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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________ .
COMMISSION FILE NUMBER: 0-20859
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GERON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2287752
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
230 CONSTITUTION DRIVE, MENLO PARK, CA 94025
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 473-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $0.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common Stock $0.001 par value Outstanding at August 10, 2001:
21,859,556 shares
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GERON CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements............................................................. 3
Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000............... 3
Condensed Consolidated Statements of Operations for the three and six months ended 4
June 30, 2001 and 2000......................................................................
Condensed Consolidated Statements of Cash Flows for the three and six months ended 5
June 30, 2001 and 2000......................................................................
Notes to Consolidated Financial Statements.................................................... 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations......... 8
Item 3: Quantitative and Qualitative Disclosures About Market Risk.................................... 21
PART II. OTHER INFORMATION
Item 1: Legal Proceedings............................................................................. 22
Item 2: Changes In Securities and Use of Proceeds..................................................... 22
Item 3: Defaults upon Senior Securities............................................................... 22
Item 4: Submission of Matters to a Vote of Security Holders........................................... 22
Item 5: Other Information............................................................................. 22
Item 6: Exhibits and Reports on Form 8-K.............................................................. 22
SIGNATURES............................................................................................... 23
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GERON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents ........................................... $ 23,074 $ 29,985
Short-term investments .............................................. 52,148 3,040
Interest and other receivables ...................................... 1,037 1,156
Other current assets ................................................ 615 414
--------- ---------
Total current assets ........................................ 76,874 34,595
Long-term investments ................................................. 10,254 62,760
Property and equipment, net ........................................... 3,797 3,681
Investment in licensees ............................................... 641 --
Deposits and other assets ............................................. 731 581
Intangibles ........................................................... 10,980 12,413
--------- ---------
$ 103,277 $ 114,030
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 706 $ 1,459
Accrued liabilities ................................................. 1,490 1,324
Deferred revenue .................................................... 2,538 550
Current portion of capital lease obligations and equipment loans .... 870 923
Current portion of accrued research funding obligation .............. 3,990 3,869
--------- ---------
Total current liabilities ................................... 9,594 8,125
Noncurrent portion of capital lease obligations and equipment loans ... 603 1,030
Noncurrent portion of accrued research funding obligation ............. 8,131 9,551
Convertible debentures ................................................ 31,469 31,406
Commitments
Stockholders' equity:
Common stock ........................................................ 22 22
Additional paid-in-capital .......................................... 216,952 214,012
Deferred compensation ............................................... (355) (475)
Accumulated deficit ................................................. (163,319) (149,802)
Accumulated other comprehensive income .............................. 180 161
--------- ---------
Total stockholders' equity .................................. 53,480 63,918
--------- ---------
$ 103,277 $ 114,030
========= =========
See accompanying notes.
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GERON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues from collaborative agreements ......... $ 500 $ 1,750 $ 2,250 $ 3,000
License fees and royalties ..................... 85 26 132 47
------------ ------------ ------------ ------------
Total revenues ............................. 585 1,776 2,382 3,047
Operating expenses:
Research and development ..................... 6,644 5,777 13,356 11,589
General and administrative ................... 1,362 2,562 5,277 6,986
------------ ------------ ------------ ------------
Total operating expenses ................... 8,006 8,339 18,633 18,575
------------ ------------ ------------ ------------
Loss from operations ........................... (7,421) (6,563) (16,251) (15,528)
Interest and other income ...................... 1,584 1,464 3,250 2,298
Interest and other expense ..................... (244) (11,399) (516) (11,752)
------------ ------------ ------------ ------------
Net loss ....................................... $ (6,081) $ (16,498) $ (13,517) $ (24,982)
============ ============ ============ ============
Basic and diluted net loss per share ........... $ (0.28) $ (0.77) $ (0.62) $ (1.24)
============ ============ ============ ============
Weighted average shares used in computing basic
And diluted net loss per share ............. 21,809,085 21,460,853 21,795,600 20,084,979
============ ============ ============ ============
See accompanying notes.
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GERON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CHANGE IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss ......................................................... $(13,517) $(24,982)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................... 713 741
Interest on convertible debentures .......................... 63 11,237
Stock-based compensation .................................... 2,576 3,021
Accretion of interest on research funding obligation ........ 245 245
Deferred compensation ....................................... 120 257
Loss on investment in unconsolidated subsidiary ............. 8 --
Changes in assets and liabilities:
Other current and noncurrent assets ......................... 1,201 1,894
Other current and noncurrent liabilities .................... 742 1,616
Translation adjustment ...................................... (136) (108)
-------- --------
Net cash used in operating activities ............................ (7,985) (6,079)
Cash flows from investing activities:
Capital expenditures ........................................... (784) (409)
Purchases of securities available-for-sale ..................... (27,379) (21,744)
Proceeds from sales/calls of securities available-for-sale ..... 14,589 15,526
Proceeds from maturities of securities available-for-sale ...... 16,540 14,980
Accrued research funding payments .............................. (1,544) (691)
-------- --------
Net cash provided by investing activities ........................ 1,422 7,662
Cash flows from financing activities:
Proceeds from equipment loans .................................. -- 201
Payments of obligations under capital leases and equipment
loans......................................................... (480) (617)
Proceeds from issuance of common and preferred stock, net ...... 132 40,363
Proceeds from issuance of debentures ........................... -- 25,000
-------- --------
Net cash (used in) provided by financing activities .............. (348) 64,947
-------- --------
Net (decrease) increase in cash and cash equivalents ............. (6,911) 66,530
Cash and cash equivalents at the beginning of the period ......... 29,985 7,835
-------- --------
Cash and cash equivalents at the end of the period ............... $ 23,074 $ 74,365
======== ========
See accompanying notes.
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GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated unaudited balance sheet as of June
30, 2001 and condensed consolidated statements of operations for the three and
six month period ended June 30, 2001 and 2000 have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month period ended June 30,
2001 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001 or any other period. These financial statements
and notes should be read in conjunction with the financial statements for the
year ended December 31, 2000, included in the Company's Annual Report on Form
10-K.
The consolidated financial statements include the accounts of Geron
Corporation, and its wholly owned subsidiary, Geron Bio-Med Ltd., a company
organized under the laws of the United Kingdom. All material intercompany
accounts, transactions and expenses have been eliminated in consolidation.
The financial statements of the Company's subsidiary outside the United
States are measured using the local currency as the functional currency. Assets
and liabilities of this subsidiary are translated at the rates of exchange at
the balance sheet date. The resultant translation adjustments are included in
accumulated other comprehensive income/(loss), a separate component of
stockholders' equity. Income and expense items are translated at average monthly
rates of exchange.
Certain reclassifications of prior year amounts have been made to conform to
current year presentation.
Net Loss Per Share
Basic earnings (loss) per share is calculated using the weighted average
number of common shares outstanding. Because the Company is in a net loss
position, diluted earnings per share is also calculated using the weighted
average number of common shares outstanding and excludes the effects of options,
warrants and convertible securities which are antidilutive. Had the Company been
in a net income position, diluted earnings per share would have included the
shares used in the computation of basic net loss per share as well as an
additional 1,775,839 and 2,327,274 shares for 2001 and 2000, respectively,
related to outstanding options, warrants and convertible securities not included
above (as determined using the treasury stock method at the estimated average
market value).
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) includes certain
changes in equity that are excluded from net income (loss). Specifically,
unrealized holding gains on our available-for-sale securities and equity
investments in licensees of $367,000, which are included in stockholders'
equity, and cumulative translation adjustment of $187,000 are included in
accumulated other comprehensive income (loss).
2. CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
places its cash and cash equivalents in interest-bearing money market funds,
municipal notes and commercial paper. As of June 30, 2001, the Company's
investments consisted primarily of corporate notes with maturities ranging from
three to 19 months.
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3. CONVERTIBLE DEBENTURES
Series C Debentures and Warrants
On September 30, 1999, the Company sold $12,500,000 in series C two-percent
coupon convertible debentures and warrants to purchase 1,100,000 shares of
common stock to an institutional investor. The series C convertible debentures
are convertible at any time by the holder at a fixed conversion price of $10.25
per share. The series C convertible debentures are convertible at the Company's
option when the common stock has traded at a certain premium to the fixed
conversion price for ten consecutive trading days. If unconverted, the
debentures have a maturity date of September 30, 2002. The series C warrants to
purchase 1,000,000 shares of common stock are exercisable at $12.50 per share
and the series C warrants to purchase 100,000 shares of common stock are
exercisable at $12.75 per share at the option of the holder through May 2001. In
December 2000, the Company adopted Emerging Issues Task Force Issue No. 00-27,
"Application of EITF Issue 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, to
Certain Convertible Instruments" ("EITF 00-27"). Accordingly, the Company
recognized $2,700,000 of additional imputed non-cash interest expense related to
series C convertible debentures and warrants.
In March 2000, series C convertible debentures with a face value of
$6,250,000 plus accrued interest were converted into approximately 615,000
shares of Geron common stock at $10.25 per share. In addition, all of the series
C warrants were exercised, which resulted in proceeds of $13,750,000 and the
issuance of 1,100,000 shares of Geron common stock. As of June 30, 2001, series
C convertible debentures with a face value of $6,250,000 and no series C
warrants remained outstanding.
Series D Debentures and Warrants
On June 29, 2000, the Company sold $25,000,000 in series D zero coupon
convertible debentures and warrants to purchase 834,836 shares of Geron common
stock to an institutional investor. The debentures are convertible at any time
by the holder at a fixed conversion price of $29.95 per share. In connection
with the issuance of the series D convertible debentures, the Company recorded
approximately $616,000 in interest expense for the difference between the fair
value of the Company's common stock and the conversion price of the debentures
on the closing date of the financing. The debentures convert at the Company's
option when Geron common stock has traded at a certain premium to the fixed
conversion price for five consecutive trading days. If unconverted, the
debentures have a maturity date of June 29, 2003. The warrant to purchase
834,836 shares of Geron common stock is exercisable at $37.43 per share at the
option of the holder through December 2001. The value of the warrant of
$10,527,000 was determined using Black-Scholes and since the debentures were
immediately convertible at the option of the holder, the entire warrant value
was recorded as a charge to interest expense and a credit to additional
paid-in-capital. In December 2000, the Company adopted EITF 00-27. Accordingly,
the Company recognized an additional $10,527,000 in imputed non-cash interest
expense related to series D convertible debentures and warrants. As of June 30,
2001, all of the series D convertible debentures and series D warrants remained
outstanding.
4. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in its fiscal year ended December 31, 1998. SFAS 131 establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The Company's chief decision
maker, as defined under SFAS 131, is the Chief Executive Officer. To date, the
Company has viewed its operations as principally one segment, the discovery and
development of therapeutic and diagnostic products for applications in oncology,
drug discovery and regenerative medicine. As a result, the financial information
disclosed herein materially represents all of the financial information related
to the Company's principal operating segment.
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5. CONSOLIDATED STATEMENT OF CASH FLOWS DATA
(IN THOUSANDS) SIX MONTHS SIX MONTHS
- -------------- ENDED ENDED
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
Supplementary investing and financing activities:
Common stock issued for services............................ $ -- $1,921
Notes receivable from stockholders.......................... $ -- $ (36)
Common stock issued under purchase plan..................... $233 $ 163
Net unrealized gain (loss) on equity investment............. $908 $ --
Net unrealized gain (loss) on available-for-sale securities. $353 $ (93)
Conversion of convertible debentures, net................... $ -- $9,076
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipate", "believe", "plan", "expect",
"future", "intend" and similar expressions to identify forward-looking
statements. These statements appear throughout the Form 10-Q and are statements
regarding our intent, belief, or current expectations, primarily with respect to
our operations and related industry developments. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of
this Form 10-Q. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us and described under the heading "Risk Factors" in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2000, in the section of this Item 2 titled "Additional Factors That May Affect
Future Results," and elsewhere in this Form 10-Q.
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.
We are a biopharmaceutical company focused on developing and commercializing
therapeutic and diagnostic products for applications in oncology and
regenerative medicine, and research tools for drug discovery. Geron's product
development programs are based upon three patented core technologies:
telomerase, human embryonic stem cells and nuclear transfer.
Since inception, substantially all of our revenues have been generated from
license and research agreements with collaborators. In addition, we receive
license payments and royalties from license and marketing agreements with
various diagnostic and research tool collaborators and sublicensees of our
nuclear transfer technology. We recognize revenue from the license and research
agreements with collaborators as the related research and development costs are
incurred under the collaborative agreements. We recognize revenue from license
payments over the term of the license. We recognize revenue from royalties as
received.
Our results of operations have fluctuated from period to period and may
continue to fluctuate in the future based upon the timing and composition of
funding under our various collaborative agreements, as well as the progress of
our research and development efforts and variations in the level of expenses
related to developmental efforts during any given period. Results of operations
for any period may be unrelated to results of operations for any other period.
In addition, historical results should not be viewed as indicative of future
operating results. We are subject to risks common to companies in our industry
and at our stage of development, including risks inherent in our research and
development efforts, reliance upon our collaborative partners, enforcement of
our patent and proprietary rights, need for future capital, potential
competition and uncertainty of regulatory approvals or clearances. In order for
a product to be commercialized based on our research, we and our collaborators
must conduct preclinical tests and clinical trials, demonstrate the efficacy and
safety of our product candidates, obtain regulatory approvals or clearances and
enter into manufacturing, distribution and marketing arrangements, as well as
obtain market acceptance. Our collaborator in the field of telomerase
inhibition, Kyowa Hakko, has selected a Geron compound (GRN 163) for
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development as an anti-cancer drug. We do not expect to receive revenues or
royalties based on therapeutic products for a period of years, if at all.
RESULTS OF OPERATIONS
Revenues
We recognized revenues from collaborative agreements of $500,000 and $2.3
million for the three and six months ended June 30, 2001, compared to $1.8
million and $3.0 million for the comparable periods in 2000. Revenues in 2001
and 2000 represented research support payments from our collaborative agreements
with Pharmacia and Kyowa Hakko. Decreased revenues in 2001 were a result of
regaining our rights from Pharmacia in January 2001.
We receive license payments and royalties from license and marketing
agreements with various diagnostic collaborators. We received royalties of
$42,000 and $84,000 for the three and six months ended June 30, 2001, from Kyowa
Medex, Intergen, Roche Diagnostics, and PharMingen (a Becton Dickinson company)
on the sale of diagnostic kits to the research-use-only market and from Clontech
from the sale of telomerase-immortalized cell lines, compared to $26,000 and
$47,000 for the comparable periods in 2000. We also recognized revenues of
$43,000 and $48,000 in license fees for the three and six months ended June 30,
2001 from agreements with various companies for our nuclear transfer technology.
We recognize revenues from these sublicense agreements over the term of the
agreement. No license fee revenue was recognized in 2000 related to these
agreements.
Research and Development Expenses
Research and development expenses were $6.6 million and $13.4 million for
the three and six months ended June 30, 2001, compared to $5.8 million and $11.6
million for the comparable period in 2000. The increase in research and
development expenses for the six month period in 2001 compared to the six month
period in 2000 was primarily the result of increased scientific personnel
expenses of $1.3 million and increased sponsored research of $400,000. We expect
research and development expenses to increase in the future as a result of
continued development of our therapeutic and diagnostic programs.
General and Administrative Expenses
General and administrative expenses were $1.4 million and $5.3 million for
the three and six months ended June 30, 2001, compared to $2.6 million and $7.0
million for the comparable periods in 2000. The decrease in general and
administrative expenses in the 2001 periods compared to the 2000 periods was the
result of reduced consulting expense of $3.8 million offset by $2.4 million of
stock-based compensation related to extending the exercise period of certain
options to purchase common stock in 2001.
Interest and Other Income
Interest income was $1.3 million and $2.9 million for the three and six
months ended June 30, 2001, compared to $1.2 million and $2.0 million for the
comparable periods in 2000. The increase in interest income for 2001 compared to
2000 was primarily the result of higher cash balances in 2001 than 2000.
Interest earned in the future will depend on any future funding cycles and
prevailing interest rates. We also received $244,000 and $323,000 in research
payments under government grants for the three and six months ended June 30,
2001, compared to $156,000 and $196,000 for the comparable periods in 2000. We
expect income from government grants to decrease in the future.
Interest and Other Expense
Interest and other expense was $244,000 and $516,000 for the three and six
months ended June 30, 2001, compared to $11.4 million and $11.8 million for the
comparable periods in 2000. The decrease in interest and other expense for both
the three and six month periods in 2001 compared to 2000 was primarily the
result of lower expenses related to convertible debentures in 2001.
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Net Loss
Net loss was $6.1 million and $13.5 million for the three and six months
ended June 30, 2001, compared to $16.5 and $25.0 million for the comparable
periods in 2000. The decrease in net loss for 2001 compared to 2000 was
primarily the net result of higher operating expenses and decreased revenues
from collaborative agreements offset by reduced interest expense. We expect net
loss to increase in the future as a result of increased operating expenses and
reduced revenues from collaborative agreements.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investments at June 30, 2001 totaled $85.5
million compared to $95.8 million at December 31, 2000. The decrease in cash,
cash equivalents and investments in 2001 was the result of cash used for
operations. We have an investment policy to invest these funds in liquid,
investment-grade securities, such as interest-bearing money market funds,
commercial paper and federal agency notes.
Net cash used in operations was $8.0 million for the six months ended June
30, 2001 compared to $6.1 million for the comparable period in 2000. The
increase was primarily a result of increased research and development expenses
in 2001. We expect net cash used in operations to continue to increase as a
result of increased research and development expenditures.
Through June 30, 2001, we have invested approximately $11.6 million in
property and equipment, of which approximately $7.7 million was financed through
equipment financing. As of June 30, 2001, we had approximately $1.5 million
available for borrowing under our equipment financing arrangements. The drawdown
period under the equipment financing arrangements expires on October 31, 2001.
We intend to renew the commitment for new equipment financing arrangements in
2001 to further fund equipment purchases. If we are unable to renew the
commitment, then we will need to spend our own resources for equipment
purchases.
We have agreed to fund scientific research at academic and research
institutions. Under these research arrangements, we are obligated to make
minimum annual payments of approximately $4.4 million and $2.6 million in 2001
and 2002, respectively. As of June 30, 2001, we have made payments of
approximately $2.6 million to academic and research institutions.
We estimate that our existing capital resources, interest income and
equipment financing will be sufficient to fund our current level of operations
through December 31, 2002. Changes in our research and development plans or
other changes affecting our operating expenses may result in the expenditure of
available resources before such time, and in any event, we will need to raise
substantial additional capital to fund our operations in the future. We intend
to seek additional funding through strategic collaborations, public or private
equity financings, capital lease transactions or other financing sources that
may be available.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business is subject to various risks, including those described below.
You should carefully consider these risk factors, together with all of the other
information included in this Form 10-Q. Any of these risks could materially
adversely affect our business, operating results and financial condition.
OUR BUSINESS IS AT AN EARLY STAGE OF DEVELOPMENT AND WE MAY NOT DEVELOP ANY
PRODUCTS THAT REACH CLINICAL TRIALS
The study of the mechanisms of cellular aging and cellular immortality,
including telomere biology and telomerase, the study of human embryonic stem
cells, and the process of nuclear transfer are relatively new areas of research.
Our business is at an early stage of development. We have not yet produced any
products that have progressed to clinical trials and we may never do so. Our
ability to produce products that progress to clinical trials is subject to our
ability to, among other things:
o continue to have success with our research and development efforts;
o select therapeutic compounds for development;
o obtain the required regulatory approvals; and
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o manufacture and market resulting products.
If and when potential lead drug compounds or product candidates are
identified through our research programs, they will require significant
preclinical and clinical testing prior to regulatory approval in the United
States and elsewhere. In addition, we will also need to determine whether any of
these potential products can be manufactured in commercial quantities at an
acceptable cost. Our efforts may not result in a product that can be marketed.
Because of the significant scientific, regulatory and commercial milestones that
must be reached for any of our research programs to be successful, any program
may be abandoned, even after significant resources have been expended.
WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE FUTURE LOSSES; CONTINUED
LOSSES COULD IMPAIR OUR ABILITY TO SUSTAIN OPERATIONS
We have incurred net operating losses every year since our operations began
in 1990. As of June 30, 2001, our accumulated deficit was approximately $163.3
million. Losses have resulted principally from costs incurred in connection with
our research and development activities and from general and administrative
costs associated with our operations. We expect to incur additional operating
losses over the next several years as our research and development efforts and
preclinical testing activities are expanded. Substantially all of our revenues
to date have been research support payments under the collaboration agreements
with Kyowa Hakko and Pharmacia. In 2001, we regained our rights to telomerase
inhibitors from Pharmacia. Kyowa Hakko provided additional research funding in
2001. We may be unsuccessful in entering into any new corporate collaboration
that results in revenues. Even if we are able to obtain new collaboration
arrangements with third parties, the revenues generated from these arrangements
will be insufficient to continue or expand our research activities and otherwise
sustain our operations.
We are unable to estimate at this time the level of revenue to be received
from the sale of diagnostic products and telomerase-immortalized cell lines, and
do not currently expect to receive significant revenues from the sale of these
products. Our ability to continue or expand our research activities and
otherwise sustain our operations is dependent on our ability, alone or with
others to, among other things, manufacture and market therapeutic products.
We may never receive material revenues from product sales or if we do
receive revenues, such revenues may not be sufficient to continue or expand our
research activities and otherwise sustain our operations.
WE WILL NEED ADDITIONAL CAPITAL TO CONDUCT OUR OPERATIONS AND DEVELOP OUR
PRODUCTS, AND OUR ABILITY TO OBTAIN THE NECESSARY FUNDING IS UNCERTAIN
We will require substantial capital resources in order to conduct our
operations and develop our products. While we estimate that our existing capital
resources, interest income and equipment financing arrangements will be
sufficient to fund our current level of operations through December 31, 2002, we
cannot guarantee that this will be the case. The timing and degree of any future
capital requirements will depend on many factors, including:
o the accuracy of the assumptions underlying our estimates for our capital
needs in 2001 and beyond;
o continued scientific progress in our research and development programs;
o the magnitude and scope of our research and development programs;
o our ability to maintain and establish strategic arrangements for
research, development, clinical testing, manufacturing and marketing;
o our progress with preclinical and clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o the costs involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims; and
o the potential for new technologies and products.
We intend to acquire additional funding through strategic collaborations,
public or private equity financings, capital lease transactions or other
financing sources that may be available. Additional financing may not be
available on acceptable terms, or at all. Additional equity financings could
result in significant dilution to stockholders.
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Further, in the event that additional funds are obtained through arrangements
with collaborative partners, these arrangements may require us to relinquish
rights to some of our technologies, product candidates or products that we would
otherwise seek to develop or commercialize ourselves. If sufficient capital is
not available, we may be required to delay, reduce the scope of or eliminate one
or more of our research or development programs, each of which could have a
material adverse effect on our business.
OUR INABILITY TO IDENTIFY A SAFE AND EFFECTIVE INHIBITOR OF TELOMERASE MAY
PREVENT US FROM DEVELOPING A VIABLE CANCER TREATMENT PRODUCT, WHICH WOULD
ADVERSELY IMPACT OUR FUTURE BUSINESS PROSPECTS
As a result of our drug discovery efforts to date, we have identified
compounds in laboratory studies that demonstrate potential for inhibiting
telomerase in humans. Kyowa Hakko has selected one of these compounds, GRN 163,
as a lead compound for preclinical development and clinical trials as a
telomerase inhibitor for cancer. Further research is required to determine if
this compound can be fully developed as a commercially viable treatment for
cancer.
This compound, and other compounds we have identified, may prove to have
undesirable and unintended side effects or other characteristics affecting its
safety or effectiveness that may prevent or limit its commercial use. In terms
of safety, our discoveries may result in cancer treatment solutions that cause
unacceptable side effects for the human body. Our discoveries may also not be as
effective as is necessary to market a commercially viable product for the
treatment of cancer. As a result, telomerase inhibition may need to be used in
conjunction with other cancer therapies. Accordingly, it may become extremely
difficult for us to proceed with preclinical and clinical development, to obtain
regulatory approval or to market a telomerase inhibitor for the treatment of
cancer. If we abandon our research for cancer treatment for any of these reasons
or for other reasons, our business prospects would be materially and adversely
affected.
IF OUR ACCESS TO NECESSARY TISSUE SAMPLES, INFORMATION OR LICENSED TECHNOLOGIES
IS RESTRICTED, WE WILL NOT BE ABLE TO DEVELOP OUR BUSINESS
To continue the research and development of our therapeutic and diagnostic
products, we need access to normal and diseased human and other tissue samples,
other biological materials and related clinical and other information. We
compete with many other companies for these materials and information. We may
not be able to obtain or maintain access to these materials and information on
acceptable terms, if at all. In addition, government regulation in the United
States and foreign countries could result in restricted access to, or
prohibiting the use of, human and other tissue samples. If we lose access to
sufficient numbers or sources of tissue samples, or if tighter restrictions are
imposed on our use of the information generated from tissue samples, our
business will be materially harmed.
SOME OF OUR COMPETITORS MAY DEVELOP TECHNOLOGIES THAT ARE SUPERIOR TO OR MORE
COST-EFFECTIVE THAN OURS, WHICH MAY IMPACT THE COMMERCIAL VIABILITY OF OUR
TECHNOLOGIES AND WHICH MAY SIGNIFICANTLY DAMAGE OUR ABILITY TO SUSTAIN
OPERATIONS
The pharmaceutical and biotechnology industries are intensely competitive.
We believe that other pharmaceutical and biotechnology companies and research
organizations currently engage in or have in the past engaged in efforts related
to the biological mechanisms of cell aging and cell immortality, including the
study of telomeres, telomerase, human embryonic stem cells and nuclear transfer.
In addition, other products and therapies that could compete directly with the
products that we are seeking to develop and market currently exist or are being
developed by pharmaceutical and biopharmaceutical companies and by academic and
other research organizations.
Many companies are also developing alternative therapies to treat cancer
and, in this regard, are competitors of ours. Many of the pharmaceutical
companies developing and marketing these competing products have significantly
greater financial resources and expertise than we do in:
o research and development;
o manufacturing;
o preclinical and clinical testing;
o obtaining regulatory approvals; and
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o marketing.
Smaller companies may also prove to be significant competitors, particularly
through collaborative arrangements with large and established companies.
Academic institutions, government agencies and other public and private research
organizations may also conduct research, seek patent protection and establish
collaborative arrangements for research, clinical development and marketing of
products similar to ours. These companies and institutions compete with us in
recruiting and retaining qualified scientific and management personnel as well
as in acquiring technologies complementary to our programs. There is also
competition for access to libraries of compounds to use for screening. Should we
fail to secure and maintain access to sufficiently broad libraries of compounds
for screening potential targets, our business would be materially harmed.
In addition to the above factors, we expect to face competition in the
following areas:
o product efficacy and safety;
o the timing and scope of regulatory consents;
o availability of resources;
o reimbursement coverage;
o price; and
o patent position, including potentially dominant patent positions of
others.
As a result of the foregoing, our competitors may develop more effective or
more affordable products, or achieve earlier patent protection or product
commercialization than us. Most significantly, competitive products may render
the products that we develop obsolete.
THE ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF OUR RESEARCH USING EMBRYONIC STEM
CELLS AND NUCLEAR TRANSFER COULD PREVENT US FROM DEVELOPING OR GAINING
ACCEPTANCE FOR COMMERCIALLY VIABLE PRODUCTS IN THIS AREA
Our programs in regenerative medicine may involve the use of human embryonic
stem cells that would be derived from human embryonic or fetal tissue. The use
of human embryonic stem cells gives rise to ethical, legal and social issues
regarding the appropriate use of these cells. In the event that our research
related to human embryonic stem cells becomes the subject of adverse commentary
or publicity, the market price for our common stock could be significantly
harmed.
Some groups have voiced opposition to our technology and practices. The
concepts of cell regeneration, cell immortality, and genetic cloning have
stimulated significant ethical debates in both the social and political arenas.
We use human embryonic stem cells derived through a process that uses either
donated embryos that are no longer needed following a successful in vitro
fertilization procedure or donated fetal material as the starting material.
Further, many research institutions, including some of our scientific
collaborators, have adopted policies regarding the ethical use of human
embryonic and fetal tissue. These policies may have the effect of limiting the
scope of research conducted using human embryonic stem cells, resulting in
reduced scientific progress. In addition, the United States government and its
agencies have in recent years refused to fund research which involves the use of
human embryonic tissue. President Bush, however, announced on August 9, 2001
that he would permit federal funding of research on human embryonic stem cells
using the limited number of embryonic stem cell lines that had already been
created. A newly created president's council will monitor stem cell research,
and the guidelines and regulations it recommends may include restrictions on the
scope of research using human embryonic or fetal tissue. Our inability to
conduct research using human embryonic stem cells due to such factors as
government regulation or otherwise could have a material adverse effect on us.
Finally, we acquired Roslin Bio-Med to gain the rights to nuclear transfer
technology. The Roslin Institute produced Dolly the sheep in 1997 -- the first
mammal cloned from an adult cell in history. Geron acquired exclusive rights to
this technology for all areas except human reproductive cloning and certain
other limited applications. Although we will not be pursuing human reproductive
cloning, all of the techniques we continue to develop for use in agricultural
cloning and our nuclear transfer work for organ regeneration are directly
applicable to human cloning should some other group in the future decide to
pursue this avenue. Negative associations with any or all of these practices
could:
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o harm our ability to establish critical partnerships and collaborations;
o prompt government regulation of our technologies;
o cause delays in our research and development; and
o cause a decrease in the price of our stock.
Human therapeutic cloning based on nuclear transfer may be useful for the
development of our regenerative medicine applications. If human therapeutic
cloning is restricted or banned (as it would be under bill H.R. 2505 recently
passed by the U.S. House of Representatives), our ability to commercialize those
applications could be significantly harmed. Also, if regulatory bodies were to
ban nuclear transfer processes, our research using nuclear transfer technology
could be cancelled and our business could be significantly harmed.
PUBLIC ATTITUDES TOWARDS GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY APPROVAL
OR PUBLIC PERCEPTION OF OUR PRODUCTS
The commercial success of our product candidates will depend in part on
public acceptance of the use of gene therapies for the prevention or treatment
of human diseases. Public attitudes may be influenced by claims that gene
therapy is unsafe, and gene therapy may not gain the acceptance of the public or
the medical community. Adverse events in the field of gene therapy that have
occurred or may occur in the future also may result in greater governmental
regulation of our product candidates and potential regulatory delays relating to
the testing or approval of our product candidates.
Negative public reaction to gene therapy in the development of certain of
our therapies could result in greater government regulation, stricter clinical
trial oversight, restrictive commercial product labeling requirements of gene
therapies, and could cause a decrease in the demand for any products that we may
develop. The subject of genetically modified organisms has received negative
publicity in Europe, which has aroused public debate. The adverse publicity in
Europe could lead to greater regulation and trade restrictions on imports of
genetically altered products. If similar adverse public reaction occurs in the
United States, genetic research and resultant products could be subject to
greater domestic regulation and could cause a decrease in the demand for our
potential products.
EVEN IF WE REACH CLINICAL TRIALS WITH ONE OR MORE OF OUR PRODUCTS, THEY MAY NOT
RESULT IN ANY COMMERCIALLY VIABLE PRODUCTS
We do not expect to generate any significant revenues from product sales for
a period of several years. We may never generate revenues from product sales or
become profitable because of a variety of risks inherent in our business,
including risks that:
o clinical trials may not demonstrate the safety and efficacy of our
products;
o completion of clinical trials may be delayed, or costs of clinical
trials may exceed anticipated amounts;
o we may not be able to obtain regulatory approval of our products, or may
experience delays in obtaining such approvals;
o we may not be able to manufacture our drugs economically on a commercial
scale;
o we and our licensees may not be able to successfully market our
products;
o physicians may not prescribe our products, or patients may not accept
such products;
o others may have proprietary rights which prevent us from marketing our
products; and
o competitors may sell similar, superior or lower-cost products.
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IMPAIRMENT OF OUR INTELLECTUAL PROPERTY RIGHTS MAY LIMIT OUR ABILITY TO PURSUE
THE DEVELOPMENT OF OUR INTENDED TECHNOLOGIES AND PRODUCTS
Our success will depend on our ability to obtain and enforce patents for our
discoveries; however, legal principles for biotechnology patents in the United
States and in other countries are not firmly established and the extent to which
we will be able to obtain patent coverage is uncertain.
Protection of our proprietary compounds and technology is critically
important to our business. Our success will depend in part on our ability to
obtain and enforce our patents and maintain trade secrets, both in the United
States and in other countries. The patent positions of pharmaceutical and
biopharmaceutical companies, including ours, are highly uncertain and involve
complex legal and technical questions for which legal principles are not firmly
established. We may not continue to develop products or processes that are
patentable, and it is possible that patents will not issue from any of our
pending applications, including allowed patent applications. Further, our
current patents, or patents that issue on pending applications, may be
challenged, invalidated or circumvented, and our current or future patent rights
may not provide proprietary protection or competitive advantages to us. In the
event that we are unsuccessful in obtaining and enforcing patents, our business
would be negatively impacted.
Patent applications filed in the United States prior to November 29, 2000,
are maintained in secrecy until patents issue. Publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries by at
least several months and sometimes several years. Therefore, the publications
may reveal in the future that the persons or entities that we or our licensors
name as inventors in our patents and patent applications may not have been the
first to invent the inventions disclosed in the patent applications or patents,
or file patent applications for these inventions. As a result, we may not be
able to obtain patents from discoveries that we otherwise would consider
patentable and that we consider to be significant to our future success.
Patent prosecution, interference, opposition proceeding or litigation may
also be necessary to obtain patents, enforce any patents issued or licensed to
us or to determine the scope and validity of our proprietary rights or the
proprietary rights of another. We may not be successful in any patent
prosecution, interference, opposition proceeding or litigation. Patent
prosecution and litigation in general can be extremely expensive and time
consuming, even if the outcome is favorable to us. An adverse outcome in a
patent prosecution or litigation or any other proceeding in a court or patent
office could weaken our proprietary position, subject our business to
significant liabilities to other parties, require disputed rights to be licensed
from other parties or require us to cease using the disputed technology.
WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS THAT ARE COSTLY TO DEFEND, AND WHICH
MAY LIMIT OUR ABILITY TO USE DISPUTED TECHNOLOGIES AND PREVENT US FROM PURSUING
RESEARCH AND DEVELOPMENT OR COMMERCIALIZATION OF POTENTIAL PRODUCTS
Our commercial success depends significantly on our ability to operate
without infringing patents and proprietary rights of others. Our technologies
may infringe the patents or proprietary rights of others. In addition, we may
become aware of discoveries and technology controlled by third parties that are
advantageous to our research programs. In the event our technologies do infringe
on the rights of others or we require the use of discoveries and technology
controlled by third parties, we may be prevented from pursuing research,
development or commercialization of potential products or may be required to
obtain licenses to these patents or other proprietary rights or develop or
obtain alternative technologies. We may not be able to obtain alternative
technologies or any required license on commercially favorable terms, if at all.
If we do not obtain the necessary licenses or alternative technologies, we may
be delayed or prevented from pursuing the development of some potential
products. Our breach of an existing license or failure to obtain alternative
technologies or a license to any technology that we may require to develop or
commercialize our products will significantly and negatively affect our
business.
Patent law relating to the scope and enforceability of claims in the
technology fields in which we operate is still evolving, and the degree of
future protection for any of our proprietary rights is highly uncertain. In this
regard, patents may not issue from any of our patent applications or our
existing patents may be found to be invalid by a court. In addition, our success
may become dependent on our ability to obtain licenses for using the patented
discoveries of others. We are aware of patent applications and patents that have
been filed by others with respect to our technologies and we may have to obtain
licenses to use these technologies. Moreover, other patent applications may be
granted priority over patent applications that we or any of our licensors have
filed. Furthermore, others may independently develop similar or alternative
technologies, duplicate any of our technologies or design around the patented
technologies we have developed. In the event that we are unable to acquire
licenses to critical technologies that we cannot patent ourselves, we may be
required to expend significant time and resources to develop alternative
technology, and we may not be successful in this regard.
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If we cannot acquire or develop the necessary technology, we may be prevented
from pursuing some of our business objectives. Moreover, one or more of our
competitors could acquire or license the necessary technology. Any of these
events could materially harm our business.
MUCH OF THE INFORMATION AND KNOW-HOW THAT IS CRITICAL TO OUR BUSINESS IS NOT
PATENTABLE AND WE MAY NOT BE ABLE TO PREVENT OTHERS FROM OBTAINING THIS
INFORMATION AND ESTABLISHING COMPETITIVE ENTERPRISES
We sometimes rely on trade secrets to protect our proprietary technology,
especially in circumstances in which patent protection is not believed to be
appropriate or obtainable. We attempt to protect our proprietary technology in
part by confidentiality agreements with our employees, consultants,
collaborators and contractors. We cannot assure you that these agreements will
not be breached, that we would have adequate remedies for any breach, or that
our trade secrets will not otherwise become known or be independently discovered
by competitors, any of which would harm our business significantly.
WE DEPEND ON OUR COLLABORATORS TO HELP US COMPLETE THE PROCESS OF DEVELOPING AND
TESTING OUR PRODUCTS AND OUR ABILITY TO DEVELOP AND COMMERCIALIZE PRODUCTS MAY
BE IMPAIRED OR DELAYED IF OUR COLLABORATIVE PARTNERSHIPS ARE UNSUCCESSFUL
Our strategy for the development, clinical testing and commercialization of
our products requires entering into collaborations with corporate partners,
licensors, licensees and others. We are dependent upon the subsequent success of
these other parties in performing their respective responsibilities and the
continued cooperation of our partners. Our collaborators may not cooperate with
us or perform their obligations under our agreements with them. We cannot
control the amount and timing of our collaborators' resources that will be
devoted to our research activities related to our collaborative agreements with
them. Our collaborators may choose to pursue existing or alternative
technologies in preference to those being developed in collaboration with us.
Our ability to successfully develop and commercialize telomerase inhibition
products depends on our corporate alliance with Kyowa Hakko. Our ability to
successfully develop and commercialize telomerase diagnostic products depends on
our corporate alliance with Roche Diagnostics. Under our collaborative
agreements with these collaborators, we rely significantly on them, among other
activities, to:
o design and conduct advanced clinical trials in the event that we reach
clinical trials;
o fund research and development activities with us;
o pay us fees upon the achievement of milestones; and
o co-promote with us any commercial products that result from our
collaborations.
The development and commercialization of products from these collaborations
will be delayed if Kyowa Hakko or Roche Diagnostics fail to conduct these
collaborative activities in a timely manner or at all. In addition, Kyowa Hakko
or Roche Diagnostics could terminate their agreements with us and we may not
receive any development or milestone payments. If we do not receive research
funds or achieve milestones set forth in the agreements, or if Kyowa Hakko or
Roche Diagnostics or any of our future collaborators breach or terminate
collaborative agreements with us, our business may be materially harmed.
OUR RELIANCE ON THE RESEARCH ACTIVITIES OF OUR NON-EMPLOYEE SCIENTIFIC ADVISORS
AND OTHER RESEARCH INSTITUTIONS, WHOSE ACTIVITIES ARE NOT WHOLLY WITHIN OUR
CONTROL, MAY LEAD TO DELAYS IN TECHNOLOGICAL DEVELOPMENTS
We rely extensively and have relationships with scientific advisors at
academic and other institutions, some of whom conduct research at our request.
These scientific advisors are not our employees and may have commitments to, or
consulting or advisory contracts with, other entities that may limit their
availability to us. We have limited control over the activities of these
advisors and, except as otherwise required by our collaboration and consulting
agreements, can expect only limited amounts of their time to be dedicated to our
activities. If our scientific advisors are unable or refuse to contribute to the
development of any of our potential discoveries, our ability to generate
significant advances in our technologies may be significantly harmed.
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In addition, we have formed research collaborations with many academic and
other research institutions throughout the world, including the Roslin
Institute. These research facilities may have commitments to other commercial
and non-commercial entities. We have limited control over the operations of
these laboratories and can expect only limited amounts of time to be dedicated
to our research goals.
THE LOSS OF KEY PERSONNEL COULD SLOW OUR ABILITY TO CONDUCT RESEARCH AND DEVELOP
PRODUCTS
Our future success depends to a significant extent on the skills, experience
and efforts of our executive officers and key members of our scientific staff.
Competition for personnel is intense and we may be unable to retain our current
personnel or attract or assimilate other highly qualified management and
scientific personnel in the future. The loss of any or all of these individuals
could harm our business and might significantly delay or prevent the achievement
of research, development or business objectives.
We also rely on consultants and advisors, including the members of our
Scientific Advisory Board, who assist us in formulating our research and
development strategy. We face intense competition for qualified individuals from
numerous pharmaceutical, biopharmaceutical and biotechnology companies, as well
as academic and other research institutions. We may not be able to attract and
retain these individuals on acceptable terms. Failure to do so would materially
harm our business.
WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN SUFFICIENT INSURANCE ON COMMERCIALLY
REASONABLE TERMS OR WITH ADEQUATE COVERAGE AGAINST POTENTIAL LIABILITIES IN
ORDER TO PROTECT OURSELVES AGAINST PRODUCT LIABILITY CLAIMS
Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of human therapeutic and
diagnostic products. We may become subject to product liability claims if the
use of our products is alleged to have injured subjects or patients. This risk
exists for products tested in human clinical trials as well as products that are
sold commercially. We currently have no clinical trial liability insurance and
we may not be able to obtain and maintain this type of insurance for any of our
clinical trials. In addition, product liability insurance is becoming
increasingly expensive. As a result, we may not be able to obtain or maintain
product liability insurance in the future on acceptable terms or with adequate
coverage against potential liabilities which could have a material adverse
effect on us.
BECAUSE WE OR OUR COLLABORATORS MUST OBTAIN REGULATORY APPROVAL TO MARKET OUR
PRODUCTS IN THE UNITED STATES AND FOREIGN JURISDICTIONS, WE CANNOT PREDICT
WHETHER OR WHEN WE WILL BE PERMITTED TO COMMERCIALIZE OUR PRODUCTS
Federal, state and local governments in the United States and governments in
other countries have significant regulations in place that govern many of our
activities. The preclinical testing and clinical trials of the products that we
develop ourselves or that our collaborators develop are subject to intense
government regulation and may prevent us from creating commercially viable
products from our discoveries. In addition, the sale by us or our collaborators
of any commercially viable product will be subject to government regulation from
several standpoints, including the processes of:
o manufacturing;
o advertising and promoting;
o selling and marketing;
o labeling; and
o distributing.
We may not obtain regulatory approval for the products we develop and our
collaborators may not obtain regulatory approval for the products they develop.
Regulatory approval may also entail limitations on the indicated uses of a
proposed product. Because certain of our product candidates involve the
application of new technologies and may be based upon a new therapeutic
approach, such products may be subject to substantial additional review by
various government regulatory authorities, and, as a result, we may obtain
regulatory approvals for such products more slowly than for products based upon
more conventional technologies. If, and to the extent that, we are unable to
comply with these regulations, our ability to earn revenues will be materially
and negatively impacted.
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The regulatory process, particularly for biopharmaceutical products like
ours, is uncertain, can take many years and requires the expenditure of
substantial resources. Any product that we or our collaborative partners develop
must receive all relevant regulatory agency approvals or clearances, if any,
before it may be marketed in the United States or other countries. Generally,
biological drugs and non-biological drugs are regulated more rigorously than
medical devices. In particular, human pharmaceutical therapeutic products,
including a telomerase inhibitor, are subject to rigorous preclinical and
clinical testing and other requirements by the Food and Drug Administration in
the United States and similar health authorities in foreign countries. The
regulatory process, which includes extensive preclinical testing and clinical
trials of each product in order to establish its safety and efficacy, is
uncertain, can take many years and requires the expenditure of substantial
resources.
Data obtained from preclinical and clinical activities is susceptible to
varying interpretations that could delay, limit or prevent regulatory agency
approvals or clearances. In addition, delays or rejections may be encountered
based upon changes in regulatory agency policy during the period of product
development and/or the period of review of any application for regulatory agency
approval or clearance for a product. Delays in obtaining regulatory agency
approvals or clearances could:
o significantly harm the marketing of any products that we or our
collaborators develop;
o impose costly procedures upon our activities or the activities of our
collaborators;
o diminish any competitive advantages that we or our collaborative
partners may attain; or
o adversely affect our ability to receive royalties and generate revenues
and profits.
Even if we commit the necessary time and resources, both economic and
otherwise, the required regulatory agency approvals or clearances may not be
obtained for any products developed by or in collaboration with us. If
regulatory agency approval or clearance for a new product is obtained, this
approval or clearance may entail limitations on the indicated uses for which it
may be marketed that could limit the potential commercial use of the product.
Furthermore, approved products and their manufacturers are subject to continual
review, and discovery of previously unknown problems with a product or its
manufacturer may result in restrictions on the product or manufacturer,
including withdrawal of the product from the market. Failure to comply with
regulatory requirements can result in severe civil and criminal penalties,
including but not limited to:
o recall or seizure of products;
o injunction against manufacture, distribution, sales and marketing; and
o criminal prosecution.
The imposition of any of these penalties could significantly impair our
business, financial condition and results of operations.
TO BE SUCCESSFUL, OUR PRODUCTS MUST BE ACCEPTED BY THE HEALTH CARE COMMUNITY,
WHICH CAN BE VERY SLOW TO ADOPT OR UNRECEPTIVE TO NEW TECHNOLOGIES AND PRODUCTS
Our products and those developed by our collaborative partners, if approved
for marketing, may not achieve market acceptance since physicians, patients or
the medical community in general may decide not to accept and utilize these
products. The products that we are attempting to develop may represent
substantial departures from established treatment methods and will compete with
a number of traditional drugs and therapies manufactured and marketed by major
pharmaceutical companies. The degree of market acceptance of any of our
developed products will depend on a number of factors, including:
o our establishment and demonstration to the medical community of the
clinical efficacy and safety of our product candidates;
o our ability to create products that are superior to alternatives
currently on the market;
o our ability to establish in the medical community the potential
advantage of our treatments over alternative treatment methods; and
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o reimbursement policies of government and third-party payors.
If the health care community does not accept our products for any of the
foregoing reasons, or for any other reason, our business would be materially
harmed.
THE REIMBURSEMENT STATUS OF NEWLY-APPROVED HEALTH CARE PRODUCTS IS UNCERTAIN AND
FAILURE TO OBTAIN REIMBURSEMENT APPROVAL COULD SEVERELY LIMIT THE USE OF OUR
PRODUCTS
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, including pharmaceuticals. If we fail to generate
adequate third party reimbursement for the users of our potential products and
treatments, then we may be unable to maintain price levels sufficient to realize
an appropriate return on our investment in product development.
In both domestic and foreign markets, sales of our products, if any, will
depend in part on the availability of reimbursement from third-party payors,
examples of which include:
o government health administration authorities;
o private health insurers;
o health maintenance organizations; and
o pharmacy benefit management companies.
Both federal and state governments in the United States and foreign
governments continue to propose and pass legislation designed to contain or
reduce the cost of health care through various means. Legislation and
regulations affecting the pricing of pharmaceuticals and other medical products
may change or be adopted before any of our potential products are approved for
marketing. Cost control initiatives could decrease the price that we receive for
any product we may develop in the future. In addition, third-party payors are
increasingly challenging the price and cost-effectiveness of medical products
and services and any of our potential products and treatments may ultimately not
be considered cost effective by these third parties. Any of these initiatives or
developments could materially harm our business.
OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND IMPROPER HANDLING OF THESE
MATERIALS BY OUR EMPLOYEES OR AGENTS COULD EXPOSE US TO SIGNIFICANT LEGAL AND
FINANCIAL PENALTIES
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive compounds. As a
consequence, we are subject to numerous environmental and safety laws and
regulations, including those governing laboratory procedures, exposure to
blood-borne pathogens and the handling of biohazardous materials. We may be
required to incur significant costs to comply with current or future
environmental laws and regulations and may be adversely affected by the cost of
compliance with these laws and regulations.
Although we believe that our safety procedures for using, handling, storing
and disposing of hazardous materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be eliminated. In the event of such an accident,
state or federal authorities could curtail our use of these materials and we
could be liable for any civil damages that result, the cost of which could be
substantial. Further, any failure by us to control the use, disposal, removal or
storage of, or to adequately restrict the discharge of, or assist in the cleanup
of, hazardous chemicals or hazardous, infectious or toxic substances could
subject us to significant liabilities, including joint and several liability
under certain statutes, and any liability could exceed our resources and could
have a material adverse effect on our business, financial condition and results
of operations. Additionally, an accident could damage our research and
manufacturing facilities and operations.
Additional federal, state and local laws and regulations affecting us may be
adopted in the future. We may incur substantial costs to comply with and
substantial fines or penalties if we violate any of these laws or regulations.
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OUR STOCK PRICE HAS HISTORICALLY BEEN VERY VOLATILE
Stock prices and trading volumes for many biopharmaceutical companies
fluctuate widely for a number of reasons, including some reasons which may be
unrelated to their businesses or results of operations such as media coverage,
legislation and regulatory measures and the activities of various protest groups
or organizations. This market volatility, as well as general domestic or
international economic, market and political conditions, could materially and
adversely affect the market price of our common stock and your return on your
investment.
Historically, our stock price has been extremely volatile. Between January
1998 and June 30, 2001, our stock has traded as high as $75.88 per share and as
low as $3.50 per share. The significant market price fluctuations of our common
stock are due to a variety of factors, including:
o depth of the market for the common stock;
o the experimental nature of our prospective products;
o fluctuations in our operating results;
o market conditions relating to the biopharmaceutical and pharmaceutical
industries;
o any announcements of technological innovations, new commercial products
or clinical progress or lack thereof by us, our collaborative partners
or our competitors; and
o announcements concerning regulatory developments, developments with
respect to proprietary rights and our collaborations.
In addition, the stock market is subject to other factors outside our
control that can cause extreme price and volume fluctuations. Securities class
action litigation has often been brought against companies, including many
biotechnology companies, when they experience volatility in the market price of
their securities. Litigation brought against us could result in substantial
costs and a diversion of management's attention and resources, which could
adversely affect our business.
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES, INCLUDING SHARES THAT WILL BECOME
ELIGIBLE FOR SALE IN THE NEAR FUTURE, MAY ADVERSELY AFFECT THE MARKET PRICE FOR
OUR COMMON STOCK
Sales of substantial number of shares of our common stock in the public
market could significantly and negatively affect the market price for our common
stock. As of June 30, 2001, we had 21,845,750 shares of common stock
outstanding. Of these shares, 10,284,534 shares were issued (including shares
issuable upon conversion or exercise of convertible notes or warrants) since
December 1998 pursuant to private placements. Of these shares, 9,423,463 shares
have been registered pursuant to shelf registration statements and therefore may
be resold (if not sold prior to the date hereof) in the public market and
861,071 of the remaining shares may be resold pursuant to Rule 144 into the
public markets as early as March 9, 2002, upon the expiration of a lockup
agreement with us.
OUR UNDESIGNATED PREFERRED STOCK MAY INHIBIT POTENTIAL ACQUISITION BIDS; THIS
MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND THE VOTING RIGHTS
OF THE HOLDERS OF COMMON STOCK
Our certificate of incorporation provides our Board of Directors with the
authority to issue up to 3,000,000 shares of undesignated preferred stock and to
determine the rights, preferences, privileges and restrictions of these shares
without further vote or action by the stockholders. As of the date of this Form
10-Q, the Board of Directors still has authority to designate and issue up to
2,950,000 shares of preferred stock. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The issuance of shares
of preferred stock may delay or prevent a change in control transaction without
further action by our stockholders. As a result, the market price of our common
stock may be adversely affected. The issuance of preferred stock may also result
in the loss of voting control by others.
PROVISIONS IN OUR CHARTER AND BYLAWS, AND PROVISIONS OF DELAWARE LAW, MAY
INHIBIT POTENTIAL ACQUISITION BIDS FOR US, WHICH MAY PREVENT HOLDERS OF OUR
COMMON STOCK FROM BENEFITING FROM WHAT THEY MAY BELIEVE MAY BE THE POSITIVE
ASPECTS OF ACQUISITIONS AND TAKEOVERS
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In addition to the undesignated preferred stock, provisions of our charter
documents and bylaws may make it substantially more difficult for a third party
to acquire control of us and may prevent changes in our management, including
provisions that:
o prevent stockholders from taking actions by written consent;
o divide the Board of Directors into separate classes with terms of office
that are structured to prevent all of the directors from being elected
in any one year; and
o set forth procedures for nominating directors and submitting proposals
for consideration at stockholders' meetings.
Our Board of Directors has adopted a stockholder rights plan, commonly
referred to as a "poison pill". This plan entitles existing stockholders to
rights, including the right to purchase shares of common stock, in the event of
an acquisition of 15% or more of our outstanding common stock. In addition, our
Board of Directors has the authority, without further action by our
stockholders, to issue additional shares of common stock, to fix the rights and
preferences of, and to issue authorized but undesignated shares of preferred
stock.
Provisions of Delaware law may also inhibit potential acquisition bids for
us or prevent us from engaging in business combinations. Either collectively or
individually, these provisions may prevent holders of our common stock from
benefiting from what they may believe are the positive aspects of acquisitions
and takeovers, including the potential realization of a higher rate of return on
their investment from these types of transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates and
foreign currency exchange rates. We do not use derivative financial instruments
for speculative or trading purposes.
The following discussion about Geron's market risk disclosures contains
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. The fair value of our available-for-sale
securities at June 30, 2001 was $85.2 million. These investments include $22.8
million of cash equivalents which are due in less than 90 days, $52.1 million of
short-term investments which are due in less than one year and $10.3 million in
long-term investments which are due in one to two years. Our investment policy
is to manage our marketable securities portfolio to preserve principal and
liquidity while maximizing the return on the investment portfolio through the
full investment of available funds. We diversify the marketable securities
portfolio by investing in multiple types of investment grade securities. We
primarily invest our marketable securities portfolio in short-term securities
with at least an investment grade rating to minimize interest rate and credit
risk as well as to provide for an immediate source of funds. Although changes in
interest rates may affect the fair value of the marketable securities portfolio
and cause unrealized gains or losses, such gains or losses would not be realized
unless the investments are sold. Due to the nature of our investments, which are
primarily corporate and municipal notes and money market funds, we have
concluded that there is no material market risk exposure.
Foreign Currency Exchange Risk. Because we translate foreign currencies into
United States dollars for reporting purposes, currency fluctuations can have an
impact, though generally immaterial, on our results. We believe that our
exposure to currency exchange fluctuation risk is insignificant primarily
because our international subsidiary satisfies its financial obligations almost
exclusively in its local currency. For the three and six months ended June 30,
2001, there was an immaterial currency exchange impact from our intercompany
transactions. However, the financial obligations of Geron to the Roslin
Institute are stated in British pounds sterling over the next four years. This
obligation may become more expensive for us if the United States dollar becomes
weaker against the British pounds sterling. As of June 30, 2001, we did not
engage in foreign currency hedging activities.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 13, 2001, Geron received a letter from the Wisconsin Alumni
Research Foundation ("WARF") advising Geron that WARF has filed a lawsuit
seeking a declaratory judgment against Geron with respect to Geron's option
to negotiate certain exclusive rights in addition to those previously
licensed from WARF.
Geron has an exclusive license from WARF for human embryonic stem cell
technology to commercialize six cell lineages (hepatocytes, myocytes, neural
cells, pancreatic islet cells, hematopoietic cells, and osteoblasts). WARF's
complaint does not challenge Geron's exclusive right to these six cell
lineages.
The license also grants Geron an option to negotiate for exclusive licenses
to additional cell types. On July 26, 2001, Geron exercised the option with
respect to additional cell types. WARF's complaint asks the court to declare
that Geron's exercise of the option was not valid.
WARF's letter invited Geron to meet with WARF representatives to resolve
the issues by the lawsuit, which Geron is prepared to do.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 Annual Meeting of Stockholders of the Company was held pursuant to
notice on May 18, 2001, at 9:00 a.m. local time at the Company's
headquarters in Menlo Park, California. There were present at the meeting,
in person or represented by proxy, the holders of 15,857,779 shares of
Common Stock. The matters voted on at the meeting and the votes cast are as
follows:
(a) As listed below, all of the nominees for Class II Directors were
elected at the meeting:
NO. OF COMMON NO. OF COMMON NO. OF COMMON
NAME OF NOMINEE VOTES IN FAVOR VOTES ABSTAINING VOTES WITHHELD
--------------- -------------- ---------------- --------------
Thomas D. Kiley 15,762,092 95,687 0
Edward V. Fritzky 15,761,992 95,787 0
(b) The approval of an amendment to the Company's 1992 Stock Option Plan to
increase the aggregate number of shares of Common Stock authorized for
issuance under such Plan by 750,000 shares. There were 15,267,855 shares
of Common Stock voting in favor, 508,690 shares of Common Stock voting
against and 81,234 shares of Common Stock abstaining.
(c) The ratification of the appointment of Ernst & Young LLP as the
Company's independent accountants for the fiscal year ending December
31, 2001. There were 15,762,522 shares of Common Stock voting in favor,
55,200 shares of Common Stock voting against and 40,057 shares of Common
Stock abstaining.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GERON CORPORATION
By: /s/ DAVID L. GREENWOOD
------------------------------------
David L. Greenwood
Senior Vice President and
Chief Financial Officer
(Duly Authorized Signatory)
Date: August 14, 2001
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