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, 2002
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 such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
As of April 30, 2002, the number of outstanding shares of the Registrant's Common Stock was 35,641,224.
CELL GENESYS, INC.
FORM 10-Q
TABLE OF CONTENTS
Part I. Financial Information
| ITEM 1. Consolidated Financial Statements: | Page |
| | |
Condensed Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001 | 3 |
| | |
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2002 and 2001 | 4 |
| | |
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2001 | 5 |
| | |
| Notes to Condensed Consolidated Financial Statements | 6 |
| | |
| ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 9 |
| | |
| ITEM 3. Quantitative and Qualitative Disclosures About Market Risk | 20 |
| | |
Part II. Other Information
| | |
| ITEM 6. Exhibits and Reports on Form 8-K | 20 |
| | |
| Signatures | 21 |
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CELL GENESYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
--------------------------
2002 2001
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ASSETS (UNAUDITED) (Note 1)
Current assets:
Cash and cash equivalents including restricted cash of
$66.4 million for March 31, 2002 and December 31, 2001...... $ 84,420 $ 143,055
Short-term investments...................................... 145,836 115,594
Investment in Abgenix common stock.......................... 169,144 301,217
Prepaid expenses and other current assets................... 5,449 10,603
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Total current assets................................ 404,849 570,469
Property and equipment, net................................... 54,762 43,217
Deposits and other assets..................................... 1,476 1,624
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$ 461,087 $ 615,310
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 2,917 $ 1,978
Accrued compensation and benefits........................... 1,737 2,637
Deferred revenue............................................ 1,847 3,756
Accrued legal expenses...................................... 400 549
Accrued clinical trial costs................................ 1,222 928
Accrued acquisition and related costs....................... 1,508 1,535
Other accrued liabilities................................... 2,242 7,405
Income tax payable.......................................... 8,120 13,094
Deferred tax liability...................................... 64,337 117,808
Current portion of property and equipment financing......... 3,000 --
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Total current liabilities........................... 87,330 149,690
Noncurrent portion of property and equipment financing........ 57,000 60,000
Commitments and contingencies
Minority interest in equity of subsidiary..................... (173) 96
Redeemable convertible preferred stock........................ 17,970 17,970
Stockholders' equity:
Common stock................................................ 36 36
Additional paid-in capital.................................. 274,794 274,365
Accumulated comprehensive income, principally unrealized
gain on investment of Abgenix............................... 96,506 176,710
Accumulated deficit......................................... (72,376) (63,557)
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Total stockholders' equity.......................... 298,960 387,554
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$ 461,087 $ 615,310
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See accompanying notes.
CELL GENESYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended March 31,
--------------------------------
2002 2001
-------------- --------------
(in thousands, except per share dat
Revenue under collaborative agreements....................... $ 4,595 $ 5,973
Operating expenses:
Research and development................................... 16,563 10,726
General and administrative................................. 3,658 2,700
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Total operating expenses.................................. 20,221 13,426
Interest and other income.................................... 2,417 7,254
Interest expense............................................. (409) (54)
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Loss before minority interest and income tax.............. (13,618) (253)
Income (loss) attributed to minority interest................ 271 (37)
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Loss before income tax.................................... (13,347) (290)
Benefit for income tax....................................... 4,529 87
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Net loss.................................................. $ (8,818) $ (203)
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Basic and diluted loss per common share...................... $ (0.25) $ (0.01)
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Weighted average shares of common stock outstanding --
basic and diluted......................................... 35,625 34,232
============== ==============
See accompanying notes.
CELL GENESYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 3
--------------------------
2002 2001
------------ -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.............................................. $ (8,818) $ (203)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization...................... 788 732
Changes to:
Prepaid expenses and other assets.................. 5,253 (1,808)
Accounts payable................................... 939 151
Accrued compensation and benefits.................. (900) (141)
Deferred revenue................................... (1,909) 2,817
Accrued legal expenses............................. (149) 47
Other accrued liabilities.......................... (4,868) 711
Accrued tax provision.............................. (4,974) (12,036)
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Net cash used in operating activities......... (14,638) (9,730)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments................... (83,841) (142,932)
Maturities of short-term investments.................. -- 20,433
Sales of short-term investments....................... 51,996 191,151
Minority interest in equity of subsidiary............. (269) 378
Capital expenditures.................................. (12,312) (6,206)
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Net cash provided by (used in)
investing activities........................ (44,426) 62,824
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuances of common stock............... 429 536
Payments under property and equipment
financing obligations............................... -- (433)
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Net cash provided by financing activities..... 429 103
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Net increase (decrease) in cash and cash equivalents.... (58,635) 53,197
Cash and cash equivalents at beginning of period........ 143,055 21,747
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Cash and cash equivalents at end of period.............. $ 84,420 $ 74,944
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Unrealized loss on investment in Abgenix................ $ (132,073) $ (318,108)
See accompanying notes
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization and basis of presentation
Cell Genesys, Inc. ("Cell Genesys" or "the Company") has focused its research and product development efforts on human disease therapies that are based on innovative gene modification technologies. The Company's objective is to develop and commercialize cancer vaccines, oncolytic virus therapies and gene therapies to treat cancer and other major, life-threatening diseases. Cell Genesys' current clinical programs include GVAX® cancer vaccines and oncolytic virus therapies.
The consolidated financial statements include the accounts of Cell Genesys and its wholly owned and majority owned subsidiaries. All significant inter-company balances and transactions have been eliminated. Investments in entities in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for by the equity method.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Report on Form 10-K for the year ended December 31, 2001.
Concentration of risk
Cash and cash equivalents, short-term investments and accounts receivables are financial instruments, which potentially subject the Company to concentrations of credit risk. The Company maintains and invests excess cash in money market funds and repurchase agreements which bear minimal risk. The Company has not experienced any significant credit losses and does not generally require collateral on receivables.
Revenue recognition
Research payments under collaborative arrangements and grants are recognized as revenue based on research expenses incurred as provided for under the terms of the arrangements.
Incentive milestone payments under collaborative arrangements are recognized as revenue upon achievement of the incentive milestone events, which represent the culmination of the earnings process because the Company has no future performance obligations related to the payment. Incentive milestone payments are triggered either by the results of our research efforts or by events external to Cell Genesys, such as regulatory approval to market a product or the achievement of specified sales levels by a marketing partner.
Amounts received in advance are recorded as deferred revenue until the related revenue is recognized.
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash, cash equivalents and short-term investments
Cell Genesys places its cash, cash equivalents and short-term investments with high credit quality U.S. and foreign financial institutions, government and corporate issuers and limits the amount of credit exposure to any one issuer. The Company considers all highly liquid investments with insignificant interest rate risk with a maturity of less than three months when purchased to be cash equivalents. Cash and cash equivalents include $67.5 million and $66.4 million of restricted cash at March 31, 2002 and December 31. 2001, respectively. All investments are denominated in U.S. dollars. Short- term investments include equity securities classified as available-for-sale. The Company records its investments at fair market value.
The Company's debt securities are classified as available- for-sale and carried at fair value. The cost of securities sold is based on the specific identification method. Realized gains and losses and declines in value, judged to be other than temporary, on available-for-sale securities are included in interest income. Unrealized holding gains and losses on securities classified as available-for-sale are recorded in accumulated deficit. The Company determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Comprehensive income (loss)
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes to stockholders' equity of the Company that are excluded from net income (loss). Specifically, unrealized gains or losses on the Company's available-for-sale securities are included in other comprehensive income (loss) and deemed dividends to preferred stockholders are charged to additional paid-in capital.
For the three months ended March 31, 2002, the Company recognized comprehensive loss of $142.5 million, including the change in unrealized loss in investment of Abgenix, Inc. ("Abgenix") of $132.0 million, compared to the same period in 2001, in which the Company's comprehensive loss was $318.3 million which included the change in unrealized loss in investment of Abgenix of $316.8 million.
Income taxes
Income taxes are computed using the asset and liability method, under which deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities, and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
Segment reporting
Our operations are treated as one operating segment as we only report profit and loss information on an aggregate basis to our chief operating decision-makers.
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Investment in Abgenix
Since 1996, the Company has maintained an investment in Abgenix, Inc. ("Abgenix"). In December 1997 and January 1998, Abgenix completed private placements of securities reducing Cell Genesys' percentage ownership from approximately 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 through 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 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 under the equity method of accounting. 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, and Cell Genesys' ownership was further reduced to approximately 19 percent. 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 securities and carried at fair value.
During 2000, the Company sold shares of Abgenix common stock resulting in $243.9 million in net proceeds. During 2001, the Company did not sell any of the Abgenix common stock and retains approximately 9 million shares, or 10.31 percent, ownership in Abgenix. Based on Abgenix common stock's market value of $18.89 per share as of March 31, 2002, the total carrying amount of the Company's investment in Abgenix was approximately $169 million.
3. Investment in Ceregene and Minority Interest
In January 2001, the Company created a new subsidiary, Ceregene, Inc. ("Ceregene"). The Company contributed $10 million in cash and access to technology and patents in the Central Nervous System ("CNS") gene therapy area, in exchange for approximately 60 percent ownership of the new company. Ceregene's financial statements are consolidated into the operations of the Company. For the quarter ended March 31, 2002, the Company reported net loss after minority interest of approximately $407,000.
4. Corporate Collaborations
In November 2001, Cell Genesys and the pharmaceutical division of Japan Tobacco Inc. ("JT") modified an agreement originally signed in December 1998 involving the Company's GVAX® prostate cancer and lung cancer vaccine programs. Under the terms of the new agreement, the two parties established a royalty arrangement on sales of GVAX® lung cancer vaccines and on sales in other cancer indications that may be derived from a certain form of that vaccine. JT will pay Cell Genesys an undisclosed royalty on GVAX® lung cancer vaccine sales in Japan, Taiwan and Korea, and Cell Genesys will pay JT the same royalty on such sales in North America and the rest of the world. The two parties will continue to share equally in the product development costs of GVAX® lung cancer vaccine and JT will continue to pay Cell Genesys milestone payments. In addition, full commercial rights to GVAX® prostate cancer vaccine have been returned to Cell Genesys. As of March 31, 2002,Cell Genesys has received over $68.4 million in milestone and other payments, reimbursement for research and development costs and capital expenditures on manufacturing facilities. The agreement provides for future loans of up to $30 million to Cell Genesys for Phase III development costs, if JT continues in the collaboration into Phase III trials. The parties have also agreed to support an ongoing clinical trial of GVAX® for kidney cancer in Japan, which is the first clinical trial of cancer gene therapy in Japan. If the parties agree to proceed with the development of this GVAX® product for kidney cancer, Cell Genesys will be eligible to receive additional funding in the form of research and development reimbursements and other payments to be agreed upon at a later date. None of the payments involve an additional equity investment in Cell Genesys by JT, which currently owns approximately three percent of the Company. This is the second collaboration agreement between Cell Genesys and JT. The first collaboration, signed in 1991, funded the successful development of the fully human monoclonal antibody technology transferred to Abgenix.
- Construction-in-progress in manufacturing and corporate facilities
The Company is constructing a 41,000 square-foot leased manufacturing facility in Hayward, California. The facility is for the clinical production requirements for Phase III studies and potential product launch of non patient-specific GVAXÒ cancer vaccine products. This GMP manufacturing facility is expected to be fully validated and on-line by late 2002. In February 2002, the Company signed a new build-to-suit lease for a two-story building consisting of approximately 50,000 square feet in the Hayward location with a fifteen-year term. The lease in the existing Hayward location will be coterminous with this new lease. The second building in the Hayward location is being constructed to provide support services for the Company's GMP facility. As of March 31, 2002, construction costs in the Hayward GMP manufacturing facility totaled approximately $40 million. The Company expects to incur approximately $30 to $35 million of additional costs associated with the construction and validation of the facility during 2002.
In February 2002, the Company announced that it had leased a 35,000 square-foot manufacturing facility in Memphis, Tennessee. Cell Genesys plans to use the Memphis facility to manufacture the Company's patient-specific GVAX® lung cancer vaccines for both Phase III clinical trials and potential market launch. The Company is beginning facility modifications in order to have validated GMP manufacturing capabilities in place prior to the initiation of these Phase III trials, expected to begin in late 2002. The facility sets the stage for Cell Genesys' product development strategy for GVAX® lung cancer vaccines, which includes establishing a centrally located GMP facility to receive and process tumor cells obtained from patient biopsies, manufacture the patient-specific vaccine products and carry out quality control testing and ship the vaccine products back to the patient treatment centers.
In March 2001, the Company signed a build-to-suit lease with a purchase option for a new building to be constructed in South San Francisco, California. The proposed building is expected to contain approximately 154,000 square feet of research and development and administrative space, and is planned to serve as the Company's future corporate headquarters. Construction is underway and the new headquarters is expected to be ready for occupancy in mid 2003. After moving to its South San Francisco facility, the Company expects to sublease its facilities in Foster City.
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 and its subsidiaries' 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 technologies, 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 "Other Factors Affecting Future Operations" below. The Company does not undertake any obligation to update forward-looking statements. The following should be read in conjunction with the Company's financial statements for the quarter ended March 31, 2002 located elsewhere in this Quarterly Report on Form 10-Q, along with the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and other documents filed by the Company from time to time with the Securities and Eexchange Commission.
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 that are based on innovative gene modification technologies. The Company's strategic objective is to develop and commercialize cancer vaccines, oncolytic virus therapies and gene therapies to treat cancer and other major, life-threatening diseases. Cell Genesys' current clinical programs include GVAX® cancer vaccines and oncolytic virus therapies. GVAX® cancer vaccines are in Phase II studies for lung cancer, prostate cancer, pancreatic cancer, and leukemia and in Phase I/II studies for multiple myeloma. The Company expects to initiate a Phase III trial for GVAX® lung cancer vaccine in late 2002 and a Phase III trial for GVAX® prostate cancer vaccine during 2003. Clinical programs evaluating the Company's oncolytic virus therapies include a Phase II study of CG7060, an intratumorally administered product for early stage prostate cancer, and a Phase I/II study of CG7870, an intravenously administered therapy for late stage prostate cancer. In addition, Cell Genesys has preclinical oncolytic virus therapy programs evaluating potential therapies for liver cancer, colon cancer and bladder cancer as well as preclinical gene therapy programs evaluating potential therapies for multiple types of cancer and hemophilia. Additionally, Cell Genesys has a majority-owned subsidiary, Ceregene Inc., which is focused on gene therapies for central nervous system disorders, and also continues to hold approximately nine million shares of common stock of its former subsidiary, Abgenix (Nasdaq: ABGX), which is focused on the development and commercialization of antibody therapies.
First Quarter 2002 and Other Recent Highlights:
- Reported preclinical data at the American Association for Cancer Research (AACR) annual meeting that CG8840, an oncolytic virus therapy engineered to target and destroy bladder cancer cells, demonstrated significant antitumor activity in a mouse model when used alone and in combination with taxotere (docetaxel), a chemotherapeutic agent commonly used in the treatment of bladder cancer.
- Announced that Cell Genesys had leased a 35,000 square-foot facility in Memphis, Tennessee for manufacturing Cell Genesys' patient-specific GVAXÒ lung cancer vaccines for both Phase III clinical trials and potential market launch. Memphis, one of the world's major shipping hubs, was chosen to facilitate the efficient transport and distribution of patient vaccines to treatment centers across the United States.
- Announced that Cell Genesys had terminated its research collaboration and license agreement with GPC Biotech AG for p27/p16 gene therapy for cancer and cardiovascular disease. The decision to discontinue the agreement reflects Cell Genesys' decision to prioritize its other cancer gene therapy programs based on the results of ongoing preclinical studies as well as a determination that p27/p16 gene therapy for cardiovascular disorders such as restenosis is a less compelling business opportunity in light of the success of other new treatment strategies for restenosis.
Cell Genesys ended the first quarter of fiscal year 2002 with over $230 million in cash, cash equivalents and short-term investments. The Company has maintained its financial position through strategic management of its resources including the Company's holdings in Abgenix (of which Cell Genesys continues to hold approximately nine million shares of common stock) and by relying on funding from various corporate collaborations and licensing agreements. In late 2001, Cell Genesys secured a $60 million asset-backed financing in connection with the construction of the Company's manufacturing facility in Hayward, California.
The Company may finance certain of its operations through corporate collaborations with established pharmaceutical and biotechnology companies in order 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, research, development and manufacturing capabilities and marketing infrastructure to aid in the commercialization of potential disease therapies. Cell Genesys also evaluates, on an ongoing basis, opportunities to in-license or acquire products and/or technologies that complement its portfolio. There can be no assurance that Cell Genesys will be able to enter into additional collaborative relationships or obtain new products and/or technologies on acceptable terms, if at all, or that if such actions occur, they will be successful. Failure to enter new corporate relationships or expand Cell Genesys' product and technological base may limit Cell Genesys' success.
Critical Accounting Policies
We consider certain accounting policies related to revenue recognition and use of estimates to be critical policies.
Revenue recognition
Since the Company's inception, a substantial portion of our revenues has been generated from research and licensing agreements with collaborators. Revenue from non-refundable upfront license fees and other payments where the Company continues involvement through development is recognized ratably over the development period. The Company recognizes cost reimbursement revenue under these collaborative agreements as the related research and development costs are incurred. Incentive milestone payments under collaborative arrangements are recognized as revenue upon achievement of the incentive milestone events, which represent the culmination of the earnings process because the Company has no future performance obligations related to the payment. Incentive milestone payments are triggered either by the results of our research efforts or by events external to Cell Genesys, such as regulatory approval to market a product or the achievement of specified sales levels by a marketing partner. Deferred revenue represents the portion of research payments received that has not been earned.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Estimates in the financial statements include, but are not limited to accrued but unbilled expenses in clinical trials, outside experts and consultants (including legal and accounting fees), useful lives of property and equipment, and other items.
Results of Operations
Revenue for the quarter was $4.6 million compared with $6.0 million for the comparable period in 2001. The higher revenue in 2001 primarily reflects recognition of milestone revenue of $1 million earned under the agreement with the pharmaceutical division of Japan Tobacco Inc. During 2001, the Company restructured its GVAXÒ collaboration with Japan Tobacco to regain full rights to its GVAXÒ prostate cancer vaccine program and converted its GVAXÒ lung cancer vaccine program with Japan Tobacco to a reciprocal royalty arrangement. This restructuring will result in lower collaboration reimbursement relating to the GVAXÒ prostate program, but reimbursement relating to the GVAXÒ lung program is not affected by the restructuring and is likely to increase as associated costs increase.
Research and development expenses were $16.6 million for the three months ended March 31, 2002, compared with $10.7 million for the three months ended March 31, 2001. The increase in research and development costs can be attributed primarily to the Company's expanding clinical trials for both its GVAXÒ cancer vaccine and oncolytic virus therapies. The Company expects that its research and development expenditures and headcount will continue to increase in future years to support expanded, more advanced and more numerous clinical trials, additional office and manufacturing facilities and additional product development activities. The rate of increase depends on a number of factors including progress in research and development and clinical trials.
General and administrative expenses were $3.7 million for the three months ended March 31, 2002, compared with $2.7 million for the comparable period in 2001. The increase resulted from additional headcount and facility infrastructure to support expanding preclinical and clinical programs including facilities added during 2001 and the first quarter of 2002. Future spending for general and administrative costs is expected to continue to increase in order to support the growing infrastructure needs of the Company, particularly in the area of facilities.
Interest and other income decreased to $2.4 million for the three months ended March 31, 2002, from $7.3 million for the three months ended March 31, 2001. The higher interest income for the comparable period of 2001 was primarily due to realized gains earned from converting a portion of the investment portfolio from tax-free securities to taxable securities. The conversion was part of the Company's strategy to minimize future tax liabilities by offsetting operating losses and available tax net operating loss carryforwards against interest income and gain on future sales of Abgenix stock. Interest expense increased to $409,000 for the three months ended March 31, 2002, from $54,000 for the three months ended March 31, 2001. The increase was a result of a $60 million liquid collateral debt financing completed in December, 2001 in connection with the construction of the Company's manufacturing facility in Hayward, California.
Cell Genesys had a net loss of $8.8 million for the three months ended March 31, 2002, compared to $203,000 for the same period in the prior year. The increase in net loss was due primarily to increased research and development expenses to support the Company's expanded portfolio of clinical programs and difference in realized gains as noted above. Losses, excluding non-recurring charges and gains from sales of Abgenix stock, are expected to continue and may increase in future years as operating expenses rise, particularly as the Company incurs expenses related to manufacturing and late stage human testing of its potential products.
The Company recorded a tax benefit for the quarter ended March 31, 2002 of $4.5 million, which represents the estimated refund available from the carryback of the current year's losses to offset taxable income in 2000.
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 shares issuable upon conversion of preferred stock and upon exercise of warrants and options, had been issued. These potential additional share issuances are not included in diluted earnings per share in loss periods as their effect would be anti-dilutive. 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.
Commitments
Cell Genesys currently has three facilities under construction which are at various stages of construction of the Company's manufacturing facility for cell-based vaccines located in Hayward, California, is expected to be completed in late 2002. Expenditures associated with the completion and validation of this facility during 2002 are expected to total approximately $30 to 35 million. As of March 31, 2002, the Company had accumulated construction-in-progress costs of approximately $40.0 million. Future commitments for the purchase of equipment total $4.2 million as of March 31, 2002.
Liquidity and Capital Resources
Cell Genesys finished the quarter ended March 31, 2002, with approximately $230 million in cash, cash equivalents and short-term investments, of which $67.5 million is classified as restricted cash. The Company has maintained its financial position through strategic management of its resources including the Company's holdings in Abgenix (of which Cell Genesys continues to hold approximately nine million shares of common stock) and by relying on funding from various corporate collaborations and licensing agreements.
Cell Genesys has financed its operations primarily through the sale of equity securities, funding under collaborative arrangements, sale of Abgenix common stock and secured financing. In February and November 2000, the Company received an aggregate of $244 million in net proceeds for the sale of shares of Abgenix common stock. From inception through March 31, 2002, the Company received $181.6 million in net proceeds from Cell Genesys equity financings, $194.7 million under collaborative agreements and $88.2 million from property and secured financings.
In addition to the Company's manufacturing facility construction for cell-based vaccines located in Hayward, (discussed under "Commitments" above), California, the Company recently announced the opening of a new manufacturing facility in Memphis, Tennessee that will be devoted to the manufacture of patient-specific cancer vaccines for non small- cell lung cancer, in support of Phase III trials expected to commence late in 2002. Total costs for equipment and improvements for this facility are expected to approximate $1.5 million in 2002. During 2001, the Company announced that it had signed a lease with a purchase option for a new facility in South San Francisco, intended to serve as the Company's new corporate headquarters and research and development facility. Construction of this new facility began in 2002, and total payments for build-out of tenant improvements during 2002 are expected to be approximately $20 to $22 million. Capital expenditures for the quarter relating primarily to the construction of the Company's manufacturing facilities for Phase III trials and market launch were $15.3 million.
Cell Genesys anticipates that its operating cash usage during fiscal year 2002 will not exceed approximately $40 million. Operating cash usage does not include any potential offset from sales of Abgenix stock or usage for capital expenditures or any potential acquisitions. The Company's capital requirements depend on numerous factors, including: the progress of the Company's research and development programs and its 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; and patent interference proceedings or other legal proceedings or their resolution. Nonetheless, the Company's ongoing development programs and any increase in the number of programs will reduce the current cash resources and potentially create the need to raise further capital. Therefore, the Company may continue to consider financing alternatives, including the potential sale of additional shares of Abgenix stock and debt financings.
A substantial portion of the Company's working capital consists of shares maintained in its former subsidiary, Abgenix. These shares are carried at market value and have been subject to extreme fluctuation in recent quarters due to the highly volatile nature of the market price of Abgenix stock. To the extent that we continue to hold a substantial amount of these shares, our working capital position can be expected to continue to fluctuate in future periods.
While the Company believes that its current liquidity position will be sufficient to meet its cash needs for at least the next year, it anticipates entertaining the possibility of raising additional capital in advance of actual capital expenditures to preserve its liquidity. Therefore, liquidity and volatility of capital markets play a significant role in the decision to raise capital. The types of financing available to the Company include the sale of Abgenix securities, asset-backed debt financing and private or public placement of Cell Genesys equity securities. The Company's evaluation processes regularly consider the liquidity of capital markets, dilution, stockholder value and tax consequences of each type of financing on stockholders. Certain of the financing options available to the Company have some type of negative consequence to stockholders such as dilution. Given the volatile nature of the capital markets, decisions to raise capital may require actions that would impose a slightly negative future consequence in order to reduce or minimize a more significant negative consequence to stockholders.
Other Factors Affecting Future Operations
Investors should carefully consider the risks described below before making an investment decision. In addition, these risks are not the only ones facing our Company. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q, including our consolidated Annual Report on Form 10-K for the year ended December 31, 2001 and other documents filed by us from time to time with the Securities and Exchange Commission.
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 cancer vaccines, oncolytic virus therapies and 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.
Our cancer vaccine and 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 vaccines and oncolytic virus therapies are currently being tested in Phase I/II and Phase II human clinical trials to determine their 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 commercially successful products. 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 manufactured in commercial quantities at reasonable cost or that such a product will be successfully marketed.
We have not been profitable in our operations (absent the gains on sales of Abgenix stock) and may not become profitable in the future.We have incurred an accumulated deficit since our inception. At March 31, 2002, our accumulated deficit was approximately $72.4 million, compared with $63.6 million at December 31, 2001. For the period ended March 31, 2002, we recorded a net loss of $8.8 million. 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.
We may have a need for substantial additional funds.We will need substantial 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. At some point in the future, we may need to raise 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 preferred stock
- our ability to realize the carrying value of the Abgenix stock due to its volatility
We intend 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.
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 approximately 315 issued or granted patents and approximately 400 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. The Company is aware of competing intellectual property relating to both its programs in cancer vaccines and oncolytic viruses. While the Company currently believes it has freedom to operate in these areas, there can be no assurance that its position will not be challenged by others in the future. We may be required to obtain licenses to certain third party technologies or genes necessary in order to market our products. Any failure to license any technologies 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 multiple interference and/or opposition proceedings with regard to:
- gene activation technology
- certainex vivo gene therapies
- certain vector technologies
- chimeric receptor technology
We cannot predict the outcome of these proceedings. An adverse result could have a material adverse effect on our intellectual property position in these areas and on our business as a whole. 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 to 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 confidentiality agreements upon the commencement of employment or consulting relationships 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, oncolytic virus therapy and gene therapy are highly competitive. Competition in the field 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 and oncolytic virus therapy programs. Certain of these competitive products are in 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 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 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 approval or disapproval 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
- 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 with which these regulatory agencies are more familiar and comfortable. 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 contamination or injury, by accident or as the results of intentional acts of terrorists, 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 may 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 may need 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 an 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 GVAXâ cancer vaccine programs and oncolytic virus therapies. The early termination of any of these clinical trial agreements would hinder the progress of our clinical trials. If any of these relationships are terminated, the clinical trials might not be completed and the results might not be evaluated.
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, the conversion of outstanding Series B redeemable convertible 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 stock options 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 fixed conversion price of $11.02 per share for the 694 remaining shares from the original issue of $20 million face value preferred stock and $14.53 per share for the 875 shares issued January 2000 from call options or
- the average of certain trading prices during the 10 trading days preceding such date of conversion.
As of March 31, 2002, the market price of Cell Genesys common stock traded above the two fixed conversion prices of $11.02 and $14.53. Consequently, the conversion rate for the shares is based on the fixed conversion price. As of March 31, 2002, the 694 outstanding shares of Series B preferred stock issued in November 1997 were convertible into an aggregate of approximately 760,000 shares of common stock, while the 875 outstanding shares issued in January 2000 were convertible into an aggregate of approximately 660,000 shares of common stock. As the market price declines 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. Since March 31, 2002, the Company's stock price has fallen below one of the fixed conversion prices, which has the effect of increasing the number of shares issuable upon conversion of the preferred stock.
Following the issuance of the new preferred shares in 2000, no further call options remain outstanding.
Our operations are vulnerable to interruption of fire, earthquake, power loss, telecommunications failure, terrorist activity and other events beyond our control. Our facilities in California have, in the past, been subject to electrical blackouts as a result of a shortage of available electrical power. In the event that these or other of our facilities are subject to future blackouts, they could disrupt the operations of the affected facilities. In addition, we do not carry sufficient business interruption insurance to compensate us for losses that may occur and any losses or damages incurred by us could have a material adverse effect on our business.
Our stock price is greatly influenced by the market price of Abgenix stock, which has been highly volatile.Our retained ownership of approximately 9 million Abgenix shares represents a material portion of the total assets on our balance sheet. Abgenix stock prices have proven to be highly volatile. The value of our 9 million shares of Abgenix stock was approximately $169 million at March 31, 2002 versus approximately $301 million at December 31, 2001. Movements in the price of Abgenix stock, up or down, exert corresponding influences on the market price of our stock.
Our business could suffer as a result of our strategic acquisitions and investments.In January 2001, the Company acquired the principal operating assets of Chiron Corporation's gene therapy business, a fully equipped and staffed manufacturing facility. Also in January 2001, we launched Ceregene, Inc., formed through the acquisition of Neurologic Gene Therapeutics, a private San Diego-based start-up company. Finally, in August 2001, we acquired Calydon, Inc., a private biotechnology company focused on the treatment of cancer using genetically engineered oncolytic viruses. We may not be able to fully integrate all these companies, their intellectual property or personnel, and our attempts to do so will place additional burdens on our management and infrastructure. These acquisitions will subject us to a number of risks, including:
- the loss of key personnel and business relationships;
- difficulties associated with assimilating and integrating the new personnel and operations of the acquired companies;
- the potential disruption of our ongoing business;
- the expense associated with maintenance of uniform standards, controls, procedures, employees and clients;
- the diversion of resources from the development of our own proprietary technology; and
- our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs.
There can be no assurance that we will be successful in overcoming these risks or any other problems encountered in connection with our acquisitions.
We may engage in future acquisitions or investments that could dilute our existing stockholders, or cause us to incur contingent liabilities, debt or significant expense. From time to time, in the ordinary course of business, we may evaluate potential acquisitions of or investments in related businesses, products or technologies. Future acquisitions could result in the issuance of dilutive equity securities or the incurrence of debt or contingent liabilities. There can be no assurance that any strategic acquisition or investment will succeed. Any future acquisition or investment could harm our business, financial condition and results of operations.
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. However, as mentioned under "Liquidity and Capital Resources" and the "Other Factors Affecting Future Operations" sections of the Company's Management Discussion and Analysis of Financial Condition and Results of Operations above, the Company is subject to risk associated with its retained ownership in Abgenix shares.
The Company has not entered into any financial instruments that would give rise to foreign currency exchange risk, commodity pricing risk or equity pricing risk.
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, Sterling Capital Management, JP Morgan Chase H & Q and Fleet National Bank.
The Company does not currently hold any derivative financial instruments nor has it entered into hedging transactions or activities.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(in thousands)
Fair Value
March 31,
2003 2004 2005 2006 Thereafter Total 2002
--------- --------- --------- --------- --------- --------- ---------
Total Investments
Securities.................. $ 125,736 $ 38,214 $ 20,251 $ 16,221 $ 17,096 $ 217,518 $ 217,558
Average Interest Rate....... 1.58% 1.67% 1.81% 1.92% 3.04% 2.18% --
Long-term Debt, including
Current Portion............. $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 60,000 $ 60,000
Average Interest Rate....... -- -- -- -- -- -- 2.90%
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports On Form 8-K
- Exhibits
Number
- (1) Lease Agreement dated February 1, 2002, between Shelby Drive Corporation, and Cell Genesys for property located at 4600 Shelby Drive, Suite 108, Memphis, Tennessee.
- (2) Lease Agreement dated January 7, 2002, between F & S Hayward, LLC, and Cell Genesys for property located at the Adjacent Park of Bridgeview Tech Park of 24570 Clawiter Road, Hayward, California.
(1) Incorporated by reference to Exhibit 10.19 filed with the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
(2) :Incorporated by reference to Exhibit 10.20 filed with the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
- Reports on Form 8-K
Not applicable
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, 2002.
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| | By: | /s/ Matthew J. Pfeffer |
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| | Matthew J. Pfeffer |
| | Vice President and Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
