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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
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COMMISSION FILE NUMBER: 0-20859
GERON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2287752
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
230 CONSTITUTION DRIVE, MENLO PARK, CA 94025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 473-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $0.001 PAR VALUE
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 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. [ ]
As of March 25, 1998, there were 10,887,568 shares of Common Stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Registrant was approximately $128,614,841 based upon the closing price of
the Common Stock on March 25, 1998 on The Nasdaq National Market. Shares of
Common Stock held by each officer, director and holder of five percent or more
of the outstanding Common 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.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for the 1998 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission not
later than 120 days after the close of the Registrant's fiscal year are
incorporated into Part III of this Form 10-K.
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Potential risks and uncertainties
include, without limitation, those mentioned in this report and in particular,
the factors described below in Part II, Item 7, under heading "Factors That May
Affect Future Results of Operations".
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PART I
ITEM 1. BUSINESS
Geron Corporation ("Geron" or the "Company") is a biopharmaceutical company
focused on discovering and developing therapeutic and diagnostic products based
upon common biological mechanisms underlying cancer and other age-related
diseases. As the pioneer in researching these mechanisms, the Company focuses on
telomeres, which are structures at the ends of chromosomes that the Company has
shown to act as a molecular "clock" of cellular aging, and telomerase, an enzyme
which appears to stop the "clock" and confers cellular immortality. The Company
and its collaborators have established that these mechanisms play a role in
cancer and many other age-related diseases and conditions, and thus the Company
believes it has a broadly applicable, proprietary platform for discovering and
developing novel small molecule therapeutics and diagnostics for such diseases.
The most advanced of the Company's three therapeutic programs is in the area of
telomerase inhibition for the treatment of cancer. Geron intends to build upon
its leadership position in the field of telomere biology and telomerase
regulation by selectively collaborating with pharmaceutical companies and
research institutions and intends to protect its leadership position by building
an extensive patent portfolio. The Company owns eight issued United States
patents and 53 United States patent applications and has licensed 18 issued
United States patents and 49 United States patent applications.
Cancer and other age-related diseases and conditions, such as skin aging,
atherosclerosis, osteoporosis and macular degeneration, are difficult and costly
to diagnose and/or treat. In many cases, entirely effective means of diagnosing
and treating these diseases and conditions are not currently available. Further,
with the progressive "graying" of the population, the incidence of cancer and
other age-related diseases and conditions is expected to increase and to place a
steadily growing financial burden on the health care system. New technology in
the diagnosis and treatment of these diseases and conditions will lead to
attractive commercial opportunities. For example, the worldwide cancer treatment
market is currently $12 billion and growing at a rate of over 10% per annum. In
the United States alone, over 1.3 million new cases of cancer were diagnosed and
approximately 550,000 cancer deaths occurred in 1996.
Geron's scientific approach focuses on telomere shortening and telomerase
regulation as common biological mechanisms underlying cancer and other
age-related disorders. Geron and collaborators have demonstrated both in vivo
and in vitro that telomeres, the repeated sequences of DNA located at the ends
of chromosomes, shorten throughout a normal cell's replicative lifespan. In
addition, the Company and its collaborators have also shown that when telomeres
reach a certain short length, cells stop dividing and become senescent.
Senescent cells display an altered pattern of gene expression compared to
replicatively young cells that leads to an imbalance in the production of
proteins and other cell products. This occurs in many tissues throughout the
body and can have a direct and destructive effect on surrounding tissues and
appears to contribute to many age-related diseases and conditions. Most
recently, Geron scientists and collaborators at the University of Colorado and
the University of Texas Southwestern Medical Center at Dallas have cloned the
catalytic protein component of the telomerase enzyme complex, and have shown
that expression of this gene in normal cells results in telomerase activity
which dramatically extends the lifespan of the cell, preventing the normal onset
of senescence.
Cancer cells escape senescence and maintain an extended ability to divide.
Geron and collaborators have shown that for most cancerous tumors to attain life
threatening size, or for cancer to metastasize throughout the body, cancer cells
must become immortal through an alteration which prevents their telomeres from
shortening with each division. In all cancer types studied to date, a germ line
enzyme called telomerase is abnormally reactivated in these cancer cells to
repair their telomeres with each cell division, thereby conferring cellular
immortality. Geron has shown telomerase to be present in all of the over 20
types of cancer that it has studied, including breast, prostate, lung, colon and
bladder cancers. The Company believes that telomerase inhibition has the
potential to be a universal and highly specific cancer therapy. Geron and
collaborators are using proprietary screening technologies to identify small
molecule compounds that selectively inhibit telomerase. Medicinal chemistry and
combinatorial chemistry are being used to optimize these compounds, and animal
models of human tumor growth have been developed to test appropriateness for
preclinical development.
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In order to develop novel therapeutic and diagnostic products, the Company
is initially focused on three programs: (i) Telomerase Inhibition and
Detection -- developing telomerase inhibitors as potentially universal and
highly specific cancer therapies and telomerase assays for the detection of
cancer; (ii) Genomics of Aging -- postponing and/or regulating the pattern of
destructive gene expression in senescent cells to treat various age-related
diseases; and (iii) Primordial Stem Cell Therapies -- generating a broad array
of cell types from primordial stem cells for use in drug discovery and cellular
transplantation. In support of these programs, the Company employs advanced drug
discovery technologies, including proprietary assays, high throughput screening,
combinatorial chemistry, proprietary differential gene display techniques,
protein purification and gene sequencing.
The Company's strategy combines the following key elements: a focus on
telomeres and telomerase as biological mechanisms of cellular aging and cellular
immortality to treat cancer and other age-related diseases and conditions;
building therapeutic discovery and diagnostic programs on this scientific
platform; selective pursuit of strategic collaborations; retention of rights to
develop and market products independently; and continued enhancement of its
proprietary leadership position in the field.
SCIENTIFIC BACKGROUND: CELLULAR AGING AND CELLULAR IMMORTALIZATION
Cells are the building blocks for all tissues in the human body. Cell
division plays an important role in the normal growth, maintenance and repair of
human tissue. However, cell division is a limited process -- depending on the
tissue type -- cells generally divide only 60 to 100 times in the course of
their normal lifespans. When cells reach the end of their replicative capacity,
they senesce. Cellular aging or senescence, although influenced by environmental
factors, is a genetically determined process. Geron and collaborators have
demonstrated that telomeres, the repeated sequences of DNA at the ends of
chromosomes, are key genetic elements involved in this process. Telomeres are
important because they protect chromosomes from degradation and fusion. Each
time a normal cell lacking telomerase divides, however, telomeres shorten.
Recent work published by Geron and collaborators demonstrates that telomeres not
only serve as a molecular "clock" for cellular aging, but that the introduction
of telomerase into normal cells is capable of restoring telomere length and
increasing the lifespan of cells.
Geron has demonstrated that once telomeres reach a certain short length,
cell division halts, and the cell enters a state known as cell senescence.
Although senescent cells no longer divide, they generally remain metabolically
active and, importantly, demonstrate an altered pattern of gene expression. In
senescent cells, certain genes normally expressed by young and healthy cells are
turned off or down-regulated while other genes are turned on or up-regulated,
creating an imbalance of proteins and other gene products that Geron believes
has a direct and destructive effect on the surrounding tissue. Geron believes
that this dysfunction at the cellular level, which occurs in numerous tissues
throughout the body, causes or contributes to age-related diseases and
conditions.
The converse of cell senescence occurs in cancer cells. Normal cells have
the potential to become cancerous when random mutations activate various
oncogenes and deactivate tumor suppressor genes. With each mutation,
pre-cancerous cells become increasingly aberrant and uncontrolled, and may begin
to generate a tumor mass. The Company believes, however, that most cells which
undergo such changes are eliminated when telomere shortening leads to either
cell senescence or chromosomal instability and cell death. Geron's and
collaborators' research indicates that for most cancerous tumors to attain life
threatening size, or for cancer to metastasize throughout the body, some cancer
cells must become immortal, which occurs through the activation of telomerase.
Telomerase is a complex germ line enzyme, composed of RNA and protein
components, that maintains telomere length by resynthesizing the DNA that is
lost each time a cell divides. With telomerase present, telomeres do not shorten
and cell death is averted. Geron's research has shown that telomerase is
abnormally reactivated in all major cancer types and that, conversely, it is not
present in most normal cell types. Telomerase enables cancer cells to maintain
telomere length, providing them with indefinite replicative capacity or cellular
immortality.
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Telomerase is expressed in certain normal cells. Telomerase is present at
high levels and telomeres are very long in reproductive cells. Telomerase is
functionally active in germ line cells to ensure the full complement of genetic
information is passed from generation to generation. Telomerase is also present
at very low levels in certain hematopoietic (blood), skin and gastrointestinal
cells. However, these cells continue to age and gradually lose telomeric DNA,
which suggests that telomerase may not be essential for their normal
functioning.
Primordial Stem ("PS") cells are germ line cells that appear for only a
short period after fertilization. These cells soon differentiate into the many
types of cells found in the body. PS cells are the only known normal cells which
are both immortal and have the potential to differentiate into any cell or
tissue in the body. Prior to differentiation, PS cells express telomerase
activity. Once PS cells have differentiated into particular tissues or cells,
however, telomerase activity is repressed and the differentiated cells are
destined to follow the senescence pathway.
MARKET OPPORTUNITY
Cancer and other age-related diseases and conditions, including skin aging,
atherosclerosis, osteoporosis and macular degeneration, are difficult and/or
costly to diagnose and treat. In many cases, entirely effective means of
diagnosing and treating these diseases and conditions are not currently
available. Further, with the progressive "graying" of the population, the
incidence of cancer and other age-related diseases and conditions is expected to
increase. By the year 2010, the over-65 population in the United States is
expected to double to approximately 64 million people, and worldwide, this
population will increase to over one billion. A breakthrough technology in the
diagnosis and treatment of these diseases and conditions should provide
attractive commercial opportunities.
Cancer
The incidence of cancer increases dramatically with age. Eighty-five
percent of cancers diagnosed occur in people over the age of 50. People over the
age of 65 have, on average, a ten times greater risk of dying from cancer than
the under-65 population.
In the United States, over ten million people alive today have a history of
cancer and well over one million people will be diagnosed each year with cancers
of the lung, colon, breast, prostate, pancreas, ovary, kidney and bladder, along
with lymphomas, leukemia and other cancers. Despite significant medical
advances, cancer researchers and clinicians have had little impact on cancer
mortality rates. Each year, cancer is expected to claim more than a half-million
lives, or approximately 25% of the total projected deaths, in the United States.
Within the next decade, largely because of population aging, cancer may become
the leading cause of death.
Cancer therapy relies heavily on three treatment modalities: surgery, to
remove the tumor mass; radiation, to destroy tumors localized to a small region;
and chemotherapy, to eliminate tumor cells in diffuse parts of the body. Surgery
is an invasive procedure that may not remove the entire cancer, and the use of
radiation is limited to certain areas of the body. While drug therapies are less
invasive than surgery or radiation, many drugs used to treat cancer attack
rapidly dividing cells indiscriminately, damaging normal as well as cancer
cells. Further, when a drug is effective initially against a particular cancer,
it is often not effective against other types of cancer and, over time, the
particular cancer can become resistant to that drug and progress. The worldwide
cancer treatment market is currently valued at $12 billion and growing at a rate
of 10% per annum. The Company believes that a telomerase inhibitor could
overcome the limitations of current therapies and potentially be a universal and
highly specific drug treatment for cancer.
Other Age-related Diseases and Conditions
There are numerous other diseases and conditions for which the incidence
increases dramatically with age, including skin aging, atherosclerosis,
osteoporosis and macular degeneration. There are significant unmet medical needs
associated with these diseases and conditions. Many current therapies simply
address the symptoms of these diseases and conditions. Despite the limitation of
current therapies, drugs targeting these
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diseases and conditions represent some of the largest selling pharmaceuticals.
For example, the United States market for cardiovascular drugs is approximately
$10 billion, while the market for drugs addressing osteoporosis and
osteoarthritis is approximately $5 billion. The market for retinoids used for
skin therapy exceeds $3 billion. The Company's focus on cellular aging and
cellular immortality is designed to produce therapeutics that address these
diseases and conditions, and treat their causes rather than their symptoms.
STRATEGY
Geron's strategy is to be the leading biopharmaceutical company focused on
discovering and developing therapeutic and diagnostic products based upon the
Company's understanding of telomerase and telomere biology. The key elements of
this strategy are described below.
Focus on Fundamental Mechanisms of Cellular Aging and Cellular
Immortality. Geron focuses its research on fundamental mechanisms of cellular
aging and cellular immortality. These include telomere shortening and telomerase
regulation. As the pioneer in researching and modulating these mechanisms, which
affect many tissues of the body, the Company believes it has established a
broadly applicable, proprietary platform for discovering and developing novel
small molecule therapeutics and diagnostics for cancer and other age-related
diseases.
Develop High Value Programs with a Common Scientific Platform. Geron's
strategy is to leverage its expertise in cellular aging and cellular immortality
to develop those programs which offer the shortest development path for
therapeutic and diagnostic products and the highest likelihood for success.
Geron is currently working in three program areas: (i) the detection and
inhibition of telomerase for the diagnosis and treatment of cancer; (ii)
genomics of aging for skin aging, atherosclerosis, osteoporosis and macular
degeneration; and (iii) primordial stem cell therapies for aiding in drug
discovery and development and cell transplantation.
Pursue Strategic Collaborations. Geron has established and will continue to
establish collaborations selectively with pharmaceutical and diagnostic
companies and leading academic institutions to enhance its research, development
and commercialization capabilities. Geron has entered into a three-company
strategic alliance with Kyowa Hakko Kogyo Co., Ltd. ("Kyowa Hakko"), a leading
oncology company in Japan, and Pharmacia & Upjohn S.p.A ("Pharmacia & Upjohn"),
a global leader in oncology, for the development and marketing of a telomerase
inhibitor to treat cancer. The Company has also established a technology and
clinical development partnership with Boehringer Mannheim GmbH, the emerging
global leader in diagnostics, to develop telomerase-based products for use in
cancer diagnosis and treatment planning.
Retain the Ability to Develop and Market Products Independently. Geron
believes that its broad scientific platform will continue to generate
opportunities for a variety of collaborative arrangements. The Company intends
to retain significant rights to develop and market or co-promote products on key
therapeutic and diagnostic applications of discoveries resulting from its
research programs.
Enhance Proprietary Leadership Position. Geron intends to maintain its
scientific leadership and accelerate its research programs by continuing to
attract and retain leaders in the fields of cellular aging and cellular
immortality, either as employees or research collaborators. The Company is
aggressively pursuing a broad and extensive patent portfolio to protect its
proprietary technology, internationally and in the United States. To date, the
Company owns eight issued United States patents and 53 United States patent
applications and has licensed 18 issued United States patents and 49 United
States patent applications.
RESEARCH PROGRAMS
Telomerase Inhibition and Detection
Geron's intention is to discover and develop a small molecule telomerase
inhibitor, which, by blocking the activity of telomerase, will allow cancer cell
telomeres to resume shortening, ultimately leading to cancer cell death. In
addition, the Company's intention is to develop clinical products using
telomerase as a marker in cancer diagnosis, prognosis, patient monitoring and
screening.
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Telomerase is not present in most normal cells, and as a result, normal
cells exhibit telomere shortening. In contrast, telomerase is abnormally active
in cancer cells, causing telomere length to be maintained, which Geron believes
confers immortality to cancer cells in malignant tumors. Research has shown that
telomerase is present in all of the over 20 different cancer types that Geron
and collaborators have studied, including the ten most prevalent cancers of
prostate, breast, lung, colon, bladder, uterus, pancreas and ovary, along with
lymphomas, leukemias and melanomas. In all of these cancers, a very high
percentage of tumor samples contain telomerase. Because telomerase is present in
all cancer types evaluated and is not biologically active in most normal cells,
telomerase appears to be a universal and highly specific marker of cancer. These
characteristics combine to make telomerase an attractive target for inhibition
to treat cancer and for detection to diagnose cancer.
Therapeutics. Geron's research has demonstrated that a telomerase inhibitor
can block cancer cells from using telomerase to maintain telomere length. As a
result, the telomeres in the cancer cells shorten as the cells continue to
divide, until reaching a critically short length, at which point the cancer
cells die. Geron scientists have blocked human telomerase in tumor cell lines in
vitro using an antisense compound to the human telomerase RNA component. In this
experiment, blocking telomerase led to telomere shortening and cancer cell
death. Based on these results, Geron is aggressively pursuing the identification
of telomerase inhibitors as potential lead compounds for preclinical
development. While it has identified several strategies for inhibiting
telomerase activity, Geron is primarily focused on developing a small molecule
inhibitor. The Company believes the small molecule approach will produce a
development candidate with a more favorable commercial profile -- oral
bioavailability, compound stability and low manufacturing cost. Geron and
collaborators are using proprietary screening technologies to identify small
molecule compounds that selectively inhibit telomerase. Traditional medicinal
chemistry and combinatorial chemistry techniques are being used to optimize
these compounds and animal models of human tumor growth have been developed to
test appropriateness for preclinical development.
To advance this program, Geron has developed proprietary screening
technology, assembled a structurally diverse library of more than 100,000 small
molecules and established medicinal and combinatorial chemistry capabilities.
Specifically, the Company has developed a substantial automated high throughput
screening effort for the identification of telomerase inhibitors using
proprietary assays based on human telomerase. Geron is using this proprietary
screening capability to screen diverse small molecule compounds that Geron has
either acquired or created through its internal combinatorial chemistry
capabilities. As a result of its screening efforts, Geron and collaborators have
identified several classes of compounds that demonstrate telomerase inhibition
and are actively pursuing structure/activity relationship studies to develop
lead compounds. Geron believes that these screens provide a strong competitive
advantage in view of the difficulty and specialized skills required for their
development and use. The United States Patent and Trademark Office has issued
three patents for Geron's telomerase inhibitor screens.
Geron believes that blocking telomerase activity will cause the affected
cancer cells to resume telomere shortening during cell division and thus lose
their immortality. When telomeres reach a critically short length, cancer cells
will die. Telomerase inhibition is therefore expected to have delayed efficacy
as cancer cell telomeres resume normal shortening. Although Geron envisions that
a telomerase inhibitor could be effective as a stand-alone treatment in certain
cases, it is expected that in most cases a telomerase inhibitor will be used in
conjunction with current anti-cancer therapies.
The Company believes that a telomerase inhibitor will be an effective
therapeutic for a broad range of cancers, although there may be certain
limitations to its use. Because telomerase is present in reproductive cells, a
telomerase inhibitor, like many cancer agents in current use, may have a
negative impact on such cells. Telomerase is also transiently expressed in
certain cells in the hematopoietic (blood), skin and gastrointestinal tract.
However, Geron scientists and others have demonstrated that these tissues age
and show gradual telomere shortening during the course of cell division. As a
result, the Company believes that telomerase is not biologically critical for
these tissues and that telomerase inhibitors are unlikely to have a significant
negative effect.
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Geron has established a strategic alliance with Kyowa Hakko, a leading
oncology company in Japan, for the development and commercialization in certain
Asian countries of a telomerase inhibitor for the treatment of cancer. Geron has
also established a strategic alliance with Pharmacia & Upjohn S.p.A, a global
leader in oncology, for a complementary worldwide collaboration in telomerase
inhibition. The Company has established research collaborations for the study of
telomerase inhibition with the National Cancer Institute and the Memorial
Sloan-Kettering Institute for Cancer Research, and for the study of telomere
biology with Baylor University.
Diagnostics. The Company believes that telomerase is a universal and highly
specific marker of cancer and, therefore, the detection and quantification of
telomerase may have significant clinical utility for cancer diagnosis,
prognosis, patient monitoring and screening. While most current cancer
diagnostics apply to a single or limited number of cancer types,
telomerase-based diagnostics could potentially address a broad range of cancer
types. The Company also believes that the availability of telomerase-based
diagnostics for cancer, which are likely to reach the market before
telomerase-based therapeutics, will enhance the commercial opportunity for a
telomerase inhibitor by increasing the understanding of clinicians of the
biological significance of telomerase activity in cancer.
The Company has developed several proprietary assays for the detection of
telomerase based on its activity or components. The first generation assay is
the Telomeric Repeat Amplification Protocol ("TRAP") assay which can be used to
detect telomerase activity in malignant tumor tissue. The United States Patent
and Trademark Office has issued Geron a patent for the TRAP assay. The second
generation assay detects the RNA component of human telomerase, which was first
cloned by Geron scientists. This enables the Company to use proprietary in situ
hybridization and other detection methods to detect the presence of telomerase.
The United States Patent and Trademark Office has issued Geron a patent relating
to the RNA component of human telomerase as well as allowed United States patent
applications directed to cancer prognosis and detection of specific types of
cancer based on telomerase activity. The Company was also the first to report
the cloning of the human telomerase reverse transcriptase component and has
filed numerous patent applications throughout the world on diagnostic
applications targeting this molecule. The Company is also the exclusive licensee
of several issued United States patents which cover cancer diagnostic
applications of its telomerase detection technologies.
Geron is overseeing preclinical studies to assess the full potential of its
telomerase detection technology. Data from two such studies indicate telomerase
levels correlate with clinical outcome in breast cancer and neuroblastoma
patients. The Company intends to proceed with development of its telomerase
detection technology, in collaboration with Boehringer Mannheim, as a novel and
important diagnostic for cancer.
Oncor Inc. ("Oncor"), Boehringer Mannheim GmbH ("Boehringer Mannheim") and
Kyowa Medex Co., Ltd. ("Kyowa Medex") have licensed the Company's TRAP assay
technology; Dako Corporation ("Dako") has licensed the Company's RNA detection
technology; and PharMingen has licensed the Company's TRAP assay and telomere
length measurement technology, each on a non-exclusive basis for sale to the
research-use-only market. Oncor commenced commercial sale of the TRAP-eze(TM)
kit in May 1996, followed by Boehringer Mannheim and Kyowa Medex in late 1996.
PharMingen began selling its TeloQuant(TM) telomere length assay kit in 1997.
Although the Company does not expect royalties from the sale of these kits to be
significant, their use is expected to stimulate additional studies of telomerase
activity by academic laboratories. The Company has also established research
collaborations for the study of telomerase detection with The Cleveland Clinic,
the University of Texas, San Antonio, Johns Hopkins University, the Children's
Hospital of Los Angeles and the University of Texas Southwestern Medical Center
at Dallas.
On December 19, 1997, the Company entered into a License, Product and
Marketing Agreement with Boehringer Mannheim to develop and commercialize
research and clinical diagnostic products for cancer on an exclusive, worldwide
basis. This agreement replaced the previous agreement between the parties. Under
the collaboration Boehringer Mannheim provided reimbursement for research
previously conducted and will be responsible for all clinical, regulatory,
manufacturing, marketing and sales efforts and expenses. In addition, the
Company is entitled to receive future payments upon achievement of certain
contractual milestones relating to levels of product sales, as well as royalties
on product sales. Further, the Company has an option to exercise co-promotion
rights in the United States.
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Genomics of Aging
Geron seeks to develop therapeutics to modulate biological processes
leading to and regulating cell aging or senescence. The Company is applying
proprietary genomics and screening techniques to target, postpone and modulate
the destructive genetic changes that occur in senescent cells. Geron has entered
into research collaborations with a number of institutes to support its Genomics
of Aging program, including the Lawrence Berkeley Laboratory, Stanford
University and Darwin Discovery.
The goal of Geron's Genomics of Aging program is to treat age-related
diseases by postponing or modulating the destructive behavior of senescent
cells. As normal cells divide, they eventually exhaust their capacity for
renewal and become senescent, at which point they display an altered pattern of
gene expression. Geron has undertaken two principal approaches towards altering
the senescent phenotype. First, Geron has continued investigations aimed at
defining the differences in gene expression between young and senescent cells,
using high density DNA arrays to efficiently monitor gene expression in young
and senescent cell cultures. This has allowed for a detailed description of
genes whose deregulation is tightly associated with senescence. Such genes can
serve as markers in drug discovery screens to identify small molecules capable
of suppressing the altered pattern of gene expression in senescent cells.
Secondly, Geron scientists and collaborators at the University of Colorado and
the University of Texas Southwestern Medical Center at Dallas have cloned the
catalytic protein component of the telomerase enzyme complex, and have shown
that expression of this gene in normal cells results in telomerase activity in
normal cells. This activity has been shown to extend the lifespan of the cell,
thus preventing the normal onset of senescence.
The Company's Genomics of Aging program will target several age-related
diseases, with the initial focus on skin aging, atherosclerosis and macular
degeneration. The onset of these diseases is associated with specific cell
types: dermal fibroblasts in skin, vascular endothelial cells in atherosclerosis
and retinal pigment epithelial cells in macular degeneration. The effects of
senescence on cell function can damage the tissue, contributing to age-related
pathologies. For example, senescent skin fibroblasts produce lesser amounts of
important skin matrix elements such as collagen and elastin and elevated levels
of enzymes such as collagenase that break down the skin matrix. These changes
contribute to atrophy of the skin and other disorders. Similarly, metabolic
changes in senescent retinal pigment epithelium cells, and the loss of
proliferative capacity and overexpression of hypertensive and thrombotic factors
in endothelial cells are considered contributors to the pathologies of
age-related macular degeneration (AMD) and atherosclerosis, respectively.
For each of these cell types, Geron scientists have identified clear
patterns of gene expression that define the senescent phenotype. In 1997, Geron
scientists produced immortalized versions of these cells by the introduction of
telomerase activity. These cells do not enter the senescent state and do not
display the typical pattern of senescence-associated gene expression. Geron
believes that such cells will have extensive applications in both research
settings and in the treatment of diseases to which cell senescence contributes.
In addition to skin disorders, AMD and atherosclerosis, other diseases that
could benefit from this technology include osteoporosis, immune dysfunction,
arthritis, and neurodegenerative disorders.
In addition, laboratory culturing of human cells is the basis of several
important current, and anticipated therapies. One example is reconstitution of
the blood and immune system following high-dose chemotherapy for cancer. As
another example, many human biological products are made in "transformed" cell
lines derived from cancer or virally infected cells because they do not senesce.
Such methods for production of biological materials introduce the risk of
contamination from viruses or other pathogens. Normal human cell strains with an
extended life-span can replace the cells currently used to produce biological
materials, resulting in safer, economical, and more efficacious therapeutics.
Primordial Stem Cell Therapies
Geron seeks to generate a broad array of cell types from Primordial Stem
("PS") cells for aiding in drug discovery and development and cellular
transplantation. PS cells are embryonic derived germ line cells that are unique
in that they (i) have an unlimited ability to replicate, and therefore, can be
expanded indefinitely; and (ii) are capable of differentiation into any and all
types of cells and tissues in the body. The Company believes that PS cells offer
significant advantages over other stem cells, which do not proliferate well in
culture
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and have limited ability to differentiate; for example, the hematopoietic stem
cells do not expand well in vitro and are capable of becoming only blood cells.
Initially, Geron plans to use PS cells as a unique source of cells that
cannot otherwise be grown in culture, for example cardiomyocytes and neurons.
These cells can be used at Geron for its own research or sold to third parties
for drug discovery assays. Geron plans to initially pursue in vitro and in vivo
applications using PS cells derived from non-human primates. These cells were
derived at the University of Wisconsin-Madison and are currently licensed
exclusively to Geron. These cells have been shown to have unlimited replicative
capacity and the ability to differentiate into numerous cell types. Geron also
plans to pursue in vivo applications using PS cells derived from donated human
embryos. These cells were isolated at Johns Hopkins University and are currently
licensed exclusively to Geron. The Company is in the early stages of research
directed towards the production and the differentiation of PS cells.
STRATEGIC PARTNERSHIPS
Geron believes that its broad scientific platform will generate significant
opportunities for a variety of strategic partnership arrangements. Geron has
established and will continue to establish selective collaborations with leading
pharmaceutical and diagnostic companies to enhance its research, development and
commercialization capabilities. In each of these strategic collaborations, the
Company has retained significant rights to participate in the commercial success
of its products.
Kyowa Hakko Collaboration
In April 1995, the Company entered into a License and Research
Collaboration Agreement with Kyowa Hakko (the "Kyowa Hakko Agreement"). Under
the Kyowa Hakko Agreement, Kyowa Hakko agreed to provide $16.0 million of
research funding over four years to support the Company's program to discover
and develop in certain Asian countries a telomerase inhibitor for the treatment
of cancer. In addition, the Company is entitled to receive future payments
totaling $11.5 million upon the achievement of certain contractual milestones
relating to drug development and regulatory progress, as well as royalty
payments on product sales. Kyowa Hakko also purchased $2.5 million of Geron
Common Stock in connection with the Company's initial public offering. Under the
Kyowa Hakko Agreement, Geron exercises significant influence during the research
phase and Kyowa Hakko exercises significant influence during the development and
commercialization phases. Kyowa Hakko will pay for all clinical expenses
associated with product approval in the licensed territory, which includes the
countries of China, Hong Kong, India, Indonesia, Japan, Kampuchea, Korea, Laos,
Malaysia, Myan Mar, the Philippines, Singapore, Taiwan, Thailand and Vietnam.
The Kyowa Hakko Agreement provides that Kyowa Hakko will not pursue research and
development independent of its collaboration with Geron with respect to
telomerase inhibition for the treatment of cancer in humans until April 7, 2000,
at the earliest. Kyowa Hakko may terminate the agreement only in the event of
breach or bankruptcy by Geron or in the event that both parties agree that it is
no longer reasonably practical to pursue further research and development of an
inhibitor of telomerase. In March 1997, the Kyowa Hakko Agreement was amended to
extend its term until April 2000 and to make certain other changes in connection
with the signing of the Pharmacia & Upjohn Agreement (as defined below).
Pharmacia & Upjohn Collaboration
In March 1997, the Company signed a License and Research Collaboration
Agreement (the "Pharmacia & Upjohn Agreement") with Pharmacia & Upjohn to
collaborate in the discovery, development and commercialization of a new class
of anti-cancer drugs that inhibit telomerase. Under the collaboration, Pharmacia
& Upjohn will provide $15.0 million of research funding over three years. In
addition, the Company is entitled to receive future payments upon the
achievement of certain contractual milestones relating to drug development and
regulatory progress, as well as royalty payments on future product sales.
Further, the Company has an option to exercise co-promotion rights in the United
States. The companies also signed a Stock Purchase Agreement providing for an
initial equity investment of $2.0 million in Geron by Pharmacia & Upjohn, at a
premium, which was completed in January 1997. In addition on April 25, 1997 and
March 27, 1998, Pharmacia & Upjohn purchased an aggregate of $8.0 million ($4.0
million on each date) of
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Geron Common Stock at a premium. Through the Pharmacia & Upjohn and Kyowa Hakko
Agreements, the Company has granted to Pharmacia & Upjohn and Kyowa Hakko
exclusive worldwide rights to its telomerase inhibition technology, with
exception to certain antisense, gene therapy and vaccine technologies outside
Asia, for the treatment of cancer in humans.
Diagnostic Collaborations
Geron has entered into non-exclusive royalty bearing license agreements
with Oncor and Boehringer Mannheim for use of the Company's TRAP assay as a kit
for the research-use-only market. Kyowa Medex has obtained a royalty bearing
license for Japan for the TRAP assay for both the research-use-only market and
the clinical diagnostics market. Oncor commenced commercial sale of the
TRAP-eze(TM) kit during the second quarter of 1996 and Boehringer Mannheim and
Kyowa Medex commenced sales during the fourth quarter of 1996. The Company has
also entered into non-exclusive royalty-bearing license agreements with Dako for
use of Geron's telomerase RNA detection technology and PharMingen for use of
Geron's TRAP assay and telomere length measurement technology both for the
research-use-only market on a worldwide basis. PharMingen began selling its
TeloQuant(TM) telomere length assay kit in the first quarter of 1997.
On December 19, 1997, the Company entered into a License, Product and
Marketing Agreement with Boehringer Mannheim to develop and commercialize
research and clinical diagnostic products for cancer on an exclusive, worldwide
basis. This agreement replaced the previous agreement between the parties. Under
the collaboration Boehringer Mannheim provided reimbursement for research
previously conducted and will be responsible for all clinical, regulatory,
manufacturing, marketing and sales efforts and expenses. In addition, the
Company is entitled to receive future payments upon achievement of certain
contractual milestones relating to levels of product sales, as well as royalties
on product sales. Further, the Company has an option to exercise co-promotion
rights in the United States.
RESEARCH COLLABORATIONS
The Company has entered into and intends to continue to enter into research
agreements selectively with leading academic and research institutions to
enhance significantly its research and development capabilities. Under these
agreements, the Company generally provides funding for scientific research in
exchange for exclusive commercial rights to the results of such research. In
each of these agreements, the Company seeks to retain rights to develop and
market applications of any discoveries made under such collaborations by
obtaining options to license exclusively any technology developed under such
programs, including patents or patent applications filed in connection with such
programs.
The Company has established collaborations for the study of telomeres and
telomerase and the discovery and development of a telomerase inhibitor with the
National Cancer Institute, the Memorial Sloan-Kettering Institute for Cancer
Research, the University of Colorado, the University of Texas Southwestern
Medical Center at Dallas, Children's Hospital of Los Angeles, The Cleveland
Clinic, the University of Texas, San Antonio and the University of Colorado. In
support of its Genomics of Aging program, Geron has established collaborations
with Lawrence Berkeley Laboratory, Baylor College of Medicine, Aarhus University
(Denmark) and University of Groningen (The Netherlands). Geron has established
exclusive license and collaboration agreements in support of its PS Cell
Therapies program with the University of California at San Francisco, Johns
Hopkins University and the licensing arm of the University of Wisconsin-Madison.
PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS
Protection of the Company's proprietary compounds and technology is
important to the Company's business. The Company owns eight issued United States
patents and over 49 United States patent applications and has licensed 18 issued
United States patents and 53 United States patent applications, as well as
international filings under the Patent Cooperation Treaty and pending foreign
national patent applications corresponding to certain of these United States
applications. The Company's policy is to seek, when appropriate, patent
protection for its lead compounds, gene discoveries, screening technologies and
certain other proprietary technologies through licensing and by filing patent
applications in the United States and
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certain other countries. The Company believes its patent filings and patent
licenses and options may provide protection for its drug discovery and
diagnostics development programs and that its patent applications disclose
useful discoveries in the field of telomere biology and telomerase regulation as
well as cellular senescence, cellular immortality and primordial stem cell
technology. For example, the United States Patent and Trademark Office has
issued three patents for telomerase inhibitor screening technology. The
Company's screening efforts have resulted in the identification of several
compounds that inhibit human telomerase in vitro and the Company has filed
United States patent applications on certain of these chemical classes of
telomerase inhibitors, several of which have been allowed, and two of which have
issued. The Company has licensed several issued United States patents relating
to telomerase activity-based cancer diagnostic and prognostic methods. In
addition, the Company's United States patent application for the TRAP assay has
been issued, and the Company owns several allowed United States patent
applications directed to improvements to the TRAP assay. The Company's
telomerase RNA detection technology is the subject of several patent
applications. One patent relating to reagents used in the assay has issued from
the United States Patent and Trademark Office. The Company has also filed patent
applications on its technologies for identifying genes that are differentially
expressed in different cell types or at different stages of cellular
development, and the United States Patent and Trademark Office has issued a
patent relating to the Company's "Enhanced Differential Display" technology, as
well as a patent for methods to increase the replicative capacity of skin cells.
While the Company believes its patents and patent applications provide a
competitive advantage in its efforts to discover, develop and market useful
therapeutic and diagnostic products, the patent positions of pharmaceutical and
biopharmaceutical companies, including the Company, are highly uncertain and
involve complex legal and technical questions for which legal principles are not
firmly established. There can be no assurance that the Company will continue to
develop products or processes that are patentable or that patents will issue
from any of the pending applications, including patent applications that have
been allowed. There can also be no assurance that the Company's current patents,
or patents that issue on pending applications, will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
proprietary protection or competitive advantages to the Company. Because (i)
patent applications in the United States are maintained in secrecy until patents
issue, (ii) patent applications are not generally published until many months or
years after they are filed and (iii) publication of technological developments
in the scientific and patent literature often occur long after the date of such
developments, the Company cannot be certain that its or its licensors' patents
and patent applications name as inventors the first to invent the inventions
disclosed in the patent applications or patents or that it or its licensors were
the first to file patent applications for such inventions. Patent prosecution to
issue patents and litigation to establish the validity of patents, to defend
against patent infringement claims of others, and to assert infringement claims
against others can be expensive and time consuming even if the outcome is
favorable to the Company. If the outcome of patent prosecution or litigation is
unfavorable to the Company, the Company could be materially adversely affected.
Patent law relating to the scope and enforceability of claims in the
technology fields in which the Company operates is still evolving. The degree of
future protection for the Company's proprietary rights, therefore, is highly
uncertain. In this regard, there can be no assurance that independent patents
will issue from each of the United States patent applications referenced above,
which include many interrelated applications directed to common or related
subject matter. The Company is aware of certain patent applications and patents
that have been filed by others with respect to telomerase and telomere length
related technology. In addition, there are a number of issued patents and
pending applications owned by others directed to differential display, stem cell
and other technologies relating to the Company's research, development and
commercialization efforts. There can be no assurance that the Company's
technology can be developed and commercialized without a license to such patents
or that patent applications of others will not be granted priority over patent
applications filed by the Company. Furthermore, there can be no assurance that
others will not independently develop similar or alternative technologies to
those of the Company, duplicate any of the Company's technologies, or design
around the patented technologies developed by the Company or its licensors, any
of which may have a material adverse effect on the Company.
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The commercial success of the Company depends significantly on its ability
to operate without infringing patents and proprietary rights of others. There
can be no assurance that the Company's technologies do not and will not infringe
the patents or proprietary rights of others. In the event of such infringement,
the Company may be enjoined from pursuing research, development or
commercialization of its potential products or may be required to obtain
licenses to these patents or other proprietary rights or to develop or obtain
alternative technologies. There can be no assurance that the Company will be
able to obtain alternative technologies or any required license on commercially
favorable terms, if at all, and if any such license is or alternative
technologies are not obtained, the Company may be delayed or prevented from
pursuing the development of certain of its potential products. The Company's
breach of an existing license or failure to obtain or delay in obtaining
alternative technologies or a license to any technology that it may require to
develop or commercialize its products may have a material adverse effect on the
Company.
Litigation may also be necessary to enforce any patents issued or licensed
to the Company or to determine the scope and validity of the Company's or
another's proprietary rights. The Company could incur substantial costs if
litigation is required to defend itself in patent suits or other intellectual
property litigation brought by third parties or if Geron initiates such suits.
There can be no assurance that the Company's issued or licensed patents would be
held valid or infringed in a court of competent jurisdiction or that a patent
held by another will be held invalid or not infringed in such court. An adverse
outcome in litigation or an interference to determine priority or other
proceeding in a court or patent office could subject the Company to significant
liabilities to other parties, require disputed rights to be licensed from other
parties, or require the Company to cease using such technology, any of which
could have a material adverse effect on the Company.
Geron also relies on trade secrets to protect its proprietary technology,
especially in circumstances in which patent protection is not believed to be
appropriate or obtainable. Geron attempts to protect its proprietary technology
in part by confidentiality agreements with its employees, consultants and
certain contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors.
The Company is party to various license agreements which give it rights to
use certain technologies in its research, development and commercialization
activities. Disputes have arisen and may continue to arise as to the
inventorship and corresponding rights in know-how and inventions resulting from
the joint creation or use of intellectual property by the Company and its
licensors, research collaborators and consultants. There can be no assurance
that the Company will be able to continue to license such technologies on
commercially reasonable terms, if at all, or to maintain the exclusivity of its
exclusive licenses. In this regard, the Company's license with the licensing arm
of the University of Wisconsin-Madison for PS cells derived from primates is
currently exclusive until the year 2000 and non-exclusive thereafter. The
failure of the Company to maintain exclusive or other rights to such
technologies could have a material adverse effect on the Company.
SCIENTIFIC ADVISORS AND CONSULTANTS
The Company has consulting agreements with a number of leading academic
scientists and clinicians who serve as members of its Scientific Advisory Board
("SAB") or as consultants. These individuals are distinguished scientists and
clinicians with expertise in the areas of genetics of aging, cell senescence,
telomerase, cell biology and molecular biology.
The SAB was established to consult with the Company with respect to
scientific programs and strategies. The individuals also provide important
contacts throughout the broader scientific community. The SAB meets as a whole
or in smaller groups at least once per year to focus on general strategy and
certain scientific issues. Individual members are called upon on an ad hoc basis
as appropriate.
Each SAB member has entered into an agreement with the Company covering the
terms of his or her position as a member of the SAB. Each member provides
services on an as-needed basis. Certain SAB members hold options to purchase or
have purchased Common Stock of the Company. In addition, members of the SAB are
reimbursed for out-of-pocket expenses incurred in attending each meeting. Most
members of
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the SAB are employed by institutions other than the Company and may have
commitments to, or consulting or advisory agreements, with other entities that
may limit their availability to the Company.
The Company's SAB members and consultants include the following
individuals:
ELIZABETH BLACKBURN, PH.D., is a Professor and Chair of the Department of
Microbiology and Immunology at the University of California at San Francisco and
a member of the National Academy of Sciences. Dr. Blackburn is known for her
pioneering characterization of telomeres and for her co-discovery of telomerase
with Dr. Carol Greider in 1985 and subsequent characterization of this important
enzyme.
GUNTER K. BLOBEL, M.D., PH.D., is an investigator at the Howard Hughes
Medical Institute, Rockefeller University and is a member of the Company's SAB.
Dr. Blobel is a member of the National Academy of Sciences, the recipient of the
1993 Lasker Award and past president of the American Society for Cell Biology.
He is well known for his work in protein translocation and is now turning much
of his research focus to nuclear trafficking.
DAVID BOTSTEIN, PH.D., is Professor and Chairman of the Department of
Genetics, Stanford University School of Medicine. He was elected to the National
Academy of Sciences in 1981 and to the Institute of Medicine in 1993. His
current research activities include studies of yeast genetics and cell biology
and linkage mapping of human genes predisposing to manic-depressive illness and
the development and maintenance of the Saccharomyces Genome Database on the
World Wide Web. He has received numerous awards, including the Eli Lilly Award
in Microbiology (1978), the Genetics Society of America Medal (1985), and the
Allen Award of the American Society of Human Genetics (1989). Dr. Botstein has
served on numerous committees including the NAS/NRC study on the Human Genome
Project (1987-88), the NIH Program Advisory Panel on the Human Genome (1989-90)
and the Advisory Council of the National Center for Human Genome Research
(1990-95).
ROBERT N. BUTLER, M.D., is a gerontologist and psychiatrist with broad
experience in aging research and advocacy. In 1982, he founded the first, and
still the only, department of geriatrics at a United States medical
school -- the Department of Geriatrics and Adult Development at the Mount Sinai
Medical Center -- where he continues to serve as Professor. Since 1990, he has
also been Director of the International Longevity Centers. In 1975, he became
the founding director of the National Institute on Aging of the National
Institutes of Health, a position he held until 1982. He currently serves on the
National Advisory Council of the National Institute on Aging. Dr. Butler also
serves as editor-in-chief of the journal Geriatrics and is the author of
approximately 300 scientific and medical articles. In 1976, he won the Pulitzer
Prize for his book, "Why Survive? Being Old in America."
JUDITH CAMPISI, PH.D., is a Senior Scientist and Acting Chair, Department
of Cancer Biology, Lawrence Berkeley National Laboratory. She has been an
Established Investigator of the American Heart Association and currently has a
MERIT Award from the National Institute on Aging, and serves on the NIA Board of
Scientific Counselors. Her major interest is the cellular and molecular biology
of senescence and tumorigenesis.
VINCENT CRISTOFALO, PH.D., is a Professor of Pathology and Laboratory
Medicine, and Director of the Center for Gerontological Research, Medical
College of Pennsylvania and Hahnemann University and is a member of the
Company's SAB. In addition, he is professor emeritus at the University of
Pennsylvania and adjunct professor at the Wistar Institute. He sits on the Board
of Scientific Counselors of the National Institute on Aging and the Department
of Veterans Affairs Geriatrics and Gerontology Advisory Committee, as well as
numerous editorial boards.
JOHN GEARHART, PH.D., is a Professor of Gynecology and Obstetrics,
Physiology, Comparative Medicine, and Population Dynamics at the School of
Medicine of Johns Hopkins University, where he is also the Director of the
Division of Genetics and the Preimplantation Genetics Diagnosis Program. Dr.
Gearhart has been a leader in the utilization of transgenic models and in the
development of new transgenic and embryonic stem cell technologies.
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LEONARD GUARENTE, PH.D., has studied mechanisms of eukaryotic
transcriptional regulation over the past 17 years. More recently, his lab has
turned its focus to identifying causes of aging by identifying genes that
control lifespan in the model system S. cerevisiae. His lab has also begun a
study of the WRN gene, mutations in which give rise to Werner's Syndrome, a
human disease characterized by premature aging.
DOUGLAS HANAHAN, PH.D., is a Professor of Biochemistry in the Department of
Biochemistry and Biophysics and Associate Director of the Hormone Research
Institute, University of California at San Francisco and is a member of the
Company's SAB. His major research interests are the cellular and genetic
mechanisms of tumor development and autoimmunity. Prior to joining the
University of California at San Francisco in 1988, Dr. Hanahan was with the Cold
Spring Harbor Laboratory for nine years, where he developed technologies for
recombinant DNA and molecular cloning and established transgenic mouse models to
study cancer and autoimmune diseases.
LEONARD HAYFLICK, PH.D., is a Professor of Anatomy at the School of
Medicine of the University of California at San Francisco, and is a member of
the Company's SAB. Dr. Hayflick is best known for his pioneering work in tissue
culture, where he discovered the finite replicative capacity of normal human
cells which he interpreted as aging at the cellular level. This phenomenon is
known as the "Hayflick Limit" and Dr. Hayflick is widely known as the "father"
of cellular gerontology. Dr. Hayflick has published over 200 papers and is the
recipient of numerous national and international research awards and honors, was
President of the Gerontological Society of America, is editor-in-chief of
Experimental Gerontology, was a founding member of the Council of the National
Institute on Aging, and recently authored the popular book, "How and Why We
Age."
ERIC LANDER, PH.D., is a Professor of Biology at the Massachusetts
Institute of Technology and serves as the Director of the Whitehead
Institute/MIT Center for Genome Research. Dr. Lander is active in several
organizations involved in human genetics research, including serving on the
board of directors for the Genetic Society of America, acting as former chair of
the Genome Research Review Committee for NIH's National Center for Human Genome
Research and is a member of the Company's SAB. He brings broad experience in
human and mammalian genetic research.
GEORGE M. MARTIN, M.D., is Professor of Pathology, Adjunct Professor of
Genetics and Director of Alzheimer's Disease Research Center, University of
Washington School of Medicine. He has held various positions in the departments
of pathology and genetics at the University of Washington School of Medicine
since 1957, and was appointed director of the Alzheimer's Disease Research
Center in 1985. Dr. Martin's recent awards include a Research Medal granted by
the American Aging Association in 1992 and the Robert W. Kleemeier Award given
by the Gerontological Society of America in 1993.
MALCOLM MOORE, PH.D., is a Professor of Biology at the Sloan-Kettering
Division, Cornell Graduate School of Medical Sciences. He is also currently
incumbent of the Enid A. Haupt Chair of Cell Biology, Memorial Sloan-Kettering
Cancer Center. Dr. Moore most recently received the William B. Coley Award For
Distinguished Research in Immunology by the Cancer Research Institute (June
1995).
ROGER A. PEDERSEN, PH.D., is a Professor of Obstetrics, Gynecology and
Reproductive Sciences at the University of California at San Francisco, where he
teaches developmental genetics and mammalian embryology. He received his B.A.
degree from Stanford University in 1965, and his Ph.D. in 1970 at Yale
University. He completed his postdoctoral research at the Johns Hopkins
University. Since 1991 he has served as Series Editor of Current Topics in
Developmental Biology. He has written numerous original publications and reviews
on early mouse development, and co-produced two instructional videotapes on the
use of mice in transgenic and gene targeting research.
JERRY W. SHAY, PH.D., is a Professor of Cell Biology and Neuroscience, the
University of Texas Southwestern Medical Center at Dallas and is a member of the
Company's SAB. Dr. Shay's research focuses on molecular mechanisms of
tumorigenesis and immortalization with a particular emphasis on cancer of the
breast.
JAMES D. WATSON, PH.D., is the President of Cold Spring Harbor Laboratory
and is a member of the Company's SAB. Dr. Watson is the former head of the NIH
Human Genome Project and is famous for his
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1953 discovery with Francis Crick of the double helical structure of DNA for
which he received the Nobel Prize.
WOODRING E. WRIGHT, M.D., PH.D., is a Professor of Cell Biology and
Neuroscience, the University of Texas Southwestern Medical Center at Dallas and
is a member of the Company's SAB. He is widely recognized as a leading molecular
biologist working in the field of cellular senescence and on the molecular basis
of muscle development.
BUSINESS ADVISORS AND CONSULTANTS
The Company has also established a Business Advisory Board to advise it on
strategic business matters. Each member of the Business Advisory Board has
entered into an agreement with the Company covering the terms of the position
and provides services on an as-needed basis. The members of the Company's
Business Advisory Board are:
JACK L. BOWMAN has over 30 years of health care management experience, most
recently as company group chairman of Johnson & Johnson. Prior to Johnson &
Johnson, Mr. Bowman was with American Cyanamid, where his positions included
President of Lederle Laboratories, and Ciba-Geigy Pharmaceuticals.
ROBERT A. SWANSON is a founder of Genentech, Inc., served as its Chief
Executive Officer from 1976 to 1990, and has been Chairman of the Board since
1990. Prior to forming Genentech, Mr. Swanson was a partner with Kleiner &
Perkins venture capital partnership in San Francisco, and from 1970 to 1974, he
was an investment officer with Citicorp Venture Capital Ltd. He serves on the
Board of Fellows of the Faculty of Medicine at Harvard University and is a
member of the Biology Visiting Committee of, and has served as a Trustee for,
the Massachusetts Institute of Technology. Mr. Swanson is a member of the Royal
Swedish Academy of Engineering Sciences and a member of the Board of Molten
Metal Technology, Inc.
ANDERS P. WIKLUND has spent 30 years with Kabi and Pharmacia group
companies where he served as the President and CEO of Kabi Vitrum, Inc. and Kabi
Pharmacia, Inc. He also worked as part of the Corporate Business Development
function of Pharmacia and then Pharmacia & Upjohn and was actively involved in
forming strategic alliances with United States biotechnology companies and with
merger and acquisitions on the group level. He is presently an advisor to
numerous United States and European companies and serves on the Board of
Directors for several private and public biotechnology companies.
GOVERNMENT REGULATION
Regulation by governmental entities in the United States and other
countries will be a significant factor in the preclinical and clinical testing,
production, labeling, sale, distribution, marketing, advertising and promotion
of any products developed by the Company or its strategic partners. Most of the
Company's or its strategic partners' products will require regulatory approval
or clearance by governmental agencies prior to commercialization. The nature and
the extent to which such regulation may apply to the Company or its strategic
partners will vary depending on the nature of any such products. Generally,
biological drugs and non-biological drugs are regulated more rigorously than
medical devices. In particular, human pharmaceutical therapeutic products,
including a telomerase inhibitor, are subject to rigorous preclinical and
clinical testing and other requirements by the United States Food and Drug
Administration ("FDA") in the United States and similar health authorities in
foreign countries. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
distribution, storage, record keeping and marketing of such products. The
process of obtaining these approvals or clearances is uncertain and the process
of and the subsequent compliance with appropriate federal and foreign statutes
and regulations is time consuming and require the expenditure of substantial
resources.
Generally, to gain FDA pre-market approval for a biopharmaceutical product,
a company first must conduct extensive preclinical studies in the laboratory and
in animal model systems to gain preliminary information on a product's potential
efficacy and to identify any safety problems. The results of these studies are
submitted as a part of an investigational new drug application ("IND"), which
must become effective before human clinical trials of an investigational drug
can start. To commercialize any products, the Company
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or its strategic partners will be required to sponsor and file an IND and will
be responsible for initiating and overseeing a series of clinical studies to
demonstrate the safety, purity, efficacy and potency in the case of biological
drugs, or safety and efficacy in the case of non-biological drugs that are
necessary to obtain FDA approval of any such products. Clinical trials are
normally done in three phases (Phase I -- safety and pharmacologic assessment;
Phase II a small efficacy study; and Phase III -- 200-1000 patient studies to
provide substantial evidence of safety and effectiveness) which generally take
three to six or more years to complete. After completion of clinical trials of a
new product, FDA marketing approval must be obtained. If the product is
classified as a non-biological drug, the Company or its strategic partner will
be required to file a new drug application ("NDA") and receive approval before
commercial marketing of the drug. In the case of a biological drug, an
Establishment License Application ("ELA") and Product License Application
("PLA") must be filed with and approved by the FDA before marketing can occur.
If a given recombinant product is considered to be a well-characterized
biological drug, only a Biological License Application ("BLA") combining
elements of an ELA and a PLA may be required. These testing and approval
processes are uncertain and require substantial time and the expenditure of
substantial resources, and there can be no assurance that any such approval will
be granted on a timely basis, if at all. NDAs or PLAs/ELAs submitted to the FDA
can take, on average, two to five years to receive approval, and the FDA must
confirm that good laboratory, clinical and manufacturing practices were
maintained as well as determine that safety, purity, efficacy, and potency (in
the case of a biological drug) or safety and efficacy (in the case of a
non-biological drug) have been established. If questions arise during the FDA
review process, approval can take more than five years. Even if FDA regulatory
approvals are obtained, a marketed product is subject to continual review, and
later discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market as well as possible
civil or criminal sanctions, including but not limited to recall or seizure of
product, injunction against manufacture, distribution, sales and marketing and
criminal prosecution. For marketing outside the United States, the Company will
also be subject to foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country. Any diagnostic products to be
developed by the Company or its strategic partners are likely to be regulated by
the FDA as medical devices rather than drugs. The nature of the FDA requirements
applicable to such medical diagnostic devices depends on their classification by
the FDA. A diagnostic device developed by the Company or a strategic partner
would initially be classified as a Class III device, and would most likely
require pre-market approval. Obtaining pre-market approval involves the costly
and time-consuming process, comparable to that for new drugs, of conducting
laboratory studies, obtaining an investigational device exemption to conduct
clinical tests, filing a pre-market approval application ("PMA") and obtaining
review and approval of the PMA by the FDA. Such review and approval may take
12-18 months or more. The process from laboratory to clinical studies to FDA
review and approval of a PMA, which approval cannot be assured on a timely
basis, if at all, can take several years or more. Both drugs and devices are
subject to FDA current good manufacturing practice regulations ("GMPs"), often
even at the clinical trial stages. Both drug and device GMPs specify extensive
validation and record keeping requirements, including the maintenance of product
compliance files, as well as require compliance with various standards governing
personnel, equipment and raw materials, including product stability
requirements. There can be no assurance that the Company or its collaborators or
contract manufacturers, if any, will be able to establish or maintain compliance
with the GMP regulations on a continuing basis. Failure to establish or maintain
GMP compliance or compliance with other FDA requirements could have a material
adverse effect on the Company's business.
The Company's research and development activities involve the controlled
use of hazardous materials, chemicals and various radioactive materials. The
Company is subject to federal, state and local laws and regulations governing
the use, storage, handling and disposal of such materials and certain waste
products. Although the Company believes that its safety procedures for using,
handling, storing and disposing of such materials comply with the standards
prescribed by state and federal laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company's use of these materials could be
curtailed by state or federal authorities, the Company could be held liable for
any damages that result and any liability could exceed the resources of the
Company.
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COMPETITION
The pharmaceutical and biopharmaceutical industries are intensely
competitive. The Company believes that certain pharmaceutical and
biopharmaceutical companies as well as certain research organizations currently
engage in or have in the past engaged in efforts related to the biological
mechanisms of cell aging and cell immortality, including the study of telomeres
and telomerase. In addition, other products and therapies that could compete
directly with the products that the Company is seeking to develop and market
currently exist or are being developed by pharmaceutical and biopharmaceutical
companies, and by academic and other research organizations. Many companies are
also developing alternative therapies to treat cancer and, in this regard, are
competitive with the Company. The pharmaceutical companies developing and
marketing such competing products have significantly greater financial resources
and expertise in research and development, manufacturing, preclinical and
clinical testing, obtaining regulatory consents and marketing than the Company.
Smaller companies may also prove to be significant competitors, particularly
through collaborative arrangements with large and established companies.
Academic institutions, government agencies and other public and private research
organizations may also conduct research, seek patent protection and establish
collaborative arrangements for research, clinical development and marketing of
products similar to those of the Company. These companies and institutions
compete with the Company in recruiting and retaining qualified scientific and
management personnel as well as in acquiring technologies complementary to the
Company's programs. There is also competition for access to libraries of
compounds to use for screening. Any inability of the Company to secure and
maintain access to sufficiently broad libraries of compounds for screening
potential targets would have a material adverse effect on the Company. In
addition to the above factors, Geron will face competition with respect to
product efficacy and safety, the timing and scope of regulatory consents,
availability of resources, reimbursement coverage, price and patent position,
including potentially dominant patent positions of others. There can be no
assurance that competitors will not develop more effective or more affordable
products, or achieve earlier patent protection or product commercialization than
the Company or that such products will not render the Company's products
obsolete.
EMPLOYEES
The Company had 89 full-time employees at December 31, 1997, of whom 28
hold Ph.D. degrees and 20 hold other advanced degrees. Of the total workforce,
76 are engaged in, or directly support, the Company's research and development
activities and 13 are engaged in business development, finance and
administration. The Company also retains outside consultants. None of the
Company's employees is covered by a collective bargaining agreement, nor has the
Company experienced work stoppages. The Company considers relations with its
employees to be good.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers of the Company:
NAME AGE POSITION
---- --- --------
Ronald W. Eastman 46 President, Chief Executive Officer
and Director
David L. Greenwood 46 Chief Financial Officer, Vice
President of Corporate Development,
Treasurer and Secretary
Calvin B. Harley, Ph.D. 45 Chief Scientific Officer
Kevin R. Kaster, Esq. 38 Vice President of Intellectual
Property and Chief Patent Counsel
Thomas B. Okarma, M.D., Ph.D. 52 Vice President of Cell Therapies
RONALD W. EASTMAN has served as President, Chief Executive Officer and
Director of the Company since May 1993. From 1978 until joining the Company, Mr.
Eastman was employed with American Cyanamid Co., most recently as a Vice
President and General Manager of Lederle Laboratories, American Cyanamid's
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pharmaceutical business. Mr. Eastman holds a B.A. from Williams College and an
M.B.A. from Columbia University.
DAVID L. GREENWOOD has served as Chief Financial Officer, Treasurer and
Secretary of the Company since July 1995, and Vice President of Corporate
Development since April 1997. From 1979 until joining the Company, Mr. Greenwood
held various management positions with J.P. Morgan & Co. Incorporated, an
international banking firm, and its subsidiaries, J.P. Morgan Securities Inc.
and Morgan Guaranty Trust Company of New York. Mr. Greenwood holds a B.A. from
Pacific Lutheran University and an M.B.A. from Harvard Business School.
CALVIN B. HARLEY, PH.D., has served as Chief Scientific Officer of the
Company since July 1996. From May 1994 until July 1996, Dr. Harley was the Vice
President of Research of the Company and from April 1993 to May 1994, Dr. Harley
was Director, Cell Biology of the Company. Dr. Harley was an Associate Professor
from 1989 until joining the Company, and from 1982 to 1989, an Assistant
Professor of Biochemistry at McMaster University. Dr. Harley also was the Chair
of the Canadian Association on Gerontology, Division of Biological Sciences from
October 1989 to October 1991 and Chairman Elect from 1987 to 1989. Dr. Harley
holds a B.S. from University of Waterloo and a Ph.D. from McMaster University,
and conducted postdoctoral work at the University of Sussex and the University
of California at San Francisco.
KEVIN R. KASTER, ESQ., has served as Vice President of Intellectual
Property and Chief Patent Counsel of the Company since June 1994. From September
1991 until joining the Company, Mr. Kaster was employed with Affymax, N.V., a
biotechnology company, as Director, Intellectual Property. From May 1988 until
September 1991, Mr. Kaster was a patent attorney with Cetus Corporation, a
biotechnology company. Prior to his employment with Cetus Corporation, he served
as an Associate Biologist and then as a Patent Technician with Eli Lilly and
Company, a pharmaceutical company. Mr. Kaster holds a B.S. in Chemistry and
Molecular Biology from Vanderbilt University and a J.D. from Indiana University.
THOMAS B. OKARMA, M.D., PH.D., has served as Vice President of Cell
Therapies of the Company since December 1997. From 1985 until joining the
Company, Dr. Okarma founded Applied Immune Sciences, Inc. and served as its
chairman and chief executive officer until 1995 when it was acquired by
Rhone-Poulenc Rorer. From 1980 to 1985, Dr. Okarma was a member of the faculty
in the Department of Medicine at Stanford University School of Medicine. Dr.
Okarma holds a A.B. from Dartmouth College and a M.D. and Ph.D. from Stanford
University.
ITEM 2. PROPERTIES
Geron currently leases approximately 41,000 square feet of office space at
194 Constitution Drive, 200 Constitution Drive and 230 Constitution Drive, Menlo
Park, California. The Company's lease for such office space expires in January
2002, with an option to renew the lease for two additional periods of two and
one-half years each. The Company intends to use this space for general office
and biomedical research and development purposes. The Company believes that its
existing facilities are adequate to meet its requirements for the near term.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock trades on The Nasdaq National Market under the
symbol "GERN." The high and low closing sales prices (excluding retail markup,
markdowns and commissions) of the Company's stock for the year ending December
31, 1997 and for the period beginning July 30, 1996 (the date of the Company's
initial public offering) and ending December 31, 1996 are as follows:
HIGH LOW
------- ------
Year ended December 31, 1997
First quarter........................................... $18.000 $9.625
Second quarter.......................................... $10.625 $7.125
Third quarter........................................... $16.125 $5.875
Fourth quarter.......................................... $11.250 $8.250
Year ended December 31, 1996
Third quarter (beginning July 30, 1996)................. $ 7.750 $6.375
Fourth quarter.......................................... $13.375 $6.750
As of December 31, 1997, there were approximately 424 stockholders of
record. The Company participates in a highly dynamic industry, which often
results in significant volatility of the Company's Common Stock price.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
anticipate paying cash dividends in the foreseeable future, but intends to
retain its capital resources for reinvestment in its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and other such factors as the Board of
Directors deems relevant.
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ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues from collaborative
agreements.................... $ 7,175 $ 5,235 $ 5,490 $ -- $ --
License fees and royalties...... 78 58 -- -- --
Operating expenses:
Research and development...... 15,139 14,260 11,321 8,099 3,975
General and administrative.... 3,120 3,161 2,888 2,397 2,220
----------- ---------- ---------- ---------- ----------
Total operating
expenses............ 18,259 17,421 14,209 10,496 6,195
----------- ---------- ---------- ---------- ----------
Loss from operations............ (11,006) (12,128) (8,719) (10,496) (6,195)
Interest and other income....... 1,757 1,826 919 638 351
Interest and other expense...... (392) (385) (399) (320) (103)
----------- ---------- ---------- ---------- ----------
Net loss........................ $ (9,641) $ (10,687) $ (8,199) $ (10,178) $ (5,947)
=========== ========== ========== ========== ==========
Basic and diluted net loss per
share (pro forma in 1996,
1995, 1994 and 1993)(1)....... $ (0.91) $ (1.26) $ (1.34) $ (1.89) $ (1.57)
=========== ========== ========== ========== ==========
Shares used in computing basic
and diluted net loss per
share......................... 10,551,054 8,497,229 6,123,429 5,388,197 3,796,588
DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $ 21,597 $ 24,269 $ 15,553 $13,915 $11,931
Working capital....................... 19,739 21,468 12,115 12,410 10,247
Total assets................ 26,056 28,788 19,749 17,072 14,406
Noncurrent portion of capital lease
obligations and equipment loans..... 1,250 1,644 1,654 1,647 1,360
Accumulated deficit................... (46,110) (36,471) (25,773) (17,604) (7,405)
Total stockholders'
equity.................... 21,066 23,591 14,308 13,689 11,293
- ---------------
(1) See Note 1 of Notes to Financial Statements for information concerning the
calculation of net loss per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Geron is a biopharmaceutical company focused on discovering therapeutic and
diagnostic products based upon common biological mechanisms underlying cancer
and other age-related diseases. The Company's results of operations have
fluctuated from period to period and will continue to fluctuate in the future
based upon the timing and composition of funding under various collaborative
agreements. Results of operations for any period may be unrelated to results of
operations for any other period. In addition, historical results should not be
viewed as indicative of future operating results. The following discussion
should be read in conjunction with the audited financial statements and notes
thereto included in Part II, Item 8 of this Report on Form 10-K.
On December 19, 1997, the Company entered into a License, Product and
Marketing Agreement with Boehringer Mannheim to develop and commercialize
research and clinical diagnostic products for cancer on an exclusive, worldwide
basis. Under the collaboration Boehringer Mannheim provided reimbursement for
research previously conducted and will be responsible for all clinical,
regulatory, manufacturing, marketing and sales efforts and expenses. In
addition, the Company is entitled to receive future payments upon
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achievement of certain contractual milestones relating to levels of product
sales, as well as royalties on product sales. Further, the Company has an option
to exercise co-promotion rights in the United States. In connection with this
collaboration, the Company recognized $500,000 of revenue for reimbursement of
past research efforts.
On March 27, 1998, the Company completed a private placement with two
institutional investors for the sale of 15,000 shares of Series A Convertible
Preferred Stock with a stated value of $1,000 per share resulting in proceeds of
$15.0 million. The Series A Convertible Preferred Stock is convertible into the
number of shares of Common Stock of the Company equal to the stated value plus a
premium of 6% per annum divided by a conversion price. The conversion price of
the Preferred Stock is based on the market price of the Common Stock during a
pricing period preceding conversion, up to a conversion price cap of $16.88.
With limited exceptions, during the nine month period following issuance, the
Preferred Stock is convertible only after the market price of the Common Stock
equals or exceeds $15 per share. The Preferred Stock is subject to redemption at
the Company's option if the market price of the Common Stock exceeds or falls
below certain thresholds. The Company has agreed to register the resale of the
underlying common stock under the Securities Act of 1933.
In accordance with the Stock Purchase Agreement with Pharmacia & Upjohn,
S.p.A, in March 1998, Pharmacia & Upjohn purchased $4.0 million of Geron Common
Stock, at a premium.
Geron is subject to risks common to companies in its industry and at its
stage of development, including risks inherent in its research and development
efforts, reliance upon collaborative partners, enforcement of patent and
proprietary rights, need for future capital, potential competition and
uncertainty of regulatory approvals or clearances. In order for a product to be
commercialized based on the Company's research, it will be necessary for Geron
and collaborators to conduct preclinical tests and clinical trials, demonstrate
efficacy and safety of the Company's product candidates, obtain regulatory
approvals or clearances and enter into manufacturing, distribution and marketing
arrangements, as well as obtain market acceptance. The Company does not expect
to receive revenues or royalties based on therapeutic products for a period of
years. See "Additional Factors That May Affect Future Results."
RESULTS OF OPERATIONS
Revenues
The Company recognized revenues of $7.2 million in fiscal 1997 compared to
$5.2 million in fiscal 1996 and $5.5 million in fiscal 1995. Revenues in 1997
were research support payments under the Company's collaborative agreements with
Pharmacia & Upjohn S.p.A ("Pharmacia & Upjohn") and Kyowa Hakko Kogyo Co., Ltd.
("Kyowa Hakko"). In addition, 1997 revenues included the one-time payment by
Boehringer Mannheim for reimbursement of past research efforts. Revenues in 1996
and 1995 were research support payments from Kyowa Hakko. The Company recognizes
revenue as the related research and development costs are incurred under the
collaborative agreements. Annual funding payments of $4.0 million each were
received under the Kyowa Hakko agreement in fiscal 1997 and 1996 and $7.0
million in fiscal 1995. Funding payments totaling $3.8 million were received
under the Pharmacia & Upjohn agreement in fiscal 1997. The Company expects to
receive an aggregate of $6.0 million from the Kyowa Hakko and Pharmacia & Upjohn
collaborations in 1998.
The Company receives license payments and royalties from license and
marketing agreements with various diagnostic collaborators. No license fee
payments were received in 1997. In fiscal 1997, the Company received $78,000 in
royalties from Oncor, Kyowa Medex, Boehringer Mannheim, and PharMingen on the
sale of diagnostic kits to the research-use-only market. In fiscal 1996, upon
entering into a license and marketing agreement with Kyowa Medex, the Company
received a $50,000 license fee payment from Kyowa Medex. In fiscal 1996, the
Company received $8,000 in royalties from Oncor and Kyowa Medex. No royalties or
license fee payments were received in 1995.
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Research and Development Expenses
Research and development expenses were $15.1 million, $14.3 million and
$11.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The increases in 1997 and 1996 were primarily due to expanded
patent related activities, increases in support of key outside collaborators and
greater purchases of research materials and laboratory supplies for the
expansion of the Company's research programs. The Company expects research and
development expenses to increase significantly in the future as a result of
continued development of its therapeutic and diagnostic programs.
General and Administrative Expenses
General and administrative expenses were $3.1 million, $3.2 million and
$2.9 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The slight decrease in 1997 was the net effect of a decrease in administrative
personnel and an increase in investor and public relations expenses. The
increase in expenses in 1996 was primarily due to increases in staffing,
amortization of deferred compensation, higher legal, travel and other expenses
related to business development and other costs of being a public company.
Interest and Other Income
Interest income was $1.4 million, $1.1 million and $643,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. The increases in 1997 and
1996 were due to higher average cash and investment balances as a result of the
sale of equity securities, completion of the Company's initial public offering
and research funding received under the Kyowa Hakko and Pharmacia & Upjohn
collaborative agreements. Interest earned in the future will depend on the
Company's funding cycles and prevailing interest rates. The Company also
received $369,000, $714,000 and $276,000 in research payments under government
grants for the years ended December 31, 1997, 1996 and 1995, respectively. The
Company does not expect income from government grants to substantially increase
in the future.
Interest and Other Expense
Interest and other expense were $392,000, $385,000 and $399,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. The increase in 1997
was due to an increase in bank charges during the year as a result of higher
cash and short term investment balances. The decrease in 1996 was due to lower
outstanding capital lease obligations as a result of certain leases expiring
during the year. Higher outstanding capital lease balances existed during 1995.
The Company expects interest and other expense to moderately increase as it
intends to increase equipment financing.
Net Loss
Net loss was $9.6 million, $10.7 million and $8.2 million for the years
ended December 31, 1997, 1996 and 1995, respectively. The decrease in net loss
for 1997 was the net result of increased revenue from research support payments
from the Pharmacia & Upjohn, Kyowa Hakko and Boehringer Mannheim collaborative
agreements which more than offset the increase in operating expenses during the
year. The increase in net loss for 1996 was primarily due to the increase in
operating expenses during that year.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments at December 31, 1997 were
$21.6 million compared to $24.3 million at December 31, 1996 and $15.6 million
at December 31, 1995. It is the Company's investment policy to invest these
funds in liquid, investment grade securities, such as interest-bearing money
market funds, corporate notes, commercial paper and municipal securities. The
decrease in cash, cash equivalents and short-term investments for 1997 was the
net result of increased research funding support payments and increased
operating expenses during the year. The increase in cash, cash equivalents and
short-term investments for 1996 was primarily due to the completion of the
Company's initial public offering in July 1996.
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Net cash used in operations was $7.9 million, $9.9 million and $6.3 million
for the years ended December 31, 1997, 1996 and 1995, respectively. The decrease
in net cash used in operations for 1997 was due to an increase in research
support payments as a result of funding under the Pharmacia & Upjohn
collaborative agreement entered into in 1997. The increase in net cash used in
operations for 1996 was primarily due to higher expenses incurred as a result of
expanded research and development programs. The Company expects its net cash
used in operations may increase in 1998 due to increased research and
development expenditures and decreased research support payments from Kyowa
Hakko.
The Company has funded its operations primarily through public and private
equity financings. The Company has also received additional funding from
collaborative agreements, grant revenues, interest income and equipment
financing. In January 1997, Pharmacia & Upjohn purchased an initial equity
investment of $2.0 million in Geron at a premium. In April 1997 and March 1998,
Pharmacia & Upjohn purchased an aggregate of $8.0 million ($4.0 million at each
date) of Geron Common Stock at a premium.
On March 27, 1998, the Company completed a private placement with two
institutional investors for the sale of 15,000 shares of Series A Convertible
Preferred Stock with a stated value of $1,000 per share resulting in proceeds of
$15.0 million. The Series A Convertible Preferred Stock is convertible into the
number of shares of Common Stock of the Company equal to the stated value plus a
premium of 6% per annum divided by a conversion price. The conversion price of
the Preferred Stock is based on the market price of the Common Stock during a
pricing period preceding conversion, up to a conversion price cap of $16.88.
With limited exceptions, during the nine month period following issuance, the
Preferred Stock is convertible only after the market price of the Common Stock
equals or exceeds $15 per share. The Preferred Stock is subject to redemption at
the Company's option if the market price of the Common stock exceeds or falls
below certain thresholds. The Company has agreed to register the resale of the
underlying common stock under the Securities Act of 1933.
In accordance with the Stock Purchase Agreement with Pharmacia & Upjohn,
S.p.A, in March 1998, Pharmacia & Upjohn purchased $4.0 million of Geron Common
Stock, at a premium.
Through December 31, 1997, the Company had invested approximately $6.1
million in property and equipment, of which approximately $4.5 million was
financed through equipment financing. Minimum annual payments due under the
equipment financing facility are expected to total $1.1 million, $685,000,
$474,000 and $98,000 in 1998, 1999, 2000 and 2001, respectively. As of December
31, 1997, the Company had approximately $592,000 available for borrowing under
its equipment financing facility.
The Company estimates that its existing capital resources including the
proceeds from the private placement completed in March 1998, payments under the
Pharmacia & Upjohn and Kyowa Hakko collaborative agreements, interest income and
equipment financing will be sufficient to fund its current and planned
operations through 1999. There can be no assurance, however, that changes in the
Company's research and development plans or other changes affecting the
Company's operating expenses will not result in the expenditure of available
resources before such time, and in any event, the Company will need to raise
substantial additional capital to fund its operations in future periods. The
Company intends to seek additional funding through strategic collaborations,
public or private equity financings, capital lease transactions or other
financing sources that may be available.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Specifically, the Company
wishes to alert readers that, except for the historical information contained
herein, the matters discussed in this report constitute forward-looking
statements that are dependent on certain risks and uncertainties. These and
other factors that may cause actual results to differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company
are described below.
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TECHNOLOGICAL UNCERTAINTY
The study of the mechanisms of cellular aging and cellular immortality,
including telomere biology and telomerase, is a relatively new area of research,
and there can be no assurance that this research will lead to the discovery or
development of any therapeutic or diagnostic product. If and when potential lead
drug compounds or product candidates are identified through the Company's
research programs, they will require significant preclinical and clinical
testing prior to regulatory approval in the United States and elsewhere, and
there can be no assurance that any of these efforts will result in a product
that can be marketed. Because of the significant additional scientific,
regulatory and commercial milestones that must be reached for the Company's
research programs to be successful, there can be no assurance that any program
will not be abandoned after significant resources have been expended. The
abandonment of any research program could have a material adverse effect on the
Company.
As a result of its drug discovery efforts to date, the Company has
identified compounds in in vitro studies that demonstrate potential for
inhibiting telomerase in vivo. However, additional development efforts will be
required prior to the selection of a lead compound for preclinical development
and clinical trials as a telomerase inhibitor for cancer. If and when selected,
a lead compound may prove to have undesirable and unintended side effects or
other characteristics affecting its efficacy or safety that may prevent or limit
its commercial use. For example, telomerase is active in reproductive cells and
transiently expressed in certain hematopoietic (blood) and gastrointestinal
cells. There can be no assurance that any product based on the inhibition of
telomerase will not adversely affect such cells and result in unacceptable side
effects. In addition, it is expected that telomerase inhibition will have
delayed efficacy as telomeres resume normal shortening and, as a result, will in
most cases, be used in conjunction with other cancer therapies. There can be no
assurance that the delayed efficacy of a telomerase inhibitor will not have a
material adverse effect on the preclinical and clinical development, ability to
obtain regulatory approval or marketability of a telomerase inhibitor for the
treatment of cancer. The abandonment of the Telomerase Inhibition and Detection
program would have a material adverse effect on the Company.
With respect to the development and commercial application of the Company's
proprietary telomerase detection technology, there is, as yet, insufficient
clinical data to confirm its full utility to diagnose, prognose, monitor patient
status and screen for cancer. Although the Company's licensees, Oncor,
Boehringer Mannheim, Kyowa Medex and PharMingen have commenced the sale of kits
for research use, additional development work and regulatory consents will be
necessary prior to the introduction of tests for clinical use.
With respect to the Company's Genomics of Aging program, the Company has
identified certain genes that are expressed differentially in senescent cells
versus replicatively young cells. However, the Company has not identified any
lead compounds that have been demonstrated to modulate such gene expression, and
there can be no assurance that any such lead compound will be discovered or
developed. The part of the Company's Genomics of Aging program that is designed
to modulate telomere length is at an early stage of development. While telomere
length and replicative capacity have been extended in vitro, there can be no
assurance that the Company will discover a compound that will modulate telomere
length or increase replicative capacity effectively for clinical use. The
Company's Primordial Stem Cell program is also at an early stage. While primate
Primordial Stem ("PS") cells have been isolated and allowed to expand and
differentiate into numerous cell types, there can be no assurance that the
Company's efforts to isolate the human primordial stem cell and develop products
therefrom will result in any commercial applications.
The Company may become aware of technology controlled by third parties that
is advantageous to the Company's programs. There can be no assurance that the
Company will be able to acquire or license such technology on reasonable terms,
if at all. In the event that the Company is unable to acquire such technology,
the Company may be required to expend significant time and resources to develop
similar technology, and there can be no assurance that it will be successful in
this regard. If the Company cannot acquire or develop necessary technology, it
may be prevented from pursuing certain business objectives. Moreover, a
competitor of the Company could acquire or license such technology. Any such
event could have a material adverse effect on the Company.
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EARLY STAGE OF DEVELOPMENT
Geron is at an early stage in the development of therapeutic and diagnostic
products. The Company has not yet selected a lead compound for any of its drug
development programs. In order to identify and select such a compound, it must
have access to sufficient numbers of chemical compounds and resources, of which
there can be no assurance. Products that may result from the Company's research
and development programs are not expected to be commercially available for a
number of years, if at all. The Company's program to identify a telomerase
inhibitor is currently at the drug discovery stage, while the Company's other
programs are currently focused on research efforts prior to drug discovery or
preclinical development. It is difficult to predict when, if ever, the Company
will select a lead compound for drug development as a telomerase inhibitor. In
addition, there can be no assurance that the Company's other programs will move
beyond their current stage. Assuming the Company's research advances and the
Company is able to identify and select a lead compound for telomerase
inhibition, certain preclinical development efforts will be necessary to
determine whether the potential product has sufficient safety to enter clinical
trials. If such a potential product receives authorization from the United
States Food and Drug Administration (the "FDA") to enter clinical trials, then
it will most likely be subjected to a multiphase, multicenter clinical study to
determine its safety and efficacy. It is not possible to predict the length or
extent of clinical trials or the period of any required patient follow-up.
Assuming clinical trials of any potential product are successful and other data
are satisfactory, the Company will submit an application to the FDA and
appropriate regulatory bodies in other countries to seek permission to market
the product. The review process at the FDA is substantial and lengthy, and there
can be no assurance that the FDA will approve the Company's application or will
not require additional clinical trials or other data prior to approval.
Furthermore, even if such approval is ultimately obtained, delays in the
approval process could have a material adverse effect on the Company. In
addition, there can be no assurance that any potential product will be capable
of being produced in commercial quantities at a reasonable cost or that such
product will be successfully marketed. Based on the foregoing, the Company does
not anticipate being able to commence marketing of any therapeutic products for
a period of years, if at all. There can be no assurance that any of the
Company's product development efforts will be successfully completed, that
regulatory approvals will be obtained, or that the Company's products, if any,
will achieve market acceptance.
DEPENDENCE ON STRATEGIC AND RESEARCH COLLABORATIONS
The Company's strategy for the development, clinical testing and
commercialization of its products includes entering into collaborations with
corporate partners, licensors, licensees and others, and the Company is
dependent upon the subsequent success of these other parties in performing their
respective responsibilities. The success of any collaboration depends on the
continued cooperation of its partners, as to which there can be no assurance.
The amount and timing of resources to be devoted to activities by its
collaborators are not within the direct control of the Company. There can be no
assurance that such partners will perform their obligations as expected or that
the Company will derive any benefits from such arrangements. There can also be
no assurance that the Company's current collaborators or any future
collaborators will not pursue existing or alternative technologies in preference
to those being developed in collaboration with the Company.
The Company currently has no manufacturing infrastructure and no marketing
or sales organization, and intends to rely in substantial part on its current
and future strategic partners for the manufacture of any product and the
principal marketing and sales responsibilities for any such product. To the
extent the Company chooses not to or is unable to establish such arrangements,
the Company will require substantially greater capital to undertake its own
manufacturing, marketing and sales of any product.
In April 1995, the Company entered into a License and Research
Collaboration Agreement with Kyowa Hakko (the "Kyowa Hakko Agreement") for the
development and commercialization in certain Asian countries of a telomerase
inhibitor for the treatment of cancer. Under the collaboration, Kyowa Hakko
provides certain funding for the Company's research and development activities
and is responsible for all clinical, regulatory, manufacturing, marketing and
sales efforts and expenses in the covered territory. The Kyowa Hakko Agreement
provides that Kyowa Hakko will not pursue research and development independent
of its collaboration with Geron with respect to telomerase inhibition for the
treatment of cancer in humans
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until April 7, 2000, at the earliest. The Kyowa Hakko Agreement also provides in
general that, while Geron exercises significant influence during the research
phase, Kyowa Hakko exercises significant influence during the development and
commercialization phases of the collaboration. In March 1997, the Kyowa Hakko
Agreement was amended to extend its term until April 2000 and to make certain
other changes in connection with the signing of the Pharmacia & Upjohn Agreement
(as defined below).
On March 23, 1997 the Company signed a License and Research Collaboration
Agreement (the "Pharmacia & Upjohn Agreement") with Pharmacia & Upjohn, S.p.A.
to collaborate in the discovery, development and commercialization of a new
class of anticancer drugs that inhibit telomerase. Under the collaboration,
Pharmacia & Upjohn will provide certain funding of the Company's research and
development activities and will be primarily responsible for all clinical,
regulatory, manufacturing, marketing and sales efforts and expenses. Geron has
certain promotion rights with corresponding clinical expense obligations. As
with the Kyowa Hakko Agreement, the Company exercises significant influence
during the research phase of the collaboration while Pharmacia & Upjohn will
exercise significant influence during the development and commercialization
phases of the collaboration. Through the Pharmacia & Upjohn and Kyowa Hakko
Agreements, the Company has granted to Pharmacia & Upjohn and Kyowa Hakko
exclusive worldwide rights to its telomerase inhibition technology, with
exception to certain antisense, gene therapy and vaccine technologies outside
Asia, for the treatment of cancer in humans. If and when a telomerase inhibitor
is selected for development and commercialization under the Agreements, the
Company will be significantly dependent upon the activities of Pharmacia &
Upjohn and Kyowa Hakko for the successful commercialization of such product. Any
failure of Pharmacia & Upjohn and Kyowa Hakko to develop or commercialize a
telomerase inhibitor (if and when selected) will have a material adverse effect
on the Company.
In December 1997, the Company entered into a License, Product and Marketing
Agreement with Boehringer Mannheim to develop and market research and clinical
diagnostic products to study and diagnose cancer on an exclusive, worldwide
basis. Under the collaboration Boehringer Mannheim will provide reimbursement
for research previously conducted and will be primarily responsible for all
clinical, regulatory, manufacturing, marketing and sales efforts and expenses.
In addition, the Company is entitled to receive future payments upon achievement
of certain contractual milestones relating to level of product sales, as well as
royalties on product sales. Further, the Company has an option to exercise
certain co-promotion rights in the United States. If and when a telomerase-based
diagnostic kit is developed and commercialized under the agreement with
Boehringer Mannheim, the Company will be significantly dependent upon the
activities of Boehringer Mannheim for the successful manufacturing and
commercialization of such product.
The Company has also entered into licensing arrangements with several
diagnostic companies for the Company's telomerase detection technology. However,
because these licenses are limited to the research-use-only market, such
arrangements are not expected to generate significant commercial revenues.
There can be no assurance that the Company will be able to negotiate
additional strategic arrangements in the future on acceptable terms, if at all,
or that such strategic arrangements will be successful. In the absence of such
arrangements, the Company may encounter significant delays in introducing any
product or find that the research, development, manufacture, marketing or sale
of any product is adversely affected. In the event that the Company does not
enter into such arrangements, it may be materially adversely affected.
The Company has relationships with collaborators and scientific advisors at
academic and other institutions, some of whom conduct research at the Company's
request. These collaborators and scientific advisors are not employees of the
Company and may have commitments to, or consulting or advisory contracts with,
other entities that may limit their availability to the Company. The Company has
limited control over the activities of these collaborators and advisors and,
except as otherwise required by its collaboration and consulting agreements, can
expect only limited amounts of their time to be dedicated to the Company's
activities.
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNCERTAINTY OF PATENT PROTECTION
Protection of the Company's proprietary compounds and technology is
important to the Company's business. The Company owns eight issued United States
patents and over 53 United States patent applications
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and has licensed 18 issued United States patents and over 49 United States
patent applications, as well as international filings under the Patent
Cooperation Treaty and pending foreign national patent applications
corresponding to certain of these United States applications. Geron's success
will depend in part on its ability to obtain and enforce its patents and
maintain trade secrets, both in the United States and in other countries. The
patent positions of pharmaceutical and biopharmaceutical companies, including
the Company, are highly uncertain and involve complex legal and technical
questions for which legal principles are not firmly established. There can be no
assurance that the Company will continue to develop products or processes that
are patentable or that patents will issue from any of the pending applications,
including even allowed patent applications. There can also be no assurance that
the Company's current patents, or patents that issue on pending applications,
will not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection or competitive advantages to the
Company. Because (i) patent applications in the United States are maintained in
secrecy until patents issue, (ii) patent applications are not generally
published until many months or years after they are filed and (iii) publication
of technological developments in the scientific and patent literature often
occurs long after the date of such developments, the Company cannot be certain
that the inventors on its or its licensors' patents and patent applications were
the first to invent the inventions disclosed in the patent applications or
patents or that it or its licensors were the first to file patent applications
for such inventions. Patent prosecution to issue patents and litigation to
establish the validity of patents, to defend against patent infringement claims
of others and to assert infringement claims against others can be expensive and
time consuming even if the outcome is favorable to the Company. If the outcome
of patent prosecution or litigation is unfavorable to the Company, the Company
could be materially adversely affected.
Patent law relating to the scope and enforceability of claims in the fields
in which the Company operates is still evolving. The degree of future protection
for the Company's proprietary rights, therefore, is highly uncertain. In this
regard, there can be no assurance that independent patents will issue from each
of the United States patent applications referenced above, which include many
interrelated applications directed to common or related subject matter. The
Company is aware of certain patent applications and patents that have been filed
by others with respect to telomerase and telomere length technology. In
addition, there are a number of issued patents and pending applications owned by
others directed to differential display, stem cell and other technologies
relating to the Company's research, development and commercialization efforts.
There can be no assurance that the Company's technology can be developed and
commercialized without a license to such patents or that such patent
applications will not be granted priority over patent applications filed by the
Company or its licensors. Furthermore, there can be no assurance that others
will not independently develop similar or alternative technologies to those of
the Company, duplicate any of the Company's technologies or design around the
patented technologies developed by the Company or its licensors, any of which
may have a material adverse effect on the Company.
The commercial success of the Company depends significantly on its ability
to operate without infringing patents and proprietary rights of others. There
can be no assurance that the Company's technologies do not and will not infringe
the patents or proprietary rights of others. In the event of such infringement,
the Company may be enjoined from pursuing research, development or
commercialization of its potential products or may be required to obtain
licenses to these patents or other proprietary rights or to develop or obtain
alternative technologies. There can be no assurance that the Company will be
able to obtain alternative technologies or any required license on commercially
favorable terms, if at all, and if any such license is or alternative
technologies are not obtained, the Company may be delayed or prevented from
pursuing the development of certain of its potential products. The Company's
breach of an existing license or failure to obtain or delay in obtaining
alternative technologies or a license to any technology that it may require to
develop or commercialize its products may have a material adverse effect on the
Company. Also, the Company may be subject to claims or litigation as a result of
entering into a license. In this regard, the Company signed a licensing and
sponsored research agreement relating to its Primordial Stem Cell program with
The Johns Hopkins University School of Medicine ("JHU") on August 1, 1997, after
having been informed by a third party that the Company and JHU would violate the
rights of that third party and another academic institution with which that
third party claimed to be affiliated by way of contract (collectively "Third
Party") in doing so. After a review of the correspondence with the Third Party
and JHU as well as
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related documents, including an issued U.S. patent, the Company believes that
the Third Party's claims, if asserted, would fall into three general categories:
patent infringement, misuse of confidential information and breach of contract.
The Company believes that it and JHU have substantial defenses to any claims
that might be asserted by such Third Party and has provided indemnification to
JHU relating to such potential claims. However, any litigation resulting from
this matter may divert significant resources, both financial and otherwise, from
the Company's research programs and there can be no assurance that the Company
would be successful in any such litigation. If the outcome of any such
litigation is unfavorable to the Company, the Company could be materially and
adversely affected.
Litigation may also be necessary to enforce any patents issued or licensed
to the Company or to determine the scope and validity of the Company's or
anthers' proprietary rights. The Company could incur substantial costs if
litigation is required to defend itself in patent suits or other intellectual
property litigation brought by others or if Geron initiates such suits. There
can be no assurance that the Company's issued or licensed patents would be held
valid or infringed in a court of competent jurisdiction or that a patent held by
another will be held invalid or not infringed in such court. An adverse outcome
in litigation or an interference to determine priority or other proceeding in a
court or patent office could subject the Company to significant liabilities to
other parties, require disputed rights to be licensed from other parties or
require the Company to cease using such technology, any of which could have a
material adverse effect on the Company.
Geron also relies on trade secrets to protect its proprietary technology,
especially in circumstances in which patent protection is not believed to be
appropriate or obtainable. Geron attempts to protect its proprietary technology
in part by confidentiality agreements with its employees, consultants and
certain contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors.
The Company is party to various license agreements which give it rights to
use certain technologies in its research, development and commercialization
activities. Disputes have arisen and may continue to arise as to the
inventorship and corresponding rights in know-how and inventions resulting from
the joint creation or use of intellectual property by the Company and its
licensors, research collaborators and consultants. There can be no assurance
that the Company will be able to continue to license such technologies on
commercially reasonable terms, if at all, or to maintain the exclusivity of its
exclusive licenses. The failure of the Company to maintain exclusive or other
rights to such technologies could have a material adverse effect on the Company.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will require substantial capital resources in order to conduct
its operations. The Company's future capital requirements will depend on many
factors, including, among others, continued scientific progress in its research
and development programs; the magnitude and scope of these activities; the
ability of the Company to maintain and establish strategic arrangements for
research, development, clinical testing, manufacturing and marketing; progress
with preclinical and clinical trials; the time and costs involved in obtaining
regulatory approvals; the costs involved in preparing, filing, prosecuting,
maintaining, defending and enforcing patent claims; or the potential for new
technologies and products. The Company intends to seek such additional funding
through strategic collaborations, public or private equity financings and
capital lease transactions; however, there can be no assurance that additional
financing will be available on acceptable terms, if at all. Additional equity
financings could result in significant dilution to stockholders. Further, in the
event that additional funds are obtained through arrangements with collaborative
partners, such arrangements may require the Company to relinquish rights to
certain of its technologies, product candidates or products that the Company
would otherwise seek to develop or commercialize itself. If sufficient capital
is not available, the Company may be required to delay, reduce the scope of or
eliminate one or more of its research or development programs, each of which
could have a material adverse effect on the Company. Based on current
projections, the Company estimates that its existing capital resources including
the proceeds from the private placement completed in March 1998 and payments
under the Pharmacia & Upjohn and Kyowa Hakko Agreements, interest income, grant
funding and equipment financing will be sufficient to fund its current and
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planned operations through 1999. There can be no assurance that the assumptions
underlying such estimates are correct or that such funds will be sufficient to
meet the capital needs of the Company during such period.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT
Geron has incurred net operating losses in every year of operation since
its inception in 1990. Losses have resulted principally from costs incurred in
connection with the Company's research and development activities and from
general and administrative costs associated with the Company's operations. The
Company expects to incur additional operating losses over the next several years
as the Company's research and development efforts and preclinical testing are
expanded. Substantially all of the Company's revenues to date have been research
support payments under the collaborative agreements with Kyowa Hakko and
Pharmacia & Upjohn. Research support payments under the Kyowa Hakko Agreement
expire in April 1998. Research payments under the Pharmacia & Upjohn Agreement
expire in January 2000. The Company is unable to estimate at this time the level
of revenue to be received from the sale of diagnostic products, but does not
expect to receive significant revenues from the sale of research-use-only kits.
The Company's ability to achieve profitability is dependent on its ability,
alone or with others, to select therapeutic compounds for development, obtain
the required regulatory approvals and manufacture and market resulting products.
There can be no assurance when or if the Company will receive material revenues
from product sales or achieve profitability. Failure to generate significant
additional revenues and achieve profitability could impair the Company's ability
to sustain operations.
SUBSTANTIAL COMPETITION; RISK OF TECHNOLOGICAL OBSOLESCENCE
The pharmaceutical and biopharmaceutical industries are intensely
competitive. The Company believes that certain pharmaceutical and
biopharmaceutical companies as well as certain research organizations currently
engage in or have in the past engaged in efforts related to the biological
mechanisms of cell aging and cell immortality, including the study of telomeres,
telomerase and stem cell technologies. In addition, other products and therapies
that could compete directly with the products that the Company is seeking to
develop and market currently exist or are being developed by pharmaceutical and
biopharmaceutical companies, and by academic and other research organizations.
Many companies are also developing alternative therapies to treat cancer and, in
this regard, are competitive with the Company. The pharmaceutical companies
developing and marketing such competing products have significantly greater
financial resources and expertise in research and development, manufacturing,
preclinical and clinical testing, obtaining regulatory approvals and marketing
than the Company. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large and
established companies. Academic institutions, government agencies and other
public and private research organizations may also conduct research, seek patent
protection and establish collaborative arrangements for research, clinical
development and marketing of products similar to those of the Company. These
companies and institutions compete with the Company in recruiting and retaining
qualified scientific and management personnel as well as in acquiring
technologies complementary to the Company's programs. There is also competition
for access to libraries of compounds to use for screening. Any inability of the
Company to secure and maintain access to sufficiently broad libraries of
compounds for screening potential targets would have a material adverse effect
on the Company. In addition to the above factors, Geron will face competition
with respect to product efficacy and safety, the timing and scope of regulatory
consents, availability of resources, reimbursement coverage, price and patent
position, including potentially dominant patent positions of others. There can
be no assurance that competitors will not develop more effective or more
affordable products, or achieve earlier patent protection or product
commercialization than the Company or that such products will not render the
Company's products obsolete.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the principal members of its scientific
and management staff, the loss of whose services might significantly delay or
prevent the achievement of research, development or business objectives. In
addition, the Company relies on consultants and advisors, including the members
of its Scientific Advisory Board, to assist the Company in formulating its
research and development strategy.
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Retaining and attracting qualified scientific and management personnel,
consultants and advisors is critical to the Company's success. The Company faces
competition for qualified individuals from numerous pharmaceutical,
biopharmaceutical and biotechnology companies, as well as academic and other
research institutions. There can be no assurance that the Company will be able
to attract and retain such individuals on acceptable terms and the failure to do
so would have a material adverse effect on the Company.
ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF PRIMORIDAL STEM CELL THERAPIES
The Company's Primordial Stem Cell program may involve the use of PS cells
that would be derived from human embryonic tissue, and therefore may raise
certain ethical, legal and social issues regarding the appropriate utilization
of this tissue. The use of embryonic tissue in scientific research is an issue
of national interest. Many research institutions, including certain of the
Company's scientific collaborators, have adopted policies regarding the ethical
use of these types of human tissue. These policies may have the effect of
limiting the scope of research conducted in this area, resulting in reduced
scientific progress. The Company has established an Ethics Advisory Board
comprised of independent and recognized medical ethicists to provide advice to
the Company. In addition, the United States government and its agencies
currently do not fund research which involves the use of such tissue and may in
the future regulate or otherwise restrict its use. The inability of the Company
to conduct research on these cells due to such factors as government regulation
or otherwise could have a material adverse effect on the program. In the event
the Company's research related to PS cell therapies becomes the subject of
adverse commentary or publicity, the Company's name and goodwill could be
adversely affected.
GOVERNMENT REGULATION
The preclinical testing and clinical trials of any products developed by
the Company or its collaborative partners and the manufacturing, labeling, sale,
distribution, marketing, advertising and promotion of any new products resulting
therefrom are subject to regulation by federal, state and local governmental
authorities in the United States, the principal one of which is the FDA, and by
similar agencies in other countries in which products developed by the Company
or its collaborative partners may be tested and marketed (each of such federal,
state, local and other authorities and agencies is referred to herein as a
"Regulatory Agency"). Any product developed by the Company or its collaborative
partners must receive all relevant Regulatory Agency approvals or clearances, if
any, before it may be marketed in a particular country. The regulatory process,
which includes extensive preclinical testing and clinical trials of each product
in order to establish its safety and efficacy, is uncertain, can take many years
and requires the expenditure of substantial resources. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
which could delay, limit or prevent Regulatory Agency approval or clearance. In
addition, delays or rejections may be encountered based upon changes in
Regulatory Agency policy during the period of product development and/ or the
period of review of any application for Regulatory Agency approval or clearance
for a product. Delays in obtaining Regulatory Agency approvals or clearances
could adversely affect the marketing of any products developed by the Company or
its collaborative partners, impose costly procedures upon the Company's and its
collaborative partners' activities, diminish any competitive advantages that the
Company or its collaborative partners may attain and adversely affect the
Company's ability to receive royalties and generate revenues and profits. There
can be no assurance that, even after such time and expenditures, any required
Regulatory Agency approvals or clearances will be obtained for any products
developed by or in collaboration with the Company. Moreover, if Regulatory
Agency approval or clearance for a new product is obtained, such approval or
clearance may entail limitations on the indicated uses for which it may be
marketed that could limit the potential market for any such product.
Furthermore, approved products and their manufacturers are subject to continual
review, and discovery of previously unknown problems with a product or its
manufacturer may result in restrictions on such product or manufacturer,
including withdrawal of the product from the market. In general, failure to
comply with FDA requirements can result in severe civil and criminal penalties,
including but not limited to recall or seizure of product, injunction against
manufacture, distribution, sales and marketing and criminal prosecution.
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NO ASSURANCE OF MARKET ACCEPTANCE; UNCERTAINTY OF PHARMACEUTICAL PRICING; IMPACT
OF HEALTH CARE REFORM MEASURES
There can be no assurance that any products successfully developed by the
Company or its collaborative partners, if approved for marketing, will achieve
market acceptance. The products which the Company is attempting to develop will
compete with a number of traditional drugs and therapies manufactured and
marketed by major pharmaceutical companies, as well as new products currently
under development by such companies and others. The degree of market acceptance
of any products developed by the Company will depend on a number of factors,
including the establishment and demonstration in the medical community of the
clinical efficacy and safety of the Company's product candidates, their
potential advantage over alternative treatment methods and reimbursement
policies of government and third-party payors. There is no assurance that
physicians, patients or the medical community in general will accept and utilize
any products that may be developed by the Company or its collaborative partners.
In both domestic and foreign markets, sales of the Company's products, if
any, will depend in part on the availability of reimbursement from third-party
payors such as government health administration authorities, private health
insurers, health maintenance organizations, pharmacy benefit management
companies and other organizations. Both federal and state governments in the
United States and foreign governments continue to propose and pass legislation
designed to contain or reduce the cost of health care through various means.
Legislation and regulations affecting the pricing of pharmaceuticals and other
medical products may change or be adopted before any of the Company's potential
products are approved for marketing. Cost control initiatives could decrease the
price that the Company receives for any product it may develop in the future and
have a material adverse effect on the Company. In addition, third-party payors
are increasingly challenging the price and cost-effectiveness of medical
products and services. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, including pharmaceuticals. There
can be no assurance that the Company's potential products will be considered
cost effective or that adequate third-party reimbursement will be available to
enable Geron to maintain price levels sufficient to realize an appropriate
return on its investment in product development. In any such event, the Company
may be materially adversely affected.
REGULATIONS RELATING TO THE ENVIRONMENT AND HAZARDOUS MATERIALS
The Company's research and development activities involve the controlled
use of hazardous materials, chemicals and various radioactive compounds. As a
consequence, the Company is subject to numerous environmental and safety laws
and regulations. There can be no assurance that the Company will not be required
to incur significant costs to comply with current or future environmental laws
and regulations or that the Company will not be adversely affected by the cost
of compliance with such laws and regulations. Although the Company believes that
its safety procedures for using, handling, storing and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
eliminated. In the event of such an accident, the Company's use of these
materials could be curtailed by state or federal authorities, the Company could
be held liable for any damages that result and any such liability could have a
material adverse effect on the Company.
POTENTIAL PRODUCT LIABILITY CLAIMS; ABSENCE OF INSURANCE
Although the Company believes it does not currently have any exposure to
product liability claims, the Company's future business will expose it to
potential product liability risks that are inherent in the testing,
manufacturing and marketing of human therapeutic and diagnostic products. The
Company currently has no clinical trial liability insurance and there can be no
assurance that it will be able to obtain and maintain such insurance for any of
its clinical trials. In addition, there can be no assurance that the Company
will be able to obtain or maintain product liability insurance in the future on
acceptable terms or with adequate coverage against potential liabilities.
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CONTROL BY MANAGEMENT AND CURRENT STOCKHOLDERS
Executive officers and directors of the Company, together with entities
affiliated with them, own or control approximately 10% of the outstanding shares
of Common Stock and may be able to influence significantly the election of the
Company's Board of Directors and other corporate actions requiring stockholder
approval, as well as significantly influence the direction and policies of the
Company.
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE
DILUTION FROM CONVERSION OF PREFERRED STOCK
Sales of substantial amounts of the Common Stock in the public market could
adversely affect the market price of the Common Stock. The Company had
outstanding approximately 11,142,670 shares of Common Stock and 15,000 shares of
Series A Convertible Preferred Stock as of March 30, 1998. Pharmacia & Upjohn
S.p.A. has agreed not to sell the 696,787 shares (including the 255,102 shares
purchased in March 1998) held by it until April 2000, after which time such
shares will be freely transferable in accordance with Regulation S promulgated
under the Securities Act of 1933, as amended ("the Securities Act"). The Series
A Convertible Preferred Stock (the "Preferred Stock") is convertible into the
number of shares of Common Stock equal to the stated value plus a premium of 6%
per annum divided by the market price of the Common Stock during a pricing
period preceding conversion. Therefore, the number of shares of Common Stock
issuable upon conversion of the Preferred Stock is not fixed and may result in
substantial dilution to current stockholders. The Company has agreed to register
the Common Stock issuable upon conversion of the Preferred Stock under the
Securities Act. The sales of the underlying shares of Common Stock could
adversely affect the market price of the Common Stock. In the event the Company
is not able to register the underlying Common Stock or the holders of the
Preferred Stock are otherwise unable to sell the underlying Common Stock, the
Company could be subject to various penalties, including the right of the
holders of the Preferred Stock to cause redemption of the Preferred Stock at a
premium. In addition, certain other holders of Common Stock and securities
convertible into or exercisable for shares of Common Stock have certain
registration rights under a registration rights agreement among such holders and
the Company.
POSSIBLE VOLATILITY OF STOCK PRICE
There has been a history of significant volatility in the market price for
shares of biopharmaceutical companies, and it is likely that the market price of
the Common Stock will be similarly volatile. Prices for the Common Stock may be
influenced by many factors, including the depth of the market for the Common
Stock, investor perception of the Company, fluctuations in the Company's
operating results and market conditions relating to the biopharmaceutical and
pharmaceutical industries. In addition, the market price of the Common Stock may
be influenced by announcements of technological innovations, new commercial
products or clinical progress or the lack thereof by the Company, its
collaborative partners or its competitors. In addition, announcements concerning
regulatory developments, developments with respect to proprietary rights and the
Company's collaborations as well as other factors could also have a significant
impact on the Company's business and the market price of the Common Stock.
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS; CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to 3,000,000
shares of undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without further vote or action by the
Company's stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. In addition,
certain provisions of the Company's charter documents, including the inability
of stockholders to take actions by written consent and the staggered election of
the Company's Board of Directors, and certain provisions of Delaware law could
delay or make difficult a merger, tender offer or proxy contest involving the
Company.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date
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using "00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send checks, or
engage in similar normal business activities.
The Company has started an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost is estimated at approximately $200,000 which includes $100,000 of
new software that will be capitalized and $100,000 that will be expensed as
incurred. As of December 31, 1997, the Company has not incurred any expenses for
the Year 2000 project.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Geron Corporation
We have audited the accompanying balance sheets of Geron Corporation at
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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 generally accepted auditing
standards. 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 financial position of Geron Corporation at
December 31, 1997 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 13, 1998
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GERON CORPORATION
BALANCE SHEETS
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
----------------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,122 $ 12,357
Short-term investments.................................... 17,475 11,912
Interest and other receivables............................ 866 343
Other current assets...................................... 1,016 409
-------- --------
Total current assets.............................. 23,479 25,021
Property and equipment, net................................. 2,404 2,968
Deposits and other assets................................... 173 799
-------- --------
$ 26,056 $ 28,788
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 723 $ 794
Accrued compensation...................................... 431 790
Accrued liabilities....................................... 605 790
Deferred revenue.......................................... 975 --
Current portion of capital lease obligations and equipment
loans.................................................. 1,006 1,179
-------- --------
Total current liabilities......................... 3,740 3,553
Noncurrent portion of capital lease obligations and
equipment loans........................................... 1,250 1,644
Commitments
Stockholders' equity:
Common stock, $0.001 par value; 25,000,000 shares
authorized; 10,795,913 shares and 10,040,415 shares
issued and outstanding in 1997 and 1996,
respectively........................................... 11 10
Additional paid-in-capital................................ 67,879 61,174
Notes receivable from stockholders........................ -- (119)
Deferred compensation..................................... (714) (1,003)
Accumulated deficit....................................... (46,110) (36,471)
-------- --------
Total stockholders' equity........................ 21,066 23,591
-------- --------
$ 26,056 $ 28,788
======== ========
See accompanying notes.
36
37
GERON CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE AMOUNTS)
Revenues from collaborative agreements................... $ 7,175 $ 5,235 $ 5,490
License fees and royalties............................... 78 58 --
---------- --------- ---------
Total revenues................................. 7,253 5,293 5,490
Operating expenses:
Research and development............................... 15,139 14,260 11,321
General and administrative............................. 3,120 3,161 2,888
---------- --------- ---------
Total operating expenses....................... 18,259 17,421 14,209
---------- --------- ---------
Loss from operations..................................... (11,006) (12,128) (8,719)
Interest and other income................................ 1,757 1,826 919
Interest and other expense............................... (392) (385) (399)
---------- --------- ---------
Net loss................................................. $ (9,641) $ (10,687) $ (8,199)
========== ========= =========
Basic and diluted net loss per share (pro forma in 1996
and 1995).............................................. $ (0.91) $ (1.26) $ (1.34)
Shares used in computing basic and diluted net loss per
share.................................................. 10,551,054 8,497,229 6,123,429
========== ========= =========
See accompanying notes.
37
38
GERON CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
NOTES
RECEIVABLE TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL FROM DEFERRED ACCUMU- STOCK-
------------------- ------------------- PAID-IN STOCK- COMPENSA- LATED HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL HOLDERS TION DEFICIT EQUITY
---------- ------ ---------- ------ ---------- ---------- --------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balances at December 31,
1994.................... 5,212,411 5 642,162 1 31,325 (38) -- (17,604) 13,689
Issuance of preferred
stock, net of issuance
costs of $28.......... 858,979 1 -- -- 8,732 -- -- -- 8,733
Issuance of common stock
to certain research
institutions.......... -- -- 32,352 -- 26 -- -- -- 26
Issuance of common stock
upon exercise of
options, net.......... -- -- 254,575 -- 122 (93) -- -- 29
Net change in unrealized
gain (loss) on
available-for-sale
securities............ -- -- -- -- -- -- -- 30 30
Net loss................ -- -- -- -- -- -- -- (8,199) (8,199)
---------- --- ---------- --- ------- ----- ------- -------- --------
Balances at December 31,
1995.................... 6,071,390 6 929,089 1 40,205 (131) -- (25,773) 14,308
Issuance of preferred
stock, net of issuance
costs of $13.......... 294,844 -- -- -- 2,988 -- -- -- 2,988
Issuance of common stock
upon exercise of
options, net.......... -- -- 208,606 -- 190 12 -- -- 202
Issuance of common stock
upon exercise of
warrants.............. -- -- 12,055 -- 51 -- -- -- 51
Issuance of preferred
and common stock, net
of issuance costs of
$2,050, in connection
with the Company's
Initial Public
Offering ("IPO")...... 211,931 1 2,312,500 2 16,448 -- -- -- 16,451
Conversion of preferred
stock to common stock
in connection with the
Company's IPO......... (6,578,165) (7) 6,578,165 7 -- -- -- -- --
Deferred compensation
related to certain
options and stock
purchase rights
granted to employees
and consultants....... -- -- -- -- 1,292 -- (1,292) -- --
Amortization of deferred
compensation related
to certain options and
stock purchase rights
granted to employees
and consultants....... -- -- -- -- -- -- 289 -- 289
Net change in unrealized
gain (loss) on
available-for-sale
securities............ -- -- -- -- -- -- -- (11) (11)
Net loss................ -- -- -- -- -- -- -- (10,687) (10,687)
---------- --- ---------- --- ------- ----- ------- -------- --------
Balances at December 31,
1996.................... -- -- 10,040,415 10 61,174 (119) (1,003) (36,471) 23,591
Issuance of common stock
in connection with
corporate
collaboration, net of
issuance costs of
$9.................... -- -- 441,685 1 5,991 -- -- -- 5,992
Issuance of common stock
in exchange for
services.............. -- -- 6,925 -- 59 -- -- -- 59
Issuance of common stock
to certain research
institutions.......... -- -- 8,940 -- 87 -- -- -- 87
Issuance of common stock
upon exercise of
options, net.......... -- -- 265,361 -- 359 119 -- -- 478
Issuance of common stock
under stock purchase
plan.................. -- -- 32,587 -- 209 -- -- -- 209
Amortization of deferred
compensation related
to certain options and
stock purchase rights
granted to employees
and consultants....... -- -- -- -- -- -- 289 -- 289
Net change in unrealized
gain (loss) on
available-for-sale
securities............ -- -- -- -- -- -- -- 2 2
Net loss................ -- -- -- -- -- -- -- (9,641) (9,641)
---------- --- ---------- --- ------- ----- ------- -------- --------
Balances at December 31,
1997.................... -- $-- 10,795,913 $11 $67,879 $ -- $ (714) $(46,110) $ 21,066
========== === ========== === ======= ===== ======= ======== ========
See accompanying notes.
38
39
GERON CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (9,641) $(10,687) $(8,199)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,277 947 780
Issuance of common and preferred stock in exchange for
in-process technology, services rendered and research
agreements............................................. 154 22 82
Deferred compensation amortization..................... 289 289 --
Changes in assets and liabilities:
Interest and other receivables......................... (523) (226) (44)
Other current assets................................... (607) (177) (74)
Deposits and other assets.............................. 626 302 (557)
Accounts payable....................................... (71) 294 46
Accrued compensation................................... (359) 127 332
Accrued liabilities.................................... 24 495 (19)
Deferred revenue....................................... 975 (1,335) 1,335
-------- -------- -------
Net cash used in operating activities....................... (7,856) (9,949) (6,318)
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................ (713) (1,121) (482)
Purchases of securities available-for-sale.................. (27,015) (24,497) (7,579)
Proceeds from sales of securities available-for-sale........ -- -- 500
Proceeds from maturities of securities available-for-sale... 21,454 15,585 11,490
-------- -------- -------
Net cash (used in) provided by investing activities......... (6,274) (10,033) 3,929
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from equipment loans............................... 671 1,171 471
Payments of obligations under capital leases and equipment
loans..................................................... (1,238) (1,044) (769)
Proceeds from issuance of preferred stock................... -- 2,966 8,681
Proceeds from issuance of common stock...................... 6,462 16,704 25
-------- -------- -------
Net cash provided by financing activities................... 5,895 19,797 8,408
-------- -------- -------
Net (decrease) increase in cash and cash equivalents........ (8,235) (185) 6,019
Cash and cash equivalents at beginning of period............ 12,357 12,542 6,523
-------- -------- -------
Cash and cash equivalents at end of period.................. $ 4,122 $ 12,357 $12,542
======== ======== =======
See accompanying notes.
39
40
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Geron Corporation ("Geron" or the "Company") was incorporated in the State
of Delaware on November 29, 1990. Geron is a biopharmaceutical company focused
on discovering and developing therapeutic and diagnostic products based upon
common biological mechanisms underlying cancer and other age-related diseases.
Principal activities to date have included obtaining financing, recruiting
management and technical personnel, securing operating facilities and conducting
research and development. The Company has no therapeutic products currently
available for sale and does not expect to have any therapeutic products
commercially available for sale for a period of years, if at all. These factors
indicate that the Company's ability to continue its research and development
activities is dependent upon the ability of management to obtain additional
financing as required.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share," ("SFAS 128"),
which requires the Company to simplify the calculation of earnings per share and
achieve comparability with the recently issued International Accounting Standard
No. 33, "Earnings Per Share." SFAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods presented
have been restated, where appropriate, to conform to SFAS 128.
Basic and diluted net loss per share for 1996 and 1995 have also been
retroactively restated to apply the requirements of Staff Accounting Bulletin
No. 98, issued by the SEC in February 1998 ("SAB 98"). Under SAB 98, certain
shares of common stock and options and warrants to purchase shares of common
stock issued at prices substantially below the per share price of shares sold in
the Company's initial public offering previously included in the computation of
shares outstanding pursuant to Staff Accounting Bulletin Nos. 55, 62 and 83 are
now excluded from the computation as their effect is antidilutive under SFAS
128.
Pro forma basic and diluted net loss per share for 1996 and 1995 have been
computed as described above and also give effect to the conversion of
convertible Preferred Stock which automatically converted to common shares upon
closing of the Company' s initial public offering.
40
41
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of shares used in calculation of basic and diluted and pro
forma basic and diluted net loss per share follows:
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ---------- ----------
Net loss.......................................... $ (9,641) $ (10,687) $ (8,199)
=========== ========== ==========
Basic and Diluted
Weighted average shares of Common Stock
outstanding used in computing basic and diluted
net loss per share.............................. 10,551,054 4,789,388 839,490
=========== ========== ==========
Basic and diluted net loss per share.............. $ (0.91) $ (2.23) $ (9.77)
=========== ========== ==========
Pro Forma Basic and Diluted
Shares used in computing basic and diluted net
loss per share.................................. 4,789,388 839,490
Adjusted to reflect the effect of the assumed
conversion of Preferred Stock from the date of
issuance........................................ 3,707,841 5,283,939
---------- ----------
Shares used in computing pro forma basic and
diluted net loss per share................... 8,497,229 6,123,429
========== ==========
Pro forma basic and diluted net loss per share.... $ (1.26) $ (1.34)
========== ==========
Had the Company been in a net income position, diluted earnings per share
would have included the shares used in the computation of pro forma basic net
loss per share as well as an additional 936,782 and 823,214 shares related to
outstanding options and warrants not included above (as determined using the
treasury stock method at the estimated average market value) for 1997 and 1996,
respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue as the related research and development
costs are incurred. Milestone fees are recognized upon completion of specified
milestones according to contract terms. Deferred revenue represents the portion
of research payments received which have not been earned. Nonrefundable signing
or licensing fees that are not dependent on future performance under
collaborative agreements are recognized as revenue when received. Royalties are
generally recognized upon receipt.
Depreciation and Amortization
The Company records property and equipment at cost and calculates
depreciation using the straight-line method over the estimated useful lives of
the assets, generally four years. Furniture and equipment leased under capital
leases is amortized over the useful lives of the assets. Leasehold improvements
are amortized over the remaining term of the lease.
Other Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards 130 ("SFAS 130"), "Reporting
Comprehensive Income," and Statement of Financial Accounting Standards 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which require additional disclosures to be adopted beginning in
the first quarter of 1998 and on December 31,
41
42
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1998, respectively. Under SFAS 130, the Company is required to display
comprehensive income and its components as part of the Company's full set of
financial statements. SFAS 131 requires that the Company report financial and
descriptive information about its reportable operating segments. The Company is
evaluating the impact, if any, of SFAS 130 and SFAS 131 on its future financial
statement disclosures.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to current year presentation.
2. FINANCIAL INSTRUMENTS
Cash Equivalents and Securities Available-for-Sale
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
places its cash and cash equivalents in commercial paper, master notes, and
repurchase agreements with U.S. financial institutions. The Company's
investments include corporate notes and U.S. Government securities with
maturities ranging from 3 to 14 months.
The Company classifies its marketable equity and debt securities as
available-for-sale. Available-for-sale securities are recorded at fair value
with unrealized gains and losses reported in the accumulated deficit. Fair
values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. Realized gains and losses are
included in interest and other income and are derived using the specific
identification method for determining the cost of securities sold and have been
immaterial to date. Declines in market value judged other-than-temporary result
in a charge to interest income. Dividend and interest income are recognized when
earned.
The following is a summary of available-for-sale securities at December 31,
1997 and 1996:
ESTIMATED FAIR VALUE
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
Cash and cash equivalents:
Money market fund...................................... $ 2,499 $ 5,453
Commercial paper....................................... 998 2,979
Corporate master notes and repurchase agreements....... -- 2,194
------- -------
$ 3,497 $10,626
======= =======
Short-term investments:
Municipal note......................................... $ 2,000 $ --
Corporate CD........................................... 1,000 --
Corporate notes........................................ 14,475 11,912
------- -------
$17,475 $11,912
======= =======
As of December 31, 1997 and 1996, the difference between the fair value and
the amortized cost of available-for-sale securities was immaterial. As of
December 31, 1997 and 1996, the average portfolio duration was approximately
three months and the contractual maturity of any single investment did not
exceed 14 months.
42
43
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Other Assets
The Company presently holds notes receivable of $365,000 ($624,000 in 1996)
from officers of the Company. These notes, which in general bear no interest,
are collateralized by certain personal assets of the officers and are due at
December 31, 1998.
Other Fair Value Disclosures
At December 31, 1997, the fair value of the notes receivable from officers
is $311,000. The fair value was estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms of
borrowers of similar credit quality.
The fair value of the equipment loans approximates the carrying value of
$1,675,000. The fair value was estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
Furniture and equipment.................................. $ 1,537 $ 1,249
Lab equipment............................................ 2,963 2,763
Leasehold improvements................................... 1,621 1,424
------- -------
6,121 5,436
Less accumulated depreciation and amortization........... (3,717) (2,468)
------- -------
$ 2,404 $ 2,968
======= =======
Property and equipment at December 31, 1997 and 1996 includes assets under
capitalized leases of approximately $3,465,000 and $2,767,000, respectively.
Accumulated amortization related to leased assets was approximately $1,725,000
and $1,146,000 at December 31, 1997 and 1996, respectively.
4. CAPITAL LEASE OBLIGATIONS AND EQUIPMENT LOANS
The Company has lease and equipment loan credit lines available of
$1,000,000 of which approximately $592,000 was unused and available at December
31, 1997. The drawdown period under the lease and equipment loan credit lines
expires on July 31, 1998. The obligations under the equipment loans are secured
by the equipment financed, bear interest at fixed rates of approximately 13% and
are due in monthly installments through March 2002. Under the terms of the
master lease agreement, ownership of the leased equipment will transfer to the
Company at the end of the lease term.
43
44
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under capital leases and principal payments
on equipment loans are as follows:
CAPITAL EQUIPMENT
LEASES LOANS
------- ---------
(IN THOUSANDS)
Years ending December 31:
1998................................................... $ 492 $ 563
1999................................................... 138 547
2000................................................... 7 467
2001................................................... -- 98
----- ------
Total minimum lease and principal payments,
respectively........................................... 637 $1,675
======
Amount representing interest............................. (56)
-----
Present value of future lease payments................... 581
Current portion of capital lease obligations............. (443)
-----
Noncurrent portion of capital lease obligations.......... $ 138
=====
5. OPERATING LEASE COMMITMENTS
On March 25, 1996, the Company leased two facilities under two five-year
noncancelable operating leases. Future minimum payments under noncancelable
operating leases are approximately $616,000 in 1998, $641,000 in 1999, $666,000
in 2000, $693,000 in 2001 and $58,000 in 2002. The Company has the option to
extend the term of both leases for two additional periods of two and one half
years each. Rent expense under operating leases was approximately $581,000 and
$298,000 for the years ended December 31, 1997 and 1996, respectively.
In December 1996, the Company entered into a sublease agreement with a
non-affiliated company for approximately 12,350 square feet of office space
under which the Company will receive a monthly rental fee of $18,525. The
sublease for such office space expires in March 1998, with an option to extend
for 90 days.
6. STOCKHOLDERS' EQUITY
Capital Stock
On July 30, 1996, the Company completed an initial public offering of
2,000,000 shares of Common Stock at $8.00 per share. In addition to and in
conjunction with the offering, Kyowa Hakko Kogyo Co., Ltd. purchased 312,500
shares of Common Stock at $8.00 per share. The total net proceeds from the
initial public offering and the Kyowa Hakko stock purchase were approximately
$16.7 million. Concurrent with the closing of the offering, all outstanding
shares of Preferred Stock converted to Common Stock at various ratios.
Additional shares of Preferred Stock were issued upon conversion to Common Stock
in accordance with certain anti-dilution provisions.
In July 1996, the Company effected a 1-for-3.4 reverse stock split. All
share and per share amounts have been adjusted to reflect this stock split
retroactively. In connection with this stock split, the Company also effected a
change in the authorized number of shares of Preferred Stock.
Warrants
In August 1997, in conjunction with a license agreement, the Company issued
a warrant to purchase 25,000 shares of Common Stock at $6.75 per share. The
warrant is exercisable through August 2007.
44
45
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In June 1994, in conjunction with the Series C Preferred Stock financing,
the Company issued warrants to purchase 3,253 shares of Common Stock at $9.28
per share. The warrants are exercisable through June 1999.
In February 1994, in conjunction with a research agreement, the Company
issued a warrant to purchase 47,058 shares of Common Stock at $7.65 per share.
The warrant is exercisable through February 2004.
1992 Stock Option Plan
The Company administers the 1992 Stock Option Plan ("the Plan"). The
options granted under this Plan may be either incentive stock options or
nonstatutory stock options. As of December 31, 1997, the Company had reserved
3,555,219 shares of Common Stock for issuance under the Plan. Options granted
under this Plan expire no later than ten years from the date of grant. For
incentive stock options and nonstatutory stock options, the option price shall
be at least 100% and 85%, respectively, of the fair market value on the date of
grant. If, at the time the Company grants an option, and the optionee directly
or by attribution owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company, the option price shall be
at least 110% of the fair market value and shall not be exercisable more than
five years after the date of grant.
Options to purchase shares of Common Stock generally vest over a period of
four or five years from the date of the option grant, with a portion vesting
after six months and the remainder vesting ratably over the remaining period.
Options granted under the plan prior to July 1996 (the date of the Company's
initial public offering) are generally immediately exercisable; however, any
unvested shares issued are subject to repurchase rights whereby the Company has
the option to repurchase any unvested shares upon termination of employment at
the original exercise price. In 1997 and 1996, the Company repurchased 18,737
and 3,970 shares, respectively, in accordance with these repurchase rights. As
of December 31, 1997, 24,810 shares remained subject to repurchase.
Directors' Option Plan
In July 1996, the Company adopted the 1996 Directors' Stock Option Plan and
reserved an aggregate of 250,000 shares of Common Stock for issuance thereunder.
As of December 31, 1997, 50,000 shares have been issued under the Directors'
Option Plan.
45
46
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Aggregate option activity for the 1992 Stock Option Plan and Directors'
Stock Option Plan is as follows:
OUTSTANDING OPTIONS
SHARES ---------------------------------------------
AVAILABLE NUMBER OF PRICE PER WEIGHTED AVERAGE
FOR GRANT SHARES SHARE EXERCISE PRICE
---------- --------- ------------ ----------------
Balance at December 31, 1994......... 718,755 862,597 $0.34-$ 0.82 $ 0.66
Options granted.................... (492,908) 492,908 $ 0.82 $ 0.82
Options exercised.................. -- (252,370) $0.34-$ 0.82 $ 0.48
Options canceled................... 35,486 (35,486) $0.34-$ 0.82 $ 0.71
---------- ---------
Balance at December 31, 1995......... 261,333 1,067,649 $0.34-$ 0.82 $ 0.77
Additional shares authorized....... 1,073,529 -- $ -- $ --
Options granted.................... (841,068) 841,068 $1.02-$ 8.75 $ 4.09
Options exercised.................. -- (212,579) $0.34-$ 8.00 $ 0.90
Options canceled................... 137,237 (137,237) $0.34-$ 8.00 $ 1.79
---------- ---------
Balance at December 31, 1996......... 631,031 1,558,901 $0.34-$ 8.75 $ 2.45
Additional shares authorized....... 1,000,808 -- $ -- $ --
Options granted.................... (1,491,830) 1,491,830 $6.75-$17.00 $11.07
Options exercised.................. -- (292,904) $0.34-$12.75 $ 1.54
Options canceled................... 332,036 (332,036) $0.34-$12.75 $ 8.70
---------- ---------
Balance at December 31, 1997......... 472,045 2,425,791 $0.34-$17.00 $ 6.98
========== =========
OPTIONS OUTSTANDING/EXERCISABLE
------------------------------------------------
WEIGHTED
AVERAGE
WEIGHTED REMAINING
EXERCISE PRICE AVERAGE CONTRACTUAL LIFE
RANGE NUMBER EXERCISE PRICE (IN YEARS)
-------------- --------- -------------- -----------------
$0.34-$ 1.02...................................... 522,459 $ 0.80 6.92
$2.04-$ 8.00...................................... 587,837 $ 3.93 8.43
$8.63-$ 9.13...................................... 635,673 $ 8.96 9.78
$9.19-$17.00...................................... 679,822 $12.50 9.35
---------
$0.34-$17.00...................................... 2,425,791 $ 6.98 8.72
=========
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and the related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board Statement No. 123 ("SFAS 123"), "Accounting
for Stock Based Compensation," requires use of option pricing valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
the Company generally recognizes no compensation expense with respect to such
awards.
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 its
employee stock options under the fair value method prescribed by the Statement.
The fair value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates ranging from 5.79% to 6.85%, 5.68% to
6.70% and 5.34% to 7.90% for 1997, 1996 and 1995 respectively; a dividend yield
of 0.0% for 1997, 1996 and 1995; a volatility factor of the expected market
price of the Company's Common Stock of 1.1 for 1997, 0.7 for 1996 and 0.0 for
1995; and a weighted average expected life of the options of 5 years for 1997,
1996 and 1995.
46
47
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has recorded deferred compensation of approximately $1,300,000
for the difference between the grant price and the deemed fair value of certain
of the Company's Common Stock options granted in 1996. This amount is being
amortized over the vesting period of the individual options, generally a
60-month period. Deferred compensation expense recognized in 1997 and 1996
totaled $289,000. The weighted average fair value of options granted during 1997
and 1996 with an exercise price below the deemed fair value of the Company's
Common Stock on the date of grant was $8.00 and $3.69, respectively. The
weighted average fair value of options granted during 1997 and 1996 with an
exercise price equal to the deemed fair value of the Company's Common Stock on
the date of grant was $9.77 and $8.72, respectively. The weighted average fair
value of options granted during 1997 and 1996 with an exercise price greater
than the deemed fair value of the Company's Common Stock on the date of grant
was $12.75 and none, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options using the
straight-line method. The Company's pro forma information follows:
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net loss as reported........................ $ (9,641) $(10,687) $(8,199)
Pro forma net loss.......................... $(11,325) $(11,142) $(8,214)
Basic and diluted net loss per share as
reported.................................. $ (0.91) $ (1.26) $ (1.34)
Basic and diluted pro forma net loss per
share..................................... $ (1.07) $ (1.31) $ (1.34)
The effects of applying SFAS 123 for pro forma disclosures are not likely
to be representative of the effects on reported net loss for future years. Pro
forma net loss for the year ended December 31, 1997 reflects expense for three
years' vesting while pro forma data for 1998 will reflect compensation expense
for four years' vesting of outstanding stock options.
At December 31, 1997, 3,240,560 shares of Common Stock are reserved for
issuance upon exercise of options currently outstanding and options available
for grant under the 1992 Stock Option Plan, 1996 Directors' Option Plan, 1996
Employee Stock Purchase Plan and exercise of warrants.
Employee Stock Purchase Plan
In July 1996, the Company adopted the 1996 Employee Stock Purchase Plan
("Purchase Plan") and reserved an aggregate of 300,000 shares of Common Stock
for issuance thereunder. Under the terms of the Purchase Plan, employees can
choose to have up to 10% of their annual salary withheld to purchase the
Company's Common Stock. The purchase price of the stock is 85% of the lower of
the subscription date fair market value and the purchase date fair market value.
Approximately 40% of the eligible employees have participated in the Purchase
Plan. The Company does not recognize compensation cost related to employee
purchase rights under the Plan. Approximately, 33,000 shares have been issued
under the Purchase Plan as of December 31, 1997. To comply with the pro forma
reporting requirements of SFAS 123, compensation cost is estimated for the fair
value of the employees' purchase rights using the Black-Scholes model with the
following weighted average assumptions for those rights granted in 1997:
risk-free interest rates ranging from 5.62% to 5.68%; a dividend yield of 0.0%;
a volatility factor of the expected market price of the Company's Common Stock
of 1.1; and an expected life of the purchase right of 6 months. Based upon these
assumptions, the compensation cost estimated for the fair value of the
employees' purchase rights was immaterial and therefore not included in the pro
forma information. There were no shares issued under the Purchase Plan in 1996.
47
48
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COLLABORATIVE AGREEMENTS
In March 1997, the Company entered into a license and research
collaboration agreement with Pharmacia & Upjohn S.p.A ("Pharmacia & Upjohn").
Under the agreement, the Company granted an exclusive worldwide license to
Pharmacia & Upjohn to make, use, and sell cancer therapeutic products based on
telomerase inhibition technology. A three-way agreement between Geron, Kyowa
Hakko and Pharmacia & Upjohn was also signed.
In April 1995, the Company entered into a license and research
collaboration agreement with Kyowa Hakko Kogyo Co., Ltd ("Kyowa Hakko"). Under
the agreement, the Company granted an exclusive license to Kyowa Hakko to make,
use and sell cancer therapeutic products based on telomerase inhibition
technology within a specified territory in exchange for royalty payments,
payments for certain research and development activities and payments due on
achieving specified development milestones.
Costs associated with research and development activities attributable to
the above agreements approximate revenue recognized. Under these agreements,
revenues of approximately $6,700,000, $5,200,000 and $5,500,000 were recognized
in 1997, 1996 and 1995, respectively. No milestone payments have been received
or earned to date.
In December 1997, the Company signed a license, product development and
marketing agreement with Boehringer Mannheim GmbH ("Boehringer Mannheim") for
the development and commercialization of diagnostic cancer products. In
accordance with the agreement, the Company received a $500,000 research
reimbursement payment in January 1998.
8. INCOME TAXES
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $41,900,000 and $5,100,000, respectively.
The federal net operating loss carryforwards will expire at various dates
beginning in 2006 through 2012, if not utilized. The state net operating loss
carryforwards will expire at various dates beginning in 1997 through 2002.
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 assets as of December
31 are as follows:
1997 1996
-------- --------
(IN THOUSANDS)
Net operating loss carryforwards....................... $ 14,500 $ 11,800
Research credits (expiring 2007 - 2012)................ 2,600 1,700
Capitalized research and development................... 1,000 800
Other -- net........................................... 1,200 600
-------- --------
Total deferred tax assets.................... 19,300 14,900
Valuation allowance for deferred tax assets............ (19,300) (14,900)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
Because of the Company's history of losses, the net deferred tax asset has
been fully offset by a valuation allowance. The valuation allowance increased by
approximately $4,100,000 and $3,800,000 during the years ended December 31, 1996
and 1995, respectively.
Approximately $300,000 of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to contributed capital.
48
49
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
9. IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send checks, or engage in
similar normal business activities.
The Company has started an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost is estimated at approximately $200,000 which includes $100,000 of
new software that will be capitalized and $100,000 that will be expensed as
incurred. As of December 31, 1997, the Company has not incurred any expenses for
the Year 2000 project.
10. SUBSEQUENT EVENTS (UNAUDITED)
On March 27, 1998, the Company completed a private placement with two
institutional investors for the sale of 15,000 shares of Series A Convertible
Preferred Stock with a stated value of $1,000 per share resulting in proceeds of
$15.0 million. The Series A Convertible Preferred Stock is convertible into the
number of shares of Common Stock of the Company equal to the stated value plus a
premium of 6% per annum divided by a conversion price. The conversion price of
the Preferred Stock is based on the market price of the Common Stock during a
pricing period preceding conversion, up to a conversion price cap of $16.88.
With limited exceptions, during the nine month period following issuance, the
Preferred Stock is convertible only after the market price of the Common Stock
equals or exceeds $15 per share. The Preferred Stock is subject to redemption at
the Company's option if the market price of the Common stock exceeds or falls
below certain thresholds. The Company has agreed to register the resale of the
underlying common stock under the Securities Act of 1933.
In accordance with the Stock Purchase Agreement with Pharmacia & Upjohn,
S.p.A, in March 1998, Pharmacia & Upjohn purchased $4.0 million of Geron Common
Stock, at a premium.
11. STATEMENT OF CASH FLOWS DATA
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
----- -------- -----
(IN THOUSANDS)
Supplementary Information
Interest paid.................................... $332 $ 337 $359
Supplementary Investing and Financing Activities
Equipment acquired under capital leases.......... $ -- $ 48 $661
Common stock issued under purchase plan.......... $209 $ -- $ --
Notes receivable from stockholders............... $ -- $ (12) $ 93
Deferred compensation related to options
granted....................................... $ -- $(1,292) --
Net unrealized gain (loss) on available-for-sale
securities.................................... $ 2 $ (11) $ 30
49
50
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
IDENTIFICATION OF DIRECTORS
The information required by this Item concerning the Company's directors is
incorporated by reference from the sections captioned "Proposal 1: Election of
Directors" contained in the Company's Definitive Proxy Statement related to the
Annual Meeting of Shareholders to be held May 29, 1998, to be filed by the
Company with the Securities and Exchange Commission (the "Proxy Statement").
IDENTIFICATION OF EXECUTIVE OFFICERS
The information required by this Item concerning the Company's executive
officers is set forth in Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
section captioned "Executive Compensation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
section captioned "Certain Transactions" and "Executive Compensation" contained
in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS.
Included in Part II of this Report:
PAGE IN
FORM 10-K
---------
Report of Ernst & Young LLP, Independent Auditors........... 35
Balance Sheets -- December 31, 1997 and 1996................ 36
Statements of Operations -- Years ended December 31, 1997,
1996 and 1995............................................. 37
Statement of Stockholders' Equity -- Three years ended
December 31, 1997......................................... 38
Statements of Cash Flows -- Years ended December 31, 1997,
1996 and 1995............................................. 39
Notes to Financial Statements............................... 40
50
51
(2) FINANCIAL STATEMENT SCHEDULES.
Financial statement schedules are omitted because they are not required or the
information is disclosed in the financial statements listed in item 14(a)(1).
(3) EXHIBITS.
3.1*** Amended and Restated Certificate of Incorporation of
Registrant
3.2**** Bylaws of Registrant
4.1** Form of Common Stock Certificate
10.1** Form of Indemnification Agreement
10.2** 1992 Stock Option Plan
10.3** 1996 Employee Stock Purchase Plan
10.4** 1996 Directors' Stock Option Plan
10.5** Investors' Rights Agreement dated November 10, 1995 among
the Registrant and certain security holders of the
Registrant
10.6+** Agreement with Respect to Option dated August 31, 1992
between the Registrant and Cold Spring Harbor Laboratory and
Amendments No. 1 and 2 thereto dated May 3, 1993 and January
1994
10.7+** Patent License Agreement dated September 8, 1992 between the
Registrant and University of Texas Southwestern Medical
Center at Dallas
10.8+** Sponsored Research Agreement dated as of September 8, 1992
between the Registrant and University of Texas Southwestern
Medical Center at Dallas
10.9+** Exclusive License Agreement dated February 2, 1994 between
the Registrant and the Regents of the University of
California
10.10+** License and Research Collaboration Agreement dated April 24,
1995 between the Registrant and Kyowa Hakko Kogyo Co., Ltd,
and Amendment No. 1 thereto dated July 15, 1995
10.11+** Standard Nonexclusive License Agreement dated January 1,
1996 between the Registrant and Wisconsin Alumni Research
Foundation
10.12** Business Park Lease dated March 25, 1996 between the
Registrant and David D. Bohannon Organization
10.13** Business Park Lease dated January 20, 1993 between the
Registrant and David D. Bohannon Organization and Amendments
Nos. 1, 2 and 3 thereto dated July 26, 1993, February 22,
1994 and March 25, 1996, respectively
10.14** Equipment Financing Agreement dated January 5, 1992 between
the Registrant and Lease Management Services, Inc.
10.15** Master Lease Agreement dated January 5, 1993 between the
Registrant and Lease Management Services, Inc.
10.16** Note Secured by Stock Pledge Agreement dated July 7, 1993
between the Registrant and Michael West and Amendment
thereto dated May 20, 1996
10.19** Note Secured by Second Deed of Trust dated May 20, 1993
between the Registrant and Jeryl Lynn Hilleman and Amendment
thereto dated May 20, 1996
10.20** Note Secured by Second Deed of Trust dated December 1993
between the Registrant and Calvin B. Harley
10.21** Note Secured by Second Deed of Trust dated September 30,
1995 between the Registrant and David L. Greenwood
10.22** Note Secured by Second Deed of Trust dated September 30,
1995 between the Registrant and David L. Greenwood
10.23** Common Stock Warrant dated May 4, 1994, issued by the
Registrant to Cold Spring Harbor Laboratory
10.24** Series C Preferred Stock Purchase Warrants issued to certain
investors on June 29, 1994
51
52
10.25* Common Stock Purchase Agreement dated December 20, 1996
between the Registrant and Pharmacia & Upjohn S.p.A.
10.26+***** License and Research Collaboration Agreement dated March 23,
1997 between Registrant and Pharmacia & Upjohn S.p.A.
10.27+***** Amendment No. 2 to License and Research Collaboration
Agreement dated April 24, 1995 between Registrant and Kyowa
Hakko Kogyo Co., Ltd. dated March 23, 1997
10.28+***** Three Party Agreement dated March 23, 1997 by and among
Registrant, Kyowa Hakko Kogyo Co., Ltd. and Pharmacia &
Upjohn S.p.A.
10.29+***** Common Stock Purchase Agreement dated March 23, 1997 between
Registrant and Pharmacia & Upjohn S.p.A.
10.30+***** Intellectual Property License Agreement dated December 9,
1996 between Registrant and University Technology
Corporation
10.31***** Second Amendment to Note Secured by Second Deed of Trust
with Hilleman
10.32***** Second Amendment to Note Secured by Stock Pledge Agreement
with West
10.33***** First Amendment to Note Secured by Deed of Trust with Harley
10.34***** Note Secured by Second Deed of Trust with Greenwood
10.35+****** License Agreement dated August 1, 1997 between Registrant
and The Johns Hopkins University
10.36+****** Research Agreement dated August 1, 1997 between Registrant
and The Johns Hopkins University
10.37+ License, Product Development, and Marketing Agreement by and
between Registrant and Boehringer Mannheim, GmbH
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
- ---------------
** Incorporated by reference to identically numbered exhibits filed with
the Registrant's Registration Statement Form S-1 which became effective
on July 30, 1996.
+ Certain portions of this Exhibit have been omitted for which
confidential treatment has been requested and filed separately with the
Securities and Exchange Commission.
* Incorporated by reference to Exhibit 10.1 on the Registrant's Form 8-K
filed on January 24, 1997.
*** Incorporated by reference to Exhibit 3.3 filed with the Registrant's
Registration Statement Form S-1 which became effective July 30, 1996.
**** Incorporated by reference to Exhibit 3.4 filed with the Registrant's
Registration Statement Form S-1 which became effective July 30, 1996.
***** Incorporated by reference to identically numbers exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the period ended March 31,
1997.
****** Incorporated by reference to identically numbered exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the period ended September
30, 1997.
(b) REPORTS ON FORM 8-K.
None filed.
(c) INDEX TO EXHIBITS.
52
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Menlo
Park, State of California, on the 30th day of March, 1998.
GERON CORPORATION
By /s/ RONALD W. EASTMAN
------------------------------------
Ronald W. Eastman
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Ronald W. Eastman
and David L. Greenwood, and each one of them, attorneys-in-fact for the
undersigned, each with the power of substitution, for the undersigned in any and
all capacities, to sign any and all amendments to this 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, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitutes, may do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his/her name.
Pursuant to the requirements of the Securities and Exchange 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/ RONALD W. EASTMAN President, Chief Executive March 30, 1998
- -------------------------------------------------------- Officer and Director
Ronald W. Eastman (Principal Executive Officer)
/s/ DAVID L. GREENWOOD Chief Financial Officer, Vice March 30, 1998
- -------------------------------------------------------- President of Corporate
David L. Greenwood Development, Treasurer,
Secretary (Principal
Financial and Accounting
Officer)
/s/ ALEXANDER E. BARKAS Director March 30, 1998
- --------------------------------------------------------
Alexander E. Barkas
/s/ BRIAN H. DOVEY Director March 30, 1998
- --------------------------------------------------------
Brian H. Dovey
/s/ CHARLES M. HARTMAN Director March 30, 1998
- --------------------------------------------------------
Charles M. Hartman
/s/ THOMAS D. KILEY Director March 30, 1998
- --------------------------------------------------------
Thomas D. Kiley
/s/ ROBERT B. STEIN Director March 30, 1998
- --------------------------------------------------------
Robert B. Stein
/s/ JOHN P. WALKER Director March 30, 1998
- --------------------------------------------------------
John P. Walker
53
54
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------------ -----------
3.1*** Amended and Restated Certificate of Incorporation of
Registrant
3.2**** Bylaws of Registrant
4.1** Form of Common Stock Certificate
10.1** Form of Indemnification Agreement
10.2** 1992 Stock Option Plan
10.3** 1996 Employee Stock Purchase Plan
10.4** 1996 Directors' Stock Option Plan
10.5** Investors' Rights Agreement dated November 10, 1995 among
the Registrant and certain security holders of the
Registrant
10.6+** Agreement with Respect to Option dated August 31, 1992
between the Registrant and Cold Spring Harbor Laboratory and
Amendments No. 1 and 2 thereto dated May 3, 1993 and January
1994
10.7+** Patent License Agreement dated September 8, 1992 between the
Registrant and University of Texas Southwestern Medical
Center at Dallas
10.8+** Sponsored Research Agreement dated as of September 8, 1992
between the Registrant and University of Texas Southwestern
Medical Center at Dallas
10.9+** Exclusive License Agreement dated February 2, 1994 between
the Registrant and the Regents of the University of
California
10.10+** License and Research Collaboration Agreement dated April 24,
1995 between the Registrant and Kyowa Hakko Kogyo Co., Ltd,
and Amendment No. 1 thereto dated July 15, 1995
10.11+** Standard Nonexclusive License Agreement dated January 1,
1996 between the Registrant and Wisconsin Alumni Research
Foundation
10.12** Business Park Lease dated March 25, 1996 between the
Registrant and David D. Bohannon Organization
10.13** Business Park Lease dated January 20, 1993 between the
Registrant and David D. Bohannon Organization and Amendments
Nos. 1, 2 and 3 thereto dated July 26, 1993, February 22,
1994 and March 25, 1996, respectively
10.14** Equipment Financing Agreement dated January 5, 1992 between
the Registrant and Lease Management Services, Inc.
10.15** Master Lease Agreement dated January 5, 1993 between the
Registrant and Lease Management Services, Inc.
10.16** Note Secured by Stock Pledge Agreement dated July 7, 1993
between the Registrant and Michael West and Amendment
thereto dated May 20, 1996
10.19** Note Secured by Second Deed of Trust dated May 20, 1993
between the Registrant and Jeryl Lynn Hilleman and Amendment
thereto dated May 20, 1996
10.20** Note Secured by Second Deed of Trust dated December 1993
between the Registrant and Calvin B. Harley
10.21** Note Secured by Second Deed of Trust dated September 30,
1995 between the Registrant and David L. Greenwood
10.22** Note Secured by Second Deed of Trust dated September 30,
1995 between the Registrant and David L. Greenwood
10.23** Common Stock Warrant dated May 4, 1994, issued by the
Registrant to Cold Spring Harbor Laboratory
10.24** Series C Preferred Stock Purchase Warrants issued to certain
investors on June 29, 1994
10.25* Common Stock Purchase Agreement dated December 20, 1996
between the Registrant and Pharmacia & Upjohn S.p.A.
10.26+***** License and Research Collaboration Agreement dated March 23,
1997 between Registrant and Pharmacia & Upjohn S.p.A.
55
EXHIBIT DESCRIPTION
------------ -----------
10.27+***** Amendment No. 2 to License and Research Collaboration
Agreement dated April 24, 1995 between Registrant and Kyowa
Hakko Kogyo Co., Ltd. dated March 23, 1997
10.28+***** Three Party Agreement dated March 23, 1997 by and among
Registrant, Kyowa Hakko Kogyo Co., Ltd. and Pharmacia &
Upjohn S.p.A.
10.29+***** Common Stock Purchase Agreement dated March 23, 1997 between
Registrant and Pharmacia & Upjohn S.p.A.
10.30+***** Intellectual Property License Agreement dated December 9,
1996 between Registrant and University Technology
Corporation
10.31***** Second Amendment to Note Secured by Second Deed of Trust
with Hilleman
10.32***** Second Amendment to Note Secured by Stock Pledge Agreement
with West
10.33***** First Amendment to Note Secured by Deed of Trust with Harley
10.34***** Note Secured by Second Deed of Trust with Greenwood
10.35+****** License Agreement dated August 1, 1997 between Registrant
and The Johns Hopkins University
10.36+****** Research Agreement dated August 1, 1997 between Registrant
and The Johns Hopkins University
10.37+ License, Product Development, and Marketing Agreement by and
between Registrant and Boehringer Mannheim, GmbH
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
- ---------------
** Incorporated by reference to identically numbered exhibits filed with
the Registrant's Registration Statement Form S-1 which became effective
on July 30, 1996.
+ Certain portions of this Exhibit have been omitted for which
confidential treatment has been requested and filed separately with the
Securities and Exchange Commission.
* Incorporated by reference to Exhibit 10.1 on the Registrant's Form 8-K
filed on January 24, 1997.
*** Incorporated by reference to Exhibit 3.3 filed with the Registrant's
Registration Statement Form S-1 which became effective July 30, 1996.
**** Incorporated by reference to Exhibit 3.4 filed with the Registrant's
Registration Statement Form S-1 which became effective July 30, 1996.
***** Incorporated by reference to identically numbers exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the period ended March 31,
1997.
****** Incorporated by reference to identically numbered exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the period ended September
30, 1997.