UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
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 0-19986
CELL GENESYS, INC. (Exact name of Registrant as specified in its Charter)
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500 Forbes Boulevard, South San Francisco, California 94080
(Address of Principal Executive Offices including Zip Code)
(650) 266-3000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Preferred Shares Purchase Rights
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indictae by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of June 28, 2002, the last business day of the Registrant's most recently completed second fiscal quarter, there were 35,652,412 shares of the Registrant's voting stock outstanding, and the approximate aggregate market value of such shares held by non-affiliates of the Registrant (based on the closing sale price of such shares on the NASDAQ National Market on June 28, 2002) was $443.8 million. Shares of Common Stock held by each executive officer and director and by each person known to the Registrant who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 14, 2003, the number of outstanding shares of the Registrant's Common Stock was 36,951,569.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. Such Proxy Statement will be filed within 120 days of the fiscal year covered by this Annual Report on Form 10-K.
TABLE OF CONTENTS
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risks
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Disclosure Controls and Procedures
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
PART I
Statements made in this document other than statements of historical
fact, including statements about the Company's and its subsidiaries'
progress and results of preclinical studies, clinical trials,
marketability of potential products and nature of product pipelines,
corporate partnerships, licenses and intellectual property are forward-
looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and
are subject to a number of uncertainties that could cause actual results
to differ materially from the statements made, including risks
associated with the success of research and product development
programs, results achieved in future preclinical studies and clinical
trials, the regulatory approval process, competitive technologies and
products, the scope and validity of patents, proprietary technology and
corporate partnerships. Reference is made to discussions about risks
associated with product development programs, intellectual property and
other risks which may affect the Company under "Risk Factors" below. The
Company does not undertake any obligation to update forward-looking
statements.
Item 1. BUSINESS Overview Since its inception in April 1988, Cell
Genesys, Inc. ("Cell Genesys" or "the Company") has focused
its research and product development efforts on human disease therapies that are
based on innovative gene modification technologies. The Company's strategic
objective is to develop and commercialize biological therapies, including cancer
vaccines, oncolytic virus therapies and cancer gene therapies, to treat multiple
types of cancer. Cell Genesys' current clinical programs include
GVAX® cancer vaccines and oncolytic virus therapies.
GVAX® cancer vaccines are in Phase 2 studies for prostate cancer,
lung cancer, pancreatic cancer and leukemia and in Phase 1/2 studies for
multiple myeloma. The Company expects to initiate Phase 3 trials for
GVAX® prostate cancer vaccine and lung cancer vaccine during the
next year. Ongoing clinical programs evaluating the Company's oncolytic virus
therapies include CG7870, an intratumorally administered therapy for early-stage
prostate cancer. In addition, Cell Genesys has preclinical oncolytic virus
therapy programs evaluating potential therapies for bladder cancer, liver cancer
and colon cancer as well as preclinical cancer gene therapy programs evaluating
potential therapies for multiple types of cancer. The Company plans to file an
Investigational New Drug ("IND") application for CG8840, an oncolytic
virus therapy for the treatment of bladder cancer, during the next year.
Additionally, Cell Genesys has a majority-owned subsidiary, Ceregene, Inc.,
which is focused on gene therapies for neurological disorders, and Cell Genesys
continues to hold approximately 8.7 million shares of common stock of its former
subsidiary, Abgenix, Inc. (Nasdaq: ABGX), which is focused on the development
and commercialization of antibody therapies. Cell Genesys was incorporated in the State of Delaware in
1988. Our common stock trades on the NASDAQ National Market under the symbol
"CEGE". Our principal executive offices are located at 500 Forbes
Boulevard, South San Francisco, California 94080, and our phone number is (650)
266-3000. Our Internet home page is located at
http://www.cellgenesys.com; however, the
information in, or that can be accessed through, our home page is not part of
this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to such reports are available, free
of charge, on or through our Internet home page as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission, or SEC. During 2002, Cell Genesys continued to increase its focus
on developing cancer therapies and establishing its manufacturing infrastructure
in preparation for Phase 3 clinical trials. Cell Genesys' goal is to emphasize
"off-the-shelf" products and when possible, therapies that can be
administered in the outpatient setting. However, the Company is also developing
a patient-specific vaccine product for lung cancer. Cancer therapies based on biological therapy technologies
are currently being evaluated by Cell Genesys in human clinical studies. These
include studies of GVAX® cancer vaccines, which employ
genetically modified tumor cells to induce the immune system and enhance an
immune response against malignant cells,
as well as studies of oncolytic virus therapies which employ genetically
modified adenoviruses engineered to selectively replicate in and kill targeted
cancer cells. During 2002, encouraging data were obtained from clinical trials
of GVAX® prostate cancer vaccine and GVAX® lung
cancer vaccine. Additionally, in 2002, encouraging data were obtained from
clinical trials of the Company's oncolytic virus therapy, CG7870, for the
treatment of prostate cancer, and positive preclinical studies were reported
with CG8840, an oncolytic virus therapy for the treatment of bladder cancer.
Product candidates based on in vivo gene therapy
technologies are at the preclinical stage of development at Cell Genesys. With
in vivo cancer gene therapy, the treatment goals include stimulating
targeted cells to produce a protein or other substance needed to normalize key
biological processes, or otherwise inhibit the spread of cancer. In 2002, the
Company continued preclinical studies in a number of therapeutic areas and
further developed its gene therapy technologies, with an emphasis on
antiangiogenesis, or preventing tumor blood vessel growth, for the treatment of
multiple types of cancer. The Company's majority-owned subsidiary, Ceregene,
Inc., which was launched in January 2001, continues to conduct research
evaluating gene therapy for the treatment of Alzheimer's and Parkinson's
disease. Cell Genesys ended 2002 with approximately $167 million
in cash, cash equivalents and short-term investments, including approximately
$67 million of restricted cash and investments. The Company has maintained its
financial position through strategic management of its resources, including the
Company's holdings in Abgenix (of which Cell Genesys continues to hold
approximately 8.7 million shares of common stock) and by relying on funding from
various corporate collaborations and licensing agreements. Additionally, in
February 2003, a shelf registration statement filed by Cell Genesys with the
Securities and Exchange Commission was declared effective, which enables the
Company to offer up to $150 million of securities on short notice in one or more
public offerings. However, there can be no assurance the Company will be able
to issue such securities on acceptable terms, or at all. The Company may finance certain of its operations through
corporate collaborations with established pharmaceutical and biotechnology
companies in order to develop its technologies as broadly as possible, to fund
product development and to accelerate the commercialization of certain product
opportunities. Such alliances are intended to provide financial resources,
research, development and manufacturing capabilities and marketing
infrastructure to aid in the commercialization of potential disease therapies.
Cell Genesys also evaluates, on an ongoing basis, opportunities to in-license or
acquire products and/or technologies that complement its portfolio. There can be
no assurance that Cell Genesys will be able to enter into additional
collaborative relationships or obtain new products and/or technologies on
acceptable terms, if at all, or that if such actions occur, they will lead to
successful products. Failure to enter into new corporate relationships or
expand Cell Genesys' product and technological base may limit Cell Genesys'
success. A major portion of the Company's operating expenses to
date is related to the research and development ("R&D") of
products either on its own behalf or under contracts. During 2002, 2001 and
2000, the Company's R&D expenses were $75.1 million, $50.8 million and $30.4
million, respectively. Cell Genesys intends to maintain its strong commitment
to R&D as an essential component of its oncology product development effort.
Licensed technology developed by outside parties is an additional source of
potential products. Product Development Cell Genesys' strategic objective is to develop and
commercialize biological cancer therapies. In its clinical stage cancer
programs, Cell Genesys is genetically modifying selected cell types and viruses
outside of the body (ex vivo) to impart disease-fighting capabilities
that are not possible with conventional therapeutic agents. Clinical Programs Overview of GVAX® Cancer Vaccines
Program. GVAX® cancer vaccines, a type of biological
therapy, are treatment vaccines, not preventative vaccines, designed to
stimulate the patient's immune system to effectively fight cancer. This program
was added to the product portfolio of Cell Genesys through its acquisition of
Somatix Therapy Corporation in 1997. GVAX® cancer vaccines are
comprised of tumor cells that are genetically modified to secrete an immune-
stimulating hormone, granulocyte-macrophage colony stimulating factor ("GM-
CSF"), and then are lethally irradiated for safety. The goal of
GVAX® cancer vaccines is to stimulate an antitumor immune
response that targets and destroys tumor cells which persist or recur following
surgery, radiation therapy and/or chemotherapy treatment. Cell Genesys is
currently testing non patient-specific and patient-specific configurations of
GVAX® cancer vaccines in human clinical studies. Cell Genesys
currently has clinical trials under way for GVAX® cancer vaccines
in prostate cancer, lung cancer, pancreatic cancer, leukemia and myeloma.
GVAX® cancer vaccines can be administered by intradermal (under
the skin) injection on an outpatient basis. They have been administered to over
500 patients in multiple human trials to date and have been found to be safe and
well tolerated. The most consistent treatment-related side effects appear to be
inflammation at the injection site and occasional low-grade fever. Cell Genesys
expects to manufacture GVAX® cancer vaccines in its facilities
located in Hayward, California and Memphis, Tennessee. GVAX® Prostate Cancer Vaccine.
GVAX® prostate cancer vaccine is an "allogeneic" (non
patient-specific) vaccine comprised of prostate cancer cells that have been
genetically modified to secrete GM-CSF and then irradiated for safety. The
Company's plan is to develop and manufacture this potential product as an
"off-the-shelf" pharmaceutical for use after surgery, radiation and/or
hormone therapy for advanced-stage prostate cancer. In September 2002, updated
data from the initial Phase 2 multicenter trial of GVAX® prostate
cancer vaccine in hormone-refractory patients were presented. Thirty-four
patients entered in the trial had metastatic prostate cancer in the bone with
positive bone scans at the start of therapy and were assigned to receive either
low dose (24 patients) or high dose (10 patients) vaccine treatment as their
only therapy. Five of 10 (50 percent) patients receiving the higher dose level
of the vaccine were reported to be alive 2.5 years after treatment (median
survival = 31 months), and seven of 22 patients (32 percent) receiving the lower
dose of the vaccine were reported to be alive 2.5 years after treatment (median
survival = 22 months). Two patients could not be located for follow-up. These
results compare favorably to the reported median survival for hormone-refractory
prostate cancer patients with bone metastases who are treated with chemotherapy,
the current standard of care for this patient group, although such a comparison
needs to be confirmed in a larger randomized controlled trial. In addition,
post treatment follow-up of the 34 patients with positive bone scans prior to
treatment revealed a trend toward prolonged progression-free survival as
measured by bone scan in patients who received the higher dose of vaccine as
compared to patients who received the lower dose (median time to progression of
140 days v. 85 days). Treatment with GVAX® prostate cancer
vaccine was safe and well tolerated. Based on these data, Cell Genesys launched a series of
Phase 1/2 clinical trials in hormone-refractory prostate cancer patients to
evaluate the safety and efficacy of a higher potency form of
GVAX® prostate cancer vaccine. The Company expects to initiate
its Phase 3 clinical trial with this form of GVAX® prostate
cancer vaccine in hormone-refractory patients. Cell Genesys plans to
manufacture GVAX® prostate cancer vaccine for Phase 3 trials and
potential market launch in its manufacturing facility in Hayward,
California. GVAX® Lung Cancer Vaccine.
Based on encouraging data from Cell Genesys' initial GVAX® lung
cancer vaccine trial, the Company initiated an additional multicenter clinical
trial of an "autologous" (patient-specific) GVAX®
cancer vaccine. The vaccine is made directly from each treated patient's tumor
cells. After surgical removal of a patient's tumor, the GVAX®
cancer vaccine is prepared by genetically modifying the patient's tumor cells to
secrete GM-CSF. The cells are then irradiated for safety prior to vaccinating
the patient. The multicenter trial was conducted on patients with advanced non
small-cell lung cancer who had failed surgery, radiation and/or chemotherapy.
In December 2002, updated data from this trial were presented at the
International Conference on Gene Therapy of Cancer. Of the 33 patients who
received vaccination, three patients (9 percent) achieved a complete response
(complete disappearance of tumor at all disease sites) with a median duration of
17.8 months. One of the complete responses was reported to be ongoing at 21.7
months. Another seven patients (21 percent) had stable disease or minor
responses with an overall median duration of 7.7 months. The median survival of
all 33 treated patients was 11.6 months (measured from the initiation of vaccine
manufacturing). These data compare favorably to the reported median survival of
5.7 to 7.0 months for the approved second-line chemotherapy (docetaxel) for such
patients or 4.6 months for best supportive care. Moreover, median survival was
significantly longer in patients whose vaccine products secreted higher levels
of GM-CSF, an immune stimulatory hormone that, all GVAX® vaccines
are genetically engineered to produce. Patients whose vaccines secreted greater
than 40 nanograms of GM-CSF per million
cells per 24 hours had a median survival
time of 17.1 months compared to a median survival time of 7.4 months in patients
whose vaccines secreted less than 40 nanograms of GM-CSF. The results of
this trial also suggested that one type of non small-cell lung cancer,
bronchioalveolar carcinoma ("BAC") may be particularly
responsive to GVAX® lung cancer vaccine in that two of the three
complete responses occurred in patients with this diagnosis. During 2003, Cell Genesys plans to initiate two Phase 2
clinical trials of GVAX® lung cancer vaccine-one which is
expected to be sponsored and partially funded by the Southwest Oncology Group
("SWOG"), a cooperative clinical trials group of the National Cancer
Institute ("NCI"), and the other which will be sponsored by Cell
Genesys. The SWOG-sponsored trial will focus on patients with BAC, and the Cell
Genesys-sponsored trial will enroll patients with all subtypes of non small-cell
lung cancer. The two trials are expected to enroll approximately 75 patients
each. In May 2002, the Company announced preliminary data at the
American Society of Clinical Oncology Annual Meeting regarding an additional
trial of an alternative form of GVAX® lung cancer vaccine. The
Phase 1/2 multicenter trial for patients with advanced-stage lung cancer was
designed to evaluate the safety and efficacy a non patient-specific
GVAX® product that is mixed with the patient's irradiated lung
tumor cells. Preliminary data from this trial indicate that this form of the
patient-specific vaccine could be efficiently manufactured in 87 percent of the
patients entered on the trial. Vaccine treatment was well tolerated and
demonstrated evidence of antitumor immunity, and evaluations for tumor response
are ongoing. While the Company may continue to evaluate this alternate form of
vaccine in future clinical trials, Phase 3 trials of GVAX® lung
cancer vaccine will be conducted with the patient-specific form of the vaccine
which is made entirely from patient's tumor cells. GVAX® Pancreatic Cancer Vaccine.
GVAX® pancreatic cancer vaccine is comprised of
"allogeneic" (non patient-specific) pancreatic cancer cells that have
been genetically modified to secrete GM-CSF and then irradiated for safety. The
Company is currently conducting two clinical trials of GVAX®
pancreatic cancer vaccine-a Phase 2 clinical trial of GVAX®
pancreatic cancer vaccine in combination with surgery and standard adjuvant
radiation and chemotherapy, and a multicenter Phase 2 clinical trial of
GVAX® pancreatic cancer vaccine in patients with inoperable or
metastatic pancreatic cancer. These trials, which are expected to enroll 60 and
40 patients, respectively, were prompted by compelling results from an initial
Phase 1 clinical trial conducted at the Sidney Kimmel Comprehensive Cancer
Center at Johns Hopkins. Data from this trial, which evaluated
GVAX® pancreatic cancer vaccine in combination with surgery and
standard adjuvant radiation and chemotherapy, demonstrated prolongation of
disease-free survival in three of eight patients who received the two highest
vaccine doses following surgery and adjuvant radiation and chemotherapy.
Additionally, these data, updated in June 2002, revealed that these three
patients remained disease-free at an average of approximately 4.5 years after
their respective diagnoses. GVAX® Vaccines for Hematologic
Malignancies. Cell Genesys is also currently conducting clinical trials
utilizing GVAX® cancer vaccine in combination with bone
marrow stem cell transplantation for the treatment of hematologic malignancies,
including multiple myeloma and acute myelogenous leukemia. In these trials, the
patient's tumor cells are collected and mixed with a non patient-specific
GVAX® cancer vaccine product manufactured at Cell Genesys. In
February 2001, Cell Genesys initiated a multicenter Phase 1/2 clinical trial,
which is now fully enrolled, evaluating GVAX® cancer vaccine in
patients with multiple myeloma. The goal of GVAX® vaccine
therapy in this setting is to stimulate an immune response directed against the
patient's tumor cells and prolong the remission induced by standard chemotherapy
and bone marrow stem cell transplantation. In November 2001, the Company
initiated a similar multicenter Phase 2 trial in patients with acute myelogenous
leukemia. This trial, which is expected to enroll up to approximately 50
patients, was prompted by encouraging results published in the May 2000 issue of
the journal, Blood, demonstrating that in animal studies of
GVAX® vaccine for acute leukemia, GVAX® vaccine
administered following bone marrow transplantation significantly prevented tumor
relapse and increased the therapeutic benefit of transplantation. Bone marrow
stem cell transplantation is currently being used to treat hematologic cancers
in order to reduce the bone marrow toxicity of high dose chemotherapy and to
enhance antitumor immunity.
Overview of Oncolytic Virus Therapies Program.
Cell Genesys added the oncolytic virus technology platform to its
portfolio in September 2001 through its acquisition of Calydon, Inc., a private
Sunnyvale, California-based biotechnology company. The proprietary oncolytic
virus therapy program utilizes adenovirus, one of the viruses responsible for
the common cold, to create cancer cell-killing viruses. The virus, which is
administered primarily by injection into tumors or body cavities containing
tumors, is engineered to selectively replicate in and kill targeted cancer
cells, leaving healthy normal cells largely unharmed. The virus replicates in
cancer cells until the cancer cell can no longer contain the virus and bursts.
The tumor cell is destroyed and the newly created viruses spread to neighboring
cancer cells to repeat the cycle. Following treatment, excess virus is
cleared by the patient's immune system. Compared with traditional therapies,
oncolytic virus therapies have a high therapeutic index with respect to their
ability to kill tumor cells. In some instances, the tissue selectively index of
oncolytic viruses has been found to be as high as 10,000 to 1, i.e., for every
10,000 tumor cells that are killed, only one normal cell is killed. This is
significantly higher than the selectively index commonly seen with chemotherapy
and may result in greater efficacy with fewer side effects. Cell
Genesys expects to manufacture oncolytic virus therapies and other viral-based
products in its Good Manufacturing Practices ("GMP") facility
located in San Diego, California. In August 2002, Cell Genesys announced that it had been
issued a broad patent (U.S. Patent No. 6,432,700) that includes specific
composition of matter claims pertaining to the Company's proprietary oncolytic
virus therapies. The patent covers adenovirus-derived oncolytic viruses that
are genetically engineered to have at least two different, cell type-specific
gene switches referred to as transcriptional regulatory elements (TREs),
elements that serve a key role in restricting viral replication to certain,
desired cell types. Additionally, in December 2002, the Company announced the
formation of a three-year research collaboration with VectorLogics, Inc., in
which Cell Genesys' oncolytic virus therapies will be evaluated in combination
with novel methods to further enhance the viruses' cell targeting abilities.
CG7870 Oncolytic Virus Therapy for Early-stage Prostate
Cancer. CG7870, an oncolytic virus therapy for prostate cancer,
has demonstrated encouraging results in Phase 1/2 studies, both by
intraprostatic and intravenous administration. In December 2002, encouraging
data from a Phase 1/2 trial of intraprostatically administered CG7870 in
patients with localized, recurrent prostate cancer were announced at the
International Conference on Gene Therapy of Cancer. Data demonstrated antitumor
activity as measured by reductions in serum levels of prostate-specific antigen
(PSA) in 75 percent of patients (9 of 12) who had elevated PSA levels at baseline.
In the nine responding patients, PSA levels decreased by 25-50 percent, and eight
patients remained progression-free at a median follow-up time of six months.
During this year, the Company expects to initiate a Phase 2
trial of intraprostatic CG7870 in combination with external beam radiation in
early-stage, high risk prostate cancer patients. Additionally, preclinical
studies of CG7870 in combination with chemotherapy, the current standard of care
for patients with prostate cancer, demonstrated significant synergistic
antitumor activity in mouse tumor models of prostate cancer-complete elimination
of tumors within four weeks of treatment without dose-limiting toxicity. In
2002, the Company decided to advance CG7870 rather than CG7060, a second
prostate cancer-specific oncolytic virus therapy, as the lead oncolytic virus
therapy product candidate. Cell Genesys' GVAX® cancer vaccines and
oncolytic virus therapies are novel therapies which must undergo rigorous human
testing regulated by the United States Food and Drug Administration
("FDA"). There is no assurance that GVAX® cancer
vaccines or oncolytic virus therapies will be proven safe or efficacious, or if
approved by the FDA, that such products can be successfully commercialized.
Although preliminary results reported to date from Cell Genesys' clinical trials
of GVAX® vaccines for prostate cancer, lung cancer and pancreatic
cancer as well as clinical trials of oncolytic virus therapy, CG7870, are
encouraging and the therapies appear to be both safe and well tolerated by
patients, there can be no assurance that the therapies will be tolerated over an
extended period of time or that the clinical efficacy of the vaccines will be
demonstrated in later stage testing. There also can be no assurance that the
initial studies of GVAX® vaccines for the treatment of
hematologic malignancies will demonstrate clinical efficacy. Any conclusion as
to whether the Company's GVAX® cancer vaccines and oncolytic
virus therapies can potentially play a role in the treatment of multiple types
of cancer will be based on both the results of ongoing clinical trials as well
as future Phase 2 and Phase 3 studies. Preclinical Programs Cell Genesys' preclinical programs are focused on
oncolytic virus therapies and gene therapies for multiple types of cancer.
Moreover, with the Company's increasing focus on cancer, Cell Genesys continues
to execute its plan to pursue gene therapies for neurologic disorders, such as
Alzheimer's and Parkinson's disease, through its majority-owned subsidiary,
Ceregene, Inc. Oncolytic Virus Therapies. In addition to
prostate cancer, Cell Genesys' oncolytic virus technology is demonstrating
encouraging results in preclinical studies of bladder cancer (CG8840), liver
cancer (CG8900) and colon cancer (CG7980) when used alone as well as in
combination with chemotherapy or radiation. For example, at the American
Association for Cancer Research Annual Meeting in April 2002, Cell Genesys
reported that significant antitumor activity was demonstrated when evaluating
CG8840 alone and in combination with docetaxel in mouse models for bladder
cancer. The Company plans to file an IND for CG8840 for bladder cancer in late
2003. Cancer Gene Therapy. Cell Genesys is
developing a pipeline of potential in vivo cancer gene therapy products.
The goal of in vivo cancer gene therapy is to deliver genes to the tumor
cells in order to interfere with cancer cell growth or spread either directly or
indirectly by blocking tumor blood vessel or lymphatic vessel growth (antiangiogenesis).
In early 2003, Cell Genesys entered into an exclusive worldwide research and license
agreement with the Ludwig Institute for Cancer Research for gene therapy rights
to vascular endothelial growth factor receptor-3 (VEGFR-3), a novel protein
believed to play a key role in the spread of cancer to lymph glands. Under the
terms of the research agreement, Cell Genesys' proprietary adeno-associated
viral (AAV) gene delivery system will be used in preclinical studies to evaluate
the inhibition of VEGFR-3 with the goal of reducing the metastasis (spread) of
tumors. This strategy is based on the concept that delivering a gene which
results in long-term expression of an anticancer protein may be a more efficient
and practical way to deliver such therapy than repeated protein injections over
a long period of time. During 2002, Cell Genesys also entered into a research
collaboration with the National Institutes of Health ("NIH"), which
focuses on the development of an initial AAV-based gene therapy for glioblastoma
(brain cancer). Also during 2002, the Company discontinued its collaborations
with Rigel Pharmaceuticals, Inc. and EntreMed, Inc. in antiangiogenesis gene
therapy for cancer to focus on other preclinical cancer gene therapy
programs. Proprietary Gene Therapy Technologies Cell Genesys' proprietary gene delivery technologies
include, among others, AAV and adenoviral vectors. The breadth of Cell Genesys'
vector portfolio enhances the number of gene therapy applications that the
Company and its collaborators can pursue. The selection of a specific vector is
based on the disease indication, safety considerations, production efficiencies,
disease site and other factors. Adenoviral vectors deliver larger genes into
dividing or nondividing cells, and they are currently being used ex vivo
in human clinical studies of GVAX® lung cancer vaccine. AAV
vectors deliver smaller genes to certain nondividing cells, including muscle,
liver, nerve and blood vessel cells. Effective in vivo gene delivery
using the AAV vector has been achieved in the Company's preclinical cancer gene
therapy program and previously in the Company's Parkinson's disease research now
being conducted by Ceregene, Inc. (see Cell Genesys' Assets Outside of its Core
Business in Gene Therapy). Cell Genesys has signed license agreements with companies
that are commercializing these technologies for the scientific research market.
These include agreements in which Cell Genesys is receiving payments from these
companies, including Invitrogen Corporation and Clontech Laboratories, Inc., a
division of Becton Dickinson. Government Regulations FDA Regulation. The activities required
before a pharmaceutical agent may be marketed in the United States begin with
preclinical testing. Preclinical tests include laboratory evaluation of
potential products and animal studies to assess the potential safety and
efficacy of the product and its formulations. The results of these studies and
other information must be submitted to the FDA as part of an IND application,
which must be reviewed and approved by the FDA before proposed clinical testing
can begin. Clinical trials involve the administration of the investigational
new drug to healthy volunteers or to patients under the supervision of a
qualified principal investigator. Clinical trials are conducted in accordance
with Good Clinical Practices under protocols that detail the objectives of the
study, the parameters to be used to monitor safety and the efficacy criteria to
be evaluated. Each protocol must be submitted to the FDA as part of the IND
application. Further, each clinical study must be conducted under the auspices
of an independent institutional review board at the institution at which the
study will be conducted. The institutional review board will consider, among
other things, ethical factors and the safety of human subjects. In addition,
certain protocols involving the use of genetically modified human cells must
also be reviewed by the Recombinant Advisory Committee of the NIH. Typically, clinical testing involves a three-phase
process. In Phase 1, clinical trials are conducted with a small number of
subjects to determine the early safety profile and pharmacology of the new
therapy. In Phase 2, clinical trials are conducted with groups of patients
afflicted with a specific disease in order to determine preliminary efficacy,
optimal dosages and expanded evidence of safety. In Phase 3, large scale,
multicenter, comparative clinical trials are conducted with patients afflicted
with a target disease in order to provide enough data for the statistical proof
of efficacy and safety required by the FDA and others. In the case of products
for life-threatening diseases, the initial human testing is generally done with
diseased patients rather than with healthy volunteers. Since these patients are
already afflicted with the target disease, it is possible that such studies may
provide some results traditionally obtained in Phase 2 trials. These trials are
frequently referred to as Phase 1/2 trials. Although the preliminary Phase 1/2
and Phase 2 clinical trials of Cell Genesys' GVAX® cancer vaccine
and oncolytic virus therapies have shown a favorable safety profile to date,
there can be no assurance that such therapies or products will be tolerated at
higher doses or that the clinical efficacy of such therapy or product will be
demonstrated in later stage testing. The results of the preclinical and clinical testing,
together with chemistry and manufacturing information, are submitted to the FDA
in the form of a new drug application ("NDA") for a pharmaceutical
product, and in the form of a biologic license application ("BLA") for
a biologic product in order to obtain approval to commence commercial sales. In
responding to an NDA or a BLA, the FDA may grant marketing approvals, request
additional information or further research, or deny the application if it
determines that the application does not satisfy its regulatory approval
criteria. Approvals may not be granted on a timely basis, if at all, or if
granted may not cover all the clinical indications for which Cell Genesys is
seeking approval or may contain significant limitations in the form of warnings,
precautions or contraindications with respect to conditions of use. Other Government Regulations. In addition
to laws and regulations enforced by the FDA, Cell Genesys is also subject to
regulation under National Institutes of Health guidelines, as well as
under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local laws
and regulations, as Cell Genesys' research and development involves the
controlled use of hazardous materials, chemicals, viruses and various
radioactive compounds. Manufacturing Manufacture of clinical quantities of Cell Genesys'
products does not require an FDA license, although the FDA may at any time
inspect the Company's manufacturing facilities. Cell Genesys has three leased
manufacturing facilities including a 41,000 square-foot facility in Hayward,
California, a 35,000 square-foot facility in Memphis, Tennessee, and a 48,000
square-foot facility in San Diego, California, all of which were constructed
according to ("GMP") standards. Cell
Genesys believes that its three manufacturing facilities will have the capacity
to manufacture products for Phase 3 trials and market launch. The Company
expects to manufacture patient-specific GVAX® lung cancer
vaccines in its Memphis facility, viral-based products in its San Diego
facility and non patient-specific GVAX®
Cell Genesys' Assets Outside of its Core Business
Investment in Abgenix, Inc. ("Abgenix") Abgenix is developing antibody therapies for inflammation, cancer, transplant disorders, cardiovascular disease and infectious disease. Abgenix's core technology includes strains of transgenic mice capable of generating fully human antibodies. Cell Genesys formed Abgenix as a separate business subsidiary in June 1996. Abgenix completed its initial public offering (Nasdaq-ABGX) in July 1998. The Company currently holds approximately 8.7 million shares of Abgenix stock, or approximately 9.9 percent of outstanding shares as of December 31, 2002. The Company expects to sell these shares of Abgenix common stock over time to provide additional funding for Cell Genesys' cancer vaccine, oncolytic virus therapy and gene therapy programs.
Ceregene, Inc. ("Ceregene"), A Majority- Owned Subsidiary of Cell Genesys. In January 2001, Cell Genesys launched a new majority-owned subsidiary, Ceregene, Inc., located in San Diego, California, which is focused on gene therapies for central nervous system (CNS) disorders such as Alzheimer's disease and Parkinson's disease. Ceregene's goal is to use gene therapy as a "drug delivery" strategy to deliver neurologic growth factors to specific sites in the brain to prevent the nerve degeneration associated with diseases such as Alzheimer's and Parkinson's disease. Ceregene was formed through the acquisition of Neurologic Gene Therapeutics, a private San Diego-based start-up company. Cell Genesys contributed $10 million to Ceregene together with access to technology and patents in the CNS gene therapy area, in exchange for approximately 60 percent ownership of the new company. Cell Genesys has majority representation on Ceregene's board, and Stephen A. Sherwin, M.D., chairman and chief executive officer of Cell Genesys, also serves as chairman of Ceregene since early 2001. Ceregene's operations significantly expanded in 2001 and 2002, and included the appointment of Dr. Jeffrey M. Ostrove, Ph.D., as president and chief operating officer. During 2001, the first-ever study of Alzheimer's disease gene therapy was initiated at the University of California, San Diego (UCSD) School of Medicine based on technology exclusively licensed to Ceregene. The Phase 1 clinical trial is fully enrolled and involves eight patients. All patients have completed treatment, and patients are now being monitored for improvement in their disease using cognitive function and brain imaging. Preliminary results from this trial indicate that the gene therapy treatment is well tolerated and biologically active. A complete report on this trial is expected later in 2003. Additionally, Ceregene announced in March 2003 that it signed a licensing agreement with Genentech, Inc. (NYSE: DNA) for exclusive worldwide rights to genes expressing two nervous system growth factors for use in neurological gene therapies such as Alzheimer's disease and gene therapy. These patented neurotrophic factor genes, coding for the proteins known as nerve growth factor and neurotrophic factor 4/5 have demonstrated therapeutic potential in the treatment of neurodegenerative disorders, among other applications.
Gene Activation Technology. Cell Genesys has developed a novel and proprietary method for protein production referred to as "gene activation." Gene activation involves the insertion of genetic regulatory elements at specific sites in cell chromosomes in proximity to a human gene responsible for the production ("expression") of a therapeutic protein. Subsequently, the gene-activated protein could be produced in a cell-based production system. Gene activation licensing agreements have provided more than $50 million in revenues to Cell Genesys to date. Since February 1997, Cell Genesys has had a license agreement with Hoechst Marion Roussel, now Aventis Pharmaceuticals, Inc. ("Aventis"), for gene- activated erythropoietin ("EPO"). To date, Cell Genesys has received over $17 million under this license agreement, which includes certain milestone payments relating to the development of gene-activated EPO, which Aventis is developing in collaboration with Transkaryotic Therapies, Inc. ("TKT"). The agreement also provides for royalties on future sales of gene-activated EPO anywhere in the world. In June 2002, Cell Genesys announced the completion of a separate licensing agreement under which Cell Genesys exclusively licensed to TKT intellectual property relating to its gene activation technology for certain therapeutic proteins. In exchange, Cell Genesys received an up-front license fee of $26 million, which was to have been comprised of $11 million in cash and $15 million in shares of TKT common stock. In early 2003, the companies mutually agreed to an amendment to the original license agreement substituting a cash payment of $15 million in lieu of the TKT stock.
Corporate Collaborations
Pharmaceutical Division of Japan Tobacco. In October 2002, Cell Genesys announced that it had reacquired full commercial rights to GVAX® lung cancer vaccines following the termination of its remaining license agreement with the pharmaceutical division of Japan Tobacco ("JT"). Cell Genesys now holds all worldwide commercial rights to its entire portfolio of GVAX® cancer vaccine products. This agreement was originally signed in December 1998 and later modified in November 2001 to focus only on GVAX® lung cancer vaccines. As of December 31, 2002, Cell Genesys has received over $81 million in milestone and other payments and reimbursement for research and development costs. This was the second collaboration agreement between Cell Genesys and JT. The first collaboration, signed in 1991, funded the successful development of the fully human monoclonal antibody technology transferred to Abgenix.
Gene Therapy Rights Agreement with Abgenix. In November 1997, Cell Genesys entered into a gene therapy rights agreement (the "GTRA") with Abgenix. The GTRA provides Cell Genesys with certain rights to utilize Abgenix's XenoMouse® technology in the field of gene therapy for two antigen targets per year. Cell Genesys is obligated to make certain payments to Abgenix for these rights including license fees and royalties on future product sales. The GTRA also prohibits Abgenix from granting any third-party licenses for antibody products based on antigens nominated by Abgenix for its own purposes where the primary field of use is gene therapy. In the case of third-party licenses granted by Abgenix where gene therapy is a secondary field, Abgenix is obligated to share with Cell Genesys a portion of the cash milestone payments and royalties resulting from any products in the field of gene therapy.
Other Collaborations. Cell Genesys has licensing agreements relating to its proprietary viral vector technologies. These collaborations enable Cell Genesys to either acquire commercial rights to therapeutic genes or to receive monetary reimbursement for providing viral vector technologies to companies that commercialize these technologies for the research market. Examples include agreements with the Clontech division of Becton Dickinson and Invitrogen for specific vector technologies. In 2002, the Company discontinued its research collaborations with EntreMed, Inc., and Rigel, Inc. for antiangiogenesis gene therapy to focus on other preclinical cancer gene therapy programs.
In December 2002, the Company announced the formation of a three-year research collaboration with VectorLogics, Inc., in which Cell Genesys' oncolytic virus therapies will be evaluated in combination with novel methods to further enhance the viruses' cell targeting abilities.
In early 2003, Cell Genesys entered into an exclusive worldwide research and license agreement with the Ludwig Institute for Cancer Research for gene therapy rights to vascular endothelial growth factor receptor- 3 (VEGFR-3), a novel protein believed to play a key role in the spread of cancer to lymph glands. Under the terms of the research agreement, Cell Genesys' proprietary adeno-associated viral (AAV) gene delivery system will be used in preclinical studies to evaluate the inhibition of VEGFR-3 with the goal of reducing the metastasis (spread) of tumors. This strategy is based on the concept that delivering a gene which results in long-term expression of an anticancer protein may be a more efficient and practical way to deliver such therapy than repeated protein injections over a long period of time. The VEGFR- 3 collaboration complements Cell Genesys' other programs in cancer gene therapy, which currently focus on blocking tumor angiogenesis, or tumor blood vessel growth, as a potential cancer treatment strategy.
Patents and Trade Secrets
The patent positions of pharmaceutical and biotechnology firms, including Cell Genesys, are generally uncertain and involve complex legal and factual questions. Cell Genesys currently has approximately 330 issued or granted patents and over 390 pending applications. While Cell Genesys is currently prosecuting its patent applications, it cannot be certain whether any given application will result in the issuance of a patent or, if any patent is issued, whether it will provide significant proprietary protection or will not be invalidated. Because patent applications in the United States are confidential until patents are issued and publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, Cell Genesys cannot be certain that it was the first creator of inventions covered by pending patent applications or that it was the first to file patent applications for such inventions.
The commercial success of the Company will also depend in part on not infringing the patents or proprietary rights of others and not breaching licenses granted to the Company. The Company is aware of competing intellectual property relating to both its programs in cancer vaccines and oncolytic viruses. While the Company currently believes it has freedom to operate in these areas, there can be no assurance that its position will not be challenged by others in the future. The Company may be required to obtain licenses to certain third-party technologies or genes necessary in order to market our products. Any failure to license any technologies or genes required to commercialize our technologies or products at reasonable cost may have a material adverse effect on the Company's business, results of operations or financial condition.
Litigation, which could result in substantial cost to the Company, may also be necessary to enforce any patents issued to the Company or to determine the scope and validity of other parties' proprietary rights. To determine the priority of inventions, interference proceedings are frequently declared by the U.S. Patent and Trademark Office, which could result in substantial costs to the Company and may result in an adverse decision as to the priority of the Company's inventions. Cell Genesys is currently involved in multiple interference and/or opposition proceedings with regard to: (i) gene activation technology, (ii) certain ex vivo gene therapies, (iii) chimeric receptor technology and (iv) certain vector technologies. The outcomes of these proceedings cannot be predicted, but are not expected to have a material adverse effect on the Company's intellectual property position or our business. The Company may be involved in other interference and/or opposition proceedings in the future. The Company believes there will continue to be significant litigation in the industry regarding patent and other intellectual property rights.
The Company also relies on unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain its competitive position. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its rights to its unpatented trade secrets.
Cell Genesys requires its employees and consultants to execute confidentiality agreements upon the commencement of employment and consulting relationships with the Company. These agreements provide that all confidential information developed by or made known to an individual during the course of the employment or consulting relationship generally must be kept confidential. In the case of employees, the agreements provide that all inventions conceived by the individual, while employed by the Company, relating to the Company's business are the Company's exclusive property. These agreements may not provide meaningful protection for the Company's trade secrets in the event of unauthorized use or disclosure of such information.
Competition
The Company faces substantial competition in the development of products for cancer and other diseases. This competition, from other manufacturers of the same type of products and from manufacturers of different types of products designed for the same uses, is expected to continue in both U.S. international markets. Cancer vaccines, oncolytic virus therapies and cancer gene therapies, the three primary focus areas of the Company, are rapidly evolving areas of the biotechnology industry and are expected to undergo many changes in the coming years as a result of technological advances. Cell Genesys is aware of a number of groups that are developing cancer vaccines, oncolytic virus therapies and cancer gene therapies including early-stage and established biotechnology companies, pharmaceutical companies, academic institutions, government agencies and research institutions. The Company faces competition from these groups in areas such as recruiting employees, acquiring technologies that might enhance the Company's ability to market products, establishing relationships with certain research or academic institutions, enrolling patients in clinical trials and in partnering certain of its programs with larger pharmaceutical companies. It is possible that the Company's competitors could achieve earlier market commercialization, could have superior patent protection, or could have safer, more effective or more cost-effective products. These factors could render the Company's potential products less competitive, which could have a material adverse effect on our business.
Human Resources
As of December 31, 2002, Cell Genesys employed 336 persons, of whom 39 hold Ph.D. degrees and five hold M.D. degrees. Approximately 269 employees are engaged in research, development and manufacturing, and 67 employees support business development, intellectual property, finance and other administrative functions. Many of Cell Genesys' management have had prior product development experience in the biotechnology and pharmaceutical industries.
Cell Genesys' success will depend in large part upon its ability to attract and retain employees. Cell Genesys faces competition in this regard from other companies, research and academic institutions, government entities and other organizations. Cell Genesys believes that it maintains good relations with its employees.
Executive Officers
The executive officers of Cell Genesys and their ages as of March 31, 2003, are as follows:
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| Stephen A. Sherwin, M.D |
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| Joseph J. Vallner, Ph.D. |
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| Matthew J. Pfeffer |
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| Dale G. Ando M.D. |
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| Christine McKinley |
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| Michael W. Ramsay |
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| Robert H. Tidwell |
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| Peter K. Working, Ph.D. |
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Dr. Sherwin has served as chief executive officer and a director of Cell Genesys since March 1990. Dr. Sherwin also served as president until July 2001, at which time Joseph J. Vallner, Ph.D. was appointed president. In March 1994, Dr. Sherwin was elected to the additional position of chairman of the board. From 1983 to 1990, Dr. Sherwin held various positions at Genentech, Inc., a biotechnology company, most recently as vice president of clinical research. Prior to 1983, Dr. Sherwin was on the staff of the National Cancer Institute. Dr. Sherwin currently serves as the chairman of the board of Ceregene, Inc., a majority-owned subsidiary of Cell Genesys. He is also a director of Neurocrine Biosciences, Inc., Rigel Pharmaceuticals, Inc. and privately-owned Calyx Therapeutics, Inc. Dr. Sherwin, who also serves as a board member of the Biotechnology Industry Organization, holds a B.A. in biology from Yale University, an M.D. from Harvard Medical School and is board-certified in internal medicine and medical oncology.
Dr. Vallner joined Cell Genesys in October 1999 as executive vice president and chief operating officer. Effective July 2001, Dr. Vallner was appointed president of the Company. He currently manages the research, development, clinical, regulatory, manufacturing and operations departments at Cell Genesys. Prior to joining Cell Genesys, Dr. Vallner was with SEQUUS Pharmaceuticals from 1992 to 1999 where he was instrumental in the product launch of two products including Doxil®, a liposome-based cancer therapeutic. In addition, Dr. Vallner helped transition SEQUUS through its merger with ALZA Corporation. Prior to that, he held various positions with Syntex Corporation and G.D. Searle and Company from 1983 to 1986, and was an associate professor of pharmaceutics at the University of Georgia. Dr. Vallner, who serves as a board member of the California Healthcare Institute, received his Ph.D. in pharmaceutics, his M.S. in physical chemistry and his B.S. in pharmacy from the University of Wisconsin, Madison.
Mr. Pfeffer joined Cell Genesys in June 1996 as director of finance and was appointed chief financial officer in September 1998 and vice president in April 1999. From 1989 to 1996, Mr. Pfeffer held a variety of positions at Diasonics Ultrasound, Inc., most recently as corporate controller. From 1987 to 1989, he was in the finance department at ComputerLand Corporation. From 1981 to 1987, Mr. Pfeffer was in the audit and consulting groups at Price Waterhouse, where he obtained his CPA certificate. Mr. Pfeffer graduated with a B.S. degree in business administration from the University of California, Berkeley.
Dr. Ando, vice president, clinical research, joined Cell Genesys in July 1997. Dr. Ando previously served as director of clinical gene therapy for Chiron Technologies at Chiron, where he served from 1992 to 1997 His experience includes clinical development of biological therapeutics and gene therapy for both cancer and HIV infection. From 1988 to 1990, Dr. Ando was with Cetus Corporation, where the last position he held was Physician, Clinical Research and Development. Dr. Ando began his career as a faculty member at the UCLA School of Medicine in the division of rheumatology from 1983 to 1988. He received his M.D. and Internal Medicine training at the University of Michigan and a B.S. in Chemistry from Stanford University.
Ms. McKinley, vice president, human resources, joined Cell Genesys in l994. From 1986 to 1994, she was responsible for human resources at Nellcor Puritan Bennett, Inc. Previously, Ms. McKinley also worked at Genentech, Inc. from1985 to 1994 in various human resource positions. She received a B.A. in psychology from the University of California, Santa Barbara.
Mr. Ramsay joined Cell Genesys in January 2002 and serves as senior vice president, manufacturing operations. Prior to joining Cell Genesys, Mr. Ramsay served as a vice president of manufacturing at ALZA Corporation from 1999 to 2001. Mr. Ramsay also held various positions between 1992 to 1999 with SEQUUS Pharmaceuticals, including vice president of manufacturing operations, as well as various positions at Syntex Corporation focusing on manufacturing, product development and regulatory affairs from 1978 to 1991. Mr. Ramsay holds a Bachelor of Pharmacy from the University of Nottingham in the United Kingdom.
Mr. Tidwell, senior vice president, corporate development, has been with Cell Genesys since August 2000. Prior to joining Cell Genesys, Mr. Tidwell was vice president of business development at Calydon, Inc. from 1998 to 2000. Mr. Tidwell has also held various management positions with such companies as Boston Life Sciences, where he served as chief operating officer from 1993 to 1994, Genetics Institute, where he was vice president of marketing and business development from 1988 to 1993, and Eli Lilly and Company, where he held various positions including director of worldwide pharmaceutical licensing, between 1969 and 1985. Mr. Tidwell holds an M.B.A from The Ohio State Graduate School of Business and a Bachelor of Pharmacy from The Ohio State School of Pharmacy.
Dr. Working joined Cell Genesys in September 2001 and serves as senior vice president, research and development. Prior to joining Cell Genesys, from 1999 to 2001, Dr. Working served as vice president of analytical and non-clinical sciences and principal scientist at ALZA Corporation. Dr. Working has also held various positions with SEQUUS Pharmaceuticals, where from 1997 to 1999 he served as vice president of research and development, as well as Genentech, Inc. where he served from 1988 to 1992 as a senior toxicologist and head of the Experimental Toxicology Group in the Department of Safety Evaluation. Dr. Working holds Ph.D., M.S. and B.S. degrees from the University of California, Davis and an M.A. degree from the University of California, San Francisco.
Medical Advisory Board
Cell Genesys has established a prominent Medical Advisory Board ("MAB") that includes several leaders in the field of oncology. As of March 31, 2003, the board consists of the following individuals:
NAME SCIENTIFIC POSITION
- ------------------------------- ---------------------------------------------------
Bruce Chabner, M.D............. Chief of Hematology/Oncology,
Massachusetts General Hospital
Clinical Director, Massachusetts
General Hospital Cancer Center
Professor of Medicine,
Harvard Medical School
Jordan U. Gutterman, M.D....... Department of Molecular Therapeutics
Professor of Medicine
University of Texas
M.D. Anderson Cancer Center
Craig Henderson, M.D........... Adjunct Professor of Hematology/Oncology
University of California, San Francisco
Ronald Levy, M.D............... Robert K. Summy and Helen K. Summy
Professor of Medicine
Chief of the Division of Oncology
Stanford University School of Medicine
William Nelson, M.D., Ph.D..... Associate Professor of Oncology, Pathology,
Pharmacology and Medicine, and Urology
Sidney Kimmel Comprehensive Cancer Center
Johns Hopkins University
John T. Potts, Jr., M.D. ...... Director of Research
Massachusetts General Hospital
Physician-in-Chief Emeritus Jackson
Distinguished Professor of Clinical Medicine
Harvard Medical School
Dr. Potts, who is also a member of the Cell Genesys Board of Directors, serves as a liaison between the MAB and the Board of Directors and makes periodic reports on the findings of the MAB to the Board.
Scientific Advisory Board
Cell Genesys has established a prominent Scientific Advisory Board ("SAB") that includes several leaders in the fields of cancer immunotherapy and gene therapy. As of March 31, 2003, the board consists of the following individuals:
NAME SCIENTIFIC POSITION
- ------------------------------- ---------------------------------------------------
Fred H. Gage, Ph.D............. Professor of Neuroscience
The Salk Institute
Ronald N. Germain, M.D., Ph.D.. Deputy Chief of Laboratory of Immunology
National Institutes of Health
National Institute of Allergy and Infectious Diseas
Raju S. Kucherlapati, Ph.D..... Scientific Director
Harvard-Partners Center for Genetics and Genomics
Paul C. Cabot Professor of Genetics
Professor of Medicine
Harvard Medical School
John T. Potts, Jr., M.D........ Director of Research
Massachusetts General Hospital
Physician-in-chief Emeritus Jackson
Distinguished Professor of Clinical Medicine
Havard Medical School
Thomas E. Shenk, Ph.D.......... Elkins Professor
Chiarman of the Department of Molecular Biology
Professor, Princeton University
Inder M. Verma, Ph.D........... Professor of Molecular Biology and Virology
The Salk Institute
Dr. Verma, who is also a member of the Cell Genesys Board of Directors, serves as a liaison between the SAB and the Board of Directors and makes periodic reports on the findings of the SAB to the Board.
Item 2. Properties
On November 7, 2002, Cell Genesys announced that it had completed construction of the portion of its Hayward, California manufacturing facility necessary to support the Company's Phase 3 clinical trial of GVAXâ prostate cancer vaccine. Cell production, a key portion of the vaccine manufacturing process, has begun at the site in preparation for Phase 3 manufacturing.
During 2002, Cell Genesys completed modifications to its viral-based product manufacturing facility in San Diego, California. The Company acquired this 48,000 square-foot facility from Chiron Corporation in January 2001.
On February 12, 2002, Cell Genesys announced that it had leased a 35,000 square-foot manufacturing facility in Memphis, Tennessee. Cell Genesys plans to use the Memphis facility to manufacture patient-specific GVAX® lung cancer vaccines for both Phase 3 clinical trials and potential market launch. The facility provides Cell Genesys with a centrally located facility to receive and process tumor cells obtained from patient biopsies, manufacture the patient-specific vaccine products, carry out quality control testing and ship the vaccine products back to the patient treatment centers. In December 2002, the Company announced that it had completed the construction of the facility necessary for the initiation of Phase 3 trials.
Cell Genesys maintains its headquarters in South San Francisco, California. The facility consists of approximately 154,000 square feet of research and development and administrative space. Cell Genesys moved to this location in March 2003 from its previous facilities in Foster City, California. The Company is actively pursuing sublease alternatives for its facilities in Foster City. In December 2002, the Company recorded an accrual for lease exit costs in the amount of approximately $6.2 million in association with the estimated remaining lease obligation for the Foster City facilities. The lease agreements for the Foster City facilities are expected to continue through the contractual termination of January 2006.
Ceregene, Inc., a majority-owned subsidiary of Cell Genesys, is currently subleasing approximately 20,000 square feet for its headquarters and research laboratory space in San Diego, California. The lease commenced in March 2002 and has a five year duration.
Cell Genesys has other leased facilities, including facilities in Alameda, California that were acquired in connection with its acquisition of Somatix Therapy Corporation in 1997. Cell Genesys had been subleasing these facilities to other companies under sub-leasing arrangements.
Item 3. Legal proceedings
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Cell Genesys Common Stock is traded in the over-the- counter market and is quoted on The Nasdaq National Market under the symbol "CEGE." The following table sets forth, for the periods indicated, the high and low closing prices per share of Cell Genesys Common Stock as reported by The Nasdaq National Market. Cell Genesys did not pay any cash dividends with respect to the Cell Genesys Common Stock during any of the periods indicated below.
High Low
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2001
First Quarter....................................... $ 22.44 $ 12.50
Second Quarter...................................... $ 20.50 $ 12.61
Third Quarter....................................... $ 20.97 $ 13.79
Fourth Quarter...................................... $ 24.80 $ 15.60
2002
First Quarter....................................... $ 22.99 $ 15.00
Second Quarter...................................... $ 17.73 $ 12.02
Third Quarter....................................... $ 14.35 $ 10.68
Fourth Quarter...................................... $ 13.03 $ 10.47
As of March 14, 2003, there were 961 holders of record and approximately 29,000 beneficial holders of the Company's Common Stock. On March 14, 2003, the last reported sales price on the Nasdaq National Market for the Common Stock was $6.82. The market for the Company's Common Stock is highly volatile.
The Company has 665 shares of Series B redeemable convertible preferred stock outstanding, held by 8 holders of record. The preferred stock is convertible into shares of common stock at the option of the holder, as of December 31, 2002 the carrying value was approximately $7.6 million. No established public trading market exists for the preferred stock itself. For a description of the terms of the preferred stock, see Note 9 of Notes to Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K.
The information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Item 12 of this Annual Report on Form 10-K.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
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2002 2001 2000 1999 1998
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CONSOLIDATED STATEMENT OF OPERATIONS DATA: (in thousands, except per share amounts)
Revenue........................................... $ 39,141 $ 28,317 $ 24,209 $ 33,607 $ 24,146
Operating expenses:
Research and development........................ 75,138 50,752 30,474 24,538 37,932
General and administrative (1).................. 20,697 11,850 6,984 4,833 8,204
Charge (credit) for purchased in-process
technology..................................... (186) 18,042 -- -- --
Merger termination costs........................ 15,382
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Total operating expenses.......................... 95,649 80,644 37,458 44,753 46,136
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Operating loss.................................... (56,508) (52,327) (13,249) (11,146) (21,990)
Equity in loss of Abgenix, Inc.................... -- -- -- (3,083) (2,917)
Gain on sale of stock of Abgenix, Inc. common stoc 2,246 -- 239,660 -- 7,020
Interest and other income, net.................... 8,931 17,878 13,172 2,235 1,567
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Income (loss) before minority interest, income
taxes and cumulative effect of change
in accounting................................ (45,331) (34,449) 239,583 (11,994) (16,320)
Loss attributed to minority interest.............. 96 264 -- -- 4,192
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Income (loss) before income taxes and cumulative
effect of change in accounting .......... (45,235) (34,185) 239,583 (11,994) (12,128)
Benefit (provision) for income taxes.............. 18,636 5,512 (64,203) -- --
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Income (loss) before cumulative effect of
change in accounting........................... (26,599) (28,673) 175,380 (11,994) (12,128)
Cumulative effect of change in accounting
principle, net of taxes (2).................... -- -- (6,460) -- --
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Net income (loss) ................................ $ (26,599) $ (28,673) $ 168,920 $ (11,994) $ (12,128)
Deemed dividend to preferred stockholders......... 702 785 756 392 1,088
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Income (loss) attributed to common stockholders... $ (27,301) $ (29,458) $ 168,164 $ (12,386) $ (13,216)
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Basic income (loss) per common share ............. $ (0.76) $ (0.85) $ 4.99 $ (0.39) $ (0.46)
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Diluted income (loss) per common share............ $ (0.76) $ (0.85) $ 4.55 $ (0.39) $ (0.46)
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Weighted average shares of common stock
outstanding -- basic............................. 35,889 34,746 33,716 31,682 28,607
========= ========= ========== ========= =========
Weighted average shares of common stock
outstanding -- diluted......................... 35,889 34,746 36,952 31,682 28,607
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(1) The year ended December 31, 2002 includes accrued facility exit costs of $6.2 million.
(2) Reflects the impact of the adoption of SAB 101 on revenue recognition effective January 1, 2000. Pro forma
amounts of net income (loss) and related duluted per share amounts, excluding the effects of deemed dividends
to preferred stockholders and assuming retroactive application of the change in accounting principle for
the years ended 2000, 1999, and 1998 are as follows (in thousands, except per share amounts):
Pro forma: 2000 1999 1998
Net income (loss)..................................................$ 175,380 $ (10,257) $ (22,277)
Income (loss) per common share-diluted.............................$ 4.75 $ (0.32) $ (0.78)
December 31,
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2002 2001 2000 1999 1998
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CONSOLIDATED BALANCE SHEET DATA: (in thousands)
Cash, cash equivalents and short-term investments,
including restricted cash and investments....... $ 166,905 $ 258,649 $ 259,647 $ 50,287 $ 53,243
Working capital................................... 178,948 420,779 549,985 334,646 44,080
Total assets...................................... 405,848 615,310 793,716 489,683 65,799
Total current liabilities......................... 68,373 149,690 239,002 150,430 9,964
Long-term obligations............................. 98,695 60,000 1,350 3,198 4,860
Redeemable convertible preferred stock............ 7,632 17,970 17,185 7,679 12,083
Accumulated deficit............................... (90,156) (63,557) (34,883) (203,803) (191,809)
Stockholders' equity.............................. 231,148 387,554 536,179 328,376 38,892
QUARTERLY RESULTS OF OPERATIONS 2002
(unaudited) ---------------------------------------------
March 31 June 30 September 30December 31
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(in thousands, except per share amounts)
Revenue (1)....................................... $ 4,595 $ 31,102 $ 1,479 $ 1,968
Research and development.......................... 16,563 17,800 19,490 21,285
General and administrative........................ 3,658 4,348 3,370 9,321
Charge (credit) for purchased in-process
technology....................................... -- -- (186) --
Net income (loss) (2)............................. $ (8,818) $ 6,481 $ (12,712) $ (12,252)
Basic income (loss) per common share.............. $ (0.25) $ 0.18 $ (0.35) $ (0.34)
Diluted income (loss) per common share............ $ (0.25) $ 0.17 $ (0.35) $ (0.34)
(1) The quarter ended June 30, 2002 includes an upfront fee in the amount
of $26.0 million related to the TKT license agreement.
(2) The quarter ended December 31, 2002 includes a gain on sale of Abgenix, Inc. common stock of
approximately $2.2 million and accrued facility exit costs of $6.2 million.
QUARTERLY RESULTS OF OPERATIONS 2001
(unaudited) ---------------------------------------------
March 31 June 30 September 30 December 31
---------------------------------------------
(in thousands, except per share amounts)
Revenue (3)....................................... $ 5,973 $ 4,036 $ 4,635 $ 13,673
Research and development.......................... 10,726 11,010 12,362 16,654
General and administrative........................ 2,700 2,839 2,786 3,525
Charge for purchased in-process technology (4).... -- -- 18,042 --
Net income (loss) ................................ $ (203) $ (4,678) $ (22,384) $ (1,408)
Basic income (loss) per common share.............. $ (0.01) $ (0.14) $ (0.64) $ (0.06)
Diluted income (loss) per common share............ $ (0.01) $ (0.14) $ (0.64) $ (0.06)
(3) The quarter ended December 31, 2001 includes milestone revenue from the collaboration with Japan Tobacco.
(4) The quarter ended September 30, 2001 includes a charge for the acquisition of Calydon, Inc.
Statements made in this Item other than statements of historical fact, including statements about the Company's and its subsidiaries' clinical trials, research programs, product pipelines, current and potential corporate partnerships, licenses and intellectual property, the adequacy of capital reserves and anticipated operating results and cash expenditures, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. As such, they are subject to a number of uncertainties that could cause actual results to differ materially from the statements made, including risks associated with the success of research and product development programs, the issuance and validity of patents, the development and protection of proprietary technologies, the ability to raise capital, operating expense levels and the ability to establish and retain corporate partnerships. Reference is made to discussions about risks associated with product development programs, intellectual property and other risks which may affect the Company under "Other Factors Affecting Future Operations" below. The Company does not undertake any obligation to update forward-looking statements. The following should be read in conjunction with the Company's consolidated financial statements located elsewhere in this Company's Annual Report on Form 10-K for the year ended December 31, 2002 and other documents filed by the Company from time to time with the Securities and Exchange Commission.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Since its inception in April 1988, Cell Genesys has focused its research and product development efforts on human disease therapies that are based on innovative gene modification technologies. The Company's strategic objective is to develop and commercialize biological therapies, including cancer vaccines, oncolytic virus therapies and cancer gene therapies, to treat multiple types of cancer. Cell Genesys' current clinical programs include GVAX® cancer vaccines and oncolytic virus therapies. GVAX® cancer vaccines are in Phase 2 studies for prostate cancer, lung cancer, pancreatic cancer and leukemia and in Phase 1/2 studies for multiple myeloma. The Company expects to initiate Phase 3 trials for GVAX® prostate cancer vaccine and GVAX® lung cancer vaccine during the next year. Ongoing clinical programs evaluating the Company's oncolytic virus therapies include a Phase 2 study of CG7870, an intratumorally administered therapy for early-stage prostate cancer. In addition, Cell Genesys has preclinical oncolytic virus therapy programs evaluating potential therapies for bladder cancer, liver cancer and colon cancer as well as preclinical cancer gene therapy programs evaluating potential therapies for multiple types of cancer. The Company plans to file an IND for CG8840, an oncolytic virus therapy for the treatment of bladder cancer, during the next year. Additionally, Cell Genesys has a majority-owned subsidiary, Ceregene, Inc., which is focused on gene therapies for neurological disorders, and continues to hold approximately 8.7 million shares of common stock of its former subsidiary, Abgenix, Inc. (Nasdaq: ABGX), which is focused on the development and commercialization of antibody therapies.
Critical Accounting Policies
We consider certain accounting policies related to revenue recognition, lease accounting, income taxes and use of estimates to to be critical policies.
Revenue recognition
Since the Company's inception, a substantial portion of our revenues has been generated from research and licensing agreements with collaborators. Revenue under such collaboration agreements typically include upfront payments, cost reimbursements and milestone payments. Revenue under these agreements from non-refundable upfront license fees and other payments where the Company continues involvement through development is recognized ratably over the development period. The Company recognizes cost reimbursement revenue under collaborative agreements as the related research and development costs are incurred. Incentive milestone payments under collaborative arrangements are recognized as revenue upon achievement of the incentive milestone events, which represent the culmination of the earnings process. Incentive milestone payments are triggered either by the results of our research efforts or by events external to Cell Genesys, such as regulatory approval to market a product or the achievement of specified sales levels by a marketing partner. As such, the incentive milestones are substantially at risk at the inception of the contract and the values assigned thereto are commensurate with the milestone achieved. Upon the achievement of an incentive milestone event, the Company has no future performance obligations related to that payment. Deferred revenue represents the portion of research payments received that has not been earned.
Lease Accounting
During the three month period ended December 31, 2002, the Company recorded a charge of approximately $6.2 million for lease exit costs associated with the Company's move to the South San Francisco, California headquarters in March 2003. Cell Genesys utilized current market conditions to estimate the charge for lease exit costs related to the move of its corporate headquarters to South San Francisco, California and the related vacancy in Foster City, California. Total rent payments for the Company's Foster City location are $16.8 million. The charge will be adjusted as necessary based on our ability to sub-lease the facilities and then current market conditions.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Estimates in the financial statements include, but are not limited to, accrued but unbilled expenses in clinical trials, expenses for certain outside experts and consultants useful lives of property and equipment, and other items.
Income taxes
Significant management judgment is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. We record valuation allowances to reduce deferred tax assets to the amounts that are more likely than not to be realized. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances. If we determined that we would be able to realize our deferred tax assets in the future in excess of our net deferred tax assets, adjustments to the deferred tax assets would increase income by reducing tax expense in the period that we made such determination. Likewise, if we determined that we would not be able to realize all or part of our net deferred tax assets in the future, adjustments to the deferred tax assets would decrease income by increasing tax expense in the period that we made such determination.
Results of Operations
Revenue
Revenue increased to $39.1 million in 2002 from $28.3 million in 2001 and $24.2 million in 2000. The increase in revenues in 2002 can be attributed primarily to the receipt of an upfront fee of $26.0 million associated with a license agreement with Transkaryotic Therapies, Inc. ("TKT") for the Company's gene activation technology.
Revenue from the Company's GVAX® collaboration agreement with the pharmaceutical division of Japan Tobacco ("JT") for 2002 was $11.6 million compared to $25.1 million in 2001 and $21.3 million in 2000. Of the revenue from JT in 2002, $9.8 million, or 84 percent was related to cost reimbursement. The decrease in revenue under the JT agreement is attributed to the termination of the license agreement with JT in October 2002 which pertained to GVAX® lung cancer vaccines. Previously during 2001, the Company had restructured its GVAX® collaboration with JT to regain full rights to its GVAX® prostate cancer vaccine program and converted its GVAX® lung cancer vaccine program to a reciprocal royalty arrangement. Under the October 2002 termination agreement, full commercial rights to the entire GVAX® cancer vaccine portfolio was reverted to Cell Genesys. Revenues for 2000 were impacted by the adoption of SAB 101 and the resulting change in the Company's revenue recognition policy. As a result of the adoption of SAB 101, a cumulative effect of a change in accounting of $6.5 million, net of taxes, was recorded in 2000 (see the revenue recognition note in the Notes to the Consolidated Financial Statements for further information on our adoption of SAB 101).
The Company's gene activation technology agreement with Aventis for gene activated erythropoietin ("EPO") provides for milestone payments and annual maintenance fees, in addition to royalties on future sales of gene-activated EPO products. The Company recognized revenue of $1.1 million, $3.2 million and $2.8 million in 2002, 2001 and 2000, respectively, pursuant to the Aventis agreement. Of the revenue from Aventis during 2002, $1 million, or 91 percent was related to an annual maintenance.
Research and development expenses
Research and development costs increased to $75.1 million in 2002 from $50.8 million during 2001, and $30.5 million in 2000. The increase can be attributed primarily to the Company's expanding clinical trials for both its GVAX® cancer vaccines and oncolytic virus therapy programs. During 2002, the Company advanced its clinical trial programs, including trials of GVAX® vaccines in multiple cancers and oncolytic virus therapies, as well as its preclinical cancer gene therapy programs. The Company expects that its research and development expenditures will continue to increase in future years to support expanded, more advanced and more numerous clinical trials and additional product development activities. The rate of increase depends on a number of factors, including progress in research and development and the results of clinical trials.
Biopharmaceutical products such as those developed by Cell Genesys generally take 10 to 15 years to research, develop and bring to market in the United States. Drug development in the U.S. is a process that includes several steps regulated by the FDA. The process begins with the filing of an IND which, if successful, allows opportunity for clinical study of the potential new medicine. Clinical development typically involves three phases of study: Phase 1, 2, and 3. Costs for each phase are generally larger than the preceding phase, as the size of the clinical trial (number of patients) grows. The most significant costs associated with clinical development are the Phase 3 trials as they tend to be the longest and largest studies conducted during the drug development process. We currently have two products in development that have been targeted for Phase 3 studies. However, the successful development of our products is highly uncertain. Estimates of product completion dates and completion costs can vary significantly for each product and are difficult to predict. Completion of clinical trials may take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the product candidate. However, we estimate that clinical trials of the type we generally conduct are usually completed over the following timelines:
Clinical Phase Estimated Completion Period
Phase 1 1-3 years
Phase 2 1-3 years
Phase 3 2-5 years
Many factors may delay our commencement and speed of completion of clinical trials, including the size/number of patients participating in the trial, the duration of patient follow-up required, the number of clinical sites at which the trial is conducted, and the length of time required to locate and enroll suitable patient subjects. Various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of each product. The lengthy process of seeking these 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 a BLA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not provide an adequate basis for approval. There can be no assurance that any approval required by the FDA or other regulatory body will be obtained on a timely basis, if at all. For additional discussion of the risks and uncertainties associated with completing development of potential products, see "Other Factors Affecting Future Operations" below.
Included below is a summary of products and the related stage of development for each product in clinical development. The information in the column labeled "Estimated Completion of Phase" contains forward-looking statements regarding timing of completion of product development phases. Timing of completion of these trials is based on typical times to completion for trials of that type at such phases of development. The actual timing of completion of these phases of clinical trials could differ materially from the estimates provided in the table due to the number of patients enrolled in the trial, the number of clinical trial sites involved, the time needed to fully enroll the trial, the time required for patient follow-up and other factors. In addition, it is possible that any of these ongoing clinical trials may never be completed due to the occurrence of unacceptable treatment-related side effects, lack of clinical efficacy, insufficient supply of product for these clinical trials and other factors. For a discussion of the risks and uncertainties associated with the timing of completing a product development phase, see ""Other Factors Affecting Future Operations" below.
Phase of Estimiated Completion
Product Indication Development of Phase
------------------------------------------------------------------------------------
GVAXreg; Prostate Prostate cancer Phase 2 2003
GVAXreg; Lung Non small-cell lung cancer Phase2 2003 - 2004
GVAXreg; Pancreatic Pancreatic cancer Phase 2 2003 - 2004
GVAXreg; Leukemia Acute Leukemia Phase 2 2003 - 2004
GVAXreg; Myeloma Multiple Myeloma Phase 1/2 2003
CV7870 Oncolytic Virus Prostate cancer Phase 1 2003
General and Administrative Expenses
General and administrative expenses were $20.7 million during 2002, compared to $11.9 million and $7.0 million in 2001 and 2000, respectively. During 2002, Cell Genesys recorded a charge of approximately $6.2 million for lease exit costs for its facilities in Foster City, California, in association with the move to its new facilities in South San Francisco. In addition, the remaining increase in 2002 was primarily attributed to approximately $1.1 million related to increased headcount costs and increased facility related costs of $1.1 million. Of the increase in 2001 compared to 2000, approximately $1.6 million was related to headcount costs, $1.2 million increased facility costs and $0.7 increased consulting services. Excluding the impact of the $6.2 million lease exit charge, future spending for general and administrative costs is expected to continue to increase in future years to support the growing infrastructure needs of the Company, particularly in the area of facilities.
Purchased in-process technology
During 2002, Cell Genesys recorded a credit of $186,000 to purchased in-process technology related to its acquisition of Calydon, Inc. in 2001. The adjustment related to the return to Cell Genesys of a portion of the purchase price held in escrow in accordance with the terms of the purchase agreement. In 2001, Cell Genesys recorded a charge of $18 million for the purchased in-process technology from the acquisition of Calydon, and does not anticipate that there is any alternative future use for the in-process technology that was expensed. Cell Genesys continues research in the technology acquired in the acquisition of Calydon.
Interest income, interest expense and other income
Interest and other income was $9.9 million in 2002, compared to $18.4 million and $13.6 million in 2001 and 2000, respectively. The higher income in 2001 compared to 2002 and 2000 is a result of higher average cash balances, plus $8.0 million of realized gains earned from the sale of certain tax-free securities during the first quarter of 2001. Also, interest rates in 2002 and the latter part of 2001 were lower compared to rates in 2000. In 2002, the Company realized $2.2 million gain on the sale of Abgenix stock. In 2000, the Company realized $239.7 million gain on the sale of Abgenix common stock. The Company did not sell any Abgenix common stock during 2001.
Interest expense increased to $1.0 million in 2002 from $0.5 million in 2001 and $0.4 million in 2000. The increase in 2002 is a result of a $60 million liquid collateral debt financing completed in December 2001 in connection with the construction of the Company's manufacturing facility in Hayward, California. The Company capitalized interest expense in 2002 of approximately $751,000 as part of the construction costs.
Income taxes
The Company recorded a tax benefit for 2002 of $18.6 million and $5.5 for 2001, which primarily represents the estimated refund available from the carryback of losses to offset taxable income in 2000. In 2000, Cell Genesys recorded a tax provision of $64.2 million primarily as a result of gains from its sale of Abgenix stock. At December 31, 2002, Cell Genesys had federal net operating loss carryforwards of approximately $65 million. The 2002 net operating losses will expire in the years 2011 through 2021, if not utilized. The large capital gains associated with the sale of a portion of the Company's investment in Abgenix during February and November 2000 were substantially offset by utilizing a large portion of the Company's previously available net operating loss carryforwards and tax credits.
Losses, excluding non-recurring charges and gains from sales of Abgenix stock, are expected to continue and may increase in future years as operating expenses rise, particularly as the Company incurs expenses related to manufacturing and late-stage human testing of its potential products.
Liquidity and Capital Resources
Cell Genesys ended 2002 with approximately $166.9 million in cash, cash equivalents and short-term investments, of which $67.3 million is classified as restricted cash primarily related to the Company's debt financing. Information regarding the classification of these assets is included in Notes to Financial Statements, "Fair Value of Financial Instruments." The Company has maintained its financial position through strategic management of its resources including the Company's holdings in Abgenix of which Cell Genesys continues to hold approximately 8.7 million shares of common stock and by relying on funding from various corporate collaborations and licensing agreements. Additionally, in December 2002, the Company filed a shelf registration statement with the Securities and Exchange Commission (SEC) pursuant to Rule 415 under the Securities Act of 1933, as amended, which, once effective, would allow the company to offer up to $150 million of securities on short notice in subsequent public offerings. However, there can be no assurance the Company will be able to issue such securities on acceptable terms, or at all.
Cell Genesys has financed its operations primarily through the sale of equity securities, funding under collaborative arrangements, sales of Abgenix common stock and secured financing. In 2002 and 2000, Cell Genesys received approximately $2.5 million and $243.9 million, respectively, in net proceeds from the sale of shares of Abgenix common stock. Cell Genesys did not sell any Abgenix stock in 2001.
In connection with the gain on sale of Abgenix common stock in 2000, the Company paid $41.5 million in federal and state income tax. The Company recorded a tax benefit for 2002 of $18.6 million, which represents the estimated refund available primarily from the carryback of losses in 2002 to offset taxable income in 2000. Since 2001 the Company has received $19 million in tax refunds from the carryback of losses. The Company has additional unutilized net operating loss ("NOL") carryforwards, although the future utilization of these NOL carryforwards is limited by IRS regulation Section 382, which imposes an annual limitation on taxable income that can be offset by NOLs following a change in control. The Company, for IRS purposes, experienced a change in control during its acquisition of Somatix in 1997. It is the Company's current intention to minimize future tax liabilities on sales of Abgenix stock by offsetting gains against current operating losses and the NOL carryforwards allowed under Section 382. In addition, the Company has certain research and development tax credits which it may utilize to offset the tax effects of such gains. However, under some circumstances the Company may sell more Abgenix stock and consequently recognize more gain than it may be able to shelter from tax using these methods.
Future minimum payments under non-cancelable operating leases, capital leases and debt financing at December 31, 2002, were (in thousands):
Operating Capital Debt
Leases Leases Financing
-------------------------------------
Years ending December 31:
2003..................................... $ 10,699 $ 5,514 $ 10,532
2004..................................... 10,822 6,171 10,275
2005..................................... 11,168 6,332 10,017
2006..................................... 4,410 6,406 9,759
2007 and beyond.......................... 18,127 87,289 25,057
----------- ----------- -----------
Total minimum payments (1)............... $ 55,226 $ 111,712 $ 65,639
===========
Less: Amount representing interest
and executory costs.................. ($58,520) (5,639)
------------------------
Present value of future debt payments...... $ $53,192 $ 60,000
------------------------
Less: Current portion of future payments... (5,608) (8,889)
------------------------
Non-current portion of payments............. $ 47,584 $ 51,111
========================
(1) Total operating lease commitments include rent payments for the Company's
Foster City facilities of $16.8 million, of which $6.2 million was accrued as of December 31,
2002 as part of the estimated facility exit costs associated with our move
to the South San Francisco, California headquarters in March 2003.
Cell Genesys leases certain of its facilities and
equipment under non-cancelable operating leases. These leases, including the
Hayward, Foster City, San Diego and Memphis facilities expire at various dates
through 2017 and contain options for renewal. The South San Francisco facility
lease is recorded as a capital lease as a result of certain amendments which
required Cell Genesys to fund the costs of certain structural components of the
facility. The Company's debt financing was obtained in conjunction with the
construction of its
Hayward manufacturing facility. For 2002, the debt financing bears an interest rate
of LIBOR (London InterBank Offering Rate) plus 1.0 percent, and a term of six
years. In January 2003, the rate was reduced to Libor plus 0.75 percent.
Cell Genesys paid interest only for the first year, and will make
quarterly payments of principle and interest and approximately a 30 percent
balloon payment at the end of the six year term. Ceregene, a subsidiary of Cell
Genesys, also maintains capital leases to fund the purchases of furniture and
machinery equipment. The Company has completed construction of its
manufacturing facility for non patient specific cell-based vaccines in Hayward,
California. Expenditures associated with the completion and validation of this
facility during 2003 are expected to total approximately $5 million. In
addition, the Company has completed the construction of its new manufacturing
facility in Memphis, Tennessee that will be devoted to the manufacturing of
patient-specific vaccines for lung cancer. Total additional costs for equipment
and improvements for this facility are expected to approximate $1 million in
2003. Cell Genesys moved to its new headquarters facility in South San
Francisco in March 2003. The headquarters include both the Company's research
and development laboratories and administrative offices. Total additional costs
for build-out of tenant improvements for this facility during 2003 are expected
to be approximately $12 million. Cell Genesys anticipates that its net operating use of
cash during 2003 will be approximately $60-65 million. Net operating use of
cash does not include capital expenditures or the cost of any potential
acquisitions, nor does it reflect the potential offset by future sales of
Abgenix stock or equity or debt financings. The Company's capital requirements
depend on numerous factors, including: the progress of the Company's research
and development programs and its preclinical and clinical trials; clinical and
commercial scale manufacturing requirements; the extent of funding from
collaborative partners; the acquisition of new products or technologies; and the
cost and outcome of litigation, patent interference proceedings or other legal
proceedings. The Company's ongoing development programs and any increase in the
number and size of programs and trials will reduce the Company's current cash
resources and potentially create the need to raise further capital. Therefore,
the Company may continue to consider financing alternatives, including potential
equity and debt financings in addition to periodic sales of the Company's
holdings of Abgenix stock. A substantial portion of the Company's working capital
consists of holdings of shares its former subsidiary, Abgenix. These shares are
carried at market value and have been subject to extreme fluctuations in recent
quarters due to the highly volatile nature of the market price of Abgenix stock.
To the extent that the Company continues to hold a substantial amount of these
shares, the Company's working capital position can be expected to continue to
fluctuate in future periods. The value of the Company's investment in Abgenix
common stock holdings was approximately $64.1 million at December 31, 2002 and
approximately $301.2 million at December 31, 2001. In June 2002, the Company
completed a license agreement with TKT under which it was to receive a portion
of the consideration in the form of TKT common stock, the number of shares of
which was to be determined when the shares became freely tradable, such that the
shares would have a market value of $15 million at that time. In January 2003,
the Company, under an amended agreement with TKT, received $15 million in cash
in lieu of the TKT stock that was to be issued under the original license
agreement. Based on this amended agreement, the Company has reclassified the
"investment in TKT" as previously reported in the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 2002, to
"receivable from TKT" at December 31, 2002. While Cell Genesys believes that its current liquidity
position will be sufficient to meet its cash needs for at least the next year,
the Company may entertain the possibility of raising additional capital to
preserve its liquidity, depending on a number of conditions, including
conditions in the capital markets. The sources of liquidity available to the
Company include the sale of Abgenix securities, asset-backed debt financing,
private or public placement of Cell Genesys equity securities, warrants, debt
securities or depositary shares. The Company's evaluation processes regularly
consider the liquidity of capital markets, dilution, stockholder value and tax
consequences of each type of financing on stockholders. Certain of the
financing options available to the Company may have negative consequences to
stockholders such as dilution. Given the volatile nature of the capital
markets, decisions to raise capital may require actions that would impose a
negative consequence in order to reduce or minimize a more significant negative
consequence to stockholders. Recent Accounting Pronouncements Business combinations In July 2001, the Financial Accounting Standards
Board ("FASB") issued Statements of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS 141 requires that all
business combinations be accounted for by the purchase method of accounting and
changes the criteria for recognition of intangible assets acquired in a business
combination. The provisions of SFAS 141 apply to all business combinations
initiated after June 30, 2001, including the Company's acquisition of Calydon,
Inc. in September 2001. SFAS 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized; however, these assets must
be reviewed at least annually for impairment. Intangible assets with finite
useful lives will continue to be amortized over their respective useful lives.
The standard also establishes specific guidance for testing for impairment of
goodwill and intangible assets with indefinite useful lives. As the Company
does not have goodwill recorded from previous acquisitions, the transitional
impairment test was not applicable and the adoption of SFAS 142 did not impact
the Company's consolidated financial condition or results of operations. Asset retirement obligations In August 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligation." SFAS 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated retirement costs.
The adoption of SFAS 143 in 2002 did not impact the Company's consolidated
financial condition or results of operations. Asset impairments In October 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS 144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. The adoption of
SFAS 144 in 2002 did not impact the Company's consolidated financial position or
results of operations. Exit or disposal activities In June 2002, the FASB issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities"
which addresses accounting for restructuring, discontinued operations, plant
closing, or other exit or disposal activity. SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002, and earlier adoption is encouraged. The Company
intends to adopt SFAS 146 as of January 1, 2003. Guarantor's accounting and disclosure requirements for
guarantees, including direct guarantees of indebtedness of others In November 2002, the FASB issued Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("The Interpretation").
The Interpretation applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or an
equity security of the guaranteed party. The Company adopted the disclosure
provisions of this Interpretation in 2002 and does not expect the adoption of
the recognition and measurement requirements to impact Cell Genesys' financial
position or results of operations. Revenue arrangements with multiple deliverables In November 2002, the FASB issued Emerging Issues Task
Force ("EITF") Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables." EITF 00-21 addresses certain aspects of the
accounting by a company for arrangements under which it will perform multiple
revenue-generating activities. EITF 00-21 addresses when and how an arrangement
involving multiple deliverables should be divided into separate units of
accounting. EITF 00-21 provides guidance with respect to the effect of certain
customer rights due to company nonperformance on the recognition of revenue
allocated to delivered units of accounting. EITF 00-21 also addresses the
impact on the measurement and/or allocation of arrangement consideration of
customer cancellation provisions and consideration that varies as a result of
future actions of the customer or the company. Finally, EITF 00-21 provides
guidance with respect to the recognition of the cost of certain deliverables
that are excluded from the revenue accounting arrangement. The provisions of
EITF 00-21 will apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Cell Genesys is currently evaluating the effect
that the adoption of EITF 00-21 will have on its financial condition and results
of operations. Consolidation of variable interest entities In January 2003, the FASB issued Financial Interpretation
No. 46, "Consolidation of Variable Interest Entities" ("FIN
46"). The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim periods
beginning after June 15, 2003. Certain of the disclosure requirements apply in
all financial statements issued after January 31, 2003, regardless of when the
variable entity was established. Cell Genesys does not have variable interest
entities and does not expect the adoption of FIN 46 to have a material effect on
its financial condition or results of operations. OTHER FACTORS AFFECTING FUTURE OPERATIONS Investors should carefully consider the risks
described below before making an investment decision. The risks described below
are not the only ones facing our company. Additional risks not currently known
to us or that we currently believe are immaterial may also impair our business
operations. Our business could be harmed by any of these risks. The trading
price of our common stock could decline due to any of these risks, and investors
may lose all or part of their investment. In assessing these risks, investors
should also refer to the other information contained or incorporated by
reference in this Annual Report on Form 10-K, including our consolidated
financial statements and related notes. Risks Related to Our Company Our products are in developmental stage, are not approved for
commercial sale and might not ever receive regulatory approval or become
commercially viable. All of our potential cancer vaccines, oncolytic virus
therapies and cancer gene therapy products are in research and development. We
have not generated any revenues from the sale of products. We do not expect to
generate any revenues from product sales for at least the next several years.
Our products currently under development will require significant additional
research and development efforts, including extensive preclinical and clinical
testing and regulatory approval, prior to commercial use. Our research and
development efforts may not be successful and any of our future products may not
be ultimately commercially successful. Even if developed, our products may not
receive regulatory approval or be successfully introduced and marketed at prices
that would permit us to operate profitably. Our cancer vaccine, oncolytic virus therapies and cancer
gene therapy programs must undergo exhaustive clinical testing and may not prove
to be safe or effective. If any of our proposed products are delayed or fail, we
may have to curtail our operations. Gene therapy is a new technology.
Existing preclinical and clinical data on the safety and efficacy of gene
therapy are limited. Data relating to our specific gene therapy approaches are
also limited. Our GVAX® cancer vaccines and oncolytic virus
therapies are currently being tested in human clinical trials to determine their
safety and efficacy. None of our other products or therapies under development
are in human clinical trials. The results of preclinical studies do not predict
safety or efficacy in humans. Unacceptable side effects may be discovered
during preclinical and clinical testing of our potential products or thereafter.
Possible side effects of gene therapy may be serious and potentially life-
threatening. There are many reasons that potential products that appear
promising at an early-stage of research or development do not result in
commercially successful products. Although we are testing proposed products or
therapies in human clinical trials, we cannot guarantee that we will be
permitted to undertake human clinical trials for any of our other products or
that adequate numbers of patients can be recruited for our clinical trials.
Also, the results of this testing might not demonstrate the safety or efficacy
of these products. Even if clinical trials are successful, we might not obtain
regulatory approval for any indication. Finally, even if our products proceed
successfully through clinical trials and receive regulatory approval, there is
no guarantee that an approved product can be manufactured in commercial
quantities at reasonable cost or that such a product will be successfully
marketed. We have not been profitable in our operations (absent the
gains on sales of Abgenix stock and certain upfront or non-recurring license
fees). We expect to continue to incur substantial losses and negative cash flow
from operations and may not become profitable in the future. We have
incurred an accumulated deficit since our inception. At December 31, 2002, our
accumulated deficit was approximately $90.2 million, compared with $63.6 million
at December 31, 2001. Our accumulated deficit would be substantially higher
absent the gains we have realized on sales of our Abgenix stock. For the year
ended December 31, 2002, we recorded a net loss attributed to common
stockholders of $27.3 million, which included revenue of $26.0 million from an
upfront fee in connection with the Company's license agreement with TKT in June
2002. We expect to incur substantial operating losses for at least the next
several years. This is due primarily to the expansion of research and
development programs, clinical trials and manufacturing activities and, to a
lesser extent, general and administrative expenses. We also have substantial
lease obligations related to our new manufacturing and headquarter facilities
impacting operating expenses. We expect that losses will fluctuate from quarter
to quarter and that these fluctuations may be substantial. We cannot guarantee
that we will successfully develop, manufacture, commercialize or market any
products. We cannot guarantee that we will ever achieve or sustain product
revenues or profitability. We will need substantial additional funds to continue
operations, and our ability to generate funds depends on many factors beyond our
control. We will need substantial funds for existing and planned
preclinical and clinical trials, to continue research and development
activities, for lease obligations related to our manufacturing and headquarter
facilities, and to establish manufacturing and marketing capabilities for any
products we may develop. At some point in the future, we will also need to
raise additional capital just to fund our operations. Our future capital
requirements will depend on, and could increase as a result of, many factors,
such as: the progress and scope of our internally funded research, development
and commercialization activities; our ability to establish new collaborations and the terms of those
collaborations; competing technological and market developments; the time and cost of regulatory approval; the extent to which we choose to commercialize our future products
through our own sales and marketing capabilities; the costs we incur in obtaining and enforcing patent and other
proprietary rights or gaining the freedom to operate under the patents of
others; and our success in acquiring and integrating complementary products,
technologies or businesses. We plan to raise additional funds through collaborative
relationships, sales of some portion or all of our investment in Abgenix,
additional equity or debt financings, or otherwise, but we may not be able to do
any of the foregoing on favorable terms, or at all. Because of our long-
term capital requirements, we may seek to access the public or private equity
markets whenever conditions are favorable, even if we do not have an immediate
need for additional capital at that time. Additional funding may not be
available to us, and, if available, may not be on acceptable terms. If we raise
additional funds by issuing equity securities, stockholders will incur immediate
dilution. Opportunities for in-licensing technologies or for third-party
collaborations may not continue to be available to us on acceptable terms, or at
all. If adequate funds are not available, we may be required to delay, reduce
the scope of, or eliminate one or more of our research, development and clinical
activities. Alternatively, we may need to seek funds through arrangements with
collaborative partners or others that require us to relinquish rights to
technologies or product candidates that we would otherwise seek to develop or
commercialize ourselves. Either of these events could have a material adverse
effect on our business, results of operations, financial condition or cash flow.
Currently, we have no collaborative partners for the development of our
GVAX® cancer vaccines or oncolytic virus therapy products. In
October 2002, our remaining license agreement with the pharmaceutical division
of Japan Tobacco for GVAX® lung cancer vaccine was terminated,
and we will not receive any additional payments under this collaboration for the
future development costs of this product. Our ability to manufacture our products is uncertain,
which may delay or impair our ability to develop, test and commercialize our
products. We are building our own manufacturing facilities in compliance
with FDA Good Manufacturing Practices regulatory requirements for the
manufacture of products for clinical trials and to support the potential
commercial launch of our product candidates. We are under significant lease
obligations for each of our facilities. Completion of these facilities could
take longer than expected, and our inability to establish and maintain the
facilities within our planned time and budget could materially affect our
product development timelines. Our manufacturing facilities will be subject to
ongoing, periodic inspection by the FDA and state agencies to ensure compliance
with Good Manufacturing Practices. We also may encounter problems with the
following: achieving consistent production yield and costs; meeting product release specifications; quality control and assurance; shortages of qualified manufacturing personnel; shortages of raw materials; shortages of key contractors; and ongoing compliance with FDA and other regulations. Developing advanced manufacturing techniques and process
controls is required to fully utilize our expanded facilities. We may not be
able to develop these techniques and process controls to manufacture our
products effectively to meet demands of clinical testing and production. If we are unable to manufacture our products for any reason,
our options for outsourcing manufacturing are currently limited. We are unaware
of available contract manufacturing facilities on a worldwide basis in which our
product candidates can be manufactured under Good Manufacturing Practices
regulations, a requirement for all pharmaceutical products. It would take a
substantial period of time for a contract manufacturing facility that has not
been producing our particular products to begin producing them under Good
Manufacturing Practices regulations. Our manufacturing facilities are subject to licensing
requirements of the California Department of Health Services and the Tennessee
Department of Commerce and Insurance, Board of Pharmacy, referred to as the
Tennessee Board of Pharmacy. While not subject to license by the FDA, these
facilities are subject to inspection by the FDA, as well as by the California
Department of Health Services and the Tennessee Board of Pharmacy. Failure to
maintain these licenses or to meet the inspection criteria of the FDA, the
California Department of Health Services or the Tennessee Board of Pharmacy
would disrupt our manufacturing processes and have a material adverse effect on
our business, results of operations, financial condition and cash flow. If our proposed products are not effectively protected by
issued patents or if we are not otherwise able to protect our proprietary
information, we will be more vulnerable to competitors and our business could be
adversely affected. We rely heavily on the development and protection of
our intellectual property portfolio. The patent positions of pharmaceutical and
biotechnology firms, including Cell Genesys, are generally uncertain and involve
complex legal and factual questions. As of December 31, 2002, we had
approximately 330 issued or granted patents and approximately 390 pending
applications. Although we are prosecuting patent applications, we cannot be
certain whether any given application will result in the issuance of a patent
or, if any patent is issued, whether it will provide significant proprietary
protection or will be invalidated. Also, patent applications in the United
States are confidential until patents are issued. Publication of discoveries in
scientific or patent literature tends to lag behind actual discoveries by
several months. Accordingly, we cannot be sure that we were the first creator
of inventions covered by pending patent applications or that we were the first
to file patent applications for these inventions. In addition, to the extent we
license our intellectual property to other parties, we may incur expenses as a
result of contractual agreements in which we indemnify these licensing parties
against losses incurred if our intellectual property infringes upon the rights
of others. Our intellectual property may be challenged by our
competitors in the future, which may have a material adverse effect on our
business, results of operations, financial condition and cash flow. Our
commercial success depends in part on not infringing the patents or proprietary
rights of others and not breaching licensees granted to us. We are aware of
competing intellectual property relating to both our programs in cancer vaccines
and oncolytic virus therapies. While we currently believe we have freedom to
operate in these areas, our position may be challenged by others in the future.
We may be required to obtain licenses to third-party technologies or genes
necessary in order to market our products. Any failure to license any
technologies or genes required to commercialize our technologies or products at
reasonable cost may have a material adverse effect on our business, results of
operations, financial condition and cash flow. We may have to engage in litigation, which could result in
substantial cost, to enforce our patents or to determine the scope and validity
of other parties' proprietary rights. To determine the priority of
inventions, the United States Patent and Trademark Office frequently declares
interference proceedings. In Europe, patents can be revoked through opposition
proceedings. These proceedings could result in an adverse decision as to the
priority of our inventions. We are currently involved in multiple interference and/or opposition
proceedings with regard to: gene activation technology; certain ex vivo gene therapies; certain vector technologies; and chimeric receptor technology. We cannot predict the outcome of these proceedings. An
adverse result could have a material adverse effect on our intellectual property
position in these areas and on our business as a whole. We may be involved in
other interference and/or opposition proceedings in the future. We believe that
there will continue to be significant litigation in the industry regarding
patent and other intellectual property rights. Our competitive positions may be adversely affected by our
limited ability to protect and control unpatented trade secrets, know-how and
other technological innovation. Our competitors may independently develop
similar or better proprietary information and techniques and disclose them
publicly. Also, others may gain access to our trade secrets, and we may not be
able to meaningfully protect our rights to our unpatented trade secrets. We require our employees and consultants to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with us. These agreements provide that all confidential
information developed by or made known to an individual during the course of the
employment or consulting relationship generally must be kept confidential. In
the case of employees, the agreements provide that all inventions relating to
our business conceived by the employee while employed by us are our exclusive
property. These agreements may not provide meaningful protection for our trade
secrets in the event of unauthorized use or disclosure of such information. Our competitors may commercialize products more rapidly
than we do, which may adversely affect our competitive position. There are
approximately 50 companies worldwide pursuing cancer programs with similar
technology to ours. Some of these competitors are large pharmaceutical
companies, such as Aventis and GlaxoSmithKline, which have greater experience
and resources than we do in developing products, in undertaking preclinical
testing and human clinical trials of new pharmaceutical products, in obtaining
FDA and other regulatory approvals of products, and in manufacturing and
marketing new therapies. We are also competing with other biotechnology
companies with similar experience and resources to ours, but who may have
programs which are in a later stage of clinical testing than ours, such as
Dendreon Corporation. However, our competitive position and that of our
competitors can vary based on the performance of products in clinical trials.
In addition, our competitors may obtain patent protection or FDA approval and
commercialize products more rapidly than we do, which may impact future sales of
our products. We also may not have the access that some of our competitors have
to biological materials necessary to support the research, development or
manufacturing of planned therapies. If we are permitted by the FDA to commence
commercial sales of products, we will also be competing with respect to
marketing capabilities and manufacturing efficiency, areas in which we have
limited or no experience. We expect that competition among products approved
for sale will be based, among other things, on: product efficacy; price; safety; reliability; availability; patent protection; and sales, marketing and distribution capabilities. Our competitive position also depends upon our ability to
attract and retain qualified personnel, develop proprietary products or
processes, and secure sufficient funding for the often lengthy period between
product conception and commercial sales. To the extent we depend on strategic partners to sell,
market or distribute our products, we will have reduced control over the success
of the sales, marketing and distribution of our future products. We have no
experience in sales, marketing or distribution of biopharmaceutical products.
We may in the future rely on sales and marketing expertise of potential
corporate partners for our initial products. The decision to market future
products directly or through corporate partners will be based on a number of
factors, including: market size and concentration; size and expertise of the partner's sales force in a particular market;
and our overall strategic objectives. We may in the future be exposed to product liability
claims, which could adversely affect our business, results of operation,
financial condition and cash flow. Clinical trials or marketing of any of
our potential products may expose us to liability claims resulting from the use
of our products. These claims might be made by consumers, health care providers
or sellers of our products. We currently maintain product liability insurance
with respect to each of our clinical trials. We may not be able to maintain
insurance or obtain sufficient coverage at a reasonable cost, given the
increasing cost of insurance in today's insurance market. An inability to
maintain insurance at an acceptable cost, or at all, could prevent or inhibit
the clinical testing or commercialization of our products or otherwise affect
our financial condition. A claim, particularly resulting from a clinical trial,
on any of our insurance policies or a product recall could have a material
adverse effect on our business, results of operations, financial condition and
cash flow. Our business, financial condition and results of
operations could suffer as a result of our strategic acquisitions and
investments. In January 2001, we acquired the principal operating assets of
Chiron Corporation's gene therapy business, a fully equipped and staffed
manufacturing facility. Also in January 2001, we launched Ceregene, Inc.,
formed through the acquisition of Neurologic Gene Therapeutics, a private San
Diego-based start-up company. Finally, in September 2001, we acquired Calydon,
Inc., a private biotechnology company focused on the treatment of cancer using
genetically engineered oncolytic virus therapies. We may not be able to fully
integrate all these companies and their intellectual property or personnel. Our
attempts to do so will place additional burdens on our management and
infrastructure. These acquisitions will also subject us to a number of risks,
including: the loss of key personnel and business relationships; difficulties associated with assimilating and integrating the new
personnel and operations of the acquired companies; the potential disruption of our ongoing business; the expense associated with maintenance of diverse standards, controls,
procedures, employees and clients; the diversion of resources from the development of our own proprietary
technology; and our inability to generate revenue from acquired technology sufficient to
offset associated acquisition and maintenance costs. We may not be successful in overcoming these risks or any
other problems encountered in connection with our acquisitions. Moreover, we
may engage in future acquisitions or investments that could dilute our existing
stockholders or cause us to incur contingent liabilities, debt or significant
expense. From time to time, in the ordinary course of business, we may evaluate
potential acquisitions or investments in related businesses, products or
technologies. We may not be successful with any strategic acquisition or
investment. Any future acquisition or investment could harm our business,
financial condition and results of operations. Our operations are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure, terrorist activity and other
events beyond our control, which could result in a material adverse effect on
our business. Our facilities in California have, in the past, been subject
to electrical blackouts as a result of a shortage of available electrical power.
Future blackouts could disrupt the operations of our facilities. In addition,
we do not carry sufficient business interruption insurance to compensate us for
actual losses from interruption of our business that may occur, and any losses
or damages incurred by us could have a material adverse effect on our
business. We depend on our key technical and management personnel
and clinical investigative sites to advance our technology, and the loss of
these personnel or partners could impair the development of our products.
We rely and will continue to rely on our key management and scientific staff.
The loss of key personnel or the failure to recruit necessary additional
qualified personnel could have a material adverse effect on our business and
results of operations. There is intense competition from other companies,
research and academic institutions and other organizations for qualified
personnel. We may not be able to continue to attract and retain the qualified
personnel necessary for the development of our business. We will need to
continue to recruit experts in the areas of clinical testing, manufacturing,
marketing and distribution and to develop additional expertise in our existing
personnel. If we do not succeed in recruiting necessary personnel or developing
this expertise, our business could suffer significantly. We have clinical trial agreements with a number of public and
private medical institutions for the conduct of human clinical trials for our
GVAX® cancer vaccine programs and oncolytic virus therapies. The
early termination of any of these clinical trial agreements would hinder the
progress of our clinical trial program. If any of these relationships are
terminated, the clinical trials might not be completed and the results might not
be evaluated. Inventions or processes discovered by our outside
scientific collaborators may not become our property, which may affect our
competitive position. We rely on the continued availability of outside
scientific collaborators performing research. These relationships generally may
be terminated at any time by the collaborator, typically by giving 30 days
notice. These scientific collaborators are not our employees. As a result, we
have limited control over their activities and can expect that only limited
amounts of their time will be dedicated to our activities. Our agreements with
these collaborators, as well as those with our scientific consultants, provide
that any rights we obtain as a result of their research efforts will be subject
to the rights of the research institutions for which they work. In addition,
some of these collaborators have consulting or other advisory arrangements with
other entities that may conflict with their obligations to us. For these
reasons, inventions or processes discovered by our scientific collaborators or
consultants may not become our property. Our stock price is influenced by the market price of
Abgenix stock, which has been highly volatile. Our retained ownership of
Abgenix common stock represents a material portion of the total assets on our
balance sheet. Abgenix stock price has proven to be highly volatile. The value
of our of Abgenix common stock was approximately $64.1 million at December 31,
2002 versus approximately $301.2 million at December 31, 2001. Movements in the
price of Abgenix stock, up or down, may exert corresponding influences on the
market price of our stock. Our stock price has fluctuated in the past and is likely
to continue to be volatile in the future. The stock prices of
biopharmaceutical and biotechnology companies (including Cell Genesys) have
historically been highly volatile. Our stock price has fluctuated during the
past two years between a high close price of $24.80 on December 6, 2001 and a
low close price of $7.00 on March 12, 2003. The market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. The following factors may affect
our stock price: fluctuations in our financial results; announcements of technological innovations or new therapeutic products
by us or our competitors; announcements of changes in governmental regulation affecting us or our
competitors; announcements of regulatory approval or disapproval of our or our
competitors' products; developments in patent or other proprietary rights affecting us or our
competitors; public concern as to the safety of products developed by us or other
biotechnology and pharmaceutical companies; general market conditions; fluctuations in the price of Abgenix stock, as described above; severe fluctuations in price and volume in the stock market in general
(or in the trading of the stock of biopharmaceutical and biotechnology companies
in particular) that are unrelated to our operating performance; issuances of common stock upon conversion of our Series B preferred
stock; sales of common stock by us or by existing stockholders; and the perception that such issuances or sales could occur. Our stockholders may be diluted by the conversion of
outstanding Series B redeemable convertible preferred stock. As of December
31, 2002, 665 shares of Series B redeemable convertible preferred stock issued
in January 2000 remained outstanding and were convertible into an aggregate of
approximately 654,000 shares of common stock as of that date. The holders of
the Series B preferred may choose at any time to convert their shares into
common stock. Conversion of the Series B preferred would result in issuance of
additional shares of common stock, diluting existing stockholders. The number
of shares of common stock issuable upon conversion of the Series B preferred is
determined by dividing the market value of the shares to be converted by the
lower of: a fixed conversion price of $14.53 per share (subject to antidilution
provisions); or the average of certain trading prices during the 10 trading days
preceding such date of conversion. The market value of the Series B preferred is based on the
outstanding carrying value from the original issuance plus the deemed dividend
earned over the holding period. As of December 31, 2002, the aggregate market
value for all outstanding Series B preferred was approximately $7.6 million.
The number of shares of common stock issuable upon conversion of the Series B
preferred, and therefore the dilution of existing investors, would increase as a
result of either an event triggering the antidilution rights of the Series B
preferred or a decline in the market price of our common stock immediately prior
to conversion of the Series B preferred. In the event the holders of the remaining outstanding Series
B preferred do not convert their shares, the shares will automatically be
converted on January 18, 2005 according to the formula described above. Our stockholders may be diluted by the exercise of
outstanding stock options or other issuances of our common stock.
Substantially all our outstanding shares of common stock are eligible for sale
in the public market. Issuance of common stock or the exercise of stock options
would dilute existing investors. We have adopted anti-takeover defenses that could make it
difficult for another company to acquire control of us or limit the price
investors might be willing to pay for our stock. Certain provisions of our
Certificate of Incorporation, Bylaws, and Delaware law could make it more
difficult for a third party to acquire us, even if doing so would benefit our
stockholders. These provisions include the adoption of a Stockholder Rights
Plan, commonly known as a "poison pill." Under the Stockholders
Rights Plan, stockholders of record on August 21, 1995 received one preferred
share purchase right for each outstanding share of our common stock. In July
2000, we made certain technical changes to amend the plan and extended the term
of such plan until 2010. The rights are exercisable only if an acquirer
purchases 15 percent or more of our common stock or announces a tender offer for
15 percent or more of our common stock. Upon exercise, holders other than the
acquirer may purchase our stock at a discount. The Board of Directors may
terminate the rights plan at any time or under certain circumstances redeem the
rights. Because the rights may substantially dilute the stock ownership of a
person or group attempting to take us over with out the approval of the Board of
Directors, the plan could make it more difficult for a third party to acquire us
(or a significant percentage of our outstanding capital stock) with out first
negotiating with our Board of Directors regarding such acquisition. These
provisions and certain provisions of the Delaware General Corporation Law may
have the effect of deterring hostile takeovers or otherwise delaying or
preventing changes in the control or management of Cell Genesys, including
transactions in which our stockholders might otherwise receive a premium over
the fair market value of our common stock. Risks Related to Our Industry In order for our products to be offered to the public, they
must undergo extensive clinical testing and receive approval from the Food and
Drug Administration, which could delay or prevent the commercialization of our
products. Human therapeutic products must undergo rigorous preclinical and
clinical testing and other premarket approval procedures by the FDA and similar
authorities in foreign countries. Preclinical tests include laboratory
evaluation of potential products and animal studies to assess the potential
safety and efficacy of the product and its formulations. Clinical trials
involve the administration of the investigational new drug to healthy volunteers
or to patients under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with FDA Good Clinical Practices
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety and the efficacy criteria to be evaluated. The developer
of the drug must provide information relating to the characterization of the
product after administration to the patients participating in the clinical
trials. This requires developing approved assays of the product to test before
and after administration to the patient. The results of the preclinical testing
and clinical testing, together with chemistry, manufacturing and controls
information, are submitted to the FDA in the form of a new drug application for
a pharmaceutical product, and in the form of a biologics license application for
a biological product, requesting approval to commence commercial sales. In responding to a new drug application or a biologics
license application, the FDA may grant marketing approvals, request additional
information or further research, or deny the application if it determines that
the application does not satisfy its regulatory approval criteria. Approvals
may not be granted on a timely basis, if at all, and if granted may not cover
all the clinical indications for which we are seeking approval. Also, an
approval might contain significant limitations in the form of warnings,
precautions or contraindications with respect to conditions of use. We are subject to federal, state and local laws and
regulations, and complying with these may cause us to incur significant costs.
We are subject to laws and regulations enforced by the FDA, the California
Department of Health Services, the Tennessee Board of Pharmacy and other
regulatory statutes including: Occupational Safety and Health Act; Environmental Protection Act; Toxic Substances Control Act; Resource Conservation and Recovery Act; and other current and potential future federal, state or local laws and
regulations. In particular with respect to environmental laws, product
development activities involve the use of hazardous materials, and we may incur
significant costs as a result of the need to comply with these laws. Our
research and development activities involve the controlled use of hazardous
materials, chemicals, viruses and radioactive compounds. We are subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of these materials and waste products. Although
we believe that our safety procedures for handling and disposing of these
materials comply with the standards prescribed by applicable laws and
regulations, we cannot completely eliminate the risk of contamination or injury,
by accident or as the results of intentional acts of terrorists, from these
materials. In the event of an accident, we could be held liable for any damages
that result, and any resulting liability could exceed our resources. We may
also be required to incur significant costs to comply with environmental laws
and regulations in the future. Failure to comply with foreign regulatory requirements
governing human clinical trials and marketing approval for drugs and devices
could prevent us from selling our products in foreign markets, which may
adversely affect our operating results and financial condition. For
marketing outside the United States, the requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary greatly from
country to country. Failure to comply with these regulatory requirements or
obtain required approvals could impair our ability to develop these markets and
have a material adverse effect on our results of operations and financial
condition. Our competitors may develop therapies for the diseases
that we are targeting that are more advanced or more effective than ours, which
could adversely affect our competitive position. Competition in the field
from other biotechnology and pharmaceutical companies and from research and
academic institutions is intense and expected to increase. In many instances,
we compete with other commercial entities in acquiring products or technology
from universities. There are numerous competitors working on products to treat
each of the diseases for which we are seeking to develop therapeutic products.
Some competitors are pursuing a product development strategy competitive with
ours, particularly with respect to our cancer vaccine and oncolytic virus
therapy programs. Certain of these competitive products are in more advanced
stages of product development and clinical trials. We compete with other
clinical-stage companies and institutions for clinical study participants, which
could reduce our ability to recruit participants for our clinical trials. Delay
in recruiting clinical study participants could adversely affect our ability to
bring a product to market prior to our competitors. Our competitors may develop
technologies and products that are more effective than ours, or that would
render our technology and products less competitive or obsolete. Reimbursement from third-party payers may become more
restricted in the future, which may reduce demand for our products. Sales
of our future products will be influenced by the willingness of third-party
payers to provide reimbursement. In both domestic and foreign markets, sales of
our potential products will depend in part upon coverage and reimbursement from
third-party payers, including: government agencies; private health care insurers and other health care payers such as health
maintenance organizations; self-insured employee plans; and Blue Cross/Blue Shield and similar plans. There is considerable pressure to reduce the cost of
biotechnology and pharmaceutical products. Reimbursement from government
agencies, insurers and large health organizations may become more restricted in
the future. Our potential products represent a new mode of therapy, and while
the cost-benefit ratio of the products may be favorable, we expect that the
costs associated with our products will be substantial. Our proposed products,
if successfully developed, may not be considered cost-effective by third-party
payers. Insurance coverage might not be provided by third-party payers at all
or without substantial delay. Even if such coverage is provided, the approved
reimbursement might not provide sufficient funds to enable us to become
profitable. The continuing efforts of governmental and third-party
payers to contain or reduce the costs of healthcare may impair our future
revenues and profitability. The pricing of our future products may be
influenced in part by government controls. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been, and we expect that
there will continue to be, a number of federal and state proposals to implement
similar government control. While we cannot predict whether the government will
adopt any such legislative or regulatory proposals, the announcement or adoption
of these proposals could have a material adverse effect on our business, results
of operations, financial condition and cash flow. Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK In the normal course of business, the financial position of
the Company is subject to a variety of risks, including market risk associated
with interest rate movements. The Company regularly assesses these risks and
has established policies and business practices to protect against these and
other exposures. However, as mentioned under "Liquidity and Capital
Resources" and the "Other Factors Affecting Future Operations"
sections of the Company's Management Discussion and Analysis of Financial
Condition and Results of Operations above, the Company is subject to risk
associated with its retained ownership in Abgenix shares. The Company has not entered into any financial instruments
that would give rise to foreign currency exchange risk or commodity pricing
risk. The Company has exposure related to the value of the number of shares of
Abgenix common stock it holds, which was approximately 8.7 million and 9.0
million shares as of December 31, 2002 and 2001, respectively. The following table provides information about the Company's
financial instruments that are sensitive to changes in interest rates. For
investment securities and debt obligations, the table presents principal cash
flows and related weighted-average interest rates by expected maturity dates.
Additionally, the Company has assumed its available-for- sale securities,
comprised of corporate notes and commercial paper, are similar enough to
aggregate those securities for presentation purposes. The average interest rate
was calculated using the weighted average fixed rates under all these
instruments with Wells Fargo Bank, Sterling Capital Management, JP Morgan Chase
H & Q, Fleet National Bank and General Electric Capital Corporation. The Company does not currently hold any derivative financial
instruments nor has it entered into hedging transactions or activities. Interest Rate Sensitivity (1) Interest rate based upon libor rate index plus a spread of one percent,
and can be reset on a quarterly or semi-annual basis.
Item 8. Financial Statements and supplementary data Report of Ernst & Young LLP,
Independent Auditors The Board of Directors and Stockholders We have audited the accompanying consolidated balance sheets
of Cell Genesys, Inc. as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cell Genesys, Inc. at December 31, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States. As discussed in the Note 1 to the consolidated financial
statements, in 2000 the Company changed its method of revenue recognition. /s/ERNST & YOUNG LLP Palo Alto, California
CELL GENESYS, INC. See accompanying notes.
CELL GENESYS, INC. See accompanying notes.
CELL GENESYS, INC. See accompanying notes.
CELL GENESYS, INC. See accompanying notes Cell GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies Organization and basis of presentation Cell Genesys, Inc. ("Cell Genesys" or "the
Company") has focused its research and product development efforts on human
disease therapies that are based on innovative gene modification technologies.
The Company's objective is to develop and commercialize cancer vaccines,
oncolytic virus therapies and cancer gene therapies to treat multiple types of
cancers. Cell Genesys' current clinical programs include GVAX®
cancer vaccines and oncolytic virus therapies. The consolidated financial statements include the
accounts of Cell Genesys and its wholly-owned and majority- owned subsidiaries.
All significant inter-company balances and transactions have been eliminated.
Concentration of risk Cash and cash equivalents, short-term investments and
accounts receivables are financial instruments, which potentially subject the
Company to concentrations of credit risk. The Company maintains and invests
excess cash in money market funds which bear minimal risk. The Company has not
experienced any significant credit losses and does not generally require
collateral on receivables. Revenue recognition Research payments under collaborative
arrangements and grants are recognized as revenue based on research expenses
incurred, as provided for under the terms of the arrangements. Incentive milestone payments
under collaborative arrangements are recognized as revenue upon the achievement
of the milestone event and upon the agreement between the Company and
collaborative partners. As such, the incentive milestone payments are
substantially at risk at the inception of the contract, and the values assigned
thereto are commensurate with the milestone achieved. Upon achievement of an
incentive milestone event, the Company has no future performance obligations
related to the payment. Incentive milestone payments are triggered either by
the results of our research efforts or by events external to Cell Genesys, such
as regulatory approval to market a product or the achievement of specified sales
levels by a marketing partner. Amounts received in advance are recorded as deferred
revenue until the related revenue is recognized. Amounts received under license agreements relating to the
Company's intellectual property are recognized as revenue upon execution of the
technology licensing agreement, if the Company has no future performance
obligations. In 2002, Cell Genesys received approximately 66 percent
of its revenue from Transkaryotic Therapies, Inc, and 30 percent of its revenue
from Japan Tobacco.
For 2001 and 2000, Cell Genesys received revenue of approximately 89
percent and 88 percent, respectively, from Japan Tobacco and 11 percent and 12
percent, respectively, from Aventis. Cell Genesys previously recognized non-refundable license
fees as revenue when received and when all significant contractual obligations
of Cell Genesys relating to the fees had been met. Effective January 1, 2000,
Cell Genesys changed its method of accounting for non-refundable license fees to
recognize such fees ratably over the research and development period of the
applicable agreement. Cell Genesys believes the change in accounting principle
is preferable based on guidance provide in SEC Staff Accounting Bulletin No. 101
- - Revenue Recognition in Financial Statements. The $6.5 million, net of taxes,
cumulative effect of the change in accounting principle, calculated as of
January 1, 2000, was reported as a charge in the year ended December 31, 2000.
The cumulative effect was initially recorded as deferred revenue and is being
recognized as revenue over the estimated research and development periods of the
agreements. The impact of the accounting change in 2001 and 2000 exclusive of
the cumulative effect amount and net of income taxes was to
increase net income by $5.4 million, or $.016 per share,
and $3.3 million or $0.10 per share, respectively, which represents the
cumulative effect amount recognized as revenue in 2001 and 2000 based on the
new accounting method. Depreciation and amortization Cell Genesys records property and equipment at cost and
depreciates it using the straight-line method over the estimated useful lives of
the assets, generally five years. Computer equipment is depreciated over a life
of three years. Furniture and equipment leased under capital leases is
amortized over the shorter of the useful lives or the lease term. Amortization
of leased assets is included in depreciation and amortization expense and is
combined with accumulated depreciation and amortization of the Company's owned
assets. Intangible assets, which consist of patents, are amortized using the
straight-line method over the estimated useful lives of the assets, generally 10
years. Cash, cash equivalents and short-term investments Cell Genesys places its cash, cash equivalents and short-
term investments, including restricted cash and investments, with high credit
quality United States and foreign financial institutions, government and
corporate issuers and limits the amount of credit exposure to any one issuer.
The Company considers all highly liquid investments with insignificant interest
rate risk with a maturity of less than three months when purchased to be cash
equivalents. All investments are denominated in U.S. dollars. Short-term
investments include equity securities classified as available-for-sale. The
Company records its investments at fair market value, based on quoted market
prices. The Company's debt and equity securities are classified as
available-for-sale and carried at fair value. The cost of securities sold is
based on the specific identification method. Realized gains and losses and
declines in value, judged to be other than temporary, on available-for-sale
securities are included in interest and other income (loss). Unrealized holding
gains and losses on securities classified as available-for-sale are recorded in
accumulated other comprehensive income, net of tax. The Company determines the
appropriate classification of debt securities at the time of purchase and re-
evaluates such designation as of each balance sheet date (see Note 6 on fair
value of financial instruments). Restricted cash and investments relate to the Company's $60
million secured credit agreement with a financial institution (see Note 8 on
commitments and contingencies). Reclassifications Certain prior year balances have been reclassified to
conform with the current year presentation. In 2002, Cell Genesys reclassified
certain cash, cash equivalents and investments related to the collateral
restriction of its debt financing for 2001. In addition, for 2000, Cell Genesys
reclassified the amount pertaining to the change in accounting principle for
revenue recognition to reflect this amount net of income taxes. Stock-based compensation In accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), the Company has elected
to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related interpretations and
to adopt the "disclosure only" alternative described in SFAS 123.
Under APB 25, when the exercise price of the Company's employee stock options
equals or exceeds the fair market value on the date of the grant or the fair
value of the underlying stock on the date of the grant as determined by the
Company's Board of Directors, no compensation expense is recognized. The following table illustrates, pursuant to SFAS 123, as
amended by SFAS No. 148, the effect on net income (loss) and related net income
(loss) per common share, had compensation costs for stock-based employee compensation
plans been determined based upon the fair value method prescribed under SFAS
123: (see note 10 on stockholder's equity) Net income (loss) per share Basic earnings (loss) per common share is calculated using
the weighted average number of shares of common stock outstanding during the
period, less shares subject to repurchase. Diluted earnings per share includes
the impact of potentially dilutive securities. As the Company's potentially
dilutive securities (stock options, warrants, and redeemable convertible
preferred stock) were anti-dilutive for the years ended December 31, 2002 and
2001, they have been excluded from the computation of shares used in computing
diluted net loss per common share for those years. The following table presents the calculation of basic and
diluted income (loss) per common share (in thousands, except per share
data): Use of estimates The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. Comprehensive income (loss) Comprehensive income (loss) is comprised of net income (loss)
and other comprehensive income (loss). Other comprehensive income (loss)
includes certain changes to stockholders' equity of the Company that are
excluded from net income (loss). Specifically, unrealized gains or losses on
the Company's available-for-sale securities are included in other comprehensive
income (loss), net of tax Segment reporting Our operations are treated as one operating segment, as we
report profit and loss information only on an aggregate basis to our chief
operating decision-makers. Recent accounting pronouncements Business combinations In July 2001, the Financial Accounting Standards
Board ("FASB") issued Statements of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS 141 requires that all
business combinations be accounted for by the purchase method of accounting and
changes the criteria for recognition of intangible assets acquired in a business
combination. The provisions of SFAS 141 apply to all business combinations
initiated after June 30, 2001, including the Company's acquisition of Calydon,
Inc. in September 2001. SFAS 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized; however, these assets must
be reviewed at least annually for impairment. Intangible assets with finite
useful lives will continue to be amortized over their respective useful lives.
The standard also establishes specific guidance for testing for impairment of
goodwill and intangible assets with indefinite useful lives. As the Company
does not have goodwill recorded from previous acquisitions, the transitional
impairment test was not applicable and the adoption of SFAS 142 did not impact
the Company's consolidated financial condition or results of operations. Asset retirement obligations In August 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligation." SFAS 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated retirement costs.
The adoption of SFAS 143 in 2002 did not impact the Company's consolidated
financial condition or results of operations. Asset impairments In October 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS 144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. The adoption of
SFAS 144 in 2002 did not impact the Company's consolidated financial position or
results of operations. Exit or disposal activities In June 2002, the FASB issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities"
which addresses accounting for restructuring, discontinued operations, plant
closing, or other exit or disposal activity. SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002, and earlier adoption is encouraged. The Company
intends to adopt SFAS 146 as of January 1, 2003. Guarantor's accounting and disclosure requirements for
guarantees, including direct guarantees of indebtedness of others In November 2002, the FASB issued Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Other" ("The Interpretation").
The Interpretation applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or an
equity security of the guaranteed party. The Company adopted the disclosure
provisions of this Interpretation in 2002 and does not expect the adoption of
the recognition and measurement requirements to impact Cell Genesys' financial
position or results of operations. Revenue arrangements with multiple deliverables In November 2002, the FASB issued Emerging Issues Task
Force ("EITF") Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables." EITF 00-21 addresses certain aspects of the
accounting by a company for arrangements under which it will perform multiple
revenue-generating activities. EITF 00-21 addresses when and how an arrangement
involving multiple deliverables should be divided into separate units of
accounting. EITF 00-21 provides guidance with respect to the effect of certain
customer rights due to company nonperformance on the recognition of revenue
allocated to delivered units of accounting. EITF 00-21 also addresses the
impact on the measurement and/or allocation of arrangement consideration of
customer cancellation provisions and consideration that varies as a result of
future actions of the customer or the company. Finally, EITF 00-21 provides
guidance with respect to the recognition of the cost of certain deliverables
that are excluded from the revenue accounting arrangement. The provisions of
EITF 00-21 will apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Cell Genesys is currently evaluating the effect
that the adoption of EITF 00-21 will have on its financial condition and results
of operations. Consolidation of variable interest entities In January 2003, the FASB issued Financial Interpretation
No. 46, "Consolidation of Variable Interest Entities" ("FIN
46"). The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim periods
beginning after June 15, 2003. Certain of the disclosure requirements apply in
all financial statements issued after January 31, 2003, regardless of when the
variable entity was established. Cell Genesys does not have variable interest
entities and does not expect the adoption of FIN 46 to have a material effect on
its financial condition or results of operations. 2. Statement of Cash Flows Supplemental disclosure to the Consolidated Statements of Cash Flows is
as follows for the years ended December 31, (in thousands): The Company capitalized interest expense of $751,000 in 2002 as part of the
construction costs in connection with its Hayward, California manufacturing
facility. Supplemental disclosure regarding non-cash investing and financing activities
is as follows for the years ended December 31, (in thousands): 3. Investment in Abgenix Since 1996, the Company has maintained an investment in
Abgenix, Inc. ("Abgenix"). On July 2, 1998, Abgenix completed an
initial public offering ("IPO"), reducing Cell Genesys' percentage
ownership to approximately 40 percent. On November 19, 1999, Abgenix completed
a private placement of 1.8 million shares of its common stock, and Cell Genesys'
ownership was further reduced to approximately 19 percent. Accordingly, the
Company no longer accounts for Abgenix's losses under the equity method of
accounting. The Company's investment in Abgenix is now classified as available-
for-sale and carried at fair value During 2000, the Company sold shares of Abgenix common
stock resulting in $243.9 million in net proceeds. During 2001, the Company did
not sell any of the Abgenix common stock. In 2002, the Company sold approximately 260,000 shares
of Abgenix stock resulting in $2.5 million in net proceeds and further reduced
the Company's ownership to approximately 9.9 percent. Based on Abgenix common
stock's market value of $7.37 per share as of December 31, 2002, the total
carrying amount of the Company's investment in Abgenix was $64.1 million. 4. Acquisitions In January 2001, the Company acquired the principal
operating assets of Chiron Corporation's gene therapy business located in San
Diego, California, at a cost of approximately $4.8 million. The transaction was
accounted for as a purchase. The cost of the acquisition was allocated among
the principal assets, leasehold improvements and machinery and equipment. The
allocation was based on information on construction costs of similar type
facilities for leasehold improvements and machinery and equipment. The $4.8
million purchase price was allocated entirely to tangible assets and no material
intangible assets were purchased. In January 2001, the Company created
a new subsidiary, Ceregene, Inc., ("Ceregene") through the acquisition
of Neurologic Gene Therapeutics, a private San Diego-based start-up company.
The Company contributed $10 million in cash and access to technology and patents
in the central nervous system ("CNS") gene therapy area, in exchange
for approximately 60 percent ownership of the new company. Ceregene's financial
statements are consolidated into the operations of the Company. In September 2001, the Company completed the acquisition of
Calydon, Inc., a private biotechnology company focused on the treatment of
cancer using genetically engineered oncolytic virus therapies, for approximately
$17.4 million in Cell Genesys stock and other consideration and assumption of
approximately $2.6 million in liabilities, for a total purchase price of
approximately $20 million. The acquisition provided Cell Genesys with a third
product platform in addition to cancer vaccines and cancer gene therapies as
well as a product candidate, CG7870, for early-stage prostate cancer. The
Company engaged the services of an outside consulting firm to value the acquired
assets. In relation to the acquisition, the Company recognized approximately an
$18 million charge for in-process research and development and
approximately $1 million in intangible assets related to
patents. The acquisition was accounted for as a purchase business combination
using the guidance contained in Statement of Financial Accounting Standards No.
141 ("SFAS 141") issued by the Financial Accounting Standards Board
("FASB"). In 2002, Cell Genesys recorded a credit of $186,000 to the
original purchased in-process technology charge in 2001 as a result of the
claim made by Cell Genesys against the portion of the purchase price held in
escrow The claim resulted from undisclosed liabilities assumed in the purchase.
Additionally in 2002, Cell Genesys recorded a non-cash purchase price adjustment
in the amount of $396,000 related to common stock issued to former shareholders
of a subsidiary of Somatix, Inc. 5. Collaborative and License Agreements Collaborative agreement with Japan Tobacco Inc. On December 17, 1998, Cell Genesys entered into a
worldwide collaboration agreement with the pharmaceutical division of Japan
Tobacco Inc. ("JT") for the Company's GVAX® cancer
vaccine program. The Company received an initial payment under the agreement of
$12.7 million in December 1998. Through December 31, 2002, the Company has
received $41.6 million in research and development funding, $22 million for
product milestone achievements, $2.5 million anniversary payment and $8.5
million in manufacturing facility build-out cost reimbursement. In October
2002, full commercial rights to GVAX® lung cancer vaccines
reverted to Cell Genesys following the termination of the license agreement with
JT, resulting in Cell Genesys' reacquisition of full commercial rights to the
entire GVAX® cancer vaccine portfolio. Gene activation technology licenses Cell Genesys executed a license agreement with Aventis in
February 1997 for gene-activated erythropoietin ("EPO") and a second
undisclosed protein. In late 2000, Aventis informed the Company of its
intention to terminate this license agreement as it relates to the second
undisclosed protein. The agreement provides for up to $26 million in milestone
payments and fees, in addition to any royalties on future sales of gene-
activated EPO anywhere in the world. As of December 31, 2002, Cell Genesys had
received approximately $17 million under this license agreement, which included
certain milestone payments relating to the development of gene-activated EPO
which Aventis is developing in
collaboration with Transkaryotic Therapies, Inc
("TKT"). The Company recognized revenue of $1.1 million, $3.2 million
and $2.8 million in 2002, 2001 and 2000, respectively, pursuant to the
agreement. In June of 2002, Cell Genesys completed a license agreement
with TKT under which Cell Genesys exclusively licensed intellectual property
relating to the development of gene-activated EPO. In exchange, Cell Genesys
received an upfront license fee of $26 million, which was to have been comprised
of $11 million in cash and $15 million in shares of TKT common stock. As per an
amendment to the original license agreement substituting a cash payment in lieu
of the TKT stock, Cell Genesys received a cash payment of $15 million in January
2003. In addition, Cell Genesys may receive additional payments, in an aggregate
amount of up to $17 million in cash and TKT common stock, upon the achievement
of certain patent-related milestones, but Cell Genesys can make no assurances
that any of these patent-related milestones will ever be achieved or that any
additional payments will be received. No ongoing royalty payments will be made
by TKT to Cell Genesys under the terms of this agreement. Gene therapy rights agreement with Abgenix In November 1997, Cell Genesys entered into a gene
therapy rights agreement (the "GTRA") with Abgenix. The GTRAprovides
Cell Genesys with certain rights to Abgenix's XenoMouse®
technology in the field of gene therapy for two antigen targets per year. Cell
Genesys is obligated to make certain payments to Abgenix for these rights
including reimbursement of license fees and royalties on future product sales.
The GTRA also prohibits Abgenix from granting any third-party licenses for
antibody products based on antigens nominated by Abgenix for its own purposes
where the primary field of use is gene therapy. In the case of third-party
licenses granted by Abgenix where gene therapy is a secondary field, Abgenix is
obligated to share with Cell Genesys a portion of the cash milestone payments
and royalties resulting from any products in the field of gene therapy. Other collaborations Cell Genesys has licensing
agreements relating to its proprietary viral vector technologies. These
collaborations enable Cell Genesys to either acquire commercial rights to
therapeutic genes or to receive monetary reimbursement for providing viral
vector technologies to companies that commercialize these technologies for the
research market. Examples include agreements with the Clontech division of
Becton Dickinson and Invitrogen. In 2002, the Company discontinued its research
collaboration with EntreMed, Inc. and Rigel, Inc., which focused on
antiangiogenesis gene therapy for cancer. In December 2002, the Company announced
the formation of a three-year research collaboration with VectorLogics, Inc., in
which Cell Genesys' oncolytic virus therapies will be evaluated in combination
with novel methods to further enhance the viruses' cell targeting abilities.
6. Fair Value of Financial Instruments The following is a summary of the Company's available-
for-sale securities at December 31, 2002 and 2001, respectively (in
thousands): The net unrealized holding gains on these securities at
December 31, 2002 and 2001 are $57.9 million and $294.6 million, respectively,
and are principally unrealized gains on the investment of Abgenix common stock.
Gross realized gains for sale of investment securities were $3.4 million, $8.0
million, and $239.7 million for the years ended December 31, 2002, 2001, and
2000, respectively. The realized gain in 2000 primarily resulted from the sale
of Abgenix common stock. In 2002, the Company sold approximately 260,000
shares of Abgenix stock, resulting in net proceeds of $2.5 million. The Company
did not sell any Abgenix common stock in 2001. The amortized cost and estimated fair value of available-for-sale debt
securities at December 31, 2002, by contractual maturity, are shown below (in
thousands): 7. Property and Equipment
Principal Amount by Expected Maturity
Average Interest Rate
(dollars in thousands)
Fair Value
2007 December 31,
As of December 31, 2002 2003 2004 2005 2006 Thereafter Total 2002
-------- -------- ------- ------- ------- -------- ----------
Total Investment Securities... $ 66,284 $ 47,251 $22,930 $ 6,747 $ 8,024 $ 151,236 $ 153,129
Average Interest Rate......... 4.03% 3.67% 4.48% 5.33% 4.61% 4.42% --
Long-term Debt, including
Current Portion............. $ 9,128 $ 9,146 $ 9,119 $ 8,993 $24,444 $ 60,830 $ 60,830
Average Interest Rate (1)... 2.81% 2.81% 2.81% 2.81% 2.81% 2.81% --
Fair Value
2006 December 31,
As of December 31, 2001 2002 2003 2004 2005 Thereafter Total 2001
-------- -------- ------- ------- ------- -------- ----------
Total Investment Securities... $ 66,766 $ 52,082 $43,326 $12,883 $ 2,586 $ 177,643 $ 179,287
Average Interest Rate......... 1.93% 3.75% 3.92% 4.30% 5.83% 3.08% --
Long-term Debt, including
Current Portion............. $ -- $ 12,000 $12,000 $12,000 $24,000 $ 60,000 $ 60,000
Average Interest Rate (1)... -- 2.90% 2.90% 2.90% 2.90% 2.90% --
Cell Genesys, Inc.
January 21, 2003
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
December 31,
-------------------------
2002 2001
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................... $ 39,072 $ 76,722
Short-term investments...................................... 60,555 115,594
Current portion of restricted cash and investments.......... 16,166 6,333
Receivable from Transkaryotic Therapies, Inc................ 15,000 --
Investment in Abgenix common stock.......................... 64,076 301,217
Prepaid expenses and other current assets................... 1,340 10,603
----------- ------------
Total current assets................................ 196,209 510,469
Restricted cash and investments............................... 51,112 60,000
Property and equipment, net................................... 157,215 43,217
Deposits and other assets..................................... 1,312 1,624
----------- ------------
$ 405,848 $ 615,310
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 3,980 $ 1,978
Accrued compensation and benefits........................... 3,611 2,637
Deferred revenue............................................ 5,871 3,756
Accrued acquisition and related costs....................... -- 1,535
Accrued facility exit cost.................................. 6,178 --
Other accrued liabilities................................... 6,870 8,882
Income tax payable.......................................... 4,219 13,094
Deferred tax liability...................................... 23,147 117,808
Current portion of debt financing........................... 8,889 --
Current portion of capital leases........................... 5,608 --
----------- ------------
Total current liabilities........................... 68,373 149,690
Non-current portion of debt financing......................... 51,111 60,000
Non-current portion of capital leases......................... 47,584
Commitments
Minority interest in equity of Ceregene....................... -- 96
Redeemable convertible preferred stock, $0.001 per value:
5,000,000 shares authorized; 665 and 1,569 shares
issued and outstanding in 2002 and 2001, respectively...... 7,632 17,970
Stockholders' equity:
Common stock, $.001 per value: 80,000,000 shares
authorized; 36,882,428 and 35,596,445 shares issued
and outstanding in 2002 and 2001, respectively........... 37 36
Additional paid-in capital.................................. 286,548 274,365
Accumulated other comprehensive income...................... 34,719 176,710
Accumulated deficit......................................... (90,156) (63,557)
----------- ------------
Total stockholders' equity.......................... 231,148 387,554
----------- ------------
$ 405,848 $ 615,310
=========== ============
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
----------------------------------
2002 2001 2000
----------------------------------
(in thousands, except per share d
Revenue........................................... $ 39,141 $ 28,317 $ 24,209
Operating expenses:
Research and development........................ 75,138 50,752 30,474
General and administrative ..................... 20,697 11,850 6,984
Charge (credit) for purchased in-process
technology..................................... (186) 18,042 --
--------- ---------- ----------
Total operating expenses................ 95,649 80,644 37,458
--------- ---------- ----------
Operating loss.................................... (56,508) (52,327) (13,249)
Gain on sale of stock of Abgenix, Inc.common stock 2,246 -- 239,660
Interest and other income......................... 9,942 18,378 13,558
Interest expense.................................. (1,011) (500) (386)
--------- ---------- ----------
Income (loss) before minority interest,
income taxes and cumulative effect of
change in accounting........................... (45,331) (34,449) 239,583
Loss attributed to minority interest.............. 96 264 --
--------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of change in accounting ..... (45,235) (34,185) 239,583
Benefit (provision) for income taxes.............. 18,636 5,512 (64,203)
--------- ---------- ----------
Income (loss) before cumulative effect of
change in accounting........................... (26,599) (28,673) 175,380
Cumulative effect of change in accounting
principle, net of taxes........................ -- -- (6,460)
--------- ---------- ----------
Net income (loss) ........ $ (26,599) $ (28,673) $ 168,920
Deemed dividend to preferred stockholders......... 702 785 756
--------- ---------- ----------
Income (loss) attributed to common stockholders... $ (27,301) $ (29,458) $ 168,164
========= ========== ==========
Basic income (loss) per common share ............. $ (0.76) $ (0.85) $ 4.99
========= ========== ==========
Diluted income (loss) per common share............ $ (0.76) $ (0.85) $ 4.55
========= ========== ==========
Weighted average shares of common stock
outstanding -- basic........................... 35,889 34,746 33,716
========= ========== ==========
Weighted average shares of common stock
outstanding -- diluted......................... 35,889 34,746 36,952
========= ========== ==========
Pro forma amounts assuming the new revenue recognition
policy was applied retroactively (unaudited)
Income (loss) attributed to common stockholders.... $ 175,380
Diluted income (loss) per common share............. $ 4.75
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Accumulated
Additional Other Total
Common Paid-in Comprehensive Accumulated Stockholders'
Stock Capital Income(loss) Deficit Equity
--------- ---------- ---------- --------- -----------
Balances at December 31, 1999.................. $ 33 $ 248,255 $ 283,891 $(203,803) $ 328,376
Net income................................... -- -- -- 168,920 168,920
Change in net unrealized holding gain
on available for sale securities........... -- -- 31,130 -- 31,130
-----------
Comprehensive income......................... 200,050
Issuance of 1,537,515 shares of common
stock upon exercise of stock options
and pursuant to the 1992 Employee
Stock Purchase Plan........................ 1 8,508 -- -- 8,509
Dividend to preferred stockholders........... -- (756) -- -- (756)
--------- ---------- ---------- --------- -----------
Balances at December 31, 2000.................. 34 256,007 315,021 (34,883) 536,179
Net loss..................................... -- -- -- (28,673) (28,673)
Change in net unrealized holding gain
on available for sale securities........... -- -- (138,311) -- (138,311)
-----------
Comprehensive loss........................... (166,984)
Issuance of 909,199 shares of common
stock upon acquisition of Calydon.......... 1 16,421 -- -- 16,421
Issuance of 563,476 shares of common
stock upon exercise of stock options
and pursuant to the 1992 Employee
Stock Purchase Plan........................ 1 2,722 -- -- 2,723
Dividend to preferred stockholders........... -- (785) -- -- (785)
--------- ---------- ---------- --------- -----------
Balances at December 31, 2001.................. 36 274,365 176,710 (63,557) 387,554
Net loss..................................... -- -- -- (26,599) (26,599)
Change in net unrealized holding gain
on available for sale securities........... -- -- (141,991) -- (141,991)
-----------
Comprehensive loss........................... (168,590)
Cancellation of 10,043 shares of common
stock in settlement of outstanding
Calydon acquisition........................ -- (186) -- -- (186)
Issuance of 148,867 shares of common
stock upon exercise of stock options
and pursuant to the 1992 Employee
Stock Purchase Plan.......................... -- 1,202 -- -- 1,202
Issuance of 99,105 shares of common
stock related to the 1997 Somatix
acquisition............ -- 396 -- -- 396
Income tax benefit from stock option deduction. -- 196 -- -- 196
Non-employee stock-baed compensation expense... -- 238 -- -- 238
Conversion of 904 preferred shares into
1,047,503 shares of commons stock............ 1 11,039 -- -- 11,040
Dividend to preferred stockholders............. -- (702) -- -- (702)
--------- ---------- ---------- --------- -----------
Balances at December 31, 2002.................. $ 37 $ 286,548 $ 34,719 $ (90,156) $ 231,148
========= ========== ========== ========= ===========
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
-------------------------------------
2002 2001 2000
-------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................... $ (26,599) (28,673) $ 168,920
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization....................... 4,366 3,410 2,211
Gain on disposal of property and equipment.......... 50 -- --
Gain on sale of Abgenix common stock.................. (2,246) -- (239,660)
Issuance of common stock related to Somatix acquisit 396 -- --
Charge (credit) for purchased
in-process technology....................... (186) 18,042 --
Non-employee stock based compensation expense....... 238 -- --
Changes to:
Prepaid expenses and other current assets........... 9,489 (10,546) 991
Receivable from Transkaryotic Therapies, Inc........ (15,000) -- --
Accounts payable.................................... 2,002 1,458 (574)
Accrued compensation and benefits................... 974 796 (733)
Deferred revenue.................................... 2,115 (1,747) 1,308
Accrued acquisition and related costs............... (1,535) 1,535 (1,068)
Accrued facility exit costs......................... 6,178 -- --
Other accrued liabilities........................... (1,799) 9,732 (832)
Minority interest in equity of subsidiary........... (96) 96 --
Income taxes payable................................ (8,677) (11,726) 21,120
----------- ----------- -----------
Net cash used in operating activities.......... (30,330) (17,623) (48,317)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments.................... (235,669) (333,640) (347,396)
Maturities of short-term investments................... -- 20,433 30,844
Sales of short-term investments........................ 290,741 434,652 126,759
Capital expenditures................................... (66,074) (42,188) (2,373)
Purchases of restricted cash and investments........... (945) (66,333) --
Proceeds from disposal of property and equipment....... 107 -- 31
Exercise of Abgenix warrants........................... -- -- (730)
Net proceeds from sale of Abgenix common stock......... 2,487 -- 243,860
----------- ----------- -----------
Net cash provided by (used in)
investing activities......................... (9,353) 12,924 50,995
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible preferred stock.. -- -- 8,750
Proceeds from issuances of common stock................ 1,202 2,772 8,517
Proceeds from long-term debt financing................. 926 60,000 --
Payments under property and equipment
financing obligations................................ (95) (3,098) (3,498)
----------- ----------- -----------
Net cash provided by financing activities...... 2,033 59,674 13,769
----------- ----------- -----------
Net increase (decrease)in cash and cash equivalents...... (37,650) 54,975 16,447
Cash and cash equivalents at beginning of year........... 76,722 21,747 5,300
----------- ----------- -----------
Cash and cash equivalents at end of year................. $ 39,072 76,722 $ 21,747
=========== =========== ===========
Year Ended December 31,
----------------------------------
2002 2001 2000
----------------------------------
(in thousands, except per share data)
Net income (loss) $ (26,599) $ (28,673) $ 168,920
Deduct:
Stock-based employee
compensation expense
determined under SFAS 123............ $ (14,957) (11,957) (6,566)
----------------------------------
Pro forma net income (loss).................$ (41,556) $ (40,630) $ 162,354
==================================
Basic net income (loss) per common
share as reported...................... $ (0.76) $ (0.85) $ 4.99
Diluted net income (loss) per common
share as reported...................... $ (0.76) $ (0.85) $ 4.55
Basic pro forma net income (loss)
per common share.......................$ (1.16) $ (1.17) $ 4.82
Diluted pro forma net income (loss)
per common share...................... $ (1.16) $ (1.17) $ 4.39
Year ended December 31,
----------------------------------
2002 2001 2000
----------------------------------
Net income (loss) attributed to common stockholders...... $ (27,301) $ (29,458) $ 168,164
==================================
Weighted average shares outstanding:
Denominator for basic earnings (loss) per common share 35,889 34,746 33,716
Potential common shares:
- stock options....................................... -- -- 2,000
- convertible preferred stock......................... -- -- 1,236
----------------------------------
Denominator for diluted earnings (loss) per share...... 35,889 34,746 36,952
Net income (loss) per commons share: ==================================
Basic...................................................$ (0.76) $ (0.85) $ 4.99
=========== =========== ==========
Diluted.................................................$ (0.76) $ (0.85) $ 4.55
==================================
Year ended December 31,
----------------------------------
(in thousands) 2002 2001 2000
----------------------------------
Net income (loss)........................................ $ (26,599) $ (28,673) $ 168,920
Other comprehensive income (loss):
Increase (decrease) in unrealized gain on investments,
net of change in tax of approximately ($94.7) million,
($90.2) million and $(71.0) million in 2002,
2001, and 2000, respectively......................... (139,973) (133,531) 174,926
Less: reclassification adjustment for gains recognized
in income (loss), net of tax effect of
approximately $1.3 million, $3.2 million, and $95.9
million in 2002, 2001, and 2000, repectively....... (2,018) (4,780) (143,796)
----------------------------------
Comprehensive income (loss)...............................$ (168,590) $ (166,984) 200,050
==================================
-------------------------------------
2002 2001 2000
-------------------------------------
Cash paid for interest................................. $ 1,762 $ 500 $ 386
Cash paid (refunded) for income taxes.................. $ (10,161) $ (6,487) $ 40,000
-------------------------------------
2002 2001 2000
-------------------------------------
Facility, furniture and equipment acquired
under lease obligations.................................$ 52,361 -- --
GROSS
AMORTIZED UNREALIZED ESTIMATED
COST GAINS FAIR VALUE
-------- ----------- ------------
2002
Commercial paper..................$ 15,654 $ -- $ 15,654
Corporate notes.................... 67,595 810 68,405
Municipal bonds.................... 11,068 70 11,138
U.S. government and its agencies... 56,919 1,013 57,932
Abgenix common stock............. 8,046 56,030 64,076
-------- ----------- -----------
Short-term investments........... $159,282 $ 57,923 $ 217,205
======== =========== ===========
Classified as:
Cash equivalents................. $ 32,574 $ -- $ 32,574
Restricted cash and investments.... 60,000 -- 60,000
Short-term investments........... 58,662 1,893 60,555
Abgenix common stock............... 8,046 56,030 64,076
-------- ----------- -----------
$159,282 $ 57,923 $ 217,205
======== =========== ===========
GROSS
AMORTIZED UNREALIZED ESTIMATED
COST GAINS FAIR VALUE
-------- ----------- -----------
2001
Commercial paper..................$ 70,944 $ 109 $ 71,053
Corporate notes.................... 53,864 1,085 54,949
U.S. government and its agencies... 52,836 449 53,285
Abgenix common stock............. 8,287 292,930 301,217
-------- ----------- -----------
Short-term investments........... $185,931 $ 294,573 $ 480,504
======== =========== ===========
Classified as:
Cash equivalents................. $ 3,693 $ -- $ 3,693
Restricted cash and investments.... 60,000 -- 60,000
Short-term investments........... 113,951 1,643 115,594
Abgenix common stock............... 8,287 292,930 301,217
-------- ----------- -----------
$185,931 $ 294,573 $ 480,504
======== =========== ===========
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
Due in one year or less.................... $ 66,284 $ 66,489
Due in one to seven years.................. 84,951 86,640
----------- -----------
$ 151,236 $ 153,129
=========== ===========
Property and equipment consists of the following at December 31, (in thousands):
2002 2001
------------------------
Furniture and equipment under capital lease............. $ 745 $ --
Machinery, furniture and equipment...................... 24,935 23,003
Leasehold improvements ................................. 19,402 12,945
Construction in process under capital lease............. 52,617 --
Construction in process................................. 89,454 34,856
------------------------
187,153 70,804
Accumulated depreciation and amortization............... (29,938) (27,587)
------------------------
$ 157,215 $ 43,217
========================
The increase in the construction in process reflects the leasehold improvements in connection with the Hayward facility.
8. Debt and Leases
Capital Lease
During 2002, Cell Genesys amended the facility lease previously classified as an operating lease for its new headquarter facilities in South San Francisco, California requiring the Company to fund the costs of certain structural components of the facility. As a result, Cell Genesys is considered, for accounting purposes, to be the owner of the construction project, requiring the Company to account for the lease as a capital, lease obligation. Approximately $52.4 million of property and equipment assets, as well as capital lease liabilities have been recorded on the consolidated balance sheet at December 31, 2002. The future cash payments under the lease obligation were not impacted by the amendment.
In 2002, Ceregene entered into capital lease obligations to fund the acquisition of property and equipment.
Operating Leases
The Company leases certain of its facilities and equipment under non-cancelable operating leases. The leases, including the Hayward facilities, Foster City facilities, San Diego facilities, and the Memphis facility, expire at various dates through 2017 and some contain options for renewal. Rent expense under operating leases was $9.6 million in 2002, $7.9 million in 2001 and $2.0 million in 2000. The Company moved to the South San Francisco facility in March 2003 and expects to sublease its facilities in Foster City. In December 2002, the Company recorded a lease exit cost to general and administrative expense in the amount of approximately $6.2 million in association with the estimated lease obligation related to the Foster City facilities. The lease exit costs is based on current market assumptions for lease rental rates, as well as the amount of time needed to sublease the facility. These estimates will be adjusted as necessary based on the Company's ability to sub-lease the facilities and then current market conditions. No payments have been made to offset this obligation as of December 31, 2002. The lease agreements for the Foster City facilities are expected to continue through the contractual termination of January 2006.
In 2002, Cell Genesys recorded a deferred rent liability in connection with the rent escalation clauses of its new operating leases for the Hayward facility. The rent escalation clauses represent the annual increase in rent according to the lease agreements for each facility.
Property and equipment financing
In December 2001, the Company completed a $60 million asset- backed debt financing in connection with the construction of the Company's manufacturing facility in Hayward, California. The financing obligation is secured by liquid financial instruments, including cash and marketable securities, which are classified as restricted cash and investments on the consolidated balance sheet. Under the terms of the obligation, the Company is required to meet various financial reporting covenants with which it was in compliance at December 31, 2002.
The $60 million asset-backed debt financing entered in connection with the construction of the Company's manufacturing facility in Hayward, California. For 2002, the interest rate was LIBOR (London InterBank Offering Rate) plus 1.0 percent and a term of six years. In January 2003, the interest rate was reduced to Libor plus 0.75 percent. Based upon the floating rate nature of this debt financing, the carrying value approximates the fair value. Cell Genesys paid only interest for the first year, followed by quarterly payments and approximately a 30 percent balloon payment at the end of the six-year period.
Future minimum payments under non-cancelable operating leases, capital leases and debt financing at December 31, 2002, were (in thousands):
Operating Capital Debt
Leases Leases Financing
-------------------------------------
Years ending December 31:
2003..................................... $ 10,699 $ 5,514 $ 10,532
2004..................................... 10,822 6,171 10,275
2005..................................... 11,168 6,332 10,017
2006..................................... 4,410 6,406 9,759
2007 and beyond.......................... 18,127 87,289 25,057
----------- ----------- -----------
Total minimum payments (1)............... $ 55,226 $ 111,712 $ 65,639
===========
Less Amount representing interest
and executory costs................... ($58,520) (5,639)
------------------------
Present value of future debt payments................... $ $53,192 $ 60,000
------------------------
Less: Current portion of future payments... (5,608) (8,889)
------------------------
Non-current portion of payments............. $ 47,584 $ 51,111
========================
* Total operating lease commitments include rent payments for the Company's Foster City location of $16.8 million, of which $6.2 million was accrued as of December 31, 2002 as part of the estimated facility exit costs associated with the Company's move to the South San Francisco, California headquarters in March 2003.
9. Redeemable Convertible Preferred Stock
On November 14, 1997, the Company completed a private placement of 2,000 shares of Series B redeemable convertible preferred stock for aggregate proceeds of $20 million. As of November 2002, all shares of Series B preferred under this placement have been converted into common stock of Cell Genesys. Each Series B preferred share was convertible, at the option of the holder, into shares of common stock of the Company based upon a conversion price of $11.02 per share or, if lower, 100 percent of the average of specified trading prices during the 10 trading days preceding a conversion.
Investors in Cell Genesys' preferred stock in 1997 were initially granted a call option, triggered upon certain conditions, to purchase up to an additional $10 million of Series B preferred stock. In January 2000, the Company received approximately $8.8 million from the issuance of 875 new Series B convertible preferred shares following the exercise of such call options for these shares. The call option right, which was available under the term of these agreements, was triggered by the rise of Cell Genesys' stock price. Following the issuance of the new preferred shares, no further call options remained outstanding.
The number of shares of common stock issuable upon conversion of theses shares of Series B preferred is determined by dividing the market value of the shares to be converted by the lower of a fixed conversion price of $14.53 per share (subject to antidilution provisions); or the average of certain trading prices during the 10 trading days preceding such date of conversion.
In August 2002, 210 shares of these 875 Series B preferred stock were converted into 216,961 shares of the Company's common stock at the then-effective conversion price of $10.895 per share.
As of December 31, 2002, 665 shares remained outstanding and were convertible into aggregate of approximately 654,000 shares of common stock, and the aggregate market value for all outstanding Series B preferred stock was approximately $7.6 million as of that date. The number of shares of common stock issuable upon conversion of the Series B preferred, and therefore the dilution of existing investors, would increase as a result of either an event triggering the antidilution rights of the Series B preferred or a decline in the market price of our common stock immediately prior to conversion of the Series B preferred.
The preferred stock bears a dividend of 5 percent, payable in kind upon conversion. If Cell Genesys enters into a "major transaction" or effects a "triggering event" as defined in the private placement agreement, the stock may be redeemed at the option of the holders. Examples of such transactions or events would include a change in control of Cell Genesys or delisting of Cell Genesys stock. The preferred stock is non-voting.
In the event the holders of the remaining outstanding Series B preferred do not elect to convert their shares prior to January 18, 2005, the shares will automatically convert.
10. Stockholders' Equity
Stock Option Plans
Under the Cell Genesys 1989, 1992 and 1998 Incentive Stock Option Plans ("the ISO Plans"), 15,877,858 shares of common stock were authorized for issuance as of December 31, 2002. The 1992 ISO Plan was retired in 2002 and 4,273,354 shares expired. The ISO Plans provide for the issuance of common stock and granting of options for common stock to employees, officers and consultants of the Company. Cell Genesys generally grants options to purchase shares of common stock for issuance under the ISO Plans at no less than the fair market value of the stock as of the date of grant Options granted under the ISO Plans have a maximum term of 10 years and generally vest over four years at the rate of 25 percent one year from the grant date and 1/48 monthly thereafter. As of December 31, 2002, the number of shares reserved for future issuance was 3,964,176.
Under the Company's 2001 Non-Statutory Option Plan ("2001 Plan"), 5,000,000 shares of common stock have been authorized for issuance as of December 31, 2002. The 2001 Plan provides for the issuance of common stock and granting of options for common stock to employees (excluding executive officers) and consultants of the Company. The Company generally grants options to purchase shares of common stock for issuance under the 2001 Plan at no less than the fair market value of the stock as of the date of grant. Options granted under the 2001 Plan have a maximum term of 10 years and generally vest over four years at the rate of 25 percent one year from the grant date and 1/48 monthly thereafter. As of December 31, 2002, the number of shares reserved for future issuance was 4,992,902.
Under the Company's 2001 Non-Employee Directors Stock Option Plan ("the DIR Plan"), 300,000 shares of common stock have been authorized for issuance as of December 31, 2002. The DIR Plan provides for the issuance of common stock and granting of options for common stock to non-employee directors of the Company. The Company grants options to purchase common stock for issuance under the DIR Plan at no less than the fair market value of the stock as of the date of grant. Options granted under the DIR Plan have a maximum term of 10 years. Each non-employee director is automatically granted an option to purchase 30,000 shares upon initial appointment or election to the Board and an option to purchase 7,500 shares each year thereafter. Stock options granted upon appointment or election to the Board vest at the rate of 25 percent annually on each anniversary of the date of grant. Subsequent grants for continued service on the Board vest fully on date of grant. As of December 31, 2002, the number of shares reserved for future issuance was 300,000.
The following table summarizes information about the plans (share numbers in thousands):
Outstanding Options
-----------------------------
Shares Number of Weighted Average
Available Shares Exercise Price
----------- ------------ ---------------
Balances, December 31, 1999.......... 4,611 4,345 $ 6.10
Authorized...................... 1,500 -- --
Granted......................... (792) 792 $ 23.64
Exercised....................... -- (1,431) $ 5.69
Expired......................... (118) -- --
Forfeited....................... 398 (398) $ 7.81
----------- ------------
Balances, December 31, 2000.......... 5,599 3,308 $ 10.30
Authorized...................... 2,300 -- --
Granted......................... (1,834) 1,834 $ 18.95
Exercised....................... -- (415) $ 5.13
Expired......................... (178) -- --
Forfeited....................... 281 (281) $ 17.23
----------- ------------
Balances, December 31, 2001.......... 6,168 4,446 $ 13.91
Authorized...................... 3,000 -- --
Granted......................... (1,807) 1,807 $ 14.14
Exercised....................... -- (83) $ 5.16
Expired......................... (4,273) -- --
Forfeited....................... 408 (408) $ 18.09
----------- ------------
Balances, December 31, 2002.......... 3,496 5,762 $ 13.82
=========== ============
Exercisable at December 31, 2002.................. 3,114 $ 11.66
============
Exercisable at December 31, 2001.................. 2,197 $ 9.48
============
Exercisable at December 31, 2000.................. 1,761 $ 5.92
============
Weighted average fair value of options granted during 2002...... $ 8.21
Weighted average fair value of options granted during 2001...... $ 14.26
Weighted average fair value of options granted during 2000...... $ 18.34
The following table summarizes information about stock options outstanding at December 31, 2002:
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices (000) Life (Years) Price (000) Price
- ------------------ ----------- ------------ --------- ----------- ---------
$3.50 - $5.88 1,138 5.4 $ $4.92 1,133 $ $4.91
$6.44 - $12.88 1,342 7.1 9.81 774 8.77
$13.03 - $16.00 1,330 9.1 15.10 302 15.21
$16.06 - $19.88 1,166 8.2 18.46 507 18.66
$20.13 - $42.63 786 8.1 24.49 398 24.83
----------- -----------
5,762 3,114
=========== ===========
Employee Stock Purchase Plans
The 1992 Employee Stock Purchase Plan ("1992 plan") expired in 2002. A total of 650,000 shares of common stock had been reserved for issuance under the 1992 Plan. As of December 31, 2002, 620,411 shares had been issued pursuant to the 1992 Plan and 29,589 shares expired.
The 2002 Employee Stock Purchase Plan ("the Purchase Plan") was approved by shareholders in June 2002. This plan allows eligible employees to participate and purchase common stock at 85 percent of its fair value at certain specified dates. Employee contributions are limited to 10 percent of compensation or $25,000, whichever is less. A total of 200,000 shares of common stock have been reserved for issuance under the Purchase Plan. This plan also allows for annual increases in the number of shares reserved for issuance under the Purchase plan to be added on the first day of each of the Company's fiscal years beginning in 2003, equal to the lesser amount of (a) 100,000 shares, (b) 1/2 percent of the outstanding shares on such date, or (c) an amount determined by the board of directors. The first purchase under the Purchase Plan is scheduled for February 3, 2003. As of December 31, 2002, no shares have been issued pursuant to the plan.
Pro forma information
Pro forma information regarding net loss and net loss per share is required by SFAS 123, and has been determined as if the Company had accounted for options granted under its employee stock option plans and the Purchase Plan under the fair value method of SFAS 123 (see Note 1. Organization and Summary of Significant Accounting Policies). The fair value of the applicable options and shares was estimated at the date of grant using a Black- Scholes option pricing model with the following assumptions for 2000, 2001 and 2002, respectively: risk-free interest rates of 6.14 percent, 4.08 percent and 1.70 percent; no dividend yields; volatility factors of the expected market price of the Company's common stock of 1.0, 1.0 and .79; and an expected life of the option of five, five and three years, respectively, under the stock option plan and 0.5 years for shares issued under the Purchase Plan.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.Stockholder Rights Plan
In July 1995, the board of directors approved a stockholder rights plan under which stockholders of record on August 21, 1995 received one preferred share purchase right for each outstanding share of the Company's common stock. In July 2000, the Company made certain technical changes to amend the plan and extend the life of the plan until 2010. The rights are exercisable only if an acquirer purchases 15 percent or more of the Company's common stock or announces a tender offer for 15 percent or more of the Company's common stock. Upon exercise, holders other than the acquirer may purchase Cell Genesys stock at a discount. The board of directors may terminate the rights plan at any time or under certain circumstances redeem the rights.
Shares reserved
At December 31, 2002, the Company has reserved shares of common stock for potential future issuance consisting 3,446,202 upon conversion of preferred stock; and 9,457,078 for exercises under the employee stock option plans or the stock purchase plan.
Non-employee stock-based compensation
In 2002, Cell Genesys recorded a charge for non-employee stock-based compensation of $238,000 related to grants of stock options to consultants, based upon the fair value of the vested portion of the grants. Additional compensation will be recorded in future periods for the remaining unvested portions of the grants.
11. Income Taxes
The benefit (provision) for income taxes primarily represents the estimated refund available from the carryback of losses to offset taxable income in 2000, and consists of the following (in thousands):
Year ended December 31,
2002 2001 2000
---------- ---------- ----------
Current:
Federal.............................. $ 10,286 $ 4,262 $ (52,707)
State................................ -- -- (15,196)
---------- ---------- ----------
10,286 4,262 (67,903)
Deferred:
Federal.............................. 8,350 1,250 3,700
State................................ -- -- --
---------- ---------- ----------
8,350 1,250 3,700
Benefit (provision) for income taxes. $ 18,636 $ 5,512 $ (64,203)
========== ========== ==========
A reconciliation between our income tax provision and the U.S. statutory rate
follows (in thousands):
December 31,
2002 2001 2000
---------- ---------- ----------
Tax at U.S. statutory rate of 35%.....$ 15,832 11,965 (83,854)
State taxes, net of federal benefit.... -- -- (9,877)
Net operating losses utilized
(not benefited)..................... 7,576 (1,177) 25,585
Change in valuation allowance.......... (9,170) 1,250 3,700
Research and development tax
credits utilized................... 4,350 -- 1,300
In-process research and development.... 74 (6,315) --
Other.................................. (26) (211) (1,057)
---------- ---------- ----------
Benefit (provision) for income taxes. $ 18,636 $ 5,512 $ (64,203)
========== ========== ==========
As of December 31, 2002, the Company had net operating loss carryforwards for federal income tax purposes of approximately $65 million, which will expire on various dates beginning in 2011 through 2021, if not utilized. The federal R&D tax credits of $2.5 million will expire on various dates beginning in 2018 through 2021. As of December 31, 2002, the net operating loss for state income tax purposes of $15 million will expire on various dates beginning with 2004 through 2001. The state R&D tax credits of $3.6 million do not expire.
Utilization of the net operating losses and credits carryforwards may be subject to substantial annual limitation due to ownership change provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities are as follows (in thousands):
December 31,
----------------------
Deferred Tax Assets: 2002 2001
---------- ----------
Net operating loss carryforwards............................. $ 23,400 $ 15,000
Research credit carryforwards................................ 4,850 500
Capitalized research and development......................... 2,310 1,000
Other accruals and reserves.................................. 5,910 2,450
---------- ----------
Net deferred tax assets...................................... 36,470 18,950
Valuation allowance ......................................... (23,170) (14,000)
---------- ----------
Net deferred tax assets...................................... $ 13,300 $ 4,950
---------- ----------
Deferred Tax Liabilities:
Unrealized gain on investment in Abgenix......................$ (23,440) $ (122,758)
---------- ----------
Net deferred tax liability....................................$ (10,140) $ (117,808)
========== ==========
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. The valuation allowance decreased by $9.2 million in 2002 and increased by $9.3 million and $3.7 million during 2001 and 2000, respectively.
12. 401(k) Plan
Cell Genesys sponsors a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code covering all full time employees ("Cell Genesys 401K Plan"). Participating employees may contribute up to the annual Internal Revenue Service contribution limit. The Cell Genesys 401K Plan also provides for employer matching contributions up to a limit of $3,000. The Cell Genesys 401K Plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions by the employees or by Cell Genesys, and income earned on the contributions, are not taxable to employees until withdrawn from the plan. Contributions by Cell Genesys are deductible by Cell Genesys when made. At the discretion of each participant, the assets of the Cell Genesys 401K Plan are invested in any of 12 different investment options.
In January 2001, the board of directors of Cell Genesys approved the matching contribution. The matching contribution is invested in the investment options selected by the employee for their contributions. The matching contributions vest ratably over three years. The matching contributions for 2002 and 2001 were $777,000 and $625,000, respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information required by this Item concerning the Company's directors is incorporated by reference to the Company's Definitive Proxy Statement for the 2003 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the Company's 2002 fiscal year (the "2003 Proxy Statement").
(b) The information required by this Item concerning the Company's executive officers is set forth in the section entitled "Executive Officers" at the end of Part I of this Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the Company's 2003 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item regarding security ownership of certain beneficial owners and management, as well as equity compensation plans, is incorporated by reference to the information set forth in the sections "Beneficial Owners and Management's Ownership of Cell Genesys Stock" and "Equity Compensation Plan Information" in our 2003 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the Company's 2003 Proxy Statement.
Item 14. DISCLOSURE CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Based on their evaluation of our disclosure controls and procedures, as that is defined by Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, within 90 days of the filing date of this report, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures are effective in ensuring that all material information required to be included in this annual report and on Form 10-K has been made known to them in a timely fashion.
Changes in internal controls.
There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were any corrective actions required to significant deficiencies and material weaknesses subsequent to that date.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8- K
(a) 1. Index to Financial Statements
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended December 31, 2002,
2001 and 2000
Consolidated Statement of Stockholders' Equity for the years ended December
31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31, 2002,
2001 and 2000
Consolidated Notes to Financial Statements
2. Index to Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto.
(b) Reports on Form 8-K
Not applicable
(c) Exhibits
Exhibit
Number Note Exhibit Description
- -----------------------------------------------------------------------------------
Number Note Description
2.1 (7)Agreement and plan of merger and reorganization, dated as of January 12,
1997, among Cell Genesys, S Merger Corp. and Somatix Therapy Corporation.
2.2 (10)Asset Purchase Agreement dated January 8, 2001 between Cell Genesys and Chiron
Corporation, pursuant to which Cell Genesys purchased operating assets of
Chiron Corporation's gene therapy operations.
2.3 (11)Series A Preferred Stock Purchase Agreement dated January 10, 2001, pursuant to
which Cell Genesys purchased shares of Series A Preferred Stock of Ceregene, Inc.
2.4 (16)Agreement and Plan of Reorganization dated as of August 1, 2001 by and among
Cell Genesys, Satellite Acquisition Corporation, Calydon, Inc., Kenneth Socha
as shareholder representative (with respect to Articles VII and IX only) and
Chase Manhattan Bank and Trust Company, N.A., as escrow agent.
3.1 (17)Restated Certificate of Incorporation.
3.2 (17)Certificate of Amendment to Restated Certificate of Incorporation.
3.3 (17)Certificate of Designation of Series A Participating Preferred Stock.
3.4 (17)Certificate of Amendment to Certificate of Designation of Series A
Participating Preferred Stock.
3.5 (17)Certificate of Designation of Series B Convertible Preferred Stock.
3.6 (17)Bylaws.
4.1 (8)Amended and Restated Preferred Shares Rights Agreement, dated as of
July 26, 2000 between Cell Genesys and Fleet National Bank.
10.1+ (1)Form of Indemnification Agreement for Directors and Officers.
10.2+ (5)Amended 1989 Incentive Stock Plan.
10.3+ (5)Amended 1992 Employee Stock Purchase Plan.
10.4 (1)Representative Preferred Stock Purchase Agreement.
10.5 (4)Fourth Amended and Restated Stockholder Rights Agreement.
10.6 (1)License Agreement dated August 13, 1990 between Cell Genesys and the
University of North Carolinaat Chapel Hill.
10.8 (2)License Agreement dated June 28, 1991 between Cell Genesys and the
University of Utah Research Foundation.
10.9+ (3)Amended Employment Agreement with Stephen A. Sherwin, M.D.
10.10 (3)Research and Development Leases dated November 1, 1994 between Cell
Genesys and Vintage Park Associates and Addendums thereto.
10.11* (6)Amendment No. 1 dated June 7, 1996 to Vintage Park Research and
Development Lease.
10.12+ (9)Amended 1998 Incentive Stock Plan.
10.13 (12)Research and Development Leases Amendment dated February 12, 2001
between Cell Genesys and Vintage Park Associates.
10.14 (13)Research and Development Leases between Cell Genesys and Drawbridge/
Forbes LLC, dated March 3, 2001.
10.15 (14)Lease Agreement dated June 21, 2001, between Alexandria Real Estate
Equities, Inc., and Cell Genesys for property located at 11055 Roselle
Street in San Diego, California.
10.16 (15)Lease Agreement dated June 21, 2001, between Alexandria Real Estate
Equities, Inc., and Cell Genesys for property located at 11075 Roselle
Street in San Diego, California.
10.17* Amended and Restated GVAXr Agreement by and between Japan Tobacco Inc.
and Cell Genesys dated November 26, 2001.
10.18 Credit Agreement between Cell Genesys and Fleet National Bank dated
as of December 27, 2001.
10.19 Lease Agreement dated February 1, 2002, between Shelby Drive Corporation,
and Cell Genesys for property located at 4600 Shelby Drive, Suite 108,
Memphis, Tennessee.
10.2 Lease Agreement dated January 7, 2002, between F & S Hayward, LLC,
and Cell Genesys for property located at the Adjacent Park of Bridgeview
Tech Park of 24570 Clawiter Road, Hayward, California.
10.21 License Agreement dated June 7, 2002 between Transkaryotic Therapies,
Inc. and Cell Genesys, Inc.
10.22 Termination of the GVAXreg; lung cancer vaccine license agreement with
Japan Tobacco dated October 17, 2002.
10.24 (18)2002 Employee Stock Purchase Plan.
10.25 (18)2001 Nonstatutory Stock Option Plan.
10.26 Change of Control Severance Agreement.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney, (Reference is made to page 59).
99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
* Confidential treatment has been granted with respect to specific portions of this exhibit.
+ Management compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K
(1) Incorporated by reference to the same numbered exhibit filed with the Company's Registration Statement on Form S-1 (Reg. No. 33-46452) as amended.
(2) Incorporated by reference to the same numbered exhibit filed with The Company's Annual Report on Form 10-K for the year ended December 31, 1992.
(3) Incorporated by reference to the same numbered exhibit filed with The Company's Annual Report on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the same numbered exhibit filed with The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
(5) Incorporated by reference to the same numbered exhibit filed with The Company's Annual Report on Form 10-K for the year ended December 31, 1995.
(6) Incorporated by reference to Exhibit 10.40 filed with The Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
(7) Incorporated by reference to Exhibit 2.1 filed with The Company's Form 8-K dated January 12, 1997.
(8) Incorporated by reference to The Company's Form 8-A12G/A dated July 28, 2000.
(9) Incorporated by reference to Exhibit 4.1 filed with The Company's Registration Statement Form S-8 filed July 31, 2000.
(10) Incorporated by reference to Exhibit 10.3 filed with The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
(11) Incorporated by reference to Exhibit 10.4 filed with The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
(12) Incorporated by reference to Exhibit 10.1 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
(13) Incorporated by reference to Exhibit 10.2 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
(14) Incorporated by reference to Exhibit 10.1 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
(15) Incorporated by reference to Exhibit 10.2 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
(16) Incorporated by reference to Exhibit 10.1 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
(17) Incorporated by reference to the same numbered exhibit filed with the Company's Registration Statement on Form S-3/A (Reg. No. 333-102122) filed with the SEC on January 30, 2003.
(18) Incorporated by reference to Exhibit 4 filed with the Company's Registration Statement on Form S-8 filed with the SEC on July 2, 2002.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in Foster City, California, on March 31, 2003:
| CELL GENESYS, INC. |
| By: | /s/ MATTHEW J. PFEFFER |
|
| |
| Matthew J. Pfeffer | |
|
Vice President and Chief Financial Officer (Principal Accounting Officer) |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen A. Sherwin, M.D. and Matthew J. Pfeffer, jointly and severally, as his or her attorneys-in-fact, each with the full power of substitution, for him or her, in any and all capacities, to sign any amendment to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or any of them, or their or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date
- -------------------------------- --------------------------------- --------------
/s/ STEPHEN A. SHERWIN, M.D. Chairman of the Board and Chief March 31, 2003
- -------------------------------- Executive Officer (Principal
Stephen A. Sherwin, M.D. Executive Officer)
/S/ MATTHEW J. PFEFFER Vice President and Chief Financial March 31, 2003
- -------------------------------- Officer (Principal Financial and
Matthew J. Pfeffer Accounting Officer)
/s/ DAVID W. CARTER Director March 31, 2003
- --------------------------------
David W. Carter
/s/ NANCY M. CROWELL Director March 31, 2003
- --------------------------------
Nancy M. Crowell
/s/ JAMES M. GOWER Director March 31, 2003
- --------------------------------
James M. Gower
/s/ JOHN T. POTTS, JR., M.D. Director March 31, 2003
- --------------------------------
John T. Potts, Jr., M.D.
/s/ Thomas E. Shenk, Ph.D. Director March 31, 2003
- --------------------------------
Thomas E. Shenk, Ph.D.
/s/ EUGENE L. STEP Director March 31, 2003
- --------------------------------
Eugene L. Step
/s/ INDER M. VERMA, PH.D. Director March 31, 2003
- --------------------------------
Inder M. Verma, Ph.D.
CERTIFICATIONS
I, Stephen A. Sherwin, certify that:
Dated: March 31, 2003
By: /s/ Stephen A. Sherwin, M.D
Name: Stephen A. Sherwin, M.D.
Title: Chief Executive Officer
CERTIFICATIONS
I, Matthew J. Pfeffer, certify that:
Dated: March 31, 2003
By: /s/ Matthew J. Pfeffer
Name: Matthew J. Pfeffer
Title: Chief Financial Officer