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<p align="center"><font size="3"><strong>UNITED STATES</br>
SECURITIES AND EXCHANGE COMMISSION</br>
Washington, D.C. 20549</strong></font></p>
<HR align=center SIZE=2 width="25%">
<br>
<p align="center"><font size="5"><strong>FORM 10-Q</strong></center></font></p>
<HR align=center SIZE=2 width="25%">
<p> <i>(Mark One)</i>
<p align="center"><font size="3"><strong>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</strong></font></p>
<p align="center"><font size="4" color="FF0000"><strong>
For the Quarterly Period Ended September 30, 1999
</strong></font></p>
<p align="center"><font size="3"><strong> OR </strong></font></p>
<p align="center"><font size="3"><strong>
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
</strong></font></p>
<p align="center"><font size="3"><strong>
For the transition period from ________to _________
</strong></font></p>
<p align="center"><font size="3"><strong>
<u>Commission file number 0-19986</u>
</strong></font></p>
<p align="center"><font size="6" color="#0000FF"><strong>
<u>CELL GENESYS, INC.</u>
</strong></font></br>
<font size="2">
(Exact name of Registrant as specified in its Charter)
</font></p>
<P>
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<TD>
<font size="3"><strong>
<CENTER><u>Delaware</u></CENTER>
</font></strong>
</TD>
<TD>
<font size="3"><strong>
<CENTER><u> 94-3061375 </u></CENTER>
</font></strong>
</TD>
</TR>
<TR>
<TD>
<font size="2">
<CENTER> (State or Other Jurisdiction of Incorporation or Organization) </CENTER>
</font>
</TD>
<TD>
<font size="2">
<CENTER>(IRS Employer Identification Number)</CENTER>
</font>
</TD>
</TR>
<BR>
<p align="center"><font size="3"><strong>
<u>342 Lakeside Drive, Foster City, California 94404
</strong></font></u><br>
<font size="2">
(Address of Principal Executive Offices including Zip Code)
</font></p>
<p align="center"><font size="3"><strong><u>
(650) 425-4400
</strong></font></u><br>
<font size="2">
(Registrant's Telephone Number, Including Area Code)
<br>
<br>
<br>
(Former name, former address and former fiscal year if changed
since last report)
</font></p>
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<p>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ] </p>
As of October 29, 1999, the number of outstanding shares of the Registrant's
Common Stock was 32,398,501.
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<p align="center"><strong>
CELL GENESYS, INC.<br>
FORM 10-Q<br>
TABLE OF CONTENTS
</strong></p>
<p align="center"><strong>
PART I. FINANCIAL INFORMATION
</strong></p>
<p>Item 1. Consolidated Financial Statements:
<BLOCKQUOTE>
<OL TYPE=a>
<p><A HREF="#bs">
<LI>Condensed Consolidated Balance Sheets --
September 30, 1999 and December 31, 1998</A>
<p><A HREF="#ops">
<LI>Condensed Consolidated Statements of Operations -- Three
and Nine Months ended September 30, 1999 and 1998</A>
<p><A HREF="#flows">
<LI>Condensed Consolidated Statements of Cash Flows --
Nine Months ended September 30, 1999 and 1998</A>
<p><A HREF="#notes">
<LI>Notes to Condensed Consolidated Financial
Statements</A>
</OL TYPE=a>
</BLOCKQUOTE>
<p>Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
<BLOCKQUOTE>
<p><A HREF="#over">
Overview</A>
<p><A HREF="#results">
Results of Operations</A>
<p><A HREF="#liquid">
Liquidity and Capital Resources</A>
<p><A HREF="#risk">
Risk Factors</A>
<p><A HREF="#Y2K">
Year 2000 Compliance</A>
</BLOCKQUOTE>
<A HREF="#market">
<p>Item 3. Quantitative and Qualitative Disclosure about Market Risks</A>
<p align="center"><strong>
PART II. OTHER INFORMATION
</strong></p>
<p>Item 1: Legal Proceedings
<p>Item 2: Changes in Securities and Use of Proceeds
<p>Item 3: Defaults Upon Senior Securities
<p>Item 4: Submission of Matters to a Vote of Security Holders
<p>Item 5: Other Information
<p>Item 6: Exhibits and Reports on Form 8-K
<p align="left"><strong>
<A HREF="#sign">
SIGNATURES</A>
</strong></p>
<br>
<br>
<br>
<br>
<br>
<br>
<br>
<br>
<br>
<br>
<p align="center"><strong>
PART I -- FINANCIAL INFORMATION
</strong></p>
<p>ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<br>
<br>
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<A NAME="bs"></A>
<p align="center"><strong>
Cell Genesys, Inc.
<br>
<br>
Condensed Consolidated Balance Sheets
<br>
(In thousands)
</strong>
<pre>
September 30, December 31,
1999 1998
------------ -----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents......................... $14,334 $14,086
Short-term investments............................ 45,709 38,788
Prepaid expenses and other current assets......... 1,132 1,121
------------ -----------
Total current assets................................. 61,175 53,995
Property and equipment, net.......................... 4,576 6,079
Investment in Abgenix................................ 12,656 5,080
Deposits and other assets............................ 500 645
------------ -----------
$78,907 $65,799
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other accrued liabilities.... $3,650 $4,763
Deferred revenue.................................. 4,170 703
Accrued acquisition related costs................. 1,127 932
Current portion of property and equipment
financing....................................... 2,875 3,566
------------ -----------
Total current liabilities............................ 11,822 9,964
Noncurrent portion of property and equipment
financing......................................... 3,441 4,860
Redeemable convertible preferred stock............... 7,287 12,083
Stockholders' equity:
Common stock...................................... 32 31
Additional paid-in capital........................ 246,779 230,557
Accumulated other comprehensive income............ (396) 113
Accumulated deficit............................... (190,058) (191,809)
------------ -----------
Total stockholders' equity........................... 56,357 38,892
------------ -----------
$78,907 $65,799
============ ===========
</pre>
<p align="center"><strong> See accompanying notes.</strong></p>
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<A NAME="ops"></A>
<p align="center"><strong>
Cell Genesys, Inc.
<br>
<br>
Condensed Consolidated Statements of Operations
<br>
(In thousands, except per share data)
<br>
(Unaudited)
</strong>
<pre>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ----------
Revenue under collaborative agreements. $10,233 $4,186 $23,530 $11,684
--------- --------- --------- ----------
Operating expenses:
Research and development............. 5,918 8,032 17,732 31,378
General and administrative .......... 1,072 1,683 3,421 6,897
--------- --------- --------- ----------
Total operating expenses............... 6,990 9,715 21,153 38,275
Equity in loss of Abgenix.............. (278) (1,322) (2,260) (1,322)
Interest and other income............. 655 844 2,380 3,099
Interest expense....................... (177) (477) (746) (1,875)
--------- --------- --------- ----------
Income (loss) before minority interest
in Abgenix........................ 3,443 (6,484) 1,751 (26,689)
Minority interest in loss of Abgenix .. -- -- -- 4,192
Net income ( loss) attributed to ...... --------- --------- --------- ----------
common stock...................... $3,443 ($6,484) $1,751 ($22,497)
========= ========= ========= ==========
Net income ( loss) per common share
- basic .......................... $0.11 ($0.23) $0.06 ($0.79)
========= ========= ========= ==========
Weighted average common share
outstanding ........................ 32,086 28,437 31,435 28,328
========= ========= ========= ==========
Net income(loss) per common share
- diluted ........................ $0.10 ($0.23) $0.05 ($0.79)
========= ========= ========= ==========
Adjusted weighted average share
outstanding ........................ 34,157 28,437 34,013 28,328
========= ========= ========= ==========
</pre>
<p align="center"><strong> See accompanying notes.</strong></p>
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<A NAME="flows"></A>
<p align="center"><strong>
Cell Genesys, Inc.
<br>
<br>
Condensed Cosolidated Statements of Cash Flows
<br>
(In thousands)
<br>
(Unaudited)
</strong>
<pre>
Nine Months Ended
September 30,
----------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit (loss).................................... $1,751 ($22,497)
Adjustments to reconcile net profit (loss) to net
cash used by operating activities:
Depreciation and amortization...................... 2,328 3,829
Amortization of deferred compensation of Abgenix... -- --
Minority interest in net loss of Abgenix........... -- (4,192)
Equity in losses of Xenotech joint venture......... -- 118
Equity in losses of Abgenix........................ 2,260 1,322
Changes to:
Prepaid expenses and other assets.................. 9 (1,166)
Accounts payable and other accrued liabilities..... (237) (7,757)
Deferred revenue from related parties.............. 3,467 --
Accrued acquisition related costs.................. (682) (809)
---------- ----------
Net cash provided by (used in) operating
activities............................. 8,896 (31,152)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments.................. (43,647) (29,257)
Maturities of short-term investments................. -- 14,831
Sales of short-term investments...................... 36,218 50,295
Contributions to Xenotech joint venture ............. -- (8)
Capital expenditures................................. (65) (151)
Cash effect of applying equity method of accounting
to the investment in Abgenix...................... -- (642)
---------- ----------
Net cash provided by (used in) investing
activities............................. (7,494) 35,068
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from minority interest in Abgenix........... -- 3,944
Proceeds from issuance of common stock............... 1,591 1,100
Proceeds from property and equipment financing....... -- --
Payments of convertible note payable................. -- (15,000)
Payments under property and equipment
financing obligations.............................. (2,745) (3,222)
---------- ----------
Net cash used in financing activities.......... (1,154) (13,178)
---------- ----------
Net increase (decrease) in cash and cash equivalents.... 248 (9,262)
Cash and cash equivalents at beginning of period........ 14,086 10,631
---------- ----------
Cash and cash equivalents at end of period.............. $14,334 $1,369
========== ==========
NON-CASH INVESTING IN FINANCING ACTIVITIES
Furniture and equipment acquired under financing..... $531 $950
Capital contribution resulting in an increase of
carrying value of Abgenix......................... $9,836 --
</pre>
<p align="center"><strong> See accompanying notes.</strong></p>
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<A NAME="notes"></A>
<p align="center"><strong>
Cell Genesys, Inc.
</strong><br>
<strong>
Notes To Condensed Consolidated Financial Statements
</strong>
<p><strong>1. Organization and Summary of Significant Accounting Policies</strong></p>
<p><strong>Organization and basis of presentation</strong></p>
<p>Cell Genesys, Inc. ("Cell Genesys" or the "Company"), 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).
<p><strong>Comprehensive income (loss)</strong></p>
<p>Cell Genesys recognized total comprehensive income of $3.4 million and
$1.2 million for the three and nine months ended September 30, 1999.
Total comprehensive losses for the same period in 1998 were $6.3 million
and $22.3 million.
<p><strong>2. Investment in Abgenix and Minority Interest</strong></p>
<p>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%.
<p>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 Abgenix March 1999 public offering.
public offering.
<p>The carrying amount of the Company's investment in Abgenix at September
30, 1999 was $12.7 million. Summarized information for Abgenix is as
follows (in thousands):
<pre>
Three Months Nine Months
Ended Ended
September 30, 1999 September 30, 1999
---------------- ----------------
Revenue.................... $3,670 $5,390
Operating loss............. (1,939) (11,851)
Net loss................... (1,279) (10,244)
</pre>
<p><strong>3. Subsequent Event</strong></p>
<p>On October 22, 1999, Cell Genesys filed a Form 8-K with the Securities
and Exchange Commission stating that the Company and Genzyme Corporation
have entered into a definitive agreement under which Genzyme Corporation
will acquire Cell Genesys for approximately $350 million in a tax-free
stock-for-stock exchange. The transaction is expected to close in the
first quarter of 2000, pending regulatory and Cell Genesys stockholder
approval. For further information, refer to the Form 8-K described in
Part II, Item 6 below.
<p><strong>4. Collaboration with Hoechst Marion Roussel</strong></p>
<p>On September 15, 1999, the Company reacquired product rights to its AIDS
gene therapy program following the termination of a collaboration
agreement with Hoechst Marion Roussel, Inc. Since October 1995 the
agreement has provided funding of approximately $43.6 million for the
Company's AIDS gene therapy program including the Phase II human clinical
trials conducted to date. In addition, the Company received a payment of
$8 million from Hoechst Marion Roussel as final wind-down payment
following the termination of the collaborative agreement.
<br>
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<HR WIDTH="85%">
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<br>
<p align="center"><strong>
CELL GENESYS, INC.
</strong><br>
<p><strong>Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</strong></p>
<p><i> Statements made in this Item other than statements of historical
fact, including statements about the Company's clinical trials, research
programs, product pipelines, current and potential corporate
partnerships, licenses and intellectual property, the adequacy of capital
reserves and anticipated operating results and cash expenditures are
forward-looking statements within the meaning of section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. As such, they are subject to a number of uncertainties that could
cause actual results to differ materially from the statements made,
including risks associated with the success of research and product
development programs, the issuance and validity of patents, the
development and protection of proprietary technology, the ability to
raise capital, operating expense levels and the ability to establish and
retain corporate partnerships. Reference is made to discussions about
risks associated with product development programs, intellectual property
and other risks which may affect the Company under "Risk Factors"
below. The Company does not undertake any obligation to update forward-
looking statements. The following should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31,
1998, the Company's Quarterly Reports on Form 10-Q, the Company's current
report on Form 8-K filed on October 22, 1999 and the Company's
Registration Statement on Form S-3. </i>
<A NAME="over"></A>
<p><strong>Overview</strong></p>
<p>Since its inception in April 1988, 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, cardiovascular disease and AIDS. Cell Genesys' clinical programs
include GVAX® 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. GVAX® vaccines for prostate cancer and for lung cancer
are being developed through a worldwide collaboration with the
pharmaceutical division of Japan Tobacco Inc. ("JT"). In addition,
Cell Genesys has preclinical programs which are evaluating potential gene
therapies for 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, Inc. (NASDAQ:ABGX), which is
focused on the development and commercialization of antibody therapies,
and a licensing program in gene activation technology.
commercialization of antibody therapies, and a licensing program in gene
activation technology.
<p>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.
<p>During 1999, the Company has reported encouraging data from its Phase
I/II human trials evaluating the GVAX® vaccine for prostate cancer. Data
from the recently completed Phase I/II trial of GVAX® prostate cancer
vaccine demonstrate evidence of clinical safety and preliminary evidence
of antitumor effects as measured by levels of prostate specific antigen
(PSA). Based on positive results from this trial, the Company has
recently initiated two multi-center trials of GVAX® vaccine in prostate
cancer. Both trials will enroll approximately 40 patients. Phase I/II
clinical trials for GVAX® vaccine in lung cancer are continuing, and the
patients are now being evaluated. The Company is planning to initiate an
expanded multi-center trial for GVAX® lung cancer treatment later in
1999. As for the AIDS gene therapy, the Company reported encouraging
results from a recently completed randomized, controlled Phase II trial
of T cell gene therapy for AIDS. The trial included 40 patients with HIV
infection who had no detectable HIV in their bloodstream while receiving
optimal antiretroviral drug therapy. Twenty patients received infusions
of their own T cells which were genetically modified with an HIV-specific
receptor to recognize and destroy HIV-infected cells, and a control group
of 20 patients received infusions of their own unmodified T cells. The T
cell therapy was administered in combination with stable antiretroviral
drug therapy, and patients were monitored for potential reductions in
HIV-infected cells in the blood and tissues and for HIV relapse in the
blood for six months following treatment.
<p>On September 15, 1999, the Company reacquired product rights to its AIDS
gene therapy program following the termination of a collaboration
agreement with Hoechst Marion Roussel, Inc. Since October 1995 the
agreement has provided funding of approximately $43.6 million for the
Company's AIDS gene therapy program including the Phase II human clinical
trials conducted to date. In addition, the Company received a payment of
$8 million from Hoechst Marion Roussel as final wind-down payment
following the termination of the collaborative agreement.
<p>A separate agreement between Cell Genesys and Hoechst Marion Roussel for
the Company's gene activation technology for specific therapeutic
proteins is continuing. In 1997, the Company signed a license agreement
with Hoechst Marion Roussel providing access to the Company's gene
activation intellectual property for erythropoietin (EPO) and a second
undisclosed protein. In exchange, the Company may receive up to $26
million in milestone payments and fees in addition to royalties on
potential future sales of these two gene-activated products. To date,
the Company has received over $13 million from this license agreement.
<p>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 inhibition of smooth muscle
proliferation in rabbit models of restenosis. During 1999 the Company
expanded its collaboration with Mitotix, Inc. for p16/p27 genes to include
applications in cancer gene therapy in addition to cardiovascular gene
therapy. In addition, during 1999 the Company has entered into research
agreements with Entremed and Rigel Pharmaceuticals, Inc. Under these
agreements the Company's proprietary gene delivery systems will be
evaluated in preclinical studies in the cancer area. The Company has also
recently initiated a research agreement with Pharmacia & Upjohn in the
field of animal health.
<p>Cell Genesys ended the third quarter of 1999 with approximately $60
million in cash and short-term investments. The Company has maintained
its financial position by relying on funding from various corporate
collaborations and licensing agreements, as well as through expense
management. The Company plans to continue to finance its operations,
when possible, through corporate collaborations with established
pharmaceutical and biotechnology companies. This funding strategy should
allow the Company to develop its technologies as broadly as possible, to
fund product development and to accelerate the commercialization of
certain product opportunities. Such alliances are intended to provide
financial resources for research, development, manufacturing
capabilities, and marketing infrastructure, which will aid in the
commercialization of potential disease therapies.
<A NAME="results"></A>
<p><strong>Results of Operations</strong></p>
<p>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 statements in
the first half of 1998. 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.
<pre>
Gene Therapy Operations
Three Months Nine Months
ended September 30 ended September 30,
------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ----------
Revenue............................... $10,233 $4,186 $23,530 $10,068
Research and development expenses..... 5,918 8,032 17,732 22,651
General and administration expenses... 1,072 1,683 3,421 4,730
Interest and other income............. 655 844 2,380 2,767
Interest expense...................... (177) (477) (746) (1,565)
Net income (loss)..................... $3,721 ($5,162) $4,011 ($16,111)
</pre>
<p>Revenue increased to $10.2 million and $23.5 million for the three and
nine months ended September 30, 1999 from $4.2 million and $10.1 million
for the same periods in 1998. In 1995, the Company entered into a
collaboration agreement with Hoechst Marion Roussel, Inc. for Cell
Genesys' AIDS gene therapy program. The increase in revenue resulted from
the wind-down payment of approximately $8.0 million from Hoechst Marion
Roussel following the termination of the collaborative agreement on AIDS
studies. Also, the increase reflects research and development revenues
from 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. Cell Genesys recognized
research and development revenues of $2.1 million and $6.6 million for
the three and nine months ended September 30, 1999. In addition, a $4.5
million milestone was earned following the completion of Phase I/II
clinical trial of GVAX® prostate cancer vaccine.
<p>Research and development expenses were $5.9 million and $17.7 million for
the three and nine months ended September 30, 1999 compared with $8.0
million and $22.7 million for the three and nine months ended September
30, 1998. The decrease in research and development costs is primarily a
result of a corporate restructuring plan implemented in the fourth
quarter of 1998. The restructuring and cost reductions were implemented
to allow the Company to increasingly focus its resources on its cancer
and cardiovascular gene therapy programs. The Company expects that
research and development expenses will increase to support additional
product development activities, particularly relating to the execution of
multi-center clinical trials. The rate of increase depends on a number
of factors including progress in research and development and especially
in clinical trials.
<p>General and administrative expenses were $1.1 million and $3.4 million
for the three and nine months ended September 30, 1999 compared with $1.7
million and $4.7 million for the three and nine months ended September
30, 1998. The decrease also reflects the corporate restructuring plan
implemented in late 1998. The Company continues its efforts to control
administrative expenditures through an aggressive program of expense
management.
<p>Interest income decreased to $655,000 and $2.4 million at $844,000 and
$841,000 for the three and nine months ended September 30, 1999 from
$844,000 and $2.8 million for the three and nine months ended September
30, 1998. The decrease reflects lower average cash balances during 1999,
and lower interest rates compared to 1998. Interest expense decreased to
$177,000 and $746,000 for the three and nine months ended September 30,
1999 from $477,000 and $1.6 million for the three and nine months ended
September 30, 1998. Interest expense was higher in the 1998 periods due
to interest owed on a note payable to GenPharm International, Inc. which
was fully repaid in September 1998.
1998.
<p>Gene Therapy Operations had net income of $3.7 million and $4.0 million
for the three and nine months ended September 30, 1999, compared to net
losses of $5.2 million and $16.1 million in the same periods of 1998.
The increase was due to the wind-down payment of approximately $8.0
million from Hoechst Marion Roussel following the termination of the
collaborative agreement on AIDS studies and increases in in revenues
under the GVAX® collaboration agreement with Japan Tobacco. Also, total
expense (excluding interest) reductions for the nine months amounted to
$6.2 million compared to the same period in 1998 resulting from the
corporate restructuring plan implemented in September 1998. Net losses,
excluding non-recurring chargesfrom operations are likely to be incurred
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.
<A NAME="EPS"></A>
<p><strong>Net Income (Loss) Per Share</strong></p>
<p>Basic net income per share is computed using the weighted average number
of outstanding shares of common stock and diluted net income per share is
computed using the weighted average number of outstanding shares of
common stock and common stock equivalents. Basic and diluted net loss
per shares are computed using the weighted average number of outstanding
shares of common stock.
<A NAME="liquid"></A>
<p><strong>Liquidity and Capital Resources</strong></p>
<p>Cell Genesys has financed its operations to date primarily through the
sale of equity securities, funding from collaborative arrangements and
equipment financing. From inception through October 31, 1999, the
Company received $172.8 million in net proceeds from equity financings,
$138.7 million under collaborative agreements and utilized $27.9 million
of property and equipment financings.
<p>At September 30, 1999, Cell Genesys' cash, cash equivalents and short-
term investments totaled $60.0 million, compared to $52.9 million at
December 31, 1998. The increase was due to approximately $8.0 million
wind-down payment from Hoechst Marion Roussel following the termination
of the collaborative agreement on AIDS study.
<p>At September 30, 1999, the Company held approximately $3.3 million shares
of Abgenix common stock, which had a market value of approximately $130
million. These securities have restrictions which limit their liquidity,
but the Company may from time to time consider the sale of these
securities to invest in the Company's programs.
<p>Cell Genesys anticipates that consolidated net cash usage will not exceed
3 million for the remainder of 1999. The Company expects its cash
requirements to increase significantly in the future. The Company's
capital requirements will 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; the potential cost
associated with the redemption of outstanding shares of Series B
preferred stock; and the cost of litigation, patent interference
proceedings or other legal proceedings or their resolution.
<p>Cell Genesys believes that its available cash, cash equivalents and
short-term investments at September 30, 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.
existing stockholders.
<A NAME="risk"></A>
<p><strong>Risk Factors</strong></p>
<p><strong>We will likely have a need for substantial additional funds.</strong></p>
<p>We will likely have a 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.
<p>Our future capital requirements will depend on, and could increase as a
result of, many factors such as:
<BLOCKQUOTE>
<UL>
<p><LI> continued scientific progress of research and development
programs<br>
<LI> magnitude of such programs expenses<br>
<LI> progress of preclinical and clinical testing<br>
<LI> time and costs involved in obtaining regulatory approvals<br>
<LI> costs involved in preparing, filing, prosecuting, maintaining,
enforcing and defending patent claims<br>
<LI> competing technological and market developments<br>
<LI> changes in collaborative relationships with Japan
Tobacco and others<br>
<LI> terms of any additional collaborative arrangements into which
we may enter<br>
<LI> our ability to establish research, development and
commercialization arrangements pertaining to products other
than those covered by existing collaborative arrangements<br>
<LI> cost of establishing manufacturing facilities<br>
<LI> cost of commercialization activities<br>
<LI> demand for our products, if and when approved<br>
<LI> potential redemption obligations in connection with conversion
of the Series B convertible preferred stock<br>
</UL>
</BLOCKQUOTE>
<p>We expect to raise additional funds through collaborative relationships,
sales of some portion or all of our investment in Abgenix, additional
equity or debt financings, or otherwise. Because of our long-term capital
requirements, we may seek to access the public or private equity markets
whenever conditions are favorable, even if we do not have an immediate
need for additional capital at that time. There can be no assurance that
any such additional funding will be available to us, or, if available,
that it will be on acceptable terms. If we raise additional funds by
issuing equity securities, stockholders will incur immediate dilution.
There can be no assurance that opportunities for in-licensing
technologies or for third party collaborations will continue to be
available to us on acceptable terms. If adequate funds are not
available, we may be required to delay, reduce the scope of, or eliminate
one or more of our research, development and clinical activities.
Alternatively, we may need to seek funds through arrangements with
collaborative partners or others that require us to relinquish rights to
certain of our technologies or product candidates that we would otherwise
seek to develop or commercialize ourselves. Either of these events could
have a material adverse effect on our business, results of operations,
financial condition or cash flow.
<p><strong>Our products are in developmental stage, are not approved for commercial
sale and might not receive regulatory approval or become commercially
viable.</strong></p>
<p>All of our potential gene therapy products are in research and
development. We have not generated any revenues from the sale of
products. We do not expect to generate any revenues from product sales
for at least the next several years. Our products currently under
development will require significant additional research and development
efforts, including extensive preclinical and clinical testing and
regulatory approval, prior to commercial use. There can be no assurance
that our research and development efforts will be successful or that any
of our future products will ultimately be commercially successful. Even
if developed, our products may not receive regulatory approval or be
successfully introduced and marketed at prices that would permit us to
operate profitably.
<p><strong>We have not been profitable and may not become profitable in the future.</strong></p>
<p>We have incurred annual net losses since our inception. At September 30,
1999, our accumulated deficit was approximately $190.1 million. For the
nine months ended September 30, 1999, we incurred profit of $1.8 million.
However, these profits were anomalous and we expect to resume incurring
operating losses in the future. Under the equity method of accounting,
we recorded losses in equity of Abgenix of $2.3 million for the nine
months ended September 30, 1999, and we expect to continue to recognize
losses from Abgenix in the future. We expect to incur substantial
operating losses for at least the next several years due primarily to the
expansion of research and development programs, including preclinical
studies, clinical trials, manufacturing and to a lesser extent, from
general and administrative expenses. We expect that losses will fluctuate
from quarter to quarter and that these fluctuations may be substantial.
We cannot guarantee that we will successfully develop, commercialize,
manufacture or market any products. We cannot guarantee that we will
ever achieve or sustain product revenues or profitability.
<p><strong>Our gene therapy programs depend on new and unproven technologies.</strong></p>
<p>Gene therapy is a new technology. Existing preclinical and clinical data
on the safety and efficacy of gene therapy are limited. Data relating to
our specific gene therapy approaches are also limited. Our GVAX® cancer
vaccine and T cell gene therapy for AIDS 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.
Unacceptable side effects may be discovered during preclinical and
clinical testing of our potential products or thereafter. There are many
reasons that potential products that appear promising at an early stage
of research or development do not result in commercialization. Although
we are testing proposed products or therapies in human clinical trials,
we cannot guarantee that we will be permitted to undertake human clinical
trials for any of our other products. Also, the results of this testing
might not demonstrate the safety or efficacy of these products. Even if
clinical trials are successful, we might not obtain regulatory approval
for any indication. Finally, even if our products proceed successfully
through clinical trials and receive regulatory approval, there is no
guarantee that an approved product can be produced in commercial
quantities at reasonable cost or that such a product will be successfully
marketed.
<p><strong>We rely heavily on the development and protection of our intellectual property portfolio.</strong></p>
<p>The patent positions of pharmaceutical and biotechnology firms, including
Cell Genesys, are generally uncertain and involve complex legal and
factual questions. Cell Genesys currently has more than 200 (have not
disclosed "215") issued or granted patents and more than 330 pending
applications.
Although we are prosecuting patent applications, we cannot be certain
whether any given application will result in the issuance of a patent or,
if any patent is issued, whether it will provide significant proprietary
protection or will be invalidated. Also, patent applications in the United
States are confidential until patents are issued. Publication of discoveries
in scientific or patent literature tends to lag behind actual discoveries
by several months. Accordingly, we cannot be sure that we were the first
creator of inventions covered by pending patent applications or that we
were the first to file patent applications for these inventions.
<p>Our commercial success will also depend in part on not infringing the
patents or proprietary rights of others and not breaching licenses
granted to us. We will be required to obtain licenses to certain third
party technology and genes necessary to conduct our business. Any failure
to license any technology or genes required to commercialize our
technologies or products at reasonable cost may have a material adverse
effect on our business, results of operations or financial condition.
<p>We may also have to engage in litigation, which could result in
substantial cost to us, to enforce our patents, or to determine the scope
and validity of other parties' proprietary rights. To determine the
priority of inventions, the United States Patent and Trademark Office
frequently declares interference proceedings. In Europe, other patents
can be revoked through opposition proceedings. Such proceedings could
result in an adverse decision as to the priority of our inventions.
<p>We are currently involved in three separate interference and/or
opposition proceedings with regard to:
<BLOCKQUOTE>
<p>a) gene activation technology<br>
b) ex vivo gene therapy<br>
c) chimeric receptor technology
</BLOCKQUOTE>
<p>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.
<p>We also rely on unpatented trade secrets, know-how and continuing
technological innovation to develop and maintain our competitive
position. Our competitors may independently develop similar or better
proprietary information and techniques and disclose them publicly. Also,
there can be no assurance that others will not gain access to our trade
secrets, or that we can meaningfully protect our rights to our unpatented
trade secrets.
<p>We require our employees and consultants to execute a confidentiality
agreement upon the commencement of an employment or consulting
relationship with us. These agreements provide that all confidential
information developed by or made known to an individual during the course
of the employment or consulting relationship generally must be kept
confidential. In the case of employees, the agreements provide that all
inventions conceived by the employee while employed by us, relating to
our business are our exclusive property. These agreements may not provide
meaningful protection for our trade secrets in the event of unauthorized
use or disclosure of such information.
<p><strong>The field of gene therapy is highly competitive.</strong></p>
<p>Competition in the field of gene therapy from other biotechnology and
pharmaceutical companies and from research and academic institutions is
intense and expected to increase. In many instances, we compete with
other commercial entities in acquiring products or technology from
universities. There are numerous competitors working on products to
treat each of the diseases for which we are seeking to develop
therapeutic products. Some competitors are pursuing a product development
strategy competitive with ours, particularly with respect to our cancer
vaccine program. Certain of these competitive products are in
substantially more advanced stages of product development and clinical
trials. Our competitors may develop technologies and products that are
more effective than ours, or that would render our technology and
products less competitive or obsolete.
<p>Many of our competitors have substantially greater financial resources
and larger research and development staffs than we do. Some of these
competitors have significantly greater experience than we do in
developing products, in undertaking preclinical testing and human
clinical trials of new pharmaceutical products, in obtaining United
States Food and Drug Administration and other regulatory approvals of
products, and in manufacturing and marketing such products. Accordingly,
our competitors may obtain patent protection or FDA approval and
commercialize products more rapidly than we do. There can be no assurance
that we will be able to obtain certain biological materials necessary to
support our research, development or manufacturing of any of our planned
therapies. If we are permitted to commence commercial sales of products,
we will also be competing with respect to marketing capabilities and
manufacturing efficiency, areas in which we have limited or no
experience. We expect to build additional clinical scale and commercial
scale manufacturing facilities and/or use contract facilities to
commercialize our products. We also expect to secure funding for these
and other product development activities through our partners and future
potential partners.
<p>We expect that competition among products approved for sale will be
based, among other things, on:
<BLOCKQUOTE>
<UL>
<p><LI> product efficacy
<p><LI> price
<p><LI> safety
<p><LI> reliability
<p><LI> availability
<p><LI> patent protection
<p><LI> sales, marketing and distribution capabilities
</UL>
</BLOCKQUOTE>
<p>Our competitive positions also depend upon our ability to attract and
retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient funding
for the often lengthy period between product conception and commercial
sales.
<p><strong>Our stock price has fluctuated in the past and is likely to continue to be volatile in the future.</strong></p>
<p>The stock prices of biopharmaceutical and biotechnology companies
(including Cell Genesys) have historically been highly volatile. The
market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of
particular companies. The following factors may affect our stock price:
<BLOCKQUOTE>
<UL>
<p><LI> changes in our financial results
<p><LI> announcements of technological innovations or new therapeutic
products by us or our competitors
<p><LI> announcements of changes in governmental regulation affecting
us or our competitors
<p><LI> announcements of regulatory approvals or disapprovals of our or
our competitors' products
<p><LI> developments in patent or other proprietary rights affecting us
or our competitors
<p><LI> public concern as to the safety of products developed by us or
other biotechnology and pharmaceutical companies
<p><LI> general market conditions
<p><LI> severe fluctuations in price and volume in the stock market in
general which are unrelated to our operating performance
<p><LI> issuance of common stock upon conversion of the Series B
preferred stock or exercise of outstanding warrants
<p><LI> future sales of such common stock or other shares of common
stock by existing stockholders
<p><LI> the perception that such issuances or sales could occur
</UL>
</BLOCKQUOTE>
<p><strong>Our business is subject to extensive regulation and any failure to
obtain required regulatory approvals could prevent or delay the
commercialization of our products.</strong></p>
<p>Regulation by governmental authorities in the United States and foreign
countries is important in the manufacture and marketing of our proposed
products and our research and development activities. All of our products
will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic products must undergo
rigorous preclinical and clinical testing and other premarket approval
procedures by the FDA and similar authorities in foreign countries. Since
our potential products involve the application of new technologies,
regulatory approvals may take longer than for products produced using
more conventional methods. Various federal and, in some cases, state laws
also govern or influence the manufacturing, safety, labeling, storage,
record keeping and marketing of these products. The lengthy process of
seeking these approvals, and the subsequent compliance with applicable
federal laws, requires significant expenditures. Any delay or failure by
us or our collaborators or licensees to obtain regulatory approvals could
hinder the marketing of our products and our ability to receive product
or royalty revenue.
<p>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.
<p>In addition to laws and regulations enforced by the FDA, we are also
subject to regulation under:
<BLOCKQUOTE>
<UL>
<p><LI> Occupational Safety and Health Act
<p><LI> Environmental Protection Act
<p><LI> Toxic Substances Control Act
<p><LI> Resource Conservation and Recovery Act
<p><LI> Other present and potential future federal, state or local
laws and regulations
</UL>
</BLOCKQUOTE>
<p>Our manufacturing facilities are subject to licensing requirements of the
California Department of Health Services. While not subject to license by
the FDA, these facilities are subject to inspection by the FDA as well as
by the California Department of Health Services. A separate license from
the FDA is required for commercial manufacture of any product. Failure to
maintain these licenses or to meet the inspection criteria of the FDA and
the California Department of Health Services would disrupt our
manufacturing processes and have a material adverse effect on our
business, results of operations, financial condition and cash flow.
<p>For marketing outside the United States, we are subject to foreign
regulatory requirements governing human clinical trials and marketing
approval for drugs and devices. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary
greatly from country to country. Failure to comply with these regulatory
requirements or obtain required approvals could impair our ability to
develop these markets and have a material adverse effect on our results
of operations and financial condition.
<p><strong>Our product development activities involve the use of hazardous
materials and we may incur significant costs as a result of the need to
comply with environmental laws. </strong></p>
<p>Our research and development activities involve the controlled use of
hazardous materials, chemicals, viruses and radioactive compounds. We
are subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of these materials
and waste products. Although we believe that our safety procedures for
handling and disposing of these materials comply with the standards
prescribed by applicable laws and regulations, we cannot completely
eliminate the risk of accidental contamination or injury from these
materials. In the event of an accident, we could be held liable for any
damages that result, and any resulting liability could exceed our
resources. We may also be required to incur significant costs to comply
with environmental laws and regulations in the future.
<p><strong>We expect to depend on our strategic partners for the sales, marketing
and distribution of our future products.</strong></p>
<p>We have no experience in sales, marketing or distribution of
biopharmaceutical products. We expect to rely on sales and marketing
expertise of potential corporate partners for our initial products. The
decision to market future products directly or through corporate partners
will be based on a number of factors, including:
<BLOCKQUOTE>
<UL>
<p><LI> market size and concentration
<p><LI> size and expertise of the partner's sales force in a
particular market
<p><LI> our overall strategic objectives
</UL>
</BLOCKQUOTE>
<p><strong>We may in the future be exposed to product liability claims and may be
unable to obtain sufficient insurance coverage.</strong></p>
<p>Clinical trials or marketing of any of our potential products may expose
us to liability claims resulting from the use of our products. These
claims might be made by consumers, health care providers or by others
selling our products. We currently maintain product liability insurance
with respect to each of our clinical trials. There can be no assurance
that we will be able to maintain insurance or that sufficient coverage
can be acquired at a reasonable cost. An inability to maintain insurance
at acceptable cost, or at all, could prevent or inhibit the clinical
testing or commercialization of our products or otherwise affect our
financial condition. A product liability claim or recall could have a
material adverse effect on our business, results of operations, financial
condition and cash flow.
<p><strong>Sales of our future products will be influenced by the willingness of
third-party payers to provide reimbursement.</strong></p>
<p>In both domestic and foreign markets, sales of our potential products
will depend in part upon coverage and reimbursement from third-party
payers, including:
<BLOCKQUOTE>
<UL>
<p><LI> government agencies
<p><LI> private health care insurers and other health care payers such
as health maintenance organizations
<p><LI> self-insured employee plans
<p><LI> Blue Cross/Blue Shield and similar plans
</UL>
</BLOCKQUOTE>
<p>There is considerable pressure to reduce the cost of biotechnology and
pharmaceutical products. In particular, reimbursement from government
agencies, insurers and large health organizations may become more
restricted in the future. Our potential products represent a new mode of
therapy and, while the cost-benefit ratio of the products may be
favorable, we expect that the costs associated with our products will be
substantial. There can be no assurance that our proposed products, if
successfully developed, will be considered cost-effective by third-party
payers. Insurance coverage might not be provided by third-party payers
at all or without substantial delay. Even if such coverage is provided,
the approved reimbursement might not provide sufficient funds to enable
us to become profitable.
<p><strong>The pricing of our future products may be influenced in part by
government controls.</strong></p>
<p>The continuing efforts of governmental and third-party payers to contain
or reduce the costs of healthcare may impair future revenues and
profitability of biotechnology companies. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is
subject to government control. In the United States, there have been, and
we expect that there will continue to be, a number of federal and state
proposals to implement similar government control. While we cannot
predict whether the government will adopt any such legislative or
regulatory proposals, the announcement or adoption of these proposals
could have a material adverse effect on our business, results of
operations, financial condition and cash flow.
<p><strong>We depend on our key technical and management personnel and
collaborative partners to advance our technology, and the loss of these
personnel or partners could impair the development of our products.</strong></p>
<p>We rely and will continue to rely on our key management and scientific
staff. The loss of key personnel or the failure to recruit necessary
additional qualified personnel could have a material adverse effect on
our business and results of operations. There is intense competition
from other companies, research and academic institutions and other
organizations for qualified personnel. There is no assurance that we will
be able to continue to attract and retain the qualified personnel
necessary for the development of our business. We will need to continue
to recruit experts in the areas of clinical testing, manufacturing,
marketing and distribution and develop additional expertise in our
existing personnel. If we do not succeed in recruiting such personnel or
developing such expertise, our business could suffer significantly.
<p>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 for AIDS:
<BLOCKQUOTE>
<UL>
<p><LI> University of California, San Francisco
<p><LI> Dana Farber Partners Cancer Care
<p><LI> The Johns Hopkins Medical Institutions
<p><LI> US Oncology, Inc.
<p><LI> University of Tokyo, IMSUT
<p><LI> Providence Portland Medical Center
<p><LI> Affiliated Research Centers
</UL>
</BLOCKQUOTE>
<p>The early termination of any of these clinical trial agreements would
hinder the progress of our clinical trials including trials of GVAX®
cancer vaccine for prostate cancer and lung cancer. If any of these
relationships are terminated, the clinical trials might not be completed
and the results might not be evaluated.
<p>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.
<p><strong>Cell Genesys stockholders may be diluted by the exercise of outstanding
stock options or warrants, the conversion of outstanding Series B
preferred stock, or other issuances of our common stock.</strong></p>
<p>Substantially all the outstanding shares of Cell Genesys common stock are
eligible for sale in the public market. Conversion of the Series B
preferred stock or exercise of outstanding warrants would result in
issuance of additional shares of common stock, diluting existing
investors. The number of shares of common stock issued, and therefore
the dilution of existing investors, would increase as a result of either
(i) an event triggering the antidilution rights of any outstanding shares
of Series B preferred stock, or (ii) a decline in the market price of the
Company's common stock immediately prior to conversion of the Series B
preferred stock.
<p>The holders of the Series B preferred stock may choose at any time to
convert their shares into common stock. In that event, the number of
shares of common stock issued would be based on the lower of:
<p>a) a fixed conversion price of $11.02 per share or,
<br>b) the average of certain trading prices during the 10 trading
days preceding such date of conversion (the "Floating
Conversion Price").
<p>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.
<p>During the past year, the majority of the outstanding Series B preferred
shares were converted into common shares. Of the total original issue of
$20 million face value of Series B preferred shares, approximately $7.3
million remain outstanding as of October 29, 1999.
<p><strong>We may be subject to a redemption obligation in connection with requests
by the holders of Series B preferred stock to convert their shares into
common stock.</strong></p>
<p>If the holders of the Series B preferred stock decide to convert their
shares into common stock, we would not be required to issue more than
5,624,000 shares of common stock (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 the unconverted
shares of Series B preferred stock, and the amount of these redemption
obligations could become material if the common stock price declined
below approximately $3.50 per share. Since the common stock traded at
prices below $3.50 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.
<A NAME="Y2K"></A>
<p><strong>Impact of the Year 2000.</strong></p>
<p>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.
<p>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.
<p>The following summarizes the progress the Company has made to date on
each phase of its Year 2000 project plan:
<pre>
Phase Timeframe for Completion Percent Complete
- --------------------------------------------------------------------
Initial identification
and assessment......... Q2-1999 100%
Remediation.............. Q4-1999 95%
Testing.................. Q4-1999 70%
Contingency planning..... Q4-1999 80%
</pre>
<p>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 parties interests
to determine whether their systems are Year 2000 compliant. We cannot
guarantee that all of our key suppliers, partners and others will
achieve Year 2000 compliance in a timely manner. The failure of our
vendors and partners to successfully address the Year 2000 issue could
have a material adverse effect on our ability to fully address the Year
2000 issue. These failures could materially affect our results of
operations, liquidity and financial condition. Due to the general
uncertainty of the Year 2000 readiness of third parties, we are unable
to determine at this time whether all consequences of Year 2000 failures
will have a material impact on our results of operations, liquidity and
financial condition.
<p>The costs of our Year 2000 project plan, the dates on which we believe
we will complete each phase of our 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.
<A NAME="market"></A>
<p><strong>Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK</strong></p>
<p>In the normal course of business, the financial position of the Company
is subject to a variety of risks, including market risk associated with
interest rate movements. The Company regularly assesses these risks and
has established policies and business practices to protect against these
and other exposures. As a result, the Company does not anticipate
material potential losses in these areas.
<p>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.
<pre>
<font size="1">
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate Fair Value
There- September 30,
(IN THOUSANDS) 1999 2000 2001 2002 2003 After Total 1999
- ------------------------------------------- --------- -------- ------- -------- ------- --------- ------------
Total Investments Securities...... $8,489 $46,101 -- -- -- -- $54,590 $54,198
Average Interest Rate.......... 4.29% 5.90% -- -- -- -- 5.80%
Long-term Debt, including
Current Portion................. $937 $3,059 $1,905 $666 $576 $30 $7,173 $7,173
Average Interest Rate.......... 11.31% 11.13% 10.58% 10.61% 9.85% 9.85% 10.56%
</font size="1">
</pre>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<p align="center"><strong>
PART II - Other Information
</strong></p>
Part II. OTHER INFORMATION
<p><strong>Item 1. Litigation</strong></p>
<p> none
<p><strong>Item 2. Changes in Securities and Use of Proceeds</strong></p>
<p> none
<p><strong>Item 3. Defaults Upon Senior Securities</strong></p>
<p> none
<p><strong>Item 4. Submission of Matters to a Vote of Security Holders</strong></p>
<p> none
<p><strong>Item 5: Other Information</strong></p>
<p> none
<p><strong>Item 6. Exhibits and Reports On Form 8-K</strong></p>
<BLOCKQUOTE>
<p> a) Exhibits
<BLOCKQUOTE>
<p> 27.1 Financial Data Schedule
</BLOCKQUOTE>
<p> b) Reports on Form 8-K
<BLOCKQUOTE>
<p> Current Report on Form 8-K filed on October 22, 1999
</BLOCKQUOTE>
</BLOCKQUOTE>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<A NAME="sign"></A>
<p align="center"><strong>
CELL GENESYS, INC.
<br>
<br>
SIGNATURES
</strong></p>
<p>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 November ??, 1999:
<P>
<TABLE border=0 cellPadding=0 cellSpacing=0 width="100%">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD align=left>
CELL GENESYS, INC.
</TD></TR>
<TABLE border=0 cellPadding=0 cellSpacing=0 width="100%">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD align=left>
<I>(Registrant)</I>
</TD></TR>
<P>
<TABLE border=0 cellPadding=0 cellSpacing=0 width="100%">
<TR>
<TD width="38%"></TD>
<TD width="2%"></TD>
<TD width="60%"></TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD>By: </TD>
<TD align=left>
/s/ Matthew J. Pfeffer
</TD></TR>
<TABLE border=0 cellPadding=0 cellSpacing=0 width="100%">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD align=left>
<HR align=left SIZE=1>
</TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD align=left>
Matthew J. Pfeffer
</TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD align=left><I>
Chief Financial Officer
</I></TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD align=left><I>
(Principal Accounting and Financial Officer)
</I></TD></TR></P>
<br>
<P>
<TABLE border=0 cellPadding=0 cellSpacing=0 width="100%">
<TR>
<TD width="38%"></TD>
<TD width="62%"></TD></TR>
<TR vAlign=top>
<TD> </TD>
<TD align=left>
Date: November 15, 1999
</TD></TR>
<br>
<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<p align="center"><strong>
INDEX TO EXHIBITS
</strong></p>
<P>
<TABLE COLS=2 WIDTH="50%" >
<TR>
<TD>
<font size="3"><strong>
<CENTER><u>Exhibit Number</u></CENTER>
</font></strong>
</TD>
<TD>
<font size="3"><strong>
<CENTER><u> Description</u></CENTER>
</font></strong>
</TD>
</TR>
<TR>
<TD>
<font size="3">
<CENTER> 27.1</CENTER>
</font>
</TD>
<TD>
<font size="3">
<CENTER>Financial Data Schedule</CENTER>
</font>
</TD>
</TR>