Director                                 |   | March    | 31 | , 2002 |
| Nicholas J. Simon III          |   |                                     |   |     |
|                           |   |                                     |   |     |
| /s/ Vincent Worms              |   | Director                                 |   | March    | 31 | , 2002 |
| Vincent Worms                  |   |                                     |   |     |
|                                |        |                                          |        |          |  |  |  |  |  |  |  |  |

 

71

 

**EXHIBITINDEX**

** **
| **Exhibits** |   | **Description  of Exhibit**                                                                                                                                                                                                                                                                                                                                                     |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.1          |   | Agreement and Plan of  Merger, dated as of July 24, 1995, between SangStat Delaware, Inc. and  SangStat Medical Corporation, a California corporation, as filed with the  Delaware Secretary of State on August 11, 1995 (filed as Exhibit 2.1 to the  Registrant’s Registration Statement on Form 8-B, filed on December 4, 1995,  and incorporated herein by reference). |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.2          |   | Master Agreement  between SangStat Medical Corporation and Pasteur Merieux Serums &  Vaccins, S.A., dated June 10, 1998, including Exhibit 8 thereto (filed as  Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, filed on October  15, 1998 and as amended on December 14, 1998, and incorporated herein by  reference).                                    |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1          |   | Certificate of  Incorporation of SangStat Delaware, Inc. (filed as Exhibit 3.1 to the  Registrant’s Registration Statement on Form 8-B, filed on December 4, 1995,  and incorporated herein by reference).                                                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2          |   | Certificate of  Amendment of the Certification of Incorporation, filed with the Delaware  Secretary of State on July 24, 2000 (filed as Exhibit 3.6 to the Registrant’s  Current Report on Form 8-K, filed on August 30, 2000, and incorporated herein  by reference).                                                                                                     |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.3          |   | Certificate of  Designation for the Series A Junior Participating Preferred Stock, filed with  the Delaware Secretary of State on August 16, 1995 (filed as Exhibit 3.4 to  the Registrant’s Current Report on Form 8-K, filed on September 1, 1995, and  incorporated herein by reference).                                                                               |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.4          |   | Second Amended and  Restated Bylaws of the Registrant (filed as Exhibit 3.5 to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended March 30, 2000, filed on  May 15, 2000, and incorporated herein by reference).                                                                                                                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1          |   | Specimen Common Stock  Certificate of Registrant (filed as Exhibit 4.5 to the Registrant’s  Registration Statement on Form S-1, file no. 033-70436, and incorporated  herein by reference).                                                                                                                                                                                |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.1*        |   | 1993 Stock Option/Stock  Issuance Plan (filed as Exhibit 10.7 to the Registrant’s Registration  Statement on Form S-1, file no. 033-70436, and incorporated herein by  reference).                                                                                                                                                                                         |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.2         |   | Form of Indemnification  Agreement between the Registrant and its directors, officers and certain  other employees (filed as Exhibit 10.1 to the Registrant’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 2001, filed on November 14,  2001, and incorporated herein by reference).                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.3**       |   | License Agreement,  dated November 15, 1993, between the Registrant and the Board of Trustees of  Leland Stanford Junior University (filed as Exhibit 10.19 to the Registrant’s Registration  Statement on Form S-1, file no. 033-70436, and incorporated herein by  reference).                                                                                           |
|         |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 10.4         |   | Rights Agreement, dated  as of August 14, 1995, between the Registrant and First National Bank of  Boston (filed as Exhibit 2 to the Registrant’s Registration Statement on Form  8-A, filed on August 25, 1995, and incorporated herein by reference).                                                                                                                    |

 

72

 
| **Exhibits** |   | **Description  of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.5         |   | First Amendment to  Rights Agreement, dated as of October 8, 2001, among the Registrant, Fleet  National Bank (f/k/a The First National Bank of Boston) and EquiServe Trust  Company, N.A. (filed as Exhibit 99.1 to the Registrant’s Current Report on  Form 8-K, filed on October 9, 2001, and incorporated herein by reference).                                                                                                                                                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.6         |   | Real Property  Sub-Lease, dated March 8, 1999, between the Registrant and Kelley-Clarke,  Inc. to the Real Property lease, dated September 1, 1988, between  Kelly-Clarke Inc. and Kaiser Development Company, as amended on February 26,  1990, May 1, 1990, May 5, 1990, and April 19, 1995 (filed as Exhibit 10.26 to  the Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 1998, filed on March 31, 1999, and incorporated herein by  reference). |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.7**       |   | Co-Promotion Agreement,  dated as of May 7, 1999, between the Registrant and Abbott Laboratories, Inc.  (filed as Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for  the fiscal year ended December 31, 2000, filed on March 30, 2001, and incorporated  herein by reference).                                                                                                                                                                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.8         |   | Right of First Refusal  Agreement, dated as of May 7, 1999, between the Registrant and Abbott  Laboratories, Inc. (filed as Exhibit 10.28 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 1999, filed on August 16,  1999, and  incorporated herein by reference).                                                                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.9         |   | Registration Rights  Agreement, dated as of May 7, 1999, between the Registrant and Abbott  Laboratories, Inc. (filed as Exhibit 10.29 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 1999, filed on August 16,  1999, and  incorporated herein by reference).                                                                                                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.10        |   | Convertible Promissory  Note, dated March 1999, for $10,000,000 with Warburg Dillon Read LLC  (filed as Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for  the fiscal year ended December 31, 1999, filed on April 14, 2000, and  incorporated herein by reference).                                                                                                                                                                                             |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.11**      |   | Co-Development, Supply  and License Agreement, dated as of August 8, 2000, between the Registrant and  Abgenix, Inc. (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2000, filed on November 14,  2000, and incorporated herein by reference).                                                                                                                                                                         |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.12        |   | Securities Purchase  Agreement, dated December 29, 2000, between the Registrant and Narragansett  I. LP, Narragansett Offshore, Ltd., Royal Bank of Canada, and SDS Capital  Partners, LLC (filed as Exhibit 10.35 to the Registrant’s Current Report on  Form 8-K, filed on January 8, 2001, and incorporated herein by reference).                                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.13        |   | Registration Rights  Agreement, dated December 29, 2000, between the Registrant and Narragansett  I. LP, Narragansett Offshore, Ltd., Royal Bank of Canada, and SDS Capital  Partners, LLC (filed as Exhibit 10.36 to the Registrant’s Current Report on  Form 8-K, filed on January 8, 2001, and incorporated herein by reference).                                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.14        |   | Securities Purchase  Agreement, dated as of June 20, 2001, between the Company and Narragansett I.  LP, Narragansett Offshore, Ltd., Royal Bank of Canada, S.A.C. Capital  Associates, LLC, and Société Générale (filed as Exhibit 10.39 to the  Registrant’s Current Report on Form 8-K, filed on June 21, 2001, and  incorporated herein by reference).                                                                                                        |

 

73

 
| **Exhibits** |   | **Description  of Exhibit**                                                                                                                                                                                                                                                                                                                                                        |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.15        |   | Registration Rights  Agreement, dated as of June 20, 2001, between the Company and Narragansett I.  LP, Narragansett Offshore, Ltd., Royal Bank of Canada, S.A.C. Capital  Associates, LLC, and Société Générale (filed as Exhibit 10.40 to the  Registrant’s Current Report on Form 8-K, filed on June 21, 2001, and  incorporated herein by reference). |
|         |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.16        |   | Registration Rights  Agreement, dated March 19, 1999, by and between Registrant and Warburg  Dillon Read LLC (filed as Exhibit 4.4 to the Registrant’s Registration  Statement on Form S-3, file no. 333-46578, and incorporated herein by  reference).                                                                                                                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 21.1         |   | Subsidiaries of  Registrant.                                                                                                                                                                                                                                                                                                                                                       |
|         |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 23.1         |   | Independent Auditors’  Consent.                                                                                                                                                                                                                                                                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 24.1         |   | Power of Attorney  (reference is made to the signature page hereof).                                                                                                                                                                                                                                                                                                               |

 

____________

 

* Management contract orcompensatory plan or arrangement.

 

**Confidential treatmenthas been granted for the deleted portions of this document.  The non-public information has been filed separately with the SEC.

 

74

 

**Exhibit 21.1**

**Subsidiaries of Registrant**

 

SangStat AtlantiqueS.A.S.

IMTIX-SangStat S.A.S.

SangStat LuxembourgS.à.r.l.

IMTIX-SangStat B.V.

IMTIX-SangStat GmbH

IMTIX-SangStat(Switzerland) GmbH

SangStat Spain S.L.

IMTIX-SangStat AustriaGmbH

IMTIX-SangStat S.r.l.

SangStat Canada, Ltd.

SangStat U.K., Ltd

SangStat MedicalInternational Cayman

SangStat Netherlands B.V.

ChronimmunePharmaceuticals, Inc.

Human Organ Science Inc.

XenoStat, Inc.

IMTIX-SangStat, S.L.

IMTIX-SangStat (UK)Limited

 

75

 

**Exhibit23.1**

 

INDEPENDENT AUDITORS’ CONSENT

 

We consent to theincorporation by reference in Registration Statement Nos. 33-77300, 33-80155,333-53181, 333-63345, and 333-94555 on Form S-8, and Nos. 33-96766, 333-46574,333-46578, 333-53720 and 333-76028 on Form S-3 of SangStat Medical Corporationof our report dated January 21, 2002 (March 27, 2002 as to Note 5, the secondparagraph of Note 10, the ninth paragraph of Note 19 and Note 20), appearing inthis Annual Report on Form 10-K of SangStat Medical Corporation for the yearended December 31, 2001.

 

DELOITTE & TOUCHE LLP

 

San Jose, California

March 27, 2002

 

76