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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD FROM
--------------- TO
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COMMISSION FILE NUMBER: 0-19986
CELL GENESYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3061375
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OR ORGANIZATION)
342 LAKESIDE DRIVE, FOSTER CITY, CALIFORNIA 94404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK $.001
PAR VALUE
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(650) 425-4400
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information incorporated
by reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ ]
As of March 19, 1998, the approximate market value of voting stock held by
nonaffiliates of the Registrant was $164,437,286. 2,725,561 shares of Common
Stock held by each officer, director and holder of 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 19, 1998, the number of outstanding shares of the Registrant's
Common Stock was 28,259,301.
DOCUMENTS INCORPORATED BY REFERENCE:
INCORPORATED BY REFERENCE
DOCUMENT INTO PART OF THIS FORM 10-K
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The information called by Part III of this Form 10-K is incorporated by
reference to the definitive proxy statement for the annual meeting of
stockholders of the company which will be filed no later than 120 days
after December 31, 1997.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related 17
Stockholder Matters.......................................
Item 6. Selected Consolidated Financial Data........................ 18
Item 7. Management's Discussion and Analysis of Financial Condition 19
and Results of Operations.................................
Item 7a Quantitative and Qualitative Disclosures about Market 28
Risk......................................................
Item 8. Consolidated Financial Statements and Supplementary Data.... 29
Item 9. Changes In and Disagreements with Accountants on Accounting 47
and Financial Disclosure..................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 47
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and 47
Management................................................
Item 13. Certain Relationships and Related Transactions.............. 47
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 47
8-K.......................................................
SIGNATURES.............................................................. 52
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PART I
ITEM 1. BUSINESS
OVERVIEW
Statements made in this document other than statements of historical fact,
including statements about the company's and its subsidiary's clinical trials,
product pipelines, corporate partnerships, licenses and intellectual property,
are forward-looking statements within the meaning of section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
and are subject to a number of uncertainties that could cause actual results to
differ materially from the statements made, including risks associated with the
success of research and product development programs, patents, proprietary
technology and corporate partnerships. Reference is made to discussions about
risks associated with product development programs, intellectual property and
other risks which may affect the company under "Risk Factors" below. The company
does not undertake any obligation to update forward-looking statements.
Since its inception in April 1988, Cell Genesys, Inc. ("Cell Genesys" or
"the Company") has focused its research and product development efforts on human
disease therapies which are based on innovative gene modification technologies.
Cell Genesys' strategic objective is to develop and commercialize ex vivo and in
vivo gene therapies to treat major, life-threatening diseases and disorders.
Cell Genesys' AIDS gene therapy currently is in Phase II human clinical testing
and is being developed through a worldwide collaboration with Hoechst Marion
Roussel, Inc. ("Hoechst Marion Roussel"). Two types of cancer gene therapies,
for which Cell Genesys currently has worldwide rights, are in Phase I/II human
clinical testing for the treatment of colon cancer, lung cancer, melanoma and
prostate cancer. Preclinical studies are being conducted by Cell Genesys for the
treatment of other cancer indications as well as for hemophilia, cardiovascular
disease and neurologic conditions. Cell Genesys' assets outside of gene therapy
include its licensing program in gene activation technology and its subsidiary,
Abgenix, Inc. ("Abgenix"), which is focused on the development and
commercialization of antibody therapies.
During 1997, Cell Genesys acquired Somatix Therapy Corporation ("Somatix"),
establishing a leadership position in gene therapy. Product research and
development programs of the two companies were highly complementary, with Cell
Genesys focused on the treatment of AIDS and cancer, and Somatix focused on
cancer, central nervous system diseases and other disorders. Technology research
and development programs were also highly complementary, with synergies in the
retroviral and adenoviral vector programs of both companies and with new
adeno-associated viral and lentiviral vector programs contributed by Somatix.
Integration of the two companies was completed by the end of 1997, having
prioritized the most promising programs, significantly reducing overall expenses
of the combined businesses. With the combined portfolio of product
opportunities, technologies and intellectual property, Cell Genesys believes it
has substantially increased its ability to attract new corporate collaborations,
to advance product candidates through development and commercialization and also
has expanded its opportunities to license additional therapeutic genes from
other companies and research institutes needed to create new gene therapies.
Cell Genesys believes that gene therapies are likely to be developed on a
continuum, progressing from ex vivo (modification of cells outside the patient's
body for injection as therapy) to in vivo (modification of cells within the
patient's body to provide therapy). Ex vivo gene therapies currently are being
evaluated by Cell Genesys in human clinical studies. Designed to impart new
disease-fighting capabilities to the patient's immune system, they include two
proprietary approaches to treatment: T cell gene therapy for cancer and AIDS,
and GVAX(TM) therapeutic vaccines for cancer. In each case, Cell Genesys'
treatment goal is to stimulate an immune response which targets and destroys
diseased cells.
In vivo gene therapies, which may lead to "gene in a bottle" products for
use much like any biopharmaceutical, currently are being evaluated by Cell
Genesys in preclinical studies. Targeted cells typically cannot be removed from
the body for external processing and therefore are modified within the body.
Preclinical studies include applications for treatment of hemophilia,
Parkinson's disease and other neurological disorders. The treatment goal is to
stimulate the cells to produce a protein needed to normalize key biological
processes, inhibit specific disease mechanisms, or overcome various
difficult-to-treat conditions.
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During 1997, Cell Genesys made extensive progress in its gene therapy
programs. For the treatment of HIV infection, Phase II human clinical studies
were expanded using T cell AIDS gene therapy, based on encouraging data from
earlier clinical studies and widespread medical reports about the inability of
current drug therapies to eradicate reservoirs of HIV, the AIDS-causing virus.
For the treatment of cancer, Phase I/II human clinical studies were initiated
using T cell cancer gene therapy for colon cancer and using the GVAX cancer
vaccine for melanoma, lung cancer and prostate cancer. Hemophilia gene therapy
entered preclinical testing and demonstrated long-term production of a blood
clotting protein that is deficient in patients with hemophilia. Cardiovascular
gene therapy continued to show promise in preclinical testing for the prevention
or inhibition of restenosis following angioplasty. In Cell Genesys' central
nervous system gene therapy program, progress was achieved in preclinical
studies evaluating the potential to slow or halt the degeneration of certain
brain cells in Parkinson's disease. A new treatment indication, the management
of uncontrollable pain associated with fatal illness, also is being evaluated.
Cell Genesys has maintained its financial strength through funding received
from various corporate partnerships and licensing agreements, as well as through
strategic management of its resources. In 1997, Cell Genesys licensed its rights
related to two gene-activated proteins to Hoechst Marion Roussel. In addition,
Cell Genesys' antibody business subsidiary Abgenix agreed to license three
antibodies to Pfizer, Inc., ("Pfizer"), and raised $21 million in a private
placement, thereby increasing its valuation to $75 million. Separately, Cell
Genesys raised an additional $20 million in a private placement to support its
gene therapy programs, bringing the Company's consolidated cash position to
$88.8 million at December 31, 1997.
To develop its technologies as broadly as possible, to fund product
development and to accelerate the commercialization of certain product
opportunities, Cell Genesys has and intends to continue to enter selectively
into strategic collaborative agreements with established pharmaceutical and
biotechnology companies. Such alliances are intended to provide financial
resources, research, development and manufacturing capabilities, and marketing
infrastructure to aid in the commercialization of potential disease therapies.
Cell Genesys also evaluates on an ongoing basis opportunities to in-license or
acquire genes and technologies that complement its portfolio. There can be no
assurance that Cell Genesys will be able to enter into additional collaborative
relationships or obtain new genes and technologies on acceptable terms, if at
all, or that if such actions occur, they will be successful. Failure to enter
new corporate relationships or expand Cell Genesys' product and technological
base may limit Cell Genesys' success unless alternative avenues are available.
BACKGROUND
For many years the pharmaceutical industry has focused on developing
chemical compounds as pharmaceutical drugs and disease therapies. Most often
synthesized in the laboratory or derived from substances found in nature, these
traditional pharmaceutical products include antibiotics, analgesics and
compounds which treat inflammation, cardiovascular disease and cancer. The
therapeutic value of such compounds generally depends on their ability to
stimulate or inhibit physiological processes related to disease, to interfere
directly with infection or cancer, or to correct various chemical imbalances. In
many cases, traditional pharmaceutical products may not be able to achieve these
purposes, due to a variety of reasons including unwanted side effects, delivery
of insufficient amounts of drug to the disease site, or treatment of symptoms
rather than the underlying cause of illness. Equally important, while
traditional pharmaceutical products may halt the damage associated with disease,
they generally cannot restore damaged cells or correct cellular dysfunctions.
Although the biotechnology industry has made significant advances,
protein-based therapeutic products also may not adequately treat diseases which
involve the loss, damage or dysfunction of particular cells in the body.
Examples include AIDS, other viral infections, certain types of cancer,
cardiovascular diseases, neurologic conditions and a variety of genetic diseases
and disorders. As has been the case with chemical compounds, the use of
therapeutic proteins or monoclonal antibodies to treat these medical problems
has not been completely successful because such products cannot replace the many
complex biological functions of missing or damaged cells and because it is often
impossible to deliver such products in adequate concentrations to the site of
disease without unwanted side effects.
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An appropriate therapeutic strategy for effecting a correction in cell
function, restoring damaged cells or replenishing lost cells may involve the
transplantation of cells or cell therapy. Cell Genesys believes that an
important approach to cell therapy is the genetic modification of cells, ex vivo
or in vivo, to potentially provide new, enhanced or expanded functions as a form
of "gene therapy."
GENE THERAPY
At the heart of gene therapy are genes, or segments of DNA, which typically
are contained in the nucleus of cells. Genes provide the chemical instructions
that direct cells to produce proteins. The production process is known as gene
"expression," and the resulting proteins determine the nature and function of
cells and tissues in all living organisms.
A worldwide effort has been under way for several years to discover and
study genes and their functions. Findings by academic institutions, government
organizations and various corporations provide the fundamental basis for
understanding human health and illness. It is now well known that genes are
implicated in the cause of many diseases, including not only inherited
conditions involving a defective or missing gene, but also a wide range of
diseases arising from inappropriate biological reactions, such as the over- or
under-expression of a normal gene, as a result of environmental factors. Genes
also may provide therapeutic benefits by stimulating the production of proteins
that can overcome various disease processes. Already an estimated 5,000 genes
have been identified as having therapeutic utility.
The field known as gene therapy is based on the principal that naturally
occurring or genetically modified genes can be introduced into target cells to
bring about a therapeutic effect. Depending upon the choice of genetic material
delivered, gene therapy may be used to enhance normal cell activities or enable
cells to perform new roles. In addition, certain forms of gene therapy involve
"gene correction," which introduces normal genes into relevant cells of patients
with genetically inherited diseases, or "vaccination," which uses genetic
material or modified cells to stimulate the patient's immune response. Cell
Genesys' lead gene therapy efforts are focused on expanding the capabilities of
specific cells to target and more effectively fight disease.
Another key component of gene therapy is the methodology used to introduce
therapeutic genes into cells. Whether ex vivo or in vivo, the insertion of genes
into cells is typically accomplished using reagents known as vectors. The role
of vectors is multi-fold: to deliver the gene to the target cell, to transport
it across the outer membrane and inside the cell, to determine its delivery site
within the cell (e.g., in the nucleus or elsewhere), and to stimulate the gene
to express specific proteins. Depending upon the type of gene and its delivery
site in the cell, the expressed protein may remain within the cell for
intracellular effect, travel to the cell membrane to exert a cell-surface
effect, or be secreted into the bloodstream to provide a systemic effect.
Different types of vectors are needed for multiple gene therapy products,
and the appropriateness of a specific vector is based on the disease indication,
safety considerations, production efficiencies, disease site and other factors.
Certain viruses, because of their natural ability to insert genes into cells,
have proven to be particularly efficient vectors and can be genetically modified
to eliminate inherent disease-causing properties. Engineered viruses contain
biologic "promoters" which can be used to stimulate inserted genes to provide
high levels of therapy. They also have selective capabilities for targeting the
delivery of genes into specific cell types and specific regions within the
cells. To date, Cell Genesys has focused its gene delivery efforts primarily on
the development and use of viral vector systems, including retroviral,
adenoviral, adeno-associated viral and lentiviral vectors.
PRODUCT DEVELOPMENT
Cell Genesys' strategic objective is to develop and commercialize ex vivo
and in vivo gene therapies to treat major, life-threatening diseases and
disorders. Toward this end, Cell Genesys is genetically modifying selected cell
types, using patient-specific or more broadly applicable treatment approaches,
to impart disease-fighting capabilities that are not possible with conventional
therapeutic agents.
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Clinical Programs
GVAX(TM) Cancer Vaccine. A treatment vaccine, not a preventative, the GVAX
cancer vaccine is designed to stimulate the patient's overall immune system to
effectively fight cancer. The principles of both gene therapy and vaccine
development apply in this program, which Cell Genesys obtained as part of its
acquisition of Somatix. The GVAX cancer vaccine is composed of tumor cells which
are genetically modified to secrete an immune-stimulating protein,
granulocyte-macrophage colony stimulating factor (GM-CSF) and then are lethally
irradiated. Administration of the resulting product is much like any other
vaccine, in that the modified cells are injected into the patient. The goal,
however, is unique: to stimulate an anti-tumor immune response that targets and
destroys tumor cells which persist or recur following surgery and/or radiation
therapy.
Initial clinical results using a first-generation product based on the
patient's own tumor cells demonstrated safety and provided evidence of a strong
cellular immune response to the vaccine. Evidence of immune response included a
marked infiltration of white blood cells at the vaccination site, as well as
immune cell infiltration at metastatic sites distant from the site of vaccine
injection. Based on this encouraging data, Cell Genesys has developed two
second-generation GVAX cancer vaccines, which offer more attractive economics,
and are now undergoing human clinical testing. They involve the use of an
adenoviral gene delivery system that has proven to be so efficient it eliminates
the need for extensive cell expansion and allows overnight cell processing at
the clinical hospital. Clinical studies testing this approach are being
conducted at the Dana-Farber Cancer Institute. In the Phase I/II clinical
program, study participants with lung cancer or melanoma are receiving an
"autologous" (patient-specific) GVAX vaccine, which utilizes the patient's own
irradiated cancer cells genetically modified with GM-CSF. A second approach
being tested at Johns Hopkins University employs an "allogeneic"
(non-patient-specific) GVAX vaccine. This product uses irradiated tumor cells
acquired from a number of patients which have been genetically modified with
GM-CSF and is manufactured as a standardized gene product. In a Phase I/II study
of this approach, prostate cancer patients who have rising prostate-specific
antigen levels (PSAs) indicative of recurrent disease are receiving the
"allogeneic" GVAX vaccine. Cell Genesys' objective with the GVAX program is to
determine whether therapeutic vaccines can protect against the recurrence of
cancer and favorably impact the long-term survival of patients. Data from these
second generation formats is expected to be available during the next year.
T Cell Cancer Gene Therapy. Cell Genesys' objective is to develop cancer
gene therapies which represent highly targeted treatment approaches that can
selectively destroy tumor cells while leaving healthy cells unharmed. This
approach may prove particularly useful in treating patients whose immune systems
are impaired, such as those who have undergone radiation or chemotherapy.
For its lead T cell cancer gene therapy, Cell Genesys is "programming"
immune cells to be highly specific to tumors which produce a cell-surface
protein known as TAG-72. The TAG-72 protein is present on many types of cancer
cells, including colon, breast, lung, ovarian and prostate cancers. To provide
treatment, Cell Genesys scientists are inserting a proprietary therapeutic gene,
CC49-zeta, into T cells obtained from the patient, thereby providing the genetic
instructions for those immune cells to recognize and bind cancer cells that
produce TAG-72.
Preclinical studies for this T cell cancer gene therapy were conducted by
Cell Genesys in collaboration with the National Cancer Institute. In vitro
laboratory studies demonstrated highly specific killing of colon tumor cells by
the engineered immune cells. In vivo studies provided additional findings that
served as the basis for the submission of an Investigational New Drug
application ("IND") and the initiation of human clinical studies in colon cancer
during 1997.
In the ongoing Phase I/II human clinical studies, Cell Genesys is
evaluating T cell gene therapy against colon cancer which has spread to the
liver. The clinical studies are being conducted at three sites, including the
University of California, San Francisco, Stanford University and PRN Research,
Inc. The treatment process involves collecting T cells from the patient's blood
using standard blood bank procedures; modifying the cells and expanding their
number ex vivo (outside the body) to seek out and selectively kill cancer cells
expressing the TAG-72 protein; and then returning the modified, expanded cells
to the patient as therapy. In these studies, the modified cells are being
administered to the patient either through intravenous infusion into
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the bloodstream or through direct delivery to the liver (using a catheter, as is
common in chemotherapy). Importantly, Cell Genesys' retroviral gene delivery
system enables transfer of the therapeutic gene directly into the cell genome,
where it can persist and be passed on to subsequent generations of T cells,
potentially providing long-term therapy. Data from these studies is expected to
be available during the next year.
Other therapeutic genes can be inserted into T cells to target other types
of cancers. Cell Genesys initiated a research collaboration in 1995 with the
Ludwig Institute for Cancer Research and the Sloan-Kettering Institute for
Cancer Research which has provided Cell Genesys with a portfolio of reagents for
use in developing T cell gene therapies for specific types of cancer. In 1996,
through new research agreements established with the National Cancer Institute,
Dana-Farber Cancer Institute and Arizona Cancer Center at the University of
Arizona, Cell Genesys expanded the portfolio of genes it has the right to
engineer and has generated preclinical data for multiple cancer indications.
Since the normal action of a T cell is to destroy anything that it binds, the
reintroduction of these engineered cells into the patient's body is expected to
kill cancer tissue.
AIDS Gene Therapy. HIV is the virus which infects the human immune system
and ultimately causes AIDS. A number of antiviral drugs have been approved by
the U.S. Food and Drug Administration ("FDA") to inhibit replication of HIV in
infected individuals and thereby slow the spread of infection throughout the
immune system. However, none of these antiviral drugs, including the widely used
protease inhibitors, is able to kill HIV-infected cells or eliminate persistent
sites of infection responsible for producing millions of copies of the virus.
Furthermore, AIDS patients undergoing long-term therapy may become
drug-resistant or experience serious difficulties with multiple drug side
effects. Under such circumstances, they must either switch to other drugs, until
all options have been exhausted, or discontinue drug therapy. Extensive evidence
now shows that the virus reappears within a short period when the patient
becomes drug-resistant or when antiviral therapy is discontinued.
Cell Genesys' AIDS gene therapy, which is designed to target and destroy
HIV-infected cells that are the reservoir for the virus, offers a different but
highly compatible treatment strategy designed to stimulate the patient's immune
system to more effectively fight HIV infection. In a healthy immune system,
killer T cells (CD8 cells) directly target and destroy disease cells, while
helper T cells (CD4 cells) signal macrophages and other white blood cells to
launch an attack. In patients infected with HIV, however, the CD4 cells and
macrophages become diseased, and the ability of CD8 cells to control the virus
is weakened.
Cell Genesys has developed a method for arming the patient's T cells with
the ability to recognize and destroy HIV-infected cells and thereby eliminate
reservoirs of the virus which are not affected by antiviral drugs. Specifically,
a new targeting mechanism -- a genetically engineered CD4-zeta gene -- is
introduced into T cells collected from the patient's blood via apheresis, a
standard blood bank procedure. This genetically engineered receptor, which is
not patient-specific and therefore can potentially function in multiple
patients, targets a cell-surface protein produced by HIV-infected cells. After
the patient's T cells are genetically modified to incorporate this receptor,
they are expanded to greater than 30 billion cells. Sufficient for multiple
doses of therapy, the modified and expanded cells are then infused into the
patient periodically in an outpatient clinical setting, potentially enabling a
strong HIV-specific immune system response.
Cell Genesys' patient-specific treatment intended for commercialization is
being tested in a series of Phase II clinical studies currently under way that
have been designed to evaluate various treatment protocols, including
combination therapy with antiviral drugs. Current trials involve genetically
engineering the patient's own T cells, killer T cells and helper T cells, to
recognize and destroy HIV-infected cells. These studies are being conducted at
six clinical sites including the University of California, San Francisco at San
Francisco General Hospital, University of Colorado Health Sciences Center,
Massachusetts General Hospital, University of California, Los Angeles, the AIDS
Community Research Consortium and ViRx, Inc. Currently, Cell Genesys' AIDS gene
therapy is being tested in patients who have persistent HIV levels detectable in
the blood despite continued antiviral drug therapy. An additional Phase II
study, expected to be initiated in early 1998, will evaluate the gene therapy in
combination with antiviral drugs in approximately 40 patients without detectable
virus in the blood. The primary endpoint for this latter study will be various
measurements of HIV-infected cells, which are now known to persist in patients
for years even when HIV in the blood is
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undetectable following drug therapy. Taken together, these multiple Phase II
studies are expected to provide the basis for assessing the potential value of
the Company's AIDS gene therapy during the next year.
Cell Genesys' AIDS gene therapy is a novel therapy which must undergo
rigorous human testing regulated by the FDA. There is no assurance that the
therapy will be proven safe or efficacious, or if approved, that the therapy can
be successfully commercialized. Ten-week data reported in early February 1998
show that both types of engineered T cells persist in patients. Persistence of
the modified CD4 cells is particularly significant, since CD4 cells are
typically destroyed by the virus, and this finding suggests potential resistance
to HIV infection. Although preliminary results reported to date from Cell
Genesys' Phase I/II clinical testing for AIDS gene therapy are encouraging and
there have been no treatment-related side effects to date, there can be no
assurance that this therapy will be tolerated over an extended period of time or
that the clinical efficacy of this therapy will be demonstrated. Any conclusion
as to whether the Company's gene therapy can potentially play a role in the
treatment of AIDS will be based on the results of ongoing Phase II clinical
trials as well as future Phase II/III studies. Additional laboratory research
reported in 1997 further demonstrated that the "programmed" cells are able to
recognize and destroy HIV-infected cells quickly enough to prevent viral
replication. The data demonstrate efficient killing of both types of diseased
cells -- HIV-infected T cells and HIV-infected macrophages -- which antiviral
drugs are unable to eradicate. Early findings also indicated that T cell AIDS
gene therapy has the potential to reconstitute the patient's immune system, with
respect to the fundamental deficit caused by the disease.
Preclinical Programs
Over the long term, Cell Genesys expects gene therapy to progress from ex
vivo to in vivo therapy involving standardized gene products that can be used
much like any other biopharmaceutical. The purpose of in vivo gene therapy is to
introduce genes into appropriate cells within the patient's body, in order to
restore normal biological functions, stimulate the production of key therapeutic
proteins or inhibit/inactivate disease processes. The newly introduced genes may
be naturally occurring or genetically engineered with new capabilities, and
their role is to serve as chemical blueprints guiding the recipient cells to
perform designated biological activities. Cell Genesys' preclinical programs are
focused primarily on in vivo gene therapies.
Hemophilia Gene Therapy. In 1997, Cell Genesys scientists and a team of
academic collaborators at the University of Washington successfully delivered
the Factor IX gene into liver cells. Factor IX plays a vital role in blood
clotting and is deficient in patients with hemophilia B, an inherited genetic
disorder. Following just one injection, the genetically modified cells generated
therapeutic levels of the Factor IX protein for at least nine months (the last
recorded study point). No toxicities were observed.
This scientific accomplishment is important for two reasons: 1) Liver cells
are the primary site for production of blood clotting proteins. With gene
therapy, a hemophiliac's liver cells may be modified to provide this missing
capability, potentially eliminating patient needs for costly, frequent and risky
blood transfusions. Encouraged by the success with Factor IX, Cell Genesys is
now evaluating delivery of the Factor VIII gene missing in patients with
hemophilia A, the most common form of hemophilia. 2) The study was performed
with normal laboratory mice and employed Cell Genesys' adeno-associated viral
(AAV) vector for gene delivery. AAV vectors integrate into the genome of
nondividing cells, including not only liver but also muscle, cardiovascular and
central nervous system cells. Effective in vivo use of Cell Genesys' AAV
technology thus enables the long-term production of therapeutic proteins and
opens up opportunities to treat a multitude of genetic, cardiovascular and
neurodegenerative diseases and disorders.
Cardiovascular Gene Therapy. The accessibility of cardiovascular conditions
through the bloodstream has led Cell Genesys to explore cardiovascular
opportunities for gene therapy through research collaborations with Duke
University and the Arizona Heart Center. Cell Genesys' lead program in
cardiovascular gene therapy is focused on peripheral vascular disease, a severe
condition that causes blood vessel blockages in the arms, legs and other
extremities. The first line of defense in treating peripheral vascular disease
is a surgical procedure known as angioplasty, which opens blood vessel blockages
and restores blood flow. However, when the underlying cause of disease is
advanced atherosclerosis or diabetes, restenosis (the reclosure of arteries)
occurs within six months of treatment in as many as 40% of patients. The primary
problem leading to
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restenosis is an undesirable tissue repair response. Following angioplasty,
arterial cells rapidly migrate to and proliferate at treatment sites, remodeling
vascular walls and therefore constricting blood flow.
Cell Genesys believes that gene therapy represents a potential treatment
solution for use immediately following angioplasty. In preclinical studies,
several molecules which are expressed by genes have been shown to inhibit or
slow the proliferation of vascular cells associated with restenosis. Treatment
strategies are readily available to achieve the site-specific delivery of key
genes into the cells lining angioplasty sites. Furthermore, Cell Genesys'
adenoviral gene delivery system, which does not integrate genes into the cell
nucleus, has been shown to allow short-term genetic modifications that would
provide high-level therapy during the critical early hours following
angioplasty. Cell Genesys is conducting ongoing preclinical studies of this gene
therapy application.
Central Nervous System Gene Therapy. Biological conditions affecting the
blood-brain interface present significant difficulties for drug therapies. As a
result, there is a lack of adequate pharmaceutical agents to treat major
neurodegenerative diseases. Gene therapy, however, may provide potential
solutions. Cell Genesys has validated a system for delivering genes to brain
cells and expects to achieve similar results delivering genes to cells into
other parts of the central nervous system. Two treatment opportunities are of
particular interest to Cell Genesys: slowing or halting the degeneration of
certain brain cells in Parkinson's disease, and managing the uncontrollable pain
that accompanies many fatal illnesses.
In Parkinson's disease, a neurodegenerative condition affecting movement
and speech, Cell Genesys scientists have successfully used a proprietary AAV
vector system to deliver the gene for glial cell line-derived neurotrophic
factor (GDNF) to a specific region of the brain affected by this disease.
Successful site-specific delivery of modified cells producing the GDNF protein
lasted for at least ten weeks; the duration of the study has been demonstrated
in preclinical studies. Importantly, this procedure prevented the degeneration
of nerve cells responsible for producing the neurotransmitter, dopamine, which
is vital to normal motor functions and disappears with the progression of
Parkinson's disease. Cell Genesys is actively seeking corporate partners to
develop this product opportunity and to also explore other central nervous
system conditions, such as chronic pain.
PROPRIETARY TECHNOLOGIES
Vectors. Cell Genesys has developed a "toolbox" of retroviral, adenoviral,
adeno-associated viral and lentiviral vectors, which have been engineered to
provide efficient, long-term gene expression. In human clinical studies of its T
cell AIDS gene therapy, Cell Genesys is using a retroviral vector system to
insert genes ex vivo into certain types of immune white blood cells known as
killer T cells and helper T cells. The T cells are genetically modified so that
they can recognize and destroy HIV-infected cells responsible for producing
millions of copies of the virus. A similar approach is being used in Cell
Genesys' T cell cancer gene therapy, which is undergoing human clinical studies
to treat colon cancer and is in preclinical studies for other cancer
indications.
Adenoviral vectors are used ex vivo in human clinical studies of the
patient-specific GVAX cancer vaccine, to genetically modify irradiated tumor
cells with the objective of stimulating an anti-tumor immune response against
lung cancer and melanoma.
Adeno-associated viral (AAV) vectors are the subject of Cell Genesys'
preclinical programs focused on in vivo gene therapy. AAV vectors integrate into
the genome of nondividing cells, including liver, muscle, cardiovascular and
central nervous system cells. As demonstrated by Cell Genesys research for the
treatment of hemophilia, effective in vivo use of this AAV technology enables
the long-term production of therapeutic proteins and opens up opportunities to
treat various genetic, cardiovascular and neurodegenerative diseases and
disorders.
In earlier-stage research, Cell Genesys is working with proprietary
second-generation lentiviral vectors, which potentially increase Cell Genesys'
ability to deliver gene therapy to nondividing cells in vivo. As reported in
1997, Cell Genesys scientists have successfully eliminated key viral genes
responsible for replication and pathogenesis, without decreasing the ability of
the lentivirus to deliver therapeutic genes
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efficiently. In preclinical research conducted in collaboration with scientists
at The Salk Institute, these new vectors demonstrated gene expression in liver
and muscle cells for at least six months (the period of study) following a
single injection. Potential uses include in vivo gene delivery to nerve, liver,
muscle and bone marrow stem cells.
Cell Genesys believes that its extensive vector and intellectual property
portfolios position it as an attractive partner for academic institutions and
genomics companies as well as for biotechnology and pharmaceutical companies
which have genes they want to use therapeutically or "diagnostically" to
understand genetic function. This technology also could enhance Cell Genesys'
ability to access genes for its own product development through potential
genomics and other collaborations.
Genes. Gene therapy is based on the function of genes which normally exist
in cells. For therapeutic indications, Cell Genesys is focused on the use of
proprietary genes that may be either identified in nature or engineered for
medical purposes. These genes are then combined with vectors for delivery into
the patient's cells, where they can potentially perform specific therapeutic
functions.
Depending upon the choice of genetic material delivered, Cell Genesys' gene
therapy may be used to enhance normal cell activities or enable cells to perform
new roles. In addition, certain forms of gene therapy involve "gene correction,"
which introduces normal genes into patients with inherited genetic diseases;
"gene modification," which stimulates or inhibits normal cell functions; or
"vaccination," which uses genetic material or modified cells to stimulate the
patient's immune response.
Cell Genesys' lead efforts in cancer and HIV are focused on expanding the
capabilities of the patient's immune system cells to target and more effectively
fight disease. This is accomplished by constructing proprietary genes. When
these genes are inserted into target cells, they express a disease-specific
protein which serves as a receptor enabling the cells to recognize and destroy
disease cells. For T cell AIDS gene therapy, Cell Genesys has constructed
proprietary genes which are used to genetically modify T cells to target and
destroy HIV-infected cells. For T cell cancer gene therapy, Cell Genesys has
genetically modified T cells to target and destroy cancer cells. For the GVAX
cancer vaccine, Cell Genesys has genetically modified irradiated tumor cells to
stimulate an anti-tumor immune response against the patient's cancer.
Cell Genesys expects to enter collaborations with genomics companies, other
biotechnology and pharmaceutical companies and academic institutions to license
additional genes for product development. In particular, Cell Genesys expects to
focus its gene licensing efforts in the areas of cancer, cardiovascular disease
and neurologic conditions.
GOVERNMENT REGULATIONS
FDA Regulation. The activities required before a pharmaceutical agent may
be marketed in the United States begin with preclinical testing. Preclinical
tests include laboratory evaluation of potential products and animal studies to
assess the potential safety and efficacy of the product and its formulations.
The results of these studies and other information must be submitted to the FDA
as part of an investigational new drug application, which must be reviewed and
approved by the FDA before proposed clinical testing can begin. Clinical trials
involve the administration of the investigational new drug to healthy volunteers
or to patients under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the investigational new drug application.
Further, each clinical study must be conducted under the auspices of an
independent institutional review board at the institution at which the study
will be conducted. The institutional review board will consider, among other
things, ethical factors and the safety of human subjects. In addition, certain
protocols involving the use of genetically modified human cells must also be
reviewed by the Recombinant Advisory Committee of the National Institutes of
Health.
Typically, clinical testing involves a three-phase process. In Phase I,
clinical trials are conducted with a small number of subjects to determine the
early safety profile and pharmacology of the new therapy. In Phase II, clinical
trials are conducted with groups of patients afflicted with a specific disease
in order to
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determine preliminary efficacy, optimal dosages and expanded evidence of safety.
In Phase III, large scale, multicenter, comparative clinical trials are
conducted with patients afflicted with a target disease in order to provide
enough data for the statistical proof of efficacy and safety required by the FDA
and others. In the case of products for life-threatening diseases, the initial
human testing is generally done with diseased patients rather than with healthy
volunteers. Since these patients are already afflicted with the target disease,
it is possible that such studies may provide results traditionally obtained in
Phase II trials. These trials are frequently referred to as Phase I/II trials.
Although the preliminary Phase I/II clinical testing results to date of Cell
Genesys' AIDS gene therapy have shown no significant treatment-related safety
problems, there can be no assurance that such therapy or product will be
tolerated at higher doses or that the clinical efficacy of such therapy or
product will be demonstrated.
The results of the preclinical and clinical testing, together with
chemistry and manufacturing information, are submitted to the FDA in the form of
a new drug application for a pharmaceutical product, and in the form of a
product license application for a biological product, for approval to commence
commercial sales. In responding to a new drug application or a product license
application, the FDA may grant marketing approvals, request additional
information or further research, or deny the application if it determines that
the application does not satisfy its regulatory approval criteria. Approvals may
not be granted on a timely basis, if at all, or if granted may not cover all the
clinical indications for which Cell Genesys is seeking approval or may contain
significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use.
Other Government Regulation. In addition to laws and regulations enforced
by the FDA, Cell Genesys is also subject to regulation under the Occupational
Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act and other present and
potential future federal, state or local laws and regulations as Cell Genesys
research and development involves the controlled use of hazardous materials,
chemicals, viruses and various radioactive compounds.
Cell Genesys' manufacturing facility for production of clinical quantities
of its products was licensed in 1994 by the California Department of Health
Services. The California Department of Health Services may inspect the facility
annually. Manufacture of clinical quantities of Cell Genesys' products does not
require an FDA license, although the FDA may at any time inspect the facility.
The continued operation of this facility requires compliance with FDA standards
for this type of manufacturing. A separate license from the FDA is required for
commercial manufacturing of any products. During 1995, Cell Genesys completed
construction of its clinical scale cell processing facility. This facility is
being used to process cells for Cell Genesys' Phase II clinical testing of its T
cell gene therapy for AIDS as well as for the Company's clinical trials testing
T cell gene therapy in colon cancer. In addition the Company manufactures on
site the vectors utilized in its clinical trials. Cell Genesys will consider
contract manufacturing for commercial scale requirements in the future to the
extent possible, or expansion of its own facilities if necessary.
OTHER CELL GENESYS ASSETS
Abgenix Subsidiary. While Cell Genesys is focused on the commercialization
of gene therapies, Cell Genesys' Abgenix subsidiary is focused on the
commercialization of antibody therapies. Cell Genesys formed Abgenix as a
separate business subsidiary in June 1996, contributing $14 million in cash,
research, development and manufacturing technology as well as patents and other
intellectual property specific to the antibody therapy programs. Approximately
40 Cell Genesys employees were transferred to Abgenix in 1996, including
employees of Cell Genesys' former Xenotech Division and other Cell Genesys
employees who were primarily involved with the antibody program. R. Scott Greer,
who served for over five years at Cell Genesys, was named chief executive
officer of Abgenix.
The formation of Abgenix was accompanied by a new agreement with Cell
Genesys' development partner, Japan Tobacco Inc. ("Japan Tobacco") expanding
commercialization rights. Under the terms of various agreements, Abgenix and
Japan Tobacco are each selecting and developing product candidates based on the
transgenic technology developed through a joint venture with JT Immunotech USA
Inc., ("J Immunotech"), a medical subsidiary of Japan Tobacco. For products
pursued separately by Abgenix, Abgenix has
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the opportunity to obtain worldwide rights, opening up prospects for additional
corporate alliances and licensing agreements. Abgenix also has options to the
rights in North America on a select number of Japan Tobacco's products. Rights
to jointly targeted products will be licensed to Abgenix in North America, to
Japan Tobacco in Japan, Taiwan and Korea, and co-exclusively to both Abgenix and
Japan Tobacco elsewhere in the world.
Abgenix currently has five monoclonal antibody therapeutics under
development. Abgenix' lead product candidate, ABX-CBL, is a proprietary antibody
currently in late stage clinical trials. The proprietary antigen to which
ABX-CBL binds is selectively expressed on activated immune cells including T
cells, B cells and natural killer cells. This gives ABX-CBL the ability to
destroy just the active subsets of immune cells without affecting all immune
cells. This may enable ABX-CBL to reverse an unwanted immune system response.
ABX-CBL has been tested in various acute transplant related conditions including
graft versus host disease (GVHD) and kidney and corneal transplant rejection in
90 patients to date. Abgenix initiated a multi-center confirmatory Phase II
clinical trial in GVHD in January 1998 and plans to complete this study by the
end of 1998. A second antibody, ABX-IL8, is a fully human monoclonal antibody
that blocks interleukin-8 (IL-8), an important inflammatory cytokine. Excess
IL-8 has been implicated in a number of inflammatory diseases, including
psoriasis. Abgenix has filed an IND and expects to initiate human clinical
trials in 1998 for ABX-IL8. Abgenix is also developing ABX-EGF, a fully human
monoclonal antibody for the treatment of multiple types of cancer which is
currently in preclinical development. ABX-LSN is a fully human monoclonal
antibody which targets inflammatory disorders and is in preclinical development.
Finally, ABX-RB2 is another fully human monoclonal antibody which may be useful
in organ transplant rejection and autoimmune disease and is in preclinical
development.
Gene Activation Technology. Separate from gene therapy, Cell Genesys has
developed a novel and proprietary method for protein production referred to as
"gene activation." Gene activation involves the insertion of genetic regulatory
elements at specific sites in chromosomes in proximity to a human gene
responsible for the production ("expression") of a therapeutic protein.
Subsequently, the gene-activated protein could be produced in a cell-based
production system. Gene activation, which may be applied to therapeutic proteins
such as follicle-stimulating hormone or erythropoietin, eliminates the sometimes
difficult and time-consuming process of cloning entire human genes. For
companies engaged in protein manufacturing, this technology may offer certain
production advantages.
In February 1997, Cell Genesys executed a license agreement with Hoechst
Marion Roussel for erythropoietin and a second, undisclosed protein. The
agreement provides for up to $26 million in milestone payments and fees, in
addition to any royalties on future sales of these two potential gene-activated
protein products. Cell Genesys has earned $5.1 million through December 31, 1997
under this license.
In February 1994, Cell Genesys signed a licensing agreement with Theriak
A.G., a subsidiary of Akzo Nobel N.V. ("Akzo Nobel"), to develop and market Cell
Genesys' therapeutic protein product, gene-activated follicle stimulating
hormone ("FSH") for the treatment of infertility. Akzo Nobel was granted
worldwide rights to develop and market gene-activated FSH in exchange for
licensing fees, royalties and other payments to Cell Genesys. During 1995, Akzo
Nobel settled a patent dispute with another party related to recombinant FSH and
is now marketing this form of FSH subject to regulatory approval. Cell Genesys
has received $8.1 million in payments under the agreement and a 1996 amendment.
CORPORATE RELATIONSHIPS
Hoechst Marion Roussel. In 1995, Cell Genesys signed a worldwide agreement
with Hoechst Marion Roussel for the development and commercialization of Cell
Genesys' AIDS gene therapy program. The agreement could provide more than $160
million in funding for this program, including $50 million in committed funding
and $100 million in progress-dependent funding for research and development
costs, plus a $10 million warrant for future equity. The committed funding
included a $20 million equity investment in Cell Genesys Common Stock,
representing approximately 7 percent of the outstanding Cell Genesys Common
Stock as of December 31, 1997. Under the agreement, Cell Genesys is leading
product development in North America and providing worldwide manufacturing
services. Hoechst Marion Roussel has worldwide marketing
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rights to AIDS gene therapy. In North America, Cell Genesys will participate in
profit sharing and has retained a copromotion option. Elsewhere in the world,
Cell Genesys will receive royalties. Cell Genesys has retained worldwide rights
for any cancer gene therapy. In addition to AIDS gene therapy, Hoechst Marion
Roussel also has preferential rights for up to two additional T cell gene
therapy product candidates that, if exercised, would result in additional
payments to Cell Genesys. The collaboration also provides for consolidation of
intellectual property related to Cell Genesys' gene therapy technology through a
cross-licensing agreement among Cell Genesys, Hoechst Marion Roussel and its
licensor in this field, Massachusetts General Hospital. Through December 1997,
Cell Genesys has received approximately $63 million under its agreement with
Hoechst Marion Roussel. There can be no assurance that Cell Genesys will receive
any further progress-dependent funding from Hoechst Marion Roussel pursuant to
this arrangement, or that Hoechst Marion Roussel will exercise its warrant to
purchase additional shares of Cell Genesys' common stock.
In February 1997, Cell Genesys also signed a license agreement with Hoechst
Marion Roussel for use of its gene activation technology in the production of
erythropoietin and a second undisclosed protein. The agreement provides for up
to $26 million in milestone payments and fees, in addition to royalties on any
future sales of these two potential gene-activated protein products. Through
December 31, 1997, Cell Genesys has received $5.1 million under the license.
Japan Tobacco. Cell Genesys' relationship with Japan Tobacco was
established in July 1991, when Cell Genesys formed an equally owned worldwide
joint venture with JT Immunotech. Through the former Xenotech Division of Cell
Genesys this venture has focused on developing strains of transgenic mice
capable of producing fully human monoclonal antibodies and conducting
preclinical studies with initial antibodies. Through 1997, Cell Genesys has
received $41.2 million in funding through the joint venture including an equity
investment representing approximately 3.3% of the outstanding shares of Cell
Genesys common stock as of December 31, 1997. Committed funding from Japan
Tobacco decreased in 1997 due to the completion of the majority of research
activities.
GENE THERAPY PATENTS AND TRADE SECRETS
The patent positions of pharmaceutical and biotechnology firms, including
Cell Genesys, are generally uncertain and involve complex legal and factual
questions. While Cell Genesys is currently prosecuting its patent applications,
it cannot be certain whether any given application will result in the issuance
of a patent or, if any patent is issued, whether it will provide significant
proprietary protection or will be invalidated. Because patent applications in
the United States are confidential until patents are issued and publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries by several months, Cell Genesys cannot be certain that it was the
first creator of inventions covered by pending patent applications or that it
was the first to file patent applications for such inventions.
The commercial success of the Company will also depend in part on not
infringing the patents or proprietary rights of others and not breaching
licenses granted to the Company. The Company may be required to obtain licenses
to third party technology or genes necessary to conduct its business. Any
failure by the Company to license at reasonable cost any technology or genes
required to commercialize its technologies or products may have a material
adverse effect on the Company's business, results of operations, financial
condition or cash flow.
Litigation, which could result in substantial cost to the Company, may also
be necessary to enforce any patents issued to the Company or to determine the
scope and validity of other parties' proprietary rights. To determine the
priority of inventions, interference proceedings are frequently declared by the
U.S. Patent Office that could result in substantial costs to the Company and may
result in an adverse decision as to the priority of the Company's inventions.
Cell Genesys is currently involved in three separate interference proceedings
with regard to: (i) gene activation technology, (ii) ex vivo gene therapy, and
(iii) chimeric receptor technology. While the Company believes its position in
each interference proceeding is strong, the outcome of each proceeding cannot be
predicted, and an adverse result could have a material adverse effect on the
Company's intellectual property position and its business. The Company may be
involved in other interference
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proceedings in the future. The Company believes there will continue to be
significant litigation in the industry regarding patent and other intellectual
property rights.
The Company also relies on unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position. No assurance can be given that others will
not independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can meaningfully protect its rights to its
unpatented trade secrets.
Cell Genesys requires its employees and consultants to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with the Company. These agreements provide that all confidential
information developed by or made known to an individual during the course of the
employment or consulting relationship generally must be kept confidential. In
the case of employees, the agreements provide that all inventions conceived by
the individual, while employed by the Company, relating to the Company's
business are the Company's exclusive property. These agreements may not provide
meaningful protection for the Company's trade secrets in the event of
unauthorized use or disclosure of such information.
HUMAN RESOURCES
As of December 31, 1997, Cell Genesys employed 151 persons of whom 24 hold
Ph.D. degrees and 8 hold M.D. degrees. Approximately 108 employees are engaged
in research and development, and 37 support business development, intellectual
property, finance and other administrative functions. Cell Genesys' senior
management and directors have had prior product development experience in the
biotechnology and pharmaceutical industries. Separately, 56 persons are employed
by Cell Genesys' Abgenix subsidiary.
Cell Genesys' success will depend in large part upon its ability to attract
and retain employees. Cell Genesys faces competition in this regard from other
companies, research and academic institutions, government entities and other
organizations. Cell Genesys believes that it maintains good relations with its
employees.
EXECUTIVE OFFICERS
The executive officers of Cell Genesys and their ages as of December 31,
1997 are as follows:
NAME AGE POSITION WITH CELL GENESYS
---- --- --------------------------
Stephen A. Sherwin, M.D........... 49 Chairman of the Board, President and Chief
Executive Officer
Kathleen Sereda Glaub............. 44 Senior Vice President and Chief Financial Officer
Dale H. Ando M.D.................. 44 Vice President -- Clinical Research
Bridget P. Binko.................. 46 Vice President -- Regulatory Affairs
David F. Broad, Ph.D.............. 44 Vice President -- Process Development
Mitchell H. Finer, Ph.D........... 39 Vice President -- Research
Bruce A. Hironaka................. 43 Vice President -- Corporate Development
Christine McKinley................ 44 Vice President -- Human Resources
Dr. Sherwin has served as the president and chief executive officer and a
director of Cell Genesys since March 1990. In March 1994, Dr. Sherwin was
elected to the additional position of chairman of the board of directors of Cell
Genesys. From 1983 to 1990, Dr. Sherwin held various positions at Genentech,
Inc., a biotechnology company, most recently as vice president of clinical
research. Prior to 1983, Dr. Sherwin held various positions on the staff of the
National Cancer Institute. Dr. Sherwin also currently serves as an associate
clinical professor of medicine at the University of California, San Francisco, a
position he has held since 1986, and he is currently a director of the
California Healthcare Institute, a non-profit institution. Dr. Sherwin holds a
B.A. in biology from Yale University and an M.D. from Harvard Medical School.
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Ms. Glaub was elected senior vice president and chief financial officer of
Cell Genesys in October 1995. Ms. Glaub joined Cell Genesys in September 1993 as
vice president and chief financial officer. From 1985 to 1990, Ms. Glaub held
various financial positions at Genentech, Inc., most recently as treasurer. From
1980 to 1985, she held various positions in the treasury and finance departments
at Intel Corporation. Ms. Glaub received a B.A. in psychology from the
University of California, Berkeley and an M.B.A. from Northwestern University.
Mr. Ando was appointed to the position of vice president, clinical research
in July 1997. Dr. Ando brings over nine years of clinical development and
research experience to Cell Genesys, including three years at Cetus Corporation
and six years at Chiron Corporation. Most recently he has served as director of
clinical gene therapy for Chiron Technologies at Chiron. His experience includes
clinical development of biological therapeutics and gene therapy in both cancer
and HIV. Dr. Ando began his career as a faculty member at UCLA medical school in
the division of rheumatology. He received his M.D. and Internal Medicine
training at the University of Michigan and a B.S. in Chemistry from Stanford
University.
Ms. Binko, vice president of regulatory affairs, joined Cell Genesys in
1993, bringing to Cell Genesys extensive experience in FDA regulations. She
previously worked in a variety of regulatory areas at IDEC Pharmaceuticals for
five years, including human clinical studies of antibodies and the licensure of
manufacturing facilities. Prior to IDEC, Ms. Binko participated in both
investigational new drug application and new drug application filings with the
FDA in the antiviral area at Syntex, where she also worked for five years. She
received a B.S. in biology and an M.A. in microbiology from the State University
of New York at Buffalo.
Dr. Broad joined Cell Genesys in 1993 and is currently vice president of
process development. His depth of experience in biological product development
includes more than six years at Celltech Limited, where he specialized in
cell-based manufacturing systems for therapeutic proteins and antibodies. Dr.
Broad also served as a senior development scientist at Beecham Pharmaceuticals.
He received his B.S. and Ph.D. in microbiology from the University of London and
served as a postdoctoral research fellow in the Microbiology Section of the
School of Pharmacy, University of London.
Dr. Finer, vice president, research of Cell Genesys, joined Cell Genesys in
1990, serving in a variety of scientific positions. He has provided scientific
leadership to both the ex vivo and in vivo gene therapy programs at Cell
Genesys. Prior to joining Cell Genesys, Dr. Finer was an American Cancer Society
postdoctoral fellow at the Whitehead Institute for Biomedical Research. He
received his B.A. in biochemistry, microbiology and immunology from the
University of California, Berkeley and his Ph.D. in biochemistry and molecular
biology from Harvard University. He served as a postdoctoral fellow at the
Whitehead Institute of the Massachusetts Institute of Technology.
Mr. Hironaka, vice president, corporate development, joined Cell Genesys in
1994. From 1992 to 1994, Mr. Hironaka was with Aviron, a biotechnology company
focusing on viral vaccines, most recently as vice president responsible for
business development, finance, human resource and operations. Previously, he was
a consultant with McKinsey & Company, a leading international management
consulting firm. Mr. Hironaka graduated Phi Beta Kappa with an A.B. in economics
from the University of California, Berkeley and holds an M.B.A. and J.D. from
Stanford University.
Ms. McKinley, vice president, human resources joined Cell Genesys in l994.
From 1986 to 1994, she was responsible for human resources at Nellcor Puritan
Bennett, Inc. Previously, Ms. McKinley also worked at Genentech, Inc. for seven
years in various human resource positions. She received a B.A. in psychology
from the University of California, Santa Barbara.
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SCIENTIFIC ADVISORY BOARD
Cell Genesys has created a prominent scientific advisory board that
includes several leaders in the gene therapy field. The board consists of the
following individuals:
NAME SCIENTIFIC POSITION
---- -------------------
Fred H. Gage, Ph.D................ Professor of Neuroscience at The Salk Institute
for Biological Studies
Ronald N. Germain, M.D., Ph.D..... Deputy Chief of Laboratory of Immunology
Chief, Lymphocyte Biology Section
National Institutes of Health
National Institute of Allergy and Infectious
Diseases
Jerome E. Groopman, M.D........... Chief, Division of Experimental Medicine
Beth Israel Deaconess Medical Center
Harvard Institutes of Medicine
Jordan U. Gutterman, M.D.......... Chairman, Clinical Immunology and Biological
Therapy
M. D. Anderson Cancer Center
Philip A. Hieter, Ph.D............ Professor of Medical Genetics
University of British Columbia
Center for Molecular Medicine & Therapeutics
Raju S. Kucherlapati, Ph.D........ Kramer Professor
Chairman of the Department of Molecular Genetics
Albert Einstein College of Medicine
Richard C. Mulligan, Ph.D......... Investigator, Howard Hughes Medical Institute
Children's Hospital
Mallinckrodt Professor of Genetics
Harvard Medical School
John T. Potts, Jr., M.D........... Director of Research
Massachusetts General Hospital
Physician-in-Chief Emeritus
Jackson Distinguished Professor of Clinical
Medicine
Harvard Medical School
Thomas E. Shenk, Ph.D............. Elkins Professor
Chairman of the Department of Molecular Biology
Investigator, Howard Hughes Medical Institute
Professor, Princeton University
Inder M. Verma, Ph.D.............. Professor of Molecular Biology and Virology
The Salk Institute
Arthur Weiss, M.D., Ph.D.......... Chief, Rheumatology Division
Ephraim P. Engleman
Distinguished Professor of Rheumatology
Investigator, Howard Hughes Medical Institute
University of California, San Francisco
ITEM 2. PROPERTIES
Cell Genesys occupies administrative offices and research laboratories
covering approximately 95,000 square feet of space in a research and development
office park located in Foster City, California. Cell Genesys' lease of these
facilities expires in 2002, with an option to renew the lease for an additional
four-year term. Cell Genesys' laboratories are equipped for biochemical and
tissue culture research and development. Additionally, Cell Genesys has
constructed a facility licensed for Good Manufacturing Practices manufacturing
of clinical quantities of Cell Genesys' products.
Cell Genesys' Abgenix subsidiary occupies administrative offices and
research laboratories covering approximately 52,000 square feet of space in a
research and development office park located in Fremont, California. Abgenix'
lease of these facilities expires in 2006, with an option to renew the lease for
three additional three-year terms.
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In addition, Cell Genesys leases certain other facilities, including
facilities assumed as part of its purchase of Somatix. These facilities are not
currently occupied by Cell Genesys, but are sublet to other companies under
sub-leasing arrangements.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Cell Genesys Common Stock is traded in the over-the-counter market and
is quoted on The Nasdaq National Market under the symbol "CEGE." The following
table sets forth, for the periods indicated, the high and low bid prices per
share of Cell Genesys Common Stock as reported by The Nasdaq National Market.
Cell Genesys did not pay any cash dividends with respect to the Cell Genesys
Common Stock during any of the periods indicated below.
HIGH LOW
------ -----
Calendar Year 1996
First Quarter............................................. $12.00 $7.38
Second Quarter............................................ $10.25 $7.25
Third Quarter............................................. $ 8.38 $6.00
Fourth Quarter............................................ $ 9.25 $6.25
Calendar Year 1997
First Quarter............................................. $ 9.44 $6.13
Second Quarter............................................ $ 6.25 $4.50
Third Quarter............................................. $ 7.88 $4.94
Fourth Quarter............................................ $11.50 $7.19
Calendar Year 1998
First Quarter (through March 19, 1998).................... $ 8.63 $6.25
As of March 19, 1998, there were approximately 12,313 holders of record of
the Company's Common Stock. On March 19, 1998 the last reported sales price on
the Nasdaq National Market for the Common Stock was $6.44. The market for the
Company's Common Stock is highly volatile.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue under collaborative agreements-
principally from related parties......... $ 23,806 $ 22,505 $ 13,822 $ 9,416 $ 6,916
Operating expenses:
Research and development................. 36,830 27,587 25,879 21,540 13,963
General and administrative............... 10,659 7,469 5,670 5,316 3,073
Charge for purchased in-process
technology............................ 72,270 -- -- -- --
Restructuring charge related to
acquisition........................... 6,576 -- -- -- --
Charge for cross-license and settlement
(includes $11,250 equity in losses of
Xenotech joint venture associated with
cross-license and settlement)......... 22,500 -- -- -- --
--------- -------- -------- -------- --------
Total operating expenses......... 148,835 35,056 31,549 26,856 17,036
--------- -------- -------- -------- --------
Operating loss............................. (125,029) (12,551) (17,727) (17,440) (10,120)
Interest income, net..................... 1,500 3,277 2,739 2,896 1,504
========= ======== ======== ======== ========
Net loss................................... $(123,529) $ (9,274) $(14,988) $(14,544) $ (8,616)
========= ======== ======== ======== ========
Net loss per share......................... $ (5.33) $ (0.57) $ (1.07) $ (1.07) $ (0.80)
========= ======== ======== ======== ========
Shares used in computing basic net loss per
share.................................... 23,172 16,373 14,025 13,630 10,830
========= ======== ======== ======== ========
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.............................. $ 88,816 $ 85,584 $ 81,929 $ 70,772 $ 85,700
Working capital............................ 51,804 64,137 76,098 67,923 82,956
Total assets..................... 106,887 99,809 94,120 82,162 91,599
Note payable and other current
obligation............................... 18,750 -- -- -- --
Long-term obligations...................... 11,082 6,133 7,720 5,126 1,648
Redeemable convertible preferred stock..... 19,817 -- -- -- --
Accumulated deficit........................ (179,563) (56,270) (46,459) (32,405) (17,346)
Stockholders' equity....................... 18,641 71,064 79,393 72,329 86,385
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements made in this Item other than statements of historical fact,
including statements about the Company's and its subsidiary's clinical trials,
product pipelines, corporate partnerships, licenses and intellectual property,
are forward-looking statements within the meaning of section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
and are subject to a number of uncertainties that could cause actual results to
differ materially from the statements made, including risks associated with the
success of research and product development programs, patents, proprietary
technology and corporate partnerships. Reference is made to discussions about
risks associated with product development programs, intellectual property and
other risks which may affect the Company under "Risk Factors" below. The Company
does not undertake any obligation to update forward-looking statements.
OUTLOOK
Since its inception in April 1988, Cell Genesys has focused its research
and product development efforts on human disease therapies which are based on
innovative gene modification technologies. Cell Genesys' strategic objective is
to develop and commercialize ex vivo and in vivo gene therapies to treat major,
life-threatening diseases and disorders. Cell Genesys' AIDS gene therapy
currently is in Phase II human clinical testing and is being developed through a
worldwide collaboration with Hoechst Marion Roussel. Two types of cancer gene
therapies, for which Cell Genesys currently has worldwide rights, are in Phase
I/II human clinical testing for the treatment of colon cancer, lung cancer,
melanoma and prostate cancer. Preclinical studies are being conducted by Cell
Genesys for the treatment of other cancer indications as well as for hemophilia,
cardiovascular disease and neurologic conditions. Cell Genesys' assets outside
of gene therapy include its licensing program in gene activation technology and
its Abgenix subsidiary, which is focused on the development and
commercialization of antibody therapies.
During 1997, Cell Genesys acquired Somatix Therapy Corporation ("Somatix"),
establishing a leadership position in gene therapy. Product research and
development programs of the two companies were highly complementary, with Cell
Genesys focused on the treatment of AIDS and cancer, and Somatix focused on
cancer, central nervous system diseases and other disorders. Technology research
and development programs also were highly complementary, with synergies in the
retroviral and adenoviral vector programs of both companies and with new
adeno-associated viral and lentiviral vector programs contributed by Somatix.
Integration of the two companies was completed by the end of 1997, having
prioritized the most promising programs, significantly reducing overall expenses
of the combined businesses. With the combined portfolio of product
opportunities, technologies and intellectual property, Cell Genesys believes it
has substantially increased its ability to attract new corporate collaborations
to advance product candidates through development and commercialization and also
has expanded its opportunities to license additional therapeutic genes from
other companies and research institutes needed to create new gene therapies.
During 1997, Cell Genesys made extensive progress in its gene therapy
programs. For the treatment of HIV infection, Phase II human clinical studies
were expanded using T cell AIDS gene therapy, based on encouraging data from
earlier clinical studies and widespread medical reports about the inability of
current drug therapies to eradicate reservoirs of HIV, the AIDS-causing virus.
For the treatment of cancer, Phase I/II human clinical studies were initiated
using T cell cancer gene therapy for colon cancer and using the GVAX(TM) cancer
vaccine for melanoma, lung cancer and prostate cancer. Hemophilia gene therapy
entered preclinical testing and demonstrated long-term production of a blood
clotting protein that is deficient in patients with hemophilia. Cardiovascular
gene therapy continued to show promise in preclinical testing for the prevention
or inhibition of restenosis following angioplasty. In Cell Genesys' central
nervous system gene therapy program, progress was achieved in preclinical
studies evaluating the potential to slow or halt the degeneration of certain
brain cells in Parkinson's disease. A new treatment indication, the management
of uncontrollable pain associated with fatal illness, is also being evaluated.
In the human monoclonal antibody program (being pursued through the
Company's subsidiary, Abgenix), the Company has developed transgenic technology
to create strains of mice capable of producing human monoclonal antibodies.
These transgenic mice contain the majority of human antibody genes and could
produce multiple product candidates. The Company believes that fully human
antibodies should avoid
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the allergic reactions seen with antibodies containing mouse proteins, which
should make them better suited to long-term therapy and could provide a
marketing advantage. Abgenix is focused on the development and commercialization
of monoclonal antibodies to treat a wide range of serious diseases, including
transplantation-associated conditions, inflammation, autoimmune disorders and
cancer. Abgenix currently has five antibody products in development. Abgenix'
lead product candidate, ABX-CBL, is in confirmatory Phase II trials for treating
steroid-resistant graft versus host disease (GVHD), a frequent, fatal and
currently untreatable complication of allogeneic bone marrow transplants.
ABX-CBL has been tested in various acute transplant related conditions including
GVHD, kidney and corneal transplant rejection in 90 patients to date. An IND has
been filed for a second antibody product, ABX-IL8, and is expected to begin
clinical trials in 1998 for the treatment of moderate to severe psoriasis.
The Company's consolidated net cash expenditures for 1998 in its current
operations are not expected to exceed approximately $25 million and the Company
intends to manage toward this net cash expenditure target. The Company may from
time to time evaluate opportunities to acquire or in-license other potential
products and technologies. Expenses associated with in-licensing such products
may constitute unbudgeted expenses.
RESULTS OF OPERATIONS
Revenue increased to $23.8 million in 1997 from $22.5 million and $13.8
million in 1996 and 1995, respectively. The increase in 1996 primarily reflects
revenues from the collaboration with Hoechst Marion Roussel, Inc. which was
entered into in 1995 for Cell Genesys' AIDS gene therapy program, including a
milestone payment of $2.0 million earned during 1996. Revenue under this
agreement decreased slightly in 1997. Hoechst Marion Roussel continues to fund
this clinical development program in 1998. In February 1997, Cell Genesys
entered into an agreement to license the Company's gene activation technology to
Hoechst Marion Roussel for erythropoietin (EPO) and a second undisclosed
protein. The agreement provides for milestone payments and annual maintenance
fees, in addition to royalties on future sales of these two potential
gene-activated protein products. The Company recognized revenue of $5.1 million
in 1997 pursuant to the agreement. Other revenues resulted from the Company's
joint venture ("Xenotech") with JT Immunotech in its human monoclonal antibody
program (see Note 3 to Financial Statements). Revenue earned under this
agreement decreased in 1997 and will continue to decrease in 1998 due to the
completion of the majority of research activities. Also, the Company received
final payments of $2.5 million in each of 1997 and 1996 under its agreements
with Akzo Nobel N.V. for the license of a gene activated follicle-stimulating
hormone.
Research and development expenses have increased to $36.8 million during
1997 from $27.6 million and $25.9 million in 1996 and 1995, respectively. The
increase reflects the costs of additional research staff transferred following
the acquisition of Somatix and expanding clinical development activities for the
Company's AIDS gene therapy and cancer gene therapy programs. The increase also
reflects Abgenix contract manufacturing costs related to its lead antibody
product candidate. Research and development expenses have generally represented
approximately 80% of the Company's total operating expenses, excluding the
effect of non-recurring charges for the cross-license and settlement and the
acquisition of Somatix and related restructuring. The Company expects that its
research and development expenditures will continue to increase to support
additional product development activities, particularly in the field of cancer,
for which a number of trials commenced in 1997. The rate of increase depends on
a number of factors including progress in research and development, especially
clinical trials.
Purchased in-process technology costs and restructuring costs related to
the acquisition of Somatix on May 30, 1997 totaling $78.9 million were incurred
in 1997. The fair value of the net assets acquired in the acquisition including
in-process technology were estimated based on independent valuations of the
acquired net assets. Other costs related to the acquisition consist primarily of
underwriting and other transaction related costs, employee severance payments,
consolidation of facilities and the write down of the book value of certain
fixed assets.
General and administrative expenses increased to $10.7 million during 1997
from $7.5 million and $5.7 million in 1996 and 1995, respectively. The increases
reflect growth in administrative staff and outside
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services required to support expanded research and development programs,
including facilities expenses related to Abgenix' lease of independent
facilities and hiring of independent administrative staff in 1997. The Company
expects these expenses to increase as these programs expand.
In 1997, the Company reported expenses of $22.5 million related to the
Company's cross-license and settlement agreement with GenPharm International,
Inc. ("GenPharm"). No such costs were incurred in 1996 or 1995. A $15 million
non-recurring, non-cash charge was recognized in the first quarter 1997. The
additional $7.5 million represents Abgenix' share of two patent milestone fees
recognized in 1997. No further milestone fees will accrue under the agreement.
Interest income was $4.0 million in 1997 compared to $4.4 million and $3.8
million in 1996 and 1995, respectively. The increase in 1996 was due to interest
earned on $20.0 million received by Cell Genesys during the fourth quarter of
1995 in connection with the equity investment made by Hoechst Marion Roussel.
The decrease in 1997 was due to lower average cash balances during the year.
Interest expense increased to $2.5 million in 1997 from $1.2 million and $1.1
million in 1996 and 1995, respectively, due to higher levels of property and
equipment financing and interest accrued on the note payable to GenPharm.
Cell Genesys' net loss increased to $123.5 million in 1997, compared to
$9.3 million and $15.0 million in 1996 and 1995, respectively. This was
primarily due to $78.9 million in non-recurring charges for the acquisition of
Somatix and related costs and $22.5 million in non-recurring charges related to
the cross-license and settlement agreement. Losses, excluding non-recurring
charges, are expected to continue and are likely to increase in future years as
operating expenses rise, particularly as the Company incurs expenses related to
manufacturing and late stage human testing of its potential products.
At December 31, 1997, Cell Genesys had available net operating loss and
research credit carryforwards for federal income tax purposes of approximately
$130.0 million and $2.2 million, respectively, which expire in the years 1998
through 2012. The Company's ability to utilize its net operating loss
carryforwards may be subject to an annual limitation in future periods due to
the "change in ownership rules" under the Internal Revenue Code.
LIQUIDITY AND CAPITAL RESOURCES
Cell Genesys has financed its operations primarily through the sale of
equity securities, funding under collaborative arrangements and equipment
financing. From inception through February 28, 1998, the Company received $168.9
million in net proceeds from equity financings, $95.0 million under
collaborative agreements and utilized $26.0 million of property and equipment
financings.
At December 31, 1997, Cell Genesys' cash, cash equivalents and short-term
investments totaled $88.8 million, compared to $85.6 million at December 31,
1996. This increase of $3.2 million was primarily due to $37.2 million provided
by two private placements of preferred stock completed by the Company and its
subsidiary, Abgenix, which was offset by the use of cash in operating
activities, payment of lease line obligations and payment of obligations
incurred by Somatix or related to the merger transaction. Cell Genesys also had
non-cash charges of $72.3 million for purchased in-process technology related to
the Somatix acquisition, $15.0 million for the GenPharm convertible note and
$3.8 million accrued for a patent milestone fee related to the cross-license and
settlement agreement (see below).
On March 27, 1997, the Company announced that, along with Abgenix,
Xenotech, L.P. ("Xenotech", an equal joint venture of Abgenix and Japan Tobacco)
and Japan Tobacco, it had signed a comprehensive patent cross-license and
settlement agreement with GenPharm International, Inc. that resolved all related
litigation and claims between the parties. The cross-license agreement includes
a worldwide royalty free cross-license to all issued and related patent
applications pertaining to the generation of fully human monoclonal antibody
technologies in genetically modified strains of mice. The Company also obtained
a license to certain technology in the field of gene therapy held by GenPharm.
As consideration for the cross-license and settlement agreement, Cell Genesys
issued a note due September 30, 1998 for $15.0 million, convertible into shares
of Cell Genesys common stock, initially at $9.00 per share. Under the terms of
the note, the conversion price will be reset at $8.62 per share; effective April
1, 1998. Of this note, $3.75 million was contributed to, then paid by Xenotech.
The entire amount of the note was recognized as expense by Abgenix in the first
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quarter of 1997 based on an independent valuation analysis of technology
acquired. In addition, Japan Tobacco also made a cash payment to GenPharm.
During 1997, two patent milestones of $7.5 million each under the agreement were
met. Xenotech recognized expense of $15.0 million, $7.5 million of which was
paid in cash with the remainder to be paid in November 1998. During 1997,
Abgenix recognized an expense of $7.5 million for its contribution due to
Xenotech for its share of the patent milestone obligations, of which $3.75
million was paid in cash and $3.75 million is accrued at December 31, 1997. The
balance of the patent milestone obligations is the responsibility of Japan
Tobacco. No additional milestone payments will accrue under this agreement.
Cell Genesys anticipates that consolidated net cash expenditures will not
exceed $25 million in 1998. Revenues under the agreement with Hoechst Marion
Roussel are expected to decrease in 1998 and have been prepaid by Hoechst Marion
Roussel. In addition, the above referenced note payable to GenPharm will come
due September 30, 1998 and, depending on the Cell Genesys stock price at that
time, may require cash settlement, at the option of the holder. Payment of the
second milestone due GenPharm will also be due in 1998. The Company expects its
cash requirements to increase significantly in the future. The Company's capital
requirements depend on numerous factors, including: the progress of the
Company's research and development programs; preclinical and clinical trials;
clinical and commercial scale manufacturing requirements; the attraction and
maintenance of collaborative partners; the acquisition of new products or
technologies; and the cost of litigation, patent interference proceedings or
other legal proceedings or their resolution.
Cell Genesys believes that its available cash, cash equivalents and
short-term investments at December 31, 1997, together with payments to be
received under the Company's collaborative arrangements and license agreements
and $4.8 million in equipment financing available for capital equipment
purchases will be sufficient to meet the Company's operating expenses and
capital requirements at least through 1999. Thereafter, the Company will require
substantial additional funds. Because of the Company's significant long-term
cash requirements, the Company regularly considers financing alternatives,
including the private or public sale of equity by Cell Genesys and by its
subsidiary Abgenix. Any such transaction may be dilutive to existing
stockholders.
RISK FACTORS
Need for Substantial Additional Funds. The Company and its subsidiary,
Abgenix, will require substantial additional funds to continue existing and
planned preclinical and clinical trials and its research and development
activities, and to establish manufacturing and marketing capabilities for any
products it may develop. The Company expects that its existing capital
resources, together with payments to be received under existing collaborative
agreements and amounts available under existing equipment financing facilities,
will enable the Company to maintain the Company's operations at least through
1999. Beyond such time, the Company and Abgenix will need to raise substantial
additional capital to fund its operations.
The Company's future capital requirements will depend on, and could
increase as a result of, many factors, including, but not limited to, the
continuation of the collaboration with Hoechst Marion Roussel, continued
scientific progress in its research and development programs, the magnitude of
such programs, the progress of preclinical and clinical testing, the time and
costs involved in obtaining regulatory approvals, the costs involved in
preparing, filing, prosecuting, maintaining, enforcing and defending patent
claims, competing technological and market developments, changes in
collaborative relationships, the terms of any additional collaborative
arrangements into which the Company may enter, the Company's ability to
establish research, development and commercialization arrangements pertaining to
products other than those covered by existing collaborative arrangements, the
cost of establishing manufacturing facilities, the cost of commercialization
activities, and the demand for the Company's products if and when approved.
There is no assurance that opportunities for in-licensing technologies or for
third party collaborations will continue to be available to the Company on
acceptable terms.
A major portion of the Company's operating revenues are derived from a
collaborative agreement with Hoechst Marion Roussel signed in October 1995.
Under the terms of the agreement, Hoechst Marion Roussel
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has the ability to terminate its commitment at any time two years after its
anniversary date. Hoechst Marion Roussel is funding clinical development for
this program in 1998. There is no assurance that Hoechst Marion Roussel will
continue the agreement or that the level of funding will not vary year to year.
The Company's operating results would be adversely affected should Hoechst
Marion Roussel decide not to continue funding under this arrangement.
Cell Genesys expects to raise additional funds through additional equity or
debt financings, collaborative relationships, or otherwise. Because of these
long-term capital requirements, the Company and its subsidiary, Abgenix, may
seek to access the public or private equity markets whenever conditions are
favorable, even if it does not have an immediate need for additional capital at
that time. There can be no assurance that any such additional funding will be
available to the Company, or, if available, that it will be on acceptable terms.
If additional funds are raised by issuing equity securities, further dilution to
stockholders may result. If adequate funds are not available, the Company may be
required to delay, reduce the scope of, or eliminate one or more of its
research, development and clinical activities or to seek to obtain funds through
arrangements with collaborative partners or others that 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, any of which could have a material adverse effect on the Company's
business, results of operations, financial condition or cash flow.
Early Stage Of Development; No Developed Or Approved Products. Cell
Genesys' potential gene therapy products are in research and development. No
revenues have been generated from the sale of any of such products, nor are any
such revenues expected for at least the next several years. The products
currently under development by Cell Genesys will require significant additional
research and development efforts, including extensive preclinical and clinical
testing and regulatory approval, prior to commercial use. There can be no
assurance that Cell Genesys' research and development efforts will be successful
or that any commercially successful products will ultimately be developed by
Cell Genesys. Even if developed, these products may not receive regulatory
approval or be successfully introduced and marketed at prices that would permit
Cell Genesys to operate profitably.
Technological Uncertainty. Gene therapy is a new technology, and existing
preclinical and clinical data on the safety and efficacy of gene therapy are
limited. Data relating to Cell Genesys' specific gene therapy approaches are
even more limited. The Company's T cell gene therapy for cancer, GVAX(TM) cancer
vaccine and AIDS gene therapy are currently being tested in Phase I/II and Phase
II human clinical trials to determine their safety and efficacy. None of the
other products or therapies under development are in human clinical trials. The
results of preclinical studies do not predict safety or efficacy in humans.
Possible side effects of gene therapy may be serious and life-threatening. There
can be no assurance that unacceptable side effects will not be discovered during
preclinical and clinical testing of Cell Genesys' potential products or
thereafter. There are many reasons that potential products that appear promising
at an early stage of research or development do not result in commercialization.
Although Cell Genesys is testing proposed products or therapies in human
clinical trials, there can be no assurance that Cell Genesys will be permitted
to undertake human clinical trials for any of its other products or that the
results of such testing will demonstrate safety or efficacy. Even if clinical
trials are successful, there is no assurance that Cell Genesys will obtain
regulatory approval for any indication, or that an approved product can be
produced in commercial quantities at reasonable cost, or be successfully
marketed.
Patents And Trade Secrets. The patent positions of pharmaceutical and
biotechnology firms, including Cell Genesys, are generally uncertain and involve
complex legal and factual questions. While Cell Genesys is prosecuting patent
applications, it cannot be certain whether any given application will result in
the issuance of a patent or, if any patent is issued, whether it will provide
significant proprietary protection or will be invalidated. Because patent
applications in the United States are confidential until patents are issued and
publication of discoveries in the scientific or patent literature tends to lag
behind actual discoveries by several months, Cell Genesys cannot be certain that
it was the first creator of inventions covered by pending patent applications or
that it was the first to file patent applications for such inventions.
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The commercial success of the Company will also depend in part on not
infringing the patents or proprietary rights of others and not breaching
licenses granted to Cell Genesys. The Company may be required to obtain licenses
to third party technology and genes necessary to conduct its business. Any
failure by the Company to license at reasonable cost any technology or genes
required to commercialize its technologies or products may have a material
adverse effect on the Company's business, results of operations, financial
condition or cash flow.
Litigation, which could result in substantial cost to the Company, may also
be necessary to enforce any patents issued to Cell Genesys, or to determine the
scope and validity of other parties' proprietary rights. To determine the
priority of inventions, interference proceedings are frequently declared by the
United States Patent Office that could result in substantial costs to the
Company and may result in an adverse decision as to the priority of Cell
Genesys' inventions. Cell Genesys is currently involved in three separate
interference proceedings with regard to: (i) gene activation technology, (ii) ex
vivo gene therapy, and (iii) chimeric receptor technology. While the Company
believes its position in each interference proceeding is strong, the outcome of
each proceeding cannot be predicted, and an adverse result could have a material
adverse effect on the Company's intellectual property position and its business.
The Company may be involved in other interference proceedings in the future.
Cell Genesys believes that there will continue to be significant litigation in
the industry regarding patent and other intellectual property rights.
Cell Genesys also relies on unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position. No assurance can be given that others will
not independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can meaningfully protect its rights to its
unpatented trade secrets.
Cell Genesys requires its employees and consultants to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with it. These agreements provide that all confidential information
developed by or made known to an individual during the course of the employment
or consulting relationship generally must be kept confidential. In the case of
employees, the agreements provide that all inventions conceived by the
individual while employed by Cell Genesys, relating to its business are the
exclusive property of Cell Genesys. These agreements may not provide meaningful
protection for the Company's trade secrets in the event of unauthorized use or
disclosure of such information.
Competition. Competition in the field of gene therapy from other
biotechnology and pharmaceutical companies and from research and academic
institutions is intense and expected to increase. There are numerous competitors
working on products to treat each of the diseases for which Cell Genesys is
seeking to develop therapeutic products. Some competitors are pursuing a product
development strategy competitive with Cell Genesys, particularly with respect to
the Company's human monoclonal antibody program. Certain of these competitive
products are in substantially more advanced stages of product development and
clinical trials. The Company's competitors may develop technologies and products
that are more effective than those being developed by Cell Genesys, or that
would render the Company's technology and products less competitive or obsolete.
Many of these competitors have substantially greater financial resources and
larger research and development staffs than Cell Genesys. In addition, many of
these competitors may have significantly greater experience than Cell Genesys in
developing products, in undertaking preclinical testing and human clinical
trials of new pharmaceutical products, in obtaining United States Food and Drug
Administration (the "FDA") and other regulatory approvals of products, and in
manufacturing and marketing such products. Accordingly, Cell Genesys'
competitors may succeed in obtaining patent protection, receiving FDA approval
or commercializing products more rapidly than Cell Genesys. There can be no
assurance that the Company will be able to obtain certain biological materials
necessary to support its research, development or manufacturing of any of its
planned therapies. If the Company is permitted to commence commercial sales of
products, it will also be competing with respect to marketing capabilities and
manufacturing efficiency, areas in which it has limited or no experience. It is
anticipated that the Company will build additional clinical scale and commercial
scale manufacturing facilities to the extent that contract facilities are not
available in order to commercialize its products. It is also anticipated that
the Company will secure funding for these and other product development
activities through its partners and future potential partners. Cell Genesys also
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competes with universities and other research institutions in the development of
products, technologies and processes. In many instances, Cell Genesys competes
with other commercial entities in acquiring products or technology from
universities.
Cell Genesys expects that competition among products approved for sale will
be based, among other things, on product efficacy, safety, reliability,
availability, price, patent, position, and sales, marketing and distribution
capabilities. Cell Genesys' competitive positions also depend upon its ability
to attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient capital
resources for the often substantial period between product conception and
commercial sales.
The levels of revenues and profitability of biotechnology and
pharmaceutical companies such as the Company may be affected by the continuing
efforts of governmental and third-party payers to contain or reduce the costs of
health care through various means. In the United States there have been, and
Cell Genesys expects that there will continue to be, a number of federal and
state proposals to control health care costs. Cell Genesys cannot predict the
effect health care reforms may have on its business, and no assurance can be
given that any such reforms will not have a material adverse effect on the
Company's business, results of operations, financial condition or cash flow. In
the United States and elsewhere, sales of therapeutic products are dependent in
part on the availability of reimbursements to the consumer from third party
payers, such as government and private insurance plans. If the Company succeeds
in bringing one or more products to the market, there can be no assurance that
these products will be considered cost effective and that reimbursement to the
consumer will be available or will be sufficient to allow the Company to sell
its products on a competitive basis.
Operating Loss And Accumulated Deficit. Cell Genesys has incurred net
losses since its inception. At December 31, 1997, Cell Genesys' accumulated
deficit was approximately $179.6 million. Such losses have resulted principally
from expenses incurred in its research and development programs, the acquisition
of Somatix and other new technologies, and to a lesser extent, from general and
administrative expenses. In 1997, Cell Genesys incurred losses of $123.5
million, including $78.9 million related to the acquisition of Somatix and $22.5
million related to the Cross-License and Settlement Agreement with GenPharm. The
Company expects to incur substantial and increasing losses for at least the next
several years due primarily to the expansion of research and development
programs, including preclinical studies, clinical trials and manufacturing. Cell
Genesys expects that losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial. There can be no assurance that the Company will
successfully develop, commercialize, manufacture or market its products or ever
achieve or sustain product revenues or profitability.
Volatility Of Stock Price. The market prices for securities of
biopharmaceutical and biotechnology companies (including Cell Genesys) have
historically been highly volatile, and the market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. Factors such as fluctuations in
Cell Genesys' operating results, announcements of technological innovations or
new therapeutic products by Cell Genesys or its competitors, governmental
regulation, developments in patent or other proprietary rights, public concern
as to the safety of products developed by the Company or other biotechnology and
pharmaceutical companies, and general market conditions may have a significant
effect on the market price of the Cell Genesys' Common Stock.
Government Regulation. Regulation by governmental authorities in the United
States and foreign countries is a significant factor in the manufacture and
marketing of Cell Genesys' proposed products and its research and development
activities. All of Cell Genesys' products will require regulatory approval by
governmental agencies prior to commercialization. In particular, human
therapeutic products must undergo rigorous preclinical and clinical testing and
other premarket approval procedures by the FDA and similar authorities in
foreign countries. Since certain of Cell Genesys' potential products involve the
application of new technologies, regulatory approvals may take longer than for
products produced using more conventional methods. Various federal and, in some
cases, state statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of such
products. The lengthy process of seeking these approvals, and the subsequent
compliance with applicable federal statutes and regulations, requires the
expenditure of substantial resources. Any failure by Cell Genesys or its
collaborators or licensees
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to obtain, or any delay in obtaining, regulatory approvals could adversely
affect the marketing of any products developed by Cell Genesys, and its ability
to receive product or royalty revenue.
In responding to a new drug application, or a product license application,
the FDA may grant marketing approvals, request additional information or further
research, or deny the application if it determines that the application does not
satisfy its regulatory approval criteria. Approvals may not be granted on a
timely basis, if at all, or if granted may not cover all the clinical
indications for which Cell Genesys is seeking approval or may contain
significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use.
In addition to laws and regulations enforced by the FDA, Cell Genesys is
also subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state or local laws and regulations. Cell Genesys' research and development
involves the controlled use of hazardous materials, chemicals, viruses and
various radioactive compounds. Although Cell Genesys believes its safety
procedures for handling 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 completely eliminated. In
the event of such an accident, Cell Genesys could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
The manufacturing facilities of Cell Genesys are subject to licensing
requirements of the California Department of Health Services. While not subject
to license by the FDA, such facilities are subject to inspection by the FDA as
well as by the California Department of Health Services. A separate license from
the FDA is required for commercial manufacture of any product. Failure to
maintain such licenses or to meet the inspection criteria of the FDA and the
California Department of Health Services would result in disruption to the
manufacturing processes of the Company and would have a material adverse effect
on the Company's business, results of operations, financial condition and cash
flow.
For marketing outside the United States, Cell Genesys is subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for drugs and devices. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary greatly from country
to country. Failure to comply with such regulatory requirements or obtain such
approvals could impair the Company's ability to develop these markets and have a
material adverse effect on the Company's business, results of operations,
financial condition or cash flow.
Commercialization; Lack Of Marketing Experience. It is anticipated that the
Company will rely on sales and marketing expertise of potential corporate
partners for its initial products. Cell Genesys does not have any experience in
sales, marketing or distribution of biopharmaceutical products. The decision to
market future products directly or through corporate partners will be based on a
number of factors including market size and concentration, the size and
expertise of the partner's sales force in a particular market and the Company's
overall strategic objectives. Cell Genesys is currently engaged in various
stages of discussions with potential partners. There can be no assurance that
Cell Genesys will be able to establish such relationships, if at all, on
acceptable terms and conditions.
Product Liabilities And Insurance. Clinical trials or marketing of any of
Cell Genesys' potential products may expose the Company to liability claims
resulting from the use of such products. These claims might be made directly by
consumers, health care providers or by others selling such products. Cell
Genesys and Abgenix currently maintain product liability insurance with respect
to each company's clinical trials. There can be no assurance that the Company
will be able to maintain such insurance or, if maintained, that sufficient
coverage can be acquired at a reasonable cost. An inability to maintain
insurance at acceptable cost or at all could prevent or inhibit the clinical
testing or commercialization of products developed by the Company. A product
liability claim or recall could have a material adverse effect on the Company's
business, results of operations, financial condition and cash flow.
Hazardous Materials; Environmental Matters. Cell Genesys' research and
development activities involve the controlled use of hazardous materials,
chemicals, viruses and various radioactive compounds. Cell
26
27
Genesys is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. Although Cell Genesys believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
The Company may be required to incur significant costs to comply with
environmental laws and regulations in the future. The Company's operations,
business or assets may be materially adversely affected by current or future
environmental laws or regulations.
Reimbursement. In both domestic and foreign markets, sales of the Company's
potential products will depend in part upon coverage and reimbursement from
third-party payers, including health care organizations, government agencies,
private health care insurers and other health care payers such as health
maintenance organizations, self-insured employee plans and the Blue Cross/Blue
Shield plans. There is considerable pressure to reduce the cost of drug
products. In particular, reimbursement from government agencies and insurers and
large health organizations may become more restricted in the future. Cell
Genesys' potential products represent a new mode of therapy and, while the
cost-benefit ratio of the products may be favorable, Cell Genesys expects that
the costs associated with the Company's products will be substantial. There can
be no assurance that the Company's proposed products, if successfully developed,
will be considered cost-effective by third-party payers, that insurance coverage
will be available or, if available, that such third-party payers' reimbursement
policies will not adversely affect the Company's ability to sell its products on
a profitable basis. In addition, there can be no assurance that insurance
coverage will be provided by such third-party payers at all or without
substantial delay or, if such coverage is provided, that the approved
reimbursement will provide sufficient funds to enable the Company to become
profitable.
Uncertainty Of Pharmaceutical Pricing And Related Matters. The future
revenues and profitability of and availability of capital for biotechnology
companies may be materially adversely affected by the continuing efforts of
governmental and third-party payers to contain or reduce the costs of healthcare
through various means. For example, in certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been, and Cell Genesys expects that there will
continue to be, a number of federal and state proposals to implement similar
government control. While Cell Genesys cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could have a material adverse effect on the Company's
business, results of operations, financial condition and cash flow.
Dependence Upon Key Personnel And Collaborative Relationships. Cell
Genesys' success is highly dependent on the retention of principal members of
management and scientific staff and the recruitment of additional qualified
personnel. The loss of key personnel or the failure to recruit necessary
additional qualified personnel could have a material adverse effect on the
Company's business, results of operations, financial condition or cash flow.
There is intense competition from other companies, research and academic
institutions and other organizations for qualified personnel in the areas of
Cell Genesys' activities. There is no assurance that the Company will be able to
continue to attract and retain the qualified personnel necessary for the
development of its business. These activities are expected to require the
addition of new personnel with expertise in the areas of clinical testing,
manufacturing, marketing and distribution and the development of additional
expertise by existing personnel. The failure to acquire such personnel or
develop such expertise could have a material adverse effect on the Company's
business, results of operations, financial condition and cash flow.
Cell Genesys has clinical trial arrangements with the National Institutes
of Allergy and Infectious Diseases covering the initial proof-of-principle study
for AIDS gene therapy being conducted in identical twin pairs now in Phase II
testing. Cell Genesys also has clinical trial arrangements with the University
of California, San Francisco, San Francisco General Hospital, the University of
Colorado Health Sciences Center, Massachusetts General Hospital, the University
of California, Los Angeles, ViRx, Inc. and the Aids Research Community
Consortium covering Cell Genesys' patient-specific configuration of its AIDS
gene therapy also now in Phase II testing. If these relationships were
terminated, progress of clinical testing would be adversely affected.
27
28
In addition, the Company has several clinical trial arrangements under its
GVAX (TM) program, including with The Johns Hopkins University covering a Phase
I clinical trial to treat prostate cancer patients and with the Dana Farber
Cancer Institute covering two Phase I clinical trials to treat lung cancer and
melanoma patients. In the event that any of these relationships are terminated,
the completion and evaluation of clinical trials could be adversely affected.
In addition, the Company has several clinical trial arrangements under its
cc49 program, including with University of California, San Francisco, Stanford
University and PRN Research, Inc. In the event that any of these relationships
are terminated, the completion and evaluation of clinical trials could be
adversely affected.
The Company will depend, in part, on the continued availability of outside
scientific collaborators performing research. These relationships generally may
be terminated at any time by the collaborator, typically by giving 30 days'
notice. The Company's scientific collaborators are not employees of Cell
Genesys. As a result, the Company has limited control over their activities and
can expect that only limited amounts of their time will be dedicated to the
Company's activities. The Company's agreements with these collaborators, as well
as those with the Company's scientific consultants provide that any rights the
Company obtains as a result of the research efforts of these individuals will be
subject to the rights of the research institutions in such work. In addition,
some of these collaborators have consulting or other advisory arrangements with
other entities that may conflict with their obligations to the Company. For
these reasons, there can be no assurance that inventions or processes discovered
by the Company's scientific collaborators or consultants will become the
property of the Company.
Shares Eligible For Future Sale; Dilution. Substantially all of the
Company's shares are eligible for sale in the public market. The issuance of
common stock upon conversion of the Series B preferred stock and convertible
note and upon exercise of the warrants, as well as future sales of such common
stock or of shares of common stock by existing stockholders, or the perception
that such sales could occur, could adversely affect the market price of the
common stock. Conversion of the Series B preferred stock and the convertible
note and exercise of the warrants for shares of common stock could adversely
affect the market price of the common stock. In addition, investors could
experience substantial dilution upon conversion of the Series B preferred stock
into common stock as a result of either (i) a decline in the market price of the
Company's common stock immediately prior to conversion, or (ii) an event
triggering the antidilution rights of any outstanding shares of Series B
preferred stock.
IMPACT OF THE YEAR 2000
The Company has initiated modification of its information technology
systems to recognize the year 2000 and has begun converting critical hardware
and data processing systems. The Company expects the project to be substantially
complete by early 1999. The Company does not expect this project to have a
significant effect on operations, and the costs of modification are expected to
be insignificant. In addition, the Company is evaluating significant vendors and
other third parties which could have an effect on the Company's operations to
ensure Year 2000 compliance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
28
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cell Genesys, Inc.
We have audited the accompanying consolidated balance sheets of Cell
Genesys, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cell Genesys,
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 28, 1998
29
30
CELL GENESYS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
DECEMBER 31,
---------------------
1997 1996
--------- --------
Current assets:
Cash and cash equivalents................................. $ 10,631 $ 20,935
Short-term investments.................................... 78,185 64,649
Prepaid expenses and other current assets................. 2,943 1,165
--------- --------
Total current assets.............................. 91,759 86,749
Property and equipment, net................................. 13,815 12,485
Deposits and other assets................................... 1,313 575
--------- --------
$ 106,887 $ 99,809
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,090 $ 1,669
Accrued compensation and benefits......................... 892 1,414
Deferred revenue from related parties..................... 5,993 12,164
Accrued construction costs................................ 22 2,118
Accrued legal expenses.................................... 1,137 1,986
Accrued acquisition and related costs..................... 1,648 --
Other accrued liabilities................................. 4,264 439
Current portion of property and equipment financing....... 5,159 2,822
Contribution payable to related party..................... 3,750 --
Convertible note payable.................................. 15,000 --
--------- --------
Total current liabilities......................... 39,955 22,612
Noncurrent portion of property and equipment financing...... 11,082 6,133
Commitments and contingencies
Redeemable convertible preferred stock, $.001 par value:
5,000,000 shares authorized; 2,000 shares issued and
outstanding in 1997 (none in 1996). Aggregate redemption
value of $20,000.......................................... 19,817 --
Minority interest in the equity of subsidiary............... 17,392 --
Stockholders' equity:
Common stock, $.001 par value: 80,000,000 and 25,000,000
shares authorized; 28,168,459 and 16,514,693 shares
issued and outstanding in 1997 and 1996,
respectively........................................... 28 16
Additional paid-in capital................................ 199,495 127,318
Deferred compensation of subsidiary....................... (1,319) --
Accumulated deficit....................................... (179,563) (56,270)
--------- --------
Total stockholders' equity........................ 18,641 71,064
--------- --------
$ 106,887 $ 99,809
========= ========
See accompanying notes.
30
31
CELL GENESYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- ------- --------
Revenue under collaborative agreements -- principally from
related parties (net of equity in losses of the Xenotech
joint venture of $897, $3,866 and $1,702)................ $ 23,806 $22,505 $ 13,822
Operating expenses:
Research and development.............................. 36,830 27,587 25,879
General and administrative............................ 10,659 7,469 5,670
Charge for purchased in-process technology............ 72,270 -- --
Restructuring charge related to acquisition........... 6,576 -- --
Charge for cross-license and settlement (includes
$11,250 equity in losses of Xenotech joint venture
associated with cross-license and settlement)....... 22,500 -- --
--------- ------- --------
Total operating expenses......................... 148,835 35,056 31,549
Interest income............................................ 3,953 4,446 3,827
Interest expense........................................... (2,453) (1,169) (1,088)
--------- ------- --------
Net loss................................................... $(123,529) $(9,274) $(14,988)
========= ======= ========
Net loss per share......................................... $ (5.33) $ (0.57) $ (1.07)
========= ======= ========
Shares used in computing net loss per share................ 23,172 16,373 14,025
========= ======= ========
See accompanying notes.
31
32
CELL GENESIS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL TOTAL
COMMON PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL COMPENSATION DEFICIT EQUITY
------ ---------- ------------ ----------- -------------
Balances at December 31, 1994............ $14 $105,117 $ (397) $ (32,405) $ 72,329
Issuance of 2,000,000 shares of common
stock to Hoechst Marion Roussel, net
of offering costs of $66............ 2 19,932 -- -- 19,934
Issuance of 244,468 shares of common
stock upon exercise of stock options
and pursuant to the 1992 Employee
Stock Purchase Plan................. -- 787 -- -- 787
Amortization of deferred
compensation........................ -- -- 397 -- 397
Change in net unrealized holding loss
on available-for-sale securities.... -- -- -- 934 934
Net loss............................... -- -- -- (14,988) (14,988)
--- -------- ------- --------- ---------
Balances at December 31, 1995............ 16 125,836 -- (46,459) 79,393
Issuance of 555,522 shares of common
stock upon exercise of stock options
and pursuant to the 1992 Employee
Stock Purchase Plan................. -- 1,482 -- -- 1,482
Change in net unrealized holding loss
on available-for-sale securities.... -- -- -- (537) (537)
Net loss............................... -- -- -- (9,274) (9,274)
--- -------- ------- --------- ---------
Balances at December 31, 1996............ 16 127,318 -- (56,270) 71,064
Issuance of 11,089,706 shares of common
stock to Somatix stockholders....... 11 67,913 -- -- 67,924
Issuance of 564,060 shares of common
stock upon exercise of stock options
and pursuant to the 1992 Employee
Stock Purchase Plan................. 1 2,561 -- -- 2,562
Deferred compensation related to the
issuance of certain stock options of
subsidiary.......................... -- 1,703 (1,703) -- --
Amortization of deferred compensation
recognized by subsidiary............ -- -- 384 -- 384
Change in net unrealized holding loss
on available-for-sale securities.... -- -- -- 236 236
Net loss............................... -- -- -- (123,529) (123,529)
--- -------- ------- --------- ---------
Balances at December 31, 1997............ $28 $199,495 $(1,319) $(179,563) $ 18,641
=== ======== ======= ========= =========
See accompanying notes.
32
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CELL GENESYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(123,529) $(9,274) $(14,988)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.......................... 5,433 3,718 3,577
Amortization of deferred compensation of subsidiary.... 384 -- --
Equity in losses of Xenotech joint venture............. 897 3,866 1,702
Charge for purchased in-process technology............. 72,270 -- --
Restructuring charges.................................. 4,021 -- --
Charge for cross-license and settlement................ 22,500 -- --
Changes, excluding effect of acquisition, to:
Prepaid expenses and other assets...................... (1,369) (250) 738
Accounts payable....................................... (1,280) 1,312 (776)
Accrued compensation and benefits...................... (1,520) 249 110
Deferred revenue from related parties.................. (6,170) 10,060 1,604
Accrued legal expenses................................. (446) 1,654 99
Accrued acquisition and related costs.................. (3,203) -- --
Other accrued liabilities.............................. (2,551) (204) 333
--------- ------- --------
Net cash provided by (used in) operating
activities...................................... (34,563) 11,131 (7,601)
--------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments....................... (79,282) (62,946) (98,742)
Maturities of short-term investments...................... 9,607 24,752 19,000
Sales of short-term investments........................... 56,375 46,747 54,597
Purchase of subsidiary, net of cash acquired.............. 2,842 -- --
Contributions to Xenotech joint venture................... (4,647) (3,205) (2,357)
Capital expenditures...................................... (2,460) (2,726) (1,737)
--------- ------- --------
Net cash provided by (used in) investing
activities...................................... (17,565) 2,622 (29,239)
--------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible preferred stock..... 19,817 -- --
Proceeds from minority investment in subsidiary........... 17,392 -- --
Proceeds from issuances of common stock................... 2,563 1,482 20,721
Proceeds from property and equipment financing............ 5,735 -- --
Proceeds from long-term debt.............................. -- (750) 2,812
Payments under equipment financing obligations............ (3,683) (1,740) (1,615)
--------- ------- --------
Net cash provided by (used in) financing
activities...................................... 41,824 (1,008) 21,918
--------- ------- --------
Net increase (decrease) in cash and cash equivalents........ (10,304) 12,745 (14,922)
Cash and cash equivalents at beginning of year.............. 20,935 8,190 23,112
--------- ------- --------
Cash and cash equivalents at end of year.................... $ 10,631 $20,935 $ 8,190
========= ======= ========
See accompanying notes.
33
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CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and basis of presentation
Cell Genesys, Inc. ("Cell Genesys"), a Delaware corporation, is focused on
the development and commercialization of gene therapies to treat major,
life-threatening diseases, including AIDS and cancer. Abgenix, Inc., ("Abgenix")
a subsidiary of Cell Genesys, is focused on the development and
commercialization of human monoclonal antibodies for pharmaceutical
applications, including inflammation, autoimmune disorders, and cancer. In May
1997, the Company acquired Somatix Therapy Corporation, ("Somatix"). The
accompanying consolidated financial statements include the accounts of Cell
Genesys, including Abgenix, and Somatix from May 30, 1997, the date of
acquisition, ("the Company"). Intercompany accounts and transactions have been
eliminated in consolidation.
Revenue recognition
Revenue under collaborative agreements, principally from related parties,
is recorded when earned as defined under the terms of the respective
collaborative agreements. Nonrefundable signing or licensing fees that are not
dependent on future performance under collaborative agreements are recognized as
revenue when received. Payments for research and development performed by the
Company under contractual arrangements are recognized as revenue ratably over
the period in which the related work is performed. Revenue from the achievement
of milestone events is recognized when the funding party agrees that the
scientific or clinical results stipulated in the agreement have been achieved.
Deferred revenue arises principally due to timing of cash payments received
under research and development contracts. Revenues from Abgenix' joint venture
("Xenotech") with JT Immunotech are recognized net of the Company's related
payments to Xenotech.
Research and development
Research and development expenses, including direct and allocated expenses,
consist of independent research and development costs and costs associated with
sponsored research and development. Research and development payments made by
Abgenix to Xenotech are eliminated against related revenues from Xenotech.
Depreciation and amortization
Cell Genesys records property and equipment at cost and depreciates it
using the straight-line method over the estimated useful lives of the assets,
generally five years. Furniture and equipment leased under capital leases is
amortized over the shorter of the useful lives or the lease term. Amortization
of leased assets is included in depreciation and amortization expense and is
combined with accumulated depreciation and amortization of the Company's owned
assets. Intangible assets are amortized using the straight-line method over the
estimated useful lives of the assets, generally three years.
Cash, cash equivalents and short-term investments
Cell Genesys places its cash, cash equivalents and short-term investments
with high credit quality U.S. and foreign financial institutions, government and
corporate issuers and limits the amount of credit exposure to any one issuer.
The Company considers all highly liquid investments with insignificant interest
rate risk with a maturity of less than three months when purchased to be cash
equivalents. All investments are denominated in U. S. dollars.
The Company's debt securities are classified as available-for-sale and
carried at fair value. The cost of securities sold is based on the specific
identification method. Realized gains and losses and declines in value, judged
to be other than temporary, on available for sale securities are included in
interest income. Unrealized holding gains and losses on securities classified as
available-for-sale are recorded in accumulated deficit. The
34
35
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
company determines the appropriate classification of debt securities at the time
of purchase and re-evaluates such designation as of each balance sheet date.
Net loss per share
In December 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") and
restated all prior periods. Under the provisions of SFAS 128, basic earnings per
share is calculated based on the weighted average number of common shares
outstanding during the period. Diluted earnings per share also give effect to
the dilutive effect of stock options and warrants (calculated based on the
treasury stock method). The Company does not present diluted earnings per share
as the effect of potentially dilutive shares from stock options, warrants and
preferred stock, totaling (in thousands) 7,614, 3,196 and 3,400 shares at
December 31, 1997, 1996 and 1995, respectively, is antidilutive.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Recently issued accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" ("SFAS 130") and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes standards
for reporting comprehensive income and is effective in 1998. SFAS 131
establishes standards for annual and interim disclosures of operating segments,
products and services, geographic areas and major customers, and is also
effective in 1998. The Company is in the process of evaluating the disclosure
requirements of the new standards, the adoption of which will have no impact on
Cell Genesys' results of operations or financial condition.
Statement of cash flows
Supplemental disclosure to the Consolidated Statements of Cash Flows is as
follows for the years ended December 31(in thousands):
1997 1996 1995
------ ------ ------
Cash paid for interest................................... $2,224 $1,169 $1,075
Supplemental disclosure regarding noncash investing and financing
activities is as follows for the years ended December 31(in thousands):
1997 1996 1995
------ ------ ------
Furniture and equipment acquired under financing......... $3,652 $1,319 $2,326
Construction payable..................................... -- 2,118 --
Deferred compensation related to grant of stock options
by subsidiary.......................................... 1,703 -- --
Shares issued to Somatix stockholders.................... 67,924 -- --
35
36
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATION AND RELATED RESTRUCTURING
On May 30, 1997, Cell Genesys acquired Somatix Therapy Corporation. Under
the terms of the merger agreement, Somatix became a subsidiary of Cell Genesys
in a tax-free reorganization and stock-for-stock merger. Somatix stockholders
received 0.385 shares of Cell Genesys stock for each share of Somatix stock. A
total of 11,089,706 shares were issued to Somatix stockholders. The acquisition
was accounted for under the purchase method of accounting. The purchase price of
approximately $70.9 million, comprised of $67.9 million of common stock and $3.0
million of transaction costs, was allocated to the acquired assets and assumed
liabilities based upon their estimated fair value. The fair value of the net
assets acquired, including in-process technology, was based upon an independent
valuation. The purchase price was allocated as follows:
(IN THOUSANDS)
Purchased in-process technology............................. $72,270
Purchased intangibles....................................... 500
Liabilities assumed in excess of assets acquired............ (1,870)
-------
$70,900
=======
The amount allocated to purchased in-process technology was charged to
operations in 1997. The purchased intangible, assembled workforce, is being
amortized over the period of three years using the straight-line method. The
operations of Somatix are included in the Company's consolidated operating
results from May 31, 1997 forward.
In addition, Cell Genesys recognized $6.6 million in 1997 for restructuring
and integration expenses related to the acquisition. The current status of the
accrued restructuring charges is summarized below:
AMOUNT UTILIZED AMOUNT TO BE
AMOUNT OF TOTAL THROUGH UTILIZED IN
RESTRUCTURING CHARGE DECEMBER 31, 1997 FUTURE PERIODS
-------------------- ----------------- --------------
(IN THOUSANDS)
Employee-related costs.................. $2,880 $(2,730) $ 150
Facility shut-down...................... 1,991 (918) 1,073
Duplicate equipment..................... 537 (537) --
Other................................... 1,170 (745) 425
------ ------- ------
$6,578 $(4,930) $1,648
====== ======= ======
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma information presents the results of
operations of the Company and Somatix for the years ended December 31, 1996 and
1997 as if the acquisition had been consummated as of the beginning of the
periods presented. This pro forma information does not purport to be indicative
of what would have occurred had the acquisitions been made as of those dates or
of results which may occur in the future. The pro forma information does not
include the charge for purchased in-process technology of $72.3 million or other
transaction-related restructuring costs totaling $6.6 million which were
recognized as expense during 1997, relating to the acquisition of Somatix.
DECEMBER 31,
--------------------------------------
1997 1996
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Total revenues................................. $23,806 $22,505
Net loss....................................... (53,239) (31,169)
Net loss per share............................. (1.92) (1.14)
36
37
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COLLABORATIVE AND LICENSE AGREEMENTS
Collaborative agreement with Hoechst Marion Roussel
In 1995, Cell Genesys entered into a collaboration agreement with Hoechst
Marion Roussel, Inc. ("Hoechst Marion Roussel") for the worldwide development
and commercialization of the Company's AIDS gene therapy program. The agreement
provides for committed payments for research and development during the first
two years, and based on research and development progress, could also extend for
an additional five years.
In connection with the collaboration, Hoechst Marion Roussel paid $20
million for the purchase of two million shares of common stock at $10.00 per
share and has been granted a warrant for the purchase of 750,000 shares of
common stock, exercisable at $13.00 per share, expiring in 2000. Due to the
Company's equity transactions in 1997, Hoechst Marion Roussel's ownership
percentage of the Company was reduced to below 10%.
Under the agreement with Hoechst Marion Roussel, Cell Genesys will conduct
research, lead product development in North America and provide worldwide
manufacturing services. Hoechst Marion Roussel has worldwide marketing rights
for AIDS products developed in this program and Cell Genesys retains a co-
promotion option in North America. Cell Genesys receives payments for research
and development, a transfer price for manufacturing services, milestone
payments, and profit sharing. The Company recognized revenue of $14.4 million,
$15.3 million and $7.6 million in fiscal 1997, 1996 and 1995, respectively,
pursuant to the agreement. Research and development expenses incurred under
collaborative agreements with Hoechst Marion Roussel were $13.7 million, $12.7
million, and $10.2 million in 1997, 1996 and 1995 respectively.
Gene Activation Technology Licenses
In 1997, the Company entered into an agreement to license the Company's
gene activation technology to Hoechst Marion Roussel for gene-activated
erythropoietin (EPO) and a second undisclosed protein. The agreement provides
for milestone payments and fees, in addition to royalties on future sales of
these two potential gene-activated protein products. The Company recognized
revenue of $5.1 million in 1997 pursuant to the agreement.
In 1994, the Company entered into a license agreement for gene-activated
follicle-stimulating hormone ("FSH") for infertility with Organon, a business
unit of Akzo Nobel Pharma Group. The Company received $3.1 million in 1994 in
connection with this initial license agreement. In November 1996, the Company
renegotiated the license agreement. The Company recognized revenue of $2.5
million in fiscal 1997 and $2.5 million in fiscal 1996 pursuant to the
agreement.
Joint venture with JT Immunotech
In 1991, the Company and JT Immunotech, a medical subsidiary of Japan
Tobacco Inc. ("Japan Tobacco"), formed Xenotech, LP, ("Xenotech"), an
equally-owned joint venture, to develop genetically modified strains of mice
which can produce human monoclonal antibodies and to commercialize products
generated from these mice. In June 1996, Cell Genesys transferred its
partnership interest in the joint venture to its subsidiary, Abgenix, as part of
the initial formation of Abgenix. Xenotech funds this research which is now
conducted by Abgenix on behalf of the joint venture. The Company recognized
revenue of $1.3 million, $4.7 million and $6.2 million in 1997, 1996 and 1995,
respectively, net of its own payments to the joint venture. Related research and
development expenses incurred were $2.9 million, $8.9 million, and $7.5 million
for the same periods, respectively.
Substantially all of the cash capital contributions to Xenotech through
June 1995 were made by JT Immunotech. The Company contributed a license to
certain technology for its interest in Xenotech. Since July 1, 1995, the Company
has funded 50% of all Xenotech expenses.
37
38
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COLLABORATIVE AND LICENSE AGREEMENTS (CONTINUED)
The Company accounts for its investment in Xenotech under the equity
method; 50% of Xenotech's losses (after adjustment for certain timing
differences) are offset against revenue, as follows (in thousands):
1997 1996 1995
-------- ------ ------
Cell Genesys' share of Xenotech net loss............... $ 12,347 $3,306 $2,315
Losses associated with cross-license and settlement.... (11,250) -- --
Difference due to timing and change in deferred
revenue.............................................. (200) 560 (613)
-------- ------ ------
Equity in losses of Xenotech........................... $ 897 $3,866 $1,702
======== ====== ======
Summarized information for Xenotech at December 31, 1997, 1996, and 1995
and for the years then ended follows (in thousands):
1997 1996 1995
-------- ------- --------
Total assets........................................ $ 7,569 $ 492 $ 1,357
Total liabilities................................... 7,556 59 601
Total revenues...................................... 272 1,912 4,747
Total expenses (principally research and
development)...................................... (24,964) (8,547) (11,926)
Net loss............................................ (24,680) (6,614) (7,129)
Included in the Net loss in 1997 is $22.5 million related to the settlement
and cross-license agreement with GenPharm International, Inc. ("GenPharm"), see
note 4.
XenoMouse(TM) Technology License
In 1997, the Company entered into a comprehensive patent cross-license
agreement with GenPharm for human monoclonal antibody and certain gene therapy
technology. This agreement is more fully described in Note 4.
In 1997, Abgenix entered into a research collaboration and worldwide
license agreement with Pfizer, Inc. ("Pfizer"). Under the agreement, Abgenix
will use its XenoMouse() technology to generate fully human antibodies for up to
three antigen targets for Pfizer. The agreement provides for potential research,
license fee, milestone and equity payments of up to approximately $30 million
plus royalty payments on future potential product sales by Pfizer.
4. CHARGE FOR CROSS-LICENSE AND SETTLEMENT
On March 27, 1997, the Company announced that, along with Abgenix, Xenotech
(an equal joint venture of Abgenix and Japan Tobacco, Inc.) and Japan Tobacco,
it had signed a comprehensive patent cross-license and settlement agreement with
GenPharm that resolved all related litigation and claims between the parties.
The cross-license agreement includes a worldwide royalty free cross-license to
all issued and related patent applications pertaining to the generation of fully
human monoclonal antibody technologies in genetically modified strains of mice.
The Company also obtained a license to certain technology in the field of gene
therapy held by GenPharm. As consideration for the cross-license and settlement
agreement, Cell Genesys issued a note due September 30, 1998 for $15 million,
convertible into shares of Cell Genesys common stock initially at $9.00 per
share. The conversion price is subject to adjustment on April 1, 1998. Of this
note, $3.75 million was contributed to, then paid by Xenotech. The entire amount
of the note was recognized as expense by Abgenix in the first quarter of 1997
based on an independent valuation analysis of technology acquired. In addition,
Japan Tobacco also made a cash payment to GenPharm. During 1997, two patent
milestones of $7.5 million each under the agreement were met. Xenotech
recognized an expense of $15 million, $7.5 million of which was paid in cash and
the remainder to be paid in November 1998. During
38
39
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CHARGE FOR CROSS-LICENSE AND SETTLEMENT (CONTINUED)
1997, Abgenix recognized an expense of $7.5 million for its contribution due to
Xenotech for its share of the patent milestone of which $3.75 million was paid
in cash and $3.75 million is accrued at December 31, 1997. No additional
milestone payments will accrue under this agreement.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of the Company's available-for-sale securities
at December 31, 1997 and 1996, respectively (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
1997
U.S. Government and its agencies.............. $33,897 $ 62 $-- $33,959
Corporate notes............................... 26,123 10 -- 26,133
Commercial paper.............................. 24,866 46 -- 24,912
------- ---- -- -------
Short-term investments........................ $84,886 $118 $-- $85,004
======= ==== == =======
Classified as:
Cash equivalents.............................. 6,819 -- -- 6,819
Short-term investments........................ 78,067 118 -- 78,185
------- ---- -- -------
$84,886 $118 $-- $85,004
======= ==== == =======
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
1996
U.S. Government and its agencies.............. $53,955 $14 $(115) $53,854
Corporate notes............................... 4,854 7 (25) 4,836
Commercial paper.............................. 5,958 1 -- 5,959
------- --- ----- -------
Short-term investments........................ $64,767 $22 $(140) $64,649
======= === ===== =======
The net unrealized holding gain (loss) on these securities at December 31,
1997 and 1996 are $118,000 and ($118,000), respectively and is included in the
Company's accumulated deficit. Gross realized gains recorded on sales of
available-for-sale securities were approximately $29,000 and $154,000 for the
year ended December 31, 1997 and 1996, respectively, and are included in
interest income. Gross realized gains and losses for 1995 were immaterial.
The amortized cost and estimated fair value of available-for-sale
securities at December 31, 1997, by contractual maturity, are shown below (in
thousands):
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
Due in one year or less................................ $54,453 $54,508
Due after one through two years........................ 30,433 30,496
------- -------
$84,886 $85,004
======= =======
The fair value of the convertible note payable issued in March 1997
approximates the carrying value as the note is convertible to $15.0 million of
the Company's common stock or is payable in cash in September 1998 (see footnote
4).
39
40
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 (in
thousands):
1997 1996
-------- --------
Furniture and equipment under equipment financing........... $ 13,236 $ 10,554
Machinery and equipment..................................... 4,733 3,553
Leasehold improvements under financing...................... 9,173 3,001
Leasehold improvements...................................... 4,188 4,582
Construction in progress.................................... 32 3,061
-------- --------
31,362 24,751
Accumulated depreciation and amortization................... (17,547) (12,266)
-------- --------
$ 13,815 $ 12,485
======== ========
The Company recognized depreciation and amortization expense of $5,281,000,
$3,709,000 and $3,179,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
7. DEBT OBLIGATIONS
Contribution payable to related party
Under the terms of the GenPharm cross-license and settlement agreement (see
Note 4) a patent milestone payment of $7.5 million is payable to GenPharm by
Xenotech in November 1998. In 1997, Abgenix recognized and accrued an expense of
$3.75 million for its contribution due to Xenotech as its share of this
obligation.
Convertible note payable
In March 1997, as consideration for the cross-license and settlement
agreement with GenPharm (see Note 4), Cell Genesys issued a note due September
30, 1998 for $15.0 million, convertible into shares of Cell Genesys common stock
initially at $9.00 per share. The conversion price is subject to adjustment on
April 1, 1998. Interest accrues at 7% per annum and is payable semi-annually.
Accrued interest at December 31, 1997 was $262,500.
Property and equipment financing
As of December 31, 1997 Cell Genesys, including its subsidiary Abgenix and
obligations assumed under the Somatix acquisition, has $22.4 million of property
and equipment financed through long-term obligations. These obligations bear
interest ranging from 10 to 14 percent, have up to 5 year terms and contain
various buy-out provisions at term expiration. These obligations are secured by
certain fixed assets at the Company and by certain deposits. Under these
obligations, the Company is required to meet various financial covenants with
which it was in compliance at December 31, 1997. $4.8 million is available under
these leaselines for future financings.
40
41
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT OBLIGATIONS (CONTINUED)
Future minimum principal payments under property and equipment financing as
of December 31, 1997 were (in thousands):
Years ending December 31:
1998...................................................... $ 5,160
1999...................................................... 4,884
2000...................................................... 4,001
2001...................................................... 1,970
2002 and beyond........................................... 226
-------
16,241
Current portion of property and equipment financing......... (5,159)
-------
Noncurrent portion of property and equipment financing...... $11,082
=======
8. COMMITMENTS AND CONTINGENCIES
Rental Commitments
The Company leases its facilities and other equipment under noncancelable
operating leases. The leases expire at various dates through 2007 and some
contain options for renewal. Rent expense under operating leases was $2.2
million in 1997 ($1.8 million in 1996 and $1.3 million in 1995). Included in
accrued liabilities was $1.8 million at December 31, 1997 for future lease
payments, net of expected sublease income, related to the closed Alameda
facility assumed through the Somatix acquisition.
Future minimum payments under noncancelable operating leases, excluding the
Alameda facility, at December 31, 1997 were (in thousands):
Years ending December 31:
1998...................................................... $ 2,482
1999...................................................... 2,511
2000...................................................... 2,617
2001...................................................... 2,640
2002...................................................... 1,127
2003 and thereafter....................................... 4,360
-------
$15,737
=======
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On November 14, 1997, the Company completed a private placement of 2,000
shares of Series B redeemable convertible preferred stock, ("preferred stock"),
for aggregate proceeds of $20 million. The Company, subject to certain
conditions, may exercise a put option to sell up to an additional $10 million of
preferred stock and investors, subject to certain conditions, may exercise a
call option to purchase up to an additional $10 million of preferred stock.
After the satisfaction of certain holding periods, each of the preferred shares
is convertible, at the option of the holder, into shares of common stock of the
Company based upon a conversion price of $11.02 per share or if lower, 100% of
the average of specified trading prices during the ten trading days preceding a
conversion. Any shares not converted prior to November 2002 are automatically
converted into shares of the Company's common stock. The convertible preferred
stock bears a dividend of 5%, payable in kind upon conversion. If the Company
enters into a "major transaction" or effects a "triggering event" as defined in
the private placement agreement, the stock may be redeemed at the option of the
holders.
41
42
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
Examples of such transactions or events would include a change in control of the
Company or delisting of company's stock. The preferred stock is non-voting.
10. MINORITY INTEREST
Minority interest in the equity of subsidiary represents the minority
shareholders' proportionate share of the equity of Abgenix, Inc. (Abgenix). In
December 1997, Abgenix issued 2,846,542 shares of redeemable convertible
preferred stock at $6.50 per share to the minority shareholders for net
aggregate proceeds of $17.0 million (net of $1.5 million of issuance costs). In
addition, at December 31, 1997, Abgenix held subscriptions for 421,143 shares of
redeemable convertible preferred stock. Proceeds of $2.7 million from these
subscriptions were received in January 1998. At December 31, 1997 and 1996, the
Company owned approximately 56% and 99%, respectively, of Abgenix.
11. STOCKHOLDERS' EQUITY
Accounting for Stock Issued to Employees
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
1989 Incentive Stock Plan
The 1989 Incentive Stock Plan ("the Plan") provides for the issuance of
common stock and granting of options for common stock to employees, officers,
directors and consultants of the Company. The Company grants shares of common
stock for issuance under the plan at no less than the fair market value of the
stock (85% of fair market value for non-qualified options). Options granted
under the Plan have a maximum term of ten years and generally vest over four
years at the rate of 25% one year from the grant date and 1/48 monthly
thereafter.
Effective June 5, 1997, Cell Genesys offered employees holding outstanding
options the opportunity to exchange each option share for one option share
priced at $7.00 (approximately 120% of the closing price on that date). All
other terms remained unchanged. As a result of the offer, 1,126,013 options were
exchanged which are included in the table below.
42
43
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about the plan:
OUTSTANDING STOCK OPTIONS
---------------------------
SHARES NUMBER OF WEIGHTED-
AVAILABLE SHARES AVERAGE
(000) (000) EXERCISE PRICE
--------- --------- --------------
Balances, December 31, 1994............................... 671 2,496 $ 7.45
Authorized........................................... 700
Granted.............................................. (1,657) 1,657 $ 6.52
Exercised............................................ (181) $ 2.51
Canceled 1,433 (1,433) $11.67
------ ------
Balances, December 31, 1995............................... 1,147.. 2,539 $ 4.83
Authorized........................................... 500
Granted.............................................. (838) 838 $ 9.70
Exercised............................................ (484) $ 2.29
Canceled............................................. 558 (558) $ 8.01
------ ------
Balances, December 31, 1996............................... 367 2,335 $ 6.36
Authorized........................................... 1,750
Granted.............................................. (2,410) 2,410 $ 6.99
Exercised............................................ (442) $ 4.48
Canceled............................................. 1,372 (1,372) $ 8.52
Balances, December 31, 1997............................... 2,079 2,931 $ 6.13
====== ======
Exercisable at December 31, 1996.......................... 1,313 $ 5.10
======
Exercisable at December 31, 1997.......................... 1,425 $ 5.68
======
Weighted average fair value of options granted during 1996........... $ 5.97
Weighted average fair value of options granted during 1997........... $ 3.78
The following table summarizes information about stock options outstanding
at December 31, 1997:
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ----------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES (000) CONTRACTUAL LIFE EXERCISE PRICE (000) EXERCISE PRICE
--------------- ----------- ------------------- -------------- ----------- --------------
$ 0.05 - 1.50 180 3.6 years $ 1.14 180 $ 1.14
$ 3.00 - 4.38 283 5.5 years $ 3.25 262 $ 3.19
$ 5.13 - 6.75 872 8.9 years $ 5.93 206 $ 6.21
$ 7.00 - 10.13 1,545 8.7 years $ 7.16 726 $ 7.11
$11.00 - 19.50 51 5.6 years $12.11 51 $12.11
----- -----
2,931 1,425
===== =====
Abgenix Incentive Stock Plan
In connection with the formation of the Company's subsidiary, Abgenix,
Inc., a stock option plan was created which provides for the issuance of Abgenix
common stock and granting of options for Abgenix common stock to employees,
officers, directors and consultants of Abgenix. Also, as part of the initial
formation of Abgenix, eligible Cell Genesys employees received a one-time grant
of options under the Abgenix Plan. Abgenix grants shares of common stock for
issuance under the plan at no less than the fair market value of the stock (85%
of fair market value for non-qualified options). Options granted under the
43
44
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
Abgenix Plan generally vest over four years at the rate of 25% one year from the
grant date and 1/48 monthly thereafter.
Information with respect to the Abgenix Plan activity from the date of
inception (July 15, 1996) to December 31, 1996 and for the year ended December
31, 1997 follows:
OUTSTANDING STOCK OPTIONS
---------------------------
SHARES NUMBER OF WEIGHTED-
AVAILABLE SHARES AVERAGE
(000) (000) EXERCISE PRICE
--------- --------- --------------
Authorized at inception................................... 1,600
Granted................................................. (1,201) 1,201 $0.60
Exercised............................................... (1) $0.60
Canceled................................................ 13 (13) $0.60
------ -----
Balances, December 31, 1996............................... 412 1,187 $0.60
Authorized.............................................. 791 --
Granted................................................. (677) 677 $2.26
Exercised............................................... -- (232) $1.51
Canceled................................................ 130 (130) $1.14
------ -----
Balances, December 31, 1997............................... 656 1,502 $1.22
====== =====
Exercisable at December 31, 1996.......................... 108 $0.60
=====
Exercisable at December 31, 1997.......................... 252 $0.80
=====
Weighted average fair value of options granted during
1996.................................................... $0.60
Weighted average fair value of options granted during
1997.................................................... $2.25
In 1997, Abgenix recorded deferred compensation for the difference between
the grant price and the deemed fair value for financial statement presentation
purposes of Abgenix' common shares for certain options granted. Amortization of
deferred compensation for the year ended December 31, 1997 was $384,000.
Somatix 1992 Stock Option Plan
Under the terms of the merger agreement with Somatix, the Company adopted
the 1992 Stock Option Plan. Information with respect to the plan activity from
the date of acquisition (May 30, 1997 to December 31, 1997 follows:
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE PER SHARE
(000) (000)
--------- ----------------
Outstanding at acquisition............................ 1,018 $ 8.94
Granted............................................. -- --
Exercised........................................... (44) $ 4.69
Canceled............................................ (137) $10.15
---------
Authorized and Outstanding at December 31, 1997....... 837 $ 8.97
=========
Exercisable at December 31, 1997...................... 810 $ 8.73
=========
Weighted average remaining contractual life........... 6.43years
44
45
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
1992 Employee Stock Purchase Plan
The 1992 Employee Stock Purchase Plan allows eligible employees to
participate and purchase common stock at 85% of its fair value at certain
specified dates. Employee contributions are limited to 10% of compensation. A
total of 500,000 shares of common stock have been reserved for issuance under
the Purchase Plan. As of December 31, 1997, 246,459 shares have been issued
pursuant to the Purchase Plan.
Pro forma information
Pro forma information regarding net loss and net loss per share is required
by Statement 123, and has been determined as if the Company had accounted for
options granted under its employee stock option plans, including the Abgenix
plan, and the Purchase Plan under the fair value method of that Statement. The
fair value of Cell Genesys' options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for 1995, 1996
and 1997, respectively: risk-free interest rates of 7.30%, 5.29% and 6.46%; no
dividend yields; volatility factors of the expected market price of the
Company's common stock of 0.68, 0.68 and 0.67; and an expected life of the
option of 5 years and 0.5 years for options granted under the Purchase Plan. The
fair value of Abgenix' options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for 1996 (the
year of plan inception) and 1997, respectively: risk-free interest rates of
6.65% and 6.46%; no dividend yields; volatility factors of the expected market
price of the Company's common stock of 0.68 and 0.67; and an expected life of
the option granted under stock option plan of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The following
table illustrates what net loss would have been had the Company accounted for
its stock options under the provisions of FAS 123. Because Statement 123 is
applicable only to options granted subsequent to December 31, 1994, its pro
forma effect will not be fully reflected until 1998.
1997 1996 1995
----------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net loss As reported $(123,529) $ (9,274) $(14,988)
Pro forma $(126,549) $(11,028) $(15,787)
Net loss per
share........... As reported $ (5.33) $ (0.57) $ (1.07)
Pro forma $ (5.46) $ (0.67) $ (1.13)
Stockholder Rights Plan
In July 1995, the Board of Directors approved a stockholder rights plan
under which stockholders of record on August 21, 1995 received one preferred
share purchase right for each outstanding share of the Company's common stock.
The rights are exercisable only if an acquirer purchases 20% or more of the
Company's common stock or announces a tender offer for 20% or more of the
Company's common stock. Upon exercise, holders other than the acquirer may
purchase Cell Genesys stock at a discount. The Board of Directors may terminate
the rights plan at any time or under certain circumstances redeem the rights.
45
46
CELL GENESYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
Warrants
In connection with its collaboration with Hoechst Marion Roussel, the
Company has a warrant outstanding for the purchase of 750,000 shares of common
stock at an exercise price of $13.00 per share, which expires in 2000.
The Company has assumed various warrants issued by Somatix for the purchase
of 742,716 shares of the Company's common stock at exercise prices ranging from
$0.03 to $18.83 per share, which expire from June 1998 to December 1999.
Shares reserved
The Company has reserved shares of common stock for potential future
issuance consisting of (i). 5,624,000 upon conversion of preferred stock; (ii).
1,666,667 upon conversion the note payable; (iii). 1,492,716 upon exercises of
warrants; and (iv). 6,101,002 for exercises under the employee stock option
plans or the stock purchase plan.
13. INCOME TAXES
At December 31, 1997, the Company had available net operating loss and
research credit carryforwards for federal income tax purposes of approximately
$130 million and $2.2 million, respectively, which expire in the years 1998
through 2012, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of December 31 are as follows (in
thousands):
Deferred tax assets:
1997 1996
-------- --------
Net operating loss carryforwards............................ $ 44,700 $ 17,900
Research credits............................................ 3,100 2,500
Capitalized research expenses............................... 2,300 2,200
Capitalized license agreements.............................. 8,000 --
Other-net................................................... 3,700 1,200
-------- --------
Total deferred tax assets......................... 61,800 23,800
Valuation allowance for deferred tax assets................. (61,800) (23,800)
-------- --------
Total deferred tax assets......................... $ -- $ --
======== ========
During 1997, 1996, and 1995, the valuation allowance for deferred tax
assets increased by $38.0 million, $4.2 million and $4.5 million, respectively.
Approximately $2.6 million for the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to contributed capital.
46
47
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information required by this Item concerning the Company's
directors is incorporated by reference to the Company's Proxy Statement related
to the 1998 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days after the Company's fiscal year end (the
"1998 Proxy Statement").
(b) The information required by this Item concerning the Company's
executive officers is set forth in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's 1998 Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. INDEX TO FINANCIAL STATEMENTS
PAGE
----
Balance Sheets at December 31, 1997 and 1996................ 30
Statements of Operations for the years ended December 31,
1997, 1996 and 1995....................................... 31
Statement of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995.......................... 32
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995....................................... 33
Notes to Financial Statements............................... 34
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are not
applicable or not required or because the required information is included
in the financial statements or notes thereto.
(b) REPORTS ON FORM 8-K
The Company reported on Form 8-K dated November 14, 1997, the sale and
issuance of Series B Redeemable Convertible Preferred Stock.
47
48
(c) EXHIBITS
NUMBER DESCRIPTION
------ -----------
2.1* (10) Stock Purchase Agreement, dated as of October 9, 1995,
between the Registrant and Hoechst Marion Roussel, Inc.
2.2 (17) Agreement and plan of merger and reorganization, dated as of
January 12, 1997, among Registrant, S Merger Corp. and
Somatix Therapy Corporation.
3.1 (2) Restated Certificate of Incorporation.
3.2 (1) Bylaws.
10.1 (1) Form of Indemnification Agreement for Directors and
Officers.
10.2 (14) Amended 1989 Incentive Stock Plan.
10.3 (14) Amended 1992 Employee Stock Purchase Plan.
10.4 (1) Representative Preferred Stock Purchase Agreement.
10.5 (1) Fourth Amended and Restated Stockholder Rights Agreement.
10.7* (1) License Agreement dated August 13, 1990 between Registrant
and the University of North Carolina at Chapel Hill.
10.7(a) (1) First page only of Exhibit 10.7.
10.8(b)* (9) Amended and Restated Exclusive License Agreement dated
September 5, 1995 between the Company and the Regents of the
University of California.
10.9* (1) License Agreement dated June 28, 1991 between Registrant and
the University of Utah Research Foundation.
10.9(a)* (1) First page only of Exhibit 10.9.
10.11* (1) Joint Venture Agreement dated June 12, 1991 between
Registrant and JT Immunotech USA Inc. (without certain
exhibits, which are filed separately).
10.11(a) (1) First page only of Exhibit 10.11.
10.11(b)* (4) Amendment No. 1 dated January 1, 1994 to Joint Venture
Agreement (Exhibit 10.11).
10.12* (1) Limited Partnership Agreement dated June 12, 1991 among
Registrant, Xenotech, Inc. and JT Immunotech USA Inc.
(without certain exhibits, which are filed separately).
10.12(a) (1) First page only of Exhibit 10.12.
10.12(b)* (4) Amendment No. 2 dated January 1, 1994 to Limited Partnership
Agreement (Exhibit 10.12).
10.12(c) (8) Amendment No. 3 dated July 1, 1995 to Limited Partnership
Agreement (Exhibit 10.12).
10.13* (1) Collaboration Agreement dated June 12, 1991 among
Registrant, Xenotech, Inc. and JT Immunotech USA Inc.
(without certain exhibits, which are filed separately).
10.13(a)* (1) First page only of Exhibit 10.13 and first page of Exhibit C
to Exhibit 10.13 only.
10.13(b)* (3) Amendment No. 1 dated June 30, 1993 to Collaboration
Agreement (Exhibit 10.13).
10.13(c) (4) Amendment No. 2 dated January 1, 1994 to Collaboration
Agreement (Exhibit 10.13).
10.13(d)* (8) Amendment No. 3 dated July 1, 1995 to Collaboration
Agreement (Exhibit 10.13).
48
49
NUMBER DESCRIPTION
------ -----------
10.14 (1) Field License dated June 12, 1991 among Registrant, JT
Immunotech USA Inc. and the Partnership (Xenotech. L.P.).
10.15* (1) Expanded Field License dated June 12, 1991 among Registrant,
JT Immunotech USA Inc. and the Partnership (Xenotech, L.P.).
10.15(a) (1) First page only of Exhibit 10.15.
10.19* (1) License Agreement dated June 17, 1992 between Registrant and
The Dana-Farber Cancer Institute.
10.19(a)* (4) Amendment No. 1 dated December 15, 1993 to License Agreement
between Registrant and the Dana-Farber Cancer Institute
(Exhibit 10.19).
10.20 (2) Amended Employment Agreement with Stephen A. Sherwin, M.D.
10.21 (3) Master Loan and Security Agreement dated April 26, 1993
between Registrant and Financing for Science International,
Inc.
10.21(a) (4) Commitment Letter dated march 1, 1994 between Registrant and
Financing for Science International, Inc.
10.21(b) (5) Amendment dated April 25, 1994 to Commitment Letter with
Financing for Science International, Inc.
10.21(c) (8) Commitment Letter dated April 20, 1995 between the Company
and Financing for Science International, Inc.
10.21(d) (14) Amendment dated January 22, 1996 to Commitment Letter with
Financing for Science International, Inc.
10.22* (4) Assignment of Dana-Farger Cancer Institute License Agreement
dated December 31, 1993 between Registrant and Xenotech L.P.
(Exhibit A was previously filed as Exhibit 10.19).
10.23* (4) Master Research and License Agreement dated January 1, 1994
between Registrant, Japan Tobacco Inc. and Xenotech L.P.
10.24* (4) Xenotech Division Research Agreement dated January 1, 1994
between Registrant, Xenotech L.P. and JT Immunotech USA Inc.
10.24(a) (7) Amendment No. 1 dated as of January 19, 1995 to Xenotech
Division Research Agreement (Exhibit 10.24).
10.26 (6) Research and Development Leases dated November 1, 1994
between Registrant and Vintage Park Associates and Addendums
thereto.
10.27* (11) Collaboration Agreement, dated as of October 9,1995, by and
among the Registrant, Hoechst Aktiengesellschaft and Hoechst
Marion Roussel, Inc., including the letter agreement dated
as of October 9, 1995 between the parties.
10.28* (12) Cross License Agreement. dated as of October 9, 1995,
between the Registrant and Hoechst Aktiengesellschaft.
10.29* (13) Settlement Procedure Agreement, dated as of October 9, 1995,
by and among the Registrant, Hoechst Aktiengesellschft and
Massachusetts General Hospital.
10.1* (15) Reassignment dated January 1, 1996 of Dana-Farber Cancer
Institute License Agreement between Registrant and Xenotech
L.P.
10.30 (15) Reassignment dated January 1, 1996 of Dana-Barber Cancer
Institute License Agreement between Registrant and Xenotech
L.P.
10.31 (15) Amendment No. 1 dated March 22, 1996 to Field License
(Exhibit 10.14).
10.32 (15) Amendment No. 2 dated June 28, 1996 to Field License
(Exhibit 10.14).
10.33 (15) Amendment No. 1 dated June 28, 1996 to Expanded Field
License (Exhibit ).
49
50
NUMBER DESCRIPTION
------ -----------
10.34* (15) Amendment No. 2 dated June 28, 1996 to Joint Venture
Agreement (Exhibit 10.11).
10.35 (15) Amendment No. 4 dated June 28, 1996 to Limited Partnership
Agreement (Exhibit 10.120.
10.36* (15) Amendment No. 4 dated June 28, 1996 to Collaboration
Agreement (Exhibit 10.13).
10.37* (15) Agreement dated June 28, 1996 to Terminate Xenotech Division
Research Agreement between Registrant, Xenotech L.P. and JT
Immunotech USA Inc.
10.38* (15) Master Research License and Option Agreement dated June 28,
1996 between Registrant, Japan Tobacco Inc. and Xenotech
L.P.
10.39* (15) Universal Receptor License and Option Agreement dated June
28, 1996 between Registrant and Xenotech L.P.
10.40* (16) Amendment No. 1 dated June 7, 1996 to Vintage Park Research
and Development lease.
10.41 (16) Lease Agreement dated July 31, 1996 between Abgenix. Inc.
and John Arrillaga and Richard T. Peery
10.42 (18) Stock Option Agreement, dated as of January 12, 1997,
between Somatix Therapy Corporation, as grantor, and
Registrant, as grantee.
10.42 (18) Stock Option Agreement, dated as of January 12, 1997,
between Somatix Therapy Corporation, as grantor, and
Registrant, as grantee.
10.43 (19) Stock Option Agreement, dated as of January 12, 1997,
between Registrant, as grantor, and Somtix Therapy
Corporation, as grantee.
10.44* (20) Release and Settlement Agreement, dated March 26, 1997,
among Cell Genesys, Inc., Abgenix. Inc., Xenotech, L.P.,
Japan Tobacco Inc. and GenPharm International. Inc.
10.45* (20) Cross License Agreement, effective as of March 26, 1997,
among Cell Genesys, Inc. Abgenix, Inc., Xenotech, L.P.,
Japan Tobacco Inc. and GenPharm International, Inc.
10.46* (20) Interference Settlement Procedure Agreement, effective as of
March 26, 1997, among Cell Genesys, Inc., Abgenix, Inc.,
Xenotech. L.P., Japan Tobacco Inc. and GenPharm
International, Inc.
10.47 (20) Convertible Note Purchase Agreement, dated as of March 26,
1997, between Cell Genesys, Inc. and GenPharm International,
Inc.
10.48 (20) Convertible Subordinated Promissory Note, dated March 26,
1997, made by Cell Genesys Inc. to the order of GenPharm
International, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney, (Reference is made to page 52).
27.1 Financial Data Schedule.
99.1 Condensed Consolidating Balance Sheet at December 31, 1997
(Unaudited)
99.2 Condensed Consolidating Statement of Operations for the Year
Ended December 31, 1997 (Unaudited)
- ---------------
* Confidential treatment has been granted with respect to specific portions
of this exhibit.
(1) Incorporated by reference to the same numbered exhibit filed with the
Company's Registration Statement on Form S-1 (Reg. No. 33-46452) as
amended.
50
51
(2) Incorporated by reference to the same numbered exhibit filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1992.
(3) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1993.
(4) Incorporated by reference to the same numbered exhibit filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1993.
(5) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-K for the quarter ended March 31,
1994.
(6) Incorporated by reference to the same numbered exhibit filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
(7) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended Mach 31,
1995.
(8) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
(9) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
(10) Incorporated by reference to the same numbered exhibit filed with the
Company's Form 8-K dated October 9, 1995.
(11) Incorporated by reference to Exhibit 10.1 filed with the Company's Form 8-K
dated October 9, 1995.
(12) Incorporated by reference to Exhibit 10.2 filed with the Company's Form 8-K
dated October 9, 1995.
(13) Incorporated by reference to Exhibit 10.3 filed with the Company's Form 8-K
dated October 9, 1995.
(14) Incorporated by reference to the same numbered exhibit filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
(15) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
(16) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.
(17) Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-K
dated January 12, 1997.
(18) Incorporated by reference to Exhibit 10.1 filed with the Company's Form 8-K
dated January 12, 1997.
(19) Incorporated by reference to Exhibit 10.2 filed with the Company's Form 8-K
dated January 12, 1997.
(20) Incorporated by reference to the Company's Form 10-K/A for the fiscal year
ended December 31, 1996 as filed April 30, 1997.
51
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized in Foster City, California, on
March 30, 1998:
CELL GENESYS, INC.
By: /s/ KATHLEEN SEREDA GLAUB
------------------------------------
Kathleen Sereda Glaub,
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Date: March 30, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Stephen A. Sherwin, M.D. and Kathleen
Sereda Glaub, jointly and severally, as his or her attorneys-in-fact, each with
the full power of substitution, for him or her, in any and all capacities, to
sign any amendment to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting to said attorneys-in-fact, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact or any of them, or their or his
or her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STEPHEN A. SHERWIN, M.D. Chairman of the Board, March 30, 1998
- -------------------------------------------------------- President and Chief
Stephen A. Sherwin, M.D. Executive Officer (Principal
Executive Officer)
/s/ KATHLEEN SEREDA GLAUB Senior Vice President and March 30, 1998
- -------------------------------------------------------- Chief Financial Officer
Kathleen Sereda Glaub (Principal Financial and
Accounting Officer)
/s/ DAVID W. CARTER Director March 30, 1998
- --------------------------------------------------------
David W. Carter
/s/ JAMES M. GOWER Director March 30, 1998
- --------------------------------------------------------
James M. Gower
/s/ RAJU S. KUCHERLAPATI, PH.D. Director March 30, 1998
- --------------------------------------------------------
Raju S. Kucherlapati, Ph.D.
/s/ JOSEPH E. MAROUN Director March 30, 1998
- --------------------------------------------------------
Joseph E. Maroun
/s/ JOHN T. POTTS, JR., M.D. Director March 30, 1998
- --------------------------------------------------------
John T. Potts, Jr., M.D.
52
53
SIGNATURE TITLE DATE
--------- ----- ----
/s/ THOMAS E. SHENK, PH.D. Director March 30, 1998
- --------------------------------------------------------
Thomas E. Shenk, Ph.D.
/s/ EUGENE L. STEP Director March 30, 1998
- --------------------------------------------------------
Eugene L. Step
/s/ INDER M. VERMA, PH.D. Director March 30, 1998
- --------------------------------------------------------
Inder M. Verma, Ph.D.
53
54
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
2.1* (10) Stock Purchase Agreement, dated as of October 9, 1995,
between the Registrant and Hoechst Marion Roussel, Inc.
2.2 (17) Agreement and plan of merger and reorganization, dated as of
January 12, 1997, among Registrant, S Merger Corp. and
Somatix Therapy Corporation.
3.1 (2) Restated Certificate of Incorporation.
3.2 (1) Bylaws.
10.1 (1) Form of Indemnification Agreement for Directors and
Officers.
10.2 (14) Amended 1989 Incentive Stock Plan.
10.3 (14) Amended 1992 Employee Stock Purchase Plan.
10.4 (1) Representative Preferred Stock Purchase Agreement.
10.5 (1) Fourth Amended and Restated Stockholder Rights Agreement.
10.7* (1) License Agreement dated August 13, 1990 between Registrant
and the University of North Carolina at Chapel Hill.
10.7(a) (1) First page only of Exhibit 10.7.
10.8(b)* (9) Amended and Restated Exclusive License Agreement dated
September 5, 1995 between the Company and the Regents of the
University of California.
10.9* (1) License Agreement dated June 28, 1991 between Registrant and
the University of Utah Research Foundation.
10.9(a)* (1) First page only of Exhibit 10.9.
10.11* (1) Joint Venture Agreement dated June 12, 1991 between
Registrant and JT Immunotech USA Inc. (without certain
exhibits, which are filed separately).
10.11(a) (1) First page only of Exhibit 10.11.
10.11(b)* (4) Amendment No. 1 dated January 1, 1994 to Joint Venture
Agreement (Exhibit 10.11).
10.12* (1) Limited Partnership Agreement dated June 12, 1991 among
Registrant, Xenotech, Inc. and JT Immunotech USA Inc.
(without certain exhibits, which are filed separately).
10.12(a) (1) First page only of Exhibit 10.12.
10.12(b)* (4) Amendment No. 2 dated January 1, 1994 to Limited Partnership
Agreement (Exhibit 10.12).
10.12(c) (8) Amendment No. 3 dated July 1, 1995 to Limited Partnership
Agreement (Exhibit 10.12).
10.13* (1) Collaboration Agreement dated June 12, 1991 among
Registrant, Xenotech, Inc. and JT Immunotech USA Inc.
(without certain exhibits, which are filed separately).
10.13(a)* (1) First page only of Exhibit 10.13 and first page of Exhibit C
to Exhibit 10.13 only.
10.13(b)* (3) Amendment No. 1 dated June 30, 1993 to Collaboration
Agreement (Exhibit 10.13).
10.13(c) (4) Amendment No. 2 dated January 1, 1994 to Collaboration
Agreement (Exhibit 10.13).
10.13(d)* (8) Amendment No. 3 dated July 1, 1995 to Collaboration
Agreement (Exhibit 10.13).
55
NUMBER DESCRIPTION
------ -----------
10.14 (1) Field License dated June 12, 1991 among Registrant, JT
Immunotech USA Inc. and the Partnership (Xenotech. L.P.).
10.15* (1) Expanded Field License dated June 12, 1991 among Registrant,
JT Immunotech USA Inc. and the Partnership (Xenotech, L.P.).
10.15(a) (1) First page only of Exhibit 10.15.
10.19* (1) License Agreement dated June 17, 1992 between Registrant and
The Dana-Farber Cancer Institute.
10.19(a)* (4) Amendment No. 1 dated December 15, 1993 to License Agreement
between Registrant and the Dana-Farber Cancer Institute
(Exhibit 10.19).
10.20 (2) Amended Employment Agreement with Stephen A. Sherwin, M.D.
10.21 (3) Master Loan and Security Agreement dated April 26, 1993
between Registrant and Financing for Science International,
Inc.
10.21(a) (4) Commitment Letter dated march 1, 1994 between Registrant and
Financing for Science International, Inc.
10.21(b) (5) Amendment dated April 25, 1994 to Commitment Letter with
Financing for Science International, Inc.
10.21(c) (8) Commitment Letter dated April 20, 1995 between the Company
and Financing for Science International, Inc.
10.21(d) (14) Amendment dated January 22, 1996 to Commitment Letter with
Financing for Science International, Inc.
10.22* (4) Assignment of Dana-Farger Cancer Institute License Agreement
dated December 31, 1993 between Registrant and Xenotech L.P.
(Exhibit A was previously filed as Exhibit 10.19).
10.23* (4) Master Research and License Agreement dated January 1, 1994
between Registrant, Japan Tobacco Inc. and Xenotech L.P.
10.24* (4) Xenotech Division Research Agreement dated January 1, 1994
between Registrant, Xenotech L.P. and JT Immunotech USA Inc.
10.24(a) (7) Amendment No. 1 dated as of January 19, 1995 to Xenotech
Division Research Agreement (Exhibit 10.24).
10.26 (6) Research and Development Leases dated November 1, 1994
between Registrant and Vintage Park Associates and Addendums
thereto.
10.27* (11) Collaboration Agreement, dated as of October 9,1995, by and
among the Registrant, Hoechst Aktiengesellschaft and Hoechst
Marion Roussel, Inc., including the letter agreement dated
as of October 9, 1995 between the parties.
10.28* (12) Cross License Agreement. dated as of October 9, 1995,
between the Registrant and Hoechst Aktiengesellschaft.
10.29* (13) Settlement Procedure Agreement, dated as of October 9, 1995,
by and among the Registrant, Hoechst Aktiengesellschft and
Massachusetts General Hospital.
10.1* (15) Reassignment dated January 1, 1996 of Dana-Farber Cancer
Institute License Agreement between Registrant and Xenotech
L.P.
10.30 (15) Reassignment dated January 1, 1996 of Dana-Barber Cancer
Institute License Agreement between Registrant and Xenotech
L.P.
10.31 (15) Amendment No. 1 dated March 22, 1996 to Field License
(Exhibit 10.14).
10.32 (15) Amendment No. 2 dated June 28, 1996 to Field License
(Exhibit 10.14).
10.33 (15) Amendment No. 1 dated June 28, 1996 to Expanded Field
License (Exhibit ).
56
NUMBER DESCRIPTION
------ -----------
10.34* (15) Amendment No. 2 dated June 28, 1996 to Joint Venture
Agreement (Exhibit 10.11).
10.35 (15) Amendment No. 4 dated June 28, 1996 to Limited Partnership
Agreement (Exhibit 10.120.
10.36* (15) Amendment No. 4 dated June 28, 1996 to Collaboration
Agreement (Exhibit 10.13).
10.37* (15) Agreement dated June 28, 1996 to Terminate Xenotech Division
Research Agreement between Registrant, Xenotech L.P. and JT
Immunotech USA Inc.
10.38* (15) Master Research License and Option Agreement dated June 28,
1996 between Registrant, Japan Tobacco Inc. and Xenotech
L.P.
10.39* (15) Universal Receptor License and Option Agreement dated June
28, 1996 between Registrant and Xenotech L.P.
10.40* (16) Amendment No. 1 dated June 7, 1996 to Vintage Park Research
and Development lease.
10.41 (16) Lease Agreement dated July 31, 1996 between Abgenix. Inc.
and John Arrillaga and Richard T. Peery
10.42 (18) Stock Option Agreement, dated as of January 12, 1997,
between Somatix Therapy Corporation, as grantor, and
Registrant, as grantee.
10.42 (18) Stock Option Agreement, dated as of January 12, 1997,
between Somatix Therapy Corporation, as grantor, and
Registrant, as grantee.
10.43 (19) Stock Option Agreement, dated as of January 12, 1997,
between Registrant, as grantor, and Somtix Therapy
Corporation, as grantee.
10.44* (20) Release and Settlement Agreement, dated March 26, 1997,
among Cell Genesys, Inc., Abgenix. Inc., Xenotech, L.P.,
Japan Tobacco Inc. and GenPharm International. Inc.
10.45* (20) Cross License Agreement, effective as of March 26, 1997,
among Cell Genesys, Inc. Abgenix, Inc., Xenotech, L.P.,
Japan Tobacco Inc. and GenPharm International, Inc.
10.46* (20) Interference Settlement Procedure Agreement, effective as of
March 26, 1997, among Cell Genesys, Inc., Abgenix, Inc.,
Xenotech. L.P., Japan Tobacco Inc. and GenPharm
International, Inc.
10.47 (20) Convertible Note Purchase Agreement, dated as of March 26,
1997, between Cell Genesys, Inc. and GenPharm International,
Inc.
10.48 (20) Convertible Subordinated Promissory Note, dated March 26,
1997, made by Cell Genesys Inc. to the order of GenPharm
International, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney, (Reference is made to page 52).
27.1 Financial Data Schedule.
99.1 Condensed Consolidating Balance Sheet at December 31, 1997
(Unaudited)
99.2 Condensed Consolidating Statement of Operations for the Year
Ended December 31, 1997 (Unaudited)
- ---------------
* Confidential treatment has been granted with respect to specific portions
of this exhibit.
(1) Incorporated by reference to the same numbered exhibit filed with the
Company's Registration Statement on Form S-1 (Reg. No. 33-46452) as
amended.
57
(2) Incorporated by reference to the same numbered exhibit filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1992.
(3) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1993.
(4) Incorporated by reference to the same numbered exhibit filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1993.
(5) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-K for the quarter ended March 31,
1994.
(6) Incorporated by reference to the same numbered exhibit filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
(7) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended Mach 31,
1995.
(8) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
(9) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
(10) Incorporated by reference to the same numbered exhibit filed with the
Company's Form 8-K dated October 9, 1995.
(11) Incorporated by reference to Exhibit 10.1 filed with the Company's Form 8-K
dated October 9, 1995.
(12) Incorporated by reference to Exhibit 10.2 filed with the Company's Form 8-K
dated October 9, 1995.
(13) Incorporated by reference to Exhibit 10.3 filed with the Company's Form 8-K
dated October 9, 1995.
(14) Incorporated by reference to the same numbered exhibit filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
(15) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
(16) Incorporated by reference to the same numbered exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.
(17) Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-K
dated January 12, 1997.
(18) Incorporated by reference to Exhibit 10.1 filed with the Company's Form 8-K
dated January 12, 1997.
(19) Incorporated by reference to Exhibit 10.2 filed with the Company's Form 8-K
dated January 12, 1997.
(20) Incorporated by reference to the Company's Form 10-K/A for the fiscal year
ended December 31, 1996 as filed April 30, 1997.