1
United States
Securities and Exchange Commission
Washington D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended September 30, 1996
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
GERON CORPORATION
Delaware 75-2287752
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Constitution Drive, Menlo Park, CA 94025
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 473-7700
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 Outstanding at October 31, 1996:
value 10,014,200
2
GERON CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Balance Sheets as of September 30, 1996 and December
31, 1995
Condensed Statements of Operations for the three and nine
months ended September 30, 1996 and 1995
Condensed Statements of Cash Flows for the three and nine
months ended September 30, 1996 and 1995
Notes to Financial Statements
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Item 2: Changes In Securities
Item 3: Defaults upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
3
GERON CORPORATION
CONDENSED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(In thousands, except share and per share amounts) 1996 1995
-------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 17,009 $ 12,542
Short-term investments 10,925 3,011
Other current assets 955 349
-------- --------
Total current assets 28,889 15,902
Property and equipment, net 2,427 2,746
Notes receivable from officers 672 817
Deposits and other assets 36 284
-------- --------
$ 32,024 $ 19,749
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 543 $ 500
Accrued compensation 512 445
Accrued liabilities 1,019 513
Deferred revenue 862 1,335
Current portion of capital lease
obligations and equipment loans 965 994
-------- --------
Total current liabilities 3,901 3,787
Noncurrent portion of capital lease
obligations and equipment loans 1,297 1,654
Commitments
Stockholders' equity:
Preferred stock--Issuable in series, $0.001 par value; 3,000,000 and
6,410,759 shares authorized at September 30, 1996 and December 31,
1995, respectively; no and 6,071,390 shares issued and outstanding
at September 30, 1996 and December 31, 1995, respectively -- 6
Common stock, $0.001 par value; 25,000,000 shares and
10,294,117 shares authorized at September 30, 1996 and
December 31, 1995, respectively; 10,014,200 and 929,390
shares issued and outstanding at September 30, 1996 and
December 31, 1995, respectively 10 1
Additional paid-in-capital 61,349 40,205
Notes receivable from stockholders (122) (131)
Deferred compensation (1,075) --
Accumulated deficit (33,336) (25,773)
-------- --------
Total stockholders' equity 26,826 14,308
-------- --------
$ 32,024 $ 19,749
======== ========
See accompanying notes
4
GERON CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share and per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Revenues--contract $ 1,511 $ 1,545 $ 4,373 $ 2,970
License fees & royalties 3 -- 53 --
----------- ----------- ----------- -----------
Total revenues 1,514 1,545 4,426 2,970
Operating expenses:
Research and development 3,756 3,027 10,461 8,232
General and administrative 808 869 2,345 2,183
----------- ----------- ----------- -----------
Total operating expenses 4,564 3,896 12,806 10,415
----------- ----------- ----------- -----------
Loss from operations (3,050) (2,351) (8,380) (7,445)
Interest and other income 483 168 1,116 571
Interest and other expense (94) (106) (291) (295)
----------- ----------- ----------- -----------
Net loss $ (2,661) $ (2,289) $ (7,555) $ (7,169)
=========== =========== =========== ===========
Net loss per share: $ (0.38) $ (1.42) $ (2.19) $ (4.63)
=========== =========== =========== ===========
Shares used in calculation of
net loss per share: 7,046,618 1,615,234 3,446,358 1,548,070
=========== =========== =========== ===========
See accompanying notes.
5
GERON CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
NINE MONTHS ENDED
(In thousands) SEPTEMBER 30,
----------------------------
1996 1995
-------- --------
Cash flows from operating activities:
Net loss $ (7,555) $(7,169)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 688 569
Issuance of preferred stock in
exchange for services rendered 22 28
Deferred compensation 217 --
Changes in assets and liabilities:
Other current assets (606) (73)
Notes receivable from officers 145 (540)
Deposits and other assets 248 (13)
Accounts payable 43 113
Accrued compensation 67 21
Accrued liabilities 506 250
Deferred revenue (473) 3,855
-------- -------
Net cash used in operating activities (6,698) (2,959)
Cash flows from investing activities:
Capital expenditures (321) (486)
Purchases of securities available-for-sale (15,623) (3,763)
Proceeds from sales of securities available-for-sale -- (1,302)
Proceeds from maturities of securities available-for-sale 7,700 8,717
-------- -------
Net cash (used in) provided by investing activities (8,244) 3,166
Cash flows from financing activities:
Proceeds from equipment loans 313 440
Payments of obligations under capital leases and
equipment loans (747) (548)
Proceeds from issuance of common and preferred stock 19,843 12
-------- -------
Net cash provided by (used in) financing activities 19,409 (96)
-------- -------
Net increase in cash and cash equivalents 4,467 111
Cash and cash equivalents at the beginning of the period 12,542 6,523
-------- -------
Cash and cash equivalents at the end of the period $ 17,009 $ 6,634
======== =======
See accompanying notes.
6
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed unaudited balance sheet as of September 30,
1996 and condensed statements of operations for the three- and nine-month
periods ended September 30, 1996 and 1995 have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting 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, 1996 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1996.
These financial statements should be read in conjunction with the financial
statements for the year ended December 31, 1995, included in the Company's
Registration Statement on Form S-1 (No. 333-05853) declared effective by the
Securities and Exchange Commission on July 30, 1996. Unless otherwise
indicated, all information herein has been reinstated to reflect the
Company's 1-for-3.4 reverse stock split effected in July 1996 and the
conversion of all outstanding Preferred Stock into Common Stock as of the
closing of the Company's initial public offering in August 1996.
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding during the periods presented. Common equivalent
shares from stock options and convertible preferred stock are excluded from
the computation as their effect is antidilutive, except that, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and
common equivalent shares (stock options, warrants, and convertible preferred
stock) issued during the 12 month period prior to the Company's initial
public offering are presumed to have been issued in contemplation of the
public offering and have been included in the calculation as if they were
outstanding for all periods through June 30, 1996 (using the treasury stock
method for stock options and warrants and the if-converted method for
convertible preferred stock).
The supplemental calculation of net loss per share presented below has been
computed as described above but also gives retroactive effect from the date
of issuance to the conversion of the convertible preferred stock which
automatically converted to common shares upon the closing of the Company's
initial public offering.
Supplemental Net Loss Per Share Information
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------------- ----------------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Supplemental net loss per share $ (0.29) $ (0.37) $ (0.96) $ (1.19)
Shares used in computation 9,133,370 6,104,359 7,869,349 6,037,112
7
2. CASH EQUIVALENTS AND SHORT-TERM 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 market funds,
commercial paper, corporate master notes, and repurchase agreements with
United States financial institutions. As of September 30, 1996, the Company's
short-term investments consisted primarily of corporate notes with maturities
ranging from 3 to 12 months.
The Company classifies its marketable debt securities as available-for-sale.
Available-for-sale securities are recorded at fair value with unrealized
gains and losses reported in the accumulated deficit. Fair values for
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments. Realized gains and losses are
included in interest and other income and are derived using the specific
identification method for determining the cost of securities sold and have
been immaterial to date. Declines in market value judged other-than-temporary
result in a charge to interest income. Dividend and interest income are
recognized when earned.
8
GERON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of certain factors set forth under the heading "Risk Factors" in the
Company's Registration Statement on Form S-1 (Reg. No. 333-05853) dated July 30,
1996 relating to the Company's initial public offering and in the section of
this Item 2 titled "Additional Factors That May Affect Future Results".
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 Prospectus and
Registration Statement on Form S-1 (Reg. No. 333-05853) dated July 30, 1996
relating to the Company's initial public offering.
Geron is a biopharmaceutical company exclusively focused on discovering and
developing therapeutic and diagnostic products based upon the common biological
mechanisms underlying cancer and other age-related diseases.
The Company's 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 various collaborative agreements, as well as the progress of its
research and development efforts. 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. Geron is
subject to risks common to companies in its industry and at its stage of
development, including risks inherent in its research and development efforts,
reliance upon collaborative partners, enforcement of 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 the Company's research, it will be necessary for Geron and its
collaborators to conduct preclinical tests and clinical trials, demonstrate
efficacy and safety of the Company's product candidates, obtain regulatory
approvals or clearances and enter into manufacturing, distribution and marketing
arrangements, as well as obtain market acceptance. See "Additional Factors That
May Affect Future Results."
RESULTS OF OPERATIONS
REVENUES
The Company recognized contract revenues of $1.5 million in each of the three
months ended September 30, 1996 and 1995. The contract revenues were research
support payments under the Company's collaborative agreement with Kyowa Hakko
Kogyo, Co. Ltd. ("Kyowa Hakko"). Revenues recognized under this agreement
increased to $4.4 million for the nine month period ending September 30, 1996,
compared to $3.0 million for the nine month period ending September 30, 1995 as
a result of increased research expenditures and the fact that the agreement was
signed in April 1995.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $3.8 million and $10.5 million
for the three and nine months ended September 30, 1996, respectively, compared
to $3.0 million and $8.2 million for the comparable periods in 1995. These
increases were primarily due to increases in scientific staffing, expanded
patent related activities, start of deferred compensation amortization and
greater purchases of research materials and laboratory supplies for the
expansion of the Company's research programs. The Company expects research and
development expenses to increase in the future as a result of continued
development of its research programs.
9
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased to $808,000 and increased to $2.3
million for the three and nine months ended September 30, 1996, respectively,
compared to $869,000 and $2.2 million for the comparable periods in 1995. The
overall increase in expenses for the nine month period was primarily due to the
increases in staffing and increased legal, travel, and other expenses related to
business development.
INTEREST AND OTHER INCOME
Interest income increased to $353,000 and $758,000 for the three and
nine months ended September 30, 1996, respectively, compared to $168,000 and
$473,000 for the comparable periods in 1995. These increases were due to higher
average cash and investment balances as a result of the sale of equity
securities, completion of the company's initial public offering and research
funding received under the Kyowa Hakko collaborative agreement. Interest earned
in the future will depend on the Company's funding cycles and prevailing
interest rates. The Company also received $130,000 and $358,000 in research
payments under government grants for the three and nine months ended September
30, 1996, respectively, compared to none and $98,000 for the comparable periods
in 1995. The Company does not expect income from government grants to be
significant in the foreseeable future.
INTEREST AND OTHER EXPENSE
Interest and other expense decreased to $94,000 and $291,000 for the
three and nine months ended September 30, 1996, respectively, compared to
$106,000 and $295,000 for the comparable periods in 1995. These decreases were
due to lower outstanding lease obligations as a result of certain existing
leases expiring amortization during the quarter. The Company expects interest
and other expense to increase as it intends to increase equipment financing
over the coming year.
NET LOSS
Net loss increased to $2.7 million and $7.6 million for the three and nine
months ended September 30, 1996, compared to $2.3 million and $7.2 million for
the comparable periods in 1995. These increase were due primarily to the
increases in operating expenses during 1996.
10
LIQUIDITY AND CAPITAL RESOURCES
On July 30, 1996, the Company completed an initial public offering of 2,000,000
shares of Common Stock at $8.00 per share. In addition to and in conjunction
with the offering, Kyowa Hakko purchased 312,500 shares of Common Stock at $8.00
per share. The total net proceeds from the initial public offering and the Kyowa
Hakko stock purchase were approximately $16.5 million. These funds will be used
to fund research and development expenses, laboratory and equipment purchases
and other working capital and general corporate purposes.
Cash, cash equivalents and short-term investments at September 30, 1996 were
$27.9 million compared to $10.4 million at September 30, 1995. It is the
Company's investment policy to invest these funds in highly liquid securities,
such as interest-bearing money market funds, corporate master notes, commercial
paper, repurchase agreements with United States financial institutions and
federal agency notes.
Net cash used in operations increased to $6.7 million for the nine months ended
September 30, 1996 compared to $3.0 million for the comparable period in 1995.
The increase resulted primarily from the funds received under the collaborative
agreement with Kyowa Hakko. During the nine months ended September 30, 1995, the
Company received $7.0 million compared to $4.0 million for the comparable period
in 1996.
For the nine months ended September 30, 1996, additions of equipment and
leasehold improvements totaled approximately $321,000 of which approximately
$313,000 was financed through equipment financing arrangements. At September 30,
1996, the Company had approximately $1.7 million available for borrowing under
its equipment financing facility.
The Company estimates that its existing capital resources, payments under the
Kyowa Hakko collaborative agreement, interest income and equipment financing
will be sufficient to fund its current and planned operations through the first
quarter of 1998. There can be no assurance, however, that changes in the
Company's research and development plans or other changes affecting the
Company's operating expenses will not result in the expenditure of available
resources before such time, and in any event, the Company will need to raise
substantial additional capital to fund its operations in future periods. The
Company intends to seek additional funding through collaborative arrangements,
public or private equity or debt financings, capital lease transactions or other
financing sources that may be available.
11
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Specifically, the Company
wishes to alert readers that, except for the historical information contained
herein, the above discussion constitutes forward-looking statements that are
dependent on certain risks and uncertainties. These and other factors that may
cause actual results to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company are described
below and in the Registration Statement on Form S-1 (Reg. No. 333-05853) dated
July 30, 1996 relating to the Company's initial public offering.
TECHNOLOGICAL UNCERTAINTY
The study of the mechanisms of cellular aging and cellular immortality,
including telomere biology and telomerase, is a relatively new area of research,
and there can be no assurance that this research will lead to the discovery or
development of any therapeutic or diagnostic product. If and when potential lead
drug compounds or product candidates are identified through the Company's
research programs, they will require significant preclinical and clinical
testing prior to regulatory approval in the United States and elsewhere, and
there can be no assurance that any of these efforts will result in a product
that can be marketed. Because of the significant additional scientific,
regulatory and commercial milestones necessary for the Company's research
programs to be successful, there can be no assurance that any program will not
be abandoned after significant resources have been expended. The abandonment of
any research program could have a material adverse effect on the Company.
As a result of its drug discovery efforts to date, the Company has identified
compounds in in vitro studies that demonstrate potential for inhibiting
telomerase in vivo. However, additional development efforts will be required
prior to the selection of a lead compound for preclinical development and
clinical trials as a telomerase inhibitor for cancer. If and when selected, a
lead compound may prove to have undesirable and unintended side effects or other
characteristics affecting its efficacy or safety that may prevent or limit its
commercial use. For example, telomerase is active in reproductive cells and
transiently expressed in certain hematopoietic (blood), skin and
gastrointestinal cells. There can be no assurance that any product based on the
inhibition of telomerase will not adversely affect such cells and result in
unacceptable side effects. In addition, it is expected that telomerase
inhibition will have delayed efficacy as telomeres resume normal shortening and,
as a result, will in most cases be used in conjunction with traditional cancer
therapies. There can be no assurance that the delayed efficacy of a telomerase
inhibitor will not have a material adverse effect on the preclinical and
clinical development, ability to obtain regulatory approval, or marketability of
a telomerase inhibitor for the treatment of cancer. The abandonment of the
Telomerase Inhibition and Detection program would have a material adverse effect
on the Company.
With respect to the development and commercial application of the Company's
proprietary telomerase detection technology, there is, as yet, insufficient
clinical data to confirm its full utility to diagnose, prognose, monitor or
screen for cancer. Although the Company's licensee, Oncor, Inc. ("Oncor") has
commenced the sale of a diagnostic kit for research use, additional development
work and regulatory consents will be necessary prior to the introduction of
tests for clinical use. The Company's Cell Lifespan Extension program, designed
to modulate telomere length, is at an early stage of development. While telomere
length and replicative capacity have been extended in vitro, there can be no
assurance that the Company will discover a compound that will modulate telomere
length or increase replicative capacity effectively for clinical use. With
respect to the Company's Genomics of Aging program, the Company has identified
certain genes that are expressed differentially in senescent cells versus
replicatively young cells. However, the Company has not identified any compounds
that have been demonstrated to modulate such gene expression, and there can be
no assurance that any such compound will be discovered or developed. The
Company's Primordial Stem Cell Therapies program is also at a very early stage.
While primate PS cells have recently been isolated and allowed to differentiate
into numerous cell types, there can be no assurance that the Company's efforts
in this program will result in any commercial applications.
The Company may become aware of technology controlled by third parties that is
advantageous to the Company's business. There can be no assurance that the
Company will be able to acquire or license such
12
technology on reasonable terms, if at all. In the event that the Company is
unable to acquire such technology, the Company may be required to expend
significant time and resources to develop similar technology, and there can be
no assurance that it will be successful in this regard. If the Company cannot
acquire or develop necessary technology, it may be prevented from pursuing its
business objectives. Moreover, a competitor of the Company could acquire or
license such technology. Any such event would have a material adverse effect on
the Company.
EARLY STAGE OF DEVELOPMENT
Geron is at an early stage in the development of therapeutic and diagnostic
products. The Company has not yet selected a lead compound for any of its drug
development programs. In order to identify and select such a compound, it must
have access to sufficient numbers of chemical compounds and resources, of which
there can be no assurance. Products that may result from the Company's research
and development programs are not expected to be commercially available for a
significant number of years, if at all. The Company's program to identify a
telomerase inhibitor is currently at the drug discovery stage, while the
Company's other programs are currently focused on research efforts prior to drug
discovery or preclinical development. It is difficult to predict when, if ever,
the Company will select a lead compound for drug development as a telomerase
inhibitor. In addition, there can be no assurance that the Company's other
programs will move beyond their current stage. Assuming the Company's research
advances and the Company is able to identify and select a lead compound for
telomerase inhibition, certain preclinical development efforts will be necessary
to determine whether the potential product has sufficient safety to enter
clinical trials. If such a potential product receives authorization from the
United States Food and Drug Administration ("FDA") to enter clinical trials,
then it may be subjected to a multiphase, multicenter clinical study to
determine its safety and efficacy. It is not possible to predict the length or
extent of clinical trials or the period of any required patient follow-up, but
it is presently expected to extend a number of years. Assuming clinical trials
of any potential product are successful and other data are satisfactory, the
Company will submit an application to the FDA and appropriate regulatory bodies
in other countries to seek permission to market the product. Typically, the
review process at the FDA takes several years, and there can be no assurance
that the FDA will approve the Company's application or will not require
additional clinical trials or other data prior to approval. Furthermore, even if
such approval is ultimately obtained, delays in the approval process could have
a material adverse effect on the Company. In addition, there can be no assurance
that any potential product will be capable of being produced in commercial
quantities at a reasonable cost or that such product will be successfully
marketed. Based on the foregoing, the Company does not anticipate being able to
commence marketing of any therapeutic products for many years, if at all. There
can be no assurance that any of the Company's product development efforts will
be successfully completed, that regulatory approvals will be obtained, or that
the Company's products, if any, will achieve market acceptance.
DEPENDENCE ON STRATEGIC AND RESEARCH COLLABORATIONS
The Company's strategy for the development, clinical testing and
commercialization of its products includes entering into collaborations with
corporate partners, licensors, licensees and others, and is dependent upon the
subsequent success of these other parties in performing their respective
responsibilities. The success of any collaboration depends on the continued
cooperation of its partners, as to which there can be no assurance. The amount
and timing of resources to be devoted to activities by its collaborators are not
within the direct control of the Company. There can be no assurance that such
partners will perform their obligations as expected or that the Company will
derive any revenue from such arrangements. There can also be no assurance that
the Company's current collaborators or any future collaborators will not pursue
existing or alternative technologies in preference to those being developed in
collaboration with the Company.
The Company currently has no manufacturing infrastructure and no marketing or
sales organization, and intends to rely in substantial part on its current and
future strategic partners for the manufacture of any product and the principal
marketing and sales responsibilities for any such product. To the extent the
Company chooses not to or is unable to establish such arrangements, the Company
will require substantially greater capital to undertake its own manufacturing,
marketing and sales of any product.
13
In April 1995, the Company entered into a License and Research Collaboration
Agreement with Kyowa Hakko (the "Kyowa Hakko Agreement") for the development and
commercialization in certain Asian countries of a telomerase inhibitor for the
treatment of cancer. Under the collaboration, Kyowa Hakko provides certain
funding for the Company's research and development activities and is responsible
for all clinical, regulatory, manufacturing, marketing and sales efforts and
expenses in the covered territory. The Kyowa Hakko Agreement provides that Kyowa
Hakko will not pursue research and development independent of its collaboration
with Geron with respect to telomerase inhibition for the treatment of cancer in
humans until April 24, 1999, at the earliest. The Kyowa Hakko Agreement also
provides in general that, while Geron exercises significant control during the
research phase, Kyowa Hakko exercises significant control during the development
and commercialization phases of the collaboration. There can be no assurance
that the collaboration will be successful. The Company has also entered into
licensing arrangements with several diagnostic companies for the Company's
telomerase detection technology. However, because these licenses are limited to
the research use only market, such arrangements are not expected to generate
significant commercial revenues.
There can be no assurance that the Company will be able to negotiate additional
strategic arrangements in the future on acceptable terms, if at all, or that
such strategic arrangements will be successful. In the absence of such
arrangements, the Company may encounter significant delays in introducing any
product into certain markets or find that the research, development,
manufacture, marketing or sale of any product in such markets is adversely
affected. In the event that the Company does not enter into such arrangements,
it may be materially adversely affected.
The Company has relationships with collaborators and scientific advisors at
academic and other institutions, some of whom conduct research at the Company's
request. These collaborators and scientific advisors are not employees of the
Company and may have commitments to, or consulting or advisory contracts with,
other entities that may limit their availability to the Company. The Company has
limited control over the activities of these collaborators and advisors and,
except as otherwise required by its collaboration and consulting agreements, can
expect only limited amounts of their time to be dedicated to the Company's
activities.
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNCERTAINTY OF PATENT
PROTECTION
Geron's success will depend in part on its ability to obtain and enforce its
patents and maintain trade secrets, both in the United States and in other
countries. The patent positions of pharmaceutical and biopharmaceutical
companies, including the Company, are highly uncertain and involve complex legal
and technical questions for which legal principles are not firmly established.
There can be no assurance that the Company has developed or will continue to
develop products or processes that are patentable or that patents will issue
from any of the pending applications, including even allowed patent
applications. There can also be no assurance that the Company's current patents,
or patents that issue on pending applications, will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
proprietary protection or competitive advantages to the Company. Because (i)
patent applications in the United States are maintained in secrecy until patents
issue, (ii) patent applications are not generally published until many months or
years after they are filed and (iii) publication of technological developments
in the scientific and patent literature often occurs long after the date of such
developments, the Company cannot be certain that its or its licensors' patents
and patent applications name as inventors the first to invent the inventions
disclosed in the patent applications or patents or that it or its licensors were
the first to file patent applications for such inventions.
Litigation to establish the validity of patents, to defend against patent
infringement claims of others and to assert infringement claims against others
can be expensive and time consuming even if the outcome is favorable to the
Company. If the outcome of patent prosecution or litigation is unfavorable to
the Company, the Company could be materially adversely affected. Patent law
relating to the scope and enforceability of claims in the fields in which the
Company operates is still evolving. The degree of future protection for the
Company's proprietary rights, therefore, is highly uncertain. In this regard,
there can be no assurance that patents will issue from the Company's or its
licensors' patent applications, which include
14
many interrelated applications directed to common or related subject matter. The
Company is aware of certain patent applications that have been filed by others
with respect to telomerase and telomere length modulation. For example, Iowa
State University has filed United States and corresponding foreign patent
applications claiming methods and reagents relating to the RNA component of
human telomerase, and Isis Pharmaceuticals, Inc. has filed United States and
corresponding foreign patent applications relating to oligonucleotide-like
reagents asserted to have telomere length modulating activity. In addition,
there are a number of issued patents and pending applications owned by others
directed to differential display, stem cell and other technologies relevant to
the Company's research, development and commercialization efforts. There can be
no assurance that the Company's technology can be developed and commercialized
without a license to such patents or that such patent applications will not be
granted priority over patent applications filed by the Company. Furthermore,
there can be no assurance that others will not independently develop similar or
alternative technologies to those of the Company, duplicate any of the Company's
technologies, or design around the patented technologies developed by the
Company or its licensors, any of which may have a material adverse effect on the
Company.
The commercial success of the Company depends significantly on its ability to
operate without infringing patents and proprietary rights of others. There can
be no assurance that the Company's technologies do not and will not infringe the
patents or proprietary rights of others. In the event of such infringement, the
Company may be enjoined from pursuing research, development or commercialization
of its potential products or may be required to obtain licenses to these patents
or other proprietary rights or to develop or obtain alternative technologies.
There can be no assurance that the Company will be able to obtain alternative
technologies or any required license on commercially favorable terms, if at all,
and if any such license is or alternative technologies are not obtained, the
Company may be delayed or prevented from pursuing the development of certain of
its potential products. The Company's breach of an existing license or failure
to obtain or delay in obtaining alternative technologies or a license to any
technology that it may require to develop or commercialize its products may have
a material adverse effect on the Company. In this regard, the Company is
currently in discussions with a research institution with respect to a research
collaboration for the development of certain technology related to its
Primordial Stem Cell Therapies program. A third party has notified the Company
that if the Company enters into such an arrangement, the Company will violate
the rights of such third party. The Company has made no decision whether to
enter into such an arrangement and, in any event, must yet complete scientific
and legal due diligence and successfully negotiate the terms of such an
arrangement, as to which there can be no assurance. If such an arrangement is
entered into, the Company believes it has substantial defenses to any claims
that might be asserted by such third party.
Litigation may also be necessary to enforce any patents issued or licensed to
the Company or to determine the scope and validity of others' proprietary
rights. The Company could incur substantial costs if litigation is required to
defend itself in patent suits or other intellectual property litigation brought
by others or if Geron initiates such suits. There can be no assurance that the
Company's issued or licensed patents would be held valid or infringed in a court
of competent jurisdiction or that a patent held by another will be held invalid
or not infringed in such court. An adverse outcome in litigation or an
interference to determine priority or other proceeding in a court or patent
office could subject the Company to significant liabilities to other parties,
require disputed rights to be licensed from other parties or require the Company
to cease using such technology, any of which could have a material adverse
effect on the Company.
Geron also relies on trade secrets to protect its proprietary technology,
especially in circumstances in which patent protection is not believed to be
appropriate or obtainable. Geron attempts to protect its proprietary technology
in part by confidentiality agreements with its employees, consultants and
certain contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors.
The Company is party to various license agreements which give it rights to use
certain technologies in its research, development and commercialization
activities. Disputes have arisen and may continue to arise as to the
inventorship and corresponding rights in know-how and inventions resulting from
the joint creation or use of intellectual property by the Company and its
licensors, research collaborators and consultants.
15
There can be no assurance that the Company will be able to continue to license
such technologies on commercially reasonable terms, if at all, or to maintain
the exclusivity of its exclusive licenses. In this regard, the Company's license
for primate PS cells derived from primates is currently exclusive until January
1998 and, unless agreed otherwise, non-exclusive thereafter. The failure of the
Company to maintain exclusive or other rights to any of its exclusively licensed
technologies could have a material adverse effect on the Company.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will require substantial capital resources in order to
conduct its operations. The Company's future capital requirements will depend
on many factors, including, among others, continued scientific progress in its
research and development programs; the magnitude and scope of these activities;
the ability of the Company to maintain and establish strategic arrangements for
research, development, clinical testing, manufacturing and marketing; progress
with preclinical and clinical trials; the time and costs involved in obtaining
regulatory approvals; the costs involved in preparing, filing, prosecuting,
maintaining, defending and enforcing patent claims; or the potential for new
technologies and products. The Company intends to seek such additional funding
through collaborative arrangements, public or private equity or debt financings
and capital lease transactions; however, there can be no assurance that
additional financing will be available on acceptable terms, if 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, such arrangements may require the
Company to relinquish rights to certain of its technologies, product candidates
or products that the Company would otherwise seek to develop or commercialize
itself. If sufficient capital is not available, the Company may be required to
delay, reduce the scope of or eliminate one or more of its research or
development programs, each of which would have a material adverse effect on the
Company. Based on current projections, the Company estimates that its existing
capital resources, payments under the Kyowa Hakko Agreement, interest income
and equipment financing will be sufficient to fund its current and planned
operations through the first quarter of 1998. There can be no assurance that
the assumptions underlying such estimates are correct or that such funds will
be sufficient to meet the capital needs of the Company during such period. In
addition, a substantial amount of the payments to be made by Kyowa Hakko are
dependent upon the achievement by the Company of development and regulatory
milestones and there can be no assurance that such milestones will be achieved.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT
Geron has incurred net operating losses in every year of operation since its
inception in 1990. Losses have resulted principally from costs incurred in
connection with the Company's research and development activities and from
general and administrative costs associated with the Company's operations. The
Company expects to incur additional operating losses over the next several years
as the Company's research and development efforts and preclinical testing are
expanded and clinical testing is commenced. Substantially all of the Company's
revenues to date have been research support payments under the Kyowa Hakko
Agreement. The Company's right to receive research support payments under the
Kyowa Hakko Agreement is scheduled to expire in April 1998. In addition, the
Company is unable to determine at this time the level of the revenue to be
received from the sale of diagnostic products and does not expect to receive
significant revenues from the sale of the research use only kits. The Company's
ability to achieve profitability is dependent on its ability, alone or with
others, to successfully select therapeutic compounds for development, obtain the
required regulatory consents and manufacture and market any resulting products.
There can be no assurance when or if the Company will receive revenues from
product sales or achieve profitability. Failure to generate significant
additional revenues and achieve profitability could impair the Company's ability
to sustain operations.
16
SUBSTANTIAL COMPETITION; RISK OF TECHNOLOGICAL OBSOLESCENCE
The pharmaceutical and biopharmaceutical industries are intensely competitive.
The Company believes that certain pharmaceutical and biopharmaceutical companies
as well as certain 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 and telomerase. In addition,
other products and therapies that could compete directly with the products that
the Company is seeking to develop and market currently exist or are being
developed by pharmaceutical and biopharmaceutical companies, and by academic and
other research organizations. Many companies are also developing alternative
therapies to treat cancer and, in this regard, are competitive with the Company.
The pharmaceutical companies developing and marketing such competing products
have significantly greater financial resources and expertise in research and
development, manufacturing, preclinical and clinical testing, obtaining
regulatory approvals and marketing than the Company. 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 those of the Company. These companies and institutions compete with
the Company in recruiting and retaining qualified scientific and management
personnel as well as in acquiring technologies complementary to the Company's
programs. There is also competition for access to libraries of compounds to use
for screening. Any inability of the Company to secure and maintain access to
sufficiently broad libraries of compounds for screening potential targets would
have a material adverse effect on the Company. In addition to the above factors,
Geron will face competition with respect to 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. There can be no assurance that competitors
will not develop more effective or more affordable products, or achieve earlier
patent protection or product commercialization than the Company or that such
products will render the Company's products obsolete.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the principal members of its scientific and
management staff, the loss of whose services might significantly delay or
prevent the achievement of research, development or business objectives. In
addition, the Company relies on consultants and advisors, including the members
of its Scientific Advisory Board and Clinical Advisory Board, to assist the
Company in formulating its research and development strategy. Retaining and
attracting qualified scientific and management personnel, consultants and
advisors is critical to the Company's success. The Company faces competition for
qualified individuals from numerous pharmaceutical, biopharmaceutical and
biotechnology companies, as well as academic and other research institutions.
There can be no assurance that the Company will be able to attract and retain
such individuals on acceptable terms, if at all, and the failure to do so would
have a material adverse effect on the Company.
ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF PRIMORDIAL STEM CELL THERAPIES
The Company's Primordial Stem Cell Therapies program may involve the use of PS
cells that would be derived from human embryonic tissue, and therefore may raise
certain ethical, legal and social issues regarding the appropriate utilization
of this tissue. The use of embryonic tissue in scientific research is an issue
of national interest. Many research institutions, including certain of the
Company's scientific collaborators, have adopted policies regarding the ethical
use of these types of human tissue. These policies may have the effect of
limiting the scope of research conducted in this area, resulting in reduced
scientific progress. In addition, the United States government and its agencies
currently do not fund research which involves the use of such tissue and may in
the future regulate or otherwise restrict its use. The inability of the Company
to conduct research on these cells due to such factors as government regulation
or otherwise could have a material adverse effect on the program. In the event
the Company's research related to PS cell therapies becomes the subject of
adverse commentary or publicity, the Company's name and goodwill could be
adversely affected.
17
GOVERNMENT REGULATION
The preclinical testing and clinical trials of any products developed by the
Company or its collaborative partners and the manufacturing, labeling, sale,
distribution, marketing, advertising and promotion of any new products resulting
therefrom are subject to regulation by federal, state and local governmental
authorities in the United States, the principal one of which is the FDA, and by
similar agencies in other countries in which products developed by the Company
or its collaborative partners may be tested and marketed (each of such federal,
state, local and other authorities and agencies, a "Regulatory Agency"). Any
product developed by the Company or its collaborative partners must receive all
relevant Regulatory Agency approvals or clearances, if any, before it may be
marketed in a particular country. 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 are susceptible to varying interpretations
which could delay, limit or prevent Regulatory Agency approval or clearance. In
addition, delays or rejections may be encountered based upon 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 adversely affect the marketing of any products developed by the Company or
its collaborative partners, impose costly procedures upon the Company's and its
collaborative partners' activities, diminish any competitive advantages that the
Company or its collaborative partners may attain and adversely affect the
Company's ability to receive royalties and generate revenues and profits. There
can be no assurance that, even after such time and expenditures, any required
Regulatory Agency approvals or clearances will be obtained for any products
developed by or in collaboration with the Company. Moreover, if Regulatory
Agency approval or clearance for a new product is obtained, such approval or
clearance may entail limitations on the indicated uses for which it may be
marketed that could limit the potential market for any such 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 such product or manufacturer,
including withdrawal of the product from the market. In general, failure to
comply with FDA requirements can result in severe civil and criminal penalties,
including but not limited to recall or seizure of product, injunction against
manufacture, distribution, sales and marketing, and criminal prosecution.
NO ASSURANCE OF MARKET ACCEPTANCE; UNCERTAINTY OF PHARMACEUTICAL
PRICING; IMPACT OF HEALTH CARE REFORM MEASURES
There can be no assurance that any products successfully developed by the
Company or its collaborative partners, if approved for marketing, will achieve
market acceptance. The products which the Company is attempting to develop will
compete with a number of traditional drugs and therapies manufactured and
marketed by major pharmaceutical companies, as well as new products currently
under development by such companies and others. The degree of market acceptance
of any products developed by the Company will depend on a number of factors,
including the establishment and demonstration in the medical community of the
clinical efficacy and safety of the Company's product candidates, their
potential advantage over alternative treatment methods and reimbursement
policies of government and third-party payors. There is no assurance that
physicians, patients or the medical community in general will accept and utilize
any products that may be developed by the Company or its collaborative partners.
In both domestic and foreign markets, sales of the Company's products, if any,
will depend in part on the availability of reimbursement from third-party payors
such as government health administration authorities, private health insurers,
health maintenance organizations, pharmacy benefit management companies and
other organizations. 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 the Company's potential products are
approved for marketing. Cost control initiatives could decrease the price that
the Company receives for any product it may develop in the future and have a
material adverse effect on the Company. In addition, third-party payors are
increasingly challenging the price and cost-effectiveness of medical products
and services.
18
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, including pharmaceuticals. There can be no assurance that
the Company's potential products will be considered cost effective or that
adequate third-party reimbursement will be available to enable Geron to maintain
price levels sufficient to realize an appropriate return on its investment in
product development. In any such event, the Company may be materially adversely
affected.
REGULATIONS RELATING TO THE ENVIRONMENT AND HAZARDOUS MATERIALS
The Company's research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive compounds. As a
consequence, the Company is subject to numerous environmental and safety laws
and regulations. There can be no assurance that the Company will not be required
to incur significant costs to comply with current or future environmental laws
and regulations, or that the Company will not be adversely affected by the cost
of compliance with such laws and regulations. Although the Company believes that
its safety procedures for using, handling, storing and disposing of such
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, the Company's use of these
materials could be curtailed by state or federal authorities, the Company could
be held liable for any damages that result, and any such liability could have a
material adverse effect on the Company.
POTENTIAL PRODUCT LIABILITY CLAIMS; ABSENCE OF INSURANCE
Although the Company believes it does not currently have any exposure to product
liability claims, the Company's future business will expose it to potential
product liability risks that are inherent in the testing, manufacturing and
marketing of human therapeutic and diagnostic products. The Company currently
has no clinical trial liability insurance and there can be no assurance that it
will be able to obtain and maintain such insurance for any of its clinical
trials. In addition, there can be no assurance that the Company will be able to
obtain or maintain product liability insurance in the future on acceptable terms
or with adequate coverage against potential liabilities.
CONTROL BY MANAGEMENT AND CURRENT STOCKHOLDERS
Executive officers and directors of the Company, together with entities
affiliated with them, own or control approximately 44% of the outstanding shares
of Common Stock and are able to significantly influence the election of the
Company's Board of Directors and other corporate actions requiring stockholder
approval, as well as significantly influence the direction and policies of the
Company.
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock in the public market could
adversely affect the market price of the Common Stock. The Company has
outstanding approximately 10,000,000 shares of Common Stock. Kyowa Hakko has
agreed not to sell the 312,500 shares of Common Stock held by it until July 30,
1997, after which time such shares will be freely transferable in accordance
with Regulation S promulgated under the Securities Act. Approximately 7,700,000
shares of Common Stock are Restricted Shares. The Restricted Shares were sold by
the Company in reliance upon exemptions from the registration requirements of
the Securities Act and are "restricted securities" under the Securities Act. The
officers, directors, employees and stockholders of the Company, who together
hold the Restricted Shares, have agreed not to sell their shares without the
prior written consent of J.P. Morgan Securities Inc. until January 27, 1997. On
January 27, 1997, approximately 6,300,000 Restricted Shares that are subject to
lock-up agreements (as described above) will become eligible for sale in the
public market subject to Rule 144 and Rule 701 under the Securities Act. The
remaining approximately 1,400,000 Restricted Shares, which are also subject to
such lock-up agreements, will have been held for less than two years upon the
expiration of such lock-up agreements and will become eligible for sale under
Rule 144 at various dates thereafter as the holding period provisions of Rule
144 are satisfied. Certain holders of shares of Common Stock and securities
convertible into or exercisable for shares of Common Stock have certain
registration rights under a registration rights agreement among such holders and
the Company. The shares of Common Stock
19
covered by these registration rights include approximately 7,100,000
outstanding shares of Common Stock. In addition, the Company registered under
the Securities Act approximately 2,500,000 shares of Common Stock subject to
outstanding stock options or reserved for issuance under the Company's 1992
Stock Option Plan, 1996 Directors' Stock Option Plan and 1996 Employee Stock
Purchase Plan.
POSSIBLE VOLATILITY OF STOCK PRICE
There has been a history of significant volatility in the market prices for
shares of biopharmaceutical companies, and it is likely that the market price of
the Common Stock will be similarly volatile. Prices for the Common Stock may be
influenced by many factors, including the depth of the market for the Common
Stock, investor perception of the Company, fluctuations in the Company's
operating results and market conditions relating to the biopharmaceutical and
pharmaceutical industries. In addition, the market price of the Common Stock may
be influenced by announcements of technological innovations, new commercial
products or clinical progress or the lack thereof by the Company, its
collaborative partners or its competitors. In addition, announcements concerning
regulatory developments, developments with respect to proprietary rights and the
Company's collaborations as well as other factors could also have a significant
impact on the Company's business and the market price of the Common Stock.
Finally, future sales of substantial amounts of Common Stock by existing
stockholders could also adversely affect the prevailing price of the Common
Stock.
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS; CERTAIN ANTI-TAKEOVER
PROVISIONS
The Company's Board of Directors has the authority to issue up to 3,000,000
shares of undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without further vote or action by the
Company's stockholders. 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 Preferred
Stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. In addition,
certain provisions of the Company's charter documents, including the inability
of stockholders to take actions by written consent and the staggered election of
the Company's Board of Directors, and certain provisions of Delaware law could
delay or make difficult a merger, tender offer or proxy contest involving the
Company.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
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
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter ended
September 30, 1996.
21
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
Chief Financial Officer, Treasurer
and Secretary
(Duly Authorized Signatory and Principal
Financial and Accounting Officer)
Date: November 7, 1996
22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule