- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 1996 OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Period From to
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 or organ-
ization) (I.R.S. employer identification number)
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
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 14, 1997, the approximate market value of voting stock held by
nonaffiliates of the Registrant was $76,986,375. 6,297,273 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 14, 1997, the number of outstanding shares of the Registrant's
Common Stock was 16,562,123.
Documents incorporated by reference:
Incorporated by Reference Document
Document into Part of this Form 10-K
(1) Portions of the Proxy Statement with respect
to the 1997 Annual Meeting of Stockholders
to be filed with the Securities and Ex-
change Commission not later than 120 days
after the close of the Registrant's year
end. III
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 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 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 is in Phase II human clinical testing and is being developed through a
worldwide collaboration with Hoechst Marion Roussel ("HMR"). Cancer gene
therapy, for which Cell Genesys currently has worldwide rights, is in
preclinical testing for colon, ovarian and other specific types of cancer.
These and other gene therapy programs utilize proprietary, engineered genes
and gene delivery systems. During 1996, Cell Genesys established a subsidiary,
Abgenix, Inc. ("Abgenix") to focus on developing and commercializing antibody
therapies for inflammation, autoimmune disorders, cancer and other serious
diseases.
Cell Genesys believes that it is likely that gene therapies will be
developed on a continuum, progressing from ex vivo (modification of cells
outside the patient's body) to in vivo (modification of cells within the
patient's body). Both approaches require the use of genes, which may be
engineered with specific therapeutic qualities, along with transport vehicles
called "vectors."
Cell Genesys' clinical and preclinical programs currently use engineered
genes and vectors ex vivo to impart new capabilities to certain of the
patient's immune cells, such as T cells and stem cells. This treatment
involves extracting the immune cells from the patient's blood through standard
blood bank procedures, purifying and genetically modifying the cells to target
disease, and expanding their numbers. The genetically modified cells are then
reinfused into the patient as therapy to specifically target and destroy
diseased cells.
Cell Genesys believes that in vivo gene therapy, which also is in research
at Cell Genesys, will offer the opportunity to ultimately provide "gene in a
bottle" products that will be able to be used much like any biopharmaceutical.
This approach involves transporting genes into the patient's body to
selectively modify certain cells or activate specific genetic functions,
providing new disease-fighting capabilities. Unlike cells used in ex vivo gene
therapy, target cells for in vivo gene therapy typically cannot be easily
removed for external processing. Cell Genesys' goal is to stimulate cells
inside the patient to produce a protein needed to normalize key biological
processes, inhibit specific disease mechanisms, or generate an immune response
against disease.
Successful gene therapy, whether ex vivo or in vivo, depends to a great
extent on vectors, the vehicles used to transport genes into cells. Multiple
types of vectors are needed, 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 cellular DNA, have proven to be
particularly efficient vectors. Cell Genesys has engineered proprietary
retroviral and adenoviral vectors that have been modified with the goal of
eliminating disease properties and providing safe, efficient, long-term gene
expression.
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
2
marketing infrastructure to aid in the commercialization of potential disease
therapies. Cell Genesys also evaluates on an ongoing basis in-licensing or
acquiring genes and technologies that complement Cell Genesys' 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.
During 1996, Cell Genesys made progress in its research and development of
gene therapy. In AIDS gene therapy, Cell Genesys demonstrated safety in Phase
I/II human clinical studies and initiated Phase II efficacy studies on a
patient-specific approach to treatment. In cancer gene therapy, Cell Genesys
initiated development of its lead therapeutic candidate, conducted pre-
investigational new drug application studies for the treatment of colon and
other cancers, and signed new agreements with the National Cancer Institute,
Dana-Farber Cancer Institute and Arizona Cancer Center at the University of
Arizona which provide certain genes that may be useful in creating other
specific cancer gene therapies.
Cell Genesys has maintained its financial strength through funding received
from its corporate partnerships, as well as through strategic management of
its resources. Cell Genesys reported a loss of $9.3 million for the fiscal
year ended December 31, 1996, and ended the year with $85.6 million in cash,
cash equivalents and short-term investments.
BACKGROUND
For many years the pharmaceutical industry has focused on developing
chemical compounds as pharmaceutical drugs and disease therapies. These
compounds are most often synthesized in the laboratory or derived from
substances found in nature. 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. These traditional pharmaceutical products
include antibiotics, analgesics and compounds which treat inflammation,
cardiovascular diseases and cancer. However, traditional pharmaceutical
products are not always successful in treating many diseases for a variety of
reasons, including unwanted side effects and delivery of insufficient amounts
of the drug to the site of the disease. Equally important, traditional
pharmaceutical products may halt further damage from disease processes, but
generally cannot stimulate the regrowth of damaged cells or tissues.
Although the biotechnology industry has made significant advances over the
past 20 years, protein-based therapeutic products also may not adequately
treat diseases which involve the loss or dysfunction of particular cells in
the body. This may be true, for example, for diseases in which cell
populations are lost as a result of infection or malignancy. Examples include
AIDS, other viral infections and certain types of cancer. The use of chemical
compounds, therapeutic proteins or monoclonal antibodies to treat diseases of
this type 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.
Therefore, an appropriate therapeutic strategy for diseases resulting from
cell loss or dysfunction 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 or enhanced functions as a form of "gene therapy."
GENE THERAPY
At the core of gene therapy are genes, or pieces of DNA, which normally
exist in cells. These genes are engineered to make them suitable for medical
purposes and then inserted into the patient's cells to perform specific
therapeutic functions. 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. Certain forms of gene therapy involve "gene
correction," which introduces normal genes into 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.
3
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 can be accomplished using reagents known as vectors. There
are both viral and non-viral vectors. The appropriate vector system or other
delivery vehicle may vary depending on the disease indication. Viral vectors
take advantage of the natural ability of many viruses to insert their own
genetic material into the chromosomes of the infected cells at high
efficiency. Viruses used as vectors are genetically modified with the
objective that, once inserted into cells, infectious viruses cannot form from
these vectors.
To date, Cell Genesys has focused on the development of proprietary viral
vectors such as retroviral and adenoviral vectors. Currently, retroviral
vectors are used in Cell Genesys' AIDS and cancer gene therapy. Cell Genesys
is using a retroviral vector system to insert genes ex vivo into a certain
type of immune white blood cells, known as killer T cells. The T cells are
genetically modified so that they can recognize and destroy HIV-infected
cells. Cell Genesys' Phase I/II human clinical trials to evaluate AIDS gene
therapy are currently under way. A similar approach is being used with Cell
Genesys' T cell gene therapy as potential treatment for specific cancers, such
as colon, breast and lung cancers and for which Cell Genesys expects to
initiate human clinical trials by mid-1997. Adenoviral vectors in research at
Cell Genesys easily infect certain cell types including lung cells, and do not
appear to permanently insert genetic material into the cell's genome. Cell
Genesys has engineered forms of the virus to deliver genes that it believes
are noninfectious. These novel adenoviral vectors appear to be capable of
long-term expression and can potentially avoid the toxicities seen with
earlier versions of the vectors.
Cell Genesys believes that gene therapy methodology will need to vary
depending upon the disease indication. The differences between ex vivo and in
vivo gene therapy and viral and non-viral vectors must be considered in the
context of the disease indication, safety factors, production efficiencies,
disease site and other factors.
PRODUCT DEVELOPMENT PROGRAMS
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 focused on 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 disease therapies.
Current development programs focus on the therapeutic use of white blood
cells, which are among the most powerful components of the human immune
system. White cells, such as T cells and stem cells, are naturally able to
seek out and destroy diseased cells and secrete an elaborate cascade of immune
hormones in response to disease-causing agents. Employing a unique gene
therapy strategy, Cell Genesys is genetically engineering T cells to target
and destroy virally-infected or cancer cells that otherwise overwhelm the
immune system or elude immune detection. Cell Genesys also is engineering bone
marrow stem cells, which give rise to all blood and immune cells and may thus
provide a self-renewing source of white blood cells.
T cells are a type of white blood cell found in the bloodstream and in other
tissues and are important components of the body's immune system. Killer T
cells directly attack infected or malignant cells through a precise and
controlled process that avoids damaging nearby healthy cells. More
specifically, killer T cells recognize disease cells by means of a complex
structure on the cell surface, referred to as a T cell receptor. Cell Genesys
is introducing into killer T cells novel disease-specific T cell receptors
that have the potential to recognize infected or malignant cells in multiple
patients with that particular disease.
Cancer Gene Therapies. To treat cancer, Cell Genesys scientists are
engineering T cells to recognize and bind to cells exhibiting a specific
cancer-related protein. Since the normal action of T cells is to destroy
anything that it binds to, the introduction of these engineered cells into the
patient's body is expected to kill specific cancer cells. This approach may
prove particularly useful in treating patients whose immune systems are
impaired, such as those who have undergone radiation or chemotherapy.
4
Preclinical studies for Cell Genesys' lead cancer gene therapy are being
conducted in collaboration with the National Cancer Institute and target
multiple cancers, including colon, breast, lung, ovarian and prostate cancers.
These efforts utilize an antibody gene, CC49, to construct immune cells that
specifically bind TAG-72, a protein which is highly specific to and found on
the surface of various types of tumor cells. Preclinical laboratory studies
have demonstrated highly specific killing of colon tumor cells by these
engineered immune cells in vitro. Additional preclinical studies should
provide the basis for an investigational new drug application with the FDA and
human clinical studies which are currently planned for mid-1997.
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 a portfolio of reagents for use in developing T
cell gene therapies for specific types of cancers, including breast, colon and
lung cancers. In 1996, through new 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 will generate preclinical data for multiple cancer
indications. Cell Genesys' objective is to develop cancer gene therapies that
represent highly targeted treatment approaches that can selectively destroy
tumor cells while leaving healthy cells unharmed.
AIDS Gene Therapy. HIV infection is the cause of AIDS. The Centers for
Disease Control estimates that over 600,000-900,000 Americans are infected
with HIV and that more than 450,000 persons in the United States have been
afflicted with AIDS. It is estimated that during the next 10 years there will
be approximately 50,000 new cases of AIDS each year. A number of antiviral
drugs for the treatment of HIV infection have been approved by the FDA. These
drugs, including the new protease inhibitors, inhibit virus replication in
individuals already infected with HIV. However, they do not kill HIV-infected
cells or eliminate persistent sites of infection. Virus replication is only
temporarily inhibited and, therefore, the virus quickly reappears when
medication is discontinued. Furthermore, patients on long-term drug therapy
may become resistant to treatment and must switch to other drugs, until all
options have been exhausted.
Cell Genesys' AIDS gene therapy, by targeting and destroying HIV-infected
cells that are the reservoir for the virus, offers a different but highly
compatible treatment strategy. Studies published in the scientific literature
suggest that T cells may play an important role in attacking HIV-infected
cells. Over time, however, it appears that the patient's T cells lose their
ability to fight HIV, and the virus infection increases, often with fatal
consequences. Cell Genesys has developed a method for arming T cells with the
ability to recognize and destroy HIV-infected cells. Specifically, a new
targeting mechanism is introduced into killer T cells--genetically engineered
receptors--that enable the T cell to recognize viral proteins (antigens) that
appear on the surface of an HIV-infected cell. The modified killer T cells can
then bind to the infected cell and destroy it. To increase the specificity of
anti-HIV T cells and to attempt to overcome the virus' tendency to become
resistant to antiviral drugs, Cell Genesys has constructed a genetically
engineered receptor that targets the part of the virus that is involved in
binding to healthy cells during infection. A proprietary gene for the new
receptor, which can potentially function in multiple patients with HIV
infection, is introduced into killer T cells using Cell Genesys' high
efficiency gene transfer technology. This proprietary methodology increases
the ability to generate larger numbers of modified T cells for patient
therapy.
Two Phase II human clinical studies are currently under way using Cell
Genesys' ex vivo gene therapy. The initial proof-of-principle study for AIDS
gene therapy is being conducted by Drs. Robert Walker and H. Clifford Lane,
two AIDS researchers at the National Institute of Allergy and Infectious
Diseases in Bethesda, Maryland. This trial is designed to determine the
efficacy of repeated doses of Cell Genesys' T cell gene therapy over an
extended period. Approximately 30 pairs of identical twins, one HIV-positive,
the other not, are participating in the Phase II portion of the study, in
which T cells are obtained from the healthy twin, modified by inserting the
CD4-zeta gene which should enable them to recognize and destroy HIV-infected
cells, expanded in number and then infused into the HIV-positive twin as
therapy. To date, Cell Genesys has evaluated over 100 treatment cycles of this
proof-of-principle AIDS gene therapy, and has observed no significant
treatment-related safety problems associated with this therapy. In addition,
six-month data have demonstrated that the genetically modified killer T cells
continue to persist in the patient's circulatory system.
5
Cell Genesys' patient-specific treatment intended for commercialization is
currently being tested in a series of Phase II pilot studies designed to
evaluate various treatment protocols, including combination therapy with
antiviral drugs. Initiated in June 1996, this effort involves genetically
engineering the patient's own T cells to recognize and destroy HIV-infected
cells. Leading clinical investigators in the AIDS field--Drs. Steven Deeks and
Paul Volberding of the University of California, San Francisco and San
Francisco General Hospital, respectively, Drs. Elizabeth Connick and Robert
Schooley of the University of Colorado Health Sciences Center, Drs. Bruce
Walker and David Scudder of Massachusetts General Hospital, and Dr. Ronald
Mitsayasu of the University of California, Los Angeles--are conducting these
studies. Initial clinical findings confirm earlier safety results and cell
persistence data. Cell Genesys expects to complete these pilot studies during
1997 and, based on efficacy data, develop a plan to expand into Phase II/III
studies. Cell Genesys' T cell 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. Although preliminary results of
Cell Genesys' Phase I/II clinical testing in AIDS gene therapy reported to
date have shown no significant treatment-related safety problems, 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.
In October 1995, Cell Genesys signed a worldwide agreement with HMR 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 12 percent of the outstanding Cell Genesys Common Stock as of
January 31, 1997. Under the agreement, Cell Genesys is leading product
development in North America and providing worldwide manufacturing services.
HMR has worldwide marketing 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 cancer gene therapy. In addition to
AIDS gene therapy, HMR also has preferential rights for up to two additional
AIDS 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, HMR and its
licensor in this field, Massachusetts General Hospital. Through December 1996,
Cell Genesys has received approximately $50 million under its agreement with
HMR. There can be no assurance that Cell Genesys will receive any further
progress-dependent funding from HMR pursuant to this arrangement, or that HMR
will exercise its warrant to purchase additional shares of Cell Genesys'
capital stock.
Cell Processing Capabilities. To commercialize its first gene therapies,
Cell Genesys intends to operate cell processing centers at regional sites
around the United States. This centralization of specialist services is
similar to the centralization of blood processing, in which blood is drawn
from patients at blood banks and processed elsewhere to control the cost,
quality and efficiency of service. Cell Genesys currently provides all cell
processing for its patient-specific AIDS gene therapy clinical trial. Cell
Genesys is currently expanding its cell processing capacity in preparation for
cancer gene therapy clinical studies.
In Vivo Gene Therapy. The accessibility of cardiovascular and inflammatory
conditions through the bloodstream has led Cell Genesys to explore a variety
of new opportunities for gene therapy. Most recently, through a collaboration
with Duke University, Cell Genesys' proprietary adenoviral vectors are being
used as ex vivo and in vivo gene delivery systems to evaluate the potential of
cardiovascular gene therapy. One potential treatment target is inhibition of
restenosis, a potentially damaging blockage of blood flow that may occur after
arteries are unblocked through coronary angioplasty or heart surgery.
In 1997, Cell Genesys' goal is to generate preclinical data to support a
product development decision for an in vivo gene therapy. A number of
opportunities are under evaluation to in-license specific genes for such an in
vivo gene therapy application.
6
Stem Cell Gene Therapy. Cell Genesys scientists are also engineering bone
marrow stem cells for potential use in the treatment of cancer and AIDS. Stem
cells give rise to all blood and immune cells. As such, they offer a self-
renewing source of white blood cells, including T cells, and might therefore
involve less frequent treatment than T cell gene therapy. Research results to
date show that the use of tumor-specific stem cells engineered by Cell Genesys
scientists and introduced into laboratory mice prevented the occurrence of
fatal cancers in 80% of the treated animals.
"Universal Donor" Cells. Longer-term, Cell Genesys is conducting research on
universal donor T cells which could be administered to multiple patients
without tissue rejection. Universal donor T cells will require additional
genetic engineering to eliminate or suppress the immunologic fingerprint that
is present on every cell in the body. Tissue rejection occurs when the
recipient's immune system recognizes the unique immunologic fingerprint of a
transplanted cell as foreign.
GOVERNMENT REGULATION
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. 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. In Phase II, clinical trials are conducted with groups of
patients afflicted with a specific disease in order to 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.
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.
7
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.
For Cell Genesys' clinical trial of AIDS gene therapy in twins, Cell Genesys
uses a contract facility for cell processing activities which are required for
the manufacture of clinical materials. The cell processing activities of this
contractor are subject to the above laws and regulations. During 1995, Cell
Genesys completed construction of its clinical scale cell processing facility.
This facility is being used to process cells for Cell Genesys' patient-
specific (autologous) AIDS gene therapy Phase II clinical testing which was
initiated in 1996. The facility is currently being expanded for Cell Genesys'
cancer gene therapy clinical trial planned for 1997. 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 ASSETS OF CELL GENESYS
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 December 1996, Cell Genesys agreed to establish a licensing agreement
with HMR 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 received $4 million upon execution of the letter of
intent, subject to execution of a definitive agreement. In February 1997, Cell
Genesys executed the definitive agreement with HMR for this license and
recognized the $4 million previously received as revenue.
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. Akzo Nobel
currently markets a urine-purified form of FSH, and has also developed a
recombinant form of FSH. During 1995, Akzo Nobel settled a patent dispute with
another party related to recombinant FSH and plans to market this form of FSH
subject to regulatory approval. Pursuant to an amendment to the 1994 agreement
made in November 1996, Cell Genesys expects to receive $5 million in payments
under such agreement.
Abgenix. While Cell Genesys is focused on the commercialization of gene
therapy, Cell Genesys' Abgenix subsidiary is focused on the commercialization
of antibody therapies for inflammation/autoimmune disease, cancer and other
serious illnesses. Cell Genesys formed Abgenix as a separate business
subsidiary in June 1996, contributing $10 million in cash and providing a $4
million convertible loan to the newly formed company. Cell Genesys also
contributed 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,
including employees of Cell Genesys' former Xenotech Division and other Cell
Genesys
8
employees who were primarily involved with the antibody program. R. Scott
Greer, who served for over five years at Cell Genesys and was most recently
Senior Vice President of Corporate Development, 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., a medical subsidiary of Japan Tobacco ("JT Immunotech"). For
products pursued separately by Abgenix, Abgenix has 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. Included in this latter arrangement is anti-IL-8
antibody developed through the partnership and expected to enter human testing
during the second half of 1997.
Cell Genesys' relationship with Japan Tobacco was established in July 1991,
when Cell Genesys formed an equally owned worldwide joint venture with JT
Immunotech, Xenotech L.P. ("Xenotech"). This venture focused on developing
strains of transgenic mice capable of producing fully human monoclonal
antibodies and conducting preclinical studies with initial antibodies. Through
1996, Cell Genesys has received $39.9 million in funding through the joint
venture, including an equity investment in Cell Genesys Common Stock
representing approximately six percent of the outstanding Cell Genesys Common
Stock as of January 31, 1997. Committed funding from Japan Tobacco is expected
to be completed in 1997.
On March 27, 1997, Cell Genesys announced that, together with Abgenix'
Xenotech and Japan Tobacco, it had signed a comprehensive patent cross-license
and settlement agreement with GenPharm International Inc. ("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. See Item 3 "Legal Proceedings".
CORPORATE RELATIONSHIPS
Hoechst Marion Roussel. In October 1995, Cell Genesys signed a worldwide
agreement with HMR 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 12 percent of the outstanding Cell Genesys Common Stock as of
January 31, 1997. Under the agreement, Cell Genesys is leading product
development in North America and providing worldwide manufacturing services.
HMR has worldwide marketing 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 cancer gene therapy. In addition to
AIDS gene therapy, HMR 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, HMR and its
licensor in this field, Massachusetts General Hospital. Through December 1996,
Cell Genesys has received approximately $50 million under its agreement with
HMR. There can be no assurance that Cell Genesys will receive any further
progress-dependent funding from HMR pursuant to this arrangement, or that HMR
will exercise its warrant to purchase additional shares of Cell Genesys'
capital stock.
In December 1996, Cell Genesys also agreed to establish a licensing
agreement with HMR 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. Cell
Genesys received $4 million upon execution of the letter of intent in December
1996 and executed the definitive agreement for the license in February 1997.
9
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 1996, Cell Genesys has
received $39.9 million in funding through the joint venture, including an
equity investment in Cell Genesys Common Stock representing approximately six
percent of the outstanding Cell Genesys Common Stock as of January 31, 1997.
Committed funding from Japan Tobacco is expected to be completed in 1997.
GENE THERAPY PATENTS AND TRADE SECRETS
Cell Genesys' success will depend in part on its ability to obtain patent
protection for its products both in the United States and other countries.
Cell Genesys has filed applications for a number of United States and foreign
patents, and has licenses or license options to patents or patent applications
of others. In 1994, Cell Genesys was issued a United States patent for the
disease-specific receptor technology underlying its T cell and stem cell gene
therapy program. In 1995, Cell Genesys received two United States patents for
gene-modified cells related to universal donor cell modifications and a notice
of allowance for a European patent on transgenic technology for the production
of human antibodies. In 1996, Cell Genesys received two United States
patents--one related to gene activation technology, and the other related to
Cell Genesys' universal donor program. Also in 1996, Cell Genesys received two
European patents--one related to the production of proteins through the use of
gene activation technology, and the other related to disease-specific receptor
technology which could be utilized in multiple therapeutic applications and
underlies Cell Genesys' programs in T cell and stem cell gene therapy. Cell
Genesys expects to continue to actively pursue patent prosecution in support
of its technological and scientific innovation in order to develop and
maintain its competitive position.
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, the Company does not know 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 issue 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 necessary to conduct the Company's
business. Any failure by the Company to license at reasonable cost any
technology required to commercialize its technologies or products may have an
adverse impact on the Company.
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. The Company believes there will continue to be significant
litigation in the industry regarding patent and other intellectual property
rights.
On March 27, 1997, Cell Genesys announced that, together with Abgenix,
Xenotech 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. See Item 3 "Legal Proceedings".
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.
10
Cell Genesys requires each employee and consultant 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, 1996, Cell Genesys employed 147 persons of whom 25 hold
Ph.D. degrees and three hold M.D. degrees. Approximately 115 employees are
engaged in research and development, and 32 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. Included in the
figures above are 45 persons 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,
1996 are as follows:
NAME AGE POSITION WITH CELL GENESYS
---- --- --------------------------
Stephen A. Sherwin, M.D. 48 Chairman of the Board, President and Chief
Executive Officer
Kathleen Sereda Glaub 43 Senior Vice President and Chief Financial
Officer
R. Scott Greer 38 President, Abgenix, Inc.
Daniel F. Hoth, M.D. 50 Senior Vice President and Chief Medical Officer
Bridget P. Binko 45 Vice President--Regulatory Affairs
David Broad, Ph.D. 43 Vice President--Process Development
Mitchell H. Finer, Ph.D. 38 Vice President--Research
Bruce A. Hironaka 42 Vice President--Corporate Development
Christine McKinley 43 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.
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. Greer has served as president of Abgenix, Inc., a subsidiary of Cell
Genesys, since its inception in June 1996. From 1991 to 1996, he held various
positions at Cell Genesys, most recently as senior vice president of corporate
development. Mr. Greer was director of corporate development at Genetics
Institute and has held positions at Booz, Allen, Hamilton, Inc. and Coopers
and Lybrand. Mr. Greer received a B.A. from Whitman College and an M.B.A. from
Harvard Business School. He is a certified public accountant.
11
Dr. Hoth joined Cell Genesys in June 1993 as Senior Vice President and Chief
Medical Officer. From March 1994 to 1996, he also served as Chief Operating
Officer of Cell Genesys. In February 1994, he was appointed by the Secretary
of Health and Human Services to the National Task Force on AIDS Drug
Development. From 1987 to 1993, Dr. Hoth served as director of the AIDS
Division of the National Institute of Allergy and Infectious Diseases, which
is the principal federal government agency division for AIDS therapy and
vaccine research. Previously, Dr. Hoth held senior positions at the National
Cancer Institute, including that of chief of the Investigational Drug Branch.
Dr. Hoth received a B.A. in psychology from Franklin and Marshall College and
an M.D. from Georgetown University. Effective June 30, 1997, Dr. Hoth will no
longer be a full-time employee of the company, but will continue as a part-
time consultant under an exclusive consulting agreement in the fields of gene
therapy and cell therapy which was signed in March 1997.
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 has served at Cell Genesys since 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 of Research at Cell Genesys, has been with Cell
Genesys since 1990, serving in a variety of scientific positions, most
recently as Director of Molecular Biology. 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, prior to being elected Vice President, Corporate Development
in l996, served as Director of Business Development for Cell Genesys' gene
therapy business, a position which he held since joining Cell Genesys in
August l994. 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, who is Vice President of Human Resources at Cell Genesys, has
played an integral role in building and managing Cell Genesys' human resource
function. She joined Cell Genesys in l994 after overseeing corporate human
resources for over eight years at Nellcor Puritan Bennett, Inc. 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.
ITEM 2. PROPERTIES
Cell Genesys occupies administrative offices and research laboratories
covering approximately 107,000 square feet of space in a research and
development office park located in Foster City, California. Cell Genesys'
lease of these facilities expires in 1998, with an option to renew the lease
for two additional four-year terms. 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.
12
In February 1997, Cell Genesys' Abgenix subsidiary moved into newly
constructed facilities in Fremont, California. These new facilities consist of
approximately 52,000 square feet of offices and laboratory facilities which
are leased through 2006, with an option to renew the lease for three
additional three-year terms.
Cell Genesys anticipates that these facilities will be adequate to meet its
and Abgenix' needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On February 1, 1994, Cell Genesys filed a complaint against GenPharm in the
Superior Court for the State of California, Santa Clara County, alleging that
GenPharm and its agents misappropriated Cell Genesys' proprietary technology
used to develop strains of mice which produce human antibodies and that
GenPharm unlawfully filed patent applications covering this technology. On
March 2, 1994, GenPharm filed an answer and cross complaint generally denying
the allegations of the complaint and alleging abuse of process, unfair
competition and interference with prospective advantage and seeking
compensatory and punitive damages, an injunction and attorneys fees. In
October 1996, GenPharm dismissed its cross complaint. One aspect of the
technology at issue related to a method for inactivating a mouse's antibody
genes. On January 7, 1997, GenPharm received United States Patent No.
5,591,669 (the "'669 patent") which includes claims related to transgenic mice
whose antibody genes have been inactivated. On that same date, GenPharm filed
suit in United States District Court for the Northern District of California
alleging that Cell Genesys' subsidiary, Abgenix, was infringing the '669
patent. In light of these developments, Cell Genesys dismissed without
prejudice its state court action against GenPharm on January 13, 1997. In
dismissing the action, Cell Genesys stated that it would continue to pursue
protection of the technology at issue before the United States Patent and
Trademark Office, in federal court and, if appropriate in the future, in state
court.
The complaint filed by GenPharm alleging infringement of the '669 patent was
consolidated with an action previously filed by GenPharm against Abgenix in
October 1996. This actions alleged that Abgenix was infringing United States
Patent No. 5,545,806 and United States Patent No. 5,569,825 which both relate
to technology pertaining to transgenic mice capable of producing human
antibodies. Cell Genesys and Abgenix have filed patent applications in the
United States and Europe relating to their transgenic technology used to
produce human antibodies. In 1995, Cell Genesys' European patent related to
this technology was allowed.
On February 6, 1996, GenPharm filed an antitrust suit against Cell Genesys
in the United States District Court for the Northern District of California,
alleging that Cell Genesys violated the Federal antitrust laws when it filed
the state court action against GenPharm on February 1, 1994. GenPharm sought
treble damages, attorneys' fees and costs for suit. The Court granted Cell
Genesys' motion to dismiss this lawsuit and entered a judgment of dismissal
without prejudice on December 17, 1996. On January 15, 1997 GenPharm filed an
appeal of this judgment.
On March 27, Cell Genesys announced that, together with Abgenix, Xenotech
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. Cell Genesys also obtained a license
to certain technology in the field of gene therapy held by GenPharm. As
consideration for the settlement and cross-license agreement, Cell Genesys
agreed to issue a note due September 30, 1998 for $15 million, convertible
into shares of Cell Genesys common stock at $9.00 per share. The conversion
price is subject to adjustment in twelve months. In addition, Japan Tobacco
agreed to make a cash payment to GenPharm. The agreement also calls for two
milestone payments of $7.5 million each based on the issuance certain patents
in the future. These payments would be made by Xenotech, L.P., which is an
equal joint venture of Abgenix and Japan Tobacco.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
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 quoted on 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 1995
First Quarter.................................................. $ 8.25 $5.25
Second Quarter................................................. $ 5.75 $3.75
Third Quarter.................................................. $ 7.13 $4.50
Fourth Quarter................................................. $10.13 $5.63
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
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
------- -------- -------- ------- -------
(IN THOUSANDS, EXPECT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue under collaborative
agreements--principally from
related parties................ $22,505 $ 13,822 $ 9,416 $ 6,916 $ 5,801
Operating expenses:
Research and development....... 27,587 25,879 21,540 13,963 8,299
General and administrative..... 7,469 5,670 5,316 3,073 2,135
------- -------- -------- ------- -------
Total operating expenses...... 35,056 31,549 26,856 17,036 10,434
------- -------- -------- ------- -------
Operating loss.................. (12,551) (17,727) (17,440) (10,120) (4,633)
Interest income, net............ 3,277 2,739 2,896 1,504 312
------- -------- -------- ------- -------
Net loss........................ $(9,274) $(14,988) $(14,544) $(8,616) $(4,321)
======= ======== ======== ======= =======
Net loss per share.............. $ (0.57) $ (1.07) $ (1.07) $ (0.80) $ (2.38)
======= ======== ======== ======= =======
Shares used in computing net
loss per share................. 16,373 14,025 13,630 10,830 1,814
======= ======== ======== ======= =======
DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
------- -------- -------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments......... $85,584 $ 81,929 $ 70,772 $85,700 $15,495
Working capital................. 64,137 76,098 67,923 82,956 14,438
Total assets.................... 99,809 94,120 82,162 91,599 18,628
Long-term obligations........... 6,133 7,720 5,126 1,648 878
Accumulated deficit............. (56,270) (46,459) (32,405) (17,346) (8,730)
Stockholders' equity............ 71,064 79,393 72,329 86,385 16,353
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OUTLOOK
Cell Genesys (the "Company") is focused on the development and
commercialization of gene therapies to treat major, life-threatening diseases,
including AIDS and cancer. The Company's objective is to commercialize both ex
vivo gene therapy with genetically engineered human immune cells and in vivo
gene therapies. In January 1997, the Company signed a merger agreement with
Somatix Therapy Corporation ("Somatix"). Pending approval by stockholders of
both companies, the merger is expected to strengthen the Company's position in
the field of gene therapy. Since its inception in 1988, the Company has funded
its research and development activities primarily through the sale of equity,
corporate partnerships and leaseline financings. The Company has been
unprofitable since its inception and has incurred a cumulative net loss of
$56.3 million. In June 1996, Cell Genesys announced the establishment of
Abgenix, Inc. ("Abgenix"), a subsidiary which will focus exclusively on the
development and commercialization of the Company's human monoclonal antibodies
for pharmaceutical applications, including inflammation, autoimmune disorders,
and cancer. All partnership interests and intellectual property relating to
the Company's antibody business have been transferred to Abgenix as part of
its initial formation. The following discussion constitutes forward looking
statements insofar as it relates to progress in the Company's research and
development programs and clinical trials, product expectations, in-licensing
plans, expected cash expenditures and expense levels, and the adequacy of the
Company's available resources. Actual results could differ materially from
statements made due to a number of factors, including those set forth in "Risk
Factors" below.
In the Company's lead gene therapy program, safety results for the Company's
Phase I clinical trial testing AIDS gene therapy indicated no significant
treatment-related safety problems. The Company is currently in Phase II
clinical testing of this therapy in an initial proof-of-principle trial in
twins, in which T cells from the healthy twin are modified and infused as
therapy for the HIV-positive twin and in a second Phase II trial of a patient-
specific approach in individuals with HIV infection. Additional clinical
trials of Cell Genesys' AIDS gene therapy will be conducted during 1997. These
include an evaluation of an improved manufacturing process involving the
genetic modification of both killer T cells and helper T cells as well as a
reduction in cell processing time to less than three weeks. In addition, a new
pilot study is planned by Cell Genesys to evaluate whether the combination of
AIDS gene therapy and antiviral drugs can delay the recurrence of HIV
infection, which has been generally observed in patients who stop their
antiviral drug therapy. This pilot study will help determine whether the gene
therapy can reduce the requirement for long-term treatment with combinations
of three or more antiviral drugs. The company anticipates efficacy data from
certain of these trials at the end of 1997. During June 1996, in connection
with the initiation of patient enrollment in the second Phase II clinical
trial to evaluate patient-specific AIDS gene therapy, the Company received a
$2 million milestone payment under its collaboration with Hoechst Marion
Roussel, Inc. ("HMR"). Also in June 1996, the Company initiated product
development of its lead cancer gene therapy product candidate for colon and
other specific cancers. Based on successful preclinical studies, the Company
plans to initiate human clinical testing for its initial cancer gene therapy
product candidate by mid 1997. The Company also has ongoing research programs
in stem cell gene therapy, universal donor cells and other gene delivery
technologies. The Company believes that such programs may provide
opportunities for collaborative arrangements with third parties that could
also provide additional funding to the Company.
In the Company's human monoclonal antibody program (now being pursued
through Abgenix), the Company has developed transgenic technology to create
strains of mice capable of producing fully human monoclonal antibodies. The
Company has created strains of mice which now contain the majority of human
antibody genes and could produce multiple product candidates. The Company
believes that fully human antibodies should avoid 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. In 1995,
the Company initiated preclinical studies of a human antibody to Interleukin-8
(IL-8), which potentially could be used as a treatment to inhibit excess
inflammation in certain diseases such as psoriasis, adult respiratory disease
syndrome (ARDS),
15
rheumatoid arthritis and reperfusion injury associated with heart attack or
stroke. Based on progress of preclinical studies, Abgenix plans to initiate
human clinical trials for this antibody product candidate during the second
half of 1997.
The Company's net cash expenditures for 1997 in its current operations are
not expected to exceed approximately $20 million, excluding one-time merger
related expenditures, and the Company intends to manage toward this net cash
expenditure target. Pending stockholder approval, significant merger-related
costs will be incurred, including cash payments currently estimated at
approximately $10 million. 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 $22.5 million in 1996 from $13.8 million and $9.4
million in 1995 and 1994, respectively. The increases in 1995 and 1996 reflect
revenues from the collaboration with HMR which was entered into in October
1995 for the Company's AIDS gene therapy program, including a $2.0 million
milestone payment earned during 1996. Other revenues resulted from the
Company's joint venture ("Xenotech") with JT Immunotech USA Inc. ("JT
Immunotech") in its human monoclonal antibody program (see Note 2 to Financial
Statements). Also, in 1996 and 1994 the Company received $2.5 million and $3.1
million, respectively, through its agreements with Akzo Nobel N.V. for the
license of a therapeutic protein product.
During 1997, funding of research by Xenotech is expected to terminate, the
Company will receive a final $2.5 million payment from Akzo Nobel N.V., and
the initial research and development funding committed by HMR will be
completed. There can be no assurance that HMR will continue progress dependent
research and development funding or that the Company will be successful in
attracting new collaborative partners or in generating revenues from
collaboration agreements.
Research and development expenses have increased to $27.6 million during
1996 from $25.9 million and $21.5 million in 1995 and 1994, respectively.
These increases were due to additional research and development staff,
facilities, and contract services related to the Company's human clinical
trials for AIDS and the preclinical studies of human monoclonal antibodies.
Also contributing to the growth were legal fees incurred in defending and
maintaining the Company's intellectual property positions. As a result of the
settlement of litigation with Genpharm International, Inc. in March 1997 (see
Item 3 "Legal Procedings") certain of these legal expenses can be expected to
decrease in 1997. Research and development expenses in each of these three
years represented approximately 80% of total expenses. The Company expects
that its research and development expenditures, including expansion of
facilities, will continue to increase to support additional product
development activities. The rate of increase depends on a number of factors
including stockholder approval of the merger agreement with Somatix and
progress in research and development, especially clinical trials.
General and administrative expenses increased to $7.5 million during 1996
from $5.7 million and $5.3 million in 1995 and 1994, respectively. The
increases also reflect growth in administrative staff and outside services
required to support expanded research and development programs. The Company
expects these expenses to increase as these programs expand.
Interest income increased to $4.4 million in 1996 from $3.8 million and $3.5
million in 1995 and 1994, respectively. The increase in 1996 was due to higher
average cash balances available for investment. Interest expense increased to
$1.2 million in 1996 from $1.1 million and $607,000 in 1995 and 1994,
respectively, due to higher levels of property and equipment financing.
The Company's net loss was $9.3 million in 1996, $15.0 million in 1995, and
$14.5 million in 1994. During 1995 and 1996, higher revenues as a result of
the Company's collaboration for AIDS gene therapy offset higher operating
expenses resulting in net losses during each of those years approximately
level with or less than 1994. Losses are expected to continue and are likely
to increase in future years as operating expenses rise, particularly
16
as the Company incurs expenses related to expanded manufacturing and human
testing of its potential products. In addition, pending stockholder approval
of the merger with Somatix, the Company expects to record non-recurring
charges to operations consisting of (i) a non-cash charge for acquired in-
process technology estimated at $95 million and (ii) a restructuring charge
estimated in the range of $5 to $10 million, including severance costs and
costs associated with elimination of redundant facilities and assets.
At December 31, 1996, the Company had available net operating loss and
research credit carryforwards for federal income tax purposes of approximately
$52 million and $2 million, respectively, which expire in the years 2003
through 2011.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of equity
securities, funding under collaborative arrangements and equipment financing.
From inception through December 31, 1996, the Company received $125.2 million
in net proceeds from equity financing, $75.3 million under collaborative
agreements and utilized $16.1 million of property and equipment financing.
At December 31, 1996, the Company's cash, cash equivalents and short-term
investments totaled $85.6 million, compared to $81.9 million at December 31,
1995. This increase of $3.7 million was primarily due to $11.1 million
provided by operating activities offset by $3.2 million contributions to
Xenotech joint venture, $2.7 million capital expenditures and $1.0 million net
cash used in financing activities.
The Company expects its cash requirements to increase significantly in the
future. The Company's capital requirements depend on numerous factors,
including stockholder approval of the merger agreement with Somatix; 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.
In March 1997, Cell Genesys announced that, together with Abgenix, Xenotech
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. Cell Genesys also obtained a license
to certain technology in the field of gene therapy held by GenPharm. As
consideration for the settlement and cross-license agreement, Cell Genesys
agreed to issue a note due September 30, 1998 for $15 million, convertible
into shares of Cell Genesys common stock at $9.00 per share. The conversion
price is subject to adjustment in twelve months. The agreement also calls for
two milestone payments of $7.5 million each based on the issuance certain
patents in the future. These payments would be made by Xenotech, which is an
equal joint venture of Abgenix and Japan Tobacco.
Under its current collaborations, the Company is responsible for funding a
portion of its research and development efforts. Substantial capital may be
required to carry out additional product development and to commercialize both
products under the current collaborations and the Company's self-funded
efforts.
The Company believes that its available cash, cash equivalents and short-
term investments at December 31, 1996, together with payments to be received
under the Company's collaborative arrangement with HMR, and $2.1 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 1998. Thereafter, the Company will require substantial
additional funds. Because of the Company's significant long-term cash
requirements, it will seek to raise additional capital if conditions in the
public equity markets are favorable, even if the Company does not have an
immediate need for additional cash at that time.
17
RISK FACTORS
There are significant risks associated with the Company's plans and goals,
including but not limited to the success of the Company's research and
development programs; the lengthy, expensive and uncertain regulatory approval
process; uncertainties and costs associated with obtaining third party
licenses, obtaining patent protection, protecting trade secrets, enforcing
intellectual property rights important to the Company's business and avoiding
infringement of others' intellectual property; competitive products; and the
availability of capital to fund the Company's operations and capital
requirements. 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. See
Item 3 "Legal Proceedings." Some or all of these factors may affect the
Company's goals to file INDs, advance product candidates through the clinical
trial process, to commercialize products and secure financing either through
corporate partnerships or additional equity offerings. Even if the Company's
goals are fully achieved, the Company does not anticipate commercialization of
any product for several years.
Because of the novelty of the Company's gene therapy technology, clinical
trials are more difficult than for products based on more traditional
technologies. In addition, a variety of factors could hinder or delay progress
in clinical trials of the Company's products or require their discontinuance,
including results of ongoing preclinical studies by the Company or others,
technical or manufacturing difficulties, clinical trial results for the
Company's or competing products, intellectual property disputes with third
parties, and/or delays relating to the review process by the FDA. Although
preliminary results of the Company's Phase I clinical testing of AIDS gene
therapy reported to date have shown no significant treatment-related safety
problems, 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.
The Company believes that a human antibody product such as that being
developed through its subsidiary, Abgenix, could be clinically superior to
products containing mouse protein, and that it could have marketing advantages
over such other products. However, until human testing has taken place, it is
not certain that human antibody products will demonstrate these advantages.
Countervailing marketing factors, such as relative price, undesirable side
effects, and/or relative marketing expertise, may serve to offset or outweigh
these advantages.
There is no assurance that opportunities for in-licensing products or for
third party collaborations will be available to the Company on acceptable
terms. Finding such opportunities, as well as a variety of other factors, such
as progress in the Company's research and development programs (including
clinical trials), receipt of anticipated contract revenues (some of which are
dependent on milestones), competitive factors, and the costs associated with
prosecuting and defending the Company's intellectual property rights or their
resolution, may affect the Company's ability to manage to its targeted net
cash expenditures in 1997, and also may affect the adequacy of the Company's
resources to fund operations and capital requirements at least through 1998.
Failure to achieve the Company's goals could have a material adverse impact
on the Company's results of operations and financial condition and its ability
to raise additional capital. Stockholders and potential investors should
carefully consider the risks associated with the Company and should be aware
that these risks may negatively impact the Company's stock price.
18
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, 1996 and 1995, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Palo Alto, California
January 27, 1997
19
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
DECEMBER 31,
-----------------
1996 1995
------- --------
ASSETS
Current assets:
Cash and cash equivalents.................................. $20,935 $ 8,190
Short-term investments..................................... 64,649 73,739
Prepaid expenses and other current assets.................. 1,165 1,176
------- --------
Total current assets........................................ 86,749 83,105
Property and equipment at cost, net......................... 12,485 10,032
Deposits and other assets................................... 575 983
------- --------
$99,809 $ 94,120
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 1,669 $ 357
Accrued compensation and benefits.......................... 1,414 1,165
Deferred revenue from related parties...................... 12,164 2,104
Accrued construction costs................................. 2,118 --
Accrued legal expenses..................................... 1,986 332
Other accrued liabilities.................................. 439 643
Current portion of property and equipment financing........ 2,822 2,406
------- --------
Total current liabilities................................... 22,612 7,007
Noncurrent portion of property and equipment financing...... 6,133 7,720
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value: 5,000,000 shares
authorized; no shares issued and outstanding.............. -- --
Common stock, $.001 par value: 25,000,000
shares authorized; 16,514,693 and 15,959,171 shares issued
and outstanding in 1996 and 1995, respectively............ 16 16
Additional paid-in capital................................. 127,318 125,836
Accumulated deficit........................................ (56,270) (46,459)
------- --------
Total stockholders' equity.................................. 71,064 79,393
------- --------
$99,809 $ 94,120
======= ========
20
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- -------- --------
Revenue under collaborative agreements--
principally from related parties................. $22,505 $ 13,822 $ 9,416
Operating expenses:
Research and development......................... 27,587 25,879 21,540
General and administrative....................... 7,469 5,670 5,316
------- -------- --------
Total operating expenses.......................... 35,056 31,549 26,856
Interest income................................... 4,446 3,827 3,503
Interest expense.................................. (1,169) (1,088) (607)
------- -------- --------
Net loss.......................................... $(9,274) $(14,988) $(14,544)
======= ======== ========
Net loss per share................................ $ (0.57) $ (1.07) $ (1.07)
======= ======== ========
Shares used in computing net loss per share....... 16,373 14,025 13,630
======= ======== ========
21
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,
1993................... $13 $104,511 $(793) $(17,346) $86,385
Issuance of 274,145
shares of common stock
upon exercise of stock
options and pursuant to
the 1992 Employee Stock
Purchase Plan.......... 1 606 -- -- 607
Amortization of deferred
compensation........... -- -- 396 -- 396
Change in net
unrealized holding
loss on available-for-
sale securities....... -- -- -- (515) (515)
Net loss............... -- -- -- (14,544) (14,544)
--- -------- ----- -------- -------
Balances at December 31,
1994................... 14 105,117 (397) (32,405) 72,329
Issuance of 2,000,000
shares of common stock
to HoechstMarion
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
=== ======== ===== ======== =======
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................ $ (9,274) $(14,988) $(14,544)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization.................. 3,718 3,577 2,894
Equity in losses of Xenotech joint venture..... 3,866 1,702 78
Changes in certain assets and liabilities:
Prepaid expenses and other current assets...... 11 682 (1,036)
Deposits and other assets...................... (261) 56 --
Accounts payable .............................. 1,312 (776) 630
Accrued compensation and benefits.............. 249 110 (186)
Deferred revenue from related parties.......... 10,060 1,604 500
Accrued legal expenses......................... 1,654 99 --
Other accrued liabilities...................... (204) 333 (186)
Net cash provided (used) by operating
activities................................... 11,131 (7,601) (11,850)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments............. (62,946) (98,742) (65,846)
Maturities of short-term investments............ 24,752 19,000 85,187
Sales of short-term investments................. 46,747 54,597 --
Contributions to Xenotech joint venture......... (3,205) (2,357) (25)
Capital expenditures............................ (2,726) (1,737) (2,052)
Net cash provided (used) by investing
activities.................................... 2,622 (29,239) 17,264
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuances of common stock......... 1,482 20,721 607
Proceeds from long-term debt.................... (750) 2,812 --
Payments under equipment financing obligations.. (1,740) (1,615) (1,093)
Net cash provided (used) by
financingactivities........................... (1,008) 21,918 (486)
Net increase (decrease) in cash and cash
equivalents.................................... 12,745 (14,922) 4,928
Cash and cash equivalents at beginning of year.. 8,190 23,112 18,184
Cash and cash equivalents at end of year........ $ 20,935 $ 8,190 $ 23,112
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for interest.......... $ 1,169 $ 1,075 $ 430
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING TRANSACTIONS
Furniture and equipment acquired under
financing...................................... $ 1,319 $ 2,326 $ 5,115
Construction payable............................ $ 2,118 $ -- $ 21
23
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and basis of presentation
Cell Genesys, Inc., 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., a subsidiary of Cell
Genesys, Inc., is focused exclusively on the development and commercialization
of human monoclonal antibodies for pharmaceutical applications, including
inflammation, autoimmune disorders, and cancer. The accompanying consolidated
financial statements include the accounts of Cell Genesys, Inc., including
Abgenix, Inc. (collectively, "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 fee payments 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 the Company's 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 the Company to Xenotech are eliminated against related revenues from
Xenotech.
Depreciation and amortization
The Company depreciates property and equipment 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.
Cash, cash equivalents and short-term investments
The Company 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. Unrealized holding gains and losses on securities
classified as available-for-sale are recorded in accumulated deficit. The
Company determines the appropriate classification of debt securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date.
24
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Net loss per share
Net loss per share is computed using the weighted average number of common
shares outstanding. Common equivalent shares from stock options are excluded
from the calculation as their effect 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.
Reclassifications
Certain items have been reclassified in the prior year financial statements
to conform to the 1996 presentation.
2. COLLABORATIVE AND LICENSE AGREEMENTS
Collaborative agreement with Hoechst Marion Roussel
In October 1995, Cell Genesys entered into a collaboration agreement with
Hoechst Marion Roussel, Inc. ("HMR") 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 to
an additional five years.
In connection with the collaboration, HMR 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.
Under the agreement with HMR, Cell Genesys will conduct research, lead
product development in North America and provide worldwide manufacturing
services. HMR 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 $15.3 million in fiscal 1996 and $7.6 million in fiscal
1995 pursuant to the agreement.
Joint venture with JT Immunotech
In 1991, the Company and JT Immunotech, a medical subsidiary of Japan Tobacco
Inc. ("JTI"), formed 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 generally conducted by Abgenix on behalf of the
joint venture.
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.
The Company accounts for its investment in Xenotech under the equity method;
50% of Xenotech's losses, up to the Company's investment amount, either offset
related revenues or are charged to research and development expense; these were
$3.9 million in 1996, $1.7 million in 1995, and $0.1 million in 1994. The
Company recognized revenue of $4.7 million, $6.2 million, and $6.2 million in
1996, 1995 and 1994, respectively, net of its own payments to the joint
venture.
25
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Research and development expenses incurred under collaborative agreements
with HMR and Xenotech were $21.6 million, $17.7 million, and $7.7 million in
1996, 1995 and 1994, respectively.
Summarized information for Xenotech at December 31, 1996, 1995 and 1994 and
for the years then ended follows (in thousands):
1996 1995 1994
------- ------- -------
Current assets....................................... $ 492 $ 1,099 $ 2,370
Noncurrent assets.................................... -- 258 237
Current liabilities.................................. 59 601 1,959
Total revenue........................................ 1,913 4,747 3,372
Net loss............................................. (6,614) (7,129) (4,605)
Gene Activation Technology Licenses
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. Under the terms of the new license
agreement the Company received $2.5 million in November 1996 and will receive
an additional $2.5 million in November 1997.
In December 1996, the Company received $4 million from HMR upon execution of
a letter of intent to license the Company's gene activation technology to HMR
for erythropoietin (EPO) and a second undisclosed protein. The agreement
provides for milestone payments and fees, in addition to royalties on any
future sales of these two potential gene-activated protein products, subject to
signature of the license agreement. That amount is included in deferred revenue
as of December 31, 1996. In February 1997, the definitive agreement was
executed.
In March 1997, the Company signed 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 8.
3. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of the Company's available-for-sale securities at
December 31, 1996 and 1995, respectively (in thousands):
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES 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
======= ==== ===== ========
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
1995 --------- ---------- ---------- ---------
U.S. Government and its Agencies...... $54,247 $295 $ (26) $54,516
Corporate Notes....................... 10,152 31 -- 10,183
Commercial Paper...................... 11,900 119 -- 12,019
------- ---- ----- --------
$76,299 $445 $ (26) $76,718
======= ==== ===== ========
Classified as:
Cash equivalents..................... 2,970 9 -- 2,979
Short-term investments............... 73,329 436 (26) 73,739
------- ---- ----- --------
$76,299 $445 $ (26) $76,718
======= ==== ===== ========
26
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The net unrealized holding loss on these securities at December 31, 1996 is
$118,000 and is included in the Company's accumulated deficit. Gross realized
gains recorded on sales of available-for-sale securities were approximately
$154,000 for the year ended December 31,1996. There were no realized losses for
the same period. Gross realized gains and losses recorded on sales of
available-for-sale securities were immaterial for the year ended December 31,
1995.
The amortized cost and estimated fair value of available-for-sale securities
at December 31, 1996, by contractual maturity, are shown below (in thousands):
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
Due in one year or less.................................. $38,375 $38,316
Due after one through two years.......................... 26,392 26,333
------- -------
$64,767 $64,649
======= =======
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 (in
thousands):
1996 1995
-------- -------
Furniture and equipment under equipment financing......... $ 10,554 $ 9,642
Machinery and equipment................................... 3,553 2,495
Leasehold improvements under financing.................... 3,001 3,001
Leasehold improvements.................................... 4,582 3,450
Construction in progress.................................. 3,061 --
-------- -------
24,751 18,588
Accumulated depreciation and amortization................. (12,266) (8,556)
-------- -------
$ 12,485 $10,032
======== =======
5. COMMITMENTS AND CONTINGENCIES
Property and Equipment Financing
As of December 31, 1996 the Company has $13.6 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, 1996.
Future principal payments under property and equipment financing are as
follows as of December 31, 1996 (in thousands):
YEARS ENDING
DECEMBER 31,
------------
1997............................................................... $2,963
1998............................................................... 2,323
1999............................................................... 2,543
2000............................................................... 827
2001............................................................... 299
------
Total principal payments............................................ 8,955
Current portion of property and equipment financing................. (2,822)
------
Noncurrent portion of property and equipment financing.............. $6,133
======
27
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 $1.8
million in 1996 ($1.3 million in 1995 and $1.2 million in 1994).
Future minimum payments under noncancelable operating leases at December 31,
1996 are (in thousands):
YEARS ENDING
DECEMBER 31,
------------
1997............................................................. $ 2,766
1998............................................................. 1,031
1999............................................................. 891
2000............................................................. 923
2001............................................................. 955
2002 and thereafter.............................................. 5,347
-------
$11,913
=======
Litigation
In February 1994, the Company filed a complaint against GenPharm
International, Inc. ("GenPharm") alleging that GenPharm and its agents
misappropriated Cell Genesys' proprietary technology used to develop strains of
mice which produce human antibodies and that GenPharm unlawfully filed patent
applications covering this technology. In March 1994, GenPharm filed an answer
and cross complaint generally denying the allegations of the complaint and
alleging abuse of process, unfair competition and interference with prospective
advantage and seeking compensatory and punitive damages, an injunction and
attorneys fees. In October 1996, GenPharm dismissed its cross complaint. One
aspect of the technology at issue related to a method for inactivating a
mouse's antibody genes. On January 7, 1997, GenPharm received a patent (the
"'669 patent") which includes claims related to transgenic mice whose antibody
genes have been inactivated. On that same date, GenPharm filed suit alleging
that the Company's subsidiary, Abgenix, was infringing the '669 patent. In
light of these developments, the Company dismissed without prejudice its state
court action against GenPharm in January 1997.
The complaint filed by GenPharm alleging infringement of the '669 patent has
been consolidated with an action previously filed by GenPharm against Abgenix
in October 1996. This action alleges that Abgenix is infringing GenPharm
patents which relate to technology used to create transgenic mice capable of
producing human antibodies. Cell Genesys and Abgenix have filed patent
applications in the United States and Europe relating to their transgenic
technology used to produce human antibodies. In 1995, Cell Genesys' European
patent related to this technology was allowed.
In February 1996, GenPharm filed an antitrust suit against the Company
alleging that Cell Genesys violated the Federal antitrust laws when it filed
the state court action against GenPharm in February 1994. GenPharm sought
treble damages, attorneys' fees and costs for suit. The Court granted Cell
Genesys' motion to dismiss this lawsuit and entered a judgment of dismissal
without prejudice in December 1996. In January 1997, GenPharm filed an appeal
of this judgment.
On March 27, Cell Genesys announced that, along with Abgenix and JTI, it had
signed a comprehensive patent cross-license and settlement agreement with
GenPharm that resolved all related litigation and claims between the parties.
See Note-8, Subsequent Events.
28
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY
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 is
not below 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 April 1995, the Company offered employees holding outstanding
options the opportunity to exchange each option share for one option share
priced at $7, which approximated 110% of the average market value for a certain
recent trading period. Vesting of the new options re-started upon the exchange
and vest over a four-year period. As a result of the offer, 1,053,000 options
were exchanged which are included in the table below.
Information with respect to the Plan activity for the years ending December
31, 1995, and 1996 is as follows:
1995 1996
----------------- -----------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE
------ --------- ------ ---------
Outstanding at beginning of year......... 2,496 $7.45 2,539 $4.83
Granted.................................. 1,657 6.52 838 9.70
Exercised................................ (181) 2.51 (484) 2.29
Canceled................................. (1,433) 11.67 (558) 8.01
------ -----
Outstanding at end of year............... 2,539 4.83 2,335 6.36
====== =====
Options exercisable at year-end.......... 1,234 1,313
Weighted-average fair value of options
granted during the year................. $3.91 $5.97
The following table summarizes information about stock options outstanding at
December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES (000) LIFE PRICE (000) PRICE
------------- ----------- ----------- --------- ----------- ---------
$ 0.05-- 1.50 331 4.5 years $ 1.00 331 $ 1.00
$ 3.00-- 4.38 381 6.7 years $ 3.30 308 $ 3.15
$ 5.13-- 6.75 313 8.5 years $ 6.43 125 $ 6.37
$ 7.00--10.13 1,254 8.6 years $ 8.38 498 $ 7.98
$11.00--19.50 56 6.6 years $12.11 51 $12.16
29
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Abgenix Incentive Stock Plan
In connection with the formation of the Company's subsidiary, Abgenix, Inc.,
a stock option plan ("the Abgenix 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 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 follows:
WEIGHTED-
SHARES AVERAGE
(000) EXERCISE PRICE
------ --------------
Granted............................................... 1,201 $0.60
Exercised............................................. (1) $0.60
Canceled.............................................. (13) $0.60
-----
Outstanding at end of year............................ 1,187 $0.60
=====
Options exercisable at year-end....................... 108 $0.60
Weighted-average fair value ofoptions granted during
the year............................................. $0.37
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
its employee stock options and those of its subsidiary, Abgenix, 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 and 1996, respectively: risk-free interest
rates of 7.30% and 5.29%; no dividend yields; volatility factors of the
expected market price of the Company's common stock of 0.68 for both years; and
an expected life of the option of 5 years. 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: risk-free interest rate of 6.65%; no
dividend yield; volatility factors of the expected market price of the
Company's common stock of 0.68; and an expected life of the option 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.
30
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
1996 1995
------------------ ------------------
IN THOUSANDS (EXCEPT PER SHARE DATA)
Net loss As reported $ 9,274 $ 14,988
Pro forma 11,028 15,787
Net loss per
share As reported $ (0.57) $ (1.07)
Pro forma $ (0.67) $ (1.13)
1992 Employee Stock Purchase Plan
The 1992 Employee Stock Purchase Plan (the "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, 1996, 176,788 shares have
been issued pursuant to the Purchase Plan. The estimated fair value, pursuant
to Statement 123, of stock purchases under the Purchase Plan is immaterial and
thus excluded from the pro forma net loss disclosure above.
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.
Warrants
As part of certain financing and contract arrangements and in connection with
its collaboration with HMR, the Company has warrants outstanding for the
purchase of common stock as follows: i) a warrant for the purchase of 30,000
shares, exercisable at $7.00 per share, expiring in June 1997, ii) warrants for
the purchase of 81,429 shares, exercisable at $8.05 per share, which expire in
August 1997, and iii) a warrant for the purchase of 750,000 shares, exercisable
at $13.00 per share, which expires in 2000.
7. INCOME TAXES
At December 31, 1996, the Company had available net operating loss and
research credit carryforwards for federal income tax purposes of approximately
$52 million and $2 million, respectively, which expire in the years 2003
through 2011.
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. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
31
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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):
1996 1995
-------- --------
DEFERRED TAX ASSETS:
Net operating loss carryforwards...................... $ 17,900 $ 12,300
Research credits...................................... 2,500 2,200
Capitalized research expenses......................... 2,200 3,200
Other-net............................................. 1,200 1,900
-------- --------
Total deferred tax assets............................ 23,800 19,600
Valuation allowance for deferred tax assets........... (23,800) (19,600)
-------- --------
Total deferred tax assets............................ $ -- $ --
======== ========
During 1996, 1995, and 1994, the valuation allowance for deferred tax assets
increased by $4.5 million, $4.5 million and $7.3 million, respectively.
Approximately $1.5 million of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to contributed capital.
8. SUBSEQUENT EVENTS
Merger with Somatix
On January 13, 1997, the Company signed a merger agreement with Somatix
Therapy Corporation ("Somatix"). Under the terms of the agreement, Somatix
will become a wholly-owned subsidiary of Cell Genesys in a tax-free
reorganization and stock-for-stock merger. Pending approval by stockholders of
both companies, Somatix stockholders will receive 0.385 shares of Cell Genesys
stock for each share of Somatix stock. The merger is expected to be accounted
for as a purchase and substantially all of the purchase price is expected to
be allocated to in-process-acquired technology and charged as a non-cash
expense item in the quarter in which the acquisition is effective, expected to
be the second quarter of 1997. Based on the number of shares of Somatix common
and preferred stock outstanding at December 31, 1996, it is expected that the
Company will issue approximately 10.6 million shares of common stock to effect
the merger.
Cross License and Litigation Settlement (unaudited)
On March 27, 1997, the Company announced that, along with Abgenix, Xenotech
and JTI, 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 settlement and cross-license agreement, Cell Genesys agreed to issue a
note due September 30, 1998 for $15 million, convertible into shares of Cell
Genesys common stock at $9.00 per share. The conversion price is subject to
adjustment in twelve months. In addition, Japan Tobacco agreed to make a cash
payment to GenPharm. The agreement also calls for two milestone payments of
$7.5 million each based on the issuance certain patents in the future. These
payments would be made by Xenotech, L.P., which is an equal joint venture of
Abgenix and Japan Tobacco.
32
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 from the sections captioned "Proposal Four:
Election Of Directors" in the Company's Proxy Statement related to the 1997
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the Company's fiscal year end (the "1997
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 sections labeled "Employment Contract," "Executive Compensation,"
"Compensation Committee Report on Executive Compensation," "Compensation
Committee Interlocks and Insider Participation" and "Compensation of
Directors" in the Company's 1997 Proxy Statement are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section labeled "Stock Ownership of Principal Stockholders and
Management" in the Company's 1997 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section labeled "Certain Transactions" in the Company's 1997 Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1. INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Balance Sheets at December 31, 1996 and 1995.......................... 20
Statements of Operations for the years ended December 31, 1996, 1995,
and 1994............................................................. 21
Statement of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994.................................................. 22
Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994............................................................. 23
Notes to Financial Statements......................................... 24-32
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.
33
3. EXHIBITS
NUMBER
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).
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.
34
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-Farber 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 Aktiengesellschaft 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-Farber 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
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 10.12).
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.
10.43 (19) Stock option agreement, dated as of January 12, 1997, between
Registrant, as grantor, and Somatix Therapy Corporation, as
grantee.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. (Reference is made to page 38).
27.1 Financial Data Schedule
35
* Confidential treatment has been granted with respect to specified 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.
(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-Q 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 March 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.
(b) REPORTS ON FORM 8-K
The Company reported on Form 8-K dated January 12, 1997, the signing of a
merger agreement with
Somatix Therapy Corporation.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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:
CELL GENESYS, INC.
Registrant
By: /s/KATHLEEN SEREDA GLAUB
-------------------------------
Kathleen Sereda Glaub
Senior Vice President and
Chief Financial Officer
(Principal Accounting
Officer)
Date: March 31, 1997
37
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kathleen Sereda Glaub and Stephen A. Sherwin,
M.D., jointly and severally, as his or her attorneys-in-fact, each with full
power of substitution, for him or her, in any and all capacities, to sign each
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, hereby ratifying and confirming all that each of said
attorneys-in-fact 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 Exchange 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 Chairman, President and March 31, 1997
________________________________ Chief Executive Officer
(Principal Executive
Officer)
STEPHEN A. SHERWIN, M.D.
/s/ KATHLEEN SEREDA GLAUB Senior Vice President and March 31, 1997
________________________________ Chief Financial Officer
(Principal Financial and
Accounting Officer)
KATHLEEN SEREDA GLAUB
/s/ JAMES GOWER Director March 31, 1997
________________________________
JAMES GOWER
/s/ PETER BARTON HUTT Director March 31, 1997
________________________________
PETER BARTON HUTT
/s/ RAJU S. KUCHERLAPATI Director March 31, 1997
________________________________
RAJU S. KUCHERLAPATI, PH.D.
/s/ JOSEPH E. MAROUN Director March 31, 1997
________________________________
JOSEPH E. MAROUN
/s/ EUGENE L. STEP Director March 31, 1997
________________________________
EUGENE L. STEP
38