UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 0-19986
CELL GENESYS, INC.
(Exact name of Registrant as specified in its Charter)
|
Delaware
|
94-3061375
|
|
(State or Other Jurisdiction of Incorporation or Organization)
|
(IRS Employer Identification Number)
|
342 Lakeside Drive, Foster City, California 94404
(Address of Principal Executive Offices including Zip Code)
(650) 425-4400
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
As of April 30, 2000, the number of outstanding shares of the Registrant's
Common Stock was 33,706,880.
CELL GENESYS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
- Condensed Consolidated Balance Sheets --
March 31, 2000 and December 31, 1999
- Condensed Consolidated Statements of Operations -- Three
Months ended March 31, 2000 and 1999
- Condensed Consolidated Statements of Cash Flows --
Three Months ended March 31, 2000 and 1999
- Notes to Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Results of Operations
Liquidity and Capital Resources
Risk Factors
Year 2000 Compliance
Item 3. Quantitative and Qualitative Disclosure about Market Risks
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Item 2: Changes in Securities and Use of Proceeds
Item 3: Defaults Upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Cell Genesys, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2000 1999
------------ -----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents, including restricted
cash of $369 for 1999 and 2000.................. $137,446 $5,300
Short-term investments............................ 112,963 44,987
Investment in Abgenix common stock................ 335,098 433,324
Prepaid expenses and other current assets......... 1,818 1,465
------------ -----------
Total current assets................................. 587,325 485,076
Property and equipment, net.......................... 3,848 4,198
Deposits and other assets............................ 368 409
------------ -----------
$591,541 $489,683
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................. $550 $1,124
Accrued compensation and benefits................. $763 $2,056
Deferred revenue.................................. 13,966 4,195
Accrued legal expenses............................ 216 712
Accrued acquisition and related costs............. 1,052 1,068
Accrued clinical trial costs...................... 696 715
Other accrued liabilities......................... 390 883
Current portion of property and equipment
financing....................................... 1,284 2,677
Accrued tax provision............................. 47,940 --
------------ -----------
Total current liabilities............................ 66,857 13,430
Noncurrent portion of property and equipment
financing......................................... 2,118 3,198
Redeemable convertible preferred stock............... 16,429 7,679
Stockholders' equity:
Common stock...................................... 34 33
Additional paid-in capital........................ 254,468 248,255
Accumulated other comprehensive income, principally
unrealized gains on investment of Abgenix...... 325,402 420,891
Accumulated deficit............................... (73,767) (203,803)
------------ -----------
Total stockholders' equity........................... 506,137 465,376
------------ -----------
$591,541 $489,683
============ ===========
See accompanying notes.
Cell Genesys, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
------------------------
2000 1999
------------ -----------
Revenue under collaborative agreements..... $4,600 $6,076
------------ -----------
Operating expenses:
Research and development................. 6,400 5,537
General and administrative .............. 1,659 1,095
------------ -----------
Total operating expenses................... 8,059 6,632
Equity in loss of Abgenix.................. -- (1,202)
Gain on sale of Abgenix stock.............. 190,236 --
Interest and other income.................. 2,090 937
Interest expense........................... (123) (278)
------------ -----------
Net income (loss) before income tax........ 188,744 (1,099)
Provision for income tax................... (47,940) --
------------ -----------
Net income (loss) before culumlative
effect of accounting change.............. 140,804 (1,099)
Cumulative effect of change in accounting.. (10,767) --
------------ -----------
Net income (loss).......................... $130,037 ($1,099)
============ ===========
Basic income (loss) per common share
before cumulative effect of
accounting change........................ $4.24 ($0.04)
Accounting change.......................... (0.32) --
------------ -----------
Basic income (loss) per common share....... $3.92 ($0.04)
============ ===========
Diluted income (loss) per common share
before cumulative effect of
accounting change........................ $3.85 ($0.04)
Accounting change.......................... (0.29) --
------------ -----------
Diluted income (loss) per common share.... $3.56 ($0.04)
============ ===========
Weighted average shares of common stock
outstanding - basic...................... 33,151 30,965
============ ===========
Weighted average shares of common stock
outstanding - diluted.................... 36,511 30,965
============ ===========
See accompanying notes.
Cell Genesys, Inc.
Condensed Cosolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
March 31,
----------------------
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit (loss).................................... $130,037 ($1,099)
Adjustments to reconcile net profit (loss) to net
cash used by operating activities:
Depreciation and amortization...................... 608 796
Gain on disposal of property and equipment......... (45) --
Equity in losses of Abgenix........................ -- 1,202
Changes to:
Prepaid expenses and other assets.................. (353) (396)
Accounts payable................................... (696) (564)
Accrued compensation and other benefits............ (1,293) (483)
Deferred revenue................................... 9,771 519
Accrued legal expenses............................. (496) (26)
Accrued acquisition and related costs.............. (16) (252)
Other accrued liabilities.......................... (390) (37)
Accrued tax provision.............................. 47,940 --
---------- ----------
Net cash provided by (used in) operating
activities............................. 185,067 (340)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments.................. (71,006) (10,930)
Sales of short-term investments...................... 2,994 4,000
Adjustment in accumulated other comprehensive
income from sale of Abgenix stock.................. 3,502 --
Proceeds from disposal of property and equipment..... 48 --
Capital expenditures................................. (220) --
Exercise of Abgenix warrants......................... (730) --
---------- ----------
Net cash used in investing activities......... (65,412) (6,930)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible
preferred stock.................................... 8,750 --
Proceeds from issuance of common stock............... 6,214 328
Proceeds from property and equipment financing....... -- 92
Payments under property and equipment
financing obligations.............................. (2,473) (821)
---------- ----------
Net cash provided by (used in) financing
activities............................. 12,491 (401)
---------- ----------
Net increase (decrease) in cash and cash equivalents.... 132,146 (7,671)
Cash and cash equivalents at beginning of period........ 5,300 14,086
---------- ----------
Cash and cash equivalents at end of period.............. $137,446 $6,415
========== ==========
See accompanying notes.
Cell Genesys, Inc.
Notes To Condensed Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
Organization and basis of presentation
Cell Genesys, Inc. ("Cell Genesys" or the "Company"), a Delaware
corporation, is focused on the development and commercialization of gene
therapies to treat cancer and other major, life-threatening diseases.
Comprehensive income (loss)
Cell Genesys recognized total comprehensive income of $37.0 million,
including change in unrealized gain in investment of Abgenix, Inc.
("Abgenix") of $95.5 million, for the three months ended March 31,
2000, compared to total comprehensive loss of $1.2 million for the same
period in the prior year.
2. Change in accounting
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements". SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. The Company adopted SAB 101 during the first
quarter of 2000 and has reflected the cumulative effect of this
accounting change as a single line item in the Statement of Operations.
Under this change, the Company recognizes non-refundable, up-front
payments and annual maintenance fee revenue ratably over the term of the
related collaborative agreement.
3. Investment in Abgenix
Since 1996, the Company has maintained an investment in Abgenix. In
December 1997 and January 1998, Abgenix completed private placements of
securities reducing Cell Genesys' percentage ownership from
100 percent to approximately 54 percent. On July 2, 1998, Abgenix
completed an initial public offering ("IPO"), reducing Cell Genesys'
percentage ownership to approximately 40 percent. Prior to the IPO,
Abgenix was a consolidated subsidiary and its financial results were
presented accordingly. From July 2, 1998 to November 19, 1999, the
Company's investment in Abgenix was accounted for under the equity method
of accounting as a result of the reduced ownership position. On March 4,
1999, Abgenix completed the sale of an additional 3,000,000 shares of
common stock in a public offering resulting in approximately $45.0
million in gross proceeds, which further reduced the Company's ownership
percentage in Abgenix to approximately 22 percent. The difference between
the cost of the investment (the carrying value of the net assets less the
equity in loss of Abgenix immediately prior to the public offering) and
the amount of the underlying equity in net assets of Abgenix immediately
following each of the public offerings was accounted for in accordance
with APB Opinion No. 18 "The Equity Method of Accounting for Investment
in Common Stock" and Staff Accounting Bulletin No. 51. Accordingly, the
Company recognized $9.8 million as a contribution to Stockholders' Equity
upon completion of the Abgenix March 1999 public offering.
On November 19, 1999, Abgenix completed a private placement of 1.8
million shares of its common stock resulting in gross proceeds of
approximately $75.0 million. Cell Genesys' ownership was thereby further
reduced to approximately nineteen percent and accordingly, the Company no
longer accounts for Abgenix's losses under the equity method of
accounting. The Company's investment in Abgenix is now treated as
available for sale and accounted for in accordance with SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities."
On February 11, 2000, Cell Genesys received net proceeds of approximately
$194.0 million from the sale of 966,000 shares of Abgenix common stock.
The transaction was completed as part of a secondary Abgenix offering in
which a total of 3,450,000 Abgenix shares were sold, with 966,000 of the
shares being sold by Cell Genesys. After the transaction, Cell Genesys
retains 4,852,068 shares (post-split), or approximately 12 percent, of
Abgenix common stock. The investment is carried at market value based on
a value of $69.06 per share on March 31, 2000. The total carrying amount
of the Company's investment in Abgenix at March 31, 2000 was $335.1
million.
CELL GENESYS, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements made in this Item other than statements of historical
fact, including statements about the Company's clinical trials, research
programs, product pipelines, current and potential corporate
partnerships, licenses and intellectual property, the adequacy of capital
reserves and anticipated operating results and cash expenditures are
forward-looking statements within the meaning of section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. As such, they are subject to a number of uncertainties that could
cause actual results to differ materially from the statements made,
including risks associated with the success of research and product
development programs, the issuance and validity of patents, the
development and protection of proprietary technology, the ability to
raise capital, operating expense levels and the ability to establish and
retain corporate partnerships. Reference is made to discussions about
risks associated with product development programs, intellectual property
and other risks which may affect the Company under "Risk Factors"
below. The Company does not undertake any obligation to update forward-
looking statements. The following should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31,
1999 and the Company's current report on Form 8-K filed on January 27,
2000.
Overview
Since its inception in April 1988, Cell Genesys, Inc. ("Cell Genesys"
or "the Company") has focused its research and product development
efforts on human disease therapies which are based on innovative gene
modification technologies. The Company's strategic objective is to
develop and commercialize in vivo and/or ex vivo gene therapies to treat
cancer and other major, life-threatening diseases, including hemophilia.
Cell Genesys' clinical programs include GVAX® cancer vaccines in Phase II
studies for prostate cancer and Phase I/II studies for lung cancer. GVAX®
vaccines for prostate cancer and for lung cancer are being developed
through a worldwide collaboration with the pharmaceutical division of
Japan Tobacco Inc. ("JT"). In addition, Cell Genesys has preclinical
programs which are evaluating potential gene therapies for hemophilia,
cancer, cardiovascular disorders and Parkinson's disease. The Company
also has assets outside of its core business which can be used to help
maintain financial strength while product candidates are under
development. These assets include Cell Genesys' 12 percent equity
ownership of Abgenix, Inc. ("Abgenix", Nasdaq-AMEX: ABGX), which is
focused on the development and commercialization of antibody therapies,
and a licensing program in gene activation technology.
Cell Genesys believes that gene therapies are likely to be developed on a
continuum, progressing from ex vivo (modification of cells outside the
patient's body for injection as therapy) to in vivo (modification of
cells within the patient's body to provide therapy). The Company's goal
is to emphasize "off-the-shelf" products that enable gene therapy to be
provided in out-patient settings. These potentially include both non-
patient-specific therapies, which could be vialed pharmaceuticals for
direct administration, and patient-specific gene therapy products, which
could be packaged as "kits" for overnight cell processing at clinical
laboratories.
During 1999, the Company reported encouraging data from its Phase I/II
human clinical trials evaluating the GVAX® vaccine for prostate cancer.
Data from the recently completed Phase I/II trial of GVAX® prostate
cancer vaccine demonstrate evidence of clinical safety and preliminary
evidence of antitumor effects as measured by levels of prostate specific
antigen ("PSA") and by specific antibody formation. Based on positive
results from this trial, the Company initiated two multicenter trials of
GVAX® vaccine in prostate cancer which are both fully enrolled. Phase
I/II clinical trials for GVAX® vaccine in lung cancer revealed
preliminary indications of antitumor activity and the Company recently
initiated a multicenter trial for GVAX® lung cancer vaccine.
An additional financial asset for Cell Genesys, aside from the Company's
cash and holdings in Abgenix, is its licensing program for its gene
activation technology which has brought in more than $23.0 million to date.
In 1997, the Company signed a license agreement with Hoechst Marion Roussel,
Inc. ("Hoechst Marion Roussel") now Aventis Pharmaceuticals, Inc.
("Aventis") providing access to the Company's intellectual property for
gene-activated erythropoietin (EPO) and a second undisclosed protein. In
exchange, the Company may receive up to $26.0 million in milestone
payments and fees in addition to royalties on potential future sales of
these two gene-activated products. To date, the Company has received
over $15.0 million from this license agreement including a $2.0 million
annual payment received in this quarter.
The Company's preclinical research is focused on studies of gene therapy
in animal models for hemophilia cancer, restenosis and Parkinson's
disease. For example, in hemophilia gene therapy studies, a single
injection resulted in improved blood clotting and reduced number of
bleeding episodes in a dog hemophilia model. Similarly, in studies for
Parkinson's disease, a single injection of gene therapy essentially
eliminated the need for daily L-dopa injections in mice with a
Parkinson's-like condition. Cardiovascular gene therapy studies
demonstrated the inhibition of smooth muscle proliferation in rabbit
models of restenosis. During 1999, the Company expanded its
collaboration with Mitotix, Inc. for p16/p27 genes to include
applications in cancer gene therapy in addition to cardiovascular gene
therapy. In addition, since the beginning of 1999, the Company entered
into agreements relating to its gene delivery technologies with Entremed,
Inc., Rigel Pharmaceuticals, Inc., Pharmacia & Upjohn and Clontech
Laboratories, Inc., a wholly owned subsidiary of Becton Dickinson.
Cell Genesys ended the first quarter of 2000 with approximately $250.4
million in cash and short-term investments. The Company has maintained
its financial position by relying on funding from various corporate
collaborations and licensing agreements, as well as through expense
management. The Company plans to continue to finance its operations,
when possible, through corporate collaborations with established
pharmaceutical and biotechnology companies. This funding strategy should
allow the Company to develop its technologies as broadly as possible, to
fund product development and to accelerate the commercialization of
certain product opportunities. Such alliances are intended to provide
financial resources for research, development, manufacturing
capabilities, and marketing infrastructure, which will aid in the
commercialization of potential disease therapies.
Results of Operations
Revenue decreased to $4.6 million for the three months ended March 31,
2000, from $6.1 million for the same prior year period. Higher revenue in
1999 reflected a $2.0 million gene activation milestone earned in the
first quarter of 1999, partially offset by increased revenues as a result
of the ramp-up of research and development activities funded under the
Company's collaboration agreement with JT for selected targets in the
company's GVAX® cancer vaccine program.
Research and development expenses were $6.4 million for the three months
ended March 31, 2000, compared with $5.5 million for the three months
ended March 31, 1999. The increase in research and development costs is
primarily a result of advancing clinical trial programs and increased
headcount and are expected to continue to increase in the future. The
rate of increase depends on a number of factors including progress in
research and development and especially in clinical trials.
General and administrative expenses were $1.7 million for the three
months ended March 31, 2000, compared with $1.1 million for the three
months ended March 31, 1999. The increase also resulted from additional
headcount in administrative area to support expanded preclinical and
clinical programs.
Interest and other income increased to $2.1 for the three months ended
March 31, 2000, from $0.9 million for the three months ended March 31,
1999. The increase is a result of higher average cash balances during
2000 and higher interest rates compared to 1999. Interest expense
decreased to $123,000 for the three months ended March 31, 2000, from
$278,000 for the three months ended March 31, 1999, due primarily to
reduced debt in the current year.
Cell Genesys had net income of $130.0 million for the three months ended
March 31, 2000, compared to net loss of $1.1 million for the same period
in the prior year. The increase in income was mainly due to realized
gain on sale of Abgenix common stock this quarter, partially offset by
$10.8 million revenue adjustment under the cumulative effect of accounting
change following the adoption of SEC Staff Accounting Bulletin No. 101
("SAB 101"), "Revenue Recognition in Financial Statements". The net
loss of $1.1 million during the same prior year period included equity in
loss of Abgenix of $1.2 million. From November 1999 forward, the Company
no longer accounts for Abgenix's losses under the equity method of
accounting because the Company's ownership in Abgenix fell below twenty
percent.
Net Income (Loss) Per Share
Basic earnings per share is calculated using income available to common
share owners divided by the weighted average of common shares outstanding
during the reporting period. Diluted earnings per share is similar to
Basic EPS except that the weighted average common shares outstanding is
increased to include the number of additional common shares that would
have been outstanding if the dilutive potential common shares, such as
preferred stock, warrants and options, had been issued. The treasury
stock method is used to calculate dilutive shares which reduces the gross
number of dilutive shares by the number of shares purchasable from the
proceeds of the warrants and option assumed to be exercised.
Liquidity and Capital Resources
Cell Genesys has financed its operations primarily through the sale of
equity securities, funding under collaborative arrangements and equipment
financing. In February 2000, the Company received $194.0 million in net
proceeds from the sale of 966,000 shares of Abgenix common stock. From
inception through March 31, 2000, the Company has received $181.6 million
in net proceeds from sale of Cell Genesys' stock, $151.9 million under
collaborative agreements and utilized $28.2 million of property and
equipment financings.
At March 31, 2000, Cell Genesys' cash, cash equivalents and short-term
investments totaled $250.4 million, compared to $50.3 million at December
31, 1999. The increase was due primarily to net proceeds from the sale
of Abgenix common stock. At March 31, 2000, the Company held
approximately 4.9 million shares (post-split) of Abgenix common stock,
which had a market value of approximately $335.1 million.
Cell Genesys anticipates that fiscal year 2000 cash usage will not exceed
$15.0 million, net of $194.0 million Abgenix stock proceeds, anticipated
tax payments from the gain on the sale of Abgenix stock and any
potential acquisition of a late stage product candidate. The Company's
capital requirements depend on numerous factors, including: the progress
of the Company's research and development programs; preclinical and
clinical trials; clinical and commercial scale manufacturing
requirements; the attraction of collaborative partners; the acquisition
of new products or technologies; the cost of litigation; patent
interference proceedings or other legal proceedings or their resolution.
Cell Genesys believes that its available cash, cash equivalents and
short-term investments at March 31, 2000 together with payments to be
received under the Company's collaborative agreements, license agreements
and proceeds from the sale of Abgenix stock, during February 2000, will
be sufficient to meet the Company's currently planned operating expenses
in the near term.
Even though the Company's current cash and investments are
expected to meet the its near term expenditures, progress in the Company's
development programs and the likely increase in the number of programs
will lead deplete the current cash resources and lead to the need to
raise further capital. Therefore the company may continue to consider
financing alternatives.
The Company anticipates that it will raise large amounts of capital
in advance of actual capital expenditures. Therefore, liquidity and
volatility of capital markets play a significant role in the decision to
raise capital. The type of financing available to the company includes
the sale of Abgenix securities and private or public placement of Cell
Genesys equity securities. The company's evaluation processes regularly
consider the liquidity of capital markets, dilution, shareholder value
and tax consequences of each type of financing on shareholders. Most of
the financing options available to the company have some type of negative
consequence to shareholders. Given the volatile nature of the capital
markets, decisions to raise capital may require actions that would impose
a slightly negative consequence in order to reduce or minimize a more
significant negative consequence to shareholders.
Risk Factors
We may have a need for substantial additional funds. We may
need substantial additional funds for existing and planned preclinical and
clinical trials to continue research and development activities, and to
establish manufacturing and marketing capabilities for any products we
may develop. We expect that our existing capital resources, together with
payments to be received under existing collaborative agreements and
amounts available under existing equipment financing facilities, will
enable us to maintain our operations at least through 2001. Beyond 2001,
we may need to raise substantial additional capital to fund our
operations.
Our future capital requirements will depend on, and could increase as a
result of, many factors such as:
- continued scientific progress of research and development
programs
- magnitude of such programs' expenses
- progress of preclinical and clinical testing
- time and costs involved in obtaining regulatory approvals
- costs involved in preparing, filing, prosecuting, maintaining,
enforcing and defending patent claims
- competing technological and market developments
- changes in collaborative relationships with Japan
Tobacco and others
- terms of any additional collaborative arrangements into which
we may enter
- our ability to establish research, development and
commercialization arrangements pertaining to products other
than those covered by existing collaborative arrangements
- cost of establishing manufacturing facilities
- cost of commercialization activities
- demand for our products, if and when approved
- potential redemption obligations in connection with conversion
of the Series B convertible preferred stock
- our ability to realize the carrying value of the Abgenix
stock due to its volatility
We expect to be able to raise additional funds through collaborative
relationships, sales of some portion or all of our investment in Abgenix,
additional equity or debt financings, or otherwise. Because of our long-
term capital requirements, we may seek to access the public or private
equity markets whenever conditions are favorable, even if we do not have
an immediate need for additional capital at that time. There can be no
assurance that any such additional funding will be available to us, or,
if available, that it will be on acceptable terms. If we raise
additional funds by issuing equity securities, stockholders will incur
immediate dilution. There can be no assurance that opportunities for in-
licensing technologies or for third party collaborations will continue to
be available to us on acceptable terms. If adequate funds are not
available, we may be required to delay, reduce the scope of, or eliminate
one or more of our research, development and clinical activities.
Alternatively, we may need to seek funds through arrangements with
collaborative partners or others that require us to relinquish rights to
certain of our technologies or product candidates that we would otherwise
seek to develop or commercialize ourselves. Either of these events could
have a material adverse effect on our business, results of operations,
financial condition or cash flow.
Our products are in developmental stage, are not approved for commercial
sale and might not receive regulatory approval or become commercially
viable.
All of our potential gene therapy products are in research and
development. We have not generated any revenues from the sale of
products. We do not expect to generate any revenues from product sales
for at least the next several years. Our products currently under
development will require significant additional research and development
efforts, including extensive preclinical and clinical testing and
regulatory approval, prior to commercial use. There can be no assurance
that our research and development efforts will be successful or that any
of our future products will ultimately be commercially successful. Even
if developed, our products may not receive regulatory approval or be
successfully introduced and marketed at prices that would permit us to
operate profitably.
We have not been profitable and may not become profitable in the future.
We have incurred annual net losses since our inception. At March 31,
2000, our accumulated deficit was approximately $73.8 million. For the
three months ended March 31, 2000, we incurred profit of $130.0 million.
However, these profits were related to the sale of Abgenix stock and
we expect to resume incurring operating losses in the future.
We expect to incur substantial operating losses for at least
the next several years due primarily to the expansion of
research and development programs, including preclinical studies,
clinical trials, manufacturing and to a lesser extent, from general and
administrative expenses. We expect that losses will fluctuate from
quarter to quarter and that these fluctuations may be substantial. We
cannot guarantee that we will successfully develop, commercialize,
manufacture or market any products. We cannot guarantee that we will
ever achieve or sustain product revenues or profitability.
Our gene therapy programs depend on new and unproven technologies.
Gene therapy is a new technology. Existing preclinical and clinical data
on the safety and efficacy of gene therapy are limited. Data relating to
our specific gene therapy approaches are also limited. Our GVAX® cancer
vaccine is currently being tested in Phase I/II and Phase II human
clinical trials to determine its safety and efficacy. None of our other
products or therapies under development are in human clinical trials. The
results of preclinical studies do not predict safety or efficacy in
humans. Possible side effects of gene therapy may be serious and
potentially life-threatening. Unacceptable side effects may be
discovered during preclinical and clinical testing of our potential
products or thereafter. There are many reasons that potential products
that appear promising at an early stage of research or development do not
result in commercialization. Although we are testing proposed products or
therapies in human clinical trials, we cannot guarantee that we will be
permitted to undertake human clinical trials for any of our other
products. Also, the results of this testing might not demonstrate the
safety or efficacy of these products. Even if clinical trials are
successful, we might not obtain regulatory approval for any indication.
Finally, even if our products proceed successfully through clinical
trials and receive regulatory approval, there is no guarantee that an
approved product can be produced in commercial quantities at reasonable
cost or that such a product will be successfully marketed.
We rely heavily on the development and protection of our intellectual property portfolio.
The patent positions of pharmaceutical and biotechnology firms, including
Cell Genesys, are generally uncertain and involve complex legal and
factual questions. Cell Genesys currently has more than 230 issued or
granted patents and more than 320 pending applications. Although we are
prosecuting patent applications, we cannot be certain whether any given
application will result in the issuance of a patent or, if any patent is
issued, whether it will provide significant proprietary protection or
will be invalidated. Also, patent applications in the United States are
confidential until patents are issued. Publication of discoveries in
scientific or patent literature tends to lag behind actual discoveries by
several months. Accordingly, we cannot be sure that we were the first
creator of inventions covered by pending patent applications or that we
were the first to file patent applications for these inventions.
Our commercial success will also depend in part on not infringing the
patents or proprietary rights of others and not breaching licenses
granted to us. We will be required to obtain licenses to certain third
party technology and genes necessary to conduct our business. Any failure
to license any technology or genes required to commercialize our
technologies or products at reasonable cost may have a material adverse
effect on our business, results of operations or financial condition.
We may also have to engage in litigation, which could result in
substantial cost to us, to enforce our patents, or to determine the scope
and validity of other parties' proprietary rights. To determine the
priority of inventions, the United States Patent and Trademark Office
frequently declares interference proceedings. In Europe, other patents
can be revoked through opposition proceedings. Such proceedings could
result in an adverse decision as to the priority of our inventions.
We are currently involved in four separate interference and/or
opposition proceedings with regard to:
a) gene activation technology
b) ex vivo gene therapy
c) certain retroviral vector technology
d) chimeric receptor technology
While we believe our position in each proceeding is strong, the outcome
of each proceeding cannot be predicted. An adverse result could have a
material adverse effect on our intellectual property position in these
areas. We may be involved in other interference and/or opposition
proceedings in the future. We believe that there will continue to be
significant litigation in the industry regarding patent and other
intellectual property rights.
We also rely on unpatented trade secrets, know-how and continuing
technological innovation to develop and maintain our competitive
position. Our competitors may independently develop similar or better
proprietary information and techniques and disclose them publicly. Also,
there can be no assurance that others will not gain access to our trade
secrets, or that we can meaningfully protect our rights to our unpatented
trade secrets.
We require our employees and consultants to execute a confidentiality
agreement upon the commencement of an employment or consulting
relationship with us. These agreements provide that all confidential
information developed by or made known to an individual during the course
of the employment or consulting relationship generally must be kept
confidential. In the case of employees, the agreements provide that all
inventions conceived by the employee while employed by us, relating to
our business are our exclusive property. These agreements may not provide
meaningful protection for our trade secrets in the event of unauthorized
use or disclosure of such information.
The fields of cancer vaccines and gene therapy is highly competitive.
Competition in the field of gene therapy from other biotechnology and
pharmaceutical companies and from research and academic institutions is
intense and expected to increase. In many instances, we compete with
other commercial entities in acquiring products or technology from
universities. There are numerous competitors working on products to
treat each of the diseases for which we are seeking to develop
therapeutic products. Some competitors are pursuing a product development
strategy competitive with ours, particularly with respect to our cancer
vaccine program. Certain of these competitive products are in
substantially more advanced stages of product development and clinical
trials. Our competitors may develop technologies and products that are
more effective than ours, or that would render our technology and
products less competitive or obsolete.
Many of our competitors have substantially greater financial resources
and larger research and development staffs than we do. Some of these
competitors have significantly greater experience than we do in
developing products, in undertaking preclinical testing and human
clinical trials of new pharmaceutical products, in obtaining United
States Food and Drug Administration ("FDA") and other regulatory
approvals of products, and in manufacturing and marketing such products.
Accordingly, our competitors may obtain patent protection or FDA approval
and commercialize products more rapidly than we do. There can be no
assurance that we will be able to obtain certain biological materials
necessary to support our research, development or manufacturing of any of
our planned therapies. If we are permitted to commence commercial sales
of products, we will also be competing with respect to marketing
capabilities and manufacturing efficiency, areas in which we have limited
or no experience. We expect to build additional clinical scale and
commercial scale manufacturing facilities and/or use contract facilities
to commercialize our products. We also expect to secure funding for these
and other product development activities through our partners and future
potential partners.
We expect that competition among products approved for sale will be
based, among other things, on:
- product efficacy
- price
- safety
- reliability
- availability
- patent protection
- sales, marketing and distribution capabilities
Our competitive positions also depend upon our ability to attract and
retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient funding
for the often lengthy period between product conception and commercial
sales.
Our stock price has fluctuated in the past and is likely to continue to be
volatile in the future.
The stock prices of biopharmaceutical and biotechnology companies
(including Cell Genesys) have historically been highly volatile. The
market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of
particular companies. The following factors may affect our stock price:
- fluctuations in our financial results
- announcements of technological innovations or new therapeutic
products by us or our competitors
- announcements of changes in governmental regulation affecting
us or our competitors
- announcements of regulatory approvals or disapprovals of our or
our competitors' products
- developments in patent or other proprietary rights affecting us
or our competitors
- public concern as to the safety of products developed by us or
other biotechnology and pharmaceutical companies
- general market conditions
- fluctuations in the price of Abgenix stock
- severe fluctuations in price and volume in the stock market in
general which are unrelated to our operating performance
- issuance of common stock upon conversion of the Series B
preferred stock or exercise of outstanding warrants
- future sales of such common stock or other shares of common
stock by existing stockholders
- the perception that such issuances or sales could occur
Our business is subject to extensive regulation and any failure to
obtain required regulatory approvals could prevent or delay the
commercialization of our products.
Regulation by governmental authorities in the United States and foreign
countries is important in the manufacture and marketing of our proposed
products and our research and development activities. All of our products
will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic products must undergo
rigorous preclinical and clinical testing and other premarket approval
procedures by the FDA and similar authorities in foreign countries. Since
our potential products involve the application of new technologies,
regulatory approvals may take longer than for products produced using
more conventional methods. Various federal and, in some cases, state laws
also govern or influence the manufacturing, safety, labeling, storage,
record keeping and marketing of these products. The lengthy process of
seeking these approvals, and the subsequent compliance with applicable
federal laws, requires significant expenditures. Any delay or failure by
us or our collaborators or licensees to obtain regulatory approvals could
hinder the marketing of our products and our ability to receive product
or royalty revenue.
In responding to a new drug application, or a product license
application, the FDA may grant marketing approvals, request additional
information or further research, or deny the application if it determines
that the application does not satisfy its regulatory approval criteria.
Approvals may not be granted on a timely basis, if at all, or if granted
may not cover all the clinical indications for which we are seeking
approval. Also, an approval might contain significant limitations in the
form of warnings, precautions or contraindications with respect to
conditions of use.
In addition to laws and regulations enforced by the FDA, we are also
subject to regulation under:
- Occupational Safety and Health Act
- Environmental Protection Act
- Toxic Substances Control Act
- Resource Conservation and Recovery Act
- Other present and potential future federal, state or local
laws and regulations
Our manufacturing facilities are subject to licensing requirements of the
California Department of Health Services. While not subject to license by
the FDA, these facilities are subject to inspection by the FDA as well as
by the California Department of Health Services. A separate license from
the FDA is required for commercial manufacture of any product. Failure to
maintain these licenses or to meet the inspection criteria of the FDA and
the California Department of Health Services would disrupt our
manufacturing processes and have a material adverse effect on our
business, results of operations, financial condition and cash flow.
For marketing outside the United States, we are subject to foreign
regulatory requirements governing human clinical trials and marketing
approval for drugs and devices. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary
greatly from country to country. Failure to comply with these regulatory
requirements or obtain required approvals could impair our ability to
develop these markets and have a material adverse effect on our results
of operations and financial condition.
Our product development activities involve the use of hazardous
materials and we may incur significant costs as a result of the need to
comply with environmental laws.
Our research and development activities involve the controlled use of
hazardous materials, chemicals, viruses and radioactive compounds. We
are subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of these materials
and waste products. Although we believe that our safety procedures for
handling and disposing of these materials comply with the standards
prescribed by applicable laws and regulations, we cannot completely
eliminate the risk of accidental contamination or injury from these
materials. In the event of an accident, we could be held liable for any
damages that result, and any resulting liability could exceed our
resources. We may also be required to incur significant costs to comply
with environmental laws and regulations in the future.
We expect to depend on our strategic partners for the sales, marketing
and distribution of our future products.
We have no experience in sales, marketing or distribution of
biopharmaceutical products. We expect to rely on sales and marketing
expertise of potential corporate partners for our initial products. The
decision to market future products directly or through corporate partners
will be based on a number of factors, including:
- market size and concentration
- size and expertise of the partner's sales force in a
particular market
- our overall strategic objectives
We may in the future be exposed to product liability claims and may be
unable to obtain sufficient insurance coverage.
Clinical trials or marketing of any of our potential products may expose
us to liability claims resulting from the use of our products. These
claims might be made by consumers, health care providers or by others
selling our products. We currently maintain product liability insurance
with respect to each of our clinical trials. There can be no assurance
that we will be able to maintain insurance or that sufficient coverage
can be acquired at a reasonable cost. An inability to maintain insurance
at acceptable cost, or at all, could prevent or inhibit the clinical
testing or commercialization of our products or otherwise affect our
financial condition. A product liability claim or recall could have a
material adverse effect on our business, results of operations, financial
condition and cash flow.
Sales of our future products will be influenced by the willingness of
third-party payers to provide reimbursement.
In both domestic and foreign markets, sales of our potential products
will depend in part upon coverage and reimbursement from third-party
payers, including:
- government agencies
- private health care insurers and other health care payers such
as health maintenance organizations
- self-insured employee plans
- Blue Cross/Blue Shield and similar plans
There is considerable pressure to reduce the cost of biotechnology and
pharmaceutical products. In particular, reimbursement from government
agencies, insurers and large health organizations may become more
restricted in the future. Our potential products represent a new mode of
therapy and, while the cost-benefit ratio of the products may be
favorable, we expect that the costs associated with our products will be
substantial. There can be no assurance that our proposed products, if
successfully developed, will be considered cost-effective by third-party
payers. Insurance coverage might not be provided by third-party payers
at all or without substantial delay. Even if such coverage is provided,
the approved reimbursement might not provide sufficient funds to enable
us to become profitable.
The pricing of our future products may be influenced in part by
government controls.
The continuing efforts of governmental and third-party payers to contain
or reduce the costs of healthcare may impair future revenues and
profitability of biotechnology companies. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is
subject to government control. In the United States, there have been, and
we expect that there will continue to be, a number of federal and state
proposals to implement similar government control. While we cannot
predict whether the government will adopt any such legislative or
regulatory proposals, the announcement or adoption of these proposals
could have a material adverse effect on our business, results of
operations, financial condition and cash flow.
We depend on our key technical and management personnel and
collaborative partners to advance our technology, and the loss of these
personnel or partners could impair the development of our products.
We rely and will continue to rely on our key management and scientific
staff. The loss of key personnel or the failure to recruit necessary
additional qualified personnel could have a material adverse effect on
our business and results of operations. There is intense competition
from other companies, research and academic institutions and other
organizations for qualified personnel. There is no assurance that we will
be able to continue to attract and retain the qualified personnel
necessary for the development of our business. We will need to continue
to recruit experts in the areas of clinical testing, manufacturing,
marketing and distribution and develop additional expertise in our
existing personnel. If we do not succeed in recruiting such personnel or
developing such expertise, our business could suffer significantly.
We have clinical trial agreements with a number of public and private
medical institutions relating to the conduct of human clinical trials for
our GVAX® cancer vaccine programs. The early termination of any of these
clinical trial agreements would hinder the progress of our clinical
trials including trials of GVAX® cancer vaccine for prostate cancer and
lung cancer. If any of these relationships are terminated, the clinical
trials might not be completed and the results might not be evaluated.
- University of California, San Francisco
- Dana Farber Partners Cancer Care
- The Johns Hopkins Medical Institutions
- US Oncology, Inc.
- University of Tokyo, IMSUT
- Providence Portland Medical Center
- Affiliated Research Centers
- Emory University
- University of Michigan
We rely on the continued availability of outside scientific collaborators
performing research. These relationships generally may be terminated at
any time by the collaborator, typically by giving 30 days notice. These
scientific collaborators are not our employees. As a result, we have
limited control over their activities and can expect that only limited
amounts of their time will be dedicated to our activities. Our agreements
with these collaborators, as well as those with our scientific
consultants, provide that any rights we obtain as a result of their
research efforts will be subject to the rights of the research
institutions in such work. In addition, some of these collaborators have
consulting or other advisory arrangements with other entities that may
potentially conflict with their obligations to us. For these reasons,
there can be no assurance that inventions or processes discovered by our
scientific collaborators or consultants will become our property.
Cell Genesys stockholders may be diluted by the exercise of outstanding
stock options or warrants, the conversion of outstanding Series B
preferred stock, or other issuances of our common stock.
Substantially all the outstanding shares of Cell Genesys common stock are
eligible for sale in the public market. Conversion of the Series B
preferred stock or exercise of outstanding warrants would result in
issuance of additional shares of common stock, diluting existing
investors. The number of shares of common stock issued, and therefore
the dilution of existing investors, would increase as a result of either
(i) an event triggering the antidilution rights of any outstanding shares
of Series B preferred stock, or (ii) a decline in the market price of the
Company's common stock immediately prior to conversion of the Series B
preferred stock.
The holders of the Series B preferred stock may choose at any time to
convert their shares into common stock. In that event, the number of
shares of common stock issued would be based on the lower of:
a) a fixed conversion price of $11.02 per share for the 694
remaining shares from the original issue of $20.0 million face
value preferred stock, and $14.53 per share for the 875 shares
issued from previously exercises call options for preferred stock.
b) the average of certain trading prices during the 10 trading
days preceding such date of conversion (the "Floating
Conversion Price").
The market price of the common stock has recently traded above the fixed
conversion price of $11.02 and $14.53 per share and consequently the
conversion rate of the Series B preferred stock is currently based on the
fixed conversion price. Should the market price decline below the fixed
conversion rate, the greater the decline in the market price, the greater
the number of shares issuable upon conversion of the Series B preferred
stock.
On January 18, 2000, the Company received approximately $8.8 million from
the issuance of 875 new Series B Convertible preferred shares following
the exercise of call options for these shares. The newly issued
preferred shares have a Fixed Conversion Price of $14.53 and other terms
as defined by the Series B preferred stock agreements dated November 14,
1997. The call option right which was available under the terms of these
agreements was triggered by the recent appreciation of Cell Genesys'
stock price. Following the issuance of the new preferred shares, no
further call options remain outstanding.
We may be subject to a redemption obligation in connection with requests
by the holders of Series B preferred stock to convert their shares into
common stock.
If the holders of the Series B preferred stock decide to convert their
shares into common stock, we would not be required to issue more than
5,624,000 shares of common stock, including those shares already issued
on conversion, (which is 19.99 percent of the outstanding shares of
common stock on November 14, 1997, or the "Share Limit"), unless we
first obtained stockholder approval. If we did not obtain prior
stockholder approval or an exemption from the requirement for stockholder
approval from the Nasdaq-AMEX (the "Nasdaq-AMEX exemption") we would
not be required to issue shares of common stock in excess of the Share
Limit pursuant to requests for conversion of the Series B preferred
stock. However, in such event, the holders of the Series B preferred
stock could require us to redeem the unconverted shares of Series B
preferred stock, and the amount of these redemption obligations could
become material if the common stock price declined below approximately
$3.50 per share. Since we have not obtained stockholder approval or the
Nasdaq-AMEX exemption, we could become subject to a material redemption
obligation if the number of shares of common stock issuable upon
conversion of the Series B preferred stock exceeds the Share Limit. The
amount of the redemption obligation will increase as the common stock
price decreases because we are limited in the number of shares we can
issue upon conversion. Consequently, volatility in the price of the
common stock could magnify the amount of any redemption obligation.
Impact of the Year 2000.
In prior years, the Company had undertaken various initiatives to ensure
that its information technology ("IT") and non-IT systems are Year 2000
ready. In late 1999, the Company completed its remediation and testing of
systems. As a result of those planning and implementation efforts the
Company had not identified any systems currently in use which require
modification or replacement as a result of its Year 2000 initiatives. The
Company is not aware of any material problems resulting from Year 2000
issues either with its research and development, its internal systems or
the products or services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the normal course of business, the financial position of the Company
is subject to a variety of risks, including market risk associated with
interest rate movements. The Company regularly assesses these risks and
has established policies and business practices to protect against these
and other exposures. As a result, the Company does not anticipate
material potential losses in these areas.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For
investment securities and debt obligations, the table presents principal
cash flows and related weighted-average interest rates by expected
maturity dates. Additionally, the Company has assumed its available for
sale securities, comprised of corporate notes and commercial paper, are
similar enough to aggregate those securities for presentation purposes.
The average interest rate was calculated using the weighted average fixed
rates under all contracts with Wells Fargo Bank, Transamerica Business
Credit Corporation and FINOVA Credit Corporation
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate Fair Value
2004 March 31,
(IN THOUSANDS) 2000 2001 2002 2003 Thereafter Total 2000
- ------------------------------------------- --------- -------- ------- ---------- --------- ------------
Total Investments Securities......$164,763 $81,675 -- -- -- $246,438 $247,382
Average Interest Rate.......... 5.31% 7.23% -- -- -- 5.95%
Long-term Debt, including
Current Portion................. $1,142 $927 $632 $458 $243 $3,402 $3,402
Average Interest Rate.......... 11.80% 11.12% 10.51% 9.92% 9.92% 10.65%
PART II - Other Information
Part II. OTHER INFORMATION
Item 1. Litigation
none
Item 2. Changes in Securities and Use of Proceeds
none
Item 3. Defaults Upon Senior Securities
none
Item 4. Submission of Matters to a Vote of Security Holders
none
Item 5: Other Information
none
Item 6. Exhibits and Reports On Form 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
Current Report on Form 8-K filed on January 27, 2000
CELL GENESYS, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in Foster City, California,
on May 15, 2000:
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By: |
/s/ Matthew J. Pfeffer
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Matthew J. Pfeffer
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Vice President and
Chief Financial Officer
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(Principal Accounting and Financial Officer)
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INDEX TO EXHIBITS
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Exhibit Number
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Description
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27.1
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Financial Data Schedule
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