GERON CORP - Quarter Report: 2006 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON
D.C. 20549
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
OR
FOR
THE
TRANSITION PERIOD FROM _____ TO _____ .
COMMISSION
FILE NUMBER: 0-20859
________________
GERON
CORPORATION
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
|
DELAWARE
|
75-2287752
|
|
(STATE
OR OTHER JURISDICTION OF
|
(I.R.S.
EMPLOYER IDENTIFICATION NO.)
|
|
INCORPORATION
OR ORGANIZATION)
|
|
230
CONSTITUTION DRIVE, MENLO PARK, CA 94025
(ADDRESS,
INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE: (650)
473-7700
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 o
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 o
Accelerated
filer x
Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
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 October 26, 2006:
|
|
Common
Stock, $0.001 par value
|
66,346,005
shares
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GERON
CORPORATION
INDEX
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Page
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PART
I. FINANCIAL INFORMATION
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Item
1:
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2
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2
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3
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4
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|
|
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5
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Item
2:
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15
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Item
3:
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21
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Item
4:
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21
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PART
II. OTHER INFORMATION
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Item
1:
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22
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Item
1A:
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22
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|
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Item
2:
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36
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|
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Item
3:
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36
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Item
4:
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36
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Item
5:
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36
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Item
6:
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36
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36
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1
PART
I. FINANCIAL INFORMATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(IN
THOUSANDS)
|
|
SEPTEMBER
30,
2006
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DECEMBER
31,
2005
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|||||
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(UNAUDITED)
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(SEE
NOTE 1)
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|||||
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ASSETS
|
|
|
|||||
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Current
assets:
|
|
|
|||||
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Cash
and cash equivalents
|
$
|
104,556
|
$
|
96,633
|
|||
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Restricted
cash
|
530
|
530
|
|||||
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Marketable
securities
|
69,493
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93,840
|
|||||
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Interest
and other receivables (including amounts from related
parties:
2006-$118, 2005-$194)
|
1,488
|
2,304
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|||||
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Current
portion of prepaid assets
|
2,074
|
2,338
|
|||||
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Total
current assets
|
178,141
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195,645
|
|||||
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Noncurrent
portion of prepaid assets
|
565
|
1,622
|
|||||
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Equity
investments in licensees and joint ventures
|
218
|
331
|
|||||
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Property
and equipment, net
|
2,526
|
2,754
|
|||||
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Deposits
and other assets
|
596
|
514
|
|||||
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Intangible
assets
|
—
|
377
|
|||||
|
|
$
|
182,046
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$
|
201,243
|
|||
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|||||
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Current
liabilities:
|
|
|
|||||
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Accounts
payable
|
$
|
1,435
|
$
|
1,906
|
|||
|
Accrued
compensation
|
1,434
|
2,470
|
|||||
|
Accrued
liabilities
|
1,367
|
1,299
|
|||||
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Current
portion of deferred revenue
|
1,455
|
2,180
|
|||||
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Current
portion of equipment loans
|
—
|
55
|
|||||
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Current
portion of research funding obligation
|
—
|
1,418
|
|||||
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Total
current liabilities
|
5,691
|
9,328
|
|||||
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Noncurrent
portion of deferred revenue
|
442
|
1,210
|
|||||
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Commitments
|
|
|
|||||
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Stockholders’
equity:
|
|
|
|||||
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Common
stock
|
66
|
65
|
|||||
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Additional
paid-in capital
|
573,868
|
560,742
|
|||||
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Accumulated
deficit
|
(397,703
|
)
|
(369,599
|
)
|
|||
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Accumulated
other comprehensive loss
|
(318
|
)
|
(503
|
)
|
|||
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Total
stockholders’ equity
|
175,913
|
190,705
|
|||||
|
|
$
|
182,046
|
$
|
201,243
|
|||
See accompanying notes.
2
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
|
|
THREE
MONTHS ENDED
SEPTEMBER
30,
|
NINE
MONTHS ENDED
SEPTEMBER
30,
|
|||||||||||
|
|
2006
|
2005
|
2006
|
2005
|
|||||||||
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Revenues
from collaborative agreements
(including
amounts from related parties:
three
months - 2006-$118; 2005-$67;
nine
months - 2006-$271; 2005-$118)
|
$
|
199
|
$
|
67
|
$
|
365
|
$
|
118
|
|||||
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License
fees and royalties
|
524
|
606
|
1,727
|
5,285
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|||||||||
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Total
revenues
|
723
|
673
|
2,092
|
5,403
|
|||||||||
|
|
|
|
|
|
|||||||||
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Operating
expenses:
|
|
|
|
|
|||||||||
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Research
and development (including amounts
for
related parties: three
months - 2006-$118;
2005-$67;
nine months - 2006-$271; 2005-$118)
|
10,703
|
12,183
|
29,392
|
25,480
|
|||||||||
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General
and administrative
|
2,114
|
1,411
|
7,064
|
7,104
|
|||||||||
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Total
operating expenses
|
12,817
|
13,594
|
36,456
|
32,584
|
|||||||||
|
Loss
from operations
|
(12,094
|
)
|
(12,921
|
)
|
(34,364
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)
|
(27,181
|
)
|
|||||
|
|
|
|
|
|
|||||||||
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Interest
and other income
|
2,283
|
1,105
|
6,364
|
2,950
|
|||||||||
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Equity
in losses in joint venture
|
—
|
—
|
—
|
(12
|
)
|
||||||||
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Interest
and other expense
|
(26
|
)
|
(46
|
)
|
(104
|
)
|
(389
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)
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|||||
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Net
loss
|
$
|
(9,837
|
)
|
$
|
(11,862
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)
|
$
|
(28,104
|
)
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$
|
(24,632
|
)
|
|
|
|
|
|
|
|
|||||||||
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Basic
and diluted net loss per share
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$
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(0.15
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)
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$
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(0.21
|
)
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$
|
(0.43
|
)
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|||||||||
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Weighted
average shares used in computing
basic
and diluted
net loss per share
|
66,166,827
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57,225,184
|
65,729,412
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55,567,371
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|||||||||
See
accompanying notes.
3
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
CHANGE
IN CASH AND CASH EQUIVALENTS
(IN
THOUSANDS)
(UNAUDITED)
|
|
NINE
MONTHS ENDED
SEPTEMBER
30,
|
||||||
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|
2006
|
2005
|
|||||
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Cash
flows from operating activities:
|
|
|
|||||
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Net
loss
|
$
|
(28,104
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)
|
$
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(24,632
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
||||||
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Depreciation
and amortization
|
802
|
703
|
|||||
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Accretion
and amortization on investments
|
(299
|
)
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1,535
|
||||
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Gain
on sale of fixed assets
|
(16
|
)
|
(3
|
)
|
|||
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Issuance
of common stock and warrants in exchange for services by
non-employees
|
1,393
|
4,508
|
|||||
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Stock-based
compensation for options to employees and directors
|
3,323
|
—
|
|||||
|
Stock-based
compensation for stock grants to employees
|
216
|
—
|
|||||
|
Accretion
of interest on research funding obligation
|
—
|
245
|
|||||
|
Amortization
of deferred compensation
|
122
|
113
|
|||||
|
Realized
loss (gain) on equity investments in licensees
|
118
|
(62
|
)
|
||||
|
Amortization
of intangible assets, principally research related
|
377
|
566
|
|||||
|
Changes
in assets and liabilities:
|
|
||||||
|
Other
current and noncurrent assets
|
3,246
|
1,829
|
|||||
|
Other
current and noncurrent liabilities
|
(759
|
)
|
4,183
|
||||
|
Accrued
research funding obligation
|
(1,418
|
)
|
(1,817
|
)
|
|||
|
Translation
adjustment
|
(3
|
)
|
(37
|
)
|
|||
|
Net
cash used in operating activities
|
(21,002
|
)
|
(12,869
|
)
|
|||
|
Cash
flows from investing activities:
|
|
||||||
|
Restricted
cash transfer
|
—
|
(375
|
)
|
||||
|
Proceeds
from sale of fixed assets
|
19
|
3
|
|||||
|
Capital
expenditures
|
(577
|
)
|
(940
|
)
|
|||
|
Purchases
of marketable securities
|
(72,178
|
)
|
(88,344
|
)
|
|||
|
Proceeds
from sales of equity investments in licensees
|
—
|
207
|
|||||
|
Proceeds
from maturities of marketable securities
|
97,007
|
117,366
|
|||||
|
Net
cash provided by investing activities
|
24,271
|
27,917
|
|||||
|
Cash
flows from financing activities:
|
|
||||||
|
Payments
of obligations under equipment loans
|
(55
|
)
|
(119
|
)
|
|||
|
Proceeds
from issuances of common stock, net of issuance costs
|
905
|
94,528
|
|||||
|
Proceeds
from exercise of warrants
|
3,804
|
—
|
|||||
|
Net
cash provided by financing activities
|
4,654
|
94,409
|
|||||
|
Net
increase in cash and cash equivalents
|
7,923
|
109,457
|
|||||
|
Cash
and cash equivalents at the beginning of the period
|
96,633
|
9,846
|
|||||
|
Cash
and cash equivalents at the end of the period
|
$
|
104,556
|
$
|
119,303
|
|||
See
accompanying notes.
4
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 September 30, 2006 and condensed consolidated statements of operations for
the three and nine months ended September 30, 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 the management of Geron, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended September 30, 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/A. 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
(VIEs). 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.
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 stock 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 1,414,422 shares and 2,061,654
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.
5
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, commercial
paper and asset-backed securities with original maturities ranging from one
to
14 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. Dividend and interest income are recognized
when earned.
We
review
our available-for-sale securities to identify and evaluate investments that
have
indications of possible impairment. 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 and nine months ended September 30, 2006 and 2005.
We
have determined that the gross unrealized losses of $166,000 on our
available-for-sale securities as of September 30, 2006 are primarily due to
a
decrease in the fair values of our fixed rate debt securities as a result of
increases in interest rates and are temporary in nature.
Revenue
Recognition
We
recognize revenue related to license and research agreements with collaborators,
royalties and milestone payments. 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.
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.
6
Restricted
Cash
As
of
September 30, 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
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 none and $119,000 for the three and nine
months ended September 30, 2006, respectively, related to other-than-temporary
declines in fair values of our non-marketable equity investments. No impairment
charges were recognized for the three and nine months ended September 30, 2005.
As of September 30, 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,
our one wholly-owned subsidiary and a United Kingdom company, satisfies its
financial obligations almost exclusively in its local currency. For the three
and nine months ended September 30, 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
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. As of June 30, 2006, the entire research
funding commitment has been paid and the intangible asset has been fully
amortized.
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, clinical trial expenses and sponsored research reimbursement fees are
included in accrued liabilities and research and development
expenses.
7
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 three and nine months ended September 30, 2006, we recognized stock-based
compensation expense of $996,000 and $3,323,000, respectively, 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 three and nine months ended September 30, 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
three and nine months ended September 30, 2005. For the nine months ended
September 30, 2006, the implementation of SFAS 123R increased loss from
operations and net loss by $3,323,000 and basic and fully diluted net loss
per
share by $0.05. The implementation of SFAS 123R did not have an impact on cash
flows from operations or financing activities for the nine months ended
September 30, 2006.
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.
8
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 non-employee 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 activity in comprehensive loss during the three and nine
months of 2006 and 2005 are as follows:
|
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||
|
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
|
(In
thousands)
|
||||||||||||
|
Net
loss
|
$
|
(9,837
|
)
|
$
|
(11,862
|
)
|
$
|
(28,104
|
)
|
$
|
(24,632
|
)
|
|
|
Change
in unrealized gains (losses) on securities available-for-sale and
marketable
equity securities
|
143
|
19
|
188
|
(51
|
)
|
||||||||
|
Change
in foreign currency translation adjustments
|
(5
|
)
|
1
|
(3
|
)
|
(37
|
)
|
||||||
|
Comprehensive
loss
|
$
|
(9,699
|
)
|
$
|
(11,842
|
)
|
$
|
(27,919
|
)
|
$
|
(24,720
|
)
|
|
The
components of accumulated other comprehensive loss are as follows:
|
|
September
30,
2006
|
December
31,
2005
|
|||||
|
|
(In
thousands)
|
||||||
|
Unrealized
holding loss on available-for-sale securities and marketable equity
investments
|
$
|
(143
|
)
|
$
|
(331
|
)
|
|
|
Foreign
currency translation adjustments
|
(175
|
)
|
(172
|
)
|
|||
|
|
$
|
(318
|
)
|
$
|
(503
|
)
|
|
Reclassifications
Certain
reclassifications of prior year amounts have made to conform to current year
presentation. Deferred compensation has been reclassified to additional paid-in
capital.
9
2. STOCKHOLDERS’ EQUITY
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). 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 September 30, 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 and
nine months ended September 30, 2006 and 2005, we did not repurchase any shares
in accordance with these repurchase rights. As of September 30, 2006, no shares
outstanding were subject to repurchase.
1996
Directors’ Stock Option Plan
The
1996
Directors’ Stock Option Plan (1996 Directors Plan) expired in June 2006 and no
further option grants can be made from the 1996 Directors Plan. The options
granted under the 1996 Directors Plan were nonstatutory stock options and
expired no later than ten years from the date of grant. The option exercise
price was equal to the fair market value of the underlying common stock on
the
date of grant. Options to purchase shares of common stock generally were 100%
vested upon grant, except for options granted upon first appointment to the
Board of Directors (First Option). The First Option vested annually over three
years upon each anniversary date of appointment to the Board. The options issued
pursuant to the 1996 Directors 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.
10
2006
Directors’ Stock Option Plan
In
May
2006, our stockholders approved the adoption of the 2006 Directors’ Stock Option
Plan (2006 Directors Plan) to replace the 1996 Directors Plan. As of September
30, 2006, we had reserved an aggregate of 2,500,000 shares of common stock
for
issuance under the 2006 Directors Plan. As of September 30, 2006, 80,000 options
have been granted under the 2006 Directors Plan. The 2006 Directors Plan
provides that each person who becomes a non-employee director after the
effective date of the 2006 Directors 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 2006 Directors Plan. In the case of the Chairman of the Board
of
Directors, the Subsequent Option is for 40,000 shares of common stock. We grant
an option to purchase 2,500 shares to each non-employee director (other than
the
Chairmen of such committees) on the date of each Annual Meeting during the
director’s service on the Audit Committee, Nominating Committee or Compensation
Committee (Committee Service Option). The Committee Service Option for the
Chairman of the Audit Committee is for 10,000 shares of common stock and the
Nominating and Compensation Committee Chairmen each receive an option to
purchase 5,000 shares of common stock.
The
2006
Directors 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 2006 Directors Plan remain exercisable for up to 90 days following the
optionee’s termination of service as a 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 2006 Directors Plan is
equal to 100% of the fair market value of the underlying common stock on the
date of grant. Options granted under the 2006 Directors 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
as of
September 30, 2006, we had reserved an aggregate of 600,000 shares of common
stock for issuance under the Purchase Plan. Approximately 304,000 and 287,000
shares have been issued under the Purchase Plan as of September 30, 2006 and
December 31, 2005, respectively. As of September 30, 2006, 296,231 shares were
available for issuance under the Purchase Plan.
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.
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.
11
Option
Activity
Aggregate
option activity for the 1992 Plan, 2002 Plan, the 1996 Directors Plan, and
the
2006 Directors Plan is as follows:
|
|
|
Outstanding
Options
|
||||||||||||||
|
|
Shares
Available For Grant
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
|
Aggregate
Intrinsic
Value
(In
thousands)
|
|||||||||||
|
Balance
at December 31, 2005
|
5,047,456
|
7,786,707
|
$
|
7.98
|
6.5
|
$
|
4,529
|
|||||||||
|
Additional
shares authorized
|
4,500,000
|
—
|
$
|
—
|
|
|
||||||||||
|
Options
granted
|
(1,665,058
|
)
|
1,665,058
|
$
|
6.74
|
|
|
|||||||||
|
Awards
granted
|
(209,563
|
)
|
—
|
$
|
—
|
|
|
|||||||||
|
Options
exercised
|
—
|
(192,919
|
)
|
$
|
4.55
|
|
|
|||||||||
|
Options
forfeited
|
368,705
|
(368,705
|
)
|
$
|
9.57
|
|
|
|||||||||
|
1992
Plan and 1996 Directors Plan options expired
|
(95,663
|
)
|
—
|
$
|
—
|
|
|
|||||||||
|
Balance
at September 30, 2006
|
7,945,877
|
8,890,141
|
$
|
7.76
|
6.4
|
$
|
4,126
|
|||||||||
|
|
|
|
|
|
||||||||||||
|
Options
exercisable at September 30, 2006
|
|
6,245,012
|
$
|
8.16
|
5.4
|
$
|
3,998
|
|||||||||
The
aggregate intrinsic value in the preceding table represents the total intrinsic
value, based on Geron’s closing stock price of $6.27 as of September 30, 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 and nine months ended September 30, 2006 which was allocated as
follows:
|
|
Three
Months Ended
|
Nine
Months Ended
|
|||||
|
|
September
30, 2006
|
September
30, 2006
|
|||||
|
|
(In
Thousands)
|
||||||
|
Research
and development
|
$
|
630
|
$
|
1,603
|
|||
|
General
and administrative
|
366
|
1,720
|
|||||
|
Stock-based
compensation expense included in operating expenses
|
$
|
996
|
$
|
3,323
|
|||
The
fair
value of options granted during the nine months ended September 30, 2006 and
2005 has been estimated at the date of grant using the Black Scholes
option-pricing model with the following assumptions:
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
2005
|
|
Dividend
yield
|
None
|
None
|
|
Expected
volatility range
|
0.789
to 0.824
|
0.863
to 0.893
|
|
Risk-free
interest rate range
|
4.28%
to 5.14%
|
3.48%
to 4.20%
|
|
Expected
term
|
5
yrs
|
4
yrs
|
12
The
fair
value of employees’ purchase rights during the nine months ended September 30,
2006 and 2005 has been estimated using the Black Scholes option-pricing model
with the following assumptions:
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
2005
|
|
Dividend
yield
|
None
|
None
|
|
Expected
volatility range
|
0.381
to 0.471
|
0.524
to 0.617
|
|
Risk-free
interest rate range
|
4.81%
to 5.27%
|
3.10%
to 3.93%
|
|
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 interest 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 three and nine months ended September 30, 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 nine months ended September
30, 2006 was $4.57 per share. The weighted average estimated fair value of
purchase rights under our Purchase Plan for the nine months ended September
30,
2006 was $1.88 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 three and nine months ended September 30, 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:
|
|
Three
Months Ended
September
30, 2005
|
Nine
Months Ended
September
30, 2005
|
|||||
|
(In
thousands, except per share amounts)
|
|
|
|||||
|
Reported
net loss
|
$
|
(11,862
|
)
|
$
|
(24,632
|
)
|
|
|
Deduct:
|
|
|
|||||
|
Stock-based
employee expense determined under SFAS 123
|
(1,071
|
)
|
(3,749
|
)
|
|||
|
Pro
forma net loss
|
$
|
(12,933
|
)
|
$
|
(28,381
|
)
|
|
|
Basic
and diluted net loss per share as reported
|
$
|
(0.21
|
)
|
$
|
(0.44
|
)
|
|
|
Basic
and diluted pro forma net loss per share
|
$
|
(0.23
|
)
|
$
|
(0.51
|
)
|
|
Based
on
the Black Scholes option-pricing model, the weighted average estimated fair
value of employee stock options granted during the nine months ended September
30, 2005 was $4.36 per share. The weighted average estimated fair value of
purchase rights under our Purchase Plan for the nine months ended September
30,
2005 was $2.55 per share.
13
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 executive management
team
represents our chief decision maker, as defined under SFAS 131. To date, we
have
viewed our operations as principally one reporting segment. 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
|
|
Nine
Months Ended
September
30,
|
||||||
|
(In
Thousands)
|
2006
|
2005
|
|||||
|
|
(Unaudited)
|
||||||
|
Supplemental
Operating, Investing and Financing Activities:
|
|
|
|||||
|
Net
unrealized gain (loss) on equity investments in licensees
|
$
|
5
|
$
|
(26
|
)
|
||
|
Cash
in transit from options
|
8
|
—
|
|||||
|
Net
unrealized gain (loss) on marketable securities
|
183
|
(25
|
)
|
||||
|
Shares
issued for 401(k) matching contribution and performance
bonus
|
2,173
|
1,803
|
|||||
|
Shares
or warrants issued for services
|
1,183
|
1,019
|
|||||
5.
SUBSEQUENT EVENT
In
October 2006, we issued 161,238 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, which
is
expected to be approximately four months.
14
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/A 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
consolidated 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/A for the fiscal year ended December 31,
2005.
Geron
is
a Menlo Park, California based biopharmaceutical company that is developing
and
intends to commercialize first-in-class therapeutic products for the treatment
of cancer and degenerative diseases, including spinal cord injury, heart
failure, diabetes and HIV/AIDS. The products are based on Geron’s core expertise
in telomerase and human embryonic stem cells.
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.
15
During
the three and nine months ended September 30, 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 and nine
months
ended September 30, 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 the 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 interest rate is based on the U.S.
Zero Coupon Treasury Strip Yields for the expected term in effect on the date
of
grant. Forfeiture rate was 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 for stock
options granted to employees and directors because the exercise price of the
stock options 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.
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 recognized stock-based compensation expense for
the
fair value of the vested portion of the non-employee awards in our consolidated
statements of operations for 2006 and 2005.
Stock-based
compensation expense recognized under SFAS 123R for the three and nine months
ended September 30, 2006 were $1.0 million and $3.3 million, respectively.
There
was no stock-based compensation expense recognized for the three and nine months
ended September 30, 2005 related to employee stock options and ESPP purchases.
As of September 30, 2006, total compensation cost related to unvested stock
options not yet recognized was $8.3 million, which is expected to be recognized
over the next 18 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.
16
RESULTS
OF OPERATIONS
Revenues
Revenues
from collaborative agreements were $199,000 and $365,000 for the three and
nine
months ended September 30, 2006, respectively, compared to $67,000 and $118,000
for the comparable 2005 periods. Revenues for the first nine months of 2006
primarily reflect the related party reimbursements we received from our joint
venture in Hong Kong, TA Therapeutics, Ltd. (TAT) for scientific research
services and revenue recognized under our collaboration with Corning Life
Sciences. Revenues for the first nine months of 2005 reflect only our related
party reimbursements from TAT.
We
have
entered into license agreements with companies involved with 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,
milestone payments and royalties on future sales, or any combination thereof.
We
recognized license fee revenues of $511,000 and $1.6 million for the three
and
nine months ended September 30, 2006, respectively, compared to $591,000 and
$5.2 million for the comparable 2005 periods related to our various agreements.
In April 2005, we recognized $4.0 million in license fee revenue in conjunction
with the transfer of nuclear transfer intellectual property rights for use
in
animal cloning to the joint venture, Start Licensing, Inc. We received royalties
of $13,000 and $84,000 for the three and nine months ended September 30, 2006,
respectively, compared to $15,000 and $53,000 for the comparable 2005 periods
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
$538,000 for the remainder of 2006, $1.2 million in 2007, $59,000 in 2008,
$47,000 in 2009 and $80,000 thereafter related to our existing deferred revenue.
However, current revenues may not be predictive of future revenues.
Research
and Development Expenses
Research
and development expenses were $10.7 million and $29.4 million for the three
and
nine months ended September 30, 2006, respectively, compared to $12.2 million
and $25.5 million for the comparable 2005 periods. The decrease for the 2006
third quarter compared to the 2005 third quarter is primarily the net result
of
increased personnel-related expense of $1.0 million, including $630,000 for
stock-based compensation expense associated with stock options, increased
manufacturing costs of $508,000 related to the telomerase cancer vaccine,
GRNVAC1, and higher preclinical and toxicology study expenses of $566,000 for
GRNOPC1, our hESC-derived oligodendrocyte progenitor cells for the treatment
of
acute spinal cord injury, offset by reduced raw materials purchases of $3.6
million for the manufacture of Geron’s telomerase inhibitor drug, GRN163L.
Research and development expense increased for the first nine months of 2006
compared to the comparable period in 2005 primarily as a result of higher
personnel-related expenses of $3.4 million, including $1.6 million for
stock-based compensation expense associated with stock options, increased costs
of $1.4 million for preclinical studies of GRNOPC1 and clinical studies of
GRN163L, increased manufacturing costs of $1.8 million related to GRNVAC1,
and
increased scientific supplies of $605,000, offset by reduced raw materials
purchases of $3.7 million for the manufacture of GRN163L. Overall, we expect
research and development expenses to increase in the next year as we incur
expenses related to clinical trials for GRN163L and GRNVAC1 and continued
development of our human embryonic stem cell (hESC) programs.
Our
research and development activities have arisen from our two major technology
platforms, telomerase and hESCs. 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. Currently four sites have been designated as patient
enrollment centers for our Phase 1-2 clinical trial of GRN163L 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. We have transferred the
vaccine manufacturing process from Duke to Geron for further optimization and
transfer to a contract manufacturer.
17
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. After completion of these studies,
and assuming continued success, we expect to begin Phase 1-2 clinical
trials.
Research
and development expenses allocated to programs are as follows (in
thousands):
|
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||
|
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
|
(Unaudited)
|
||||||||||||
|
|
|
|
|
|
|||||||||
|
Oncology
|
$
|
6,412
|
$
|
9,072
|
$
|
16,740
|
$
|
16,101
|
|||||
|
hESC
Therapies
|
4,291
|
3,111
|
12,652
|
9,379
|
|||||||||
|
Total
|
$
|
10,703
|
$
|
12,183
|
$
|
29,392
|
$
|
25,480
|
|||||
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. 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, request additional
information, deny the application if it determines that the application
does not provide an adequate basis for approval, and 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.
18
General
and Administrative Expenses
General
and administrative expenses were $2.1 million and $7.1 million for the three
and
nine months ended September 30, 2006, respectively, compared to $1.4 million
and
$7.1 million for the comparable 2005 periods. The increase in general and
administrative expenses for the 2006 third quarter compared to the 2005 third
quarter was primarily due to stock-based compensation expense recognized for
stock options to employees and directors of $366,000. General and administrative
expenses for the first nine months of 2006 and 2005 were each $7.1 million
due
to recognition of compensation expense related to stock option grants, offset
by
reduced consulting expense. We expect general and administrative expenses to
remain consistent with current levels.
Interest
and Other Income and Equity in Losses of Joint
Venture
Interest
income was $2.3 million and $6.4 million for the three and nine months ended
September 30, 2006, respectively, compared to $1.1 million and $2.9 million
for
the comparable 2005 periods. 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 September 2005 and higher interest rates.
Interest earned in future periods will depend on future funding and prevailing
interest rates.
We
also
recognized none and $64,000 of other income for the three and nine months ended
September 30, 2005, respectively, related to the sale of equity investments
in
licensees. No such sales occurred in the comparable periods in 2006.
In
March
2005, we formed TA Therapeutics, Ltd. (TAT) in Hong Kong to conduct research
and
develop telomerase activator drugs to restore the functional capacity of cells
in various organ systems that have been impacted by senescence, injury, or
chronic disease. For the three and nine months ended September 30, 2005, we
recognized none and $12,000, respectively, of loss for our proportionate share
of net losses from the joint venture. Since our share of TAT’s net losses
exceeds the original carrying value of the equity investment, we discontinued
the application of the equity method of accounting as of June 30,
2005.
Interest
and Other Expense
Interest
and other expense was $26,000 and $104,000 for the three and nine months ended
September 30, 2006, respectively, compared to $46,000 and $389,000 for the
comparable 2005 periods. 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 $9.8 million and $28.1 million for the three and nine months ended September
30, 2006, respectively, compared to $11.9 million and $24.6 million for the
comparable 2005 periods. Net loss for the third quarter of 2006 decreased
compared to the comparable 2005 period as a result of decreased operating costs
and increased interest income. Overall net loss for 2006 increased over the
comparable 2005 period primarily due to increased operating expenses for the
clinical development of GRN163L and GRNVAC1 and reduced license fee
revenue.
LIQUIDITY
AND CAPITAL RESOURCES
Cash,
restricted cash, cash equivalents and marketable securities at September 30,
2006 totaled $174.6 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 $21.0 million for the nine months ended September
30,
2006 compared to $12.9 million for the comparable 2005 period. The increase
in
net cash used for operations in 2006 was primarily the result of increased
net
operating loss.
19
Cash
Flows from Investing Activities. Net
cash
provided by investing activities was $24.3 million for the nine months ended
September 30, 2006, compared $27.9 million for the comparable 2005 period.
The
decrease in net cash provided by investing activities in 2006 compared to 2005
reflected reduced purchases and maturities of marketable
securities.
Through
September 30, 2006, we have invested approximately $16.0 million in property
and
equipment, of which approximately $8.3 million was financed through an equipment
financing arrangement. No payments are due under the equipment financing
facilities for the remainder of 2006. As of September 30, 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 nine months ended September 30, 2006
was $4.7 million, compared to $94.4 million for the comparable 2005 period.
In
2005, we received $76.0 million in net proceeds as a result of our underwritten
public offering of common stock and the exercise of the Merck warrant and
received $12.5 million in proceeds from the exercise of warrants issued to
institutional investors in November 2004.
As
of
September 30, 2006, our contractual obligations for the next five years and
thereafter are as follows:
|
|
Principal
Payments Due by Period
|
|||||||||||||||
|
Contractual
Obligations (1)
|
Total
|
Less
Than
1
Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
|||||||||||
|
|
(In
thousands)
|
|||||||||||||||
|
Operating
leases (2)
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
|
Research
funding (3)
|
6,891
|
752
|
4,958
|
394
|
787
|
|||||||||||
|
Total
contractual cash obligations
|
$
|
6,891
|
$
|
752
|
$
|
4,958
|
$
|
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.
|
|
|
|
|
(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 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.
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 five 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 September 30,
2006 was $172.8 million. These investments include $103.3 million of cash
equivalents which are due in less than 90 days and $63.2 million of short-term
investments which are due in less than one year and $6.3 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, 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
September 30, 2006, there was an immaterial currency exchange impact from our
intercompany transactions. Our financial obligation to the Roslin Institute
has
been fully paid as of June 30, 2006. As of September 30, 2006, we did not engage
in foreign currency hedging activities.
(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 September 30, 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.
21
PART
II. OTHER INFORMATION
None
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, has been studied in a
Phase
1-2 clinical trial 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:
| · |
succeed
in our research and development
efforts;
|
| · |
select
therapeutic compounds or cell therapies for
development;
|
| · |
obtain
required regulatory approvals;
|
| · |
manufacture
product candidates; and
|
| · |
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.
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.
22
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
September 30, 2006, our accumulated deficit was approximately $397.7 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 and
development 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 product candidates, and we cannot assure you that our existing
capital resources, 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:
| · |
the
accuracy of the assumptions underlying our estimates for our capital
needs
in 2006 and beyond;
|
| · |
the
magnitude and scope of our research and development
programs;
|
| · |
the
progress we make in our research and development programs and in
preclinical development and clinical
trials;
|
| · |
our
ability to establish, enforce and maintain strategic arrangements
for
research, development, clinical testing, manufacturing and
marketing;
|
| · |
the
number and type of product candidates that we
pursue;
|
| · |
the
time and costs involved in obtaining regulatory approvals;
and
|
| · |
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.
23
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 Food and Drug
Administration (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:
| · |
significantly
harm the marketing of any products that we or our collaborators
develop;
|
| · |
impose
costly procedures upon our activities or the activities of our
collaborators;
|
| · |
diminish
any competitive advantages that we or our collaborators may attain;
or
|
24
| · |
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:
| · |
manufacturing;
|
| · |
advertising
and promoting;
|
| · |
selling
and marketing;
|
| · |
labeling;
and
|
| · |
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:
| · |
recall
or seizure of products;
|
| · |
injunction
against manufacture, distribution, sales and marketing;
and
|
| · |
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:
| · |
clinical
trials may not demonstrate the safety and efficacy of our product
candidates;
|
| · |
completion
of clinical trials may be delayed, or costs of clinical trials may
exceed
anticipated amounts;
|
| · |
we
may not be able to obtain regulatory approval of our products, or
may
experience delays in obtaining such
approvals;
|
| · |
we
may not be able to manufacture our product candidates economically
on a
commercial scale;
|
| · |
we
and any licensees of ours may not be able to successfully market
our
products;
|
| · |
physicians
may not prescribe our product candidates, or patients or third party
payors may not accept such product
candidates;
|
25
| · |
others
may have proprietary rights which prevent us from marketing our products;
and
|
| · |
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 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. 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
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
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, affect 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:
| · |
harming
our ability to establish critical partnerships and
collaborations;
|
| · |
delaying
or preventing progress in our research and development;
and
|
| · |
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 impacted. Further, our patents may be challenged,
invalidated or circumvented, and our patent rights may not provide proprietary
protection or competitive advantages to us.
26
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.
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 U.S. patent protection for the same technology, the U.S.
Patent and Trademark Office (the 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 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 were
appealed by U. Mass and ACT, but the appeals have now been dismissed as part
of
a settlement agreement, resulting in invalidation of the U. Mass patents.
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 are involved
in two patent oppositions before the European Patent Office (“EPO”) with a
Danish company, Pharmexa. Pharmexa (which acquired the Norwegian company GemVax
in 2005) is developing a cancer vaccine that employs a short telomerase peptide
to induce an immune response against telomerase and has announced plans to
begin
Phase 3 clinical trials. Pharmexa obtained a European patent with claims to
the
use of telomerase peptides for the treatment of cancer, and Geron opposed that
patent in 2004. In 2005, the Opposition Division (“OD”) of the EPO revoked the
claims originally granted to Pharmexa, but permitted Pharmexa to add new,
narrower claims. Pharmexa has appealed that decision to the Technical Board
of
Appeal (“TBA”), seeking restoration of the original claims, while Geron has
cross-appealed, seeking revocation of all the claims.
27
In
parallel, Pharmexa opposed a European patent held by Geron, the claims of which
cover many facets of human telomerase, including the use of telomerase peptides
in cancer vaccines. In June 2006, the OD of the EPO revoked three of the granted
claims in Geron’s patent, specifically the three claims covering telomerase
peptide cancer vaccines. Geron will appeal that decision to the TBA. We are
also
seeking to obtain patent coverage for telomerase peptides through the filing
of
a European divisional patent application.
The
appeals in each of these European opposition cases will likely take a minimum
of
12 months and possibly considerably longer. These oppositions reflect the
complexity of the patent landscape in which we operate, and illustrate the
risks
and uncertainties. We are also involved in other patent oppositions in Europe,
Australia and New Zealand, both as the opposing party and the party whose patent
is being opposed.
Patent
opposition proceedings are not currently available in the U.S. patent system,
but legislation is pending to introduce them. However, issued U.S. patents
can
be reexamined by the Patent Office at the request of a third party. Patents
owned or licensed by Geron may therefore be subject to reexamination. As in
any
legal proceeding, the outcome of patent reexaminations is uncertain, and a
decision adverse to our interests could result in the loss of valuable patent
rights. In July 2006, requests were filed on behalf of the Foundation for
Taxpayer and Consumer Rights for reexamination of three issued U.S. patents
owned by the Wisconsin Alumni Research Foundation (WARF) and relating to human
embryonic stem cells. These three patents (U.S. Patent Nos. 5,843,780, 6,200,806
and 7,029,913) are licensed to Geron pursuant to a January 2002 license
agreement with WARF. In October 2006, the Patent Office initiated the
reexamination proceedings; such proceedings typically take one to two years
to
be concluded at the Patent Office, and the result may be subject to
appeal.
Successful
challenges to our patents through interferences, oppositions or reexamination
proceedings could result in a loss of patent rights in the relevant
jurisdiction(s). If we are unsuccessful in actions 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 interferences, oppositions, reexaminations or other
means will likely increase.
Furthermore,
if such 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.
28
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.
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 and Roche is responsible for
developing cancer diagnostics using our telomerase technology. 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:
29
| · |
conduct
research and development activities in conjunction with
us;
|
| · |
design
and conduct advanced clinical trials in the event that we reach clinical
trials;
|
| · |
fund
research and development activities with
us;
|
| · |
manage
and license certain patent rights;
|
| · |
pay
us fees upon the achievement of milestones;
and
|
| · |
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.
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.
30
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 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 an oligonucleotide like GRN163L is
greater than the cost of making most small-molecule drugs. Our present
manufacturing processes are conducted at a 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 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.
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:
| · |
research
and development;
|
| · |
manufacturing;
|
| · |
preclinical
and clinical testing;
|
31
| · |
obtaining
regulatory approvals; and
|
| · |
marketing
and distribution.
|
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:
| · |
product
efficacy and safety;
|
| · |
the
timing and scope of regulatory
consents;
|
| · |
availability
of resources;
|
| · |
reimbursement
coverage;
|
| · |
price;
and
|
| · |
patent
position, including potentially dominant patent positions of
others.
|
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.
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 or joint venture
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:
| · |
our
establishment and demonstration to the medical community of the clinical
efficacy and safety of our product
candidates;
|
32
| · |
our
ability to create products that are superior to alternatives currently
on
the market;
|
| · |
our
ability to establish in the medical community the potential advantage
of
our treatments over alternative treatment methods;
and
|
| · |
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:
| · |
government
health administration authorities;
|
| · |
private
health insurers;
|
| · |
health
maintenance organizations; and
|
| · |
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.
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.
33
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 September
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 September 30, 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:
| · |
the
demand in the market for our common
stock;
|
| · |
the
experimental nature of our product
candidates;
|
| · |
fluctuations
in our operating results;
|
| · |
market
conditions relating to the biopharmaceutical and pharmaceutical
industries;
|
| · |
announcements
of technological innovations, new commercial products, or clinical
progress or lack thereof by us, our collaborative partners or our
competitors;
|
| · |
announcements
concerning regulatory developments, developments with respect to
proprietary rights and our
collaborations;
|
| · |
comments
by securities analysts;
|
| · |
general
market conditions;
|
| · |
political
developments related to human embryonic stem cell
research;
|
| · |
public
concern with respect to our product candidates;
or
|
| · |
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 September 30, 2006, we
had
200,000,000 shares of common stock authorized for issuance and 66,177,216 shares
of common stock outstanding. In addition, as of September 30, 2006, we have
reserved for future issuance approximately 22,821,074 shares of common stock
for
our stock plans, potential milestone payments and outstanding
warrants.
34
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 our 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:
| · |
prevent
stockholders from taking actions by written
consent;
|
| · |
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
|
| · |
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.
35
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.
None
None
None
None
|
Exhibit
Number
|
Description
|
|
10.1
|
Amended
and Restated Geron Corporation Severance Plan (and Summary Plan
Description), effective October 2, 2006.
|
|
|
|
|
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
October
30, 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
October
30, 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
October
30, 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
October
30, 2006.
|
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
|
|
| Date: October 30, 2006 |
Signatory)
|
36
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
|
|
10.1
|
Amended
and Restated Geron Corporation Severance Plan (and Summary Plan
Description), effective October 2, 2006.
|
|
|
|
|
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
October
30, 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
October
30, 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
October
30, 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
October
30, 2006.
|
37