1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------
FORM 10-Q
----------------
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From _________ to _________.
Commission File Number: 0-20859
----------------
GERON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2287752
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 Constitution Drive, Menlo Park, CA 94025 (Address,
including zip code, of principal executive offices)
Registrant's telephone number, including area code: (650) 473-7700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common Stock $0.001 par value
Outstanding at 11-10-98 : 13,420,943
================================================================================
2
GERON CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Balance Sheets as of September 30, 1998 and
December 31, 1997
Condensed Statements of Operations for the three and
nine months ended September 30, 1998 and 1997
Condensed Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997
Notes to Financial Statements
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About
Market Risk
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Item 2: Changes In Securities and Use of Proceeds
Item 3: Defaults upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
2
3
GERON CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share and per share amounts)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 6,204 $ 4,122
Short-term investments 15,475 17,475
Interest and other receivables 593 866
Other current assets 811 1,016
-------- --------
Total current assets 23,083 23,479
Long-term investments 12,696 --
Property and equipment, net 2,109 2,404
Deposits and other assets 185 173
-------- --------
$ 38,073 $ 26,056
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 628 $ 723
Accrued compensation 469 431
Accrued liabilities 498 605
Deferred revenue 488 975
Current portion of capital lease obligations and
equipment loans 871 1,006
-------- --------
Total current liabilities 2,954 3,740
Noncurrent portion of capital lease obligations and
equipment loans 1,057 1,250
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value; 3,000,000 shares
authorized; 15,000 and no shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively -- --
Common stock, $0.001 par value; 25,000,000 shares authorized;
11,247,286 and 10,795,913 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively 11 11
Additional paid-in-capital 87,668 67,879
Notes receivable from stockholders -- --
Deferred compensation (497) (714)
Accumulated deficit (53,120) (46,110)
-------- --------
Total stockholders' equity 34,062 21,066
-------- --------
$ 38,073 $ 26,056
======== ========
See accompanying notes.
3
4
GERON CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share and per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues from collaborative agreements $ 1,494 $ 2,225 $ 5,212 $ 4,450
License fees & royalties 34 14 76 63
------------ ------------ ------------ ------------
Total revenues 1,528 2,239 5,288 4,513
Operating expenses:
Research and development 3,839 3,734 11,272 11,319
General and administrative 994 818 2,814 2,401
------------ ------------ ------------ ------------
Total operating expenses 4,833 4,552 14,086 13,720
------------ ------------ ------------ ------------
Loss from operations (3,305) (2,313) (8,798) (9,207)
Interest and other income 627 452 1,994 1,336
Interest and other expense (83) (98) (249) (299)
------------ ------------ ------------ ------------
Net loss $ (2,761) $ (1,959) $ (7,053) $ (8,170)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.25) $ (0.18) $ (0.63) $ (0.78)
============ ============ ============ ============
Shares used in computing basic
and diluted net loss per share 11,236,561 10,711,931 11,125,258 10,475,524
============ ============ ============ ============
See accompanying notes.
4
5
GERON CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net loss $ (7,053) $ (8,170)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 811 968
Issuance of common and preferred stock in exchange
for services rendered 434 130
Deferred compensation 217 217
Changes in assets and liabilities:
Interest and other receivables 273 (506)
Other current assets 205 283
Deposits and other assets (12) 3
Accounts payable (95) (291)
Accrued compensation 38 (405)
Accrued liabilities (33) (29)
Deferred revenue (487) 1,950
-------- --------
Net cash used in operating activities (5,702) (5,850)
Cash flows from investing activities:
Capital expenditures (516) (540)
Purchases of securities available-for-sale (25,119) (21,044)
Proceeds from maturities of securities
available-for-sale 14,465 13,838
-------- --------
Net cash used in investing activities (11,170) (7,746)
Cash flows from financing activities:
Proceeds from equipment loans 498 498
Payments of obligations under capital leases and
equipment loans (826) (863)
Proceeds from issuance of common and preferred stock, net 19,282 6,512
-------- --------
Net cash provided by financing activities 18,954 6,147
-------- --------
Net increase (decrease) in cash and cash equivalents 2,082 (7,449)
Cash and cash equivalents at the beginning of the period 4,122 12,357
-------- --------
Cash and cash equivalents at the end of the period $ 6,204 $ 4,908
======== ========
See accompanying notes.
5
6
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed balance sheet as of September 30, 1998
and condensed statements of operations for the three and nine month periods
ended September 30, 1998 and 1997 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998. These financial statements should be read in
conjunction with the financial statements for the year ended December 31, 1997,
included in the Company's Annual Report on Form 10-K.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share," ("SFAS 128"),
which requires the Company to simplify the calculation of earnings per share and
achieve comparability with the recently issued International Accounting Standard
No. 33, "Earnings Per Share." SFAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods presented
have been restated, where appropriate, to conform to SFAS 128.
Had the Company been in a net income position, diluted earnings per share
would have included the shares used in the computation of basic net loss per
share as well as the number of common shares issuable upon conversion of the
Series A Convertible Preferred Stock and common shares related to outstanding
options and warrants (as determined using the treasury stock method at the
estimated average market value) for the three and nine months ended September
30, 1998 and 1997.
2. OTHER RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard 130, ("SFAS 130"),"Reporting Comprehensive Income," in June
1997. Under SFAS 130, the Company is required to display comprehensive income
(loss) and its components as part of the Company's full set of financial
statements. Comprehensive income (loss) is comprised of net income (loss) and
other comprehensive income (loss). The measurement and presentation of net
income (loss) will not change. Other comprehensive income (loss) includes
certain changes in equity of the Company that are excluded from net income
(loss). Specifically, SFAS 130 requires unrealized holding gains and losses on
the Company's available-for-sale securities, which are currently reported in the
Company's accumulated deficit, to be included in other comprehensive income
(loss). During the third quarter of 1998 and 1997, total comprehensive loss
amounted to $2.8 million and $2.0 million, respectively. For the nine months
ended September 30, 1998 and 1997, total comprehensive loss amounted to $7.1
million and $8.2 million, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 131 ("SFAS 131"), "Disclosures about Segments of
an Enterprise and Related Information," which requires additional
6
7
disclosure to be adopted beginning December 31, 1998. SFAS 131 requires that the
Company report financial and descriptive information about its reportable
operating segments. The Company is evaluating the impact, if any, of SFAS 131 on
its future financial statement disclosure.
3. CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
places its cash and cash equivalents in interest-bearing money market funds,
commercial paper, corporate master notes, and repurchase agreements with United
States financial institutions. As of September 30, 1998, the Company's
investments consisted primarily of corporate notes with maturities ranging from
3 to 22 months.
4. EQUIPMENT FINANCING
On July 31, 1998, the Company completed negotiations for a new commitment for
$3.0 million in equipment financing.
5. EMPLOYEE STOCK OPTIONS
On September 18, 1998, the Board of Directors approved a resolution to offer
all employees holding outstanding options to purchase Common Stock of the
Company under the Company's 1992 Stock Option Plan with exercise prices in
excess of the closing price of the Company's Common Stock as reported on the
Nasdaq National Market on September 17, 1998 ($4.75) the opportunity to exchange
all such options for new incentive and/or nonstatutory stock options. Each such
new incentive and/or nonstatutory stock option shall be on the same terms as the
surrendered option, except that (i) the exercise price shall be equal to the
closing price of the Company's Common Stock as reported on the Nasdaq National
Market on September 17, 1998 ($4.75), (ii) the vesting period of each exchanged
option as set forth in the applicable stock option agreement shall be extended
for one year beginning from the original vesting commencement date, (iii) no
exchanged option may be exercised or sold by the optionee prior to September 18,
1999, except due to the involuntary termination of the employee by the Company
or his or her death or permanent disability, and (iv) options so exchanged shall
be exchanged for the maximum number of incentive stock options permitted under
applicable rules and regulations.
6. SUBSEQUENT EVENTS
On November 6, 1998, 11,548 shares of the Company's Series A Convertible
Preferred Stock were converted into 2,173,446 shares of Geron Common Stock.
As of this date, 3,452 shares of Series A Convertible Preferred Stock remain
outstanding.
7
8
GERON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of certain factors set forth under the heading "Risk Factors" in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997
and in the section of this Item 2 titled "Additional Factors That May Affect
Future Results".
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
Geron is a biopharmaceutical company focusing on discovering and developing
therapeutic and diagnostic products based upon the Company's understanding of
human embryonic stem cells and of telomeres and telomerase in cells --
fundamental biological platforms underlying cancer and other age-related
degenerative diseases.
The Company's results of operations have fluctuated from period to period and
may continue to fluctuate in the future based upon the timing and composition of
funding under various collaborative agreements, as well as the progress of its
research and development efforts. Results of operations for any period may be
unrelated to results of operations for any other period. In addition, historical
results should not be viewed as indicative of future operating results. Geron is
subject to risks common to companies in its industry and at its stage of
development, including risks inherent in its research and development efforts,
reliance upon collaborative partners, enforcement of patent and proprietary
rights, need for future capital, potential competition and uncertainty of
regulatory approvals or clearances. In order for a product to be commercialized
based on the Company's research, it will be necessary for Geron and its
collaborators to conduct preclinical tests and clinical trials, demonstrate
efficacy and safety of the Company's product candidates, obtain regulatory
approvals or clearances and enter into manufacturing, distribution and marketing
arrangements, as well as obtain market acceptance. The Company does not expect
to receive revenues or royalties based on therapeutic products for a period of
years. See "Additional Factors That May Affect Future Results".
RESULTS OF OPERATIONS
REVENUES
Contract revenues were $1.5 million and $5.2 million for the three and nine
months ended September 30, 1998, respectively, compared to $2.2 million and
$4.5 million for each of the comparable periods in 1997. Contract revenues in
1998 and 1997 were from research support payments under the Company's
collaborative agreements with Pharmacia & Upjohn S.p.A. (the "Pharmacia &
Upjohn Agreement") and Kyowa Hakko Kogyo, Co. Ltd. (the "Kyowa Hakko
Agreement"). The Company recognizes revenue as related research and development
costs are incurred under the collaborative agreements. Contract revenues are
expected to decrease as a result of reduced research funding under the Kyowa
Hakko Agreement.
The Company receives license payments and royalties from license and
marketing agreements with various diagnostic partners. No license fee payments
were received in 1997. A license fee of $10,000 was received from Boehringer
Mannheim GmbH in August 1998. Royalties of $24,000 and $66,000 were received
from licensees, including Intergen, Kyowa Medex Co., Ltd., Boehringer
Mannheim and PharMingen on the sale of diagnostic kits to the
research-use-only market for the three and nine months ended September 30,
1998, respectively, compared to $14,000 and $63,000 for the comparable periods
in 1997.
8
9
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $3.8 million and $11.3 million for the
three and nine months ended September 30, 1998, respectively, compared to $3.7
million and $11.3 million for the comparable periods in 1997. Research and
development expenditures remained relatively stable for the three and nine
months ended September 30, 1998 compared to the same periods in 1997. The
Company expects research and development and related facilities expenses to
increase in the future as a result of continued development of its research
programs as well as planned expansion of the Company's facilities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $994,000 and $2.8 million for the
three and nine months ended September 30, 1998, respectively, compared to
$818,000 and $2.4 million for the comparable periods in 1997. The overall
increase in general and administrative expenses for 1998 was primarily due to
higher legal, filing and communications costs.
INTEREST AND OTHER INCOME
Interest income was $532,000 and $1.4 million for the three and nine months
ended September 30, 1998, respectively, compared to $385,000 and $1.0 million
for the comparable periods in 1997. The increase was due to higher average cash
and investment balances as a result of a private placement and the sale of
equity securities to Pharmacia & Upjohn, both of which occurred at the end of
the first quarter of 1998. Interest earned in the future will depend on the
Company's funding cycles and prevailing interest rates. The Company also
received $95,000 and $572,000 in research payments under government grants for
the three and nine months ended September 30, 1998, respectively, compared to
$67,000 and $278,000 for the comparable periods in 1997. The Company does not
expect income from government grants to be significant in the foreseeable
future.
INTEREST AND OTHER EXPENSE
Interest and other expense was $83,000 and $249,000 for the three and nine
months ended September 30, 1998, respectively, compared to $98,000 and $299,000
for the comparable periods in 1997. The decrease was due to lower outstanding
lease obligations as a result of certain leases expiring during the first half
of 1998. The Company expects interest and other expense to remain consistent
with prior years as expiring leases are replaced with new leases over the coming
year.
NET LOSS
Net loss was $2.8 million and $7.1 million for the three and nine months
ended September 30, 1998, respectively, compared to $2.0 million and $8.2
million for the comparable periods in 1997. The increase in the net loss for the
three months ended September 30, 1998 was the result of the reduced research
support funding from Kyowa Hakko effective as of April 1998. The decrease in the
net loss for the nine months ended September 30, 1998 was due primarily to the
timing of the recognition of contract revenue from the Kyowa Hakko and Pharmacia
& Upjohn agreements. The agreement with Pharmacia & Upjohn was signed in March
1997, and no contract revenue was recognized until the second quarter of 1997.
In addition, the Company did not recognize any contract revenue from the Kyowa
Hakko Agreement in the first quarter of 1997. Net loss is expected to increase
as a result of decreased funding from Kyowa Hakko.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investments at September 30, 1998 were $34.4
million compared to $21.6 million at December 31, 1997. The increase in cash,
cash equivalents and investments for the nine months ended September 30, 1998
was primarily due to the issuances of common and preferred stock of $19.3
million in 1998.
9
10
Net cash used in operations decreased to $5.7 million for the nine months
ended September 30, 1998 compared to $5.9 million for the comparable period in
1997. The decrease resulted primarily from a lower net loss in 1998 as a result
of higher revenue recognized from the Pharmacia & Upjohn agreement in 1998.
For the nine months ended September 30, 1998, additions of equipment and
leasehold improvements totaled approximately $516,000, all of which were
financed through equipment financing arrangements. At September 30, 1998, the
Company had approximately $2.8 million available for borrowing under its
equipment financing facility. On July 31, 1998, the Company completed
negotiations for a new commitment for $3.0 million in equipment financing.
The Company estimates that its existing capital resources, payments under the
Pharmacia & Upjohn Agreement, interest income and equipment financing will be
sufficient to fund its current and planned operations through 1999. There can be
no assurance, however, that changes in the Company's research and development
plans or other changes affecting the Company's operating expenses will not
result in the expenditure of available resources before such time, and in any
event, the Company will need to raise substantial additional capital to fund its
operations in future periods. The Company intends to seek additional funding
through collaborative arrangements, public or private equity financings, capital
lease transactions or other financing sources that may be available.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Specifically, the Company
wishes to alert readers that, except for the historical information contained
herein, the matters discussed in this report constitute forward-looking
statements that are dependent on certain risks and uncertainties. These and
other factors that may cause actual results to differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company
are described below.
TECHNOLOGICAL UNCERTAINTY
The study of the mechanisms of cellular aging and cellular immortality,
including telomere biology and telomerase, is a relatively new area of research,
and there can be no assurance that this research will lead to the discovery or
development of any therapeutic or diagnostic product. If and when potential lead
drug compounds or product candidates are identified through the Company's
research programs, they will require significant preclinical and clinical
testing prior to regulatory approval in the United States and elsewhere, and
there can be no assurance that any of these efforts will result in a product
that can be marketed. Because of the significant additional scientific,
regulatory and commercial milestones that must be reached for the Company's
research programs to be successful, there can be no assurance that any program
will not be abandoned after significant resources have been expended. The
abandonment of any research program could have a material adverse effect on the
Company.
As a result of its drug discovery efforts to date, the Company has identified
compounds in in vitro studies that demonstrate potential for inhibiting
telomerase in vivo. However, additional development efforts will be required
prior to the selection of a lead compound for preclinical development and
clinical trials as a telomerase inhibitor for cancer. If and when selected, a
lead compound may prove to have undesirable and unintended side effects or other
characteristics affecting its efficacy or safety that may prevent or limit its
commercial use. For example, telomerase is active in reproductive cells and
transiently expressed in certain hematopoietic (blood) and gastrointestinal
cells. There can be no assurance that any product based on the inhibition of
telomerase will not adversely affect such cells and result in unacceptable side
effects. In addition, it is expected that telomerase inhibition will have
delayed efficacy as telomeres resume normal shortening and, as a result, will in
most cases, be used in conjunction with other cancer therapies. There can be no
assurance that the delayed efficacy of a telomerase inhibitor will not have a
material adverse effect on the preclinical and clinical development, ability to
obtain regulatory approval or marketability of a telomerase inhibitor for the
treatment of cancer. The abandonment of the Telomerase Inhibition and Detection
program would have a material adverse effect on the Company.
In addition, the Company has identified certain genes that are expressed
differentially in senescent cells versus replicatively young cells. However,
the Company has not identified any lead compounds that have been demonstrated
to modulate such gene expression, and there can be no assurance that any such
compounds will be discovered, developed or activate telomerase. While telomere
length and replicative capacity have been extended in vitro, there can be no
assurance that the Company will discover a compound that will modulate telomere
length or increase replicative capacity effectively for clinical use.
With respect to the development and commercial application of the Company's
proprietary telomerase detection technology, there is, as yet, insufficient
clinical data to confirm its full utility to diagnose, prognose, monitor patient
10
11
status and screen for cancer. Although the Company's licensees, Intergen,
Boehringer Mannheim, Kyowa Medex and PharMingen, have commenced the sale of kits
for research use, additional development work and regulatory consents will be
necessary prior to the introduction of tests for clinical use.
The Company's Embryonic Stem Cell program is also at an early stage.
While human Embryonic Stem ("hES") cells have been derived and allowed to
expand and differentiate into numerous cell types, there can be no assurance
that the Company's efforts to direct differentiation of hES cells and develop
products therefrom will result in any commercial applications.
The Company may become aware of technology controlled by third parties that
is advantageous to the Company's programs. There can be no assurance that the
Company will be able to acquire or license such technology on reasonable terms,
if at all. In the event that the Company is unable to acquire such technology,
the Company may be required to expend significant time and resources to develop
similar technology, and there can be no assurance that it will be successful in
this regard. If the Company cannot acquire or develop necessary technology, it
may be prevented from pursuing certain business objectives. Moreover, a
competitor of the Company could acquire or license such technology. Any such
event could have a material adverse effect on the Company.
EARLY STAGE OF DEVELOPMENT
Geron is at an early stage in the development of therapeutic and diagnostic
products. The Company has not yet selected a lead compound for any of its drug
development programs. In order to identify and select such a compound, it must
have access to sufficient numbers of chemical compounds and resources, of which
there can be no assurance. Products that may result from the Company's research
and development programs are not expected to be commercially available for a
number of years, if at all. The Company's program to identify a telomerase
inhibitor is currently at the drug discovery stage, while the Company's other
programs are currently focused on research efforts prior to drug discovery or
preclinical development. It is difficult to predict when, if ever, the Company
will select a lead compound for drug development as a telomerase inhibitor.
Assuming the Company's research advances and the Company is able to identify and
select a lead compound for telomerase inhibition, certain preclinical
development efforts will be necessary to determine whether the potential product
has sufficient safety to enter clinical trials. If such a potential product
receives authorization from the United States Food and Drug Administration (the
"FDA") to enter clinical trials, then it will most likely be subjected to a
multiphase, multicenter clinical study to determine its safety and efficacy. It
is not possible to predict the length or extent of clinical trials or the period
of any required patient follow-up. Assuming clinical trials of any potential
product are successful and other data are satisfactory, the Company will submit
an application to the FDA and appropriate regulatory bodies in other countries
to seek permission to market the product. The review process at the FDA is
substantial and lengthy, and there can be no assurance that the FDA will approve
the Company's application or will not require additional clinical trials or
other data prior to approval. Furthermore, even if such approval is ultimately
obtained, delays in the approval process could have a material adverse effect on
the Company. In addition, there can be no assurance that any potential product
will be capable of being produced in commercial quantities at a reasonable cost
or that such product will be successfully marketed. Based on the foregoing, the
Company does not anticipate being able to commence marketing of any therapeutic
products for a period of years, if at all. There can be no assurance that any of
the Company's product development efforts will be successfully completed, that
regulatory approvals will be obtained, or that the Company's products, if any,
will achieve market acceptance.
DEPENDENCE ON STRATEGIC AND RESEARCH COLLABORATIONS
The Company's strategy for the development, clinical testing and
commercialization of its products includes entering into collaborations with
corporate partners, licensors, licensees and others, and the Company is
dependent
11
12
upon the subsequent success of these other parties in performing their
respective responsibilities. The success of any collaboration depends on the
continued cooperation of its partners, as to which there can be no assurance.
The amount and timing of resources to be devoted to activities by its
collaborators are not within the direct control of the Company. There can be no
assurance that such partners will perform their obligations as expected or that
the Company will derive any benefits from such arrangements. There can also be
no assurance that the Company's current collaborators or any future
collaborators will not pursue existing or alternative technologies in preference
to those being developed in collaboration with the Company.
The Company currently has no manufacturing infrastructure and no marketing or
sales organization, and intends to rely in substantial part on its current and
future strategic partners for the manufacture of any product and the principal
marketing and sales responsibilities for any such product. To the extent the
Company chooses not to or is unable to establish such arrangements, the Company
will require substantially greater capital to undertake its own manufacturing,
marketing and sales of any product.
In April 1995, the Company entered into a License and Research Collaboration
Agreement with Kyowa Hakko (the "Kyowa Hakko Agreement") for the development and
commercialization in certain Asian countries of a telomerase inhibitor for the
treatment of cancer. Under the collaboration, Kyowa Hakko provides certain
funding for the Company's research and development activities and is responsible
for all clinical, regulatory, manufacturing, marketing and sales efforts and
expenses in the covered territory. The Kyowa Hakko Agreement provides that Kyowa
Hakko will not pursue research and development independent of its collaboration
with Geron with respect to telomerase inhibition for the treatment of cancer in
humans until April 7, 2000, at the earliest. The Kyowa Hakko Agreement also
provides in general that, while Geron exercises significant influence during the
research phase, Kyowa Hakko exercises significant influence during the
development and commercialization phases of the collaboration. In March 1997,
the Kyowa Hakko Agreement was amended to extend its term until April 2000 and to
make certain other changes in connection with the signing of the Pharmacia &
Upjohn Agreement (as defined below).
On March 23, 1997, the Company signed a License and Research Collaboration
Agreement (the "Pharmacia & Upjohn Agreement") with Pharmacia & Upjohn, S.p.A.
to collaborate in the discovery, development and commercialization of a new
class of anticancer drugs that inhibit telomerase. Under the collaboration,
Pharmacia & Upjohn will provide certain funding of the Company's research and
development activities and will be primarily responsible for all clinical,
regulatory, manufacturing, marketing and sales efforts and expenses. Geron has
certain promotion rights with corresponding clinical expense obligations. As
with the Kyowa Hakko Agreement, the Company exercises significant influence
during the research phase of the collaboration while Pharmacia & Upjohn will
exercise significant influence during the development and commercialization
phases of the collaboration. Through the Pharmacia & Upjohn and Kyowa Hakko
Agreements, the Company has granted to Pharmacia & Upjohn and Kyowa Hakko
exclusive worldwide rights to its telomerase inhibition technology, with
exceptions for certain antisense, gene therapy and vaccine technologies outside
Asia, for the treatment of cancer in humans. If and when a telomerase inhibitor
is selected for development and commercialization under the Kyowa Hakko and
Pharmacia & Upjohn Agreements, the Company will be significantly dependent upon
the activities of Pharmacia & Upjohn and Kyowa Hakko for the successful
commercialization of such product. Any failure of Pharmacia & Upjohn and Kyowa
Hakko to develop or commercialize a telomerase inhibitor (if and when selected)
will have a material adverse effect on the Company.
In December 1997, the Company entered into a License, Product and Marketing
Agreement with Boehringer Mannheim (Roche) to develop and market research and
clinical diagnostic products to study and diagnose cancer on an exclusive,
worldwide basis. Under the collaboration, Boehringer Mannheim (Roche) will
provide reimbursement for research previously conducted and will be primarily
responsible for all clinical, regulatory, manufacturing, marketing and sales
efforts and expenses. In addition, the Company is entitled to receive future
payments upon achievement of certain contractual milestones relating to level
of product sales, as well as royalties on product sales. Further, the Company
has an option to exercise certain co-promotion rights in the United States. If
and when a telomerase-based diagnostic kit is developed and commercialized
under the agreement with Boehringer Mannheim (Roche), the Company will be
significantly dependent upon the activities of Boehringer Mannheim (Roche) for
the successful manufacturing and commercialization of such product.
12
13
The Company has also entered into licensing arrangements with several
diagnostic companies for the Company's telomerase detection technology. However,
because these licenses are limited to the research-use-only market, such
arrangements are not expected to generate significant commercial revenues.
There can be no assurance that the Company will be able to negotiate
additional strategic arrangements in the future on acceptable terms, if at all,
or that such strategic arrangements will be successful. In the absence of such
arrangements, the Company may encounter significant delays in introducing any
product or find that the research, development, manufacture, marketing or sale
of any product is adversely affected. In the event that the Company does not
enter into such arrangements, it may be materially adversely affected.
The Company has relationships with collaborators and scientific advisors at
academic and other institutions, some of whom conduct research at the Company's
request. These collaborators and scientific advisors are not employees of the
Company and may have commitments to, or consulting or advisory contracts with,
other entities that may limit their availability to the Company. The Company has
limited control over the activities of these collaborators and advisors and,
except as otherwise required by its collaboration and consulting agreements, can
expect only limited amounts of their time to be dedicated to the Company's
activities.
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNCERTAINTY OF PATENT PROTECTION
Protection of the Company's proprietary compounds and technology is important
to the Company's business. The Company owns 17 issued United States patents and
over 52 United States patent applications and has licensed 18 issued United
States patents and over 43 United States patent applications, as well as
international filings under the Patent Cooperation Treaty, pending foreign
national patent applications and 2 foreign national patents corresponding to
certain of these United States patents and patent applications. Geron's success
will depend in part on its ability to obtain and enforce its patents and
maintain trade secrets, both in the United States and in other countries. The
patent positions of pharmaceutical and biopharmaceutical companies, including
the Company, are highly uncertain and involve complex legal and technical
questions for which legal principles are not firmly established. There can be no
assurance that the Company will continue to develop products or processes that
are patentable or that patents will issue from any of the pending applications,
including allowed patent applications. There can also be no assurance that the
Company's current patents, or patents that issue on pending applications, will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection or competitive advantages to the
Company. Because (i) patent applications in the United States are maintained in
secrecy until patents issue, (ii) patent applications are not generally
published until many months or years after they are filed and (iii) publication
of technological developments in the scientific and patent literature often
occurs long after the date of such developments, the Company cannot be certain
that the inventors on its or its licensors' patents and patent applications were
the first to invent the inventions disclosed in the patent applications or
patents or that it or its licensors were the first to file patent applications
for such inventions. Patent prosecution to issue patents and litigation to
establish the validity of patents, to defend against patent infringement claims
of others and to assert infringement claims against others can be expensive and
time consuming even if the outcome is favorable to the Company. If the outcome
of patent prosecution or litigation is unfavorable to the Company, the Company
could be materially adversely affected.
Patent law relating to the scope and enforceability of claims in the fields
in which the Company operates is still evolving. The degree of future protection
for the Company's proprietary rights, therefore, is highly uncertain. In this
regard, there can be no assurance that independent patents will issue from each
of the United States patent applications referenced above, which include many
interrelated applications directed to common or related subject matter. The
Company is aware of certain patent applications and patents that have been filed
by or issued to others with respect to telomerase and telomere length
technology. In addition, there are a number of issued patents and pending
applications owned by others directed to differential display, stem cell and
other technologies relating to the Company's research, development and
commercialization efforts. There can be no assurance that the Company's
technology can be developed and commercialized without a license to such patents
or that such patent applications will not be granted priority over patent
applications filed by the Company or its licensors. Furthermore, there can be no
assurance that others will not independently develop similar or alternative
technologies to those of the Company,
13
14
duplicate any of the Company's technologies or design around the patented
technologies developed by the Company or its licensors, any of which may have a
material adverse effect on the Company.
The commercial success of the Company depends significantly on its ability to
operate without infringing patents and proprietary rights of others. There can
be no assurance that the Company's technologies do not and will not infringe the
patents or proprietary rights of others. In the event of such infringement, the
Company may be enjoined from pursuing research, development or commercialization
of its potential products or may be required to obtain licenses to these patents
or other proprietary rights or to develop or obtain alternative technologies.
There can be no assurance that the Company will be able to obtain alternative
technologies or any required license on commercially favorable terms, if at all,
and if any such license is or alternative technologies are not obtained, the
Company may be delayed or prevented from pursuing the development of certain of
its potential products. The Company's breach of an existing license or failure
to obtain or delay in obtaining alternative technologies or a license to any
technology that it may require to develop or commercialize its products may have
a material adverse effect on the Company. Also, the Company may be subject to
claims or litigation as a result of entering into a license. In this regard, the
Company signed a licensing and sponsored research agreement relating to its
Embryonic Stem Cell program with The Johns Hopkins University School of
Medicine ("JHU") on August 1, 1997, after having been informed by a third party
that the Company and JHU would violate the rights of that third party and
another academic institution with which that third party claimed to be
affiliated by way of contract (collectively "Third Party") in doing so. After a
review of the correspondence with the Third Party and JHU as well as related
documents, including an issued U.S. patent, the Company believes that the Third
Party's claims, if asserted, would fall into three general categories: patent
infringement, misuse of confidential information and breach of contract. The
Company believes that it and JHU have substantial defenses to any claims that
might be asserted by such Third Party and has provided indemnification to JHU
relating to such potential claims. However, any litigation resulting from this
matter may divert significant resources, both financial and otherwise, from the
Company's research programs, and there can be no assurance that the Company
would be successful in any such litigation. If the outcome of any such
litigation is unfavorable to the Company, the Company could be materially and
adversely affected.
Litigation may also be necessary to enforce any patents issued or licensed to
the Company or to determine the scope and validity of the Company's or another's
proprietary rights. The Company could incur substantial costs if litigation is
required to defend itself in patent suits or other intellectual property
litigation brought by others or if Geron initiates such suits. There can be no
assurance that the Company's issued or licensed patents would be held valid or
infringed in a court of competent jurisdiction or that a patent held by another
will be held invalid or not infringed in such court. An adverse outcome in
litigation or an interference to determine priority or other proceeding in a
court or patent office could subject the Company to significant liabilities to
other parties, require disputed rights to be licensed from other parties or
require the Company to cease using such technology, any of which could have a
material adverse effect on the Company.
Geron also relies on trade secrets to protect its proprietary technology,
especially in circumstances in which patent protection is not believed to be
appropriate or obtainable. Geron attempts to protect its proprietary technology
in part by confidentiality agreements with its employees, consultants and
certain contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors.
The Company is party to various license agreements which give it rights to
use certain technologies in its research, development and commercialization
activities. Disputes have arisen and may continue to arise as to the
inventorship and corresponding rights in know-how and inventions resulting from
the joint creation or use of intellectual property by the Company and its
licensors, research collaborators and consultants. There can be no assurance
that the Company will be able to continue to license such technologies on
commercially reasonable terms, if at all, or to maintain the exclusivity of its
exclusive licenses. The failure of the Company to maintain exclusive or other
rights to such technologies could have a material adverse effect on the Company.
14
15
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will require substantial capital resources in order to conduct its
operations. The Company's future capital requirements will depend on many
factors, including, among others, continued scientific progress in its research
and development programs; the magnitude and scope of these activities; the
ability of the Company to maintain and establish strategic arrangements for
research, development, clinical testing, manufacturing and marketing; progress
with preclinical and clinical trials; the time and costs involved in obtaining
regulatory approvals; the costs involved in preparing, filing, prosecuting,
maintaining, defending and enforcing patent claims; or the potential for new
technologies and products. The Company intends to seek such additional funding
through strategic collaborations, public or private equity financings and
capital lease transactions; however, there can be no assurance that additional
financing will be available on acceptable terms, if at all. Additional equity
financings could result in significant dilution to stockholders. Further, in
the event that additional funds are obtained through arrangements with
collaborative partners, such arrangements may require the Company to relinquish
rights to certain of its technologies, product candidates or products that the
Company would otherwise seek to develop or commercialize itself. If sufficient
capital is not available, the Company may be required to delay, reduce the
scope of or eliminate one or more of its research or development programs, each
of which could have a material adverse effect on the Company. Based on current
projections, the Company estimates that its existing capital resources,
payments under the Pharmacia & Upjohn Agreement, interest income, grant funding
and equipment financing will be sufficient to fund its current and planned
operations through 1999. There can be no assurance that the assumptions
underlying such estimates are correct or that such funds will be sufficient to
meet the capital needs of the Company during such period.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT
Geron has incurred net operating losses in every year of operation since its
inception in 1990. Losses have resulted principally from costs incurred in
connection with the Company's research and development activities and from
general and administrative costs associated with the Company's operations. The
Company expects to incur additional operating losses over the next several years
as the Company's research and development efforts and preclinical testing are
expanded. Substantially all of the Company's revenues to date have been research
support payments under the collaborative agreements with Kyowa Hakko and
Pharmacia & Upjohn. Research support payments under the Kyowa Hakko Agreement
expired in April 1998. Research payments under the Pharmacia & Upjohn Agreement
expire in January 2000. The Company is unable to estimate at this time the level
of revenue to be received from the sale of diagnostic products, but does not
expect to receive significant revenues from the sale of research-use-only kits.
The Company's ability to achieve profitability is dependent on its ability,
alone or with others, to select therapeutic compounds for development, obtain
the required regulatory approvals and manufacture and market resulting products.
There can be no assurance when or if the Company will receive material revenues
from product sales or achieve profitability. Failure to generate significant
additional revenues and achieve profitability could impair the Company's ability
to sustain operations.
SUBSTANTIAL COMPETITION; RISK OF TECHNOLOGICAL OBSOLESCENCE
The pharmaceutical and biopharmaceutical industries are intensely
competitive. The Company believes that certain pharmaceutical and
biopharmaceutical companies as well as certain research organizations currently
engage in or have in the past engaged in efforts related to the biological
mechanisms of cell aging and cell immortality, including the study of telomeres,
telomerase and stem cell technologies. In addition, other products and therapies
that could compete directly with the products that the Company is seeking to
develop and market currently exist or are being developed by pharmaceutical and
biopharmaceutical companies, and by academic and other research organizations.
Many companies are also developing alternative therapies to treat cancer and, in
this regard, are competitive with the Company. The pharmaceutical companies
developing and marketing such competing products have significantly greater
financial resources and expertise in research and development, manufacturing,
preclinical and clinical testing, obtaining regulatory approvals and marketing
than the Company. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large and
established companies. Academic institutions, government agencies and other
public and private research organizations may also conduct research, seek patent
protection and establish collaborative arrangements for research, clinical
development and marketing of products similar to those of the Company. These
companies and institutions compete
15
16
with the Company in recruiting and retaining qualified scientific and management
personnel as well as in acquiring technologies complementary to the Company's
programs. There is also competition for access to libraries of compounds to use
for screening. Any inability of the Company to secure and maintain access to
sufficiently broad libraries of compounds for screening potential targets would
have a material adverse effect on the Company. In addition to the above factors,
Geron will face competition with respect to product efficacy and safety, the
timing and scope of regulatory consents, availability of resources,
reimbursement coverage, price and patent position, including potentially
dominant patent positions of others. There can be no assurance that competitors
will not develop more effective or more affordable products, or achieve earlier
patent protection or product commercialization than the Company or that such
products will not render the Company's products obsolete.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the principal members of its scientific
and management staff, the loss of whose services might significantly delay or
prevent the achievement of research, development or business objectives. In
addition, the Company relies on consultants and advisors, including the members
of its Scientific Advisory Board, to assist the Company in formulating its
research and development strategy. Retaining and attracting qualified scientific
and management personnel, consultants and advisors is critical to the Company's
success. The Company faces competition for qualified individuals from numerous
pharmaceutical, biopharmaceutical and biotechnology companies, as well as
academic and other research institutions. There can be no assurance that the
Company will be able to attract and retain such individuals on acceptable terms
and the failure to do so would have a material adverse effect on the Company.
ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF EMBRYONIC STEM CELL THERAPIES
The Company's Embryonic Stem Cell program may involve the use of ES cells
that would be derived from human embryonic tissue, and therefore may raise
certain ethical, legal and social issues regarding the appropriate utilization
of this tissue. The use of embryonic tissue in scientific research is an issue
of national interest. Many research institutions, including certain of the
Company's scientific collaborators, have adopted policies regarding the ethical
use of these types of human tissue. These policies may have the effect of
limiting the scope of research conducted in this area, resulting in reduced
scientific progress. The Company has established an Ethics Advisory Board
comprised of independent and recognized medical ethicists to provide advice to
the Company. In addition, the United States government and its agencies
currently do not fund research which involves the use of such tissue and may in
the future regulate or otherwise restrict its use. The inability of the Company
to conduct research on these cells due to such factors as government regulation
or otherwise could have a material adverse effect on the program. In the event
the Company's research related to ES cell therapies becomes the subject of
adverse commentary or publicity, the Company's name and goodwill could be
adversely affected.
GOVERNMENT REGULATION
The preclinical testing and clinical trials of any products developed by the
Company or its collaborative partners and the manufacturing, labeling, sale,
distribution, marketing, advertising and promotion of any new products resulting
therefrom are subject to regulation by federal, state and local governmental
authorities in the United States, the principal one of which is the FDA, and by
similar agencies in other countries in which products developed by the Company
or its collaborative partners may be tested and marketed (each of such federal,
state, local and other authorities and agencies is referred to herein as a
"Regulatory Agency"). Any product developed by the Company or its collaborative
partners must receive all relevant Regulatory Agency approvals or clearances, if
any, before it may be marketed in a particular country. The regulatory process,
which includes extensive preclinical testing and clinical trials of each product
in order to establish its safety and efficacy, is uncertain, can take many years
and requires the expenditure of substantial resources. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
which could delay, limit or prevent Regulatory Agency approval or clearance. In
addition, delays or rejections may be encountered based upon changes in
Regulatory Agency policy during the period of product development and/or the
period of review of any application for Regulatory Agency approval or clearance
for a product. Delays in obtaining Regulatory Agency approvals or clearances
could adversely affect the marketing of any products developed by the Company or
its collaborative partners, impose costly procedures upon the
16
17
Company's and its collaborative partners' activities, diminish any competitive
advantages that the Company or its collaborative partners may attain and
adversely affect the Company's ability to receive royalties and generate
revenues and profits. There can be no assurance that, even after such time and
expenditures, any required Regulatory Agency approvals or clearances will be
obtained for any products developed by or in collaboration with the Company.
Moreover, if Regulatory Agency approval or clearance for a new product is
obtained, such approval or clearance may entail limitations on the indicated
uses for which it may be marketed that could limit the potential market for any
such product. Furthermore, approved products and their manufacturers are subject
to continual review, and discovery of previously unknown problems with a product
or its manufacturer may result in restrictions on such product or manufacturer,
including withdrawal of the product from the market. In general, failure to
comply with FDA requirements can result in severe civil and criminal penalties,
including but not limited to recall or seizure of product, injunction against
manufacture, distribution, sales and marketing and criminal prosecution.
NO ASSURANCE OF MARKET ACCEPTANCE; UNCERTAINTY OF PHARMACEUTICAL PRICING; IMPACT
OF HEALTH CARE REFORM MEASURES
There can be no assurance that any products successfully developed by the
Company or its collaborative partners, if approved for marketing, will achieve
market acceptance. The products which the Company is attempting to develop will
compete with a number of traditional drugs and therapies manufactured and
marketed by major pharmaceutical companies, as well as new products currently
under development by such companies and others. The degree of market acceptance
of any products developed by the Company will depend on a number of factors,
including the establishment and demonstration in the medical community of the
clinical efficacy and safety of the Company's product candidates, their
potential advantage over alternative treatment methods and reimbursement
policies of government and third-party payors. There is no assurance that
physicians, patients or the medical community in general will accept and utilize
any products that may be developed by the Company or its collaborative partners.
In both domestic and foreign markets, sales of the Company's products, if
any, will depend in part on the availability of reimbursement from third-party
payors such as government health administration authorities, private health
insurers, health maintenance organizations, pharmacy benefit management
companies and other organizations. Both federal and state governments in the
United States and foreign governments continue to propose and pass legislation
designed to contain or reduce the cost of health care through various means.
Legislation and regulations affecting the pricing of pharmaceuticals and other
medical products may change or be adopted before any of the Company's potential
products are approved for marketing. Cost control initiatives could decrease the
price that the Company receives for any product it may develop in the future and
have a material adverse effect on the Company. In addition, third-party payors
are increasingly challenging the price and cost-effectiveness of medical
products and services. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, including pharmaceuticals. There
can be no assurance that the Company's potential products will be considered
cost effective or that adequate third-party reimbursement will be available to
enable Geron to maintain price levels sufficient to realize an appropriate
return on its investment in product development. In any such event, the Company
may be materially adversely affected.
REGULATIONS RELATING TO THE ENVIRONMENT AND HAZARDOUS MATERIALS
The Company's research and development activities involve the controlled use
of hazardous materials, chemicals and various radioactive compounds. As a
consequence, the Company is subject to numerous environmental and safety laws
and regulations. There can be no assurance that the Company will not be required
to incur significant costs to comply with current or future environmental laws
and regulations or that the Company will not be adversely affected by the cost
of compliance with such laws and regulations. Although the Company believes that
its safety procedures for using, handling, storing and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
eliminated. In the event of such an accident, the Company's use of these
materials could be curtailed by state or federal authorities, the Company could
be held liable for any damages that result and any such liability could have a
material adverse effect on the Company.
17
18
POTENTIAL PRODUCT LIABILITY CLAIMS; ABSENCE OF INSURANCE
Although the Company believes it does not currently have any exposure to
product liability claims, the Company's future business will expose it to
potential product liability risks that are inherent in the testing,
manufacturing and marketing of human therapeutic and diagnostic products. The
Company currently has no clinical trial liability insurance and there can be no
assurance that it will be able to obtain and maintain such insurance for any of
its clinical trials. In addition, there can be no assurance that the Company
will be able to obtain or maintain product liability insurance in the future on
acceptable terms or with adequate coverage against potential liabilities.
CONTROL BY MANAGEMENT AND CURRENT STOCKHOLDERS
Executive officers and directors of the Company, together with entities
affiliated with them, own or control approximately 2% of the outstanding shares
of Common Stock and may be able to influence significantly the election of the
Company's Board of Directors and other corporate actions requiring stockholder
approval, as well as significantly influence the direction and policies of the
Company.
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's Common Stock in the public
market could adversely affect the market price of the Company's Common Stock.
The Company had outstanding approximately 11,247,286 shares of Common Stock and
15,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred
Stock") as of September 30, 1998. As of September 30, 1998, 3,428,975 shares of
Common Stock were reserved for issuance upon exercise of the Company's
outstanding options and warrants. Pharmacia & Upjohn S.p.A. has agreed not to
sell the 696,787 shares held by it until April 2000, after which time such
shares will be freely transferable in accordance with Regulation S promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). Except for
the shares of Common Stock issued to Pharmacia & Upjohn S.p.A., all of the
Company's outstanding shares of Common Stock are freely tradeable without
restriction under the Securities Act unless held by affiliates of the Company.
In addition, certain holders of Common Stock and securities convertible into or
exercisable for shares of Common Stock have certain registration rights under a
registration rights agreement among such holders and the Company.
POSSIBLE DILUTION FROM CONVERSION OF SERIES A PREFERRED STOCK
The number of shares of the Company's Common Stock issuable upon conversion
of its Series A Convertible Preferred Stock is not fixed and could result in
substantial dilution to current stockholders. Further, sales of the underlying
shares of Common Stock could adversely affect the market price of the Common
Stock. As of September 30, 1998, 15,000 shares of the Company's Series A
Convertible Preferred Stock were issued and outstanding. Each share of the
Series A Convertible Preferred Stock is convertible into such number of shares
of Common Stock as is determined by dividing the stated value ($1,000) of the
share of Series A Convertible Preferred Stock (as such value is increased by a
premium based on the number of days the Series A Convertible Preferred Stock is
held) by the then current Conversion Price (which is determined by reference to
the then current market price). If converted on September 30, 1998, the Series A
Preferred Stock would have been convertible into approximately 3,096,972 shares
of Common Stock, but this number of shares could be significantly larger or
smaller depending on the trading price of the Common Stock at the time of
conversion. The shares of Common Stock into which the Series A Convertible
Preferred Stock may be converted have been registered pursuant to a Registration
Statement on Form S-3 that was filed on April 24, 1998 and declared effective by
the SEC on July 17, 1998.
On November 6, 1998, 11,548 shares of the Company's Series A Convertible
Preferred Stock were converted into 2,173,446 shares of Geron Common Stock.
As of this date, 3,452 shares of Series A Convertible Preferred Stock remain
outstanding.
18
19
POSSIBLE VOLATILITY OF STOCK PRICE
There has been a history of significant volatility in the market price for
shares of biopharmaceutical companies, and it is likely that the market price of
the Company's Common Stock will be similarly volatile. Prices for the Company's
Common Stock may be influenced by many factors, including the depth of the
market for the Company's Common Stock, investor perception of the Company,
fluctuations in the Company's operating results and market conditions relating
to the biopharmaceutical and pharmaceutical industries. In addition, the market
price of the Company's Common Stock may be influenced by announcements of
technological innovations, new commercial products or clinical progress or the
lack thereof by the Company, its collaborative partners or its competitors. In
addition, announcements concerning regulatory developments, developments with
respect to proprietary rights and the Company's collaborations as well as other
factors could also have a significant impact on the Company's business and the
market price of the Company's Common Stock.
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS; CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to 3,000,000
shares of undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without further vote or action by the
Company's stockholders. In March 1998, the Board of Directors designated 15,000
shares of Series A Convertible Preferred Stock. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company. In addition, certain provisions of the Company's charter documents,
including the inability of stockholders to take actions by written consent and
the staggered election of the Company's Board of Directors, and certain
provisions of Delaware law, could delay or make difficult a merger, tender offer
or proxy contest involving the Company.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or laboratory equipment that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions in
operations, including, among other things, a temporary inability to process
transactions, send checks, perform research and development activities or engage
in similar normal business activities.
Based on a recent assessment, the Company has determined that it will be
required to modify or replace certain portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. These software programs include the Company's accounting package
and voicemail system. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 Issue will not
pose significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers, service providers and corporate partners to determine the extent to
which the Company's interface systems are vulnerable to those third parties'
failure to remediate their own Year 2000 Issues. The Company's total Year 2000
project cost and estimated time to complete include the estimated costs and
time associated with the impact of third party Year 2000 Issues and is based on
presently available information. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
upgraded or converted and would not have an adverse effect on the Company's
systems. Such suppliers, service providers and corporate partners include the
Company's payroll service provider, local financial institutions and website
maintenance organization. At this time, the Company is developing contingency
plans in the event such suppliers, service providers and corporate partners
fail to remediate their own Year 2000 Issues.
The Company will utilize both internal and external resources to replace and
test software for Year 2000 modifications. The Company anticipates completing
the Year 2000 project within one year, but not later than June 30, 1999, which
is prior to any anticipated impact on its operating systems. The total cost of
the Year 2000 project
19
20
is estimated at $200,000 and is being funded through current cash holdings. Of
the total project cost, approximately $100,000 is attributable to the purchase
of new software and equipment which will be capitalized. The remaining $100,000,
which will be expensed as incurred, is not expected to have a material effect on
the Company's results of operations. To date, the Company has incurred
approximately $60,000 ($40,000 capitalized for new systems and $20,000
expensed), related to the assessment of, and preliminary efforts on, its Year
2000 project.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
20
21
GERON CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On November 5, 1998, the Company announced the successful derivation of
human embryonic stem cells in collaboration with scientists at the
University of Wisconsin-Madison. An article was published in the
journal Science.
On November 5, 1998, the Company announced the successful derivation of
human pluripotent stem cells from cultured primordial germ cells in
collaboration with scientists at the Johns Hopkins University. An
article was published in the journal Proceedings of the National
Academy of Sciences.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
99.1 November 5, 1998 Press Release: First Derivation of
Human Embryonic Stem Cells Reported in Science
99.2 November 5, 1998 Press Release: PNAS Reports Derivation
of Pluripotent Stem Cells From Cultured Primordial Germ
Cells
(b) REPORTS ON FORM 8-K
None
21
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GERON CORPORATION
By: /s/ David L. Greenwood
----------------------------------
David L. Greenwood
Chief Financial Officer, Treasurer
and Secretary
(Duly Authorized Signatory and
Principal Financial and Accounting
Officer)
Date: November 13, 1998
22
23
EXHIBIT INDEX
EXHIBIT # DESCRIPTION
--------- -----------
27.1 Financial Data Schedule
99.1 November 5, 1998 Press Release: First Derivation of Human
Embryonic Stem Cells Reported in Science
99.2 November 5, 1998 Press Release: PNAS Reports Derivation of
Pluripotent Stem Cells From Cultured Primordial Germ Cells
23