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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 1999 or
[ ] 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 (I.R.S. employer identification number)
incorporation or organization)
342 Lakeside Drive, Foster City, California 94404
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(650) 425-4400
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 such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of April 30, 1999, the number of outstanding shares of the Registrant's
Common Stock was 30,997,938.
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CELL GENESYS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
a. Condensed Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998
b. Condensed Consolidated Statements of Operations - Three Months
Ended March 31, 1999 and 1998
c. Condensed Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998
d. Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Cell Genesys, Inc.
Condensed Balance Sheets
(In thousands)
March 31, December 31,
1999 1998
------------ -----------
Assets
Current assets:
Cash and cash equivalents......................... $6,415 $14,086
Short-term investments............................ 45,601 38,788
Prepaid expenses and other current assets......... 1,517 1,121
------------ -----------
Total current assets................................. 53,533 53,995
Property and equipment at cost, net.................. 5,539 6,079
Investment in Abgenix................................ 13,714 5,080
Deposits and other assets, net....................... 603 645
------------ -----------
$73,389 $65,799
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other accrued liabilities.... $3,653 $4,763
Deferred revenue.................................. 1,222 703
Accrued acquisition related costs................. 680 932
Current portion of property and equipment
financing....................................... 3,591 3,566
------------ -----------
Total current liabilities............................ 9,146 9,964
Noncurrent portion of property and equipment
financing......................................... 4,320 4,860
Redeemable convertible preferred stock............... 11,836 12,083
Stockholders' equity:
Common stock...................................... 31 31
Additional paid-in capital........................ 240,968 230,557
Accumulated other comprehensive income............ (4) 113
Accumulated deficit............................... (192,908) (191,809)
------------ -----------
Total stockholders' equity........................... 48,087 38,892
------------ -----------
$73,389 $65,799
============ ===========
See accompanying notes
Cell Genesys, Inc.
Condensed Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
Revenue under collaborative agreements. $6,076 $4,564
--------- ---------
Operating expenses:
Research and development............. 5,537 12,467
General and administrative .......... 1,095 2,984
--------- ---------
Total operating expenses............... 6,632 15,451
Equity in loss of Abgenix.............. (1,202) --
Interest income........................ 937 1,225
Interest expense....................... (278) (671)
--------- ---------
Net loss before minority interest...... (1,099) (10,333)
Minority interest in loss of Abgenix... 0 2,646
--------- ---------
Net loss............................... ($1,099) ($7,687)
========= =========
Net loss per common share.............. ($0.04) ($0.27)
========= =========
Shares used in computing net loss
per common share.................... 30,965 28,211
========= =========
See accompanying notes
Cell Genesys, Inc.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
March 31,
----------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................. ($1,099) ($7,687)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization...................... 796 1,388
Amortization of deferred compensation of Abgenix... -- 149
Minority interest in net loss of Abgenix........... -- (2,646)
Equity in losses of Xenotech joint venture......... -- 115
Equity in losses of Abgenix........................ 1,202 --
Changes to:
Prepaid expenses and other assets.................. (396) 484
Accounts payable and other accrued
liabilities...................................... (1,110) 231
Deferred revenue from related parties.............. 519 (1,599)
Accrued acquisition related costs.................. (252) (316)
---------- ----------
Net cash used in operating activities......... (340) (9,881)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments.................. (10,930) (19,435)
Maturities of short-term investments................. -- 6,000
Sales of short-term investments...................... 4,000 11,703
Contributions to Xenotech joint venture ............. -- (117)
Capital expenditures................................. -- (54)
Cash effect of applying equity method of accounting
to the investment in Abgenix...................... -- --
---------- ----------
Net cash provided by investing activities..... (6,930) (1,903)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from minority interest in Abgenix........... -- 3,982
Proceeds from issuance of common stock............... 328 213
Proceeds from property and equipment financing....... 92 --
Payments of convertible note payable................. -- --
Payments under property and equipment
financing obligations.............................. (821) (1,531)
---------- ----------
Net cash provided by (used in)
financing activities................... (401) 2,664
---------- ----------
Net decrease in cash and cash equivalents............... (7,671) (9,120)
Cash and cash equivalents at beginning of period........ 14,086 10,631
---------- ----------
Cash and cash equivalents at end of period.............. $6,415 $1,511
========== ==========
NON-CASH INVESTING IN FINANCING ACTIVITIES
Furniture and equipment acquired under financing..... 214 --
Capital Contribution resulting in an increase
of carrying value of Abgenix............ 9,836 --
See accompanying notes
Cell Genesys, Inc.
Notes To Condensed Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
Organization and basis of presentation
Cell Genesys, Inc. ("Cell Genesys"), a Delaware corporation, is focused
on the development and commercialization of gene therapies to treat
major, life-threatening diseases, including cancer and AIDS. Abgenix,
Inc., ("Abgenix") a partially owned subsidiary of Cell Genesys, which
focuses on the development and commercialization of human monoclonal
antibodies for pharmaceutical applications, including inflammation,
autoimmune disorders, and cancer, had been fully consolidated prior to
July 2, 1998, and has been accounted for under the equity method of
accounting subsequent to July 2, 1998 (see Note 2 - Investment in
Abgenix).
Comprehensive income (loss)
For the three months ended March 31, 1999 and 1998, total comprehensive
losses amounted to $1.2 million and $7.8 million, respectively.
2. Investment in Abgenix and Minority Interest
Since 1996, the Company has maintained an investment in Abgenix, Inc
("Abgenix"). In December 1997 and January 1998, Abgenix completed
private placements of securities reducing Cell Genesys' percentage
ownership from approximately 100% to approximately 54%.
On July 2, 1998, Abgenix completed an initial public offering ("IPO")
reducing Cell Genesys' percentage ownership to approximately 40%. Prior
to the IPO, Abgenix was a consolidated subsidiary and its financial
results were presented accordingly. From July 2, 1998 forward, the
Company's investment in Abgenix is accounted for under the equity method
of accounting as a result of the reduced ownership position. On March 4,
1999 Abgenix completed the sale of an additional 3,000,000 shares of
common stock in a public offering resulting in approximately $45 million
in gross proceeds, which further reduced the Company's ownership
percentage in Abgenix to approximately 22 percent. The difference between
the cost of the investment (the carrying value of the net assets less the
equity in loss of Abgenix immediately prior to the public offering) and
the amount of the underlying equity in net assets of Abgenix immediately
following each of the public offerings was accounted for in accordance
with APB Opinion No. 18 "The Equity Method of Accounting for Investment
in Common Stock" and Staff Accounting Bulletin No. 51. Accordingly, the
Company recognized $9.8 million as a contribution to Stockholders' Equity
upon completion of the March 1999 public offering.
Equity in loss of Abgenix was $1.2 million for the three months ended
March 31, 1999. The carrying amount of the Company's investment in
Abgenix at March 31, 1999 was $13.4 million. Summarized information for
Abgenix is as follows (in thousands):
Three Months
Ended
March 31, 1999
---------------
Revenue.................... $ --
Operating loss............. (5,659)
Net loss................... (5,397)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements made in this Item other than statements of historical
fact, including statements about the Company's and its subsidiary's
clinical trials, research programs, product pipelines, current and
potential corporate partnerships, licenses and intellectual property, the
adequacy of capital reserves and anticipated operating results and cash
expenditures are forward-looking statements within the meaning of section
27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. As such, they are subject to a number of
uncertainties that could cause actual results to differ materially from
the statements made, including risks associated with the success of
research and product development programs, the issuance and validity of
patents, the development and protection of proprietary technology, the
ability to raise capital, operating expense levels and the ability to
establish and retain corporate partnerships. Reference is made to
discussions about risks associated with product development programs,
intellectual property and other risks which may affect the Company under
"Risk Factors" below. The Company does not undertake any obligation to
update forward-looking statements. The following should be read in
conjunction the Company's Annual Report for the year ended December 31,
1998 included in its filing on Form 10-K, the Company's Quarterly Reports
on Form 10-Q, and the Company's Registration Statement on Form S-3.
Overview
Since its inception in April 1988, Cell Genesys, Inc. ("Cell Genesys"
or "the Company") has focused its research and product development
efforts on human disease therapies which are based on innovative gene
modification technologies. The Company's strategic objective is to
develop and commercialize in vivo and/or ex vivo gene therapies to treat
major, life-threatening diseases including cancer and AIDS. Cell Genesys'
clinical programs include GVAXT cancer vaccines in Phase I/II studies to
treat specific types of cancer, and T cell gene therapy for AIDS, which
is undergoing Phase II testing. GVAXT vaccines for prostate cancer and
for lung cancer are being developed through a worldwide collaboration
with the pharmaceutical division of Japan Tobacco Inc. ("JT"). AIDS
gene therapy is being developed through a worldwide collaboration with
Hoechst Marion Roussel, Inc. ("Hoechst Marion Roussel"). In addition,
Cell Genesys has preclinical programs, which are evaluating potential
gene therapies for cancer, cardiovascular disorders, hemophilia and
Parkinson's disease. The Company also has assets outside of its core
business which can be used to help maintain financial strength while
product candidates are under development. These assets include Cell
Genesys' minority ownership of Abgenix which is focused on the
development and commercialization of antibody therapies and a licensing
program in gene activation technology.
Cell Genesys believes that gene therapies are likely to be developed on a
continuum, progressing from ex vivo (modification of cells outside the
patient's body for injection as therapy) to in vivo (modification of
cells within the patient's body to provide therapy). The Company's goal
is to emphasize "off-the-shelf" products that enable gene therapy to be
provided in out-patient settings. These potentially include both non-
patient-specific therapies, which could be vialed pharmaceuticals for
direct administration, and patient-specific gene therapy products, which
could be packaged as "kits" for overnight cell processing at clinical
laboratories.
During 1999 the Company has reported encouraging data from its Phase
I/II human trials evaluating the GVAXT vaccine for prostate cancer.
These data include evidence of clinical safety and preliminary evidence
of antitumor effects as measured by levels of prostate specific antigen
(PSA), a cancer "marker." As a result, the Company initiated a second
multi-center Phase I/II clinical trial for GVAXT prostate cancer in
addition to the first multi-center Phase I/II trial which began in
December 1998. Both trials will enroll approximately 40 patients.
Clinical data from the initial Phase I/II lung cancer trial has shown
treatment to be safe and well tolerated, and the Company is planning to
initiate a multi-center trial phase I/II trial for the GVAX T lung
cancer later in 1999. Phase I/II clinical trials for GVAX T melanoma
are continuing, and the patients are now being evaluated. An initial
phase II trial of T cell gene therapy for AIDS in patients with
persistent HIV in their bloodstream while receiving anitviral drugs has
thusfar demonstrated safety as well as preliminary indications of
potential antiviral activity. A second phase II trial in patients
without HIV in the bloodstream on antiviral drugs is nearing
completion. The Company expects to announce results from this trial by
the end of 1999.
In 1999, the Company's preclinical research has focused on studies of
gene therapy in animal models for hemophilia and Parkinson's disease,
and on gene therapy strategies to overcome restenosis, a serious
complication of angioplasty for cardiovascular disease. For example,
in hemophilia studies, a single injection of gene therapy resulted in
improved blood clotting and reduced number of bleeding episodes in a
dog hemophilia model. Similarly, in studies for Parkinson's disease, a
single injection of gene therapy essentially eliminated the need for
daily L-dopa injections in mice with a Parkinson's-like condition.
Cardiovascular gene therapy studies demonstrated the successful
delivery of genes to blood vessel lining cells.
Cell Genesys ended the first quarter of 1999 with approximately $52
million in cash and short-term investments. The Company has maintained
its financial position by relying on funding from various corporate
collaborations and licensing agreements, as well as through strategic
management of its resources. The Company's plan is to continue to
finance its operations when possible through corporate collaborations
with established pharmaceutical and biotechnology companies in order to
develop its technologies as broadly as possible, to fund product
development and to accelerate the commercialization of certain product
opportunities. Such alliances are intended to provide financial
resources, research, development and manufacturing capabilities, and
marketing infrastructure to aid in the commercialization of potential
disease therapies. Cell Genesys also evaluates on an ongoing basis
opportunities to in-license or acquire genes and technologies that
complement its portfolio.
Results of Operations
As a result of Abgenix's IPO on July 2, 1998, the Company's ownership
percentage was reduced to less than 50% and Abgenix has been accounted
for under the equity method of accounting subsequent to that date.
Abgenix was fully consolidated in the Company's financial statement in
the first half of 1998. Therefore, in order to provide more meaningful
analysis of the Company's results of operations in comparison with the
same period in 1998, the following table sets forth the company's
operations (referred to as the "Gene Therapy Operations") excluding the
results of Abgenix for such periods. Except as otherwise noted, the
discussion which follows relates to this table.
Gene Therapy
Operations
Three Months
ended March 31,
--------------------
1999 1998
---------- ---------
Revenue.............................. $6,076 $3,673
Research and development expenses.... 5,537 7,101
General and administration expenses.. 1,095 1,923
Interest expense..................... 937 1,027
Interest income...................... (278) (521)
Net income (loss).................... $103 ($4,845)
Revenue was $6.1 million for the three months ended March 31, 1999
compared to $3.7 million for the three months ended March 31, 1998. The
increase in revenue is partially a result of research and development
activities funded under the Company's collaboration agreement signed in
December 1998 with the pharmaceutical division of Japan Tobacco Inc. for
selected targets in the company's GVAX? cancer vaccine program.
Revenues from the company's collaborations with Hoechst Marion Roussel
were essentially flat between the two quarters, with increased revenues
from the company's gene activation licensing program largely offsetting
decreased funding of its HIV T cell gene therapy program.
Research and development expenses were $5.5 million and $7.1 million for
the three months ended March 31, 1999 and 1998, respectively. The
decrease of $1.6 million reflects the costs of research activities
reduced following the implementation of a corporate restructuring plan
in September 1998 which enabled the Company to focus on clinical
development activities for the Company's cancer gene therapy programs.
Research and development expenses generally represent 80% or more of the
Company's total operating expenses. The Company expects that its
research and development expenditures will continue to increase to
support additional product development activities, particularly in the
field of cancer, for which a number of trials commenced in 1998 and
1999. The rate of increase depends on a number of factors including
progress in research and development, especially in clinical trials.
General and administrative expenses were $1.1 million and $1.9 million
for the three months ended March 31, 1999 and 1998, respectively. The
decrease also reflects the corporate restructuring plan implemented in
September 1998. The Company has continued its efforts to control
administrative expenditures through an aggressive program of expense
management.
Interest income decreased slightly from $1.0 million to $937,000 for the
three months ended March 31, 1999 and 1998, respectively, with lower
average cash balances during 1999 being partially offset by higher
interest rates. Interest expense decreased to $278,000 from $521,000
for the three months ended March 31, 1999 and 1998, respectively. The
decrease represents interest expense on the $15 million note payable to
GenPharm International, Inc. which was fully repaid in September 1998.
Cell Genesys had net income of $103,000 for the three months ended March
31, 1999, compared to a net loss of $4.8 million in the same period of
1998. The increase was due primarily to an increase in revenue of $2.5
million under the Japan Tobacco collaboration agreement for the GVAX T
program and a combined $2.4 million cost reduction in both research and
development and general and administrative expenditures as a result of
the corporate restructuring implemented in September 1998. Net losses
from operations are expected to continue and are likely to increase in
the future as operating expenses rise, particularly as the company
incurs expenses related to manufacturing and later stage human testing
of its potential products.
Liquidity and Capital Resources
Cell Genesys has financed its operations to date primarily through the
sale of equity securities, funding under collaborative arrangements and
equipment financing. From inception through March 31, 1999, the Company
received $172.8 million in net proceeds from equity financings, $120.9
million under collaborative agreements and utilized $27.6 million of
property and equipment financings.
At March 31, 1999, Cell Genesys' cash, cash equivalents and short-term
investments totaled $52.0 million, compared to $52.9 million at December
31, 1998. The decrease was due primarily to cash used in operating
activities, capital expenditures and payments of financing obligations.
Cell Genesys anticipates that consolidated net cash usage will not exceed
$10 million in 1999. The Company expects its cash requirements to
increase significantly in the future. The Company's capital requirements
can depend on numerous factors, including: the progress of the Company's
research and development programs; preclinical and clinical trials;
clinical and commercial scale manufacturing requirements; the attraction
and maintenance of collaborative partners; the acquisition of new
products or technologies; and the cost of litigation, patent interference
proceedings or other legal proceedings or their resolution.
Cell Genesys believes that its available cash, cash equivalents and
short-term investments at March 31, 1999, together with payments to be
received under the Company's existing collaborative arrangements, license
agreements and financing facilities will be sufficient to meet the
Company's operating expenses and capital requirements at least through
2000. Thereafter, the Company may require substantial additional funds.
Due to these requirements, the Company regularly considers financing
alternatives, including sale of equity securities held in Abgenix and the
private or public sale of equity by Cell Genesys. Any sale of Cell
Genesys' equity securities may be dilutive to existing stockholders.
Risk Factors
Need for Substantial Additional Funds.
We will need substantial additional funds for existing and planned
preclinical and clinical trials, to continue research and development
activities, and to establish manufacturing and marketing capabilities for
any products we may develop. We expect that our existing capital
resources, together with payments to be received under existing
collaborative agreements and amounts available under existing equipment
financing facilities, will enable us to maintain our operations at least
through 2000. Beyond 2000, we may need to raise substantial additional
capital to fund our operations.
Our future capital requirements will depend on, and could increase as a
result of, many factors such as:
o continued scientific progress of research and development
programs
o magnitude of such programs
o progress of preclinical and clinical testing
o time and costs involved in obtaining regulatory approvals
o costs involved in preparing, filing, prosecuting, maintaining,
enforcing and defending patent claims
o competing technological and market developments
o changes in collaborative relationships with Hoechst Marion
Roussel, Japan Tobacco and others
o terms of any additional collaborative arrangements into which we
may enter
o our ability to establish research, development and
commercialization arrangements pertaining to products other than
those covered by existing collaborative arrangements
o cost of establishing manufacturing facilities
o cost of commercialization activities
o demand for our products, if and when approved
o potential redemption obligations in connection with conversion
of the Series B convertible preferred stock.
We expect to raise additional funds through additional equity or debt
financings, collaborative relationships, or otherwise. Because of our
long-term capital requirements, we may seek to access the public or
private equity markets whenever conditions are favorable, even if we do
not have an immediate need for additional capital at that time. There
can be no assurance that any such additional funding will be available to
us, or, if available, that it will be on acceptable terms. If we raise
additional funds by issuing equity securities, stockholders will incur
immediate dilution. There is no assurance that opportunities for in-
licensing technologies or for third party collaborations will continue to
be available to us on acceptable terms. If adequate funds are not
available, we may be required to delay, reduce the scope of, or eliminate
one or more of our research, development and clinical activities.
Alternatively, we may need to seek funds through arrangements with
collaborative partners or others that require us to relinquish rights to
certain of our technologies or product candidates that we would otherwise
seek to develop or commercialize ourselves. Either of these events could
have a material adverse effect on our business, results of operations,
financial condition or cash flow.
Early Stage of Development; No Developed or Approved Products.
All of our potential gene therapy products are in research and
development. We have not sold any products or generated any revenues from
the sale of products. We do not expect to generate any such revenues for
at least the next several years. Our products currently under development
will require significant additional research and development efforts,
including extensive preclinical and clinical testing and regulatory
approval, prior to commercial use. There can be no assurance that our
research and development efforts will be successful or that any of our
future products will ultimately be commercially successful. Even if
developed, our products may not receive regulatory approval or be
successfully introduced and marketed at prices that would permit us to
operate profitably.
Operating Loss and Accumulated Deficit.
We have incurred net losses since our inception. At March 31, 1999, our
accumulated deficit was approximately $192.9 million. We expect to incur
losses in the future resulting principally from expenses of research and
development programs and to a lesser extent, from general and
administrative expenses. In 1998, we incurred losses of $12.1 million.
Under the equity method of accounting, we recorded losses in equity of
Abgenix of $1.2 million for the three months ended March 31, 1999. We
expect to incur substantial losses for at least the next several years
due primarily to the expansion of research and development programs,
including preclinical studies, clinical trials and manufacturing. We
expect that losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial. There can be no assurance that we will
successfully develop, commercialize, manufacture or market any products.
We cannot guarantee that we will ever achieve or sustain product revenues
or profitability.
Technological Uncertainty.
Gene therapy is a new technology. Existing preclinical and clinical data
on the safety and efficacy of gene therapy are limited. Data relating to
our specific gene therapy approaches are also limited. Our GVAX T cancer
vaccine and AIDS gene therapy are currently being tested in Phase I/II
and Phase II human clinical trials, respectively, to determine their
safety and efficacy. None of our other products or therapies under
development are in human clinical trials. The results of preclinical
studies do not predict safety or efficacy in humans. Possible side
effects of gene therapy may be serious and potentially life-threatening.
There can be no assurance that unacceptable side effects will not be
discovered during preclinical and clinical testing of our potential
products or thereafter. There are many reasons that potential products
that appear promising at an early stage of research or development do not
result in commercialization. Although we are testing proposed products or
therapies in human clinical trials, there can be no assurance that we
will be permitted to undertake human clinical trials for any of our other
products. Also, the results of such testing might not demonstrate safety
or efficacy. Even if clinical trials are successful, we might not obtain
regulatory approval for any indication. There is no guarantee that an
approved product can be produced in commercial quantities at reasonable
cost or that such a product will be successfully marketed.
Patents and Trade Secrets.
The patent positions of pharmaceutical and biotechnology firms, including
Cell Genesys, are generally uncertain and involve complex legal and
factual questions. Cell Genesys currently has approximately 150 issued or
granted patents and more than 300 pending applications. Although we are
prosecuting patent applications, we cannot be certain whether any given
application will result in the issuance of a patent or, if any patent is
issued, whether it will provide significant proprietary protection or
will be invalidated. Also, patent applications in the United States are
confidential until patents are issued. Publication of discoveries in
scientific or patent literature tends to lag behind actual discoveries by
several months. Accordingly, we cannot be certain that we were the first
creator of inventions covered by pending patent applications or that we
were the first to file patent applications for such inventions.
Our commercial success will also depend in part on not infringing the
patents or proprietary rights of others and not breaching licenses
granted to us. We will be required to obtain licenses to certain third
party technology and genes necessary to conduct our business. Any failure
to license at reasonable cost any technology or genes required to
commercialize our technologies or products may have a material adverse
effect on our business, results of operations, financial condition or
cash flow.
Litigation, which could result in substantial cost to us, may also be
necessary to enforce any patents issued to us, or to determine the scope
and validity of other parties' proprietary rights. To determine the
priority of inventions, the United States Patent Office frequently
declares interference proceedings. In Europe, other patents can be
revoked through opposition proceedings. Such proceedings could result in
an adverse decision as to the priority of our inventions.
We are currently involved in three separate interference and/or
opposition proceedings with regard to:
(i) gene activation technology
(ii) ex vivo gene therapy
(iii) chimeric receptor technology
While we believe our position in each proceeding is strong, the outcome
of each proceeding cannot be predicted. An adverse result could have a
material adverse effect on our intellectual property position in these
areas. We may be involved in other interference and/or opposition
proceedings in the future. We believe that there will continue to be
significant litigation in the industry regarding patent and other
intellectual property rights.
We also rely on unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain
our competitive position. No assurance can be given that others will not
independently develop similar or better proprietary information and
techniques and disclose it. Also, there can be no assurance that others
will not gain access to our trade secrets, or that we can meaningfully
protect our rights to our unpatented trade secrets.
We require our employees and consultants to execute a confidentiality
agreement upon the commencement of an employment or consulting
relationship with us. These agreements provide that all confidential
information developed by or made known to an individual during the course
of the employment or consulting relationship generally must be kept
confidential. In the case of employees, the agreements provide that all
inventions conceived by the individual while employed by us, relating to
our business are our exclusive property. These agreements may not provide
meaningful protection for our trade secrets in the event of unauthorized
use or disclosure of such information.
Competition.
Competition in the field of gene therapy from other biotechnology and
pharmaceutical companies and from research and academic institutions is
intense and expected to increase. There are numerous competitors working
on products to treat each of the diseases for which we are seeking to
develop therapeutic products. Some competitors are pursuing a product
development strategy competitive with ours, particularly with respect to
our cancer vaccine program. Certain of these competitive products are in
substantially more advanced stages of product development and clinical
trials. Our competitors may develop technologies and products that are
more effective than ours, or that would render our technology and
products less competitive or obsolete. Many of these competitors have
substantially greater financial resources and larger research and
development staffs than we do. In addition, many of these competitors may
have significantly greater experience than we do in developing products,
in undertaking preclinical testing and human clinical trials of new
pharmaceutical products, in obtaining United States Food and Drug
Administration (the "FDA") and other regulatory approvals of products,
and in manufacturing and marketing such products. Accordingly, our
competitors may obtain patent protection or FDA approval and
commercialize products more rapidly than we do. There can be no assurance
that we will be able to obtain certain biological materials necessary to
support our research, development or manufacturing of any of our planned
therapies. If we are permitted to commence commercial sales of products,
we will also be competing with respect to marketing capabilities and
manufacturing efficiency, areas in which we have limited or no
experience. We expect to build additional clinical scale and commercial
scale manufacturing facilities and/or employ contract facilities to
commercialize our products. We also expect to secure funding for these
and other product development activities through our partners and future
potential partners. We also compete with universities and other research
institutions in the development of products, technologies and processes.
In many instances, we compete with other commercial entities in acquiring
products or technology from universities.
We expect that competition among products approved for sale will be
based, among other things, on:
o product efficacy
o safety
o reliability
o availability
o price
o patent position
o sales, marketing and distribution capabilities
Our competitive positions also depend upon our ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient funding for the
often substantial period between product conception and commercial sales.
Volatility Of Stock Price.
The market prices for securities of biopharmaceutical and biotechnology
companies (including Cell Genesys) have historically been highly
volatile. The market has from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance
of particular companies. The following factors may affect our stock
price:
o fluctuations in our financial results
o announcements of technological innovations or new therapeutic
products by us or our competitors
o announcements of changes in governmental regulation
o announcements of regulatory approvals or disapprovals of our or
our competitors' products
o developments in patent or other proprietary rights
o public concern as to the safety of products developed by us or
other biotechnology and pharmaceutical companies
o general market conditions
Government Regulation.
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of our
proposed products and our research and development activities. All of our
products will require regulatory approval by governmental agencies prior
to commercialization. In particular, human therapeutic products must
undergo rigorous preclinical and clinical testing and other premarket
approval procedures by the FDA and similar authorities in foreign
countries. Since certain of our potential products involve the
application of new technologies, regulatory approvals may take longer
than for products produced using more conventional methods. Various
federal and, in some cases, state statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping
and marketing of such products. The lengthy process of seeking these
approvals, and the subsequent compliance with applicable federal statutes
and regulations, requires the expenditure of substantial resources. Any
delay or failure by us or our collaborators or licensees to obtain
regulatory approvals could adversely affect the marketing of our products
and our ability to receive product or royalty revenue.
In responding to a new drug application, or a product license
application, the FDA may grant marketing approvals, request additional
information or further research, or deny the application if it determines
that the application does not satisfy its regulatory approval criteria.
Approvals may not be granted on a timely basis, if at all, or if granted
may not cover all the clinical indications for which we are seeking
approval. Also, an approval might contain significant limitations in the
form of warnings, precautions or contraindications with respect to
conditions of use.
In addition to laws and regulations enforced by the FDA, we are also
subject to regulation under:
o Occupational Safety and Health Act
o Environmental Protection Act
o Toxic Substances Control Act
o Resource Conservation and Recovery Act
o Other present and potential future federal, state or local laws
and regulations
Our manufacturing facilities are subject to licensing requirements of the
California Department of Health Services. While not subject to license by
the FDA, such facilities are subject to inspection by the FDA as well as
by the California Department of Health Services. A separate license from
the FDA is required for commercial manufacture of any product. Failure to
maintain such licenses or to meet the inspection criteria of the FDA and
the California Department of Health Services would disrupt our
manufacturing processes and have a material adverse effect on our
business, results of operations, financial condition and cash flow.
For marketing outside the United States, we are subject to foreign
regulatory requirements governing human clinical trials and marketing
approval for drugs and devices. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary
greatly from country to country. Failure to comply with such regulatory
requirements or obtain such approvals could impair our ability to develop
these markets and have a material adverse effect on our business, results
of operations, financial condition or cash flow.
Hazardous Materials; Environmental Matters.
Our research and development activities involve the controlled use of
hazardous materials, chemicals, viruses and various radioactive
compounds. We are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and
disposal of such materials and certain waste products. Although we
believe that our safety procedures for handling and disposing of such
materials comply with the standards prescribed by such laws and
regulations, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. In the event of such an
accident, we could be held liable for any damages that result, and any
such liability could exceed our resources. We may be required to incur
significant costs to comply with environmental laws and regulations in
the future. Our business may be materially adversely affected by current
or future environmental laws or regulations.
Commercialization; Lack of Marketing Experience.
We do not have any experience in sales, marketing or distribution of
biopharmaceutical products. We expect to rely on sales and marketing
expertise of potential corporate partners for our initial products The
decision to market future products directly or through corporate partners
will be based on a number of factors including;
o market size and concentration
o size and expertise of the partner's sales force in a particular
market
o our overall strategic objectives
We are currently engaged in various stages of discussions with potential
partners. There can be no assurance that we will be able to establish new
relationships, if at all, on acceptable terms and conditions.
Product Liabilities and Insurance.
Clinical trials or marketing of any of our potential products may expose
us to liability claims resulting from the use of such products. These
claims might be made directly by consumers, health care providers or by
others selling such products. We currently maintain product liability
insurance with respect to each of our clinical trials. There can be no
assurance that we will be able to maintain such insurance or that
sufficient coverage can be acquired at a reasonable cost. An inability to
maintain insurance at acceptable cost, or at all, could prevent or
inhibit the clinical testing or commercialization of our products. A
product liability claim or recall could have a material adverse effect on
our business, results of operations, financial condition and cash flow.
Reimbursement.
In both domestic and foreign markets, sales of our potential products
will depend in part upon coverage and reimbursement from third-party
payers, including:
o government agencies
o private health care insurers and other health care payers such
as health maintenance organizations
o self-insured employee plans
o Blue Cross/Blue Shield and similar plans
There is considerable pressure to reduce the cost of biotechnology and
pharmaceutical products. In particular, reimbursement from government
agencies and insurers and large health organizations may become more
restricted in the future. Our potential products represent a new mode of
therapy and, while the cost-benefit ratio of the products may be
favorable, we expect that the costs associated with our products will be
substantial. There can be no assurance that our proposed products, if
successfully developed, will be considered cost-effective by third-party
payers. There can be no assurance that insurance coverage will be
provided by such third-party payers at all or without substantial delay.
Even if such coverage is provided, the approved reimbursement might not
provide sufficient funds to enable us to become profitable.
Uncertainty Of Pharmaceutical Pricing and Related Matters.
The continuing efforts of governmental and third-party payers to contain
or reduce the costs of healthcare through various means, may have a
material adverse affect on the future revenues and profitability of
biotechnology companies. For example, in certain foreign markets, pricing
or profitability of prescription pharmaceuticals is subject to government
control. In the United States, there have been, and we expect that there
will continue to be, a number of federal and state proposals to implement
similar government control. While we cannot predict whether the
government will adopt any such legislative or regulatory proposals, the
announcement or adoption of such proposals could have a material adverse
effect on our business, results of operations, financial condition and
cash flow.
Dependence Upon Key Personnel and Collaborative Relationships.
We rely and will continue to rely on our key management and scientific
staff. The loss of key personnel or the failure to recruit necessary
additional qualified personnel could have a material adverse effect on
our business, results of operations, financial condition or cash flow.
There is intense competition from other companies, research and academic
institutions and other organizations for qualified personnel in the areas
of our activities. There is no assurance that we will be able to continue
to attract and retain the qualified personnel necessary for the
development of our business. We will need to continue to recruit experts
in the areas of clinical testing, manufacturing, marketing and
distribution and develop additional expertise in our existing personnel.
If we do not succeed in recruiting such personnel or developing such
expertise, our business could suffer significantly.
We have clinical trial agreements with a number of public and private
medical institutions relating to the conduct of human clinical trials for
our GVAX? cancer vaccine program and T cell gene therapy program, such
as:
o National Institutes of Allergy and Infectious Diseases
o University of California, San Francisco
o San Francisco General Hospital
o University of Colorado Health Sciences Center
o Massachusetts General Hospital
o University of California, Los Angeles
o ViRx, Inc.
o Aids Community Research Consortium
o Dana Farber Partners Cancer Care
o The Johns Hopkins Medical Institutions
o PRN Research Inc.
o Stanford University
o University of Tokyo, IMSUT
The early termination of any of these clinical trial agreements would
hinder the progress of our clinical trials including Phase II trials of T
cell gene therapy for HIV infection and Phase I/II trials of GVAX?
cancer vaccine for prostate cancer, lung cancer and melanoma. If any of
these relationships are terminated, the clinical trials might not be
completed and the results might not be evaluated.
We rely on the continued availability of outside scientific collaborators
performing research. These relationships generally may be terminated at
any time by the collaborator, typically by giving 30 days' notice. These
scientific collaborators are not our employees. As a result, we have
limited control over their activities and can expect that only limited
amounts of their time will be dedicated to our activities. Our agreements
with these collaborators, as well as those with our scientific
consultants, provide that any rights we obtain as a result of their
research efforts will be subject to the rights of the research
institutions in such work. In addition, some of these collaborators have
consulting or other advisory arrangements with other entities that may
potentially conflict with their obligations to us. For these reasons,
there can be no assurance that inventions or processes discovered by our
scientific collaborators or consultants will become our property.
Shares Eligible For Future Sale; Dilution.
Substantially all the outstanding shares of Cell Genesys common stock are
eligible for sale in the public market. The following factors, as well
as others such as those identified above under "Volatility of Stock
Price," could cause a decline in the market price of our common stock:
o severe fluctuations in price and volume in the stock market in general
which are unrelated to our operating performance
o issuance of common stock upon conversion of the Series B preferred
stock
o issuance of common stock upon exercise of the outstanding warrants -
see Notes to the Consolidated Financial Statements.
o future sales of such common stock or other shares of common stock by
existing stockholders
o the perception that such issuances or sales could occur
Conversion of the Series B preferred stock or exercise of the warrants
would result in issuance of additional shares of common stock, diluting
existing investors. The number of shares of common stock issued, and
therefore the dilution of existing investors, would increase as a result
of either (i) an event triggering the antidilution rights of any
outstanding shares of Series B preferred stock, or (ii) a decline in the
market price of the Company's common stock immediately prior to
conversion of the Series B preferred stock.
The holders of the Series B preferred stock may choose at any time to
convert their shares into common stock. In such event, the number of
shares of common stock issued would be based on a conversion price of
$11.02 per share or, if lower, the average of certain trading prices
during the 10 trading days preceding such date of conversion (the
"Floating Conversion Price"). The market price of the common stock has
recently traded below $11.02 per share and consequently the conversion
rate of the Series B preferred stock is currently based on the market
price. The greater the decline in the market price, the greater the
number of shares issuable upon conversion of the Series B preferred
stock.
Potential Redemption Obligation.
If the holders of the Series B preferred stock decide to convert their
shares, we would not be required to issue more than 5,624,000 shares of
common stock (which is 19.99% of the outstanding shares of common stock
on November 14, 1997, or the "Share Limit"), unless we first obtained
stockholder approval. If we did not obtain prior stockholder approval or
an exemption from the requirement for stockholder approval from the
Nasdaq-AMEX (the "Nasdaq-AMEX exemption") we would not be required to
issue shares of common stock in excess of the Share Limit pursuant to
requests for conversion of the Series B preferred stock. However, in
such event, the holders of the Series B preferred stock could require us
to redeem certain shares of Series B preferred stock, and the amount of
these redemption obligations could become material if the common stock
price declined below approximately $3.70 per share. Since the common
stock traded at prices below $3.70 per share during certain periods in
1998 and we have not obtained stockholder approval or the Nasdaq-AMEX
exemption, we could become subject to a material redemption obligation if
the number of shares of common stock issuable upon conversion of the
Series B preferred stock exceeds the Share Limit. The amount of the
redemption obligation will increase as the common stock price decreases
because we are limited in the number of shares we can issue upon
conversion. Consequently, volatility in the price of the common stock
could magnify the amount of any redemption obligation.
Impact of the Year 2000
The Company has undertaken various initiatives to ensure that its
information technology (IT) and non-IT systems are Year 2000 compliant.
Based on its assessment efforts to date, the Company has not identified
any systems currently in use which require modification or replacement as
a result of its Year 2000 initiatives. The Company currently anticipates
that its Year 2000 identification, assessment, remediation activities
(including repairing or replacing identified systems), testing and
contingency planning efforts, which began in late 1997, will be complete
by the end of the fourth quarter of 1999.
Year 2000 costs incurred to date have not been material and total costs
to modify systems for Year 2000 compliance are not expected to become
material. Such costs do not include normal system upgrades and
replacements and the actual financial impact could exceed this estimate.
The following summarizes the progress the Company has made to date on
each phase of its Year 2000 project plan:
Phase Timeframe for Completion Percent Complete
- ------------------------ ------------------------ -----------------
Initial identification
and assessment......... Q2-1999 85%
Remediation.............. Q3-1999 40%
Testing.................. Q4-1999 10%
Contingency planning..... Q4-1999 25%
In addition to risks associated with the Company's own computer systems
and equipment, the Company has relationships with, and is to varying
degrees dependent upon, a large number of third parties that provide
information, goods and services to the Company. These include financial
institutions, suppliers, vendors, research partners, governmental
entities and customers. The Company has begun surveying all of its major
vendors, collaborative partners and other third party interests to
determine whether their systems are Year 2000 compliant. We cannot
guarantee that all of the Company's key suppliers, partners and others
will achieve Year 2000 compliance in a timely manner. The failure of the
Company's vendors and partners to successfully address the Year 2000
issue could have a material adverse effect on the Company's ability to
fully address its Year 2000 issue. Such failures could materially affect
the Company's results of operations, liquidity and financial condition.
Due to the general uncertainty of the Year 2000 readiness of third
parties, the Company is unable to determine at this time whether all
consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity and financial condition.
The costs of the Company's Year 2000 project plan, the dates on which the
Company believes it will complete each phase of its Year 2000 project
plan and the process for contingency planning are best estimates, which
are derived from assumptions regarding future events, including the
continued availability of certain resources, third party remediation
plans and other factors. There can be no assurance that these estimates
and plans will prove to be accurate, and actual results could differ
materially from those currently anticipated.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the normal course of business, the financial position of the Company
is routinely subject to a variety of risks including market risk
associated with interest rate movements. The Company regularly assesses
these risks and has established policies and business practices to
protect against these and other exposures. As a result, the Company does
not anticipate material potential losses in these areas.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For
investment securities and debt obligations, the table presents principal
cash flows and related weighted-average interest rates by expected
maturity dates. Additionally, the Company has assumed its available for
sale securities, comprised of corporate notes and commercial paper, are
similar enough to aggregate those securities for presentation purposes.
The average interest rate was calculated using the weighted average fixed
rates under all contracts with Wells Fargo Bank, Transamerica Business
Credit Corporation, FINOVA Credit Corporation and Silicon Valley Bank.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
-------------------------------------------------------------------------------------
Average Interest Rate There- Fair Value
(IN THOUSANDS) 1999 2000 2001 2002 2003 After Total Mar. 31, 1999
- --------------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------------
Total Investments Securities............ $15,396 $31,207 -- -- -- -- $46,603 $46,606
Average Interest Rate................ 5.03% 5.35% -- -- -- -- 5.24%
Long-term Debt, including Current Portio $3,442 $2,883 $1,906 $580 $383 $16 $9,210 $9,210
Average Interest Rate................ 11.46% 11.04% 10.53% 10.57% 9.66% 9.66% 10.49%
Part II. OTHER INFORMATION
Item 1. Litigation
none
Item 6. Exhibits and Reports On Form 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in Foster City, California,
on May 14, 1999:
CELL GENESYS, INC.
By: /S/ Matthew J. Pfeffer
--------------------------------------
Matthew J. Pfeffer
Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: May 14, 1999
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule