UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
---------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____.
COMMISSION FILE NUMBER: 0-20859
----------------
GERON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2287752
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
230 CONSTITUTION DRIVE, MENLO PARK, CA 94025
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 473-7700
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT: N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [_] Accelerated filer [X] Non-accelerated filer [_]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Outstanding at April 25, 2008:
Common Stock, $0.001 par value 77,904,200 shares
GERON CORPORATION
INDEX
Page
------
PART I. FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements 2
Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007 2
Condensed Consolidated Statements of Operations for the three months ended March 31,
2008 and 2007 3
Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
2008 and 2007 4
Notes to Condensed Consolidated Financial Statements 5
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations 15
Item 3: Quantitative and Qualitative Disclosures About Market Risk 21
Item 4: Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 22
Item 1A: Risk Factors 22
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 3: Defaults Upon Senior Securities 36
Item 4: Submission of Matters to a Vote of Security Holders 36
Item 5: Other Information 36
Item 6: Exhibits 36
SIGNATURE 36
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GERON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2008 2007
--------------- ----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 138,670 $ 146,025
Restricted cash 1,079 2,440
Marketable securities 56,117 59,979
Interest and other receivables (including
amounts from related parties: 2008-$1,500,
2007-none) 1,602 788
Current portion of prepaid assets 5,355 4,140
--------------- ----------------
Total current assets 202,823 213,372
Noncurrent portion of prepaid assets 3,227 699
Property and equipment, net 3,862 4,075
Deposits and other assets 702 750
--------------- ----------------
$ 210,614 $ 218,896
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,000 $ 2,857
Accrued compensation 1,176 2,203
Accrued liabilities (including amounts for
related parties: 2008-$268, 2007- $1,029) 2,828 4,514
Current portion of deferred revenue 187 241
Fair value of derivatives 1,196 1,602
Current portion of advance payment from related
party for research and development, net 1,319 1,300
--------------- ----------------
Total current liabilities 8,706 12,717
Noncurrent portion of deferred revenue 72 78
Noncurrent portion of advance payment from related
party for research and development, net 68 427
Commitments and contingencies
Stockholders' equity:
Common stock 78 76
Additional paid-in capital 660,028 650,437
Accumulated deficit (458,546) (444,872)
Accumulated other comprehensive income 208 33
--------------- ----------------
Total stockholders' equity 201,768 205,674
--------------- ----------------
$ 210,614 $ 218,896
=============== ================
See accompanying notes.
2
GERON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2008 2007
------------- ---------------
Revenues from collaborative agreements (including
amounts from related parties: 2008-$26, 2007-$212) $ 79 $ 293
License fees and royalties (including amounts from
related parties: 2008-$1,500, 2007-none) 1,615 623
------------- ---------------
Total revenues 1,694 916
Operating expenses:
Research and development (including amounts for
related parties: 2008-$149, 2007-$212) 13,613 13,189
General and administrative 4,030 4,129
------------- ---------------
Total operating expenses 17,643 17,318
------------- ---------------
Loss from operations (15,949) (16,402)
Unrealized gain on derivatives 406 14,805
Interest and other income 1,893 2,792
Interest and other expense (24) (28)
------------- ---------------
Net (loss) income (13,674) 1,167
Deemed dividend on derivatives -- (3,661)
------------- ---------------
Net loss applicable to common stockholders $ (13,674) $ (2,494)
============= ===============
Basic and diluted net loss per share applicable to
common stockholders $ (0.18) $ (0.03)
============= ===============
Shares used in computing basic and diluted net loss
per share applicable to common stockholders 76,629,693 71,797,056
============= ===============
See accompanying notes.
3
GERON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CHANGE IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2008 2007
---------------- --------------
Cash flows from operating activities:
Net (loss) income $ (13,674) $ 1,167
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 548 277
Accretion and amortization on investments, net (471) (717)
Gain on sale of fixed assets (5) --
Stock-based compensation in exchange for services by
non-employees 215 2,735
Stock-based compensation for awards to employees and
directors 2,743 2,922
Amortization related to 401(k) contributions 155 41
Loss on equity investments in licensees 43 28
Unrealized gain on derivatives (406) (14,805)
Changes in assets and liabilities:
Other current and noncurrent assets 1,284 455
Other current and noncurrent liabilities (2,991) 648
Advance payment from related party for research
and development (340) --
---------------- --------------
Net cash used in operating activities (12,899) (7,249)
Cash flows from investing activities:
Restricted cash transfer 1,361 --
Proceeds from sale of fixed assets 7 --
Capital expenditures (337) (859)
Purchases of marketable securities (16,237) (39,147)
Proceeds from maturities of marketable securities 20,750 41,805
---------------- --------------
Net cash provided by investing activities 5,544 1,799
Cash flows from financing activities:
Proceeds from issuances of common stock, net of
issuance costs -- 290
Proceeds from exercise of warrants -- 15,000
---------------- --------------
Net cash provided by financing activities -- 15,290
---------------- --------------
Net (decrease) increase in cash and cash equivalents (7,355) 9,840
Cash and cash equivalents at the beginning of the period 146,025 135,882
---------------- --------------
Cash and cash equivalents at the end of the period $ 138,670 $ 145,722
================ ==============
See accompanying notes.
4
Geron Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The terms "Geron", the "Company", "we" and "us" as used in this report refer
to Geron Corporation. The accompanying condensed consolidated unaudited balance
sheet as of March 31, 2008 and condensed consolidated statements of operations
for the three months ended March 31, 2008 and 2007 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management of Geron, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
2008 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2008 or any other period. These financial statements
and notes should be read in conjunction with the financial statements for each
of the three years ended December 31, 2007, included in the Company's Annual
Report on Form 10-K. The accompanying condensed consolidated balance sheet as of
December 31, 2007 has been derived from audited financial statements at that
date.
Principles of Consolidation
The consolidated financial statements include the accounts of Geron, our
wholly-owned subsidiary, Geron Bio-Med Ltd. (Geron Bio-Med), a United Kingdom
company, and majority-owned subsidiary, TA Therapeutics, Ltd. (TAT), a Hong Kong
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 Geron Bio-Med at
rates of exchange at the balance sheet date and 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 and our joint venture, Start Licensing, Inc. 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 condensed
consolidated financial statements.
Net Loss Per Share
Basic earnings (loss) per share is calculated based on the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
(loss) per share is calculated based on the weighted average number of shares of
common stock and dilutive securities outstanding during the period. Potential
dilutive securities primarily consist of employee stock options, restricted
stock and warrants to purchase common stock and have been determined using the
treasury stock method at an average market price during the period.
Because we were in a net loss position, diluted earnings per share excludes
the effects of potential dilutive securities, 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
additional shares of 358,794 and 2,961,588 for 2008 and 2007, respectively,
related to outstanding options, restricted stock and warrants (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 us to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. On a regular basis, we evaluate these estimates and assumptions. Actual
results could differ from those estimates.
5
Geron Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(UNAUDITED)
Revenue Recognition
We recognize revenue related to license and research agreements with
collaborators, royalties, and milestone payments. The principles and guidance
outlined in EITF Issue 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, under Staff Accounting Bulletin No. 104, "Revenue
Recognition," (SAB 104) separately for each of the separate units. 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. Upfront 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 earned and over the estimated period of the continuing performance
obligations. Option payments are recognized as revenue over the term of the
option agreement. Milestone payments, earned based on substantive contingencies,
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. Deferred
revenue represents the portion of research and license payments received which
has not been earned.
We recognize revenue under collaborative agreements as the related research
and development costs for services are rendered. We recognize related party
revenue under collaborative agreements as the related research and development
costs for services are rendered and when the source of funds have not been
derived from our contributions to the related party.
Restricted Cash
The components of restricted cash are as follows:
March 31, December 31,
---------------------------
2008 2007
----------- -------------
(In thousands)
Certificate of deposit for unused equipment line of credit $ 530 $ 530
Certificate of deposit for credit card purchases 252 250
Funds held in trust for creditors of TA Therapeutics, Ltd. 297 1,660
---------- ---------------
$ 1,079 $ 2,440
==========- ===============
Fair Value of Financial Instruments
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements,"
(SFAS 157) which defines fair value, establishes guidelines for measuring fair
value and expands disclosures regarding fair value measurements. SFAS 157 does
not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements and
is effective for fiscal years beginning after November 15, 2007. In February
2008, the FASB issued FASB FSP 157-2 which delays the effective date of SFAS 157
for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), until fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. These nonfinancial items include
assets and liabilities such as reporting units measured at fair value in a
goodwill impairment test and nonfinancial assets acquired and liabilities
assumed in a business combination. Effective January 1, 2008, we adopted SFAS
157 for financial assets and liabilities recognized at fair value on a recurring
basis. The partial adoption of SFAS 157 for financial assets and liabilities did
not have a material impact on our consolidated financial position, results of
operations or cash flows. See Note 2 for information and related disclosures
regarding our fair value measurements.
6
Geron Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(UNAUDITED)
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities
-- Including an Amendment of FASB Statement No. 115," (SFAS 159). SFAS 159
allows companies to elect to measure certain assets and liabilities at fair
value and is effective for fiscal years beginning after November 15, 2007. We
have not elected to measure any assets or liabilities at fair value in
accordance with SFAS 159. The adoption of SFAS 159 as of January 1, 2008 did not
have any impact on our condensed consolidated financial statements.
Cash Equivalents and Marketable Debt Securities
-----------------------------------------------
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 U.S. government notes. Our
investments include U.S. government agency notes, commercial paper and corporate
notes issued by United States corporations with original maturities ranging from
one to nine months and asset-backed securities with original expected maturity
dates ranging from seven to ten months and original legal maturity dates ranging
from 32 to 44 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. 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. Realized gains and losses have been insignificant to date.
Dividend and interest income are recognized when earned and included in interest
and other income on our condensed consolidated statements of operations. 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.
Marketable and Non-Marketable Equity Investments in Licensees and Joint Venture
-------------------------------------------------------------------------------
Investments in non-marketable nonpublic companies are carried at cost, as
adjusted for other-than-temporary impairments. Investments in marketable equity
securities are carried at fair 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 venture 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.
Fair Value of Derivatives
-------------------------
We apply the provisions of Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133),
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,"
(SFAS 150) and Emerging Issues Task Force Issue 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," (Issue 00-19) in accounting for derivative financial
instruments.
7
Geron Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(UNAUDITED)
For warrants and non-employee options classified as assets or liabilities
under Issue 00-19, the fair value of these instruments is recorded on the
condensed consolidated balance sheet at inception of such classification and
adjusted to fair value at each financial reporting date. The change in fair
value of the warrants and non-employee options is recorded in the condensed
consolidated statements of operations as an unrealized gain (loss) on fair value
of derivatives. Fair value of warrants and non-employee options subject to Issue
00-19 is estimated using the Black Scholes option-pricing model. The warrants
and non-employee options continue to be reported as an asset or liability until
such time as the instruments are exercised or expire or are otherwise modified
to remove the provisions which require this treatment, at which time these
instruments are marked to fair value and reclassified from assets or liabilities
to stockholders' equity. For warrants and non-employee options classified as
permanent equity under Issue 00-19, the fair value of the warrants and
non-employee options is recorded in stockholders' equity and no further
adjustments are made.
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,
manufacturing costs for research and clinical trial materials, sponsored
research at other labs, consulting, costs to maintain technology licenses and
research-related overhead. Accrued liabilities for raw materials to manufacture
clinical trial drugs, manufacturing costs, clinical trial expense, costs to
maintain technology licenses and sponsored research reimbursement fees are
included in accrued liabilities and research and development expenses.
Depreciation and Amortization
We record property and equipment at cost and calculate depreciation using the
straight-line method over the estimated useful lives of the assets, generally
four years. Leasehold improvements are amortized over the shorter of the
estimated useful life or remaining term of the lease.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment," (SFAS 123R) requires the measurement and recognition of
compensation expense for all stock-based awards made to employees and directors,
including stock options, restricted stock awards and employee stock purchases
related to our Employee Stock Purchase Plan (ESPP purchases) based upon the
grant-date fair value of those awards.
On January 1, 2006 we implemented the provisions of SFAS 123R using the
modified prospective transition method. In accordance with this method, for
awards expected to vest, we recognize 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
straight-line attribution method elected originally upon the adoption of SFAS
123.
The following table summarizes the stock-based compensation expense related
to stock options, restricted stock awards and employee stock purchases under
SFAS 123R for the three months ended March 31, 2008 and 2007 which was allocated
as follows:
8
Geron Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(UNAUDITED)
Three Months Ended
March 31,
----------------------------
2008 2007
------------ --------------
(In thousands)
Research and development $ 1,371 $ 1,252
General and administrative 1,372 1,670
------------ --------------
Stock-based compensation expense included in
operating expenses $ 2,743 $ 2,922
============ ==============
Stock Options
-------------
The fair value of options granted during the three months ended March 31,
2008 and 2007 has been estimated at the date of grant using the Black Scholes
option-pricing model with the following assumptions:
Three Months Ended March 31,
----------------------------------------
2008 2007
------------------- --------------------
Dividend yield None None
Expected volatility range 0.596 0.774
Risk-free interest rate range 2.36% to 3.02% 4.43% to 4.80%
Expected term 5 yrs 5 yrs
Employee Stock Purchase Plan
----------------------------
The fair value of employees' purchase rights during the three months ended
March 31, 2008 and 2007 has been estimated using the Black Scholes
option-pricing model with the following assumptions:
Three Months Ended March 31,
-----------------------------------------
2008 2007
-------------------- --------------------
Dividend yield None None
Expected volatility range 0.458 to 0.473 0.419 to 0.460
Risk-free interest rate 3.09% to 4.97% 5.00% to 5.26%
Expected term 6 - 12 mos 6 - 12 mos
The expected volatility range is based on historical volatilities of our
stock, because traded options on Geron stock do not correspond to option terms
or the underlying stock trading volume. 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. 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 purchase period. Dividend yield is based on historical cash
dividend payments, which have been none to date. We grant options under our
equity plans to employees, non-employee directors, and consultants, which
generally vest over four years.
As stock-based compensation expense recognized in the condensed consolidated
statements of operations for the three months ended March 31, 2008 and 2007 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.
Restricted Stock Awards
-----------------------
The stock-based compensation expense related to restricted stock awards is
determined using the fair value of Geron common stock on the date of grant and
reduced for estimated forfeitures as applicable. The fair value is amortized as
compensation expense over the service period of the award on a straight-line
basis.
9
Geron Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(UNAUDITED)
We continue to apply the provisions of EITF Issue No. 96-18, "Accounting for
Equity Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services," (Issue 96-18) for our non-employee
stock-based awards. Under Issue 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 non-employee awards in our condensed
consolidated statements of operations.
Comprehensive (Loss) Income
Comprehensive (loss) income is comprised of net (loss) income and other
comprehensive (loss) income. Other comprehensive (loss) income includes certain
changes in stockholders' equity which are excluded from net (loss) income. The
activity in comprehensive (loss) income during the three months ended March 31,
2008 and 2007 are as follows:
Three Months Ended
March 31,
----------------------------
2008 2007
------------- -------------
(In thousands)
Net (loss) income $ (13,674) $ 1,167
Change in unrealized gain (loss) on securities
available-for-sale and marketable equity
securities 176 (2)
Change in foreign currency translation
adjustments (1) --
------------- -------------
Comprehensive (loss) income $ (13,499) $ 1,165
============= =============
The components of accumulated other comprehensive income are as follows:
March 31, 2008 December 31, 2007
----------------- -----------------
(In thousands)
Net unrealized holding gains on available-for-sale
securities and marketable equity investments $ 371 $ 195
Foreign currency translation adjustments (163) (162)
----------------- -----------------
$ 208 $ 33
================= =================
Recent Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, "Noncontrolling Interests in Consolidated Financial Statements," (SFAS
160) to improve the relevance, comparability and transparency of financial
information provided to investors by requiring all entities to report
noncontrolling (minority) interests in subsidiaries in the same way as required
in the consolidated financial statements. Moreover, SFAS 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and noncontrolling interests by requiring that they be treated as equity
transactions. SFAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Earlier adoption is
prohibited. We do not believe the adoption of SFAS 160 will have a significant
effect on our consolidated financial position, results of operations or cash
flows.
On March 19, 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, "Disclosures about Derivative Instruments and Hedging
Activities -- an Amendment of FASB Statement 133," (SFAS 161). SFAS 161 enhances
required disclosures regarding derivatives and hedging activities, including
enhanced disclosures regarding how: (a) an entity uses derivative instruments;
(b) derivative instruments and related hedged items are accounted for under SFAS
133; and (c) derivative instruments and related hedged items affect an entity's
financial position, financial performance and cash flows. SFAS 161 is effective
for fiscal years and interim periods beginning after November 15, 2008. We are
currently evaluating the potential effect of adopting SFAS 161 on our
disclosures included in our consolidated financial statements.
10
Geron Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(UNAUDITED)
2. FAIR VALUE MEASUREMENTS
SFAS 157 defines "fair value" as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, or an exit price. A liability's fair value
is defined as the amount that would be paid to transfer the liability to a new
obligor, not the amount that would be paid to settle the liability with the
creditor. Where available, fair value is based on observable market prices or
parameters or derived from such prices or parameters. Where observable prices or
inputs are not available, valuation models are applied. These valuation
techniques involve some level of management estimation and judgment, the degree
of which is dependent on the price transparency for the instruments or market
and the instruments' complexity.
Beginning January 1, 2008, assets and liabilities recorded at fair value in
the condensed consolidated balance sheet are categorized based upon the level of
judgment associated with inputs used to measure their value. SFAS 157 defines a
three-level valuation hierarchy for disclosure of fair value measurements as
follows:
Level 1 - Inputs are unadjusted, quoted prices in active markets for
identical assets or liabilities at the measurement date.
Level 2 - Inputs (other than quoted market prices included in Level 1) are
either directly or indirectly observable for the asset or liability through
correlation with market data at the measurement date and for the duration of
the instrument's anticipated life.
Level 3 - Inputs reflect management's best estimate of what market
participants would use in pricing the asset or liability at the measurement
date. Consideration is given to the risk inherent in the valuation technique
and the risk inherent in the inputs to the model.
A financial instrument's categorization within the valuation hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement. Following is a description of the valuation methodologies used for
instruments measured at fair value on our condensed consolidated balance sheet,
including the general classification of such instruments pursuant to the
valuation hierarchy.
Marketable Debt Securities Available-for-Sale
---------------------------------------------
Where quoted prices are available in an active market, securities are
classified as Level 1 of the valuation hierarchy. Level 1 securities include
highly liquid government and agency securities and money market funds. If quoted
market prices are not available for the specific security, then fair values are
estimated by using pricing models, quoted prices or securities with similar
characteristics or discounted cash flows. Examples of such Level 2 instruments
include corporate notes, asset-backed securities and commercial paper.
Equity Investments in Licensees
-------------------------------
Where quoted prices are available in an active market, securities are
classified as Level 1 of the valuation hierarchy. Level 1 securities include
publicly traded equities.
Derivatives
-----------
Warrants to purchase common stock and non-employee options are normally
traded less actively, have trade activity that is one way, and/or traded in
less-developed markets and are therefore valued based upon models with
significant unobservable market parameters, resulting in Level 3 classification
of the valuation hierarchy.
The fair value of derivatives has been calculated at each reporting date
using the Black Scholes option-pricing model with the following assumptions:
11
Geron Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(UNAUDITED)
March 31, 2008 December 31, 2007
------------------- -------------------
Dividend yield None None
Expected volatility range 0.457 to 0.737 0.435 to 0.763
Risk-free interest rate range 1.62% to 2.88% 3.06% to 3.73%
Expected term 2 yrs to 7 yrs 2 yrs to 7 yrs
Expected volatilities are based on historical volatilities of our stock since
traded options on Geron stock do not correspond to derivatives' terms and
trading volume of Geron options is limited. The expected term of derivatives is
equal to the remaining contractual term of the instrument. The risk-free
interest rate is based on the U.S. Zero Coupon Treasury Strip Yields for the
expected term in effect on the reporting date. Dividend yield is based on
historical cash dividend payments, which have been none to date.
Fair Value on a Recurring Basis
-------------------------------
Assets and liabilities measured at fair value on a recurring basis are
categorized in the table below based upon the lowest level of significant input
to the valuations as of March 31, 2008.
Fair Value Measurements at Reporting Date Using
---------------------------------------------------------------
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
--------------- --------------- --------------- ---------------
(In thousands) Level 1 Level 2 Level 3 Total
--------------- --------------- --------------- ---------------
Assets
Money market funds (1) $ 134,254 $ -- $ -- $ 134,254
Government notes and agency
securities (2) 3,508 -- -- 3,508
Corporate notes (2) -- 1,254 -- 1,254
Asset-backed securities (2) -- 12,766 -- 12,766
Commercial paper (2) -- 41,077 -- 41,077
Equity investments in
licensees (3) 8 -- -- 8
--------------- --------------- --------------- ---------------
Total $ 137,770 $ 55,097 $ -- $ 192,867
=============== =============== =============== ===============
Liabilities
Derivatives (4) $ -- $ -- $ 1,196 $ 1,196
=============== =============== =============== ===============
-------------------
(1) Included in cash and cash equivalents on our condensed consolidated balance
sheet.
(2) Included in cash and cash equivalents and marketable securities on our
condensed consolidated balance sheet.
(3) Included in deposits and other assets on our condensed consolidated balance
sheet.
(4) Included in fair value of derivatives on our condensed consolidated balance
sheet.
Changes in Level 3 Recurring Fair Value Measurements
----------------------------------------------------
The table below includes a rollforward of the balance sheet amounts for the
quarter ended March 31, 2008 (including the change in fair value), for financial
instruments classified as Level 3. When a determination is made to classify a
financial instrument within Level 3, the determination is based upon the
significance of the unobservable parameters to the overall fair value
measurement. However, Level 3 financial instruments typically include, in
addition to the unobservable components, observable components (that is,
components that are actively quoted and can be validated to external sources).
Accordingly, the gains and losses in the table below include changes in fair
value due in part to observable factors that are part of the methodology.
12
Geron Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(UNAUDITED)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
----------------------------------------------------------------------------------------------
Change in
Unrealized Gains
Purchases, Related to
Total Sales, Transfers Financial
Fair Value at Unrealized Issuances, In and/or Fair value at Instruments Held
December 31, Gains Included in Settlements, Out of March 31, at March 31,
(In thousands) 2007 Earnings, net (1) net Level 3 2008 2008(1)
-------------- ------------- ----------------- ------------- --------- ------------- ------------------
Derivatives $ 1,602 $ 406 $ -- $ -- $ 1,196 $ 406
-------------------
(1) Reported as unrealized gain on derivatives on our condensed consolidated
statements of operations.
3. JOINT VENTURE AND RELATED PARTY TRANSACTIONS
In March 2005, we and the Biotechnology Research Corporation (BRC), a
subsidiary of Hong Kong University of Science and Technology, established a
joint venture company in Hong Kong called TA Therapeutics, Ltd. (TAT). TAT
conducts research and was established to commercially develop products that
utilize telomerase activator drugs to restore the regenerative and functional
capacity of cells in various organ systems that have been impacted by
senescence, injury or chronic disease. On June 15, 2007, we and BRC entered into
an agreement to restructure the TAT joint venture. Under the amended agreements,
we direct the pre-clinical and drug development activities, own 75% voting
interest and have unilateral right to wind up TAT. Upon winding up of TAT, all
intellectual property of TAT is assigned to us and BRC is entitled to royalties
on sales of future products developed from TAT's efforts up to a fixed amount
based on BRC's cash contributions. Upon winding up of TAT, if the assets
available for distribution, other than the intellectual property, are
insufficient to repay the whole of the paid-up capital, such assets shall be
distributed so that the losses shall be borne by the shareholders in proportion
to the cash contributed by both parties.
As a result of our obtaining control over TAT, we have included the results
of TAT in our condensed consolidated financial statements beginning June 16,
2007. Based on consideration of the relevant rights described above, we have
determined that BRC's 25% equity interest in TAT is not substantive. The amended
arrangement represents, in substance, a research and development arrangement
between us and BRC. Therefore, this arrangement is being accounted for as a
research and development arrangement. Contributions from BRC represent its share
of funding for future research and development activities that will be performed
principally by BRC and partly by us. Accordingly, BRC's net contributions have
been recorded as an advance payment of research and development on our condensed
consolidated balance sheet. The advance payment from BRC has been recognized as
either reduction of research and development expenses or revenues from
collaborative agreements depending upon who performs the related research and
development activity. The advance payment from BRC has been recorded as a
reduction of research and development expenses in our condensed consolidated
statements of operations in the period when BRC performs the underlying research
activity on behalf of TAT. The advance payment from BRC has been recognized as
revenue from collaborative agreements in our condensed consolidated statements
of operations in the period when we perform research activity on behalf of TAT
and the source of funds has not been derived from our cash contributions to TAT.
Amounts recognized in our condensed consolidated statements of operations will
be based on proportional performance over the period of planned research
activity, which is expected to be 24 months. As of March 31, 2008 and 2007, we
incurred related party research and development costs of $149,000 and $212,000,
respectively. As of March 31, 2008 and 2007, we earned related party revenue of
$26,000 and $212,000, respectively. As of March 31, 2008 and December 31, 2007,
the net balance of the advance payment from BRC was $1,387,000 and $1,727,000,
respectively.
In April 2005, we formed Start Licensing, Inc., a joint venture with Exeter
Life Sciences, Inc., to manage and license a broad portfolio of intellectual
property rights related to animal reproductive technologies. In March 2008, we
recognized revenue of $1,500,000 related to a milestone payment in connection
with the Start Licensing joint venture as a result of the final Risk Assessment
released by the U.S. Food and Drug Administration addressing food products made
from cloned animals or their progeny.
13
Geron Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(UNAUDITED)
4. COMMON STOCK ISSUANCES
On March 25, 2008, as an advance payment of the rent due for Geron's premises
at 200 Constitution Drive and 230 Constitution Drive in Menlo Park, California
for the period from August 1, 2008 through July 31, 2012, we issued to David D.
Bohannon Organization (DDBO), the lessor of those premises, 742,158 shares of
our common stock, pursuant to a Common Stock Purchase Agreement dated as of
March 19, 2008. The total fair value of the common stock of $3,191,000 has been
recorded as a prepaid asset and will be amortized to rent expense on a
straight-line basis over the lease period. As of March 31, 2008, the entire
amount remained as a prepaid asset.
On March 25, 2008, as a sixth installment payment due to Lonza Walkersville,
Inc. (Lonza) under the first project order to a services agreement pursuant to
which Lonza is manufacturing certain products for us intended for therapeutic
use in humans, we issued to Lonza 232,558 shares of our common stock, pursuant
to a Common Stock Purchase Agreement dated as of March 18, 2008. 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. As of March 31, 2008, $1,000,000 remained as a
prepaid asset which is expected to be expensed over the next six months.
On March 25, 2008, as an installment payment due to Girindus America Inc.
(Girindus) under the fourth project order to a services agreement pursuant to
which Girindus is manufacturing certain materials for us intended for
therapeutic use in humans, we issued to Girindus 375,926 shares of our common
stock, pursuant to a Common Stock Purchase Agreement dated as of March 21, 2008.
The total fair value of the common stock was $1,624,000, 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. As of March 31, 2008, $1,624,000
remained as a prepaid asset which is expected to be expensed over the next nine
months.
5. 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 segment, the discovery
and development of therapeutic and diagnostic products for oncology and human
embryonic stem cell therapies. As a result, the financial information disclosed
herein materially represents all of the financial information related to our
principal operating segment.
6. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS DATA
Three Months Ended
March 31,
-----------------------
(In Thousands) 2008 2007
---------- -----------
(Unaudited)
Supplemental Operating Activities:
Net unrealized (loss) gain on equity investments in licensees $ (4) $ 1
Reclassification between derivative liabilities and equity -- 21,399
Shares issued for 401(k) matching contribution and
performance bonus 640 1,722
Shares or warrants issued in exchange for services 5,840 191
Supplemental Investing Activities:
Net unrealized gain (loss) on marketable securities 180 (3)
Supplemental Financing Activities:
Deemed dividend -- (3,661)
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipate", "believe", "plan", "expect",
"future", "intend" and similar expressions to identify forward-looking
statements. These statements appear throughout the Form 10-Q and are statements
regarding our intent, belief, or current expectations, primarily with respect to
our operations and related industry developments. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of
this Form 10-Q. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us and described in Part I, Item 1A, entitled "Risk Factors" in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2007, 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 for the fiscal year ended December 31,
2007.
Geron is a Menlo Park, California-based biopharmaceutical company that is
developing first-in-class therapeutic products for the treatment of cancer and
chronic degenerative diseases, including spinal cord injury, heart failure and
diabetes. The products are based on our 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
Other than the adoption of SFAS 157 as discussed below, we believe that there
have been no significant changes in our critical accounting policies and
estimates during the three months ended March 31, 2008 as compared to the
critical accounting policies and estimates disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2007.
Fair Value of Financial Instruments
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements,"
(SFAS 157), which defines fair value, establishes guidelines for measuring fair
value and expands disclosures regarding fair value measurements. SFAS 157 does
not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements and
is effective for fiscal years beginning after November 15, 2007. In February
2008, the FASB issued FASB FSP 157-2 which delays the effective date of SFAS 157
for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), until fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. These nonfinancial items include
assets and liabilities such as reporting units measured at fair value in a
goodwill impairment test and nonfinancial assets acquired and liabilities
assumed in a business combination. Effective January 1, 2008, we adopted SFAS
157 for financial assets and liabilities recognized at fair value on a recurring
basis. The partial adoption of SFAS 157 for financial assets and liabilities did
not have a material impact on our consolidated financial position, results of
operations or cash flows.
SFAS 157 defines "fair value" as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, or an exit price. A liability's fair value
is defined as the amount that would be paid to transfer the liability to a new
obligor, not the amount that would be paid to settle the liability with the
creditor. Where available, fair value is based on observable market prices or
parameters or derived from such prices or parameters. Where observable prices or
inputs are not available, valuation models are applied. These valuation
techniques involve some level of management estimation and judgment, the degree
of which is dependent on the price transparency for the instruments or market
and the instruments' complexity.
Beginning January 1, 2008, assets and liabilities recorded at fair value in
our condensed consolidated balance sheet are categorized based upon the level of
judgment associated with inputs used to measure their fair value. SFAS 157
defines a three-level valuation hierarchy for disclosure of fair value
measurements as follows:
Level 1 - Inputs are unadjusted, quoted prices in active markets for
identical assets or liabilities at the measurement date.
Level 2 - Inputs (other than quoted market prices included in Level 1) are
either directly or indirectly observable for the asset or liability through
correlation with market data at the measurement date and for the duration of
the instrument's anticipated life.
Level 3 - Inputs reflect management's best estimate of what market
participants would use in pricing the asset or liability at the measurement
date. Consideration is given to the risk inherent in the valuation technique
and the risk inherent in the inputs to the model.
We classify inputs to derive fair values for marketable debt securities
available-for-sale and marketable equity investments in licensees as Level 1 and
2. Instruments classified as Level 1 include highly liquid government and agency
securities, money market funds and publicly traded equity securities in active
markets. Instruments classified as Level 2 include corporate notes, asset-backed
securities and commercial paper.
We classify inputs to calculate fair value of derivatives as Level 3 which
includes warrants and non-employee options classified as liabilities under Issue
00-19. The fair value for these instruments is calculated using the Black
Scholes option-pricing model. The model's inputs reflect assumptions that market
participants would use in pricing the instrument in a current period
transaction. Inputs to the model include stock volatility, dividend yields,
expected term of the warrants and non-employee options and risk-free interest
rates. Expected volatilities are based on historical volatilities of our stock
since traded options on Geron stock do not correspond to derivatives' terms and
trading volume of options is limited. The expected term of derivatives is equal
to the remaining contractual term of the instrument. The risk-free interest rate
is based on the U.S. Zero Coupon Treasury Strip Yields for the expected term in
effect on the reporting date. Changes to the model's inputs are not changes to
valuation methodologies, but instead reflect direct or indirect impacts from
changes in market conditions. Accordingly, results from the valuation model in
one period may not be indicative of future period measurements.
16
For a further discussion regarding fair value measurements, see Note 2, "Fair
Value Measurements," of Notes to Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS
Revenues
We recognized revenues from collaborative agreements of $79,000 for the three
months ended March 31, 2008, compared to $293,000 for the comparable 2007
period. Revenues for 2008 and 2007 primarily reflect related party reimbursement
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. Since June 16, 2007, we have been consolidating
TAT's results of operations and have eliminated any related party revenue when
the source of funds has been derived from our contributions to the related
party.
We have entered into license and option agreements with companies involved in
oncology, diagnostics, research tools, agriculture and biologics production. In
each of these agreements, we have granted certain rights to our technologies. In
connection with the agreements, we are entitled to receive license fees, option
fees, milestone payments and royalties on future sales, or any combination
thereof. We recognized license fee revenues of $1.6 million for the three months
ended March 31, 2008, compared to $494,000 for the comparable 2007 period
related to our various agreements. The increase in license fee revenues
primarily reflects recognition of a $1.5 million milestone payment in connection
with our joint venture agreement with Exeter Life Sciences, Inc. as a result of
the final Risk Assessment released by the U.S. Food and Drug Administration
addressing food products made from cloned animals or their progeny. We expect to
recognize revenues of $181,000 for the remainder of 2008, $27,000 in 2009,
$26,000 in 2010, $25,000 in 2011 and none thereafter related to our existing
deferred revenue. Current revenues may not be predictive of future revenues.
We received royalties of $33,000 for the three months ended March 31, 2008,
compared to $129,000 for the comparable 2007 period on product sales of
telomerase detection and telomere measurement kits to the research-use-only
market, cell-based research products and agricultural products. License and
royalty revenues are dependent upon additional agreements being signed and
future product sales.
Research and Development Expenses
Research and development expenses were $13.6 million for the three months
ended March 31, 2008, compared to $13.2 million for the comparable 2007 period.
The increase for the 2008 first quarter compared to the 2007 first quarter is
primarily the net result of increased personnel-related expense of $1.4 million,
including an increase of $119,000 in stock-based compensation expense associated
with stock options and restricted stock awards, increased drug product purchases
of $550,000 associated with our telomerase inhibitor drug, GRN163L, and
increased GRN163L and GRNVAC1 clinical trial costs of $490,000 as a result of
increased activity, offset by reduced consulting fees of $1.8 million related to
the telomerase cancer vaccine, GRNVAC1. 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. We have initiated the following
clinical trials for GRN163L: 1) Phase I trial in patients with chronic
lymphocytic leukemia; 2) Phase I trial in patients with solid tumor
malignancies; 3) Phase I trial in patients with advanced non-small cell lung
cancer when administered intravenously in combination with a standard
paclitaxel/carboplatin regimen and 4) Phase I trial in patients with multiple
myeloma. Preliminary data from these studies showed safety and tolerability of
the drug in low-dose cohorts as well as the expected pharmacokinetic properties
after multiple intravenous infusions of the drug. Taking the results from the
Duke University clinical studies in prostate cancer, hematologic malignancies
and renal cell carcinoma, we optimized the vaccine manufacturing process and
transferred it to a contract manufacturer. We have initiated a Phase II clinical
trial of our telomerase vaccine using the prime/boost scheme in patients with
acute myelogenous leukemia.
17
Our hESC therapy programs focus on treating injuries and degenerative
diseases with cell therapies based on cells derived from hESCs. A core 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 grow, maintain and scale the culture of undifferentiated hESCs that use
feeder cell-free and serum-free media with chemically defined components.
Moreover, we have developed scalable processes to differentiate these cells into
therapeutically relevant cells, including cryopreserved formulations in order to
deliver these therapeutic cells "on demand". We are now testing six different
hESC-derived therapeutic cell types in animal models. From these studies, we are
advancing development of two hESC-based therapeutics to clinical testing.
Research and development expenses allocated to programs are as follows (in
thousands):
Three Months Ended
March 31,
--------------------------------
2008 2007
--------------- ---------------
(Unaudited)
Oncology $ 7,571 $ 7,396
hESC Therapies 6,042 5,793
--------------- ---------------
Total $ 13,613 $ 13,189
=============== ===============
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 I, II and III. The
most significant costs associated with clinical development are incurred in
Phase III 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, may request additional information, may deny the application if it
determines that the application does not provide an adequate basis for approval,
and may also refuse to review an application that has been submitted if it
determines that the application does not provide an adequate basis for filing
and review. We cannot provide assurance that any approval required by the FDA
will be obtained on a timely basis, if at all.
18
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 quarterly report.
General and Administrative Expenses
General and administrative expenses were $4.0 million for the three months
ended March 31, 2008, compared to $4.1 million for the comparable 2007 period.
The decrease in general and administrative expenses for the 2008 first quarter
compared to the 2007 first quarter was primarily the net result of increased
patent legal costs of $365,000, offset by net reduced compensation expense
related to restricted stock awards and stock options to directors and employees
of $298,000 and reduced corporate legal costs of $150,000. We currently
anticipate general and administrative expenses to remain consistent with current
levels.
Unrealized Gain (Loss) on Derivatives
Unrealized gain (loss) on derivatives reflects a non-cash adjustment for
changes in fair value of warrants and options held by non-employees to purchase
common stock that are classified as current liabilities. Under Issue 00-19,
derivatives classified as assets or liabilities are marked to market at each
financial reporting date with any resulting unrealized gain (loss) recorded in
the condensed consolidated statements of operations. The derivatives continue to
be reported as an asset or liability until such time as the instruments are
exercised or expire or are otherwise modified to remove the provisions which
require this treatment, at which time the fair value of these instruments is
updated and reclassified from assets or liabilities to stockholders' equity. We
incurred an unrealized gain on derivatives of $406,000 for the three months
ended March 31, 2008, compared to $14.8 million for the comparable 2007 period.
The unrealized gain on derivatives for 2008 reflects the decreasing value of
derivative liabilities currently on the condensed consolidated balance sheet.
The unrealized gain on derivatives for 2007 primarily reflects the result of
amendments executed in March 2007 to certain warrant agreements to address the
presumption under Issue 00-19 of net-cash settlement in the event that
registered shares are not available to settle the warrants and the change in
fair value for warrants held at December 2006.
Interest and Other Income
Interest income was $1.9 million for the three months ended March 31, 2008,
compared to $2.8 million for the comparable 2007 period. The decrease in
interest income for 2008 compared to 2007 was primarily due to decreased
interest rates and lower cash and investment balances. Interest earned in future
periods will depend on the size of our securities portfolio and prevailing
interest rates.
Interest and Other Expense
Interest and other expense was $24,000 for the three months ended March 31,
2008, compared to $28,000 for the comparable 2007 period. The decrease in
interest and other expense for 2008 compared to 2007 was primarily due to
decreased investment management charges as a result of lower cash and investment
balances.
Net Loss Applicable to Common Stockholders
Net loss applicable to common stockholders was $13.7 million for the three
months ended March 31, 2008, compared to $2.5 million for the comparable 2007
period. Excluding the effect of unrealized gain on derivatives and deemed
dividend on derivatives, net loss increased in 2008 compared to 2007 primarily
as a result of increased operating expenses for drug product purchases and
clinical development of GRN163L and increasing employee headcount, offset by
reduced consulting expense.
19
Deemed Dividend on Derivatives
In conjunction with the warrant exercise in February 2007, we issued warrants
to purchase 1,125,000 shares of common stock, at a premium, exercisable from
June 2007. The new warrants are substantially the same as the A Warrants issued
in the December 2006 financing. The aggregate fair value of $3.7 million for
these new instruments, as calculated using the Black Scholes option-pricing
model, was recognized as a deemed dividend in the condensed consolidated
statements of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash, restricted cash, cash equivalents and marketable securities at March
31, 2008 totaled $195.9 million compared to $208.4 million at December 31, 2007.
We have an investment policy to invest these funds in liquid, investment grade
securities, such as interest-bearing money market funds, U.S. government and
agency securities, corporate notes, commercial paper, asset-backed securities
and municipal securities. Our investment portfolio does not contain securities
with exposure to sub-prime mortgages, collateralized debt obligations or auction
rate securities. The decrease in cash, restricted cash, cash equivalents and
marketable securities in 2008 was primarily due to use of cash for operations.
Cash Flows from Operating Activities. Net cash used in operations was $12.9
million for the three months ended March 31, 2008 compared to $7.2 million for
the comparable 2007 period. The increase in net cash used for operations in 2008
was primarily the result of payments to Biotechnology Research Corporation, our
joint venture partner in TA Therapeutics, Ltd., for scientific research
services, reduced non-cash expense related to stock-based compensation for
vendors and cash payments to vendors for equipment purchases and general
operations.
Cash Flows from Investing Activities. Net cash provided by investing
activities was $5.5 million for the three months ended March 31, 2008, compared
to $1.8 million for the comparable 2007 period. The increase in cash provided by
investing activities reflected reduced marketable securities purchases offset by
increased maturities.
Since inception through March 31, 2008, we have invested approximately $19.8
million in property and equipment, of which approximately $8.3 million was
financed through an equipment financing arrangement. As of March 31, 2008, no
payments were due under our equipment financing facility. As of March 31, 2008,
we had approximately $500,000 available for borrowing under our equipment
financing facility. We intend to renew the commitment for a new equipment
financing facility in 2008 to further fund equipment purchases. If we are unable
to renew the commitment, we will use our cash resources for capital
expenditures.
Cash Flows from Financing Activities. Net cash provided by financing
activities for the three months ended March 31, 2008 was none, compared to $15.3
million for the comparable 2007 period. In 2007, we received $15.0 million in
proceeds from the exercise of warrants issued to institutional investors in
connection with a financing in December 2006.
As of March 31, 2008, our contractual obligations for the next five years and
thereafter are as follows:
Principal Payments Due by Period
----------------------------------------------------------
Remainder After
Contractual Obligations (1) Total in 2008 2009-2010 2011-2012 2012
--------------------------- ---------- ---------- ---------- ---------- ----------
(Amounts in thousands)
Equipment leases $ 37 $ 13 $ 24 $ -- $ --
Operating leases (2) -- -- -- -- --
Research funding (3) 3,156 1,234 598 574 750
---------- ---------- ---------- ---------- ----------
Total contractual cash
obligations $ 3,193 $ 1,247 $ 622 $ 574 $ 750
========== ========== ========== ========== ==========
--------------
(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. In addition, this table does not include payments
under our severance plan if there was a change in control of the Company
or severance payments to key employees under involuntary termination.
20
(2) In March 2004, we issued 363,039 shares of our common stock to the lessor
of our premises at 200 and 230 Constitution Drive in payment of our
monthly rental obligation from February 1, 2004 through July 31, 2008. In
March 2008, we issued 742,158 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 August 1, 2008 through July 31, 2012. In May 2007,
we issued 210,569 shares of our common stock to the lessor of our premises
at 149 Commonwealth Drive in payment of our monthly rental obligation from
May 1, 2007 through April 30, 2010. The fair value of the common stock
issuances has been recorded as a prepaid asset and is being amortized to
rent expense on a straight-line basis over the lease periods.
(3) Research funding is comprised of sponsored research commitments at various
laboratories around the world, including commitments of our majority-owned
subsidiary, TAT.
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 2009. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures contains
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
Credit Risk. We place our cash, restricted cash, cash equivalents, and
marketable securities with seven 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 investment-grade corporate notes, U.S.
government and agency securities, commercial paper and asset-backed securities.
Our investment policy, approved by our Board of Directors, limits the amount we
may invest in any one type of investment issuer, thereby reducing credit risk
concentrations.
Interest Rate Sensitivity. The fair value of our cash equivalents and
marketable securities at March 31, 2008 was $192.9 million. These investments
include $136.8 million of cash and cash equivalents which are due in less than
90 days, $12.8 million of asset-backed securities which have varying maturity
dates, and $43.3 million of short-term investments which are due in less than
one year.
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 wholly-owned international subsidiary, Geron Bio-Med Ltd., satisfies
its financial obligations almost exclusively in its local currency. As of March
31, 2008, there was an immaterial currency exchange impact from our intercompany
transactions. As of March 31, 2008, we did not engage in foreign currency
hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Securities and
Exchange Commission defines the term "disclosure controls and procedures" to
mean a company's controls and other procedures that are designed to ensure that
information required to be disclosed in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms.
Our chief executive officer and our chief financial officer have concluded,
based on the evaluation of the effectiveness of our disclosure controls and
procedures by our management, with the participation of our chief executive
officer and our chief financial officer, as of the end of the period covered by
this report, that our disclosure controls and procedures were effective for this
purpose.
21
(b) Changes in Internal Controls Over Financial Reporting. There was no
change in our internal control over financial reporting for the three months
ended March 31, 2008 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
Our business is subject to various risks, including those described below.
You should carefully consider these risk factors, together with all of the other
information included in this Form 10-Q. Any of these risks could materially
adversely affect our business, operating results and financial condition.
OUR BUSINESS IS AT AN EARLY STAGE OF DEVELOPMENT.
Our business is at an early stage of development, in that we do not yet have
product candidates in late-stage clinical trials or on the market. We have begun
clinical testing of our lead anti-cancer drug, GRN163L, in patients with chronic
lymphocytic leukemia, solid tumor malignancies, non-small cell lung cancer and
multiple myeloma. We have begun clinical testing of our telomerase cancer
vaccine, GRNVAC1, in patients with acute myelogenous leukemia. We have no other
product candidates in clinical testing. Our ability to develop product
candidates that progress to and through clinical trials is subject to our
ability to, among other things:
o succeed in our research and development efforts;
o select therapeutic compounds or cell therapies for development;
o obtain required regulatory approvals;
o manufacture product candidates; and
o collaborate successfully with clinical trial sites, academic
institutions, physician investigators, clinical research organizations
and other third parties.
Potential lead drug compounds or other product candidates and technologies
will require significant preclinical and clinical testing prior to regulatory
approval in the United States and other countries. Our product candidates may
prove to have undesirable and unintended side effects or other characteristics
adversely affecting their safety, efficacy or cost-effectiveness that could
prevent or limit their commercial use. In addition, our product candidates may
not prove to be more effective for treating disease or injury than current
therapies. Accordingly, we may have to delay or abandon efforts to research,
develop or obtain regulatory approvals 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 March 31, 2008, our accumulated deficit was approximately $458.5
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 arrangement
will be sufficient to fund our current and planned operations. The timing and
degree of any future capital requirements will depend on many factors,
including:
o the accuracy of the assumptions underlying our estimates for our capital
needs in 2008 and beyond;
o the magnitude and scope of our research and development programs;
o the progress we make in our research and development programs,
preclinical development and clinical trials;
o our ability to establish, enforce and maintain strategic arrangements
for research, development, clinical testing, manufacturing and
marketing;
o the number and type of product candidates that we pursue;
o the time and costs involved in obtaining regulatory approvals; and
o the costs involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims.
We do not have any committed sources of capital. Additional financing through
strategic collaborations, public or private equity financings, capital lease
transactions or other financing sources may not be available on acceptable
terms, or at all. The receptivity of the public and private equity markets to
proposed financings is substantially affected by the general economic, market
and political climate and by other factors which are unpredictable and over
which we have no control. Additional equity financings, if we obtain them, could
result in significant dilution to stockholders. Further, in the event that
additional funds are obtained through arrangements with collaborative partners,
these arrangements may require us to relinquish rights to some of our
technologies, product candidates or proposed products that we would otherwise
seek to develop and commercialize ourselves. If sufficient capital is not
available, we may be required to delay, reduce the scope of or eliminate one or
more of our programs, any of which could have a material adverse effect on our
business.
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 approvals 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. Large
scale 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. Any such delays could have a material adverse effect on our business.
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. The inability to commercialize and market our product
candidates could materially affect our business.
BECAUSE WE OR OUR COLLABORATORS MUST OBTAIN REGULATORY APPROVALS 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:
o significantly harm the marketing of any products that we or our
collaborators develop;
o impose costly procedures upon our activities or the activities of our
collaborators;
o diminish any competitive advantages that we or our collaborators may
attain; or
o adversely affect our ability to receive royalties and generate revenues
and profits.
24
Even if we commit the necessary time and resources, the required regulatory
agency approvals may not be obtained for any product candidates developed by us
or in collaboration with us. If we obtain regulatory agency approval for a new
product, this approval may entail limitations on the indicated uses for which it
can be marketed that could limit the potential commercial use of the product.
Approved products and their manufacturers are subject to continual review,
and discovery of previously unknown problems with a product or its manufacturer
may result in restrictions on the product or manufacturer, including withdrawal
of the product from the market. The sale by us or our collaborators of any
commercially viable product will be subject to government regulation from
several standpoints, including the processes of:
o manufacturing;
o advertising and promoting;
o selling and marketing;
o labeling; and
o distribution.
If, and to the extent that, we are unable to comply with these regulations,
our ability to earn revenues will be materially and negatively impacted.
Failure to comply with regulatory requirements can result in severe civil and
criminal penalties, including but not limited to:
o recall or seizure of products;
o injunction against manufacture, distribution, sales and marketing; and
o criminal prosecution.
The imposition of any of these penalties or other commercial limitations
could significantly impair our business, financial condition and results of
operations.
ENTRY INTO CLINICAL TRIALS WITH ONE OR MORE PRODUCT CANDIDATES MAY NOT RESULT IN
ANY COMMERCIALLY VIABLE PRODUCTS.
We may never generate revenues from product sales because of a variety of
risks inherent in our business, including the following risks:
o clinical trials may not demonstrate the safety and efficacy of our
product candidates;
o completion of clinical trials may be delayed, or costs of clinical
trials may exceed anticipated amounts;
o we may not be able to obtain regulatory approval of our product
candidates, or may experience delays in obtaining such approvals;
o we may not be able to manufacture our product candidates economically on
a commercial scale;
o we and any licensees of ours may not be able to successfully market our
products;
o physicians may not prescribe our products, or patients or third party
payors may not accept such products;
o others may have proprietary rights which prevent us from marketing our
products; and
o competitors may sell similar, superior or lower-cost products.
Positive preliminary results from clinical trials of GRN163L and GRNVAC1 may
not be indicative of successful outcomes in later stage trials. Negative or
limited results from any current or future clinical trials could delay or
prevent further development of our product candidates which would adversely
affect our business.
25
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
monitors 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:
o harming our ability to establish critical partnerships and
collaborations;
o delaying or preventing progress in our research and development; and
o causing a decrease in the price of our stock.
IMPAIRMENT OF OUR INTELLECTUAL PROPERTY RIGHTS MAY ADVERSELY AFFECT THE VALUE OF
OUR TECHNOLOGIES AND PRODUCT CANDIDATES AND LIMIT OUR ABILITY TO PURSUE THEIR
DEVELOPMENT.
Protection of our proprietary technology is critically important to our
business. Our success will depend in part on our ability to obtain and enforce
our patents and maintain trade secrets, both in the United States and in other
countries. In the event that we are unsuccessful in obtaining and enforcing
patents, our business would be negatively impacted. Further, our patents may be
challenged, invalidated or circumvented, and our patent rights may not provide
proprietary protection or competitive advantages to us.
The patent positions of pharmaceutical and biopharmaceutical companies,
including ours, are highly uncertain and involve complex legal and technical
questions. In particular, legal principles for biotechnology patents in the
United States and in other countries are evolving, and the extent to which we
will be able to obtain patent coverage to protect our technology, or enforce
issued patents, is uncertain. In the U.S., recent court decisions in patent
cases as well as proposed legislative changes to the patent system only
exacerbate this uncertainty. Furthermore, significant amendments to the
regulations governing the process of obtaining patents were recently proposed by
the U.S. Patent Office. These amendments were widely regarded as detrimental to
the interests of biotechnology and pharmaceutical companies. The implementation
of the amendments was blocked by a court injunction requested by a
pharmaceutical company. At this time we do not know whether the Patent Office
will seek to reintroduce the amendments in a modified form.
In Europe, 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 patent
protection for our human embryonic stem cell technologies in Europe.
26
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. As more groups become
engaged in scientific research and product development in the areas of
telomerase biology and embryonic stem cells, the risk of our patents being
challenged through patent interferences, oppositions, reexaminations or other
means will likely 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
have recently been 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 III clinical trials. Pharmexa obtained a European
patent with broad claims to the use of telomerase vaccines 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 limited to five specific small peptide
fragments of telomerase. The decision was appealed to the Technical Board of
Appeals (TBA). In August 2007, the TBA ruled, consistent with the decision of
the OD, that Pharmexa was not entitled to the originally granted broad claims
but was only entitled to the narrow claims limited to the five small peptides.
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. We have appealed that decision to the TBA,
and that appeal is still pending. Because this appeal is ongoing, the outcome
cannot be determined at this time. We are also seeking to obtain patent coverage
in Europe for telomerase peptides through a European divisional patent
application. If those patent claims are issued, they too may be subject to an
opposition proceeding.
27
European opposition and appeal proceedings can take several years to reach
final decision. The oppositions discussed above reflect the complexity of the
patent landscape in which we operate, and illustrate the risks and
uncertainties. We are also currently involved in other patent opposition
proceedings in Europe and Australia.
Patent opposition proceedings are not currently available in the U.S. patent
system, but legislation has been proposed 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.
The license agreement conveys exclusive rights to Geron under the WARF patents
for the development and commercialization of therapeutics based on neural cells,
cardiomyocytes and pancreatic islet cells, derived from human embryonic stem
cells, as well as nonexclusive rights for other product opportunities. In
October 2006, the Patent Office initiated the reexamination proceedings. After
initially rejecting the patent claims, the Patent Office recently issued
decisions in all three cases upholding the patentability of the claims. The
decisions to uphold the 5,843,780 and 6,200,806 patents are final and not
subject to further appeal. The decision on the 7,029,913 patent is subject to
appeal. We cooperated with WARF in these reexamination actions and expect that
WARF will continue to vigorously defend its patent position in any appeal of the
decision on the 7,029,913 patent. While these decisions are all favorable to our
patent position, the outcome of any appeal or of any future reexamination
proceedings cannot be determined at this time. Reduction or loss of claim scope
in these WARF embryonic stem cell patents would negatively impact Geron's
proprietary position in this technology.
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.
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.
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.
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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 we initiate negotiation for
licenses to other technologies as the need or opportunity arises. 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: Merck is developing cancer vaccines targeted to telomerase
other than the dendritic cell-based vaccines that we are developing; Cell
Genesys is developing oncolytic virus therapeutics utilizing the telomerase
promoter; and Roche and Sienna are 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:
o conduct research and development activities in conjunction with us;
o design and conduct advanced clinical trials in the event that we reach
clinical trials;
o fund research and development activities with us;
o manage and license certain patent rights;
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o pay us fees upon the achievement of milestones; and
o market with us any commercial products that result from our
collaborations or joint ventures.
The development and commercialization of potential products will be delayed
if collaborators or joint venture partners fail to conduct these activities in a
timely manner or at all. 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 who assist us in formulating our research and
development and clinical 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.
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.
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
GRN163L, GRNVAC1 and GRNOPC1 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 or manufacture 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.
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.
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SOME OF OUR COMPETITORS MAY DEVELOP TECHNOLOGIES THAT ARE SUPERIOR TO OR MORE
COST-EFFECTIVE THAN OURS, WHICH MAY IMPACT THE COMMERCIAL VIABILITY OF OUR
TECHNOLOGIES AND WHICH MAY SIGNIFICANTLY DAMAGE OUR ABILITY TO SUSTAIN
OPERATIONS.
The pharmaceutical and biotechnology industries are intensely competitive.
Other pharmaceutical and biotechnology companies and research organizations
currently engage in or have in the past engaged in efforts related to the
biological mechanisms that are the focus of our programs in oncology and human
embryonic stem cell therapies, including the study of telomeres, telomerase,
human embryonic stem cells, and nuclear transfer. In addition, other products
and therapies that could compete directly with the product candidates that we
are seeking to develop and market currently exist or are being developed by
pharmaceutical and biopharmaceutical companies and by academic and other
research organizations.
Many companies are developing alternative therapies to treat cancer and, in
this regard, are competitors of ours. According to public data from the FDA and
NIH, there are more than 200 approved anti-cancer products on the market in the
United States, and several thousand in clinical development. Many of the
pharmaceutical companies developing and marketing these competing products
(including GlaxoSmithKline, Bristol-Myers Squibb Company and Novartis AG, among
others) have significantly greater financial resources and expertise than we do
in:
o research and development;
o manufacturing;
o preclinical and clinical testing;
o obtaining regulatory approvals; and
o marketing 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:
o product efficacy and safety;
o the timing and scope of regulatory consents;
o availability of resources;
o reimbursement coverage;
o price; and
o patent position, including potentially dominant patent positions of
others.
As a result of the foregoing, our competitors may develop more effective or
more affordable products, or achieve earlier patent protection or product
commercialization than we do. Most significantly, competitive products may
render any product candidates that we develop obsolete, which would negatively
impact our business and ability to sustain operations.
WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN SUFFICIENT INSURANCE ON COMMERCIALLY
REASONABLE TERMS OR WITH ADEQUATE COVERAGE AGAINST POTENTIAL LIABILITIES IN
ORDER TO PROTECT OURSELVES AGAINST PRODUCT LIABILITY CLAIMS.
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.
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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:
o our establishment and demonstration to the medical community of the
clinical efficacy and safety of our product candidates;
o our ability to create products that are superior to alternatives
currently on the market;
o our ability to establish in the medical community the potential
advantage of our treatments over alternative treatment methods; and
o reimbursement policies of government and third-party payors.
If the health care community does not accept our potential products for any
of the foregoing reasons, or for any other reason, our business would be
materially harmed.
IF WE FAIL TO OBTAIN ACCEPTABLE PRICES OR ADEQUATE REIMBURSEMENT FOR OUR PRODUCT
CANDIDATES, THE USE OF OUR POTENTIAL PRODUCTS COULD BE SEVERELY LIMITED.
Our ability to successfully commercialize our product candidates will depend
significantly on our ability to obtain acceptable prices and the availability of
reimbursement to the patient from third-party payors. Significant uncertainty
exists as to the reimbursement status of newly-approved health care products,
including pharmaceuticals. If our potential products are not considered
cost-effective or if we fail to generate adequate third-party reimbursement for
the users of our potential products and treatments, then we may be unable to
maintain price levels sufficient to realize an appropriate return on our
investment for potential products currently in development.
In both U.S. and other markets, sales of our potential products, if any, will
depend in part on the availability of reimbursement from third-party payors,
examples of which include:
o government health administration authorities;
o private health insurers;
o health maintenance organizations; and
o pharmacy benefit management companies.
Both federal and state governments in the United States and governments in
other countries continue to propose and pass legislation designed to contain or
reduce the cost of health care. Legislation and regulations affecting the
pricing of pharmaceuticals and other medical products may be adopted before any
of our potential products are approved for marketing. Cost control initiatives
could decrease the price that we receive for any product candidate we may
develop in the future. In addition, third-party payors are increasingly
challenging the price and cost-effectiveness of medical products and services
and any of our potential products may ultimately not be considered
cost-effective by these third parties. Any of these initiatives or developments
could materially harm our business.
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.
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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 clean up, of
hazardous chemicals or hazardous, infectious or toxic substances could subject
us to significant liabilities, including joint and several liability under
certain statutes. Any such liability could exceed our resources and could have a
material adverse effect on our business, financial condition and results of
operations. Additionally, an accident could damage our research and
manufacturing facilities and operations.
Additional federal, state and local laws and regulations affecting us may
be adopted in the future. We may incur substantial costs to comply with these
laws and regulations and substantial fines or penalties if we violate any of
these laws or regulations, which would adversely affect our business.
FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH
SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS AND STOCK PRICE.
Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act)
requires that we establish and maintain an adequate internal control structure
and procedures for financial reporting and include a report of management on our
internal control over financial reporting. Our annual report on Form 10-K must
contain an assessment by management of the effectiveness of our internal control
over financial reporting and must include disclosure of any material weaknesses
in internal control over financial reporting that we have identified. In
addition, our independent registered public accounting firm must annually
provide an opinion on the effectiveness of our internal control over financial
reporting.
The requirements of Section 404 of the Sarbanes-Oxley Act are ongoing and
also apply to future years. We expect that our internal control over financial
reporting will continue to evolve as our business develops. Although we are
committed to continue to improve our internal control processes and we will
continue to diligently and vigorously review our internal control over financial
reporting in order to ensure compliance with Section 404 requirements, any
control system, regardless of how well designed, operated and evaluated, can
provide only reasonable, not absolute, assurance that its objectives will be
met. Therefore, we cannot be certain that in the future material weaknesses or
significant deficiencies will not exist or otherwise be discovered. If material
weaknesses or other significant deficiencies occur, these weaknesses or
deficiencies could result in misstatements of our results of operations,
restatements of our consolidated financial statements, a decline in our stock
price, or other material adverse effects on our business, reputation, results of
operations, financial condition or liquidity.
OUR STOCK PRICE HAS HISTORICALLY BEEN VERY VOLATILE.
Stock prices and trading volumes for many biopharmaceutical companies
fluctuate widely for a number of reasons, including factors which may be
unrelated to their businesses or results of operations such as media coverage,
legislative and regulatory measures and the activities of various interest
groups or organizations. This market volatility, as well as general domestic or
international economic, market and political conditions, could materially and
adversely affect the market price of our common stock and the return on your
investment.
Historically, our stock price has been extremely volatile. Between January
1998 and March 2008, our stock has traded as high as $75.88 per share and as low
as $1.41 per share. Between January 1, 2003 and March 31, 2008, the price has
ranged between a high of $16.80 per share and a low of $1.41 per share. The
significant market price fluctuations of our common stock are due to a variety
of factors, including:
o the demand in the market for our common stock;
o the experimental nature of our product candidates;
o fluctuations in our operating results;
o market conditions relating to the biopharmaceutical and pharmaceutical
industries;
33
o announcements of technological innovations, new commercial products, or
clinical progress or lack thereof by us, our collaborative partners or
our competitors;
o announcements concerning regulatory developments, developments with
respect to proprietary rights and our collaborations;
o comments by securities analysts;
o general market conditions;
o political developments related to human embryonic stem cell research;
o public concern with respect to our product candidates; or
o the issuance of common stock to partners, vendors or to investors to
raise additional capital.
In addition, the stock market is subject to other factors outside our control
that can cause extreme price and volume fluctuations. Securities class action
litigation has often been brought against companies, including many
biotechnology companies, which experience volatility in the market price of
their securities. Litigation brought against us could result in substantial
costs and a diversion of management's attention and resources, which could
adversely affect our business.
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES MAY ADVERSELY AFFECT THE MARKET PRICE
FOR OUR COMMON STOCK.
Sale of a substantial number of shares of our common stock in the public
market, or the perception that such sales could occur, could significantly and
negatively affect the market price for our common stock. As of March 31, 2008,
we had 200,000,000 shares of common stock authorized for issuance and 77,823,657
shares of common stock outstanding. In addition, as of March 31, 2008, we have
reserved for future issuance approximately 27,764,989 shares of common stock for
our stock plans, potential milestone payments and outstanding warrants.
In addition, we have issued common stock to certain parties, such as vendors
and service providers, as payment for products and services. Under these
arrangements, we typically agree to register the shares for resale soon after
their issuance. We may continue to pay for certain goods and services in this
manner, which would dilute your interest in us. Also, sales of the shares issued
in this manner could negatively affect the market price of our stock.
OUR UNDESIGNATED PREFERRED STOCK MAY INHIBIT POTENTIAL ACQUISITION BIDS; THIS
MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK AND THE VOTING RIGHTS
OF HOLDERS OF OUR COMMON STOCK.
Our certificate of incorporation provides our Board of Directors with the
authority to issue up to 3,000,000 shares of undesignated preferred stock and to
determine the rights, preferences, privileges and restrictions of these shares
without further vote or action by 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.
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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:
o prevent stockholders from taking actions by written consent;
o divide the Board of Directors into separate classes with terms of office
that are structured to prevent all of the directors from being elected
in any one year; and
o set forth procedures for nominating directors and submitting proposals
for consideration at stockholders' meetings.
Provisions of Delaware law may also inhibit potential acquisition bids for us
or prevent us from engaging in business combinations. 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. 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.
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 25, 2008, as an advance payment of the rent due for our premises at
200 Constitution Drive and 230 Constitution Drive in Menlo Park, California for
the period from August 1, 2008 through July 31, 2012, we issued to David D.
Bohannon Organization (DDBO), the lessor of those premises, 742,158 shares of
our common stock, pursuant to a Common Stock Purchase Agreement dated as of
March 19, 2008. The total fair value of the common stock of $3,191,000 has been
recorded as a prepaid asset and will be amortized to rent expense on a
straight-line basis over the lease period. As of March 31, 2008, the entire
amount remained as a prepaid asset.
On March 25, 2008, as a sixth installment payment due to Lonza Walkersville,
Inc. (Lonza) under the first project order to a services agreement pursuant to
which Lonza is manufacturing certain products for us intended for therapeutic
use in humans, we issued to Lonza 232,558 shares of our common stock, pursuant
to a Common Stock Purchase Agreement dated as of March 18, 2008. 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. As of March 31, 2008, $1,000,000 remained as a
prepaid asset which is expected to be expensed over the next six months.
On March 25, 2008, as an installment payment due to Girindus America Inc.
(Girindus) under the fourth project order to a services agreement pursuant to
which Girindus is manufacturing certain materials for us intended for
therapeutic use in humans, we issued to Girindus 375,926 shares of our common
stock, pursuant to a Common Stock Purchase Agreement dated as of March 21, 2008.
The total fair value of the common stock was $1,624,000, 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. As of March 31, 2008, $1,624,000
remained as a prepaid asset which is expected to be expensed over the next nine
months.
We issued the above-described shares of common stock in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended. DDBO, Lonza and Girindus represented to us that they are
accredited investors as defined in Rule 501(a) of the Securities Act of 1933, as
amended, and that the securities issued pursuant thereto were being acquired for
investment purposes.
35
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibit
Number Description
--------------------------------------------------------------------------------
10.1 Fifth Amendment to Lease by and between Registrant and David D.
Bohannon Organization, dated March 19, 2008.
10.2 Second Amendment to Lease by and between Registrant and David
D. Bohannon Organization, dated March 19, 2008.
31.1 Certification of Chief Executive Officer pursuant to Form of Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated April 30, 2008.
31.2 Certification of Chief Financial Officer pursuant to Form of Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated April 30, 2008.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated April 30, 2008.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated April 30, 2008.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GERON CORPORATION
By: /s/ DAVID L. GREENWOOD
-----------------------------------------------
David L. Greenwood
Executive Vice President and Chief
Financial Officer (Duly Authorized Signatory)
Date: April 30, 2008
36
EXHIBIT INDEX
Exhibit
Number Description
--------------------------------------------------------------------------------
10.1 Fifth Amendment to Lease by and between Registrant and David
D. Bohannon Organization, dated March 19, 2008.
10.2 Second Amendment to Lease by and between Registrant and David
D. Bohannon Organization, dated March 19, 2008.
31.1 Certification of Chief Executive Officer pursuant to Form of Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated April 30, 2008.
31.2 Certification of Chief Financial Officer pursuant to Form of Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated April 30, 2008.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated April 30, 2008.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated April 30, 2008.