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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________ .
COMMISSION FILE NUMBER: 0-20859
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GERON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2287752
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
230 CONSTITUTION DRIVE, MENLO PARK, CA 94025
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 473-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $0.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class: Common Stock $0.001 par value Outstanding at November 5, 2001:
22,035,530 shares
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GERON CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1: Consolidated Financial Statements...................................... 3
Condensed Consolidated Balance Sheets as of September 30,
2001 and December 31, 2000........................................ 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2001 and 2000........... 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000..................... 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 8
Item 3: Quantitative and Qualitative Disclosures About Market Risk............. 22
PART II. OTHER INFORMATION
Item 1: Legal Proceedings...................................................... 23
Item 2: Changes In Securities and Use of Proceeds.............................. 23
Item 3: Defaults upon Senior Securities........................................ 23
Item 4: Submission of Matters to a Vote of Security Holders.................... 23
Item 5: Other Information...................................................... 23
Item 6: Exhibits and Reports on Form 8-K....................................... 23
SIGNATURES.......................................................................... 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GERON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 30,667 $ 29,985
Short-term investments ........................................ 38,644 3,040
Interest and other receivables ................................ 1,271 1,156
Other current assets .......................................... 933 414
--------- ---------
Total current assets .................................. 71,515 34,595
Long-term investments ........................................... 10,227 62,760
Property and equipment, net ..................................... 3,728 3,681
Investment in licensees ......................................... 608 --
Deposits and other assets ....................................... 475 581
Intangibles ..................................................... 10,264 12,413
--------- ---------
$ 96,817 $ 114,030
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 745 $ 1,459
Accrued liabilities ........................................... 2,276 1,324
Deferred revenue .............................................. 2,020 550
Current portion of capital lease obligations and equipment
loans ....................................................... 860 923
Current portion of accrued research funding obligation ........ 4,226 3,869
Convertible debentures ........................................ 6,500 --
--------- ---------
Total current liabilities ............................. 16,627 8,125
Noncurrent portion of capital lease obligations and equipment
loans ......................................................... 485 1,030
Noncurrent portion of accrued research funding obligation ....... 7,409 9,551
Convertible debentures .......................................... 25,000 31,406
Commitments
Stockholders' equity:
Common stock .................................................. 22 22
Additional paid-in-capital .................................... 219,787 214,012
Deferred compensation ......................................... (270) (475)
Accumulated deficit ........................................... (172,431) (149,802)
Accumulated other comprehensive income ........................ 188 161
--------- ---------
Total stockholders' equity ............................ 47,296 63,918
--------- ---------
$ 96,817 $ 114,030
========= =========
See accompanying notes.
3
GERON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues from collaborative agreements ............... $ 515 $ 1,750 $ 2,765 $ 4,750
License fees and royalties ........................... 100 46 232 93
------------ ------------ ------------ ------------
Total revenues ................................... 615 1,796 2,997 4,843
Operating expenses:
Research and development ........................... 9,458 6,750 22,814 18,338
General and administrative ......................... 1,641 1,390 6,918 8,376
------------ ------------ ------------ ------------
Total operating expenses ......................... 11,099 8,140 29,732 26,714
------------ ------------ ------------ ------------
Loss from operations ................................. (10,484) (6,344) (26,735) (21,871)
Interest and other income ............................ 1,616 1,685 4,866 3,983
Interest and other expense ........................... (244) (269) (760) (12,021)
------------ ------------ ------------ ------------
Net loss ............................................. $ (9,112) $ (4,928) $ (22,629) $ (29,909)
============ ============ ============ ============
Basic and diluted net loss per share ................. $ (0.42) $ (0.23) $ (1.04) $ (1.45)
============ ============ ============ ============
Weighted average shares used in
computing basic and diluted net loss per share .... 21,905,598 21,586,722 21,832,266 20,585,395
============ ============ ============ ============
See accompanying notes.
4
GERON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CHANGE IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss ............................................................ $(22,629) $(29,909)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................. 883 1,094
Interest on convertible debentures ............................. 94 11,268
Stock-based compensation ....................................... 5,195 3,919
Accretion of interest on research funding obligation ........... 368 368
Deferred compensation .......................................... 206 366
Loss on investment in unconsolidated subsidiary ................ 9 --
Changes in assets and liabilities:
Other current and noncurrent assets ............................ 1,778 830
Other current and noncurrent liabilities ....................... 1,049 1,874
Translation adjustment ......................................... (98) (139)
-------- --------
Net cash used in operating activities ............................... (13,145) (10,329)
Cash flows from investing activities:
Capital expenditures .............................................. (927) (551)
Purchases of securities available-for-sale ........................ (35,581) (37,205)
Proceeds from sales/calls of securities available-for-sale ........ 25,709 15,526
Proceeds from maturities of securities available-for-sale ......... 27,040 15,480
Accrued research funding payments ................................. (2,153) (1,393)
-------- --------
Net cash provided by (used in) investing activities ................. 14,088 (8,143)
Cash flows from financing activities:
Proceeds from equipment loans ..................................... 102 201
Payments of obligations under capital leases and equipment loans .. (709) (921)
Proceeds from issuance of common and preferred stock, net ......... 346 40,608
Proceeds from issuance of debentures .............................. -- 25,000
-------- --------
Net cash (used in) provided by financing activities ................. (261) 64,888
-------- --------
Net increase in cash and cash equivalents ........................... 682 46,416
Cash and cash equivalents at the beginning of the period ............ 29,985 7,835
-------- --------
Cash and cash equivalents at the end of the period .................. $ 30,667 $ 54,251
======== ========
See accompanying notes.
5
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated unaudited balance sheet as of
September 30, 2001 and condensed consolidated statements of operations for the
three and nine month periods ended September 30, 2001 and 2000 have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the management of Geron Corporation, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three and
nine month periods ended September 30, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001 or any
other period. These financial statements and notes should be read in conjunction
with the financial statements for the year ended December 31, 2000, included in
the Company's Annual Report on Form 10-K. The accompanying condensed
consolidated balance sheet as of December 31, 2000 has been derived from audited
financial statements at that date.
The consolidated financial statements include the accounts of Geron
Corporation, and its wholly owned subsidiary, Geron Bio-Med Ltd., a company
organized under the laws of the United Kingdom. All material intercompany
accounts, transactions and expenses have been eliminated in consolidation.
The financial statements of the Company's subsidiary outside the United
States are measured using the local currency as the functional currency. Assets
and liabilities of this subsidiary are translated at the rates of exchange at
the balance sheet date. The resultant translation adjustments are included in
accumulated other comprehensive income/(loss), a separate component of
stockholders' equity. Income and expense items are translated at average monthly
rates of exchange.
Net Loss Per Share
Basic earnings (loss) per share is calculated using the weighted average
number of common shares outstanding. Because the Company is in a net loss
position, diluted earnings per share is also calculated using the weighted
average number of common shares outstanding and excludes the effects of options,
warrants and convertible securities which are antidilutive. Had the Company been
in a net income position, diluted earnings per share would have included the
shares used in the computation of basic net loss per share as well as an
additional 1,658,209 and 2,148,481 shares for 2001 and 2000, respectively,
related to outstanding options, warrants and convertible securities not included
above (as determined using the treasury stock method at the estimated average
market value).
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) includes certain
changes in equity that are excluded from net income (loss). Specifically, net
unrealized gains on our available-for-sale securities and equity investments in
licensees of $355,000, which are included in stockholders' equity, and
cumulative translation adjustment of ($167,000) are included in accumulated
other comprehensive income (loss).
2. CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
places its cash and cash equivalents in interest-bearing money
6
market funds, municipal notes and commercial paper. As of September 30, 2001,
the Company's investments consisted primarily of corporate notes with maturities
ranging from 1 day to 17 months.
3. CONVERTIBLE DEBENTURES
Series C Debentures and Warrants
On September 30, 1999, the Company sold $12,500,000 in series C
two-percent coupon convertible debentures and warrants to purchase 1,100,000
shares of common stock to an institutional investor. The series C convertible
debentures are convertible at any time by the holder at a fixed conversion price
of $10.25 per share. The series C convertible debentures are convertible at the
Company's option when the common stock has traded at a certain premium to the
fixed conversion price for ten consecutive trading days. If unconverted, the
debentures have a maturity date of September 30, 2002. The series C warrants to
purchase 1,000,000 shares of common stock are exercisable at $12.50 per share
and the series C warrants to purchase 100,000 shares of common stock are
exercisable at $12.75 per share at the option of the holder through May 2001. In
December 2000, the Company adopted Emerging Issues Task Force Issue No. 00-27,
"Application of EITF Issue 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, to
Certain Convertible Instruments" ("EITF 00-27"). Accordingly, the Company
recognized $2,700,000 of additional imputed non-cash interest expense related to
series C convertible debentures and warrants in the fourth quarter of 2000.
In March 2000, series C convertible debentures with a face value of
$6,250,000 plus accrued interest were converted into approximately 615,000
shares of Geron common stock at $10.25 per share. In addition, all of the series
C warrants were exercised, which resulted in proceeds of $13,750,000 and the
issuance of 1,100,000 shares of Geron common stock. As of September 30, 2001,
series C convertible debentures with a face value of $6,250,000 and no series C
warrants remained outstanding, and are classified as current liabilities in the
accompanying balance sheet.
Series D Debentures and Warrants
On June 29, 2000, the Company sold $25,000,000 in series D zero coupon
convertible debentures and warrants to purchase 834,836 shares of Geron common
stock to an institutional investor. The debentures are convertible at any time
by the holder at a fixed conversion price of $29.95 per share. In connection
with the issuance of the series D convertible debentures, the Company recorded
approximately $616,000 in interest expense for the difference between the fair
value of the Company's common stock and the conversion price of the debentures
on the closing date of the financing. The debentures convert at the Company's
option when Geron common stock has traded at a certain premium to the fixed
conversion price for five consecutive trading days. If unconverted, the
debentures have a maturity date of June 29, 2003. The warrant to purchase
834,836 shares of Geron common stock is exercisable at $37.43 per share at the
option of the holder through December 2001. The value of the warrant of
$10,527,000 was determined using Black-Scholes and since the debentures were
immediately convertible at the option of the holder, the entire warrant value
was recorded as a charge to interest expense and a credit to additional
paid-in-capital. In December 2000, the Company adopted EITF 00-27. Accordingly,
the Company recognized an additional $10,527,000 in imputed non-cash interest
expense related to series D convertible debentures and warrants in the fourth
quarter of 2000. As of September 30, 2001, all of the series D convertible
debentures and series D warrants remained outstanding.
4. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in its fiscal year ended December 31, 1998. SFAS 131 establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The Company's chief decision
maker, as defined under SFAS 131, is the Chief Executive Officer. To date, the
Company has viewed its operations as principally one segment, the discovery and
development of therapeutic and diagnostic products for applications in oncology,
drug discovery and regenerative medicine. As a result,
7
the financial information disclosed herein materially represents all of the
financial information related to the Company's principal operating segment.
5. CONSOLIDATED STATEMENT OF CASH FLOWS DATA
NINE MONTHS NINE MONTHS
ENDED ENDED
(IN THOUSANDS) SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
-------------- ------------------ ------------------
Supplementary Investing and Financing Activities:
Common stock issued for services ..................... $ -- $ 733
Notes receivable from stockholders ................... $ -- $ 33
Common stock issued under purchase plan .............. $ 233 $ 163
Net unrealized gain (loss) on equity investment ...... $ (458) $ --
Net unrealized gain (loss) on available-for-sale
securities.......................................... $ 372 $ 223
Conversion of convertible debentures, net ............ $ -- $9,076
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This Form 10-Q contains forward-looking statements that involve risks
and uncertainties. We use words such as "anticipate", "believe", "plan",
"expect", "future", "intend" and similar expressions to identify forward-looking
statements. These statements appear throughout the Form 10-Q and are statements
regarding our intent, belief, or current expectations, primarily with respect to
our operations and related industry developments. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of
this Form 10-Q. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us and described under the heading "Risk Factors" in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2000, in the section of this Item 2 titled "Additional Factors That May Affect
Future Results," and elsewhere in this Form 10-Q.
The following discussion should be read in conjunction with the
unaudited financial statements and notes thereto included in Part I, Item 1 of
this Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.
We are a biopharmaceutical company focused on developing and
commercializing therapeutic and diagnostic products for applications in oncology
and regenerative medicine, and research tools for drug discovery. Our product
development programs are based upon three patented core technologies:
telomerase, human embryonic stem cells and nuclear transfer.
Since inception, substantially all of our revenues have been generated
from license and research agreements with collaborators. In addition, we receive
license payments and royalties from license and marketing agreements with
various diagnostic and research tool collaborators and sublicensees of our
nuclear transfer technology. We recognize revenue from the license and research
agreements with collaborators as the related research and development costs are
incurred under the collaborative agreements. We recognize revenue from license
payments over the term of the license. We recognize revenue from royalties as
received.
Our results of operations have fluctuated from period to period and may
continue to fluctuate in the future based upon the timing and composition of
funding under our various collaborative agreements, as well as the progress of
our research and development efforts and variations in the level of expenses
related to developmental efforts during any given period. Results of operations
for any period may be unrelated to results of operations for any other period.
In addition, historical results should not be viewed as indicative of future
operating results. We are subject to risks common to companies in our industry
and at our stage of development, including risks inherent in our research and
development efforts, reliance upon our collaborative partners, enforcement of
our patent and proprietary rights, need for future capital, potential
competition and uncertainty of regulatory approvals or clearances. In order for
a product to be commercialized based on our research, we and our collaborators
must conduct preclinical tests and clinical trials, demonstrate the efficacy and
safety of our product candidates, obtain regulatory approvals or
8
clearances and enter into manufacturing, distribution and marketing
arrangements, as well as obtain market acceptance. Our collaborator in the field
of telomerase inhibition, Kyowa Hakko, has selected a Geron compound (GRN163)
for development as an anti-cancer drug. We do not expect to receive revenues or
royalties based on therapeutic products for a period of years, if at all.
RESULTS OF OPERATIONS
Revenues
We recognized revenues from collaborative agreements of $515,000 and
$2.8 million for the three and nine months ended September 30, 2001, compared to
$1.8 million and $4.8 million for the comparable periods in 2000. Revenues in
2001 and 2000 represented research support payments from our collaborative
agreements with Pharmacia and Kyowa Hakko. Decreased revenues in 2001 were a
result of regaining our rights from Pharmacia in January 2001.
We receive license payments and royalties from license and marketing
agreements with various diagnostic marketing partners. We received royalties of
$37,000 and $120,000 for the three and nine months ended September 30, 2001,
from Kyowa Medex, Intergen, Roche Diagnostics, and PharMingen (a Becton
Dickinson company) on the sale of diagnostic kits to the research-use-only
market and from Clontech from the sale of telomerase-immortalized cell lines,
compared to $46,000 and $93,000 for the comparable periods in 2000. We also
recognized revenues of $63,000 and $112,000 in license fees for the three and
nine months ended September 30, 2001 from agreements with various companies for
our nuclear transfer technology. We recognize revenues from these sublicense
agreements over the term of the agreement. No license fee revenue was recognized
in 2000 related to these agreements.
Research and Development Expenses
Research and development expenses were $9.5 million and $22.8 million
for the three and nine months ended September 30, 2001, compared to $6.8 million
and $18.3 million for the comparable period in 2000. The increase in research
and development expenses for the nine month period in 2001 compared to the nine
month period in 2000 was primarily the result of increased scientific personnel
expenses of $2.2 million, increased sponsored research of $660,000 and increased
scientific supplies of $630,000. We expect research and development expenses to
increase in the future as a result of continued development of our therapeutic
and diagnostic programs.
General and Administrative Expenses
General and administrative expenses were $1.6 million and $6.9 million
for the three and nine months ended September 30, 2001, compared to $1.4 million
and $8.4 million for the comparable periods in 2000. The decrease in general and
administrative expenses for the nine month period in 2001 compared to the nine
month period in 2000 was the result of reduced consulting expense partially
offset by a stock-based compensation expense related to extending the exercise
period of certain options to purchase common stock in 2001.
Interest and Other Income
Interest income was $1.3 million and $4.2 million for the three and nine
months ended September 30, 2001, compared to $1.7 million and $3.8 million for
the comparable periods in 2000. The overall increase in interest income for 2001
compared to 2000 was primarily the result of higher cash balances in 2001 than
2000. Interest earned in the future will depend on any future funding cycles and
prevailing interest rates. We also received $325,000 and $648,000 in research
payments under government grants for the three and nine months ended September
30, 2001, compared to none and $196,000 for the comparable periods in 2000. We
expect income from government grants to decrease in the future.
Interest and Other Expense
Interest and other expense was $244,000 and $760,000 for the three and
nine months ended September 30, 2001, compared to $269,000 and $12.0 million
for the comparable periods in 2000. The decrease in interest and other expense
for both the three and nine month periods in 2001 compared to the comparable
periods in 2000 was primarily the result of lower expenses related to
convertible debentures in 2001. In 2000,
9
we recognized interest expense of $10.5 million for the fair value of warrants
issued with the Series D convertible debentures.
Net Loss
Net loss was $9.1 million and $22.6 million for the three and nine
months ended September 30, 2001, compared to $4.9 million and $29.9 million for
the comparable periods in 2000. The increase in net loss for the three months
ended September 30, 2001 compared to the comparable periods in 2000 was due to
higher operating expenses and decreased revenues from collaborative agreements.
The decrease in net loss for 2001 compared to 2000 was primarily the net result
of higher operating expenses and decreased revenues from collaborative
agreements offset by reduced interest expense. We expect net loss to increase
in the future as a result of increased operating expenses and reduced
revenues from collaborative agreements.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investments at September 30, 2001 totaled
$79.5 million compared to $95.8 million at December 31, 2000. The decrease in
cash, cash equivalents and investments in 2001 was the result of cash used for
operations. We have an investment policy to invest these funds in liquid,
investment-grade securities, such as interest-bearing money market funds,
commercial paper and federal agency notes.
Net cash used in operations was $13.1 million for the nine months ended
September 30, 2001 compared to $10.3 million for the comparable period in 2000.
The increase was primarily a result of increased research and development
expenses in 2001. We expect net cash used in operations to continue to increase
as a result of increased research and development expenditures.
Through September 30, 2001, we have invested approximately $11.8 million
in property and equipment, of which approximately $7.8 million was financed
through equipment financing. As of September 30, 2001, we had approximately $1.5
million available for borrowing under our equipment financing arrangements. The
drawdown period under the equipment financing arrangements expires on October
31, 2001. We intend to renew the commitment for new equipment financing
arrangements in 2001 to further fund equipment purchases. If we are unable to
renew the commitment, then we will need to spend our own resources for equipment
purchases.
We have agreed to fund scientific research at academic and research
institutions. Under these research arrangements, we are obligated to make
minimum annual payments of approximately $4.8 million and $3.1 million in 2001
and 2002, respectively. As of September 30, 2001, we have made payments of
approximately $3.7 million to academic and research institutions.
We estimate that our existing capital resources, interest income and
equipment financing will be sufficient to fund our current level of operations
through December 31, 2002. Changes in our research and development plans or
other changes affecting our operating expenses may result in the expenditure of
available resources before such time, and in any event, we will need to raise
substantial additional capital to fund our operations in the future. We intend
to seek additional funding through strategic collaborations, public or private
equity financings, capital lease transactions or other financing sources that
may be available.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business is subject to various risks, including those described
below. You should carefully consider these risk factors, together with all of
the other information included in this Form 10-Q. Any of these risks could
materially adversely affect our business, operating results and financial
condition.
OUR BUSINESS IS AT AN EARLY STAGE OF DEVELOPMENT
The study of the mechanisms of cellular aging and cellular immortality,
including telomere biology and telomerase, the study of human embryonic stem
cells, and the process of nuclear transfer are relatively new areas of research.
Our business is at an early stage of development. Our ability to produce
products that progress to and through clinical trials is subject to our ability
to, among other things:
- continue to have success with our research and development
efforts;
10
- select therapeutic compounds for development;
- obtain the required regulatory approvals; and
- manufacture and market resulting products.
When potential lead drug compounds or product candidates are identified
through our research programs, they will require significant preclinical and
clinical testing prior to regulatory approval in the United States and
elsewhere. In addition, we will also need to determine whether any of these
potential products can be manufactured in commercial quantities at an acceptable
cost. Our efforts may not result in a product that can be marketed. Because of
the significant scientific, regulatory and commercial milestones that must be
reached for any of our research programs to be successful, any program may be
abandoned, even after significant resources have been expended.
WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE FUTURE LOSSES; CONTINUED
LOSSES COULD IMPAIR OUR ABILITY TO SUSTAIN OPERATIONS
We have incurred net operating losses every year since our operations
began in 1990. As of September 30, 2001, our accumulated deficit was
approximately $172.4 million. Losses have resulted principally from costs
incurred in connection with our research and development activities and from
general and administrative costs associated with our operations. We expect to
incur additional operating losses over the next several years as our research
and development efforts and preclinical testing activities are expanded.
Substantially all of our revenues to date have been research support payments
under the collaboration agreements with Kyowa Hakko and Pharmacia. In 2001, we
regained our rights to telomerase inhibitors from Pharmacia and we will not
receive future payments from Pharmacia. Kyowa Hakko provided additional research
funding in 2001. We may be unsuccessful in entering into any new corporate
collaboration that results in revenues. Even if we are able to obtain new
collaboration arrangements with third parties, the revenues generated from these
arrangements will be insufficient to continue or expand our research activities
and otherwise sustain our operations.
We are unable to estimate at this time the level of revenue to be
received from the sale of diagnostic products and telomerase-immortalized cell
lines, and do not currently expect to receive significant revenues from the sale
of these products. Our ability to continue or expand our research activities and
otherwise sustain our operations is dependent on our ability, alone or with
others to, among other things, manufacture and market therapeutic products.
We may never receive material revenues from product sales or if we do
receive revenues, such revenues may not be sufficient to continue or expand our
research activities and otherwise sustain our operations.
WE WILL NEED ADDITIONAL CAPITAL TO CONDUCT OUR OPERATIONS AND DEVELOP OUR
PRODUCTS, AND OUR ABILITY TO OBTAIN THE NECESSARY FUNDING IS UNCERTAIN
We will require substantial capital resources in order to conduct our
operations and develop our products. While we estimate that our existing capital
resources, interest income and equipment financing arrangements will be
sufficient to fund our current level of operations through December 31, 2002, we
cannot guarantee that this will be the case. The timing and degree of any future
capital requirements will depend on many factors, including:
- the accuracy of the assumptions underlying our estimates for our
capital needs in 2001 and beyond;
- continued scientific progress in our research and development
programs;
- the magnitude and scope of our research and development
programs;
- our ability to maintain and establish strategic arrangements for
research, development, clinical testing, manufacturing and
marketing;
- our progress with preclinical and clinical trials;
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- the time and costs involved in obtaining regulatory approvals;
- the costs involved in preparing, filing, prosecuting,
maintaining, defending and enforcing patent claims; and
- the potential for new technologies and products.
We intend to acquire additional funding through strategic
collaborations, public or private equity financings, capital lease transactions
or other financing sources that may be available. Additional financing may not
be available on acceptable terms, or at all. Additional equity financings could
result in significant dilution to stockholders. Further, in the event that
additional funds are obtained through arrangements with collaborative partners,
these arrangements may require us to relinquish rights to some of our
technologies, product candidates or products that we would otherwise seek to
develop and commercialize ourselves. If sufficient capital is not available, we
may be required to delay, reduce the scope of or eliminate one or more of our
research or development programs, each of which could have a material adverse
effect on our business.
WE MAY BE UNABLE TO IDENTIFY A SAFE AND EFFECTIVE INHIBITOR OF TELOMERASE WHICH
MAY PREVENT US FROM DEVELOPING A VIABLE CANCER TREATMENT PRODUCT, WHICH WOULD
ADVERSELY IMPACT OUR FUTURE BUSINESS PROSPECTS
As a result of our drug discovery efforts to date, we have identified
compounds in laboratory studies that demonstrate potential for inhibiting
telomerase in humans. Kyowa Hakko has selected one of these compounds, GRN163,
as a lead compound for preclinical development as a telomerase inhibitor for
cancer. Further research is required to determine if this compound can be fully
developed as a efficacious, safe and commercially viable treatment for cancer.
This compound, and other compounds we have identified, may prove to have
undesirable and unintended side effects or other characteristics adversely
affecting its safety or efficacy that would likely prevent or limit its
commercial use. Accordingly, it may not be appropriate for us to proceed with
clinical development, to obtain regulatory approval or to market a telomerase
inhibitor for the treatment of cancer. If we abandon our research for cancer
treatment for any of these reasons or for other reasons, our business prospects
would be materially and adversely affected.
IF OUR ACCESS TO NECESSARY TISSUE SAMPLES, INFORMATION OR LICENSED TECHNOLOGIES
IS RESTRICTED, WE WILL NOT BE ABLE TO DEVELOP OUR BUSINESS
To continue the research and development of our therapeutic and
diagnostic products, we need access to normal and diseased human and other
tissue samples, other biological materials and related clinical and other
information. We compete with many other companies for these materials and
information. We may not be able to obtain or maintain access to these materials
and information on acceptable terms, if at all. In addition, government
regulation in the United States and foreign countries could result in restricted
access to, or prohibiting the use of, human and other tissue samples. If we lose
access to sufficient numbers or sources of tissue samples, or if tighter
restrictions are imposed on our use of the information generated from tissue
samples, our business will be materially harmed.
SOME OF OUR COMPETITORS MAY DEVELOP TECHNOLOGIES THAT ARE SUPERIOR TO OR MORE
COST-EFFECTIVE THAN OURS, WHICH MAY IMPACT THE COMMERCIAL VIABILITY OF OUR
TECHNOLOGIES AND WHICH MAY SIGNIFICANTLY DAMAGE OUR ABILITY TO SUSTAIN
OPERATIONS
The pharmaceutical and biotechnology industries are intensely
competitive. We believe that other pharmaceutical and biotechnology companies
and research organizations currently engage in or have in the past engaged in
efforts related to the biological mechanisms of cell aging and cell immortality,
including the study of telomeres, telomerase, human embryonic stem cells and
nuclear transfer. In addition, other products and therapies that could compete
directly with the products that we are seeking to develop and market currently
exist or are being developed by pharmaceutical and biopharmaceutical companies
and by academic and other research organizations.
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Many companies are also developing alternative therapies to treat cancer
and, in this regard, are competitors of ours. Many of the pharmaceutical
companies developing and marketing these competing products have significantly
greater financial resources and expertise than we do in:
- research and development;
- manufacturing;
- preclinical and clinical testing;
- obtaining regulatory approvals; and
- marketing.
Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large and established
companies. Academic institutions, government agencies and other public and
private research organizations may also conduct research, seek patent protection
and establish collaborative arrangements for research, clinical development and
marketing of products similar to ours. These companies and institutions compete
with us in recruiting and retaining qualified scientific and management
personnel as well as in acquiring technologies complementary to our programs.
There is also competition for access to libraries of compounds to use for
screening. Should we fail to secure and maintain access to sufficiently broad
libraries of compounds for screening potential targets, our business would be
materially harmed.
In addition to the above factors, we expect to face competition in the
following areas:
- product efficacy and safety;
- the timing and scope of regulatory consents;
- availability of resources;
- reimbursement coverage;
- price; and
- patent position, including potentially dominant patent positions
of others.
As a result of the foregoing, our competitors may develop more effective
or more affordable products, or achieve earlier patent protection or product
commercialization than us. Most significantly, competitive products may render
the products that we develop obsolete.
THE ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF OUR RESEARCH USING EMBRYONIC STEM
CELLS AND NUCLEAR TRANSFER COULD PREVENT US FROM DEVELOPING OR GAINING
ACCEPTANCE FOR COMMERCIALLY VIABLE PRODUCTS IN THIS AREA
Our programs in regenerative medicine may involve the use of human
embryonic stem cells that would be derived from human embryonic or fetal tissue.
The use of human embryonic stem cells gives rise to ethical, legal and social
issues regarding the appropriate use of these cells. In the event that our
research related to human embryonic stem cells becomes the subject of adverse
commentary or publicity, the market price for our common stock could be
significantly harmed.
Some groups have voiced opposition to our technology and practices. The
concepts of cell regeneration, cell immortality, and genetic cloning have
stimulated significant debate in social and political arenas. We use human
embryonic stem cells derived through a process that uses either donated embryos
that are no longer needed following a successful in vitro fertilization
procedure or donated fetal material as the starting material. Further, many
research institutions, including some of our scientific collaborators, have
adopted policies regarding the ethical use of human embryonic and fetal tissue.
These policies may have the effect of limiting the scope of research conducted
using human embryonic stem cells, resulting in reduced scientific
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progress. In addition, the United States government and its agencies have in
recent years refused to fund research which involves the use of human embryonic
tissue. President Bush, however, announced on August 9, 2001 that he would
permit federal funding of research on human embryonic stem cells using the
limited number of embryonic stem cell lines that had already been created. A
newly created president's council will monitor stem cell research, and the
guidelines and regulations it recommends may include restrictions on the scope
of research using human embryonic or fetal tissue. Our inability to conduct
research using human embryonic stem cells due to such factors as government
regulation or otherwise could have a material adverse effect on us. Finally, we
acquired Roslin Bio-Med to gain the rights to nuclear transfer technology. The
Roslin Institute produced Dolly the sheep in 1997 -- the first mammal cloned
from an adult cell. Geron acquired exclusive rights to this technology for all
areas except human reproductive cloning and certain other limited applications.
Although we will not be pursuing human reproductive cloning, we continue to
develop techniques for use in agricultural cloning and for possible application
in human regenerative medicine. Government imposed restrictions with respect to
any or all of these practices could:
- harm our ability to establish critical partnerships and
collaborations;
- prompt government regulation of our technologies;
- cause delays in our research and development; and
- cause a decrease in the price of our stock.
If human therapeutic cloning is restricted or banned (as it would be
under bill H.R. 2505 recently passed by the U.S. House of Representatives), our
ability to commercialize those applications could be significantly harmed. Also,
if regulatory bodies were to ban nuclear transfer processes, our research using
nuclear transfer technology could be cancelled and our business could be
significantly harmed.
PUBLIC ATTITUDES TOWARDS GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY APPROVAL
OR PUBLIC PERCEPTION OF OUR PRODUCTS
The commercial success of our product candidates will depend in part on
public acceptance of the use of gene therapies for the prevention or treatment
of human diseases. Public attitudes may be influenced by claims that gene
therapy is unsafe, and gene therapy may not gain the acceptance of the public or
the medical community. Adverse events in the field of gene therapy that have
occurred or may occur in the future also may result in greater governmental
regulation of our product candidates and potential regulatory delays relating to
the testing or approval of our product candidates.
Negative public reaction to gene therapy in the development of certain
of our therapies could result in greater government regulation, stricter
clinical trial oversight, restrictive commercial product labeling requirements
of gene therapies, and could cause a decrease in the demand for any products
that we may develop. The subject of genetically modified organisms has received
negative publicity in Europe, which has aroused public debate. The adverse
publicity in Europe could lead to greater regulation and trade restrictions on
imports of genetically altered products. If similar adverse public reaction
occurs in the United States, genetic research and resultant products could be
subject to greater domestic regulation and could cause a decrease in the demand
for our potential products.
ENTRY INTO CLINICAL TRIALS WITH ONE OR MORE PRODUCTS MAY NOT RESULT IN ANY
COMMERCIALLY VIABLE PRODUCTS
We do not expect to generate any significant revenues from product sales
for a period of several years. We may never generate revenues from product sales
or become profitable because of a variety of risks inherent in our business,
including risks that:
- clinical trials may not demonstrate the safety and efficacy of
our products;
- completion of clinical trials may be delayed, or costs of
clinical trials may exceed anticipated amounts;
- we may not be able to obtain regulatory approval of our
products, or may experience delays in obtaining such approvals;
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- we may not be able to manufacture our drugs economically on a
commercial scale;
- we and our licensees may not be able to successfully market our
products;
- physicians may not prescribe our products, or patients may not
accept such products;
- others may have proprietary rights which prevent us from
marketing our products; and
- competitors may sell similar, superior or lower-cost products.
IMPAIRMENT OF OUR INTELLECTUAL PROPERTY RIGHTS MAY LIMIT OUR ABILITY TO PURSUE
THE DEVELOPMENT OF OUR INTENDED TECHNOLOGIES AND PRODUCTS
Our success will depend on our ability to obtain and enforce patents for
our discoveries; however, legal principles for biotechnology patents in the
United States and in other countries are not firmly established and the extent
to which we will be able to obtain patent coverage is uncertain.
Protection of our proprietary compounds and technology is critically
important to our business. Our success will depend in part on our ability to
obtain and enforce our patents and maintain trade secrets, both in the United
States and in other countries. The patent positions of pharmaceutical and
biopharmaceutical companies, including ours, are highly uncertain and involve
complex legal and technical questions. We may not continue to develop products
or processes that are patentable, and it is possible that patents will not issue
from any of our pending applications, including allowed patent applications.
Further, our current patents, or patents that issue on pending applications, may
be challenged, invalidated or circumvented, and our current or future patent
rights may not provide proprietary protection or competitive advantages to us.
In the event that we are unsuccessful in obtaining and enforcing patents, our
business would be negatively impacted.
Patent applications filed in the United States prior to November 29,
2000, are maintained in secrecy until patents issue. Publication of discoveries
in the scientific or patent literature tends to lag behind actual discoveries by
at least several months and sometimes several years. Therefore, the publications
may reveal in the future that the persons or entities that we or our licensors
name as inventors in our patents and patent applications may not have been the
first to invent the inventions disclosed in the patent applications or patents,
or file patent applications for these inventions. As a result, we may not be
able to obtain patents from discoveries that we otherwise would consider
patentable and that we consider to be significant to our future success.
Patent prosecution, interference, opposition proceeding or litigation
may also be necessary to obtain patents, enforce any patents issued or licensed
to us or to determine the scope and validity of our proprietary rights or the
proprietary rights of another. We may not be successful in any patent
prosecution, interference, opposition proceeding or litigation. Patent
prosecution and litigation in general can be extremely expensive and time
consuming, even if the outcome is favorable to us. An adverse outcome in a
patent prosecution or litigation or any other proceeding in a court or patent
office could weaken our proprietary position, subject our business to
significant liabilities to other parties, require disputed rights to be licensed
from other parties or require us to cease using the disputed technology.
IF WE FAIL TO MEET OUR OBLIGATIONS UNDER LICENSE AGREEMENTS, WE MAY FACE LOSS OF
OUR RIGHTS TO KEY TECHNOLOGIES ON WHICH OUR BUSINESS DEPENDS
Our business depends on our three core technologies, each of which is
based in part on patents licensed from third parties. Those third-party license
agreements impose obligations on us, such as payment obligations and obligations
to diligently pursue development of commercial products under the licensed
patents. If a licensor believes that we have failed to meet our obligations
under a license agreement, the licensor could seek to limit or terminate our
license rights, which would most likely lead to costly and time-consuming
litigation. During the period of any such litigation our ability to carry out
the development and commercialization of potential products could be
significantly and negatively affected. If our license rights were ultimately
lost, our ability to carry on our business based on the affected technology
platform would be severely affected.
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WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS THAT ARE COSTLY TO DEFEND, AND WHICH
MAY LIMIT OUR ABILITY TO USE DISPUTED TECHNOLOGIES AND PREVENT US FROM PURSUING
RESEARCH AND DEVELOPMENT OR COMMERCIALIZATION OF POTENTIAL PRODUCTS
Our commercial success depends significantly on our ability to operate
without infringing patents and proprietary rights of others. Our technologies
may infringe the patents or proprietary rights of others. In addition, we may
become aware of discoveries and technology controlled by third parties that are
advantageous to our research programs. In the event our technologies do infringe
on the rights of others or we require the use of discoveries and technology
controlled by third parties, we may be prevented from pursuing research,
development or commercialization of potential products or may be required to
obtain licenses to these patents or other proprietary rights or develop or
obtain alternative technologies. We may not be able to obtain alternative
technologies or any required license on commercially favorable terms, if at all.
If we do not obtain the necessary licenses or alternative technologies, we may
be delayed or prevented from pursuing the development of some potential
products. Our failure to obtain alternative technologies or a license to any
technology that we may require to develop or commercialize our products will
significantly and negatively affect our business.
Patent law relating to the scope and enforceability of claims in the
technology fields in which we operate is still evolving, and the degree of
future protection for any of our proprietary rights is highly uncertain. In this
regard, patents may not issue from any of our patent applications or our
existing patents may be found to be invalid by a court. In addition, our success
may become dependent on our ability to obtain licenses for using the patented
discoveries of others. We are aware of patent applications and patents that have
been filed by others with respect to our technologies and we may have to obtain
licenses to use these technologies. Moreover, other patent applications may be
granted priority over patent applications that we or any of our licensors have
filed. Furthermore, others may independently develop similar or alternative
technologies, duplicate our technologies or design around the patented
technologies we have developed. In the event that we are unable to acquire
licenses to critical technologies that we cannot patent ourselves, we may be
required to expend significant time and resources to develop alternative
technology, and we may not be successful in this regard. If we cannot acquire or
develop the necessary technology, we may be prevented from pursuing some of our
business objectives. Moreover, one or more of our competitors could acquire or
license the necessary technology. Any of these events could materially harm our
business.
MUCH OF THE INFORMATION AND KNOW-HOW THAT IS CRITICAL TO OUR BUSINESS IS NOT
PATENTABLE AND WE MAY NOT BE ABLE TO PREVENT OTHERS FROM OBTAINING THIS
INFORMATION AND ESTABLISHING COMPETITIVE ENTERPRISES
We sometimes rely on trade secrets to protect our proprietary
technology, especially in circumstances in which patent protection is not
believed to be appropriate or obtainable. We attempt to protect our proprietary
technology in part by confidentiality agreements with our employees,
consultants, collaborators and contractors. We cannot assure you that these
agreements will not be breached, that we would have adequate remedies for any
breach, or that our trade secrets will not otherwise become known or be
independently discovered by competitors, any of which would harm our business
significantly.
WE DEPEND ON OUR COLLABORATORS TO HELP US COMPLETE THE PROCESS OF DEVELOPING AND
TESTING OUR PRODUCTS AND OUR ABILITY TO DEVELOP AND COMMERCIALIZE PRODUCTS MAY
BE IMPAIRED OR DELAYED IF OUR COLLABORATIVE PARTNERSHIPS ARE UNSUCCESSFUL
Our strategy for the development, clinical testing and commercialization
of our products requires entering into collaborations with corporate partners,
licensors, licensees and others. We are dependent upon the subsequent success of
these other parties in performing their respective responsibilities and the
continued cooperation of our partners. Our collaborators may not cooperate with
us or perform their obligations under our agreements with them. We cannot
control the amount and timing of our collaborators' resources that will be
devoted to our research activities related to our collaborative agreements with
them. Our collaborators may choose to pursue existing or alternative
technologies in preference to those being developed in collaboration with us.
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Our ability to successfully develop and commercialize a telomerase
inhibitor in Asia depends on our corporate alliance with Kyowa Hakko. Our
ability to successfully develop and commercialize telomerase diagnostic products
depends on our corporate alliance with Roche Diagnostics. Under our
collaborative agreements with these collaborators, we rely significantly on
them, among other activities, to:
- design and conduct advanced clinical trials in the event that we
reach clinical trials;
- fund research and development activities with us;
- pay us fees upon the achievement of milestones; and
- market with us any commercial products that result from our
collaborations.
The development and commercialization of products from these
collaborations will be delayed if Kyowa Hakko or Roche Diagnostics fail to
conduct these collaborative activities in a timely manner or at all. In
addition, Kyowa Hakko or Roche Diagnostics could terminate their agreements with
us and we may not receive any development or milestone payments. If we do not
achieve milestones set forth in the agreements, or if Kyowa Hakko or Roche
Diagnostics or any of our future collaborators breach or terminate collaborative
agreements with us, our business may be materially harmed.
OUR RELIANCE ON THE RESEARCH ACTIVITIES OF OUR NON-EMPLOYEE SCIENTIFIC ADVISORS
AND OTHER RESEARCH INSTITUTIONS, WHOSE ACTIVITIES ARE NOT WHOLLY WITHIN OUR
CONTROL, MAY LEAD TO DELAYS IN TECHNOLOGICAL DEVELOPMENTS
We rely extensively and have relationships with scientific advisors at
academic and other institutions, some of whom conduct research at our request.
These scientific advisors are not our employees and may have commitments to, or
consulting or advisory contracts with, other entities that may limit their
availability to us. We have limited control over the activities of these
advisors and, except as otherwise required by our collaboration and consulting
agreements, can expect only limited amounts of their time to be dedicated to our
activities. If our scientific advisors are unable or refuse to contribute to the
development of any of our potential discoveries, our ability to generate
significant advances in our technologies may be significantly harmed.
In addition, we have formed research collaborations with many academic
and other research institutions throughout the world, including the Roslin
Institute. These research facilities may have commitments to other commercial
and non-commercial entities. We have limited control over the operations of
these laboratories and can expect only limited amounts of time to be dedicated
to our research goals.
THE LOSS OF KEY PERSONNEL COULD SLOW OUR ABILITY TO CONDUCT RESEARCH AND DEVELOP
PRODUCTS
Our future success depends to a significant extent on the skills,
experience and efforts of our executive officers and key members of our
scientific staff. Competition for personnel is intense and we may be unable to
retain our current personnel or attract or assimilate other highly qualified
management and scientific personnel in the future. The loss of any or all of
these individuals could harm our business and might significantly delay or
prevent the achievement of research, development or business objectives.
We also rely on consultants and advisors, including the members of our
Scientific Advisory Board, who assist us in formulating our research and
development strategy. We face intense competition for qualified individuals from
numerous pharmaceutical, biopharmaceutical and biotechnology companies, as well
as academic and other research institutions. We may not be able to attract and
retain these individuals on acceptable terms. Failure to do so would materially
harm our business.
WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN SUFFICIENT INSURANCE ON COMMERCIALLY
REASONABLE TERMS OR WITH ADEQUATE COVERAGE AGAINST POTENTIAL LIABILITIES IN
ORDER TO PROTECT OURSELVES AGAINST PRODUCT LIABILITY CLAIMS
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Our business exposes us to potential product liability risks that are inherent
in the testing, manufacturing and marketing of human therapeutic and diagnostic
products. We may become subject to product liability claims if the use of our
products is alleged to have injured subjects or patients. This risk exists for
products tested in human clinical trials as well as products that are sold
commercially. We currently have no clinical trial liability insurance and we may
not be able to obtain and maintain this type of insurance for any of our
clinical trials. In addition, product liability insurance is becoming
increasingly expensive. As a result, we may not be able to obtain or maintain
product liability insurance in the future on acceptable terms or with adequate
coverage against potential liabilities which could have a material adverse
effect on us.
BECAUSE WE OR OUR COLLABORATORS MUST OBTAIN REGULATORY APPROVAL TO MARKET OUR
PRODUCTS IN THE UNITED STATES AND FOREIGN JURISDICTIONS, WE CANNOT PREDICT
WHETHER OR WHEN WE WILL BE PERMITTED TO COMMERCIALIZE OUR PRODUCTS
Federal, state and local governments in the United States and
governments in other countries have significant regulations in place that govern
many of our activities. The preclinical testing and clinical trials of the
products that we develop ourselves or that our collaborators develop are subject
to extensive government regulation and may prevent us from creating commercially
viable products from our discoveries. In addition, the sale by us or our
collaborators of any commercially viable product will be subject to government
regulation from several standpoints, including the processes of:
- manufacturing;
- advertising and promoting;
- selling and marketing;
- labeling; and
- distributing.
We may not obtain regulatory approval for the products we develop and
our collaborators may not obtain regulatory approval for the products they
develop. Regulatory approval may also entail limitations on the indicated uses
of a proposed product. Because certain of our product candidates involve the
application of new technologies and may be based upon a new therapeutic
approach, such products may be subject to substantial additional review by
various government regulatory authorities, and, as a result, we may obtain
regulatory approvals for such products more slowly than for products based upon
more conventional technologies. If, and to the extent that, we are unable to
comply with these regulations, our ability to earn revenues will be materially
and negatively impacted.
The regulatory process, particularly for biopharmaceutical products like
ours, is uncertain, can take many years and requires the expenditure of
substantial resources. Any product that we or our collaborative partners develop
must receive all relevant regulatory agency approvals or clearances, if any,
before it may be marketed in the United States or other countries. Generally,
biological drugs and non-biological drugs are regulated more rigorously than
medical devices. In particular, human pharmaceutical therapeutic products are
subject to rigorous preclinical and clinical testing and other requirements by
the Food and Drug Administration in the United States and similar health
authorities in foreign countries. The regulatory process, which includes
extensive preclinical testing and clinical trials of each product in order to
establish its safety and efficacy, is uncertain, can take many years and
requires the expenditure of substantial resources.
Data obtained from preclinical and clinical activities is susceptible to
varying interpretations that could delay, limit or prevent regulatory agency
approvals or clearances. In addition, delays or rejections may be encountered as
a result of changes in regulatory agency policy during the period of product
development and/or the period of review of any application for regulatory agency
approval or clearance for a product. Delays in obtaining regulatory agency
approvals or clearances could:
- significantly harm the marketing of any products that we or our
collaborators develop;
- impose costly procedures upon our activities or the activities
of our collaborators;
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- diminish any competitive advantages that we or our collaborative
partners may attain; or
- adversely affect our ability to receive royalties and generate
revenues and profits.
Even if we commit the necessary time and resources, economic and
otherwise, the required regulatory agency approvals or clearances may not be
obtained for any products developed by or in collaboration with us. If
regulatory agency approval or clearance for a new product is obtained, this
approval or clearance may entail limitations on the indicated uses for which it
may be marketed that could limit the potential commercial use of the product.
Furthermore, approved products and their manufacturers are subject to continual
review, and discovery of previously unknown problems with a product or its
manufacturer may result in restrictions on the product or manufacturer,
including withdrawal of the product from the market. Failure to comply with
regulatory requirements can result in severe civil and criminal penalties,
including but not limited to:
- recall or seizure of products;
- injunction against manufacture, distribution, sales and
marketing; and
- criminal prosecution.
The imposition of any of these penalties could significantly impair our
business, financial condition and results of operations.
TO BE SUCCESSFUL, OUR PRODUCTS MUST BE ACCEPTED BY THE HEALTH CARE COMMUNITY,
WHICH CAN BE VERY SLOW TO ADOPT OR UNRECEPTIVE TO NEW TECHNOLOGIES AND PRODUCTS
Our products and those developed by our collaborative partners, if
approved for marketing, may not achieve market acceptance since physicians,
patients or the medical community in general may decide not to accept and
utilize these products. The products that we are attempting to develop may
represent substantial departures from established treatment methods and will
compete with a number of traditional drugs and therapies manufactured and
marketed by major pharmaceutical companies. The degree of market acceptance of
any of our developed products will depend on a number of factors, including:
- our establishment and demonstration to the medical community of
the clinical efficacy and safety of our product candidates;
- our ability to create products that are superior to alternatives
currently on the market;
- our ability to establish in the medical community the potential
advantage of our treatments over alternative treatment methods;
and
- reimbursement policies of government and third-party payors.
If the health care community does not accept our products for any of the
foregoing reasons, or for any other reason, our business would be materially
harmed.
THE REIMBURSEMENT STATUS OF NEWLY-APPROVED HEALTH CARE PRODUCTS IS UNCERTAIN AND
FAILURE TO OBTAIN REIMBURSEMENT APPROVAL COULD SEVERELY LIMIT THE USE OF OUR
PRODUCTS
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, including pharmaceuticals. If we fail to generate
adequate third party reimbursement for the users of our potential products and
treatments, then we may be unable to maintain price levels sufficient to realize
an appropriate return on our investment in product development.
In both domestic and foreign markets, sales of our products, if any,
will depend in part on the availability of reimbursement from third-party
payors, examples of which include:
- government health administration authorities;
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- private health insurers;
- health maintenance organizations; and
- pharmacy benefit management companies.
Both federal and state governments in the United States and foreign
governments continue to propose and pass legislation designed to contain or
reduce the cost of health care through various means. Legislation and
regulations affecting the pricing of pharmaceuticals and other medical products
may change or be adopted before any of our potential products are approved for
marketing. Cost control initiatives could decrease the price that we receive for
any product we may develop in the future. In addition, third-party payors are
increasingly challenging the price and cost-effectiveness of medical products
and services and any of our potential products and treatments may ultimately not
be considered cost effective by these third parties. Any of these initiatives or
developments could materially harm our business.
OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND IMPROPER HANDLING OF THESE
MATERIALS BY OUR EMPLOYEES OR AGENTS COULD EXPOSE US TO SIGNIFICANT LEGAL AND
FINANCIAL PENALTIES
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive compounds. As a
consequence, we are subject to numerous environmental and safety laws and
regulations, including those governing laboratory procedures, exposure to
blood-borne pathogens and the handling of biohazardous materials. We may be
required to incur significant costs to comply with current or future
environmental laws and regulations and may be adversely affected by the cost of
compliance with these laws and regulations.
Although we believe that our safety procedures for using, handling,
storing and disposing of hazardous materials comply with the standards
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. In the event
of such an accident, state or federal authorities could curtail our use of these
materials and we could be liable for any civil damages that result, the cost of
which could be substantial. Further, any failure by us to control the use,
disposal, removal or storage of, or to adequately restrict the discharge of, or
assist in the cleanup of, hazardous chemicals or hazardous, infectious or toxic
substances could subject us to significant liabilities, including joint and
several liability under certain statutes, and any liability could exceed our
resources and could have a material adverse effect on our business, financial
condition and results of operations. Additionally, an accident could damage our
research and manufacturing facilities and operations.
Additional federal, state and local laws and regulations affecting us
may be adopted in the future. We may incur substantial costs to comply with and
substantial fines or penalties if we violate any of these laws or regulations.
OUR STOCK PRICE HAS HISTORICALLY BEEN VERY VOLATILE
Stock prices and trading volumes for many biopharmaceutical companies
fluctuate widely for a number of reasons, including some reasons which may be
unrelated to their businesses or results of operations such as media coverage,
legislation and regulatory measures and the activities of various interest
groups or organizations. This market volatility, as well as general domestic or
international economic, market and political conditions, could materially and
adversely affect the market price of our common stock and the return on your
investment.
Historically, our stock price has been extremely volatile. Between
January 1998 and September 30, 2001, our stock has traded as high as $75.88 per
share and as low as $3.50 per share. The significant market price fluctuations
of our common stock are due to a variety of factors, including:
- depth of the market for the common stock;
- the experimental nature of our prospective products;
- fluctuations in our operating results;
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- market conditions relating to the biopharmaceutical and
pharmaceutical industries;
- any announcements of technological innovations, new commercial
products or clinical progress or lack thereof by us, our
collaborative partners or our competitors; and
- announcements concerning regulatory developments, developments
with respect to proprietary rights and our collaborations.
In addition, the stock market is subject to other factors outside our
control that can cause extreme price and volume fluctuations. Securities class
action litigation has often been brought against companies, including many
biotechnology companies, when they experience volatility in the market price of
their securities. Litigation brought against us could result in substantial
costs and a diversion of management's attention and resources, which could
adversely affect our business.
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES, INCLUDING SHARES THAT WILL BECOME
ELIGIBLE FOR SALE IN THE NEAR FUTURE, MAY ADVERSELY AFFECT THE MARKET PRICE FOR
OUR COMMON STOCK
Sales of substantial number of shares of our common stock in the public
market could significantly and negatively affect the market price for our common
stock. As of September 30, 2001, we had 22,024,257 shares of common stock
outstanding. Of these shares, 10,529,534 shares were issued (including shares
issuable upon conversion or exercise of convertible notes or warrants) since
December 1998 pursuant to private placements. Of these shares, 9,623,463 shares
have been registered pursuant to shelf registration statements and therefore may
be resold (if not sold prior to the date hereof) in the public market and
906,071 of the remaining shares may be resold pursuant to Rule 144 into the
public markets as early as March 9, 2002, upon the expiration of a lockup
agreement with us.
OUR UNDESIGNATED PREFERRED STOCK MAY INHIBIT POTENTIAL ACQUISITION BIDS; THIS
MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND THE VOTING RIGHTS
OF THE HOLDERS OF COMMON STOCK
Our certificate of incorporation provides our Board of Directors with
the authority to issue up to 3,000,000 shares of undesignated preferred stock
and to determine the rights, preferences, privileges and restrictions of these
shares without further vote or action by the stockholders. As of the date of
this Form 10-Q, the Board of Directors still has authority to designate and
issue up to 2,950,000 shares of preferred stock. The rights of the holders of
common stock will be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of shares of preferred stock may delay or prevent a change in control
transaction without further action by our stockholders. As a result, the market
price of our common stock may be adversely affected. The issuance of preferred
stock may also result in the loss of voting control by others.
PROVISIONS IN SHARE PURCHASE RIGHTS PLAN, OUR CHARTER AND BYLAWS, AND PROVISIONS
OF DELAWARE LAW, MAY INHIBIT POTENTIAL ACQUISITION BIDS FOR US, WHICH MAY
PREVENT HOLDERS OF OUR COMMON STOCK FROM BENEFITING FROM WHAT THEY MAY BELIEVE
MAY BE THE POSITIVE ASPECTS OF ACQUISITIONS AND TAKEOVERS
Our Board of Directors has adopted a share purchase rights plan,
commonly referred to as a "poison pill". This plan entitles existing
stockholders to rights, including the right to purchase shares of common stock,
in the event of an acquisition of 15% or more of our outstanding common stock.
Our share purchase rights plan could prevent stockholders from profiting from an
increase in the market value of their shares as a result of a change of control
of Geron by delaying or preventing a change of control. In addition, our Board
of Directors has the authority, without further action by our stockholders, to
issue additional shares of common stock, to fix the rights and preferences of,
and to issue authorized but undesignated shares of preferred stock.
In addition to our share purchase rights plan and the undesignated
preferred stock, provisions of our charter documents and bylaws may make it
substantially more difficult for a third party to acquire control of us and may
prevent changes in our management, including provisions that:
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- prevent stockholders from taking actions by written consent;
- divide the Board of Directors into separate classes with terms
of office that are structured to prevent all of the directors
from being elected in any one year; and
- set forth procedures for nominating directors and submitting
proposals for consideration at stockholders' meetings.
Provisions of Delaware law may also inhibit potential acquisition bids
for us or prevent us from engaging in business combinations. Either collectively
or individually, these provisions may prevent holders of our common stock from
benefiting from what they may believe are the positive aspects of acquisitions
and takeovers, including the potential realization of a higher rate of return on
their investment from these types of transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates and
foreign currency exchange rates. The following discussion about Geron's market
risk disclosures contains forward-looking statements. Actual results could
differ materially from those projected in the forward-looking statements. We are
exposed to market risk related to changes in interest rates and foreign currency
exchange rates. We do not use derivative financial instruments for speculative
or trading purposes.
Interest Rate Sensitivity. The fair value of our available-for-sale
securities at September 30, 2001 was $78.7 million. These investments include
$29.9 million of cash equivalents which are due in less than 90 days, $38.6
million of short-term investments which are due in less than one year and $10.2
million in long-term investments which are due in one to two years. Our
investment policy is to manage our marketable securities portfolio to preserve
principal and liquidity while maximizing the return on the investment portfolio
through the full investment of available funds. We diversify the marketable
securities portfolio by investing in multiple types of investment grade
securities. We primarily invest our marketable securities portfolio in
short-term securities with at least an investment grade rating to minimize
interest rate and credit risk as well as to provide for an immediate source of
funds. Although changes in interest rates may affect the fair value of the
marketable securities portfolio and cause unrealized gains or losses, such gains
or losses would not be realized unless the investments are sold. Due to the
nature of our investments, which are primarily corporate and municipal notes and
money market funds, we have concluded that there is no material market risk
exposure.
Foreign Currency Exchange Risk. Because we translate foreign currencies
into United States dollars for reporting purposes, currency fluctuations can
have an impact, though generally immaterial, on our results. We believe that our
exposure to currency exchange fluctuation risk is insignificant primarily
because our international subsidiary satisfies its financial obligations almost
exclusively in its local currency. For the three and nine months ended September
30, 2001, there was an immaterial currency exchange impact from our intercompany
transactions. However, the financial obligations of Geron to the Roslin
Institute are stated in British pounds sterling over the next four years. This
obligation may become more expensive for us if the United States dollar becomes
weaker against the British pounds sterling. As of September 30, 2001, we did not
engage in foreign currency hedging activities.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Wisconsin Alumni Research Foundation ("WARF") filed suit against
Geron on August 13, 2001 seeking a declaratory judgment concerning Geron's
rights and WARF's obligations under the 1999 license agreement between WARF and
Geron. The license agreement covers the commercialization of six cell types made
from human embryonic stem cells. We funded the research at the University of
Wisconsin-Madison that led to the isolation of human embryonic stem cells.
WARF's lawsuit addresses our option to obtain an exclusive license to cell types
in addition to the six cell types already licensed to us and the scope of our
exclusive license to commercialize research products based on those six cell
types. The complaint does not seek monetary damages or injunctive relief. On
October 3, 2001, we filed an answer and a motion for judgment on the pleadings
in the lawsuit. WARF's response to our motion was filed on October 30, 2001. The
suit is scheduled for trial in August 2002, although it is possible that it will
be dismissed based on our motion, settled, or otherwise decided before then.
Based upon the nature of the claims made and the information available to date
to us and our counsel through investigations and otherwise, we believe the
outcome of the lawsuit is not likely to have a material adverse effect on our
financial position, results of operations or cash flows. WARF has also indicated
that it is dissatisfied with the development plans we submitted to WARF for the
six cell types covered by our license agreement, and with our progress in
commercializing therapeutic products based on the WARF patents, and that WARF
believes we have not fully complied with our development obligations. WARF has
not filed any claim with respect to the development plans in the lawsuit, and
has not stated any intent to do so. In any event, we believe our development
plans and activities are both reasonable and consistent with our obligations
under the license agreement. We expect to continue to take such steps as we deem
necessary to meet our obligations under the license agreement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 20, 2001, our Board of Directors adopted a share purchase rights
plan and declared a dividend distribution of one right for each outstanding
share of common stock to stockholders of record as of July 31, 2001. Each right
entitles the holder to purchase one unit consisting of one one-thousandth of a
share of our Series A Junior Participating Preferred Stock for $100 per unit.
Under certain circumstances, if a person or group acquires 15% or more of our
outstanding common stock, holders of the rights (other than the person or group
triggering their exercise) will be able to purchase, in exchange for the $100
exercise price, shares of Geron common stock or of any company into which Geron
is merged having a value of $200. The rights expire on July 31, 2011 unless
extended by our Board of Directors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
(i) The Registrant filed a report on Form 8-K dated July 20, 2001
announcing the adoption a share purchase rights plan.
(ii) The Registrant filed a report on Form 8-K dated August 22, 2001
announcing the event that Kyowa Hakko Kogyo Co., Ltd. had
selected a telomerase inhibitor compound for the treatment of
cancer.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GERON CORPORATION
By: /s/ DAVID L. GREENWOOD
-------------------------------------
David L. Greenwood
Senior Vice President and
Chief Financial Officer
(Duly Authorized Signatory)
Date: November 5, 2001
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