Cell Genesys 10Q 2005 Q4 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


		þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2005


		o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the 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)		(I.R.S. employer identification number)

500 Forbes Boulevard, South San Francisco, California 94080
(Address of principal executive offices and zip code)

(650) 266-3000
(Registrant’s telephone number, including area code)

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. Yesþ Noo

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yesþ Noo

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

As of October 31, 2005, the number of outstanding shares of the Registrant’s Common Stock was 45,546,295.

CELL GENESYS, INC.
TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements:		3
a. Condensed Consolidated Balance Sheets – September 30, 2005 and December 31, 2004		3
b. Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2005 and 2004		4
c. Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2005 and 2004		5
d. 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		27
Item 4. Controls and Procedures		27
PART II. OTHER INFORMATION		28
Item 6. Exhibits		28
SIGNATURES		28
EXHIBIT 31.1
EXHIBIT 32.1

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Cell Genesys, Inc.

Condensed Consolidated Balance Sheets

(In thousands)


	September 30,				December 31,
	2005				2004
	(unaudited)				(Note 1)
ASSETS
Current assets:
Cash and cash equivalents		$	14,218			$	58,324
Short-term investments			84,852				113,347
Restricted cash			3,291				3,300
Investment in Abgenix, Inc. common stock			76,143				68,503
Prepaid expenses and other current assets			2,868				1,184
Assets held for sale			3,200				—

Total current assets			184,572				244,658
Property and equipment, net			145,639				159,663
Noncurrent deferred tax assets			28,463				25,177
Deposits and other assets			5,000				5,641

		$	363,674			$	435,139

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	2,025			$	2,888
Deferred revenue			—				2,031
Accrued compensation and benefits			3,828				5,071
Accrued facility exit costs			1,913				6,092
Other accrued liabilities			7,109				5,924
Accrued income taxes			31,878				29,954
Deferred tax liabilities			28,463				25,177
Current portion of facility lease obligation			1,014				786

Total current liabilities			76,230				77,923
Other long-term liabilities			1,963				—
Noncurrent portion of facility lease obligation			50,207				51,013
Commitments
Convertible senior notes			145,000				145,000
Redeemable convertible preferred stock			—				1,897
Stockholders’ equity:
Common stock			46				45
Additional paid-in capital			375,618				372,014
Accumulated other comprehensive income			42,578				31,220
Accumulated deficit			(327,968	)			(243,973	)

Total stockholders’ equity			90,274				159,306

		$	363,674			$	435,139

See accompanying notes

Cell Genesys, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)


	Three months ended								Nine months ended
	September 30,								September 30,
	2005				2004				2005				2004
	(in thousands, except per share data)
Revenue		$	71			$	3,228			$	4,499			$	8,274
Operating expenses:
Research and development			23,333				21,686				71,375				68,427
General and administrative			3,648				3,772				11,356				14,436
Restructuring charges			744				—				1,597				—

Total operating expenses			27,725				25,458				84,328				82,863

Loss from operations			(27,654	)			(22,230	)			(79,829	)			(74,589	)
Gain on sale of Abgenix, Inc. common stock			6,293				180				6,293				12,160
Interest and other income			778				341				2,310				1,891
Interest expense			(2,634	)			(2,253	)			(8,044	)			(6,704	)

Loss before income taxes			(23,217	)			(23,962	)			(79,270	)			(67,242	)
Income tax provision			(4,051	)			(87	)			(4,725	)			(3,745	)

Net loss		$	(27,268	)		$	(24,049	)		$	(83,995	)		$	(70,987	)

Basic and diluted net loss per common share		$	(0.60	)		$	(0.54	)		$	(1.85	)		$	(1.64	)

Weighted average shares of common stock outstanding — basic and diluted			45,499				44,805				45,395				43,253

See accompanying notes

Cell Genesys, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Nine months ended
	September 30,
	2005				2004
	(in thousands)
Cash flows from operating activities:
Net loss		$	(83,995	)		$	(70,987	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			12,586				12,541
Gain on disposal of property and equipment			(35	)			(18	)
Gain on sale of Abgenix, Inc. common stock			(6,293	)			(12,160	)
Non-employee stock-based compensation			184				105
Write-down of assets held for sale			280				—
Changes to:
Prepaid expenses and other assets			(1,106	)			(495	)
Noncurrent deferred tax assets			2,801				3,745
Accounts payable			(863	)			929
Accrued compensation and benefits			(1,243	)			(610	)
Deferred revenue			(2,031	)			(4,443	)
Accrued facility exit costs			(4,179	)			(2,114	)
Other accrued and long-term liabilities			3,148				199
Accrued income taxes			1,924				—

Net cash used in operating activities			(78,822	)			(73,308	)

Cash flows from investing activities:
Purchases of short-term investments			(96,202	)			(203,604	)
Maturities of short-term investments			36,711				5,250
Sales of short-term investments			88,329				235,205
Restricted cash			9				(99	)
Capital expenditures			(1,987	)			(3,716	)
Proceeds from disposal of property and equipment			43				66
Proceeds from sale of Abgenix, Inc. common stock			6,867				12,918
Cash effect related to the deconsolidation of Ceregene, Inc.			—				(521	)

Net cash provided by investing activities			33,770				45,499

Cash flows from financing activities:
Proceeds from issuances of common stock			1,524				58,817
Payments under Ceregene, Inc. financing			—				(300	)
Payments under facility lease obligation			(578	)			(376	)
Payments under debt financings			—				(182	)

Net cash provided by financing activities			946				57,959

Net (decrease) increase in cash and cash equivalents			(44,106	)			30,150
Cash and cash equivalents at the beginning of the period			58,324				9,867

Cash and cash equivalents at the end of the period		$	14,218			$	40,017

See accompanying notes

Cell Genesys, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Basis of Presentation

We have focused our research and product development efforts on biological therapies for patients with cancer. Our objective is to develop and commercialize cell-based cancer vaccines and oncolytic virus therapies to treat different types of cancer. Our current clinical-stage programs include both GVAX® cancer vaccines and oncolytic virus therapies.

The consolidated financial statements include our accounts and those of our previously majority-owned subsidiary, Ceregene, Inc. After August 3, 2004, due to a decline on that date in our ownership of Ceregene, we account for our investment under the equity method of accounting for investments. Prior to August 3, 2004 the accounts of Ceregene were consolidated with our own. All significant intercompany balances and transactions have been eliminated.

The accompanying unaudited condensed 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 adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005 or for any other future period.

The condensed consolidated balance sheet at December 31, 2004 has been derived from the audited consolidated 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 unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Report on Form 10-K for the year ended December 31, 2004.

Certain prior period balances have been reclassified to conform with the current period presentation.

2. Stock-Based Compensation

In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), we have elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations and to adopt the “disclosure only” alternative described in SFAS 123. Under APB 25, when the exercise price of our employee stock options equals or exceeds the fair market value on the date of the grant or the fair value of the underlying stock on the date of the grant as determined by our Board of Directors, no compensation expense is recognized.

The following table illustrates, pursuant to SFAS 123 and as amended by SFAS No. 148, the effect on net loss and loss per common share had compensation costs for stock-based employee compensation plans been determined based upon the fair value method prescribed under SFAS 123 using the straight-line method of accounting for vesting:


	Three months ended								Nine months ended
	September 30,								September 30,
	2005				2004				2005				2004
	(in thousands, except share data)
Net loss		$	(27,268	)		$	(24,049	)		$	(83,995	)		$	(70,987	)
Deduct:
Stock-based compensation expense determined under SFAS 123, net of related taxes			(2,004	)			(3,325	)			(7,025	)			(10,268	)

Pro forma net loss		$	(29,272	)		$	(27,374	)		$	(91,020	)		$	(81,255	)

Basic and diluted loss per common share, as reported		$	(0.60	)		$	(0.54	)		$	(1.85	)		$	(1.64	)
Basic and diluted pro forma loss per common share		$	(0.64	)		$	(0.61	)		$	(2.01	)		$	(1.88	)

In December 2004, the Financial Accounting Standards Board (FASB) issued a revision of SFAS 123 which is referred to as SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”). SFAS 123R, which supersedes APB 25, will require us to recognize

compensation expense using a fair-value based method for costs related to share-based payments, including stock options and stock issued under our employee stock plans, and record such expense in our financial statements. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. We will adopt SFAS 123R for our fiscal year beginning January 1, 2006 and we are currently evaluating option valuation methodologies and assumptions in light of SFAS 123R. Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are comparable to the current pro forma disclosures under SFAS 123 presented in this note, we do expect the adoption to have a material adverse impact on our results of operations. Our current estimates of option values using the Black-Scholes method may not be indicative of the valuation methodologies that we ultimately adopt.

3. Loss Per Share

Basic loss per share is calculated using the weighted average number of shares of common stock outstanding during the period. Diluted loss per share includes the impact of potentially dilutive securities. As our potentially dilutive securities (stock options and convertible debt) were anti-dilutive for all periods presented, they have been excluded from the computation of shares used in computing diluted loss per share. These outstanding securities consisted of the following:


	September 30, 2005
	(in thousands, except per share data)
Convertible senior notes, convertible into the following number of shares of our common stock		15,934
Outstanding stock options to purchase the following number of shares of our common stock		8,390
Weighted average exercise price per share of outstanding stock options	$	11.20

4. Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes to our stockholders’ equity that are excluded from net loss. Other comprehensive income (loss) includes solely unrealized gains or losses on our available-for-sale securities, including our holdings of Abgenix, Inc. common stock, net of related tax effects. The following table presents the calculation of comprehensive income (loss):


	Three months ended								Nine months ended
	September 30,								September 30,
	2005				2004				2005				2004
	(in thousands)
Net loss		$	(27,268	)		$	(24,049	)		$	(83,995	)		$	(70,987	)
Other comprehensive income (loss):
Increase (decrease) in unrealized gain on investments, net of tax			26,213				(12,057	)			14,604				(15,533	)
Less: reclassification adjustment for gains (losses) recognized in net loss, net of tax			(3,487	)			270				(3,246	)			(7,631	)

Comprehensive loss		$	(4,542	)		$	(35,836	)		$	(72,637	)		$	(94,151	)

5. Accrued Facility Exit Costs

As of September 30, 2005 and December 31, 2004 we had accrued approximately $1.9 million and $6.1 million, respectively, in facility exit costs associated with the move of our corporate headquarters to South San Francisco, California in March 2003 and the related vacancy in Foster City, California. During the nine months ended September 30, 2004, we revised our estimate of accrued facility costs and recorded an additional $1.8 million of general and administrative expense during this period which reflected a change in estimate related to the decreasing probability that we would be able to sublet the exited facility. In November 2005, we terminated the underlying lease and paid all remaining obligations.

6. Related Parties

On August 3, 2004, Ceregene, Inc., our previously majority-owned subsidiary, announced an initial closing of a $32.0 million Series B preferred stock financing. On July 1, 2005 Ceregene announced the second closing of its $32.0 million Series B preferred stock financing. We participated in the second closing through the partial conversion of an outstanding bridge loan to Ceregene and related accrued interest into shares of Ceregene’s Series B preferred stock. Immediately following the second closing we continued to

own approximately 25% of Ceregene’s capital stock on a fully diluted basis. At September 30, 2005, the principal balance of the bridge loan outstanding to Ceregene was $1.7 million.

Subsequent to the initial closing of the Series B preferred stock financing on August 3, 2004, we account for our investment in Ceregene under the equity method of accounting for investments as a result of our reduced ownership percentage in the company. Prior to August 3, 2004, the accounts of Ceregene were consolidated with our own. We recorded revenue from Ceregene of $5,000 and $69,000 for the three and nine months ended September 30, 2005, respectively. We do not expect to recognize future losses from Ceregene, as the cost basis of our investment in Ceregene is now zero.

We have guaranteed certain secured indebtedness of Ceregene totaling $0.3 million until May 2007. We have accrued less than $0.1 million and $0.2 million related to this guarantee as of September 30, 2005 and December 31, 2004, respectively.

7. Restructuring Charges

On June 7, 2005, we commenced the implementation of a strategic restructuring of our business operations to focus resources on our most advanced and most promising product development programs. We intend to deploy the majority of our resources going forward to advance GVAX® vaccine for prostate cancer, which is currently in Phase 3 development, as well as GVAX® vaccine for leukemia and GVAX® vaccine for pancreatic cancer, both of which are in Phase 2 development. Our priorities in the oncolytic virus therapy area include CG0070, which recently entered clinical trials for recurrent bladder cancer, and CG5757, both of which could be evaluated in multiple types of cancer in the future. We have discontinued all other clinical programs including the GVAX® vaccine programs for lung cancer and myeloma. In the oncolytic virus therapy program, we discontinued further development of CG7870 for prostate cancer and our early-stage research programs for the development of new oncolytic virus therapies, as well as our research effort in anti-angiogenesis gene therapy for cancer.

We recorded $0.4 million and $1.3 million in related personnel restructuring charges for the three and nine months ended September 30, 2005. We also recorded $0.3 million in restructuring charges during the three months ended September 30, 2005 to reduce the carrying value of our San Diego manufacturing operation to net realizable value. As of September 30, 2005, we have reclassified our San Diego manufacturing operation as “Assets held for sale” in the current assets section of our balance sheet as efforts are underway to sell this operation. We are currently in the process of converting our operations in Memphis from manufacturing to product distribution. We may record further restructuring charges and other special charges in the fourth quarter as we reduce our operations in Memphis from manufacturing to product distribution, however we are unable to estimate the amount of such charges at this time.

8. Income Taxes

In July 2005, the IRS issued to us a Notice of Proposed Adjustment (“NOPA”) seeking to disallow $48.7 million of net operating losses which we deducted for the 2000 fiscal year and seeking a $3.4 million penalty for substantial underpayment of tax in fiscal 2000. We responded to the NOPA in September 2005, disagreeing with the conclusions reached by the IRS in the NOPA and seeking to resolve this matter at the Appeals level. We had recorded a liability of $30.0 million for this and other federal and state tax contingencies, including estimated interest expense, at December 31, 2004 and accrued an additional $1.2 million and $1.9 million during the three and nine month periods ended September 30, 2005, respectively, related to these contingencies and related interest. If we are unsuccessful in defending the tax filing positions that we have previously taken, then potentially our liability for federal and state tax contingencies could be significantly higher than the $31.9 million that we have recorded as of September 30, 2005. We continue to believe that our tax positions comply with all applicable tax laws, and we continue to vigorously defend against the NOPA using all administrative and legal processes available to us.

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 us and our subsidiaries and the future of our respective 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 that may affect us under “Other Factors Affecting Future Operations” below. We do not undertake any obligation to update forward-looking statements. The following should be read in conjunction with our unaudited condensed consolidated financial statements located elsewhere in this Quarterly Report onForm 10-Q and the consolidated financial statements in our Annual Report onForm 10-K for the year ended December 31, 2004 and in other documents filed by us from time to time with the Securities and Exchange Commission.

Overview

We are a biotechnology company focused on the development and commercialization of novel biological therapies for patients with cancer. We are currently developing cell-based cancer vaccines and oncolytic virus therapies to treat different types of cancer. Our clinical stage cancer programs involve cell or viral-based products that have been genetically modified during product development to impart disease-fighting characteristics that are not found in conventional therapeutic agents. As part of our GVAX® cancer vaccines program we are conducting two Phase 3 clinical trials in prostate cancer and Phase 2 trials in pancreatic cancer and leukemia. We initiated our two Phase 3 clinical trials for GVAX® vaccine for prostate cancer in July 2004 and June 2005, each under a Special Protocol Assessment (SPA) with the United States Food and Drug Administration (FDA). In our oncolytic virus therapies program, which we are developing in part through a global alliance with Novartis AG, we initiated a Phase 1 clinical trial of CG0070 in recurrent bladder cancer in April 2005. We also have other preclinical oncolytic virus therapy programs, including CG5757, evaluating potential therapies for multiple types of cancer.

Third Quarter 2005 and Other Recent Highlights:

	•		We initiated a second multicenter Phase 3 clinical trial of GVAX^® vaccine for prostate cancer in patients with metastatic hormone-refractory prostate cancer. This trial, referred to as VITAL-2, will compare GVAX^® vaccine for prostate cancer plus Taxotere^® (docetaxel) chemotherapy to Taxotere^® plus prednisone with respect to survival benefit in patients who have symptomatic metastatic hormone-refractory prostate cancer. The trial is expected to enroll approximately 600 patients at approximately 100 medical centers across North America and Europe and is being conducted under an SPA from the FDA. Our first Phase 3 trial, VITAL-1, was initiated in July 2004 and is also being conducted under an SPA. The VITAL-1 trial is expected to enroll approximately 600 patients who have asymptomatic metastatic hormone-refractory prostate cancer and will compare GVAX^® vaccine for prostate cancer to Taxotere^® plus prednisone with respect to survival benefit.

	•		We confirmed that new clinical data from both our GVAX® vaccine for pancreatic cancer and our GVAX® vaccine for leukemia programs will be presented at two upcoming medical conferences later this year. Initial results from a Phase 2 trial of GVAX® vaccine for pancreatic cancer will be presented at the AACR-NCI-EORTC meeting in Philadelphia, PA on November 17, 2005. In addition, initial results from Phase 2 trial of GVAX® vaccine for leukemia in patients with chronic myelogenous leukemia (CML) will be presented at the American Society of Hematology (ASH) meeting in Atlanta, GA on December 12, 2005.

Critical Accounting Policies

We consider certain accounting policies related to revenue recognition, lease accounting, income taxes and stock option valuation to be critical policies. There have been no material changes in our critical accounting policies from what was previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission on March 14, 2005.

Revenue recognition

Since our inception, a substantial portion of our revenue has been generated from research and licensing agreements with collaborators. Revenue under such collaboration agreements typically includes upfront payments, cost reimbursements and milestone payments.

Revenue from non-refundable upfront license fees and other payments under collaboration agreements where we continue involvement throughout development is recognized over the development period based upon when the underlying development expenses are incurred. We recognize cost reimbursement revenue under collaborative agreements as the related research and development costs are incurred, as provided for under the terms of these agreements.

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. Incentive milestone payments are triggered either by the results of our research efforts or by events external to us, such as regulatory approval to market a product or the achievement of specified sales levels by a marketing partner. As such, the incentive milestones are substantially at risk at the inception of the contract, and the amounts of the payments assigned thereto are commensurate with the milestone achieved. Upon the achievement of an incentive milestone event, we have no future performance obligations related to that payment.

Amounts received under license agreements relating to our intellectual property are recognized as revenue upon execution of the technology licensing agreement, if we have no future performance obligations.

Deferred revenue represents the portion of upfront payments received that has not been earned.

Lease accounting

We record our obligations under facility operating lease agreements as rent expense. As of September 30, 2005, we have accrued approximately $1.9 million, net of estimated sublease payments, for estimated lease exit costs associated with the vacancy of our former corporate headquarters in Foster City, California in March 2003. In November 2005 we terminated this lease and paid all remaining obligations.

Income taxes

We establish accruals for certain tax contingencies when we believe that certain tax positions may be challenged and that our positions may not be fully sustained. We adjust our tax contingency accruals in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. In July 2005, the IRS issued to us a Notice of Proposed Adjustment (“NOPA”) seeking to disallow $48.7 million of net operating losses which we deducted for the 2000 fiscal year and seeking a $3.4 million penalty for substantial underpayment of tax in fiscal 2000. We responded to the NOPA in September 2005, disagreeing with the conclusions reached by the IRS in the NOPA and seeking to resolve this matter at the Appeals level. We had recorded a liability of $30.0 million for this and other federal and state tax contingencies, including estimated interest expense, at December 31, 2004 and accrued an additional $1.2 million and $1.9 million during the three and nine month periods ended September 30, 2005, respectively, related to these contingencies and related interest.

The nature of these tax matters is uncertain and subject to change. As a result, the amount of our liability for certain of these matters could exceed or be less than the amount of our current estimates, depending on the outcome of these matters. If we are unsuccessful in defending the tax filing positions that we have previously taken, then potentially our liability for federal and state tax contingencies could be significantly higher than the $31.9 million that we have recorded as of September 30, 2005. An outcome of such matters different than previously estimated could materially impact our financial position or results of operations in the year of resolution. We continue to believe that our tax positions comply with all applicable tax laws, and we continue to vigorously defend against the NOPA using all administrative and legal processes available to us.

Our income tax benefits during the past three years have been based on our determination of deferred tax assets and liabilities and any valuation allowances that we believe might be required against these deferred tax assets. We record valuation allowances to reduce deferred tax assets to the amounts that are more likely than not to be realized. We have considered anticipated future taxable income, including future taxable income that may result from future sales of holdings of our Abgenix common stock, and potential tax planning strategies in assessing the need for valuation allowances. Certain of these determinations require judgment on the part of management. If we determine that we will be able to realize our deferred tax assets in the future in excess of the carrying value of our

net deferred tax assets, adjustments to the deferred tax assets will increase income by reducing tax expense in the period that we make such determination. Likewise, if we determine that we will not be able to realize all or part of the carrying value of our net deferred tax assets in the future, adjustments to the deferred tax assets will decrease income by increasing tax expense in the period that we make such determination. If our investment in Abgenix common stock were to suffer a significant decline in value, we may be required to reverse tax benefits in future periods that were previously recorded. Significant estimates are required in determining our income tax benefits. Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in tax laws and regulations, our future levels of spending for research and development, and changes in our overall level of pre-tax earnings or losses.

Stock option valuation

We currently do not record compensation expense when stock option grants are awarded to employees at exercise prices equal to the fair market value of our common stock on the date of grant. We disclose in Note 2, “Stock-Based Compensation” our compensation expense for stock-based employee compensation plans, determined based upon the fair value method prescribed under SFAS 123 using the straight-line method of accounting for vesting. This alternative fair value accounting requires the use of option valuation methodologies which require the input of highly subjective assumptions, including the expected life of the option and the expected future volatility of the underlying stock price. Changes in these subjective assumptions can materially affect the fair value estimate of the related compensation expense.

Disclosures that we make in the footnotes to our financial statements require us to estimate the fair value of stock options that we grant to our employees. While the fair value of awards of common stock can be readily determined based upon published, market quotes, the fair value of long-term, nontransferable stock options cannot be readily determined as stock options are not publicly traded. We use the Black-Scholes option pricing model to estimate the fair value of employee stock options. However, the Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Because our stock options have characteristics significantly different from those of traded options, and changes to the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not provide a reliable single measure of the fair value of our employee stock options.

Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are comparable to the current pro forma disclosures under SFAS 123 in Note 2, “Stock-Based Compensation”, we do expect the adoption to have a material adverse impact on our results of operations.

Results of Operations

Revenue

Revenues were $0.1 million and $4.5 million for the three and nine months ended September 30, 2005, respectively, compared to $3.2 million and $8.3 million for the corresponding periods in 2004, as shown in the following table:


	Three months						Nine months
	ended September 30,						ended September 30,
	2005			2004			2005			2004
	(in thousands)
Novartis AG		$	—		$	1,413		$	2,031		$	4,444
sanofi-aventis Group			—			1,000			2,000			2,000
Ceregene, Inc.			5			587			69			1,512
Other			66			228			399			318

		$	71		$	3,228		$	4,499		$	8,274

Revenues for the three and nine months ended September 30, 2005 include nil and $2.0 million, respectively, from Novartis recognized in connection with our global alliance for the development and commercialization of oncolytic virus therapies, compared to $1.4 million and $4.4 million for the three and nine months ended September 30, 2004, respectively. Revenues for the three and nine months ended September 30, 2005 also include nil and $2.0 million, respectively, from sanofi-aventis Group in connection with our gene activation technology license agreement, compared to $1.0 million and $2.0 million for the three and nine months ended September 30, 2004, respectively. For the three and nine months ended September 30, 2004, we recognized $0.6 million and $1.5 million of revenues from our previously majority-owned subsidiary, Ceregene, Inc.

Research and development expenses

Research and development expenses were $23.3 million and $71.4 million for the three and nine months ended September 30, 2005 compared to $21.7 million and $68.4 million for the corresponding periods in 2004. The increase for the nine months ended September 30, 2005 compared to the corresponding period in 2004 is primarily due to increased expenditures on our GVAX® vaccine for prostate cancer program and in particular the VITAL-1 Phase 3 trial which began in July 2004. In the three months ended September 30, 2005 compared to the three months ended September 30, 2004, these increased expenditures were offset partially by the absence in 2005 of research and development expenses from Ceregene, which, until August 2004, were fully consolidated in our financial statements. For more information on our treatment of Ceregene in our financials, please refer Note 6, “Related Parties” above.

We intend to deploy the majority of our resources going forward to advance GVAX® vaccine for prostate cancer, which is currently in Phase 3 development, as well as GVAX® vaccine for leukemia and GVAX® vaccine for pancreatic cancer, both of which are in Phase 2 development. Our priorities in the oncolytic virus therapy area include CG0070, which recently entered clinical trials for recurrent bladder cancer, and CG5757, both of which could be evaluated in multiple types of cancer in the future. We have discontinued all other clinical programs including the GVAX® vaccine programs for lung cancer and myeloma. In the oncolytic virus therapy program, we discontinued further development of CG7870 for prostate cancer and our early-stage research programs for the development of new oncolytic virus therapies, as well as our research effort in anti-angiogenesis gene therapy for cancer. We expect that our research and development expenditures and headcount will increase in future years to support our most advanced clinical trials, including our two Phase 3 clinical trials of GVAX® vaccine for prostate cancer and additional product development activities.

General and administrative expenses

General and administrative expenses were $3.6 million and $11.4 million for the three and nine months ended September 30, 2005 compared to $3.8 million and $14.4 million for the corresponding periods in 2004. The decrease in general and administrative expenses for the nine months ended September 30, 2005 compared to 2004 is primarily due to the absence of facility exit costs in 2005, but which were approximately $1.8 million in 2004. The costs recognized in 2004 reflected a change in estimate at that time related to the decreasing probability that we would be able to sublet our former corporate headquarters facility in Foster City, California. Although general and administrative costs may increase in the future in order to support our ongoing product development, our restructuring of business operations announced in June 2005 will allow us to focus such increases upon the development, production and possible commercialization of our most advanced products.

Restructuring charges

On June 7, 2005, we announced the implementation of a strategic restructuring of our business operations to focus resources on our most advanced and most promising product development programs. We recorded a charge of $0.3 million during the three months ended September 30, 2005 to reduce the carrying value of our San Diego manufacturing operation for viral products to net realizable value. Restructuring charges for the three and nine months ended September 30, 2005 also include $0.4 million and $1.3 million for personnel related restructuring charges. We may record further restructuring charges and other special charges in the fourth quarter as we reduce our operations in Memphis from manufacturing to product distribution, however we are unable to estimate the amount of such charges at this time.

Gain on sale of Abgenix common stock

For the three and nine months ended September 30, 2005 we recorded a gain of $6.3 million associated with the sale of 620,001 shares of Abgenix common stock. For the three and nine months ended September 30, 2004, we recorded a gain of $0.2 million and $12.2 million, respectively, associated with the sale of 19,210 and 819,210 shares of Abgenix common stock. At September 30, 2005, we continued to hold approximately 6.0 million shares of Abgenix common stock, which had a fair market value of approximately $76.1 million as of that date.

Interest and other income

Interest and other income was $0.8 million and $2.3 million for the three and nine months ended September 30, 2005 compared to $0.3 million and $1.9 million for the corresponding periods in 2004. The increases in 2005 compared to 2004 are due to higher interest rates in 2005 and to a greater percentage of money market and U.S. government securities held in our portfolio during 2004.

Interest expense

Interest expense was $2.6 million and $8.0 million for the three and nine months ended September 30, 2005 compared to $2.3 million and $6.7 million for the corresponding periods in 2004. The increase in 2005 compared to 2004 is primarily attributed to interest expense associated with our $145.0 million convertible senior notes issued in October and November 2004.

Income taxes

We recorded a non-cash income tax provision of $2.8 million for the three months ended September 30, 2005 related to the realized gain on the sale of 620,001 shares of Abgenix, Inc. common stock. We also recorded a tax provision of $1.3 million and $1.9 million for the three and nine months ended September 30, 2005, respectively, which reflects additional interest expense related to our federal and state tax contingencies. During the nine months ended September 30, 2004 we recorded a non-cash income tax provision of $3.7 million related to the realized gain on the sale of 819,210 shares of Abgenix common stock. As of September 30, 2005 we have recorded a liability related to the IRS audit of our 2000 tax return as well as other federal and state tax contingencies, including estimated interest expense, totaling $31.9 million .

Liquidity and Capital Resources

At September 30, 2005, we had approximately $102.4 million in cash, cash equivalents and short-term investments, of which $3.3 million is classified as restricted cash, related to letters of credit on our corporate headquarters facility in South San Francisco, California and our cGMP facilities in San Diego and Hayward, California and Memphis, Tennessee. We have maintained our financial position through strategic management of our resources including our holdings in Abgenix common stock, funding from various corporate collaborations and licensing agreements and the availability of equity and debt financing. At September 30, 2005 we continued to hold approximately 6.0 million shares of Abgenix common stock, which had a fair market value of approximately $76.1 million as of that date. Additionally, in February 2003, our shelf registration statement was declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended, which allowed us to offer up to $150.0 million of securities in one or more public offerings. We used this shelf registration in March 2004 to complete a public offering of 4,887,500 shares of our common stock, resulting in gross proceeds of $61.1 million. Although up to $88.9 million may still be offered under the shelf registration, there can be no assurance that we will be able to issue any of the remaining securities under this shelf registration on acceptable terms, or at all.

Net cash used in operating activities was $78.8 million for the nine months ended September 30, 2005 compared to $73.3 million for the corresponding period in 2004. This increase was due primarily to the effect of lower revenues and lower realized gains on the sale of Abgenix common stock in the 2005 period compared to the 2004 period. The increase is also due in part to the timing of payments for our operating expenses, including expenses for the Phase 3 trials for GVAX® vaccine for prostate cancer that were initiated in July 2004 and June 2005. The timing of these cash requirements may vary from period to period depending on our research and development activities, including our planned preclinical and clinical trials, obligations related to our existing manufacturing and headquarter facilities, and future requirements to establish manufacturing and marketing capabilities for any products that we may develop.

Net cash provided by investing activities for the nine months ended September 30, 2005 was $33.8 million compared to $45.5 million in the corresponding period in 2004. This decrease is primarily due to purchases, maturities and sales of short-term investments in the 2004 period that were a result of the restructuring of our investment portfolio to move investments out of corporate debt securities and primarily into short-term U.S. government securities and cash equivalents. Capital expenditures decreased to $2.0 million during the nine months ended September 30, 2005 from $3.7 million during the corresponding period in 2004. We received $6.9 million in proceeds from the sale of 620,001 shares of Abgenix common stock during the nine months ended September 30, 2005 compared to $12.9 million in proceeds from the sale of 819,210 shares during the 2004 period.

Net cash provided by financing activities was $1.0 million for the nine months ended September 30, 2005 compared to $58.0 million for the corresponding period in 2004. The decrease reflects the completion in March 2004 of our public offering of 4,887,500 shares of our common stock. The shares were priced at $12.50 per share resulting in gross proceeds of $61.1 million. We received net proceeds from this offering of $57.2 million. We did not complete any significant financing activities during the nine months ended September 30, 2005.

We have financed our operations primarily through the sale of equity securities, funding under collaborative arrangements, sales of Abgenix common stock, sales of convertible notes, and secured and unsecured debt financing.

Our retained ownership of Abgenix common stock represents a material portion of our working capital. The common stock price of Abgenix has proven to be volatile, which has a direct impact on our liquidity and capital resources. 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. The value of our investment in Abgenix common stock was $76.1 million at September 30, 2005, as compared to $68.5 million at December 31, 2004.

In October and November 2004, we issued and sold a total of $145.0 million aggregate principal amount of 3.125% Convertible Senior Notes due 2011 in a private placement. We received approximately $139.9 million in net proceeds after deducting the initial purchasers’ discount and estimated offering expenses. We used a portion of the proceeds from the sale of the notes to repay $95.0 million of outstanding bank loans, thereby eliminating restrictions on $60.0 million of cash. We intend to use the remainder of the proceeds for general corporate purposes.

Under certain circumstances, we may redeem some or all of the convertible senior notes on or after November 1, 2009 at a redemption price equal to 100% of the principal amount of the notes. Holders of the notes may require us to repurchase some or all of their notes if a fundamental change (as defined in the indenture) occurs, at a repurchase price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest (and additional amounts, if any) to, but not including, the repurchase date. The notes are convertible into our common stock, initially at the conversion price of $9.10 per share, equal to a conversion rate of approximately 109.8901 shares per $1,000 principal amount of notes, subject to adjustment.

Our capital requirements depend on numerous factors, including: the progress of our research and development programs and our preclinical and clinical trials, clinical and commercial scale manufacturing requirements, the extent of funding from collaborative partners, the acquisition of new products or technologies, our ability to reach a favorable resolution with the IRS with respect to their audit of our fiscal 2000 federal tax return, and the cost and outcome of potential litigation, patent interference proceedings or other legal proceedings. Our ongoing development programs and any increase in the number and size of programs and trials will reduce our current cash resources and potentially create further need to raise additional capital. Therefore, we will continue to consider financing alternatives, including collaborative ventures and potential equity and debt financings in addition to periodic sales of our holdings of Abgenix stock.

While we believe that our current liquidity position will be sufficient to meet our cash needs for at least the next year, we will need to raise substantial additional funds in order to complete our pending and planned trials over their multi-year course before we will obtain product revenue, if any, from such products. Accordingly, we may entertain the possibility of raising additional capital to preserve our liquidity, depending on a number of conditions, including conditions in the capital markets. The sources of liquidity available to us include the sale of Abgenix common stock, payments from potential partners and/or licensees of our potential products and technologies, and private or public placement of Cell Genesys equity securities, warrants, debt securities or depositary shares. We regularly consider the conditions of capital markets, dilution, stockholder value and tax consequences of each type of financing on stockholders. Certain of the financing options available to us may have negative consequences to stockholders such as dilution. Given the volatile nature of the capital markets, decisions to raise capital may require actions that would impose a negative consequence in order to reduce or minimize a more significant negative consequence to stockholders.

OTHER FACTORS AFFECTING FUTURE OPERATIONS

Investors in Cell Genesys should carefully consider the risks described below before making an investment decision. The risks described below may not be the only ones facing our company. Additional risks 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, and our ability to repay our convertible notes could be impaired, 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 onForm 10-Q and our Annual Report onForm 10-K for the year ended December 31, 2004, including our consolidated financial statements and related notes.

Risks Related to Our Company

Our products are in developmental stage, are not approved for commercial sale and might not ever receive regulatory approval or become commercially viable.

All of our potential cancer vaccines and oncolytic virus therapies 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. Our research and development efforts may not be successful, and any of our future products may not be ultimately 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 vaccines and oncolytic virus therapies must undergo exhaustive clinical testing and may not prove to be safe or effective. If any of our proposed products are delayed or fail, we may have to curtail our operations.

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. Clinical trials may be suspended or terminated if safety issues are identified, if our investigators or we fail to comply with regulations governing clinical trials or for other reasons. Although we and our investigators are testing some of our proposed products and therapies in human clinical trials, we cannot guarantee that we, the FDA, foreign regulatory authorities or the Institutional Review Boards at our research institutions will not suspend or terminate any of our clinical trials, that we will be permitted to undertake human clinical trials for any of our products or that adequate numbers of patients can be recruited for our clinical trials. 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. Preclinical and clinical data can be interpreted in many different ways, and FDA or foreign regulatory officials could interpret data that we consider promising differently, which could halt or delay our clinical trials or prevent regulatory approval. 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.

Our programs utilize new technologies. Existing preclinical and clinical data on the safety and efficacy of our programs are limited. Our GVAX® cancer vaccines and oncolytic virus therapies are currently being tested in human clinical trials to determine their safety and efficacy. The results of preclinical or earlier stage clinical trials do not necessarily predict safety or efficacy in humans. Our products in later stage clinical trials may fail to show desired safety and efficacy, despite having progressed through preclinical or early clinical trials. Serious and potentially life-threatening side effects may be discovered during preclinical and clinical testing of our potential products or thereafter, which could delay, halt or interrupt clinical trials of our products, and could result in the FDA or other regulatory authorities denying approval of our drugs for any or all indications.

Clinical trials are very costly and time-consuming, especially the typically larger Phase 3 clinical trials such as the recently initiated VITAL-1 and VITAL-2 trials of our GVAX® vaccine for prostate cancer. The VITAL-1 and VITAL-2 trials of our GVAX® vaccine for prostate cancer are our first Phase 3 clinical trials. We cannot exactly predict if and when any of our current clinical trials will be completed. Many factors affect patient enrollment in clinical trials, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, competing clinical trials and new therapies approved for the conditions that we are investigating. In addition to delays in patient enrollment, other unforeseen developments, including delays in obtaining regulatory approvals to commence a study, delays in identifying and reaching agreement on acceptable terms with prospective clinical trial sites, lack of effectiveness during clinical trials, unforeseen safety issues, uncertain dosing issues, inability to monitor patients adequately during or after treatment, our or our investigators’ failure to comply with FDA regulations governing clinical trials, and an inability or unwillingness of medical investigators to follow our clinical protocols, could prevent or delay completion of a clinical trial

and increase its costs, which could also prevent or delay any eventual commercial sale of the therapy that is the subject of the trial. Each of our two Phase 3 clinical trials of GVAX® vaccine for prostate cancer involves a comparison to a Taxotere® chemotherapy regimen, which is the currently approved standard of care for this patient group. However, there can be no assurance that this chemotherapy regimen will continue to be commonly used to treat these patients in the future. Should another chemotherapy regimen be shown to be more effective than the Taxotere® chemotherapy regimen, we may need to conduct additional comparative clinical trials in the future.

We have not been profitable in our operations (absent the gains on sales of Abgenix common stock and certain upfront or non-recurring license fees). We expect to continue to incur substantial losses and negative cash flow from operations and may not become profitable in the future.

We have incurred an accumulated deficit since our inception. At September 30, 2005, our accumulated deficit was $328.0 million. Our accumulated deficit would be substantially higher absent the gains we have realized on sales of our Abgenix common stock. For the nine months ended September 30, 2005, we recorded a net loss of $84.0 million. We expect to incur substantial operating losses for at least the next several years and potentially longer. This is due primarily to the expansion of development programs, clinical trials and manufacturing activities and, to a lesser extent, general and administrative expenses, at a time when we have yet to realize any product revenues. We also have substantial lease obligations related to our manufacturing and headquarter facilities. 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, manufacture, commercialize or market any products, or that we will ever achieve profitability.

We will need substantial additional funds to continue operations, and our ability to generate funds depends on many factors beyond our control.

We will need substantial additional funds for existing and planned preclinical and clinical trials, to continue research and development activities, for lease obligations related to our manufacturing and headquarter facilities, for principal and interest payments related to our debt financing obligations, for potential settlements to the IRS and to establish marketing capabilities for any products we may develop. At some point in the future, we will also need to raise additional capital to further fund our operations.

In July 2005, the IRS issued to us a Notice of Proposed Adjustment (“NOPA”) seeking to disallow $48.7 million of net operating losses which we deducted for the 2000 fiscal year and seeking a $3.4 million penalty for substantial underpayment of tax in fiscal 2000. We responded to the NOPA in September 2005, disagreeing with the conclusions reached by the IRS in the NOPA and seeking to resolve this matter at the Appeals level. We had previously recorded a liability for this and other federal and state tax contingencies, including estimated interest expense. If we are unsuccessful in defending the tax filing positions that we have previously taken, then potentially our liability for federal and state tax contingencies could be significantly higher than the $31.9 million that we have recorded as of September 30, 2005. We continue to believe that our tax positions comply with all applicable tax laws, and we continue to vigorously defend against the NOPA using all administrative and legal processes available to us.

Our future capital requirements will depend on, and could increase as a result of, many factors, such as:

•		the progress and scope of our internally funded research, development, clinical, manufacturing and commercialization activities;

•		our ability to establish new collaborations and the terms of those collaborations;

•		our ability to reach a favorable resolution with the IRS with respect to their audit of our fiscal 2000 federal tax return;

•		competing technological and market developments;

•		the time and cost of regulatory approvals;

•		the extent to which we choose to commercialize our future products through our own sales and marketing capabilities;

•		the costs we incur in obtaining and enforcing patent and other proprietary rights or gaining the freedom to operate under the patents of others;

•		our success in acquiring and integrating complementary products, technologies or businesses; and

•		the extent to which we choose to expand and develop our manufacturing capacities, including manufacturing capacities necessary to meet potential commercial requirements.

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, manufacturing or clinical activities.

We plan to raise additional funds through collaborative business relationships, sales of some portion or all of our investment in Abgenix common stock, additional equity or debt financings, or otherwise, but we may not be able to do any of the foregoing on favorable terms, or at all.

Because of our long-term capital requirements, we may seek to access the public or private debt and equity markets, sell our holdings of Abgenix common stock and/or sell our own debt or equity securities. Additional funding may not be available to us, and, if available, may not be on acceptable terms. Opportunities for out licensing technologies or for third-party collaborations may not be available to us on acceptable terms, or at all. 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, manufacturing or clinical activities. In addition, we may decide to raise additional capital when conditions are favorable, even when we do not have an immediate need for additional capital at that time. If we raise additional funds by issuing equity securities, stockholders will incur immediate dilution.

Alternatively, we may need to seek funds through arrangements with collaborative partners or others that require us to relinquish rights to 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. Currently, we do not have collaborative partners for the further development of our GVAX® cancer vaccines. Although we are in active discussions with potential partners for our GVAX® vaccine for prostate cancer, we may not be successful in entering into collaborative partnerships on favorable terms, if at all. Certain of our oncolytic virus therapy products are being developed under our global strategic alliance with Novartis, and Novartis has future commercialization rights for these products. Also, we can give no assurance that our alliance with Novartis will continue, as Novartis periodically has the option of terminating the alliance at its discretion. We recently announced the development of a novel technology for the production of monoclonal antibody products which is outside our core business focus and which therefore may represent an outlicensing opportunity. There can be no assurance that we will be successful in our efforts to raise capital through such outlicensing activities.

Our recently announced business restructuring may curtail our opportunities and may insufficiently address our operational goals.

On June 7, 2005, we commenced our plan to restructure our operations and reduce our cost structure. The restructuring plan includes a workforce reduction of approximately 95 employees, consolidation and/or sale of certain manufacturing operations and a focused emphasis on a more limited line of potential products. As a result of this restructuring program, we recorded $0.7 million and $1.6 million in restructuring costs and other special charges for the three and nine months ended September 30, 2005, and we may record further restructuring charges and other special charges in the fourth quarter.

Restructurings typically require significant management resources to execute successfully. We may fail to achieve the targeted goals of our restructuring. We also may have eliminated potentially successful product development programs, and the product development programs on which we will be focusing our efforts going forward may not succeed. Our workforce reduction may eliminate key employees or cause some of our product development programs to be delayed due to reduced personnel resources. We may be unable to sell our excess manufacturing operations on favorable terms, or at all. If our restructuring efforts are unsuccessful in achieving our desired operational goals, we may be forced to restructure further or may incur additional operating charges.

Our ability to manufacture our products is uncertain, which may delay or impair our ability to develop, test and commercialize our products.

We have built our own manufacturing facilities to operate according to the FDA’s current Good Manufacturing Practices (cGMP) regulations for the manufacture of products for clinical trials and to support the potential commercial launch of our product candidates. We are under significant lease obligations for each of our facilities. We may be unable to establish and maintain our manufacturing facilities within our planned time and budget, which could have a material adverse effect on our product development timelines. Our manufacturing facilities will be subject to ongoing, periodic inspection by the FDA and state agencies to ensure compliance with cGMP. Our failure to follow and document our adherence to such cGMP regulations or other regulatory requirements may lead to significant delays in the availability of products for commercial use or clinical study, may result in the termination or hold on a

clinical study, or may delay or prevent filing or approval of marketing applications for our products. We also may encounter problems with the following:

•		achieving consistent and acceptable production yield and costs;

•		meeting product release specifications;

•		quality control and assurance;

•		shortages of qualified manufacturing personnel;

•		shortages of raw materials;

•		shortages of key contractors or contract manufacturers; and

•		ongoing compliance with FDA and other regulations.

Failure to comply with applicable regulations could also result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could harm our business.

Developing advanced manufacturing techniques and process controls is required to fully utilize our expanded facilities. The manufacturing techniques and process controls, as well as the product release specifications, required for our GVAX® cancer vaccines and oncolytic virus therapies are more complex and less well-established than those required for other biopharmaceutical products, including small molecules, therapeutic proteins and monoclonal antibodies. We may not be able to develop these techniques and process controls to manufacture our products effectively to meet the demands of regulatory agencies, clinical testing and commercial production.

In addition, during the course of the development and testing of our products, we may make and have made improvements to processes, formulations or manufacturing methods or employ different manufacturing facilities. Such changes may be made to improve the product’s potential efficacy, make it easier to manufacture at scale, reduce variability or the chance of contamination of the product, or for other reasons. As a result, certain of the products we are currently testing in clinical trials, including our most advanced products, are not identical to those used in previous clinical trials from which we have reported clinical data. We may be required to conduct certain laboratory studies to demonstrate the comparability of our products if we introduce additional manufacturing changes. We cannot guarantee that the results of studies using the current versions of our products will be as successful as the results of earlier studies conducted using different versions of our products.

If we are unable to manufacture our products for any reason, our options for outsourcing manufacturing are currently limited. We are unaware of available contract manufacturing facilities on a worldwide basis in which our GVAX® product candidates can be manufactured under cGMP regulations, a requirement for all pharmaceutical products. It would take a substantial period of time for a contract manufacturing facility that has not been producing our particular products to begin producing them under cGMP regulations.

Our manufacturing facilities are subject to licensing requirements of the United States Drug Enforcement Administration (DEA) and the California Department of Health Services. While not yet subject to license by the FDA, these facilities are subject to inspection by the FDA, as well as by the DEA and the California Department of Health Services. Failure to maintain these licenses or to meet the inspection criteria of these agencies would disrupt our manufacturing processes and have a material adverse effect on our business, results of operations, financial condition and cash flow.

In order to produce our products in the quantities that we believe will be required to meet anticipated market demand, we will need to increase, or “scale up,” the production process by a significant factor over the current level of production. If we are unable to do so, are delayed, or if the cost of this scale up is not economically feasible for us, we may not be able to produce our products in a sufficient quantity to meet the requirements for product launch or future demand.

If our proposed products are not effectively protected by issued patents or if we are not otherwise able to protect our proprietary information, we will be more vulnerable to competitors, and our business could be adversely affected.

We rely heavily on the development and protection of our intellectual property portfolio. The patent positions of pharmaceutical and biotechnology firms, including ours, are generally uncertain and involve complex legal and factual questions. As of September 30, 2005 we had approximately 345 patents issued or granted to us or available to us based on licensing arrangements and approximately 329 applications pending in our name or available to us based on licensing arrangements. 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 whether it will be invalidated. Also, depending upon their filing date, patent applications in the United States are confidential until patents are published or 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. In addition, to the extent we license our intellectual property to other parties, we may incur expenses as a result of contractual agreements in which we indemnify these licensing parties against losses incurred if practicing our intellectual property infringes upon the rights of others.

Our intellectual property may be challenged by our competitors in the future, which may have a material adverse effect on our business, results of operations, financial condition and cash flow.

Our commercial success depends in part on not infringing the patents or proprietary rights of others and not breaching licenses granted to us. We are aware of competing intellectual property relating to both our programs in cancer vaccines and oncolytic virus therapies. While we currently believe we have freedom to operate in these areas, others may challenge our position in the future. We may be required to obtain licenses to third-party technologies 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, financial condition and cash flow.

We may have to engage in litigation, which could result in substantial cost, 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 (USPTO) frequently declares interference proceedings. In Europe, patents can be revoked through opposition proceedings. These proceedings could result in an adverse decision as to the priority of our inventions.

We are involved in interference and opposition proceedings related to our current product portfolio and certain of our technologies. We have filed an appeal of the final decision from the USPTO relating to an interference proceeding pending since 1996 with Applied Research Systems Holding N.V. (ARS) concerning a patent and patent application related to gene activation technology. ARS has also appealed the decision. The result of the appeal is uncertain at this time. We are not currently involved in any other interference proceedings. We are also currently involved in European opposition proceedings, some of which relate to our current product portfolio and certain of our core technologies. We were recently informed that one of our patents for gene activation technology was denied in an appeal proceeding in Europe, which adversely affects our ability to receive royalties on sales of products employing this technology under certain of our license agreements.

We cannot predict the outcome of these proceedings. An adverse result in any of these proceedings could have an adverse effect on our intellectual property position in these areas and on our business as a whole. If we lose in any such proceeding, our patents or patent applications that are the subject matter of the proceeding may be invalidated or may not be permitted to issue as patents. Consequently, we may be required to obtain a license from the prevailing party in order to continue the portion of our business that relates to the proceeding. Such license may not be available to us on acceptable terms or on any terms, and we may have to discontinue that portion of our business. 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.

Our competitive position may be adversely affected by our limited ability to protect and control unpatented trade secrets, know-how and other technological innovation.

Our competitors may independently develop similar or better proprietary information and techniques and disclose them publicly. Also, others may gain access to our trade secrets, and we may not be able to 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 relating to our business conceived by the employee while employed by us 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.

Our competitors may develop therapies for the diseases that we are targeting that are more advanced or more effective than ours, which could adversely affect our competitive position, or they may commercialize products more rapidly than we do, which may adversely affect our competitive position.

There are many companies pursuing programs for the treatment of cancer. Some of these competitors are large biotechnology or pharmaceutical companies, such as Amgen, Bristol-Myers Squibb, Genentech, Novartis, Roche and sanofi-aventis Group, which have greater experience and resources than we do in developing products, in undertaking preclinical testing and human clinical trials of new pharmaceutical products, in obtaining FDA and other regulatory approvals of products, and in manufacturing and marketing new therapies. We are also competing with other biotechnology companies with similar experience and resources to ours such as Dendreon, Genitope, Antigenics and Therion.

Some competitors are pursuing product development strategies that are similar to ours, particularly with respect to our cancer vaccine and oncolytic virus therapy programs. Certain of these competitors’ products are in more advanced stages of product development and clinical trials. We compete with other clinical-stage companies and institutions for clinical trial participants, which could reduce our ability to recruit participants for our clinical trials. Delay in recruiting clinical trial participants could adversely affect our ability to bring a product to market prior to our competitors. 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.

Our competitive position and those of our competitors can vary based on the performance of products in clinical trials. In addition, our competitors may obtain patent protection or FDA approval and commercialize products more rapidly than we do, which may impact future sales of our products. We also may not have the access that some of our competitors have to biological materials necessary to support the research, development or manufacturing of planned therapies. If we are permitted by the FDA 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;

•		reimbursement;

•		patent protection; and

•		sales, marketing and distribution capabilities.

Our competitive position also depends upon our ability to attract and retain qualified personnel, develop proprietary products or processes, and secure sufficient funding for the often-lengthy period between product conception and commercial sales.

To the extent we depend on strategic partners to sell, market or distribute our products, we will have reduced control over the success of the sales, marketing and distribution of our future products.

We have no experience in sales, marketing or distribution of biopharmaceutical products. We may in the future rely on sales, marketing and distribution 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; and

•		our overall strategic objectives.

If we choose to rely on strategic partners for the sale, marketing or distribution of our future products, we will have less control over the success of our products and will depend heavily upon our partners’ abilities and dedication to our products. We cannot assure you that these future strategic partnerships will be available on favorable terms, if at all, nor can we assure you that they will enhance our business.

We may in the future be exposed to product liability claims, which could adversely affect our business, results of operations, financial condition and cash flow.

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 clinical trial participants, consumers, health care providers or sellers of our products. We currently maintain product liability insurance with respect to each of our clinical trials. We may not be able to maintain insurance or obtain sufficient coverage at a reasonable cost, given the increasing cost of insurance in today’s insurance market. 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 claim, particularly resulting from a clinical trial, on any of our insurance policies or a product recall could have a material adverse effect on our business, results of operations, financial condition and cash flow.

Our business, financial condition and results of operations could suffer as a result of future strategic acquisitions and investments.

We may engage in future acquisitions or investments that could dilute our existing stockholders or cause us to incur contingent liabilities, commitments, debt or significant expense. From time to time, in the ordinary course of business, we may evaluate potential acquisitions or investments in related businesses, products or technologies, although we currently have no commitments or agreements for any such acquisitions or investments. We may not be successful with any strategic acquisition or investment. Any future acquisition or investment could harm our business, financial condition and results of operations.

If we engage in future acquisitions, we may not be able to fully integrate the acquired companies and their intellectual property or personnel. Our attempts to do so may place additional burdens on our management and infrastructure. Future acquisitions will also 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 diverse 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 acquired technology sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs.

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist activity and other events beyond our control, which could result in a material adverse effect on our business.

Our facilities in California have, in the past, been subject to electrical blackouts as a result of a shortage of available electrical power. Future blackouts could disrupt the operations of our facilities. In addition, we do not carry sufficient business interruption insurance to compensate us for actual losses from interruption of our business that may occur, and any losses or damages incurred by us could have a material adverse effect on our business. We are vulnerable to a major earthquake and other calamities. Most of our facilities are located in seismically active regions. We have not undertaken a systematic analysis of the potential consequences to our business and financial results from a major earthquake and do not have a recovery plan for fire, earthquake, power loss, terrorist

activity or similar disasters. We are unable to predict the effects of any such event, but the effects could be seriously harmful to our business.

We depend on our key technical and management personnel to advance our technology, and the loss of these personnel could impair the development of our products.

We rely and will continue to rely on our key management and scientific staff, all of whom are employed at-will. 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. We may not 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 to develop additional expertise in our existing personnel. If we do not succeed in recruiting necessary personnel or developing this expertise, our business could suffer significantly.

We depend on clinical trial arrangements with public and private medical institutions to advance our technology, and the loss of these arrangements could impair the development of our products.

We have arrangements with a number of public and private medical institutions, and individual investigators, for the conduct of human clinical trials for our GVAX® cancer vaccine programs and oncolytic virus therapies. The early termination of any of these clinical trial arrangements, the failure of these institutions to comply with the regulations and requirements governing clinical trials, or reliance upon results of trials that we have not directly conducted or monitored could hinder the progress of our clinical trial programs or our development decisions. If any of these relationships are terminated, the clinical trials might not be completed, and the results might not be evaluable.

Inventions or processes discovered by our outside scientific collaborators may not become our property, which may affect our competitive position.

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 arrangements 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 for which they work. In addition, some of these collaborators have consulting or other advisory arrangements with other entities that may conflict with their obligations to us. For these reasons, inventions or processes discovered by our scientific collaborators or consultants may not become our property.

Our stock price is influenced by the market price of Abgenix stock, which has been highly volatile.

Our retained ownership of Abgenix common stock represents a material portion of the total assets on our balance sheet. The common stock price of Abgenix has proven to be highly volatile. Since January 1, 2004, the per share price of Abgenix common stock fluctuated between a high closing price of $18.55 and low closing price of $6.54. The value of our holdings of Abgenix common stock was $76.1 million at September 30, 2005 compared to $68.5 million at December 31, 2004. Movements in the price of Abgenix common stock, up or down, may exert corresponding influences on the market price of our stock.

The prices of our common stock and convertible senior notes are likely to continue to be volatile in the future.

The stock prices of biopharmaceutical and biotechnology companies, including ours, have historically been highly volatile. Since January 1, 2003, our stock price has fluctuated between a high closing price of $15.10 on September 19, 2003 and a low closing price of $4.48 on October 12, 2005. The market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. In addition, as our convertible senior notes are convertible into shares of our common stock, volatility or depressed prices of our common stock could have a similar effect on the trading price of the notes. Also, interest rate fluctuations can affect the price of our convertible senior notes. The following factors, among others, may affect the prices of our common stock and notes:

•

announcements of data from, or material developments in, our clinical trials or those of our competitors, including delays in the commencement, progress or completion of a clinical trial;

•		fluctuations in our financial results;

•		the potential of an unfavorable future resolution with the IRS with respect to their audit of our fiscal 2000 federal tax return;

•		announcements of technological innovations or new therapeutic products by us or our competitors, including innovations or products by our competitors that may require us to redesign, and therefore delay, our clinical trials to account for those innovations or products;

•		announcements of changes in governmental regulation affecting us or our competitors;

•		announcements of regulatory approval or disapproval of our or our competitors’ products;

•		announcements of new collaborative relationships by us or our competitors;

•		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 common stock;

•		material developments related to our minority interest in Ceregene, Inc.;

•		fluctuations in price and volume in the stock market in general, or in the trading of the stock of biopharmaceutical and biotechnology companies in particular, that are unrelated to our operating performance;

•		issuances of securities in equity, debt or other financings or issuances of common stock upon conversion of our convertible senior notes;

•		sales of common stock by existing stockholders;

•		unforeseen litigation; and

•		the perception that such issuances or sales could occur.

Our stockholders may be diluted by the conversion of outstanding convertible senior notes.

We issued and sold $145.0 million aggregate principal amount of notes which are convertible into our common stock, initially at the conversion price of $9.10 per share, equal to a conversion rate of approximately 109.8901 shares per $1,000 principal amount of notes, subject to adjustment. The holders of the notes may choose at any time to convert their notes into common stock. The number of shares of common stock issuable upon conversion of the notes, and therefore the dilution of existing common stockholders, could increase as a result of an event triggering the antidilution rights of the notes, including certain acquisitions of the Company in which 10% or more of the consideration paid for our common stock in the transaction is in the form of cash or securities that are not freely tradable. Conversion of our convertible senior notes would result in issuance of additional shares of common stock, diluting existing common stockholders.

Our stockholders may be diluted, or our common stock price may be adversely affected, by the exercise of outstanding stock options or other issuances of our common stock.

We may issue additional common stock, preferred stock, or securities convertible into or exchangeable for our common stock. Furthermore, substantially all shares of common stock for which our outstanding stock options are exercisable are, once they have been purchased, eligible for immediate sale in the public market. The issuance of common stock, preferred stock or securities convertible into or exchangeable for our common stock or the exercise of stock options would dilute existing investors and could adversely affect the price of our common stock and, in turn, the price of our convertible senior notes.

We have adopted anti-takeover defenses that could make it difficult for another company to acquire control of us or could limit the price investors might be willing to pay for our stock.

Certain provisions of our certificate of incorporation, bylaws, debt instruments and Delaware law could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. These provisions include the adoption of a Stockholder Rights Plan, commonly known as a “poison pill.” Under the Stockholder Rights Plan, we made a dividend distribution of one preferred share purchase right for each share of our common stock outstanding as of August 21, 1995 and each share of our common stock issued after that date. In July 2000, we made certain technical changes to amend the plan and extended the term of such plan until 2010. The rights are exercisable only if an acquirer purchases 15 percent or more of our common stock or announces a tender offer for 15 percent or more of our common stock. Upon exercise, holders other than the acquirer may purchase our stock at a discount. Our Board of Directors may terminate the rights plan at any time or under certain circumstances redeem the rights. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, the plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding such acquisition. These provisions and certain provisions of the Delaware General Corporation Law may have the effect of deterring hostile takeovers or otherwise delaying or preventing changes in our management or in the control of our company, including transactions in which our stockholders might otherwise receive a premium over the fair market value of our common stock.

Due to the potential value of our strategic investments, we could be determined to be an investment company, and if such a determination were made, we would become subject to significant regulation that would adversely affect our business.

Our non-controlling positions in Abgenix and Ceregene, along with investments of our available cash resources in certain types of fixed-income securities, could be considered “investment securities” under the Investment Company Act of 1940, raising a question of whether we are an investment company required to register and be regulated under the Investment Company Act. Regulation under the Investment Company Act, or a determination that we failed to register when required to do so, could materially and adversely affect our business. We believe that we are primarily engaged in the research, development and commercialization of biological cancer therapies and that any investment securities are ancillary to our primary business. Nevertheless, possible required dispositions of non-controlling investments could adversely affect our future reported results.

Recent accounting pronouncements will impact our future results of operations.

New accounting pronouncements may negatively impact our future results of operations. In December 2004, the FASB issued SFAS 123R, “Share-Based Payment” which requires companies to recognize compensation expense, using a fair-value based method, for costs related to share-based payments including stock options and stock issued under our employee stock plans and record such expense in our financial statements. We will adopt SFAS 123R for our fiscal year beginning January 1, 2006. Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are comparable to the current pro forma disclosures under SFAS 123 in Note 2, “Stock-Based Compensation”, we do expect the adoption to have a material adverse impact on our results of operations. The adoption of SFAS 123R may also cause us to change the way we compensate our employees or may cause other changes in the way we conduct our business.

Risks Related to Our Industry

In order for our products to be offered to the public, they must undergo extensive clinical testing and receive approval from the FDA, which could delay or prevent the commercialization of our products.

Human therapeutic products must undergo rigorous preclinical and clinical testing and other premarket approval procedures by the FDA and similar authorities in foreign countries. Preclinical tests include laboratory evaluation of potential products and animal studies to assess the potential safety and efficacy of the product and its formulations. Initiation of clinical trials requires approval by health authorities. Clinical trials involve the administration of the investigational new drug to healthy volunteers or to patients under the supervision of a qualified principal investigator. Clinical trials must be conducted in accordance with FDA and ICH Good Clinical Practices under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Other national, foreign and local regulations may also apply. The developer of the drug must provide information relating to the characterization and controls of the product before administration to the patients participating in the clinical trials. This requires developing approved assays of the product to test before administration to the patient and during the conduct of the trial. In addition, developers of pharmaceutical products must provide periodic data regarding clinical trials to the FDA and other health authorities, and these health authorities may issue a clinical hold upon a trial if they do not believe, or cannot confirm, that the trial can

be conducted without unreasonable risk to the trial participants. We cannot assure you that U.S. and foreign health authorities will not issue a clinical hold with respect to any of our clinical trials in the future. The results of the preclinical testing and clinical testing, together with chemistry, manufacturing and controls information, are submitted to the FDA and other health authorities in the form of a new drug application for a pharmaceutical product, and in the form of a biologics license application for a biological product, requesting approval to commence commercial sales.

In responding to a new drug application or a biologics license application, the FDA or foreign health authorities 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. Regulatory approval of a new drug application, new drug application supplement or biologics license application is never guaranteed, and the approval process can take several years and is extremely expensive. The FDA and foreign health authorities have substantial discretion in the drug and biologics approval processes. Despite the time and expense incurred, failure can occur at any stage, and we could encounter problems that cause us to abandon clinical trials or to repeat or perform additional preclinical or clinical studies. Approvals may not be granted on a timely basis, if at all, and if granted may not cover all the clinical indications for which we may seek approval. Also, an approval might contain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of use.

Even if our products are approved by regulatory authorities, if we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval pre-clinical, manufacturing, clinical and safety data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products including unanticipated adverse events of unanticipated severity or frequency, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures or detention, injunctions or the imposition of civil or criminal penalties.

We are subject to federal, state, local and foreign laws and regulations, and complying with these may cause us to incur significant costs.

We are subject to laws and regulations enforced by the FDA, the DEA, the California Department of Health Services, foreign health authorities and other regulatory statutes including:

•		the Occupational Safety and Health Act;

•		the Environmental Protection Act;

•		the Toxic Substances Control Act;

•		the Resource Conservation and Recovery Act; and

•		other current and potential future federal, state, local or foreign laws and regulations.

In particular with respect to environmental laws, product development activities involve the use of hazardous materials, and we may incur significant costs as a result of the need to comply with these laws. Our research, development and manufacturing activities involve the controlled use of hazardous materials, chemicals, viruses and radioactive compounds. We are subject to federal, foreign, 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 result of intentional acts of terrorism, 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.

Failure to comply with foreign regulatory requirements governing human clinical trials and marketing approval for drugs and devices could prevent us from conducting our clinical trials or selling our products in foreign markets, which may adversely affect our operating results and financial condition.

For development and marketing of drugs and biologics outside the United States, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country and may require additional testing. The time required to obtain approvals outside the United States may differ from that required to obtain FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other countries or by the FDA. Failure to comply with these regulatory requirements or obtain required approvals could impair our ability to conduct clinical trials in foreign markets or commercially develop foreign markets for our products and may have a material adverse effect on our results of operations and financial condition.

Reimbursement from third-party payers may become more restricted in the future, which may reduce demand for our products.

There is uncertainty related to the extent to which third-party payers will cover and pay for newly approved therapies. 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 payment amounts 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; and

•		Blue Cross/Blue Shield and similar plans.

There is considerable pressure to reduce the cost of biotechnology and pharmaceutical products. 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. Our proposed products, if successfully developed, may not be considered cost-effective by third-party payers. Insurance coverage might not be provided by third-party payers at all or may be provided only after substantial delay. Even if such coverage is provided, the approved third-party payment amounts might not be sufficient to permit widespread acceptance of our products.

The continuing efforts of governmental and third-party payers to contain or reduce the costs of healthcare may impair our future revenues and profitability.

The pricing of our future products may be influenced in part by government controls. 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 more rigorous provisions relating to government payment levels. 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.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Equity Price Risk

We are subject to risk associated with our retained ownership in Abgenix common stock. The value of our holdings of Abgenix common stock was $76.1 million at September 30, 2005 compared to $68.5 million at December 31, 2004. Each 10% decrease in market value of these securities would result in a decrease in value of approximately $7.6 million and $6.9 million from the fair value of those investments at September 30, 2005 and December 31, 2004, respectively.

Interest Rate Risk

We are exposed to interest rate sensitivity on our investments in debt securities and our outstanding fixed rate debt. The objective of our investment activities is to preserve principal, while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid, investment grade and government debt securities. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in short-term securities and our goal is to maintain an average maturity of less than one year. The following table provides information about our financial instruments that are sensitive to changes in interest rates.

Interest Rate Sensitivity

Principal Amount by Expected Maturity and Average Interest Rate

(Dollars in thousands)


																									Fair Value
																	2009									September 30,
As of September 30, 2005	2005				2006				2007				2008				Thereafter				Total				2005
Total Investment Securities		$	25,740			$	38,519			$	16,781			$	2,499			$	11,787			$	95,326			$	95,019
Average Interest Rate			3.19	%			2.71	%			3.56	%			3.49	%			4.63	%			3.25	%			—
Fixed Interest Rate
Convertible Senior Notes		$	1,133			$	4,531			$	4,531			$	4,531			$	157,838			$	172,564			$	145,000
Average Interest Rate			3.125	%			3.125	%			3.125	%			3.125	%			3.125	%			3.125	%			—


																									Fair Value
																	2009				Dec				December 31,
As of December 31, 2004	2005				2006				2007				2008				Thereafter				Total				2004
Total Investment Securities		$	115,112			$	37,340			$	10,976			$	—			$	—			$	163,428			$	162,779
Average Interest Rate			2.39	%			2.27	%			2.46	%			—				—				2.37	%			—
Fixed Interest
Convertible Senior Notes		$	4,531			$	4,531			$	4,531			$	4,531			$	157,838			$	175,962			$	145,000
Average Interest Rate			3.125	%			3.125	%			3.125	%			3.125	%			3.125	%			3.125	%			—

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures were effective as of September 30, 2005 to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Controls over Financial Reporting

There were no significant changes made to our internal control over financial reporting during the quarter ended September 30, 2005 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 6. EXHIBITS


Exhibit
Number		Description
10.31	*	2005 Equity Incentive Plan and Form of Award Agreement

31.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished, not filed)


		* Incorporated by reference to Exhibits 4.1 and 4.2 to the Registration Statement on Form S-8 (Reg. No. 333-127158) filed with the SEC on August 3, 2005.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in South San Francisco, California, on November 9, 2005.


		CELL GENESYS, INC.

		By:		/s/ SHARON E. TETLOW

				Sharon E. Tetlow
				Senior Vice President and Chief Financial Officer
				(Principal Financial and Accounting Officer)

Exhibit Index


Exhibit
Number		Description
10.31	*	2005 Equity Incentive Plan and Form of Award Agreement

31.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished, not filed)


		* Incorporated by reference to Exhibits 4.1 and 4.2 to the Registration Statement on Form S-8 (Reg. No. 333-127158) filed with the SEC on August 3, 2005.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. sophomore Good

Cell Genesys (CEGE) Inactive 10-Q2005 Q4 Quarterly report

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