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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 MARCH 31, 2006
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 OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
230 CONSTITUTION DRIVE, MENLO PARK, CA 94025
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 473-7700
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT: N/A
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 by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [_] Accelerated Filer [X] Non-Accelerated Filer [_]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class: Outstanding at April 21, 2006:
Common Stock, $0.001 par value 65,915,722 shares
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GERON CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets as of March 31, 2006 and
December 31, 2005 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2006 and 2005 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2006 and 2005 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 3: Quantitative and Qualitative Disclosures About Market Risk 21
Item 4: Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 23
Item 1A: Risk Factors 23
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3: Defaults upon Senior Securities 37
Item 4: Submission of Matters to a Vote of Security Holders 37
Item 5: Other Information 37
Item 6: Exhibits 37
SIGNATURE 38
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GERON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2006 2005
------------- -------------
(UNAUDITED) (SEE NOTE 1)
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents....................... $ 80,405 $ 96,633
Restricted cash................................. 530 530
Marketable securities........................... 103,277 93,840
Interest and other receivables (including
amounts from related parties: 2006-$249,
2005-$194)..................................... 2,147 2,304
Current portion of prepaid assets............... 3,042 2,338
------------- -------------
Total current assets......................... 189,401 195,645
Noncurrent portion of prepaid assets.............. 1,261 1,622
Equity investments in licensees and joint ventures 220 331
Property and equipment, net....................... 2,613 2,754
Deposits and other assets......................... 634 514
Intangible assets................................. 188 377
------------- -------------
$ 194,317 $ 201,243
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 1,706 $ 1,906
Accrued compensation............................ 706 2,470
Accrued liabilities............................. 1,051 1,299
Current portion of deferred revenue............. 1,965 2,180
Current portion of equipment loans.............. 28 55
Current portion of research funding obligation.. 1,403 1,418
------------- -------------
Total current liabilities.................... 6,859 9,328
Noncurrent portion of deferred revenue............ 954 1,210
Commitments
Stockholders' equity:
Common stock.................................... 65 65
Additional paid-in capital...................... 565,849 561,099
Deferred compensation........................... (324) (357)
Accumulated deficit............................. (378,609) (369,599)
Accumulated other comprehensive loss............ (477) (503)
------------- -------------
Total stockholders' equity................... 186,504 190,705
------------- -------------
$ 194,317 $ 201,243
============= =============
See accompanying notes.
3
GERON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2006 2005
------------- -------------
Revenues from collaborative agreements (including
amounts from related parties: 2006-$55,
2005-none)....................................... $ 55 $ --
License fees and royalties........................ 528 59
------------- -------------
Total revenues................................. 583 59
Operating expenses:
Research and development (including amounts
from related parties: 2006-$55, 2005-none).... 9,363 6,473
General and administrative..................... 2,082 3,949
------------- -------------
Total operating expenses.................... 11,445 10,422
------------- -------------
Loss from operations.............................. (10,862) (10,363)
Interest and other income......................... 1,892 847
Interest and other expense........................ (40) (172)
------------- -------------
Net loss.......................................... $ (9,010) $ (9,688)
============= =============
Basic and diluted net loss per share.............. $ (0.14) $ (0.18)
============= =============
Weighted average shares used in computing basic
and diluted net loss per share................... 65,088,861 54,175,184
============= =============
See accompanying notes.
4
GERON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CHANGE IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2006 2005
------------- -------------
Cash flows from operating activities:
Net loss........................................ $ (9,010) $ (9,688)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 268 240
Accretion and amortization on investments..... 239 584
Issuance of common stock and warrants in
exchange for services by non-employees....... 726 2,725
Stock-based compensation for options to
employees and directors...................... 746 --
Stock-based compensation for stock grants to
employees.................................... 216 --
Accretion of interest on research funding
obligation................................... -- 123
Amortization of deferred compensation......... 33 53
Realized loss (gain) on equity investments
in licensees................................. 119 (3)
Amortization of intangible assets,
principally research related................. 189 189
Changes in assets and liabilities:
Other current and noncurrent assets........... 150 204
Other current and noncurrent liabilities...... (510) (1,085)
Accrued research funding obligation........... (15) (871)
Translation adjustment........................ 2 (27)
------------- -------------
Net cash used in operating activities............. (6,847) (7,556)
Cash flows from investing activities:
Capital expenditures............................ (127) (126)
Purchases of marketable securities.............. (23,102) (32,010)
Proceeds from maturities of marketable
securities..................................... 13,442 24,357
------------- -------------
Net cash used in investing activities............. (9,787) (7,779)
Cash flows from financing activities:
Payments of obligations under equipment loans... (27) (44)
Proceeds from issuances of common stock, net
of issuance costs.............................. 433 563
Proceeds from exercise of warrants.............. -- 12,500
------------- -------------
Net cash provided by financing activities......... 406 13,019
------------- -------------
Net decrease in cash and cash equivalents......... (16,228) (2,316)
Cash and cash equivalents at the beginning of
the period....................................... 96,633 9,846
------------- -------------
Cash and cash equivalents at the end of the
period........................................... $ 80,405 $ 7,530
============= =============
See accompanying notes.
5
GERON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The terms "Geron", the "Company", "we" and "us" as used in this report refer
to Geron Corporation. The accompanying condensed consolidated unaudited balance
sheet as of March 31, 2006 and condensed consolidated statements of operations
for the three months ended March 31, 2006 and 2005 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 U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management of Geron, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
2006 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2006 or any other period. These financial statements
and notes should be read in conjunction with the financial statements for the
year ended December 31, 2005, included in the Company's Annual Report on Form
10-K. The accompanying condensed consolidated balance sheet as of December 31,
2005 has been derived from audited financial statements at that date.
Principles of Consolidation
The consolidated financial statements include the accounts of Geron and our
one wholly-owned subsidiary, Geron Bio-Med Ltd., a United Kingdom company. We
have eliminated intercompany accounts and transactions. We prepare the financial
statements of Geron Bio-Med using the local currency as the functional currency.
We translate the assets and liabilities of this subsidiary at rates of exchange
at the balance sheet date. We translate income and expense items at average
monthly rates of exchange. The resultant translation adjustments are included in
accumulated other comprehensive income (loss), a separate component of
stockholders' equity.
FASB Interpretation No. 46-R (FIN 46R), "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51," as amended, provides guidance on the
identification, classification and accounting of variable interest entities. We
have variable interests in VIEs through marketable and non-marketable equity
investments in various companies with whom we have executed licensing
agreements. In accordance with FIN 46R, we have concluded that we are not the
primary beneficiary in any of these VIEs and therefore have not consolidated
such entities in our consolidated financial statements.
Net Loss Per Share
Basic earnings (loss) per share is based on weighted average shares
outstanding and excludes any dilutive effects of options and warrants. Diluted
earnings (loss) per share would include any dilutive effect of options and
warrants.
A reconciliation of shares used in calculation of basic and diluted net loss
per share follows:
Three Months Ended
-------------------------------
March 31, 2006 March 31, 2005
-------------- --------------
(In thousands, except per
share amounts)
Net loss.................................... $ (9,010) $ (9,688)
============== ==============
Basic and diluted net loss per common
share...................................... $ (0.14) $ (0.18)
-------------- --------------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per common share.......... 65,088,861 54,175,184
============== ==============
Because we are 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 common stock equivalents consisting of options and
warrants which are all antidilutive. Had we 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 2,070,837
6
GERON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
shares and 1,454,626 shares for 2006 and 2005, respectively, related to common
stock equivalents not included above (as determined using the treasury stock
method at an average market price during the period).
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents and Marketable Debt Securities Available-For-Sale
We consider all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. We are subject to
credit risk related to our cash equivalents and available-for-sale securities.
We place our cash and cash equivalents in money market funds and commercial
paper. Our investments include corporate notes in United States corporations and
asset-backed securities with original maturities ranging from one to 19 months.
We classify our marketable debt securities as available-for-sale. We record
available-for-sale securities at fair value with unrealized gains and losses
reported in accumulated other comprehensive income (loss) in stockholders'
equity. Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments. Realized gains and
losses are included in interest and other income and are derived using the
specific identification method for determining the cost of securities sold and
have been insignificant to date. We recognize an impairment charge when the
declines in the fair values of our available-for-sale securities below the
amortized cost basis are judged to be other-than-temporary. We consider various
factors in determining whether to recognize an impairment charge, including the
length of time and extent to which the fair value has been less than our cost
basis, the financial condition and near-term prospects of the security issuer,
and our intent and ability to hold the investment for a period of time
sufficient to allow for any anticipated recovery in market value. Declines in
market value judged other-than-temporary result in a charge to interest and
other income. No impairment charges were recorded for our available-for-sale
securities for the three months ended March 31, 2006 and 2005. Dividend and
interest income are recognized when earned.
Revenue Recognition
We recognize revenue related to license and research agreements with
collaborators, royalties, milestone payments and government grants. The
principles and guidance outlined in EITF No. 00-21 "Revenue Arrangements with
Multiple Deliverables," provide a framework to (i) determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting, (ii) determine how the arrangement consideration should be measured
and allocated to the separate units of accounting in the arrangement and (iii)
apply relevant revenue recognition criteria separately for each of the separate
units. For each separate unit of accounting we have objective and reliable
evidence of fair value using available internal evidence for the undelivered
item(s) and our arrangements generally do not contain a general right of return
relative to the delivered item.
We have several license and marketing agreements with various oncology,
diagnostics, research tools, agriculture and biologics production companies.
With certain of these agreements, we receive nonrefundable license payments in
cash or equity securities, option payments in cash or equity securities,
royalties on future sales of products, milestone payments, or any combination of
these items. Nonrefundable signing or license fees that are not dependent on
future performance under these agreements or the intellectual property related
to the license has been delivered are recognized as revenue when received and
over the term of the arrangement if we have continuing performance obligations.
Option payments are recognized as revenue over the term of the option agreement.
Milestone payments are recognized upon completion of specified milestones,
representing the culmination of the earnings process, according to contract
terms. Royalties are generally recognized upon receipt of the related royalty
payment.
7
GERON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
We recognize revenue under collaborative agreements, including related party
agreements, as the related research and development costs for services are
rendered. Deferred revenue represents the portion of research and license
payments received for which we have not yet performed the research services.
Through March 31, 2004, we received funding from United States government grants
that supported our research efforts in defined research projects. Those grants
generally provided for reimbursement of approved costs incurred as defined in
the various grants. Funding associated with those grants was recognized as
revenue upon receipt of reimbursement and was included in interest and other
income.
Restricted Cash
As of March 31, 2006 and December 31, 2005, we held $530,000 in a
Certificate of Deposit as collateral on an unused line of credit.
Marketable and Non-Marketable Equity Investments in Licensees and Joint Ventures
Investments in non-marketable nonpublic companies are carried at the lower
of cost or net realizable value. Investments in marketable equity securities are
carried at the market value as of the balance sheet date. For marketable equity
securities, unrealized gains and losses are reported in accumulated other
comprehensive income (loss) in stockholders' equity. Realized gains or losses
are included in interest and other income and are derived using the specific
identification method.
We monitor our equity investments in licensees and joint ventures for
impairment on a quarterly basis and make appropriate reductions in carrying
values when such impairments are determined to be other-than-temporary.
Impairment charges are included in interest and other income. Factors used in
determining an impairment include, but are not limited to, the current business
environment including competition and uncertainty of financial condition; going
concern considerations such as the rate at which the investee company utilizes
cash, and the investee company's ability to obtain additional private financing
to fulfill its stated business plan; the need for changes to the investee
company's existing business model due to changing business environments and its
ability to successfully implement necessary changes; and the general progress
toward product development, including clinical trial results. If an investment
is determined to be impaired, then we determine whether such impairment is
other-than-temporary. We recognized impairment charges of $119,000 and none for
the three months ended March 31, 2006 and 2005, respectively, related to
other-than-temporary declines in fair values of our non-marketable equity
investments. As of March 31, 2006 and December 31, 2005, the carrying values of
our equity investments in non-marketable nonpublic companies, including our
joint ventures, were $195,000 and $314,000, respectively.
Derivative Financial Instruments
Our exposure to currency exchange fluctuation risk is insignificant. Geron
Bio-Med, Ltd., our international subsidiary, satisfies its financial obligations
almost exclusively in its local currency. For the three months ended March 31,
2006 and 2005, there was an insignificant currency exchange impact from
intercompany transactions. We do not engage in foreign currency hedging
activities. We do not use derivative financial instruments for trading or
speculative purposes.
Intangible Asset and Research Funding Obligation
In May 1999, we completed the acquisition of Roslin Bio-Med Ltd., a
privately held company formed by the Roslin Institute in Midlothian, Scotland.
In connection with this acquisition, we formed a research collaboration with the
Roslin Institute and committed approximately $20,000,000 in research funding
over six years. Using an effective interest rate of 6%, this research funding
obligation had a net present value of $17,200,000 at the acquisition date and
was capitalized as an intangible asset that was being amortized as research and
8
GERON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
development expense over the six year funding period. In December 2004, we
extended the research funding period from June 30, 2005 to June 30, 2006 and we
adjusted the amortization period of the intangible asset to coincide with the
extended research period. No additional funding was committed. Imputed interest
was accreted to the value of the research funding obligation and recognized as
interest expense through April 2005. The remaining obligation as of March 31,
2006 was $1,403,000.
Research and Development Expenses
All research and development costs are expensed as incurred. The value of
acquired in-process research and development is charged to research and
development expense on the date of acquisition. Research and development
expenses include, but are not limited to, acquired in-process technology deemed
to have no alternative future use, payroll and personnel expense, lab supplies,
preclinical studies, raw materials to manufacture clinical trial drugs and
vaccines, manufacturing costs for research and clinical trial materials,
sponsored research at other labs, consulting and research-related overhead.
Accrued liabilities for raw materials to manufacture clinical trial drugs,
manufacturing costs and sponsored research reimbursement fees are included in
accrued liabilities and research and development expenses.
Depreciation and Amortization
We record property and equipment at cost and calculate depreciation using
the straight-line method over the estimated useful lives of the assets,
generally four years. Leasehold improvements are amortized over the shorter of
the estimated useful life or remaining term of the lease.
Stock-Based Compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment," (SFAS 123R) which requires the
measurement and recognition of compensation expense for all stock-based awards
made to employees and directors, including employee stock options and employee
stock purchases related to our Employee Stock Purchase Plan (ESPP purchases)
based upon the grant-date fair value of those awards. We previously accounted
for our stock-based awards under the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations, and provided the required
pro forma disclosures prescribed by Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation," as amended. Under the
intrinsic method, no stock-based compensation expense had been recognized in the
consolidated statements of operations, because the exercise price of the stock
options granted to employees and directors equaled the fair market value of the
underlying stock on the date of grant. SFAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. In the pro forma information
required by SFAS 123 for the periods prior to fiscal 2006, we accounted for
forfeitures as they occurred.
We implemented the provisions of SFAS 123R using the modified prospective
transition method which requires the application of the accounting standard as
of January 1, 2006, the first day of our fiscal year 2006. In accordance with
this method, for awards expected to vest, we began recognizing compensation
expense on a straight-line basis for stock-based awards granted after January 1,
2006, plus unvested awards granted prior to January 1, 2006 based on the grant
date fair value estimated in accordance with the original provisions of SFAS 123
and following the expense attribution method elected originally upon the
adoption of SFAS 123. Results for prior periods have not been adjusted
retrospectively.
During the quarter ended March 31, 2006, we recognized stock-based
compensation expense of $746,000 related to employee and director stock options
and ESPP purchases. No income tax benefit was recognized in the income statement
for share-based compensation arrangements for the quarter ended March 31, 2006,
since we reported an operating loss. There was no stock-based compensation
expense related to employee and director stock options and ESPP purchases
recognized during the quarter ended March 31, 2005. The implementation of SFAS
123R increased basic and fully diluted net loss per share by $0.01 for the
quarter ended March 31, 2006. The implementation of SFAS 123R did not have an
impact on cash flows from operations or financing activities for the quarter
ended March 31, 2006.
9
GERON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
We used the Black Scholes option-pricing valuation model to estimate the
grant-date fair value of our stock-based awards which was also used for valuing
stock-based awards for pro forma information required under SFAS 123. For
additional information, see Note 2 on Stockholders' Equity. The determination of
fair value for stock-based awards on the date of grant using an option-pricing
model is affected by our stock price as well as assumptions regarding a number
of complex and subjective variables. These variables include, but are not
limited to, our expected stock price volatility over the term of the awards, and
actual and projected employee exercise behaviors. Option-pricing models have
been developed for use in estimating the value of traded options that have no
vesting or hedging restrictions and are fully transferable. However, because our
employee stock options have certain characteristics that are significantly
different from traded options, and because changes in the subjective assumptions
can materially affect the estimated value, in management's opinion, existing
valuation models may not provide an accurate measure of the fair value of our
stock-based awards. Although the fair value of our stock-based awards is
determined in accordance with SFAS 123R and SAB 107 using an option-pricing
model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
On November 10, 2005, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position No. FAS 123(R)-3, "Transition Election Related to Accounting
for Tax Effects of Share-Based Payment Awards." We have elected to adopt the
alternative transition method provided in the FASB Staff Position for
calculating the tax effects (if any) of stock-based compensation expense
pursuant to SFAS 123R. The alterative transition method includes simplified
methods to establish the beginning balance of the additional paid-in capital
pool (APIC pool) related to the tax effects of employee stock-based
compensation, and to determine the subsequent impact to the APIC pool and the
consolidated statements of operations and cash flows of the tax effects of
employee stock-based compensation awards that are outstanding upon adoption of
SFAS 123R.
We continue to apply the provisions of EITF 96-18, "Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" (EITF 96-18) for our non-employee
stock-based awards. Under EITF 96-18, the measurement date at which the fair
value of the stock-based award is measured is equal to the earlier of 1) the
date at which a commitment for performance by the counterparty to earn the
equity instrument is reached or 2) the date at which the counterparty's
performance is complete. We recognize stock-based compensation expense for the
fair value of the vested portion of the awards in our consolidated statements of
operations.
Comprehensive Loss
Comprehensive loss is comprised of net loss and other comprehensive loss.
Other comprehensive loss includes certain changes in stockholders' equity which
are excluded from net loss.
The components of accumulated other comprehensive loss are as follows:
March 31, December 31,
2006 2005
------------ ------------
(In thousands)
Unrealized holding loss on available-for-sale
securities and marketable equity investments...... $ (307) $ (331)
Foreign currency translation adjustments........... (170) (172)
------------ ------------
$ (477) $ (503)
============ ============
10
GERON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
2. STOCKHOLDERS' EQUITY
Issuances of Common Stock
In January 2006, we awarded 175,514 shares of common stock to employees in
lieu of cash for 2005 year-end performance bonuses. The shares were granted from
the 2002 Equity Incentive Plan. Compensation expense related to this award was
included in accrued compensation as of December 31, 2005. In March 2006, we
recognized approximately $216,000 in stock-based compensation expense related to
stock grants in connection with recruitment of employees.
In March 2006, we issued 113,895 shares of Geron common stock to Cambrex
Bioscience Walkersville, Inc. (Cambrex) in a private placement as advance
consideration related to the first project order under a services agreement
pursuant to which Cambrex is manufacturing certain products for our telomerase
cancer vaccine program. The total fair value of the common stock was $1,000,000
which has been recorded as a prepaid asset and is being amortized to research
and development expense on a pro-rata basis as services are performed. For the
three months ended March 31, 2006, $526,000 had been amortized to research and
development expense.
Stock-Based Compensation
Stock Option Program Descriptions
---------------------------------
1992 Stock Option Plan
The 1992 Stock Option Plan (1992 Plan) expired in August 2002 and no further
option grants can be made from the 1992 Plan. The options granted under the 1992
Plan were either incentive stock options or nonstatutory stock options. Options
granted under the 1992 Plan expired no later than ten years from the date of
grant. For incentive stock options and nonstatutory stock options, the option
exercise price was at least 100% and 85%, respectively, of the fair market value
of the underlying common stock on the date of grant. Options to purchase shares
of common stock generally vested over a period of four or five years from the
date of the option grant, with a portion vesting after six months and the
remainder vesting ratably over the remaining period.
2002 Equity Incentive Plan
In May 2002, our stockholders approved the adoption of the 2002 Equity
Incentive Plan (2002 Plan) to replace the 1992 Plan. Our Board of Directors
administers the 2002 Plan. The 2002 Plan provides for grants to employees of us
or of our subsidiary (including officers and employee directors) of either
incentive stock or nonstatutory stock options and stock purchase rights to
employees (including officers and employee directors) and consultants (including
non-employee directors) of us or of our subsidiary. As of March 31, 2006, we had
reserved 11,579,603 shares of common stock for issuance under the 2002 Plan.
Options granted under the 2002 Plan expire no later than ten years from the date
of grant. For incentive stock options, the option price shall be equal to 100%
of the fair market value of the underlying common stock on the date of grant.
All other stock option prices are determined by the administrator. If, at the
time we grant an option, the optionee directly or by attribution owns stock
possessing more than 10% of the total combined voting power of all classes of
our stock, the option price shall be at least 110% of the fair market value of
the underlying common stock and shall not be exercisable more than five years
after the date of grant.
Options to purchase shares of common stock generally vest over a period of
four years from the date of the option grant, with a portion vesting after six
months and the remainder vesting ratably over the remaining period. Under
certain circumstances, options may be exercised prior to vesting, subject to our
right to repurchase shares subject to such option at the exercise price paid per
share. Our repurchase rights would generally terminate on a vesting schedule
identical to the vesting schedule of the exercised option. For the three months
ended March 31, 2006 and 2005, we did not repurchase any shares, in accordance
with these repurchase rights. As of March 31, 2006, no shares outstanding were
subject to repurchase.
11
GERON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
Directors' Stock Option Plan
In July 1996, we adopted the 1996 Directors' Stock Option Plan (Directors'
Option Plan) and reserved an aggregate of 250,000 shares of common stock for
issuance thereunder. In May 1999, the stockholders approved an amendment to
increase the number of authorized shares to 500,000 shares of common stock. In
May 2003, the stockholders approved an amendment to increase the number of
authorized shares to 1,000,000 shares of common stock. As of March 31, 2006,
930,000 options have been granted under the Directors' Option Plan. The
Directors' Option Plan provides that each person who becomes a non-employee
director after the effective date of the Directors' Option Plan, whether by
election by our stockholders or by appointment by the Board of Directors to fill
a vacancy, will automatically be granted an option to purchase 45,000 shares of
common stock on the date on which such person first becomes a non-employee
director (First Option). In addition, non-employee directors (other than the
Chairman of the Board of Directors) will automatically be granted a subsequent
option on the date of the Annual Meeting of Stockholders in each year during
such director's service on the Board (Subsequent Option) to purchase 20,000
shares of common stock under the Directors' Option Plan. In the case of the
Chairman of the Board of Directors, the Subsequent Option will be for 30,000
shares of common stock. Finally, we grant an option to purchase 2,500 shares to
each non-employee director upon such director's appointment to the Audit
Committee or Compensation Committee of the Board of Directors, on the date of
each Annual Meeting during the director's service on such committee (Committee
Service Option).
The Directors' Option Plan provides that each First Option granted
thereunder becomes exercisable in installments cumulatively as to one-third of
the shares subject to the First Option on each of the first, second and third
anniversaries of the date of grant of the First Option. Each Subsequent Option
and Committee Service Option is fully vested on the date of its grant. The
options issued pursuant to the Directors' Option Plan remain exercisable for up
to 90 days following the optionee's termination of service as our director,
unless such termination is a result of death or permanent and total disability,
in which case the options (both those already exercisable and those that would
have become exercisable had the director remained on the Board of Directors for
an additional 36 months) remain exercisable for up to a 24 month period.
The exercise price of all stock options granted under the Directors' Option
Plan is equal to 100% of the fair market value of the underlying common stock on
the date of grant. Options granted under the Directors' Option Plan have a term
of ten years.
Employee Stock Purchase Plan
In July 1996, we adopted the 1996 Employee Stock Purchase Plan (Purchase
Plan) and reserved an aggregate of 300,000 shares of common stock for issuance
thereunder. In May 2003, the stockholders approved an amendment to increase the
number of authorized shares to 600,000 shares of common stock. Under the terms
of the Purchase Plan, employees can choose to have up to 10% of their annual
salary withheld to purchase our common stock. An employee may not make
additional payments into such account or increase the withholding percentage
during the offering period.
The Purchase Plan is comprised of a series of offering periods, each with a
maximum duration (not to exceed 12 months) with new offering periods commencing
on January 1 and July 1 of each year. The date an employee enters the offering
period will be designated his or her entry date for purposes of that offering
period. An employee may only participate in one offering period at a time.
Approximately 36% of the eligible employees participate in the Purchase Plan as
of March 31, 2006.
The purchase price per share at which common stock is purchased by the
employee on each purchase date within the offering period is equal to 85% of the
lower of (i) the fair market value per share of Geron common stock on the
employee's entry date into that offering period or (ii) the fair market value
per share of common stock on that purchase date. If the fair market value of
Geron common stock on the purchase date is less than the fair market value at
the beginning of the offering period, a new 12 month offering period will
automatically begin on the first business day following the purchase date with a
new fair market value.
12
GERON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
Approximately 287,000 shares have been issued under the Purchase Plan as of
March 31, 2006 and December 31, 2005. As of March 31, 2006, 312,498 shares were
available for issuance under the Purchase Plan.
Option Activity
---------------
Aggregate option activity for the 1992 Plan, 2002 Plan and the Directors'
Stock Option Plan is as follows:
Outstanding Options
-------------------------------------------------------------------
Shares Number Weighted Weighted Average
Available of Average Remaining Aggregate
For Grant Shares Exercise Price Contractual Life Intrinsic Value
--------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005....... 5,047,456 7,786,707 $ 7.98 6.5 $ 15,279,360
Additional shares authorized..... 2,000,000 -- $ --
Options granted.................. (82,948) 82,948 $ 8.31
Awards granted................... (200,514) -- $ --
Options exercised................ -- (90,759) $ 4.90 $ (361,283)
Options forfeited................ 100,125 (100,125) $ 12.74
1992 Plan options expired........ (29,116) -- $ --
----------- -----------
Balance at March 31, 2006.......... 6,835,003 7,678,771 $ 7.96 6.3 $ 13,135,211
=========== ===========
Options Exercisable
at March 31, 2006................. 5,654,314 $ 8.40 5.5 $ 9,677,739
===========
The aggregate intrinsic value in the preceding table represents the total
intrinsic value, based on Geron's closing stock price of $8.31 as of March 31,
2006, which would have been received from the option holders had all the option
holders exercised their options as of that date.
Valuation and Expense Information Under SFAS 123R
On January 1, 2006, we adopted SFAS 123R, which requires the measurement and
recognition of compensation expense for all share-based payment awards made to
employees and directors, including employee stock options and employee stock
purchases related to the Purchase Plan based on estimated grant-date fair
values. The following table summarizes the stock-based compensation expense
related to stock options and employee stock purchases under SFAS 123R for the
three months ended March 31, 2006 which was allocated as follows:
Three Months Ended
March 31, 2006
----------------------
(In Thousands)
Research and development................................. $ 456
General and administrative............................... 290
-------------
Stock-based compensation expense included in
operating expenses...................................... $ 746
=============
The fair value of options granted during the three months ended March 31,
2006 and 2005 has been estimated at the date of grant using the Black Scholes
option-pricing model with the following assumptions:
13
GERON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
Three Months Ended March 31,
--------------------------------
2006 2005
--------------- ---------------
Dividend yield................................. None None
Expected volatility range...................... 0.824 0.893
Risk-free interest rate range.................. 4.28% to 4.60% 3.48% to 4.08%
Expected term.................................. 5 yrs 4 yrs
The fair value of employees' purchase rights has been estimated using the
Black Scholes option-pricing model with the following assumptions:
Three Months Ended March 31,
--------------------------------
2006 2005
--------------- ---------------
Dividend yield................................. None None
Expected volatility range...................... 0.381 to 0.471 0.617
Risk-free interest rate........................ 4.81% to 4.82% 3.10%
Expected term.................................. 6 - 12 mos 6 mos
Expected volatilities are based on historical volatilities of our stock
since no traded options on Geron stock have maturities greater than three
months. The expected term of options is derived from actual historical exercise
data and represents the period of time that options granted are expected to be
outstanding. The expected term of employees' purchase rights is equal to the
offering period. The risk free rate is based on the U.S. Zero Coupon Treasury
Strip Yields for the expected term in effect on the date of grant. We grant
options under our equity plans to employees, non-employee directors, and
consultants for whom the vesting period is generally four years.
As stock-based compensation expense recognized in the consolidated
statements of operations for the quarter ended March 31, 2006 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures but
at a minimum, reflects the grant date fair value of those awards that actually
vested in the period. SFAS 123R requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Forfeitures were estimated based on historical
experience. In the pro forma information required under SFAS 123 for periods
prior to January 1, 2006, forfeitures were accounted for as they occurred.
Based on the Black Scholes option-pricing model, the weighted average
estimated fair value of employee stock options granted during the three months
ended March 31, 2006 was $5.66 per share. The weighted average estimated fair
value of purchase rights under our Purchase Plan for the three months ended
March 31, 2006 was $2.60 per share.
Pro Forma Information Under SFAS 123 for Periods Prior to 2006
--------------------------------------------------------------
Prior to January 1, 2006, Geron followed the disclosure-only provisions of
SFAS 123. The following table illustrates the effect on net loss and net loss
per share for the quarter ended March 31, 2005 if the fair value recognition
provisions of SFAS 123 had been applied to stock-based awards using the Black
Scholes option-pricing model. The assumptions used to value the employee stock
options and employees' purchase rights are listed above.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the vesting period of the options using the
straight-line method. We accounted for forfeitures as they occurred. If we had
recognized the expense of stock-based awards to employees and directors in our
consolidated statements of operations, additional paid-in capital would have
increased by the corresponding amount. Pro forma information previously reported
during periods prior to the adoption of SFAS 123R was as follows (in thousands,
except for per share data).
14
GERON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
Three Months
Ended March 31,
2005
-------------
(In thousands, except per share amounts)
Reported net loss........................................... $ (9,688)
Deduct:
Stock-based employee expense determined under SFAS 123.... (1,040)
-------------
Pro forma net loss.......................................... $ (10,728)
=============
Basic and diluted net loss per share as reported............ $ (0.18)
=============
Basic and diluted pro forma net loss per share.............. $ (0.20)
=============
Based on the Black Scholes option-pricing model, the weighted average
estimated fair value of employee stock options granted during the three months
ended March 31, 2005 was $5.45 per share. The weighted average estimated fair
value of purchase rights under our Purchase Plan for the three months ended
March 31, 2005 was $2.33 per share.
3. SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (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. Our chief
decision maker, as defined under SFAS 131, is the Chief Executive Officer. To
date, we have viewed our operations as principally one segment, the discovery
and development of therapeutic and diagnostic products for oncology and human
embryonic stem cell therapies. As a result, the financial information disclosed
herein materially represents all of the financial information related to our
principal operating segment.
4. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS DATA
Three Months Ended
March 31,
----------------------
(In Thousands) 2006 2005
-------------------------------------------------------- ---------- ----------
(Unaudited)
Supplemental Operating, Investing and Financing
Activities:
Net unrealized gain (loss) on equity investments in
licensees.............................................. $ 8 $ (20)
Cash in transit from options............................ $ (18) $ --
Net unrealized gain (loss) on marketable securities..... $ 16 $ (232)
Shares issued for 401(k) matching contribution and
performance bonus...................................... $ 2,173 $ 1,803
Shares or warrants issued for services.................. $ 474 $ --
5. SUBSEQUENT EVENT
In April 2006, we received cash proceeds of $3,804,000 upon the exercise of
warrants to purchase 600,000 shares of common stock. The warrants were issued to
institutional investors in connection with the financing announced in April 2003
and had an expiration date of April 7, 2006.
15
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 "Additional Factors that May
Affect Future Results" in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2005, in Part II, Item 1A, entitled
"Risk Factors" and elsewhere in this Form 10-Q.
The following discussion should be read in conjunction with the unaudited
condensed financial statements and notes thereto included in Part I, Item 1 of
this Quarterly Report on Form 10-Q 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, 2005.
Geron is a biopharmaceutical company developing and commercializing three
groups of products: i) therapeutic products for oncology that target telomerase;
ii) pharmaceuticals that activate telomerase in tissues impacted by senescence,
injury or degenerative disease; and iii) cell-based therapies derived from its
human embryonic stem cell platform for applications in multiple chronic
diseases.
Our results of operations have fluctuated from period to period and may
continue to fluctuate in the future, 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. We do not expect to receive revenues or royalties
based on therapeutic products for a period of years, if at all.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Note 1 of Notes to Condensed Consolidated Financial Statements
describes the significant accounting policies used in the preparation of the
condensed consolidated financial statements.
Estimates and assumptions about future events and their effects cannot be
determined with certainty. We base our estimates on historical experience and on
various other assumptions believed to be applicable and reasonable under the
circumstances. These estimates may change as new events occur, as additional
information is obtained and as our operating environment changes. These changes
have historically been minor and have been included in the condensed
consolidated financial statements as soon as they became known. Based on a
critical assessment of our accounting policies and the underlying judgments and
uncertainties affecting the application of those policies, management believes
that our condensed consolidated financial statements are fairly stated in
accordance with accounting principles generally accepted in the United States,
and present a meaningful presentation of our financial condition and results of
operations.
16
During the first quarter ended March 31, 2006, Geron implemented a new
critical accounting policy regarding equity-based compensation which is
described below. We believe that there have been no other significant changes in
our critical accounting policies and estimates during the three months ended
March 31, 2006 as compared to the critical accounting policies and estimates
disclosed in our Annual Report on Form 10-K/A for the year ended
December 31, 2005.
Valuation of Equity-Based Compensation
On January 1, 2006, we began accounting for stock-based awards under the
provisions of SFAS 123R using the modified prospective transition method. Under
SFAS 123R, we are required to measure and recognize compensation expense for all
stock-based awards to our employees and directors, including employee stock
options and employee stock purchases related to our Employee Stock Purchase Plan
(ESPP) based on estimated fair values. We estimated the fair value of stock
options and ESPP shares using the Black Scholes option-pricing model.
Option-pricing model assumptions such as expected volatility, risk-free
interest rate and estimated term impact the fair value estimate. Further,
estimated forfeiture rate impacts the amount of aggregate compensation
recognized during the period. The fair value of equity-based awards is amortized
over the vesting period of the award using a straight-line method.
Expected volatilities are based on historical volatilities of our stock
since no traded options on Geron stock have maturities greater than three
months. The expected term of options represents the period of time that options
granted are expected to be outstanding. In deriving this assumption, we reviewed
actual historical exercise and cancellation data and the remaining outstanding
options not yet exercised nor cancelled. The expected term of employees'
purchase rights is equal to the offering period. The risk free rate is based on
the U.S. Zero Coupon Treasury Strip Yields for the expected term in effect on
the date of grant. Forfeitures were estimated based on historical experience and
will be adjusted over the requisite service period based on the extent to which
actual forfeitures differ, or are expected to differ, from their estimate.
Prior to the implementation of SFAS 123R, we accounted for stock-based
awards under the intrinsic method of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and made pro forma footnote
disclosures as required by Statement of Financial Accounting Standards No. 148,
"Accounting For Stock-Based Compensation - Transition and Disclosure," which
amended Statement of Financial Accounting Standards No. 123, "Accounting For
Stock-Based Compensation." Under the intrinsic method, no stock-based
compensation expense had been recognized in the consolidated statements of
operations because the exercise price of the stock options granted to employees
and directors equaled the fair market value of the underlying stock on the date
of grant. Pro forma net loss and pro forma net loss per share disclosed in the
footnotes to the consolidated condensed financial statements were estimated
using the Black Scholes option-pricing model.
Stock-based compensation expense recognized under SFAS 123R for the three
months ended March 31, 2006 was $746,000. There was no stock-based compensation
expense recognized for the three months ended March 31, 2005 related to employee
stock options and ESPP purchases. As of March 31, 2006, total compensation cost
related to unvested stock options not yet recognized was $5.9 million which is
expected to be recognized over the next 15 months on a weighted-average basis.
If factors change and we employ different assumptions in the application of
SFAS 123R in future periods, the compensation expense that we record under SFAS
123R may differ significantly from what we have recorded in the current period.
RESULTS OF OPERATIONS
Revenues
We recognized revenues from collaborative agreements of $55,000 for the
three months ended March 31, 2006, compared to no revenues for the comparable
period in 2005. The revenues in 2006 represent the related party reimbursements
we received from our joint venture in Hong Kong, TA Therapeutics, Ltd., for
scientific research services which began in April 2005.
17
We have entered into license and option agreements with companies involved
in oncology, diagnostics, research tools, agriculture and biologics production.
In each of these agreements, we have granted certain rights to our technologies.
In connection with the agreements, we are entitled to receive license fees,
option fees, milestone payments and royalties on future sales, or any
combination thereof. We recognized license and option fee revenues of $471,000
for the three months ended March 31, 2006 compared to $47,000 for the comparable
2005 period related to our various agreements. The overall increase in license
fee revenue was primarily due to revenue recognized from the collaboration
agreement with Merck & Co., Inc. signed in July 2005. Also, we received
royalties of $58,000 for the three months ended March 31, 2006, compared to
$12,000 for the comparable 2005 period on product sales of telomerase detection
and telomere measurement kits to the research-use-only market, cell-based
research products and agricultural products. License and royalty revenues are
dependent upon additional agreements being signed and future product sales. We
expect to recognize revenue of $1.7 million for the remainder of 2006, $1.0
million in 2007, $59,000 in 2008, $47,000 in 2009 and $79,000 thereafter related
to our existing deferred revenue. Current revenues may not be predictive of
future revenues.
Research and Development Expenses
Research and development expenses were $9.4 million for the three months
ended March 31, 2006, compared to $6.5 million for the comparable 2005 period.
The overall increase in 2006 compared to 2005 was primarily due to an increase
of $1.4 million for increased personnel-related expenses, including $456,000 for
stock-based compensation expense associated with stock options and $1.4 million
in increased scientific supplies, including contract manufacturing costs for the
telomerase vaccine. We expect research and development expenses to increase in
the next year as we incur expenses related to manufacturing and testing of our
telomerase inhibitor drug, GRN163L, continue clinical trials of our telomerase
cancer vaccine and continue development of our human embryonic stem cell (hESC)
programs.
Our research and development activities can be divided into two major
categories of related programs, oncology and hESC therapies. The oncology
programs focus on treating or diagnosing cancer by targeting or detecting the
presence of telomerase, either inhibiting activity of the telomerase enzyme,
diagnosing cancer by detecting the presence of telomerase, or using telomerase
as a target for therapeutic vaccines. Our core knowledge base in telomerase and
telomere biology supports all these approaches, and our scientists may
contribute to any or all of these programs in a given period. For our telomerase
inhibition program, we completed a series of animal toxicology and preclinical
efficacy studies of GRN163L in 2005. Currently three sites have been designated
as patient enrollment centers for the Phase 1-2 clinical trial in patients with
chronic lymphocytic leukemia. In April 2006, we initiated clinical testing of
GRN163L in patients with solid tumor malignancies at one site. An
investigator-sponsored Phase 1-2 clinical trial at Duke University Medical
Center (Duke) using our therapeutic vaccine targeting telomerase in patients
with metastatic prostate cancer has been completed. Study results showed no
treatment-related adverse effects to date and positive specific immune responses
to telomerase. We currently are conducting additional Phase 1-2 studies in
patients with prostate cancer, hematologic malignancies and renal carcinoma at
Duke. We have transferred the vaccine manufacturing process in-house for further
optimization and transfer to a contract manufacturer. At the conclusion of these
activities, we plan to file a company IND with the FDA for clinical trials in
one or more cancer types.
Our hESC therapy programs focus on treating injuries and degenerative
diseases with cell therapies based on cells derived from hESCs. A core of
knowledge of hESC biology, as well as a significant continuing effort in
deriving, growing, maintaining, and differentiating hESCs, underlies all aspects
of this group of programs. Many of our researchers are allocated to more than
one hESC project, and the percentage allocations of time change as the resource
needs of individual programs vary. In our hESC therapy programs, we have
concentrated our resources on several specific cell types. We have developed
proprietary methods to culture and scale up undifferentiated hESCs and
differentiate them into therapeutically relevant cells. We are now testing six
different therapeutic cell types in animal models of human disease. In four of
these cell types, we have preliminary results suggesting efficacy as evidenced
by functional improvements or engraftment of the cells in the treated animals.
After completion of these studies, and assuming continued success, we expect to
begin Phase 1-2 clinical trials, most likely for the treatment of acute spinal
cord injury.
18
Research and development expenses allocated to programs are as follows (in
thousands):
Three Months Ended
March 31,
----------------------
2006 2005
---------- ----------
(Unaudited)
Oncology................................................ $ 5,276 $ 3,486
hESC Therapies.......................................... 4,087 2,987
---------- ----------
Total................................................ $ 9,363 $ 6,473
========== ==========
At this time, we cannot provide reliable estimates of how much time or
investment will be necessary to commercialize products from the programs
currently in progress. Drug development in the U.S. is a process that includes
multiple steps defined by the FDA under applicable statutes, regulations and
guidance documents. After the preclinical research process of identifying,
selecting and testing in animals a potential pharmaceutical compound, the
clinical development process begins with the filing of an IND. Clinical
development typically involves three phases of study: Phase 1, 2 and 3. The most
significant costs associated with clinical development are incurred in Phase 3
trials, which tend to be the longest and largest studies conducted during the
drug development process. After the completion of a successful preclinical and
clinical development program, a New Drug Application (NDA) or Biologics License
Application (BLA) must be filed with the FDA, which includes, among other
things, very large amounts of preclinical and clinical data and results and
manufacturing-related information necessary to support requested approval of the
product. The NDA/BLA must be reviewed and approved by the FDA.
According to industry statistics, it generally takes 10 to 15 years to
research, develop and bring to market a new prescription medicine in the United
States. In light of the steps and complexities involved, the successful
development of our potential products is highly uncertain. Actual timelines and
costs to develop and commercialize a product are subject to enormous variability
and are very difficult to predict, as our clinical development programs are
updated and modified to reflect the most recent preclinical and clinical data
and other relevant information. In addition, various statutes and regulations
also govern or influence the manufacturing, safety reporting, labeling, storage,
record keeping and marketing of each product. The lengthy process of seeking
these regulatory reviews and approvals, and the subsequent compliance with
applicable statutes and regulations, require the expenditure of substantial
resources. Any failure by us to obtain, or any delay in obtaining, regulatory
approvals could materially adversely affect our business. In responding to an
NDA/BLA submission, the FDA may grant marketing approval, may request additional
information, may deny the application if it determines that the application does
not provide an adequate basis for approval, and may also refuse to review an
application that has been submitted if it determines that the application does
not provide an adequate basis for filing and review. We cannot provide assurance
that any approval required by the FDA will be obtained on a timely basis, if at
all.
For a more complete discussion of the risks and uncertainties associated
with completing development of potential products, see the sub-section titled
"Because we or our collaborators must obtain regulatory approval to market our
products in the United States and other countries, we cannot predict whether or
when we will be permitted to commercialize our products" and "Entry into
clinical trials with one or more product candidates may not result in any
commercially viable products" in Part II, Item 1A entitled "Risk Factors," and
elsewhere in this Form 10-Q.
General and Administrative Expenses
General and administrative expenses were $2.1 million for the three months
ended March 31, 2006, compared to $3.9 million for the comparable 2005 period.
In 2005, we recognized $2.6 million of consulting expense associated with the
fair value of a warrant issued to a consultant in connection with the Hong Kong
joint venture. In 2006, we recognized $290,000 of stock-based compensation
expense associated with stock options. We currently anticipate general and
administrative expenses to remain consistent with current levels.
Interest and Other Income
Interest income was $1.9 million for the three months ended March 31, 2006,
compared to $839,000 for the comparable 2005 period. The increase in interest
income for 2006 compared to 2005 was due to higher cash and investment balances
as a result of proceeds received from the public offering in 2005 and higher
interest rates. Interest earned in future periods will depend on future funding
and prevailing interest rates.
19
Interest and Other Expense
Interest and other expense was $40,000 for the three months ended March 31,
2006, compared to $172,000 for the comparable 2005 period. The decrease in
interest and other expense for 2006 compared to 2005 was primarily due to the
conclusion of interest accretion for the Roslin research-funding obligation.
Net Loss
Net loss was $9.0 million for the three months ended March 31, 2006,
compared to $9.7 million for the comparable 2005 period. Net loss for 2006
decreased over the comparable 2005 period as a result of increased license
revenue and interest income which partially offset higher operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash, restricted cash, cash equivalents and marketable securities at March
31, 2006 totaled $184.2 million compared to $191.0 million at December 31, 2005.
We have an investment policy to invest these funds in liquid, investment grade
securities, such as interest-bearing money market funds, corporate notes,
commercial paper, asset-backed securities and municipal securities. The decrease
in cash, restricted cash, cash equivalents and marketable securities in 2006 was
due to the use of cash for operations.
Cash Flows from Operating Activities. Net cash used in operations was $6.8
million for the three months ended March 31, 2006 compared to $7.6 million for
the comparable 2005 period. The decrease in net cash used for operations in 2006
was primarily the result of decreased net loss from operations.
Cash Flows from Investing Activities. Net cash used in investing activities
was $9.8 million for the three months ended March 31, 2006, compared $7.8
million for the comparable 2005 period. The increase in cash used in investing
activities reflected net purchases of marketable securities.
Through March 31, 2006, we have invested approximately $15.6 million in
property and equipment, of which approximately $8.3 million was financed through
an equipment financing arrangement. Minimum annual payments due under the
equipment financing facility are expected to total $28,000 for the remainder of
2006. As of March 31, 2006, we had approximately $1.4 million available for
borrowing under our equipment financing facilities. The drawdown period under
the equipment financing facilities expires in November 2006. We intend to renew
the commitment for new equipment financing facilities in 2006 to further fund
equipment purchases. If we are unable to renew the commitment, we will be
obliged to use our own cash resources for capital expenditures.
Cash Flows from Financing Activities. Net cash provided by financing
activities for the three months ended March 31, 2006 was $406,000 compared to
$13.0 million for the comparable 2005 period. In 2005, we received $12.5 million
in proceeds from the exercise of warrants issued to institutional investors in
connection with a financing in November 2004.
As of March 31, 2006, our contractual obligations for the next five years
and thereafter are as follows:
Principal Payments Due by Period
----------------------------------------------------------
Less Than After
Contractual Obligations (1) Total 1 Year 1-3 Years 4-5 Years 5 Years
---------------------------------------------------- ---------- ---------- ---------- ---------- ----------
(Amounts in thousands)
Equipment loans..................................... $ 28 $ 28 $ -- $ -- $ --
Operating leases (2)................................ -- -- -- -- --
Research funding (3)................................ 13,172 7,921 4,070 394 787
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations............... $ 13,200 $ 7,949 $ 4,070 $ 394 $ 787
========== ========== ========== ========== ==========
------------
(1) This table does not include any milestone payments under research
collaborations or license agreements as the timing and likelihood of such
payments are not known.
20
(2) In March 2004, we issued 363,039 shares of our common stock to the lessor
of our premises at 200 and 230 Constitution Drive in payment of our
monthly rental obligation from February 1, 2004 through July 31, 2008. The
fair value of the common stock has been recorded as a prepaid asset and is
being amortized to rent expense on a straight-line basis over the lease
period.
(3) Research funding is comprised of sponsored research commitments at various
laboratories around the world, including the Roslin Institute and our Hong
Kong joint venture.
We estimate that our existing capital resources, interest income and
equipment financing facilities will be sufficient to fund our current level of
operations through at least December 2007. Changes in our research and
development plans or other changes affecting our operating expenses or cash
balances 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, equipment loans
or other financing sources that may be available.
Recent Accounting Pronouncements
See Note 1 of Notes to Condensed Consolidated Financial Statements for a
description of new accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our 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.
Credit Risk. We place our cash, restricted cash, cash equivalents, and
marketable securities with four financial institutions in the United States.
Generally, these deposits may be redeemed upon demand and therefore, bear
minimal risk. Deposits with banks may exceed the amount of insurance provided on
such deposits. Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of marketable securities.
Marketable securities consist of high-grade corporate notes, asset-backed
securities and commercial paper. Our investment policy, approved by our Board of
Directors, limits the amount we may invest in any one type of investment,
thereby reducing credit risk concentrations.
Interest Rate Sensitivity. The fair value of our cash equivalents and
marketable securities at March 31, 2006 was $182.7 million. These investments
include $79.4 million of cash equivalents which are due in less than 90 days,
$94.4 million of short-term investments which are due in less than one year and
$8.9 million of asset-backed securities which have varying maturity dates. 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 commercial paper, corporate
notes, asset-backed securities and money market funds, we have concluded that
there is no material market risk exposure related to interest rates.
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. As of March 31, 2006, there was an immaterial
currency exchange impact from our intercompany transactions. However, our
financial obligations to the Roslin Institute are stated in British pounds
sterling over the next quarter. This obligation may become more expensive for us
if the United States dollar becomes weaker against the British pounds sterling.
As of March 31, 2006, we did not engage in foreign currency hedging activities.
21
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Securities and
Exchange Commission defines the term "disclosure controls and procedures" to
mean a company's controls and other procedures that are designed to ensure that
information required to be disclosed in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms.
Our chief executive officer and our chief financial officer have concluded,
based on the evaluation of the effectiveness of our disclosure controls and
procedures by our management, with the participation of our chief executive
officer and our chief financial officer, as of the end of the period covered by
this report, that our disclosure controls and procedures were effective for this
purpose.
(b) Changes in Internal Controls Over Financial Reporting. There was no
change in our internal control over financial reporting for the three months
ended March 31, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable assurance, and not absolute assurance,
that the objectives of the system are met. In addition, the design of any
control system is based in part upon certain assumptions about the likelihood of
future events. Because of these and other inherent limitations of control
systems, there can be no assurance that any design will succeed in achieving its
stated goals in all future circumstances.
22
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
None
Item 1A. RISK FACTORS
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.
Our business is at an early stage of development, in that we do not yet have
product candidates in late-stage clinical trials or on the market. One of our
product candidates, a telomerase therapeutic cancer vaccine, is being studied in
a Phase 1-2 clinical trial being conducted by an academic institution. We have
begun clinical testing of our lead anti-cancer drug, GRN163L, in patients with
chronic lymphocytic leukemia and solid tumor malignancies. We have no other
product candidates in clinical testing. Our ability to develop product
candidates that progress to and through clinical trials is subject to our
ability to, among other things:
o succeed in our research and development efforts;
o select therapeutic compounds or cell therapies for development;
o obtain required regulatory approvals;
o manufacture product candidates; and
o collaborate successfully with clinical trial sites, academic
institutions, physician investigators, clinical research organizations
and other third parties.
Potential lead drug compounds or other product candidates and technologies
will require significant preclinical and clinical testing prior to regulatory
approval in the United States and other countries. Our product candidates may
prove to have undesirable and unintended side effects or other characteristics
adversely affecting their safety, efficacy or cost-effectiveness that could
prevent or limit their commercial use. In addition, our product candidates may
not prove to be more effective for treating disease or injury than current
therapies. Accordingly, we may have to delay or abandon efforts to research,
develop or obtain regulatory approval to market our product candidates. In
addition, we will need to determine whether any of our potential products can be
manufactured in commercial quantities at an acceptable cost. Our research and
development efforts may not result in a product that can be approved by
regulators or marketed successfully. Because of the significant scientific,
regulatory and commercial milestones that must be reached for any of our
development programs to be successful, any program may be abandoned, even after
we have expended significant resources on the program, such as our investments
in telomerase technology and human embryonic stem cells, which could cause a
sharp drop in our stock price.
23
The science and technology of telomere biology and telomerase, human
embryonic stem cells and nuclear transfer are relatively new. There is no
precedent for the successful commercialization of therapeutic product candidates
based on our technologies. These development programs are therefore particularly
risky. In addition, we, our licensees or our collaborators must undertake
significant research and development activities to develop product candidates
based on our technologies, which will require additional funding and may take
years to accomplish, if ever.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES, AND CONTINUED LOSSES
COULD IMPAIR OUR ABILITY TO SUSTAIN OPERATIONS.
We have incurred operating losses every year since our operations began in
1990. As of March 31, 2006, our accumulated deficit was approximately $378.6
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 and, as our development efforts and clinical testing activities continue,
our operating losses may increase in size.
Substantially all of our revenues to date have been research support
payments under collaboration agreements and revenues from our licensing
arrangements. We may be unsuccessful in entering into any new corporate
collaboration or license agreement that results in revenues. We do not expect
that the revenues generated from these arrangements will be sufficient alone to
continue or expand our research or development activities and otherwise sustain
our operations.
While we receive royalty revenue from licenses of diagnostic product
candidates, telomerase-immortalized cell lines and other licensing activities,
we do not currently expect to receive sufficient royalty revenues from these
licenses to sustain our operations. 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 also expect to experience negative cash flow for the foreseeable future
as we fund our operating losses and capital expenditures. This will result in
decreases in our working capital, total assets and stockholders' equity, which
may not be offset by future financings. We will need to generate significant
revenues to achieve profitability. We may not be able to generate these
revenues, and we may never achieve profitability. Our failure to achieve
profitability could negatively impact the market price of our common stock. Even
if we do become profitable, we cannot assure you that we would be able to
sustain or increase profitability on a quarterly or annual basis.
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 candidates, and we cannot assure you that our
existing capital resources, proceeds from our recent public offering, interest
income and equipment financing arrangements will be sufficient to fund our
current and planned operations. 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 2006 and beyond;
o the magnitude and scope of our research and development programs;
o the progress we make in our research and development programs and in
preclinical development and clinical trials;
o our ability to establish, enforce and maintain strategic arrangements
for research, development, clinical testing, manufacturing and
marketing;
o the number and type of product candidates that we pursue;
24
o the time and costs involved in obtaining regulatory approvals; and
o the costs involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims.
We do not have any committed sources of capital. Additional financing
through strategic collaborations, public or private equity financings, capital
lease transactions or other financing sources may not be available on acceptable
terms, or at all. The receptivity of the public and private equity markets to
proposed financings is substantially affected by the general economic, market
and political climate and by other factors which are unpredictable and over
which we have no control. Additional equity financings, if we obtain them, could
result in significant dilution to stockholders. 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 proposed products that we would otherwise
seek to develop and 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 programs, any of which could have a material adverse effect on our
business.
WE DO NOT HAVE EXPERIENCE AS A COMPANY CONDUCTING LARGE-SCALE CLINICAL TRIALS,
OR IN OTHER AREAS REQUIRED FOR THE SUCCESSFUL COMMERCIALIZATION AND MARKETING OF
OUR PRODUCT CANDIDATES.
We will need to receive regulatory approval for any product candidates
before they may be marketed and distributed. Such approval will require, among
other things, completing carefully controlled and well-designed clinical trials
demonstrating the safety and efficacy of each product candidate. This process is
lengthy, expensive and uncertain. We have no experience as a company in
conducting large-scale, late stage clinical trials, and our experience with
early-stage clinical trials with small numbers of patients is limited. Such
trials would require either additional financial and management resources, or
reliance on third-party clinical investigators, clinical research organizations
(CROs) or consultants. Relying on third-party clinical investigators or CROs may
force us to encounter delays that are outside of our control.
We also do not currently have marketing and distribution capabilities for
our product candidates. Developing an internal sales and distribution capability
would be an expensive and time-consuming process. We may enter into agreements
with third parties that would be responsible for marketing and distribution.
However, these third parties may not be capable of successfully selling any of
our product candidates.
BECAUSE WE OR OUR COLLABORATORS MUST OBTAIN REGULATORY APPROVAL TO MARKET OUR
PRODUCTS IN THE UNITED STATES AND OTHER COUNTRIES, 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 and may prevent us from creating commercially viable products from
our discoveries.
The regulatory process, particularly for biopharmaceutical product
candidates like ours, is uncertain, can take many years and requires the
expenditure of substantial resources. Any product candidate that we or our
collaborators develop must receive all relevant regulatory agency approvals
before it may be marketed in the United States or other countries. Biological
drugs and non-biological drugs are rigorously regulated. In particular, human
pharmaceutical therapeutic product candidates are subject to rigorous
preclinical and clinical testing and other requirements by the FDA in the United
States and similar health authorities in other countries in order to demonstrate
safety and efficacy. Because certain of our product candidates involve the
application of new technologies or are based upon a new therapeutic approach,
they may be subject to substantial additional review by various government
regulatory authorities, and, as a result, the process of obtaining regulatory
approvals for them may proceed more slowly than for product candidates based
upon more conventional technologies. We may never obtain regulatory approval to
market our product candidates.
Data obtained from preclinical and clinical activities is susceptible to
varying interpretations that could delay, limit or prevent regulatory agency
approvals. In addition, delays or rejections may be encountered as a result of
changes in regulatory agency policy during the period of product development
and/or the period of review of any application for regulatory agency approval
for a product candidate. Delays in obtaining regulatory agency approvals could:
25
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 collaborators 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, the required regulatory
agency approvals may not be obtained for any product candidates developed by us
or in collaboration with us. If we obtain regulatory agency approval for a new
product, this approval may entail limitations on the indicated uses for which it
can be marketed that could limit the potential commercial use of the product.
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. 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 distribution.
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.
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.
ENTRY INTO CLINICAL TRIALS WITH ONE OR MORE PRODUCT CANDIDATES MAY NOT RESULT IN
ANY COMMERCIALLY VIABLE PRODUCTS.
We may never generate revenues from product sales because of a variety of
risks inherent in our business, including the following risks:
o clinical trials may not demonstrate the safety and efficacy of our
product candidates;
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 product candidates economically
on a commercial scale;
o we and any licensees of ours may not be able to successfully market
our products;
o physicians may not prescribe our product candidates, or patients or
third party payors may not accept such product candidates;
o others may have proprietary rights which prevent us from marketing our
products; and
o competitors may sell similar, superior or lower-cost products.
With respect to our telomerase cancer vaccine product candidate, our
clinical testing has been limited to early-stage testing for a small number of
patients. The results of this testing may not be indicative of successful
26
outcomes in later stage trials. We have begun clinical testing for our Phase 1-2
clinical trial of our telomerase inhibitor compound, GRN163L. This is the first
clinical trial for this product and no results have been received. We have not
commenced clinical testing for any other product candidate.
RESTRICTIONS ON THE USE OF HUMAN EMBRYONIC STEM CELLS, POLITICAL COMMENTARY AND
THE ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF RESEARCH INVOLVING HUMAN EMBRYONIC
STEM CELLS COULD PREVENT US FROM DEVELOPING OR GAINING ACCEPTANCE FOR
COMMERCIALLY VIABLE PRODUCTS BASED UPON SUCH STEM CELLS AND ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.
Some of our most important programs involve the use of stem cells that are
derived from human embryos. The use of human embryonic stem cells gives rise to
ethical, legal and social issues regarding the appropriate use of these cells.
Our research related to human embryonic stem cells may become the subject of
adverse commentary or publicity, which could significantly harm the market price
for our common stock.
Some political and religious groups have voiced opposition to our technology
and practices. We use stem cells derived from human embryos that have been
created for in vitro fertilization procedures but are no longer desired or
suitable for that use and are donated with appropriate informed consent for
research use. Many research institutions, including some of our scientific
collaborators, have adopted policies regarding the ethical use of human
embryonic tissue. These policies may have the effect of limiting the scope of
research conducted using human embryonic stem cells, thereby impairing our
ability to conduct research in this field.
In addition, the United States government and its agencies have until
recently refused to fund research which involves the use of human embryonic
tissue. President Bush 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, but relatively few
federal grants have been made so far. The President's Council on Bioethics 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. Certain states are considering, or have in place, legislation relating
to stem cell research, including California whose voters approved Proposition 71
to provide state funds for stem cell research in November 2004. It is not yet
clear what, if any, effect such state actions may have on our ability to
commercialize stem cell products. In the United Kingdom and other countries, the
use of embryonic or fetal tissue in research (including the derivation of human
embryonic stem cells) is regulated by the government, whether or not the
research involves government funding.
Government-imposed restrictions with respect to use of embryos or human
embryonic stem cells in research and development could have a material adverse
effect on us, including:
o harming our ability to establish critical partnerships and
collaborations;
o delaying or preventing progress in our research and development; and
o causing a decrease in the price of our stock.
IMPAIRMENT OF OUR INTELLECTUAL PROPERTY RIGHTS MAY ADVERSELY AFFECT THE VALUE OF
OUR TECHNOLOGIES AND PRODUCT CANDIDATES AND LIMIT OUR ABILITY TO PURSUE THEIR
DEVELOPMENT.
Protection of our proprietary 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. In the event that we are unsuccessful in obtaining and enforcing
patents, our business would be negatively inpacted. Further, our patents may be
challenged, invalidated or circumvented, and our patent rights may not provide
proprietary protection or competitive advantages to us.
The patent positions of pharmaceutical and biopharmaceutical companies,
including ours, are highly uncertain and involve complex legal and technical
questions. In particular, legal principles for biotechnology patents in the
United States and in other countries are evolving, and the extent to which we
will be able to obtain patent coverage to protect our technology, or enforce
issued patents, is uncertain.
For example, the European Patent Convention prohibits the granting of
European patents for inventions that concern "uses of human embryos for
industrial or commercial purposes." The European Patent Office is presently
interpreting this prohibition broadly, and is applying it to reject patent
claims that pertain to human embryonic stem cells. However, this broad
interpretation is being challenged through the European Patent Office appeals
system. As a result, we do not yet know whether or to what extent we will be
able to obtain European patent protection for our human embryonic stem cell
technologies in Europe.
27
Publication of discoveries in scientific or patent literature tends to lag
behind actual discoveries by at least several months and sometimes several
years. Therefore, 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 the
first to file patent applications for these inventions. As a result, we may not
be able to obtain patents for discoveries that we otherwise would consider
patentable and that we consider to be extremely significant to our future
success.
Where several parties seek patent protection for the same technology, the
U.S. Patent Office may declare an interference proceeding in order to ascertain
the party to which the patent should be issued. Patent interferences are
typically complex, highly contested legal proceedings, subject to appeal. They
are usually expensive and prolonged, and can cause significant delay in the
issuance of patents. Moreover, parties that receive an adverse decision in an
interference can lose important patent rights. Our pending patent applications,
or our issued patents, may be drawn into interference proceedings which may
delay or prevent the issuance of patents, or result in the loss of issued patent
rights. If more groups become engaged in scientific research related to
telomerase biology and/or embryonic stem cells, the number of patent filings by
such groups and therefore the risk of our patents or applications being drawn
into interferences may increase.
The interference process can also be used to challenge a patent that has
been issued to another party. For example, in 2004 we were party to two
interferences declared by the U.S. Patent Office at our request. These
interferences involved two of our pending applications relating to nuclear
transfer technology and two issued patents, held by the University of
Massachusetts (U. Mass) and licensed to Advanced Cell Technology, Inc. (ACT) of
Worcester, Massachusetts. We requested these interferences in order to clarify
our patent rights to this technology and to facilitate licensing to companies
wishing to utilize this technology in animal cloning. The Board of Patent
Appeals and Interferences issued final judgments in each of these cases, finding
in both instances that all of the claims in the U. Mass patents in question were
unpatentable, and upholding the patentability of Geron's pending claims. These
judgments effectively invalidated the two U. Mass patents. Both judgments have
been appealed by ACT in the U.S. District Court for the District of Columbia. We
have also filed requests for interference with other U. Mass patents in the same
field. As in any legal proceeding, the outcome of these interferences and the
appeals is uncertain. In March 2002, an interference was declared involving one
of our nuclear transfer patent applications and a patent application held by
Infigen Inc. That interference was resolved in 2004 with a final judgment in our
favor; that judgment was not appealed.
Outside of the United States, certain jurisdictions, such as Europe, New
Zealand and Australia, permit oppositions to be filed against the granting of
patents. Because our intent is to commercialize products internationally,
securing both proprietary protection and freedom to operate outside of the
United States is important to our business. We are involved in both opposing the
grant of patents to others through such opposition proceedings and in defending
our patent applications against oppositions filed by others. For example, we
have filed an opposition to a European patent granted to GemVax AS, a Norwegian
company, relating to the use of telomerase peptides for the treatment and
prophylaxis of cancer. GemVax was acquired in 2005 by Pharmexa, a Danish
company. Pharmexa has announced plans to pursue a telomerase-targeted cancer
vaccine. GemVax/Pharmexa has filed an opposition to a European patent granted to
us relating to telomerase, which includes claims to the use of telomerase in
cancer vaccines. We are involved in other patent oppositions in Europe,
Australia and New Zealand, both as the opposing party and the party whose patent
is being opposed. Successful challenges to our patents through opposition
proceedings could result in a loss of patent rights in the relevant
jurisdiction(s). If we are unsuccessful in the oppositions we bring against the
patents of other parties, we may be subject to litigation, or otherwise
prevented from commercializing potential products in the relevant jurisdiction,
or may be required to obtain licenses to those patents or develop or obtain
alternative technologies, any of which could harm our business. As more groups
become engaged in scientific research and product development in the areas of
telomerase biology and/or embryonic stem cells, the risk of our patents being
challenged through patent oppositions may increase.
28
Furthermore, if interferences, oppositions or other challenges to our patent
rights are not resolved promptly in our favor, our existing business
relationships may be jeopardized and we could be delayed or prevented from
entering into new collaborations or from commercializing certain products, which
could materially harm our business.
Patent litigation may also be necessary to enforce patents issued or
licensed to us or to determine the scope and validity of our proprietary rights
or the proprietary rights of others. We may not be successful in any patent
litigation. Patent litigation can be extremely expensive and time-consuming,
even if the outcome is favorable to us. An adverse outcome in a patent
litigation, patent opposition, patent interference, or any other proceeding in a
court or patent office could 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, any of which could severely
harm our business.
IF WE FAIL TO MEET OUR OBLIGATIONS UNDER LICENSE AGREEMENTS, WE MAY LOSE OUR
RIGHTS TO KEY TECHNOLOGIES ON WHICH OUR BUSINESS DEPENDS.
Our business depends on several critical technologies that are based in part
on patents licensed from third parties. Those third-party license agreements
impose obligations on us, such as payment obligations and obligations to
diligently pursue development of commercial products under the licensed patents.
If a licensor believes that we have failed to meet our obligations under a
license agreement, the licensor could seek to limit or terminate our license
rights, which could lead to costly and time-consuming litigation and,
potentially, a loss of the licensed rights. During the period of any such
litigation our ability to carry out the development and commercialization of
potential products could be significantly and negatively affected. If our
license rights were restricted or ultimately lost, our ability to continue our
business based on the affected technology platform would be severely adversely
affected.
WE MAY BE SUBJECT TO LITIGATION THAT WILL BE COSTLY TO DEFEND OR PURSUE AND
UNCERTAIN IN ITS OUTCOME.
Our business may bring us into conflict with our licensees, licensors, or
others with whom we have contractual or other business relationships, or with
our competitors or others whose interests differ from ours. If we are unable to
resolve those conflicts on terms that are satisfactory to all parties, we may
become involved in litigation brought by or against us. That litigation is
likely to be expensive and may require a significant amount of management's time
and attention, at the expense of other aspects of our business. The outcome of
litigation is always uncertain, and in some cases could include judgments
against us that require us to pay damages, enjoin us from certain activities, or
otherwise affect our legal or contractual rights, which could have a significant
adverse effect on our business.
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 the 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 programs. In the event our technologies
infringe 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 those patents or other proprietary rights or
develop or obtain alternative technologies. We have obtained licenses from
several universities and companies for technologies that we anticipate
incorporating into our potential products, and are in negotiation for licenses
to other technologies. We may not be able to obtain a license to patented
technology on commercially favorable terms, or at all. If we do not obtain a
necessary license, we may need to redesign our technologies or obtain rights to
alternate technologies, the research and adoption of which could cause delays in
product development. In cases where we are unable to license necessary
technologies, we could be prevented from developing certain potential products.
Our failure to obtain alternative technologies or a license to any technology
that we may require to research, develop or commercialize our product candidates
would significantly and negatively affect our business.
29
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 we believe patent protection is not
appropriate or available. 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 AND JOINT VENTURE PARTNERS TO HELP US DEVELOP AND
TEST OUR PRODUCT CANDIDATES, AND OUR ABILITY TO DEVELOP AND COMMERCIALIZE
POTENTIAL PRODUCTS MAY BE IMPAIRED OR DELAYED IF COLLABORATIONS ARE
UNSUCCESSFUL.
Our strategy for the development, clinical testing and commercialization of
our product candidates requires that we enter into collaborations with corporate
or joint venture 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. By
way of examples: Cell Genesys is principally responsible for developing
oncolytic virus therapeutics utilizing the telomerase promoter; Roche is
responsible for developing cancer diagnostics using our telomerase technology;
and Duke is responsible for conducting the current clinical trials of our
dendritic cell-based telomerase vaccine. 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 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.
Under agreements with collaborators and joint venture partners, we may rely
significantly on these parties to, among other activities:
o conduct research and development activities in conjunction with us;
o design and conduct advanced clinical trials in the event that we reach
clinical trials;
o fund research and development activities with us;
o manage and license certain patent rights;
o pay us fees upon the achievement of milestones; and
o market with us any commercial products that result from our
collaborations or joint ventures.
The development and commercialization of potential products will be delayed
if collaborators or joint venture partners fail to conduct these activities in a
timely manner or at all. For example, we recently terminated our collaboration
with Dendreon Corporation because of its failure to meet diligence requirements
in our agreement. In addition, our collaborators could terminate their
agreements with us and we may not receive any development or milestone payments.
If we do not achieve milestones set forth in the agreements, or if our
collaborators breach or terminate their collaborative agreements with us, our
business may be materially harmed.
OUR RELIANCE ON THE ACTIVITIES OF OUR NON-EMPLOYEE CONSULTANTS, RESEARCH
INSTITUTIONS, AND SCIENTIFIC CONTRACTORS, WHOSE ACTIVITIES ARE NOT WHOLLY WITHIN
OUR CONTROL, MAY LEAD TO DELAYS IN DEVELOPMENT OF OUR PRODUCT CANDIDATES.
We rely extensively upon and have relationships with scientific consultants
at academic and other institutions, some of whom conduct research at our
request, and other consultants with expertise in clinical development strategy
or other matters. These consultants 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 consultants 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.
30
In addition, we have formed research collaborations with many academic and
other research institutions throughout the world. 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 their time to be dedicated to our research goals.
We also rely on other companies for certain process development,
manufacturing or other technical scientific work, especially with respect to our
telomerase inhibitor and telomerase vaccine programs. We have contracts with
these companies that specify the work to be done and results to be achieved, but
we do not have direct control over their personnel or operations.
If any of these third parties are unable or refuse to contribute to projects
on which we need their help, our ability to generate advances in our
technologies and develop our product candidates could be significantly harmed.
THE LOSS OF KEY PERSONNEL COULD SLOW OUR ABILITY TO CONDUCT RESEARCH AND DEVELOP
PRODUCT CANDIDATES.
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 who assist us in formulating our
research and development and clinical 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 could materially harm our business.
POTENTIAL RESTRICTIONS OR A BAN ON NUCLEAR TRANSFER COULD PREVENT US FROM
BENEFITING FINANCIALLY FROM OUR RESEARCH IN THIS AREA.
Our nuclear transfer technology could theoretically be used to produce human
embryos for the derivation of embryonic stem cells (sometimes referred to as
"therapeutic cloning") or cloned humans (sometimes referred to as "reproductive
cloning"). The U.S. Congress has recently considered legislation that would ban
human therapeutic cloning as well as reproductive cloning. Such a bill was
passed by the House of Representatives, although not by the Senate. The July
2002 report of the President's Council on Bioethics recommended a four-year
moratorium on therapeutic cloning. If human therapeutic cloning is restricted or
banned, we will not be able to benefit from the scientific knowledge that would
be generated by research in that area. Further, if regulatory bodies were to
restrict or ban the sale of food products from cloned animals, our financial
participation in the businesses of our nuclear transfer licensees or the value
of our ownership in our joint venture, stART Licensing, could be significantly
harmed.
OUR PRODUCTS ARE LIKELY TO BE EXPENSIVE TO MANUFACTURE, AND THEY MAY NOT BE
PROFITABLE IF WE ARE UNABLE TO SIGNIFICANTLY REDUCE THE COSTS TO MANUFACTURE
THEM.
Our telomerase inhibitor compound, GRN163L, and our hESC-based products are
likely to be significantly more expensive to manufacture than most other drugs
currently on the market today. Oligonucleotides are relatively large molecules
with complex chemistry, and the cost of manufacturing even a short
oligonucleotide like GRN163L is considerably greater than the cost of making
most small-molecule drugs. Our present manufacturing processes are conducted at
a relatively small scale and are at an early stage of development. We hope to
substantially reduce manufacturing costs through process improvements, as well
as through scale increases. If we are not able to do so, however, and, depending
on the pricing of the potential product, the profit margin on the telomerase
inhibitor may be significantly less than that of most drugs on the market today.
Similarly, we currently make differentiated cells from hESCs on a laboratory
scale, at a high cost per unit of measure. The cell-based therapies we are
developing based on hESCs will probably require large quantities of cells. We
continue to develop processes to scale up production of the cells in a
cost-effective way. We may not be able to charge a high enough price for any
cell therapy product we develop, even if it is safe and effective, to make a
profit. If we are unable to realize significant profits from our potential
product candidates, our business would be materially harmed.
31
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.
Other pharmaceutical and biotechnology companies and research organizations
currently engage in or have in the past engaged in efforts related to the
biological mechanisms that are the focus of our programs in oncology and human
embryonic stem cell therapies, 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 product candidates 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 developing alternative therapies to treat cancer and, in
this regard, are competitors of ours. According to public data from the FDA and
NIH, there are more than 200 approved anti-cancer products on the market in the
United States, and several thousand in clinical development. Many of the
pharmaceutical companies developing and marketing these competing products
(including GlaxoSmithKline, Bristol-Myers Squibb Company and Novartis AG, among
others) 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
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.
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 we do. Most significantly, competitive products may
render any product candidates that we develop obsolete, which would negatively
impact our business and ability to sustain operations.
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.
32
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 potential products is alleged to have injured subjects or patients.
This risk exists for product candidates tested in human clinical trials as well
as potential products that are sold commercially. We currently have limited
clinical trial liability insurance and we may not be able to 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 that could have a
material adverse effect on our business.
TO BE SUCCESSFUL, OUR PRODUCT CANDIDATES MUST BE ACCEPTED BY THE HEALTH CARE
COMMUNITY, WHICH CAN BE VERY SLOW TO ADOPT OR UNRECEPTIVE TO NEW TECHNOLOGIES
AND PRODUCTS.
Our product candidates and those developed by our collaborative partners, if
approved for marketing, may not achieve market acceptance since hospitals,
physicians, patients or the medical community in general may decide not to
accept and utilize these products. The product candidates that we are attempting
to develop represent substantial departures from established treatment methods
and will compete with a number of conventional drugs and therapies manufactured
and marketed by major pharmaceutical companies. The degree of market acceptance
of any of our developed potential 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
o reimbursement policies of government and third-party payors.
If the health care community does not accept our potential products for any
of the foregoing reasons, or for any other reason, our business would be
materially harmed.
IF WE FAIL TO OBTAIN ACCEPTABLE PRICES OR ADEQUATE REIMBURSEMENT FOR OUR PRODUCT
CANDIDATES, THE USE OF OUR POTENTIAL PRODUCTS COULD BE SEVERELY LIMITED.
Our ability to successfully commercialize our product candidates will depend
significantly on our ability to obtain acceptable prices and the availability of
reimbursement to the patient from third-party payors. Significant uncertainty
exists as to the reimbursement status of newly-approved health care products,
including pharmaceuticals. If our potential products are not considered
cost-effective or 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 U.S. and other markets, sales of our potential 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 governments in
other countries continue to propose and pass legislation designed to contain or
reduce the cost of health care. Legislation and regulations affecting the
pricing of pharmaceuticals and other medical products may 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 candidate 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 may ultimately not be considered
cost-effective by these third parties. Any of these initiatives or developments
could materially harm our business.
33
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, or to adequately restrict the discharge, 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. Any such 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 these laws
and regulations and substantial fines or penalties if we violate any of these
laws or regulations.
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 factors which may be
unrelated to their businesses or results of operations such as media coverage,
legislative and regulatory measures and the activities of various interest
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 the return on your
investment.
Historically, our stock price has been extremely volatile. Between January
1998 and March 2006, our stock has traded as high as $75.88 per share and as low
as $1.41 per share. Between January 1, 2003 and March 31, 2006, the price has
ranged between a high of $16.80 per share and a low of $1.41 per share. The
significant market price fluctuations of our common stock are due to a variety
of factors, including:
o the demand in the market for our common stock;
o the experimental nature of our product candidates;
o fluctuations in our operating results;
o market conditions relating to the biopharmaceutical and pharmaceutical
industries;
o announcements of technological innovations, new commercial products,
or clinical progress or lack thereof by us, our collaborative partners
or our competitors;
o announcements concerning regulatory developments, developments with
respect to proprietary rights and our collaborations;
o comments by securities analysts;
o general market conditions;
o political developments related to human embryonic stem cell research;
34
o public concern with respect to our product candidates; or
o the issuance of common stock to partners, vendors or to investors to
raise additional capital.
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, which 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 MAY ADVERSELY AFFECT THE MARKET PRICE
FOR OUR COMMON STOCK.
Sale of a substantial number of shares of our common stock in the public
market, or the perception that such sales could occur, could significantly and
negatively affect the market price for our common stock. As of March 31, 2006,
we had 100,000,000 shares of common stock authorized for issuance and 65,315,146
shares of common stock outstanding. In addition, as of March 31, 2006, we have
reserved for future issuance approximately 21,125,513 shares of common stock for
our stock plans, potential milestone payments and outstanding warrants.
In addition, we have issued common stock to certain parties, such as vendors
and service providers, as payment for products and services. Under these
arrangements, we typically agree to register the shares for resale soon after
their issuance. We may continue to pay for certain goods and services in this
manner, which would dilute your interest in us. Also, sales of the shares issued
in this manner could negatively affect the market price of our stock.
OUR UNDESIGNATED PREFERRED STOCK MAY INHIBIT POTENTIAL ACQUISITION BIDS; THIS
MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK AND THE VOTING RIGHTS
OF HOLDERS OF OUR 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
filing, 50,000 shares of preferred stock have been designated Series A Junior
Participating Preferred Stock and the Board of Directors still has authority to
designate and issue up to 2,950,000 shares of preferred stock. 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.
In addition, if we issue preferred stock in the future that has preference
over our common stock with respect to the payment of dividends or upon our
liquidation, dissolution or winding up, or if we issue preferred stock with
voting rights that dilute the voting power of our common stock, the rights of
holders of our common stock or the market price of our common stock could be
adversely affected.
PROVISIONS IN OUR SHARE PURCHASE RIGHTS PLAN, 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 BELIEVE MAY
BE THE POSITIVE ASPECTS OF ACQUISITIONS AND TAKEOVERS.
Our Board of Directors has adopted a share purchase 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.
Our share purchase rights plan could prevent stockholders from profiting
from an increase in the market value of their shares as a result of a change of
control of us by delaying or preventing a change of control. In addition, our
Board of Directors has the authority, without further action by our
stockholders, to issue additional shares of common stock, and to fix the rights
and preferences of one or more series of preferred stock.
In addition to our share purchase rights plan and 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:
35
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.
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.
In addition, we have severance agreements with several employees and a
change of control severance plan which could require an acquiror to pay a higher
price.
WE DO NOT INTEND TO PAY CASH DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE
FUTURE.
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. Any payment of cash dividends will depend upon our financial
condition, results of operations, capital requirements and other factors and
will be at the discretion of the Board of Directors. Furthermore, we may incur
additional indebtedness that may severely restrict or prohibit the payment of
dividends.
36
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sale of Unregistered Securities
In March 2006, we issued 113,895 shares of Geron common stock to Cambrex
Bioscience Walkersville, Inc. (Cambrex) in a private placement as advance
consideration related to the first project order under a services agreement
pursuant to which Cambrex is manufacturing certain products for our telomerase
cancer vaccine program. The total fair value of the common stock was $1,000,000
which has been recorded as a prepaid asset and is being amortized to research
and development expense on a pro-rata basis as services are performed. For the
three months ended March 31, 2006, $526,000 had been amortized to research and
development expense.
We issued the above-described shares of common stock in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended. Cambrex represented to us that it was an accredited investor
as defined in Rule 501(a) of the Securities Act of 1933, as amended, and that
the securities issued pursuant thereto were being acquired for investment
purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibit
Number Description
--------- ------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Form of Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated April 28, 2006.
31.2 Certification of Chief Financial Officer pursuant to Form of Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated April 28, 2006.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated April 28, 2006.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated April 28, 2006.
37
SIGNATURE
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
Executive Vice President and Chief
Financial Officer (Duly Authorized
Signatory)
Date: April 28, 2006
38
EXHIBIT INDEX
Exhibit
Number Description
--------- ------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Form of Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated April 28, 2006.
31.2 Certification of Chief Financial Officer pursuant to Form of Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated April 28, 2006.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated April 28, 2006.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated April 28, 2006.