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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From -------- to -------- .
Commission File Number: 0-20859
GERON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2287752
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 Constitution Drive, Menlo Park, CA 94025
(Address, including zip code, of principal executive offices)
Registrant's telephone number, including area code: (650) 473-7700
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. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No |_|
As of February 27, 2003, there were 24,919,186 shares of common stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the registrant was approximately $43,020,270 based upon the closing price of
the common stock on February 27, 2003 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.
DOCUMENTS INCORPORATED BY REFERENCE:
Document Form 10-K Parts
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Portions of the Registrant's proxy statement for the 2003 annual meeting of stockholders
to be filed pursuant to Regulation 14A within 120 days of the Registrant's fiscal year
end December 31, 2002 .................................................................... III
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Forward-Looking Statements
This Annual Report on Form 10-K, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7, contains
forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause the
results of Geron Corporation ("Geron") to differ materially from those
expressed or implied by such forward-looking statements. All statements other
than statements of historical fact are statements that could be deemed
forward-looking statements. The risks and uncertainties referred to above
include, without limitation, risks inherent in the development and
commercialization of Geron's potential products, dependence on collaborative
partners, need for additional capital, need for regulatory approvals or
clearances, the maintenance of Geron's intellectual property rights and other
risks that are described herein and that are otherwise described from time to
time in Geron's Securities and Exchange Commission reports including, but not
limited to, the factors described in "Additional Factors That May Affect Future
Results" set forth in Item 1 of this report. Geron assumes no obligation and
does not intend to update these forward-looking statements.
PART I
Item 1. Business
Overview
We are a biopharmaceutical company focused on developing and
commercializing therapeutic and diagnostic products for applications in
oncology and regenerative medicine, and research tools for drug discovery. Our
product development programs are based upon three patented core technologies:
telomerase, human embryonic stem cells and nuclear transfer.
Telomeres are the ends of chromosomes that protect chromosomes from
degradation and act as a molecular "clock" for cellular aging. Telomerase is an
enzyme that restores telomere length and rewinds the molecular "clock," thereby
extending the cell's ability to multiply or replicate. By activating
telomerase, we seek to increase the lifespan of normal cells which have
prematurely aged in the body to treat certain chronic degenerative diseases.
Conversely, by inhibiting or targeting telomerase we hope to kill cancer cells
in which telomerase is abnormally turned on and to diagnose cancer by measuring
telomerase activity.
Human embryonic stem cells can develop and differentiate into all cells
and tissues in the body. As such, they are a potential source for the
manufacture of replacement cells and tissues for organ repair applications in
regenerative medicine.
Nuclear transfer is a method for generating whole animals from genetic
material derived solely from the nucleus of a single cell obtained from a
single animal. We are actively licensing this technology to others for
applications in agriculture and production of biologicals.
We were incorporated in 1990 under the laws of Delaware. Our principal
executive offices are located at 230 Constitution Drive, Menlo Park,
California, 94025. Our telephone number is (650) 473-7700.
We make available free of charge on or through our Internet website our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to those reports as soon as reasonably practicable
after they are electronically filed with, or furnished to, the Securities and
Exchange Commission. Our Internet website address is "www.geron.com".
Technology Platforms
Telomeres and Telomerase: Their role in cellular aging and cancer
Cells are the building blocks for all tissues in the human body and cell
division plays a critical role in the normal growth, maintenance and repair of
human tissue. However, in the human body, cell division is a limited process.
Depending on the tissue type, cells generally divide only 60 to 100 times
during the course of their normal lifespan.
We and our collaborators have shown that telomeres, located at the ends of
chromosomes, are key genetic elements involved in the regulation of the
cellular aging process. Our work has shown that each time a normal cell
1
divides, telomeres shorten. Once telomeres reach a certain short length, cell
division halts and the cell enters a state known as senescence or aging. Our
collaborators have used mouse models to show that this type of cellular aging
can cause numerous age-related degenerative changes in mammals. We believe that
this cellular aging process, which occurs in numerous tissues throughout the
human body, causes or contributes to chronic degenerative diseases and
conditions including anemia, AIDS, macular degeneration (a chronic disease of
the eyes often leading to vision loss), atherosclerosis (narrowing of arteries
which reduces blood flow to internal organs) and impaired wound healing.
Cellular aging is also believed to contribute to the initiation of cancer.
We and our collaborators have demonstrated that telomeres serve as a
molecular "clock" for cellular aging and that the enzyme telomerase, when
introduced into normal cells, is capable of restoring telomere length or
resetting the "clock," thereby increasing the lifespan of cells without
altering their normal function or causing them to become cancerous. Human
telomerase, a complex enzyme, is composed of a ribonucleic acid (RNA)
component, known as hTR, and a protein component, known as hTERT. In 1994, in
collaboration with Dr. Carol Greider, we cloned the gene for hTR, and in 1997,
in collaboration with Dr. Thomas Cech, we cloned the gene for hTERT.
Our work and that of others has shown that telomerase is not present in
most normal cells and tissues, but that during tumor progression, telomerase is
abnormally reactivated in all major cancer types. We have shown that while
telomerase does not cause cancer (which is caused by mutations in cells), the
presence of telomerase enables cancer cells to maintain telomere length,
providing them with indefinite replicative capacity. We and others have shown
in various tumor models that inhibiting telomerase activity results in telomere
shortening and therefore causes aging or death of the cancer cell.
We are working to develop anti-cancer therapies based on telomerase
inhibitors, oncolytic (cancer-killing) viruses and telomerase therapeutic
vaccines. We also intend to continue to develop and commercialize products
using telomerase as a marker for cancer diagnosis, prognosis, patient
monitoring and screening.
Human Embryonic Stem Cells: A potential source for the manufacturing of
replacement cells and tissues
Stem cells generally are self-renewing primitive cells that can develop
into functional, differentiated cells. Human embryonic stem cells are unique
because they are pluripotent, that is they can develop into all cells and
tissues in the body. There are two types of human pluripotent stem cells: human
embryonic stem cells (hESCs) which were first derived by our collaborators from
donated in vitro fertilized blastocysts or very early-stage embryos; and human
embryonic germ cells (hEG cells) which were derived from donated fetal
material.
In addition to their pluripotent characteristics, hESCs express telomerase
and can therefore multiply or replicate indefinitely. The ability of hESCs to
divide indefinitely in the undifferentiated state without losing pluripotency
is a unique characteristic that distinguishes them from all other stem cells
discovered to date in humans. Other stem cells such as blood or gut stem cells
express telomerase at very low levels or only periodically; they therefore age,
limiting their use in research or therapeutic applications. In other cases,
exceedingly rare subpopulations of adult mesenchymal stem cells have been
described in a few laboratories that also appear to differentiate into multiple
cell lineages. To date, these cells have proven extremely difficult to culture
and are not suitable for large-scale production. In contrast, hESCs can be
expanded in culture indefinitely and hence can be banked for scaled product
manufacture.
We intend to use human embryonic stem cell technology to:
o enable the development of transplantation therapies by providing
standard starting material for the manufacture of cells and tissues;
o facilitate pharmaceutical research and development practices by
providing cells for disease models and screening, and for assigning
function to newly discovered genes; and
o accelerate research in human developmental biology by identifying the
genes that control human growth and development.
Nuclear Transfer: A mechanism for copying adult animals
Nuclear transfer is a method for generating whole animals whose nuclear
genetic material is derived solely from a donor cell from a single animal. In
this process, the nucleus containing all of the chromosomal DNA is removed, or
enucleated, from the egg cell and replaced with the nucleus containing all of
the chromosomal DNA
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from a donor somatic (non-reproductive) cell. Fusion between the resulting egg
cell and the donor somatic nucleus results in a new cell which gains a complete
set of chromosomes derived entirely from the donor nucleus. Mitochondrial DNA,
providing some of the genes for energy production, resides outside the nucleus
and is provided by the egg. After a brief culture period, the resulting embryo
is implanted into the uterus of a female animal, where it can develop and
produce the live birth of a cloned offspring. The offspring is essentially a
genetic clone of the animal from which the donor nucleus was obtained.
In early 1997, Dr. Ian Wilmut and his colleagues at the Roslin Institute
demonstrated with the birth of Dolly, the sheep, that the nucleus of an adult
cell can be transferred to an enucleated egg to create cloned offspring. The
birth of Dolly was significant because it demonstrated the ability of egg cell
cytoplasm, the portion of the cell outside of the nucleus, to reprogram an
adult nucleus. Reprogramming enables the adult differentiated cell nucleus to
express all the genes required for full embryonic development of the adult
animal. In addition to sheep, the technique has been used to clone mice, goats,
cattle and pigs from donor cells and enucleated eggs from the respective
animals.
In order to complement and strengthen our technology platforms, in 1999,
we acquired Roslin Bio-Med Ltd., a commercial subsidiary of the Roslin
Institute which pioneered the use of nuclear transfer technology for the
creation of cloned animals. We also entered into a research collaboration with
the Roslin Institute to focus on understanding the molecular mechanisms used by
animal egg cell cytoplasm to reprogram adult animal cell nuclei.
We continue to license nuclear transfer technology to others for
applications in agriculture and production of biologicals. As of December 31,
2002, we had granted six non-exclusive licenses or license options to various
companies for applications in chickens, cows, pigs and goats, and one
non-exclusive license to a company to produce materials based on spider silk.
Today, we are using the Roslin Institute's expertise in developmental
biology to derive new stem cell lines and genetically engineer them to avoid
immune rejection through gene targeting methods. We intend to produce cells for
use in repairing organs damaged by degenerative disease that will not be
rejected by a transplant recipient.
Commercial Opportunities for Our Technology Platforms
Oncology
Cancer is a group of diseases characterized by the uncontrolled growth and
spread of abnormal cells. The American Cancer Society estimates that
approximately 1.3 million cancer cases were diagnosed in the year 2002. Overall
annual costs associated with cancer in 2002 were $172 billion in the United
States alone. Because telomerase is detectable in more than 30 human cancer
types and in the great majority of cancer samples studied, we believe that
telomerase-based drugs could overcome the limitations of current cancer
therapies and potentially be broadly applicable and highly specific drug
treatments for cancer.
We are working to discover and develop anti-cancer therapies based on
telomerase inhibitors, telomerase therapeutic vaccines, and oncolytic
(cancer-killing) viruses. We also intend to continue to develop and
commercialize products using telomerase as a marker for cancer diagnosis,
prognosis, patient monitoring and screening. We believe that we have achieved a
dominant position in telomerase research and in telomerase intellectual
property which gives us a significant advantage in the discovery and
development of oncology products based on telomerase.
Telomerase Inhibition. Telomerase activation is necessary for cancer cells
to replicate indefinitely and thereby enable tumor growth and metastasis. One
of our strategies for the development of anti-cancer therapies is to inhibit
telomerase activity in cancer cells. Inhibiting telomerase activity should
result in telomere shortening and therefore cause the aging and death of cancer
cells. Recent data show that telomerase can protect tumor cells from genomic
instability and cell death, suggesting that inhibiting telomerase can cause a
more rapid suppression of tumor growth than predicted by telomere loss alone.
Because telomerase is expressed at very low levels, if at all, in most normal
cells, the telomerase inhibition therapies described below are not expected to
be cytotoxic to normal cells. To produce a telomerase inhibitor for the
treatment of cancer, we focused our efforts on two approaches: template
antagonists and small molecules. We have concentrated our development efforts
on template antagonists which are currently in Investigational New Drug, or
IND-enabling animal studies.
Template Antagonists. We have designed and synthesized a special class
of short-chain nucleic acid- like molecules, known as oligonucleotides, to
target the template region, or active site, of telomerase.
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These oligonucleotides have demonstrated highly potent telomerase
inhibitory activity at sub-nanomolar, or very low, concentrations in
biochemical assays and various cellular systems. Published research by our
collaborators has shown that these template antagonists inhibit the growth
of malignant human glioma (brain cancer) cells, prostate cancer cells,
lymphoma, myeloma and cervical cancer cells in animals.
Our compound GRN163 is a true enzyme inhibitor and can therefore be
much smaller (lower molecular weight) than other oligonucleotide drug
candidates. It does not inhibit other critical nucleic acid-modifying
enzymes and does not appear to be toxic to normal cells at concentrations
needed to inhibit telomerase in tumor cells. This compound is now in
IND-enabling animal toxicology studies. In March 2002, we acquired from
Lynx Therapeutics, Inc. the patent portfolio covering the chemical backbone
used to synthesize our template antagonists.
Small Molecules. Through high-throughput screening of highly diverse
chemical compound libraries, we have identified classes of small molecule
compounds that are telomerase inhibitors which could be further evaluated.
We de-prioritized work directed toward improving the specificity and
potency of these small molecule compounds in order to focus on the clinical
development of our template antagonists.
Telomerase Therapeutic Vaccine. Our second approach to anti-cancer therapy
is a telomerase therapeutic vaccine. In this approach, we deliver telomerase to
special immune cells called dendritic cells which instruct the immune system to
detect cells that express telomerase and kill them.
We are conducting research to confirm the safety and efficacy of dendritic
cell telomerase vaccine therapies. In collaboration with scientists at Duke
University, we published studies in the September 2000 issue of Nature Medicine,
which demonstrate that cancer patients' immune cells can be activated with a
telomerase vaccine in the laboratory to kill their own cancer cells. This
technique was also effective in reducing tumors in animals. A Phase 1 study in
prostate cancer patients at Duke University Medical Center is currently underway
using this approach. Thus far, all treated patients in the study have
appropriately developed anti-telomerase T-cells and no adverse reactions have
been seen after as many as six vaccinations. In August 2002, we were issued a
U.S. patent covering telomerase cancer immunotherapy. We have granted a
non-exclusive license to Dendreon Corporation to develop an ex vivo telomerase
vaccine.
We are also developing procedures to directly immunize patients using
telomerase. Geron scientists have demonstrated that direct, in vivo vaccination
in tumor-bearing mice elicits a telomerase-specific immune response and causes
reduced growth of the animals' tumors. This direct method of vaccination would
eliminate the need for manipulation of dendritic cells in culture and could
potentially allow simple vaccination procedures to be available for all cancer
patients.
Oncolytic Virus. Our third anti-cancer therapeutic strategy is based on
viruses which have been manipulated or engineered to have oncolytic, or
cancer-killing, properties which would enable them to selectively target and
destroy cancer cells. We are developing customized adenoviruses (common cold
viruses) that will infect and kill cancer cells which express telomerase and not
kill normal cells which do not express telomerase. To pursue this goal, we have
cloned the region of the hTERT gene, called the promoter sequence, that is
responsible for turning on or off the activity of telomerase in a cell. We have
demonstrated that this promoter is turned on in telomerase-positive cancer
cells, and is turned off in most normal cells.
We are using the hTERT promoter to turn on the genes which are required for
the customized adenovirus to replicate within the cancer cell. Our data indicate
that when tumor cells are infected with the adenovirus which contains the hTERT
promoter, the virus multiplies or replicates within the cancer cells and causes
the rupture and death, or lysis, of the tumor cells. When these same
adenoviruses containing the hTERT promoter infect normal somatic cells, there is
no killing effect on these cells. This selective lytic effect on cancer has been
demonstrated in vitro on 12 different tumor lines including prostate, liver,
lung, pancreatic, colorectal, breast and ovarian cancer. These in vitro results
have been extended to animal models of liver and prostate cancer with similar
effects against the animals' tumors while sparing normal cells.
We believe that these oncolytic viruses could be used to treat many types
of primary and metastatic cancers. We have granted a non-exclusive license to
Genetic Therapy, Inc. (GTI), a subsidiary of Novartis AG, to use our telomerase
promoter technology in oncolytic virus products.
4
Cancer Diagnostics. Telomerase is a broadly applicable and highly specific
marker for cancer because it has been detected in more than 30 human cancer
types and in the great majority of cancer samples studied. We believe that the
detection of telomerase may have significant clinical utility for cancer
diagnosis, prognosis, monitoring and screening. Current cancer diagnostics apply
only to a single or limited number of cancer types because they rely on
molecules expressed only by particular cancer types. However, telomerase-based
diagnostics could potentially address a broad range of cancers.
We have developed several proprietary assays for the detection of
telomerase which are based on its activity or the presence of its RNA or protein
components. The first generation assay is the Telomeric Repeat Amplification
Protocol (TRAP) assay which can be used to detect telomerase activity in human
tissue or cells in culture. The second generation assays detect the presence of
hTR and hTERT in human tissues and body fluids. We own issued patents for the
detection of telomerase activity and the components of telomerase including
patents for the TRAP assay and diagnostic methods based on telomerase detection.
To date, our licensees have commercialized 13 research-use-only kits that
incorporate our technology.
We are working with Roche Diagnostics to develop the clinical potential of
our telomerase detection technology. Clinical research data generated by Roche
shows that an assay for telomerase is a sensitive and specific test for
detecting bladder cancer. We believe that these and other data support the
clinical application of telomerase assays in diagnosis, staging, monitoring and
screening for bladder, cervical, prostate and other cancers.
Research & Development Technologies
Genomics and Human Developmental Biology. The first phase of the private
and publicly funded programs to complete the sequencing of the human genome was
accomplished in 2001. Despite this catalogue of human gene sequences, little is
known about the structure of most genes, when and in what cells they are
expressed or how they function. The next major hurdle is to determine the
function of these genes and to use this information to develop new diagnostic
and therapeutic approaches to treat many diseases.
Embryonic stem cells are especially suitable for the functional analysis of
genes involved in cell proliferation, differentiation and metabolism. The
effects of adding or knocking out specific genes in hESCs can be monitored,
providing evidence for the function of the gene on a particular proliferation or
differentiation process. In collaboration with Celera Genomics, we have
generated gene libraries from hESCs and sequenced them to identify genes
important for human development. We are currently applying bioinformatic
techniques to this database to identify genes useful as markers of
differentiation or which code for proteins that control the differentiation
process. Geron's database along with hESC technology could be used to identify
the function of multiple developmental genes that could be good targets for drug
discovery.
Immortalized Cells for Research. Scientists study specific cells from
targeted tissues in order to understand their biological function. For these
studies, cells are usually isolated from tissue and maintained in culture. The
progressive changes in biological activity, morphology and proliferation as a
result of normal cell aging in tissue culture potentially limit the utility of
these cells in serial experiments and long-term research. Because of these
limitations, most research laboratories utilize transformed cell lines for their
studies. Cells can be transformed by using viruses which ultimately cause the
cells to grow indefinitely in culture. However, such immortalized cell lines
have abnormal characteristics compared to non-transformed cells. For this
reason, they are not good models of normal tissue in the human body.
The telomerase-immortalized cells may be ideal for use in biological
research because these cells proliferate indefinitely and function in culture in
the same manner as the normal, mortal cells from which they were derived.
Moreover, telomerase-immortalized cells can function in the body to form normal
tissue and their capacity to differentiate into mature tissue is maintained. The
ability of these cells to maintain normal physical and biological
characteristics while retaining proliferative capacity allows them to be a
constant source of cells for repeat and long-term studies on the function of
cells both in culture and in the body. Telomerase-immortalized cells can be used
to study any of the normal biological pathways in cells and can be used to
screen for factors which influence the appropriate function of those cells.
Moreover, cells taken from diseased tissues which are then
telomerase-immortalized in culture can be used to explore the mechanism of the
disease process and to develop interventions to prevent or treat that disease.
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We have distributed the human telomerase gene under material transfer
agreements to academic laboratories worldwide in order to generate new
applications of our technology and to preserve our commercialization rights in
these applications. To date, we have material transfer agreements with more than
550 academic laboratories worldwide.
We intend to make telomerase-immortalized cell lines commercially available
to the not-for-profit research market and to companies for basic research and
for use in drug discovery and biologics production applications.
In July 2002, we granted a non-exclusive commercial license for telomerase
cell immortalization technology to Variagenics, Inc. for use in the development
of pharmacogenomics applications.
In November 2002, we granted a non-exclusive license to PanCel Corporation
for the development and commercialization of macroencapsulated immortalized
primary human pancreatic islet cells for the treatment of diabetes.
Drug Screens and Toxicology. Three of the major hurdles of pharmaceutical
drug development are (i) identifying compounds with activity in diseased tissue;
(ii) understanding the metabolism and biodistribution of the compound; and (iii)
determining the potential toxic side effects of the compound. Undesirable
activity of a compound being evaluated as a candidate drug in any one of these
areas can impact the development and commercialization of the drug. The earlier
in development that a compound is found to have undesirable characteristics, the
faster these characteristics can be potentially corrected. This potentially
translates into reduced costs and time in drug development, and less harmful
exposure to patients in clinical trials.
Many prospective new drugs fail in clinical trials because of toxicity to
the liver or because of poor uptake, distribution or elimination of the active
compound in the human body. Much of the efficacy and safety of a drug will
depend on how that drug is metabolized into an active or inactive form, and on
the toxic metabolites that might be generated in the process. Hepatocytes, the
major cells of the liver, metabolize most compounds and thereby can be used to
predict many pharmacological characteristics of a drug.
There are no completely effective systems available today to accurately
predict the metabolism or toxicity of a compound in human livers. Rat and mouse
metabolism models only approximate human metabolism. The development of several
drugs has been terminated late in human clinical trials because rodent systems
utilized early in the development process failed to predict that the drug would
be toxic to humans. Human hepatocyte cell lines available today do not have the
same attributes as their normal counterparts in the body and must be transformed
in order to maintain their proliferative capacity in culture. Access to fresh
primary human liver tissue for use in toxicity studies is very limited and
substantial variability can be observed depending on the individual donor, the
time and process of collection and the culture conditions for the experiments.
We believe that we have the technologies to provide a consistent source of
normal human liver tissue which would more closely predict the impact of a new
drug on human livers in the body. We believe that an unlimited supply of human
hepatocytes which retain normal drug metabolism enzymes would revolutionize
toxicity testing, address the largest bottleneck in new drug research and
accelerate the drug development process. To potentially meet this need, we have
developed procedures to differentiate hESCs into hepatocyte precursors and
eventually into mature hepatocytes. Functional hepatocytes derived from hESCs
would provide a consistent and reliable source of material for extensive and
reproducible compound testing. Geron scientists have succeeded in demonstrating
that hepatocytes derived from hESCs express normal markers of hepatocyte
function, including certain Phase 1 and Phase 2 drug metabolizing enzymes. On
October 1, 2002, we were awarded a U.S. patent covering human hepatocytes
derived from hESCs and a second U.S. patent in January 2003 covering the use of
hESC-derived hepatocytes for drug screening.
We would like to commercialize such cells as a means to more accurately
determine the potential toxicity and metabolism of a new candidate drug. In
addition, the availability of a panel of hepatocytes from numerous individuals
would allow a more thorough understanding of the effects of a drug candidate on
a specific individual, allowing full development of the field of
pharmacogenomics whereby a compound's activity will be correlated with an
individual's genetic make-up.
Nuclear Transfer: Agriculture/Xenotransplantation/Biologics
Agriculture. Our nuclear transfer and gene targeting technologies can be
used for applications in agriculture that improve livestock by producing
unlimited numbers of genetically identical animals with superior commercial
6
qualities. Such applications can be extended to major agricultural sectors,
such as beef, dairy, pork and poultry, to provide large numbers of animals with
superior characteristics of disease resistance, longevity, growth rate or
product quality.
We continue to license our nuclear transfer technology to others for
applications in agriculture and production of biologicals. As of December 31,
2002, we had granted six non-exclusive licenses or license options to various
companies for applications in chicken, cows, pigs, goats or other animals.
Transgenic Animals. Our nuclear transfer technology can be applied to clone
animals that have been genetically engineered to produce proteins for human
therapeutic or industrial use. For example, herds which carry the genes to make
human antibodies could be cloned, thereby allowing for the large-scale
production of therapeutic antibodies or vaccines. In 2001, we granted a
non-exclusive license to Nexia Biotechnologies Inc. for the production of
natural and synthetic silk proteins in goats for industrial and medical
applications.
Xenotransplantation. Our nuclear transfer technologies can be used for
applications in xenotransplantation to create animals whose cells, tissues or
organs could be used in humans. This approach could be used either as a bridge
to human organ transplantation or as a long-term therapy.
Regenerative Medicine
We believe that the controlled activation of telomerase in the body can
have therapeutic applications for the treatment of blood, skin and immune
disorders, conditions in which deficiencies in cell proliferation have been
implicated. We are developing a drug-like strategy with a small molecule-based
therapy which would reactivate the existing telomerase gene or gene product
already present in the cell to restore normal function to the cell. We are also
studying methods to activate telomerase in skin cells to address conditions such
as impaired wound healing.
In cell-based therapies, differentiated cells derived from human embryonic
stem cells (hESCs) would be transplanted or injected into the patient where they
would integrate into the target tissue and thereby restore organ function or
prevent or slow further deterioration. This approach is particularly applicable
for the regeneration of tissues that do not normally divide in the body or which
fail to proliferate in the disease state. Such cells include neural cells,
cardiomyocytes (heart muscle cells), pancreatic islet (beta) cells, osteoblasts,
chondrocytes and hematopoietic cells. We are currently developing these cell
types for therapeutic applications in Parkinson's disease, spinal cord injury,
heart disease, diabetes, osteoporosis, osteoarthritis and blood diseases.
Parkinson's Disease, Stroke and Spinal Cord Injury. The major neural cells
of the nervous system typically do not regenerate after injury. If a nerve cell
is damaged due to disease or injury, there is no treatment at present to restore
lost function. Millions of patients worldwide suffer from injury to the nervous
system or disorders associated with its degeneration. Strokes are caused by
blood clots or local bleeding in the brain and result in the death or
degeneration of critical brain cells. Over 700,000 Americans suffer strokes each
year. Stroke patients are often permanently compromised by loss of cognitive
motor and sensory functions for which there are no treatments available today
except costly long-term rehabilitation programs which have limited utility in
restoring function. Over one million Americans suffer from Parkinson's disease,
a neurological disorder caused by the progressive degeneration of specific cells
within the brain that control certain motor functions. In the case of spinal
cord injuries, patients are often left partly or wholly paralyzed because nerve
and supporting cells in the spinal cord have been damaged and cannot regenerate.
Such patients are permanently disabled, often institutionalized, and may require
life support.
Embryonic stem cell-derived neural cells have been used by researchers to
treat nervous system disorders in animal models. Mouse embryonic stem cells were
stimulated to differentiate into neural cells which, when transplanted into mice
with neurological disorders, helped to restore normal function. In the case of
spinal cord injuries, neural cells derived from animal embryonic stem cells and
injected into the spinal cord injury site produced partial recovery of the
animal's ability to move and bear weight.
We have derived the major types of neural cells from hESCs in culture,
including human neurons, astrocytes and oligodendrocytes, and are characterizing
their functional properties. We have devoted a significant portion of our
research activities to developing procedures that could enable us to produce
these neural cells for transplantation therapy in humans. We are now testing
these cells in appropriate animal models to determine whether they can
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restore normal neural function. If these tests are successful, we can
potentially repair the damaged portions of patients' nervous systems by
transplanting hESC-differentiated neurons into the damaged area. In September
2002, the University of California's BioSTAR program awarded a grant to
continue support of our collaboration with researchers at the University of
California, Irvine on spinal cord injury.
Heart Disease. Heart muscle cells (cardiomyocytes) do not regenerate during
adult life. When heart muscle is damaged by injury or decreased blood flow,
functional contracting heart muscle is replaced with nonfunctional scar tissue.
Congestive heart failure, a common consequence of heart muscle or valve damage,
affects more than four million people in the United States. This year, it is
estimated that about 1.1 million people will have a heart attack, which is the
primary cause of heart muscle damage.
We can potentially treat heart disease by using cardiomyocytes derived from
hESCs. Researchers have demonstrated proof of concept of our approach in mice.
Mouse embryonic stem cells have been used to derive mouse cardiomyocytes. When
injected into the hearts of recipient adult mice, the cardiomyocytes repopulated
the heart tissue and stably integrated into the muscle tissue of the adult mouse
heart. These results suggest that hESC-derived cardiomyocytes could be developed
for cellular transplantation therapy in humans suffering from congestive heart
failure and the damage caused by heart attacks. We have derived human
cardiomyocytes from hESCs and observed their normal contractile function and
response to cardiac drugs. We have begun to test these cardiomyocytes in animal
models to establish the safety and efficacy of this cell-based therapy.
Diabetes. It is estimated that there are as many as one million Americans
suffering from the type of diabetes known as Type 1 Diabetes (Insulin Dependent
Diabetes Mellitus). Normally, certain cells in the pancreas, called the islet
(beta) cells, produce insulin which promotes the uptake of the sugar glucose by
cells in the human body. Degeneration of pancreatic islet (beta) cells results
in a lack of insulin in the bloodstream which results in diabetes. Although
diabetics can be treated with daily injections of insulin, these injections
enable only intermittent glucose control. As a result, patients with diabetes
suffer chronic degeneration of many organs, including the eye, kidney, nerves
and blood vessels. In some cases, patients with diabetes have been treated with
islet (beta) cell transplantation. However, poor availability of suitable
sources for islet (beta) cell transplantation and the complications of the
required co-administration of immunosuppressive drugs make this approach
impractical as a treatment for the growing numbers of individuals suffering from
diabetes.
We are currently developing methods to derive insulin producing islet Beta
cells from hESCs. Future work includes improving the yield of islet cells,
characterizing their secretion of insulin in response to glucose and
transplanting the islets to animal models of diabetes. If these tests are
successful, we plan to infuse those cells into the liver of patients with
severe, brittle Type 1 (insulin-requiring) diabetes.
Osteoporosis and Non-Union Bone Fractures. Osteoporosis, or loss of bone
density, is a common condition associated with aging and hormonal changes in
post-menopausal women. In addition to skeletal deformities, back pain and loss
of height, the disease causes over 1.5 million fractures per year in the United
States alone. These fractures often occur after minimal trauma and if severe, as
in hip fracture, carry average mortality rates as high as 24%, resulting in
long-term nursing home care for nearly half of those who survive. Total health
care costs for osteoporosis and its complications are estimated at $17 billion
per year in the United States.
The primary cause of the disease is metabolic bone loss (mediated by
osteoclasts -- cells which resorb bone) that is incompletely compensated by new
bone formation (mediated by osteoblasts -- cells which form new bone).
Osteoblast activity declines over human lifespan and fails to keep pace with the
increasing activity of osteoclasts, resulting in progressive loss of bone
density leading to fracture, pain and deformity.
We have recently derived from hESCs cells that are positive for
osteocalcin. Current work focuses on confirming their characteristics as
osteoblasts, improving cell yields, testing function in vitro and then testing
the cells in animals. We have an opportunity to infuse osteoblasts derived from
hESCs to treat osteoporosis. The clinical approach will first test the cells in
non-union fractures (fractures of the long bones of the leg or arm that do not
heal). If these trials are successful, we plan to proceed to test the cells in
patients with severe refractory osteoporosis.
Osteoarthritis. Osteoarthritis, or Degenerative Joint Disease, is an
extremely common condition characterized by degradation of cartilage in joints,
often accompanied by bone remodeling and bone overgrowth at the affected joints.
Depending on the criteria for diagnosis, it can be argued that the majority of
the population over 50 is afflicted by the disease. Osteoarthritis is the
leading cause of joint pain and joint disability in middle-aged and elderly
patients.
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The disease has many causes, but the end result is a structural degradation
of joint cartilage and a failure of chondrocytes (cartilage-forming cells) to
repair the degraded cartilage collagen matrix. We plan to derive chondrocytes
from hESCs and after successful in vitro and animal testing, treat patients with
osteoarthritis by injecting these chondrocytes directly into their affected
joints.
Hematologic Diseases. The hematologic system (the circulating cells of
blood) is one of the rare tissues of the human body that can replenish itself
throughout life. Nevertheless, the critical importance of the blood cells and
the many diseases that can affect those cells have caused the emergence of an
entire subspecialty in medicine: hematology -- the study of blood and its
diseases.
One of the most complex and impactful areas of hematology is bone marrow
transplantation, now used to treat patients with bone marrow failure, leukemia,
lymphoma, myeloma and solid tumors such as breast cancer. The most common
indications for the procedure are: 1) failure of bone marrow stem cells to
produce a particular blood cell type(s), such as aplastic anemia (a deficiency
of mature circulating blood cells), 2) infiltration of bone marrow by tumor
cells which displace the marrow and cause deficiencies of mature circulating
blood cells, or 3) side effects of chemotherapy or radiotherapy used for cancer
treatment which is toxic to bone marrow stem cells. Although complex and
expensive, the use of bone marrow transplantation is increasing worldwide. A
major unresolved problem in the procedure is the lack of availability of
suitably matched marrow donors, which severely limits the numbers of patients
who can undergo the transplant.
We have recently derived hematopoietic stem cells from hESCs with our
collaborator and have begun testing them in animal models of bone marrow
transplantation. If these animal tests and other in vitro tests are positive,
hematopoietic stem cells produced from hESCs may find use not only in
hematopoietic transplantation therapies, but also in procedures designed to
prevent immune rejection of other hESC-derived transplanted cells. In January
2003, we announced that we had obtained a license to hESC-produced hematopoietic
cells from the Robarts Institute and a license from the Wisconsin Alumni
Research Foundation ("WARF") to a U.S. patent covering the use of hESC-derived
hematopoietic cells to prevent immune rejection. This approach could potentially
eliminate the need for immunosuppressive drugs and patient-specific treatments
based on "adult" stem cells.
Skin. The skin is a major organ of the body whose deterioration with age
impacts not just human physical health but also appearance and self-esteem. The
thinning and increased wrinkling of older skin is symptomatic of impaired wound
healing and results in increased frequency of chronic ulcers. Skin cancers are
more prevalent than any other form of cancer and are believed to be caused in
part by aging of skin cells.
We have studied the activation of telomerase in skin cells. Our scientists
and other researchers have established that skin cells age in tissue culture and
in the body with loss of telomeric DNA. The restoration of telomerase activity
in skin cells in culture dramatically extends the healthy lifespan of these
cells. Animal models of telomere loss also correlate cellular aging with
thinning of skin, graying of hair, chronic ulcerative lesions at areas of stress
and reduced ability to repair wounds. Our approach to the therapeutic use of
telomerase activation in skin includes both small molecule drug discovery and
biological methods of restoring telomerase in various skin cells. We have
demonstrated that telomerase activation by gene therapy significantly improves
wound healing in a rabbit model of skin ulceration.
Commercial Collaborations
We believe that our broad scientific platforms will generate significant
opportunities for a variety of strategic collaborations. We have established and
intend to continue to establish selective collaborations with leading
pharmaceutical, diagnostic and technology companies to enhance our research,
development and commercialization capabilities and to participate in
commercialization opportunities.
Kyowa Hakko Collaboration
Under our April 1995 license and research collaboration agreement with
Kyowa Hakko Kogyo Co., Ltd. we received a total of $20 million of research
funding to support our program to discover a telomerase inhibitor for the
treatment of cancer. All of this research funding had been received as of
December 31, 2001. This research led to the discovery of GRN163. Kyowa Hakko has
rights to co-develop and market GRN163 and other compounds selected under the
collaboration in Asia, in return for paying us future payments upon the
achievement of certain
9
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 our common stock in connection with our initial public offering.
Ribozyme Pharmaceuticals Inc. (RPI) Collaboration
In December 2001, we entered into a collaboration with RPI to accelerate
process development for our lead telomerase inhibitor, GRN163. Under the terms
of the collaboration, RPI assisted us in the scale-up and optimization of the
manufacturing process for GRN163. During 2002, RPI began supplying us with
research quantities of GRN163. In July 2002, we and RPI entered into an
agreement under which RPI will manufacture GMP-grade GRN163 for us.
Telomerase Cancer Vaccine Clinical Development at Duke University
In August 2000, we initiated a collaboration with Merix Bioscience, Inc. to
develop telomerase-based cancer vaccines for clinical and commercial
applications using Merix's proprietary ex vivo RNA-modified dendritic cell
technology platform. Under the terms of the collaboration, we sponsored
preclinical studies at Duke University to confirm the safety and efficacy of
hTERT-modified dendritic cells to mediate immune responses against tumors.
In October 2001, we announced that researchers at Duke University Medical
Center had initiated a Phase 1 clinical trial of telomerase as an antigen for
cancer immunotherapy, using the Merix dendritic cell platform. The trial is
designed to assess the safety of using telomerase immunotherapy to treat
metastatic prostate cancer, and is being conducted under an IND submitted by
Johannes Vieweg, M.D., Associate Professor of Urology and Assistant Professor of
Immunology.
Dendreon Corporation License Agreement
In October 2001, we entered into a non-exclusive license agreement with
Dendreon Corporation to develop ex vivo cancer immunotherapies for clinical and
commercial applications. Under the terms of the license, we have granted
Dendreon non-exclusive rights to our telomerase technology. Dendreon plans to
combine telomerase with its proprietary dendritic cell-based technology using
telomerase as an antigen in a vaccine intended to induce a specific immune
response against malignant cancers. We received a license fee and will receive
milestone payments and royalties on future sales of these products.
Genetic Therapy, Inc. (GTI) License Agreement
In December 2001, we entered into a non-exclusive license agreement with
GTI, a subsidiary of Novartis AG, granting GTI non-exclusive rights to our human
telomerase (hTERT) promoter for the development of oncolytic virus products.
Under the terms of the agreement, GTI has the right to commercialize products
using the hTERT promoter in cancer therapeutics. We received a license fee and
will receive milestone payments and royalties on future sales of these products.
Diagnostic Collaborations
Research-Use-Only Kits. Roche Diagnostics (formerly Boehringer Mannheim)
has licensed all telomerase and telomere length assay technologies, including
TRAP, hTR, hTERT, and telomere length, for research-use-only kits for cancer. In
late 1996, Boehringer Mannheim commenced commercial sale of the TRAP research
kit. In 1999, Roche Diagnostics launched three additional research kits,
including quantitative TRAP, telomere length measurement and hTERT
quantification assays. In 2000, Roche Diagnostics launched an hTR quantification
kit. Roche Diagnostics is currently marketing a total of five kits.
Examples of other companies marketing research-use-only kits under license
include the following:
o In 1999, Roche Diagnostics entered into a sublicense agreement with
Dako under which Dako received non-exclusive rights to develop
antibody mediated telomerase detection assays and telomere length
measurement assays for research and clinical diagnostic applications
in oncology. We receive royalties from products commercialized under
this sublicense. In 1999, Dako marketed two kits for measuring
telomere length by fluorescence microscopy. In 2000, Dako launched a
telomere length measurement kit for flow cytometry. Dako is currently
marketing a total of three kits.
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o We licensed the TRAP assay for research-use-only to Oncor Inc. and the
license has been subsequently transferred to the Intergen Company
following the acquisition of Oncor's research reagent division by
Intergen. Intergen has since been acquired by Serologicals, Inc. and
Serologicals is currently marketing three TRAP research kits.
o Kyowa Medex Co. has licensed our TRAP assay technology on a
non-exclusive basis for the research-use-only market in Japan and
commenced commercial sale of Intergen's TRAP kit in late 1996.
o PharMingen (a Becton Dickinson company) has licensed our TRAP assay
and telomere length measurement technology on a non-exclusive basis
for sale to the research-use-only market and presently has two
research kits on the market.
Although we do not expect royalties from the sale of these 13 research kits
to be significant, the use of these kits has stimulated additional studies of
telomerase activity by academic laboratories and standardized the methodology
used to evaluate the role of telomerase in cancer.
In Vitro Diagnostics. In addition to the rights described above related to
research-use-only kits, our December 1997 license, product development and
marketing agreement with Roche Diagnostics (formally Boehringer Mannheim) also
grants Roche rights to develop and commercialize certain clinical in vitro
diagnostic products for cancer on an exclusive, worldwide basis. Under the
agreement, Roche provided reimbursement in the amount of $500,000 for research
previously conducted and is responsible for all clinical, regulatory,
manufacturing, marketing and sales efforts and expenses. We are 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, we have an option at our sole discretion to exercise co-promotion
rights with respect to in vitro diagnostic products sold by Roche in the United
States.
Clontech Marketing Agreement
In March 1999, we entered into a development and license agreement with
Clontech Laboratories, Inc. (a Becton Dickinson company) to market the
Infinity[TM] product family of primary human cell lines immortalized with
telomerase. Under the terms of the agreement, Clontech manufactured and marketed
products resulting from the use of our telomerase technology to the
not-for-profit research market. Clontech also had rights to supply products to
the biotechnology and pharmaceutical industries under licenses to be executed
between the individual commercial companies and us. Under the agreement,
Clontech paid us an up-front fee of $50,000 for development activities and we
were to equally share operating profits with Clontech from the sales of the
Infinity[TM] Cell Lines, while we will retain all licensing revenues.
In January 2003, we entered into a mutual agreement with Clontech to
terminate the development and license agreement, effective January 31, 2003.
Under the terms of the termination, we retain all rights to commercialize the
telomerase-immortalized cell lines that Clontech was previously selling.
Variagenics, Inc. License Agreement
In July 2002, we entered into a non-exclusive commercial license agreement
with Variagenics, Inc. for use of our telomerase cell immortalization technology
for pharmacogenomics applications that are expected to lead to the development
of molecular diagnostic products to be used by physicians for selection of
optimal therapy for patients. Under the agreement, we received a license fee and
will receive milestone payments and royalties on future sales of these products.
PanCel Corporation License Agreement
In November 2002, we entered into a non-exclusive license agreement with
PanCel Corporation for the use of telomerase to develop and commercialize
macroencapsulated immortalized primary human pancreatic islet cells for the
treatment of diabetes. Under the agreement, we received a license fee and will
receive royalties on future sales of these products.
Celera Genomics Collaboration
In May 2000, we entered into a collaborative research and license agreement
with Celera Genomics to combine our expertise in human embryonic stem cell
biology with Celera's DNA sequencing and gene discovery capabilities.
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In September 2001, we completed the identification of genes expressed in
undifferentiated and differentiated human embryonic stem cells. Since that time
we have been analyzing the large database of DNA sequence data and related
information derived from this collaboration, and are pursuing patent protection
for our discoveries. We intend to use the database information to enhance our
hESC programs as well as potentially to develop and commercialize, or license
others to develop and commercialize, small molecule drugs, protein therapeutics,
cell or gene therapy products, and prenatal diagnostics that target genes or
gene products identified in the research.
Nuclear Transfer Agreements
We are non-exclusively licensing our nuclear transfer technology for
commercial applications in agriculture, xenotransplantation and production of
biologicals. To date, we have signed seven licenses or license options to
various companies for applications in chicken, cows, pigs, goats or other
animals. These companies include AviGenics, Inc., Origen Therapeutics, Inc.,
Viragen, Inc., Clone International, AgResearch Pty Ltd, ProLinia, Inc. and Nexia
Biotechnologies Inc.
Research Collaborations
We selectively enter into, and intend to continue to enter into,
collaborative research agreements with leading academic and research
institutions. We design these collaborative agreements to significantly enhance
our research and development capabilities while enabling us to obtain commercial
rights to intellectual property developed through the research collaboration.
Under these agreements, we generally provide funding or other resources for
scientific research in return for commercial rights to materials and discoveries
arising out of this research. We seek to retain rights to commercially develop
and market discoveries made under these research programs by obtaining rights to
exclusively license technology developed under them, including patents and
patent applications filed in connection with these research programs.
As of December 31, 2002, we have collaborative research agreements in
support of our telomerase programs in oncology and regenerative medicine with a
number of institutions, including Duke University, the National Cancer
Institute, Stanford University, the University of Texas Southwestern Medical
School at Dallas, the University of California at San Francisco, the Memorial
Sloan-Kettering Cancer Center, and Hong Kong University of Science and
Technology. We have collaborative research agreements in support of our research
on telomerase-immortalized cells with the Roslin Institute, the University of
Texas and others. We are continuing collaborative research agreements in support
of our human embryonic stem cell research in regenerative medicine programs with
the University of California at Irvine, the Robarts Institute, the Roslin
Institute, the University of Utah, the University of Washington and the
University of Wisconsin-Madison.
Roslin Institute Collaboration
Our collaboration with the Roslin Institute, in Midlothian, Scotland began
in May 1999, when we completed the acquisition of Roslin Bio-Med Ltd., a company
formed by the Roslin Institute, in order to complement and strengthen our
technology platforms. Under the terms of the agreement, pursuant to which Roslin
Bio-Med became a wholly-owned United Kingdom subsidiary known as Geron Bio-Med
Ltd, the Roslin Institute transferred to us the exclusive rights to the patent
applications covering nuclear transfer technology for all animal and human-based
biomedical applications, excluding (i) human reproductive cloning, (ii) the
production of therapeutic proteins in the milk of ruminants and rabbits and
(iii) the modification of milk composition for nutraceutical use.
In connection with this acquisition, we also formed a research
collaboration with the Roslin Institute under which we have agreed to provide
approximately $20.0 million in applied research funding over six years (of which
$9.0 million remains payable at December 31, 2002) and we retain exclusive
license rights to commercialize the results of the research. We are using the
Roslin Institute's expertise in developmental biology to advance our
regenerative medicine programs based on human embryonic stem cells. Among other
projects, we are collaborating with Roslin scientists to derive new hESC lines;
to genetically engineer hESCs to avoid immune rejection through gene targeting
methods so as to produce cells for transplant that will not be rejected by the
transplant recipient; and to differentiate hESCs into chondrocytes for treatment
of osteoarthritis and osteoblasts for treating osteoporosis.
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Patents and Proprietary Technology
Our three core technology platforms are supported by a broad intellectual
property portfolio of issued patents and pending patent applications. We
currently own or have licensed over 110 issued or allowed United States patents,
87 granted or accepted foreign patents and over 300 patent applications that are
pending around the world.
Our policy is to seek appropriate patent protection for inventions in our
core technology platforms as well as ancillary technologies that support these
platforms or otherwise provide a competitive advantage to us. We achieve this by
filing patent applications for discoveries made by our scientists, as well as
those that we make in conjunction with our scientific collaborators and
strategic partners. Typically, although not always, we file patent applications
in the United States and internationally through the Patent Cooperation Treaty.
In addition, where appropriate we try to obtain licenses from other
organizations to patent filings that may be useful in advancing our scientific
and product development programs.
Our regenerative medicine program is founded on our human embryonic stem
cell platform, which is protected by patents rights that we either own or have
licensed. The patents that we have licensed include foundational human embryonic
stem cell (hESC) patents that arose from work that we funded at the University
of Wisconsin-Madison, as well as patents from The Johns Hopkins University
directed to human embryonic germ cells. We have also filed patent applications
to protect technologies developed by Geron scientists in our ongoing efforts to
develop products based on hESCs. By way of example, these patent applications
cover technologies that we believe will facilitate the commercial-scale
production of hESCs, such as methods for growing the cells without the need for
cell feeder layers. Patent applications that we own or have licensed also cover
cell types that can be made from hESCs, including hepatocytes (liver cells),
cardiomyocytes (heart muscle cells), neural cells (nerve cells, including
dopaminergic neurons and oligodendrocytes), chondrocytes (cartilage cells),
pancreatic islet cells, osteoblasts (bone cells) and hematopoietic cells
(blood-forming cells). Currently there are over 75 Geron-owned patent
applications pending around the world covering various aspects of our stem cell
technology. The first of these patents applications have now been granted,
including U.S. Patents Nos. 6,458,589 and 6,506,574 relating to hESC-derived
hepatocytes and Australian Patent Nos. 729,377 and 751,321 covering methods of
growing hESCs.
While our telomerase platform provides the basis for a number of different
product opportunities, it is the mainstay of our oncology program. Our extensive
development of telomerase technologies has so far produced over 44 issued or
allowed United States patents, 48 granted foreign patents and over 115 patent
applications pending around the world. Our issued United States patents include
patents covering the cloned genes that encode the RNA component (hTR) and the
catalytic protein component (hTERT) of human telomerase, as well as cells that
are immortalized by expression of recombinant hTERT. Aspects of our oncology
product development program covered by issued and pending patent applications
include cancer diagnostics based on detecting the expression of telomerase in
cancer cells, the use of telomerase as a cancer vaccine, the use of the hTERT
promoter to power cancer-killing genes and viruses, and telomerase inhibitors
for use as cancer therapeutics. Our GRN163 oncology therapeutic that is
currently under development is a modified oligonucleotide that is complementary
to a region of the telomerase RNA component termed the "template region". We own
issued patents that cover the sequence of this oligonucleotide, as well as
patents covering the modified chemistry that is used to build this
oligonucleotide.
Our third technology platform, nuclear transfer, is protected in part by
the patent rights that we acquired in 1999 with the acquisition of Roslin
Bio-Med, which we now operate as Geron Bio-Med. Two United States patents have
now issued for this technology, and 34 foreign patents have been granted or
accepted. In addition, we have more than 40 pending patent applications
worldwide relating to nuclear transfer, arising both from the acquired patent
rights and subsequent research that we funded at the Roslin Institute.
Intellectual property rights to nuclear transfer technology are the primary
asset of our licensing program through which we are granting licenses for
cloning animals for use in agriculture, xenotransplantation and production of
biologicals.
We endeavor to monitor worldwide patent filings by third parties that are
relevant to our business. Based on this monitoring, we may determine that an
action is appropriate to protect our business interests. Such actions may
include the filing of oppositions against the grant of a patent in overseas
jurisdictions, and the filing of a request for the declaration of an
interference with a U.S. patent application or issued patent. Similarly, third
parties may take similar actions against our patents. As examples, we are
currently involved in two interferences before the U.S. Patent and Trademark
Office (USPTO) involving patents and patent applications for nuclear transfer
technology and an opposition in Europe filed against our granted patent relating
to the measurement of telomerase activity.
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Government Regulation
Regulation by governmental authorities in the United States and other
countries is a significant factor in the development, manufacture and marketing
of our proposed products and in our ongoing research and product development
activities. The nature and extent to which such regulation applies to us will
vary depending on the nature of any products which may be developed by us. We
anticipate that many, if not all, of our products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic products are subject to rigorous preclinical and clinical
testing and other approval procedures of the Food and Drug Administration (FDA),
and similar regulatory authorities in European and other countries. Various
governmental statutes and regulations also govern or influence testing,
manufacturing, safety, labeling, storage and recordkeeping related to such
products and their marketing. The process of obtaining these approvals and the
subsequent compliance with appropriate statutes and regulations require the
expenditure of substantial time and money. Any failure by us or our
collaborators to obtain, or any delay in obtaining these approvals may affect
the marketing of any products developed by us, will prevent us from generating
product revenues and obtaining adequate cash to continue present and planned
operations.
FDA Approval Process
Prior to commencement of clinical studies involving humans, preclinical
testing of new pharmaceutical products is generally conducted on animals in the
laboratory to evaluate the potential efficacy and the safety of the product. The
results of these studies are submitted to the FDA as a part of an
Investigational New Drug application, which must become effective before
clinical testing in humans can begin. Typically, human clinical evaluation
involves a time consuming and costly three-phase process. In Phase 1, clinical
trials are conducted with a small number of people to assess safety and to
evaluate the pattern of drug distribution and metabolism within the body. In
Phase 2, clinical trials are conducted with groups of patients afflicted with a
specific disease in order to determine preliminary efficacy, optimal dosages and
expanded evidence of safety. In Phase 3, large-scale, multi-center, comparative
trials are conducted with patients afflicted with a target disease in order to
provide enough data to demonstrate the efficacy and safety required by the FDA.
The FDA closely monitors the progress of each of the three phases of clinical
testing and may, at its discretion, re-evaluate, alter, suspend, or terminate
the testing based upon the data which have been accumulated to that point and
its assessment of the risk/benefit ratio to the patient. Monitoring of all
aspects of the study to minimize risks is a continuing process. Reports of all
adverse events must be made to the FDA.
The results of the preclinical and clinical testing on a non-biologic drug
and certain diagnostic drugs are submitted to the FDA in the form of a New Drug
Application, or NDA, for approval prior to commencement of commercial sales. In
the case of vaccines or gene and cell therapies, the results of clinical trials
are submitted as a Biologics License Application or BLA. In responding to a NDA
or BLA, the FDA may grant marketing approval, request additional information or
deny the application if the FDA determines that the application does not satisfy
its regulatory approval criteria. There can be no assurance that approvals will
be granted on a timely basis, if at all, for any of our products.
European and Other Regulatory Approval
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities in Europe and other countries will likely be
necessary prior to commencement of marketing the product in such countries. The
regulatory authorities in each country may impose their own requirements and may
refuse to grant, or may require additional data before granting an approval,
even though the relevant product has been approved by the FDA or another
authority. As with the FDA, the regulatory authorities in the European Union, or
EU, and other developed countries have lengthy approval processes for
pharmaceutical products. The process for gaining approval in particular
countries varies, but generally follows a similar sequence to that described for
FDA approval. In Europe, the European Committee for Proprietary Medicinal
Products provides a mechanism for EU-member states to exchange information on
all aspects of product licensing. The EU has established a European agency for
the evaluation of medical products, with both a centralized community procedure
and a decentralized procedure, the latter being based on the principle of
licensing within one member country followed by mutual recognition by the other
member countries.
14
Other Regulations
We are also subject to various United States, federal, state, local and
international laws, regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices and the use and disposal of
hazardous or potentially hazardous substances, including radioactive compounds
and infectious disease agents, used in connection with our research work. We
cannot accurately predict the extent of government regulation which might result
from future legislation or administrative action.
Scientific Consultants
We have consulting agreements with a number of leading academic scientists
and clinicians. These individuals serve as key consultants or as members of
"clinical focus group panels" with respect to our product development programs
and strategies. They are distinguished scientists and clinicians with expertise
in numerous scientific fields, including embryonic stem cells, nuclear transfer
and telomere and telomerase biology, as well as developmental biology, cellular
biology and molecular biology.
We use consultants to provide us with expert advice and consultation on our
scientific programs and strategies. They also serve as important contacts for us
throughout the broader scientific community.
We retain each consultant according to the terms of a consulting agreement.
Under such agreements, some consultants hold options to purchase our common
stock, subject to the vesting requirements contained in the consulting
agreements. In addition, we pay them a consulting fee and reimburse them for
out-of-pocket expenses incurred in performing their services for us. Our
consultants are employed by institutions other than ours, and therefore may have
commitments to, or consulting or advisory agreements with, other entities or
academic institutions that may limit their availability to us.
As of December 31, 2002, our key consultants included the following
individuals:
Stephen Benkovic, Ph.D., is Professor of Chemistry at the Pennsylvania
State University. Dr. Benkovic is a member of the Chemical Society and the
recipient of the 1998 Chemical Pioneer Award given by the American Institute of
Chemists. He is an internationally recognized expert in protein chemistry,
including the enzymology of DNA polymerases.
John Clark, OBE, FRSE, Ph.D., is Head of the Division of Molecular Biology
at the Roslin Institute and is the leader of Geron Bio-Med's cellular
reprogramming team. Dr. Clark was a scientific founder of PPL Therapeutics, plc
and is also a Professor in the Division of Biology at Edinburgh University. He
received the Order of the British Empire from the Queen of England in 1997 for
his contribution to biotechnology and particularly his pioneering work on the
modification of milk composition by genetic engineering of livestock. He was
elected to the Royal Society of Edinburgh in 1999. Current research areas
include use of genetically modified animals for biomedical and agricultural
applications and fundamental studies of the control of gene expression.
Stephen Dunnett, Ph.D., is a Professorial Fellow at the School of
Biosciences, Cardiff University, Wales. Dr. Dunnett's laboratory focuses on the
preclinical development of cell based transplantation therapies for neurological
diseases. Dr. Dunnett is a consultant to Geron's human embryonic stem cell based
neural disease programs.
Greg Korbutt, Ph.D., is an Associate Professor of Surgery and the
Co-Director of the islet transplantation group at the University of Alberta. Dr.
Korbutt has extensive experience in islet cell processing, animal models of
diabetes and xenotransplantation. Dr. Korbutt serves as a consultant to Geron's
human embryonic stem cell based diabetes program.
Jeffrey Kordower, Ph.D., is a Professor of Neurosciences at
Rush-Presbyterian Medical Center. Dr. Kordower's research is focused on the
development of therapies for Parkinson's disease and has pioneered the
development of primate models to test candidate therapeutics. Dr. Kordower is a
consultant to Geron's human embryonic stem cell based Parkinson's disease
project.
Malcolm Moore, Ph.D., is a Professor of Biology at the Sloan-Kettering
Division, Cornell Graduate School of Medical Sciences and is internationally
known for his pioneering work in hematopoiesis, growth factors and cytokines. He
is also currently incumbent of the Enid A. Haupt Chair of Cell Biology, Memorial
Sloan-Kettering Cancer Center. Dr. Moore received the William B. Coley Award For
Distinguished Research in Immunology by the Cancer Research Institute in June
1995.
15
Ray Rajotte, Ph.D., is a Professor of Surgery and Medicine, Director of the
Islet Transplantation Group, and Director of the Surgical-Medical Research
Institute at the University of Alberta. Dr. Rajotte founded the islet
transplantation group at the University of Alberta and has led the development
of islet transplantation from the laboratory to clinical implementation. Dr.
Rajotte was key in establishing the Alberta Foundation for Diabetes Research to
help support the clinical trials at the University of Alberta. Dr. Rajotte is a
consultant to Geron's human embryonic stem cell based diabetes program.
Mahendra Rao, Ph.D., joined the National Institute of Aging as a Senior
Investigator in 2001. He received the Herrick-Young Investigator Award from AAAS
in 1999. Dr. Rao's laboratory explores the cellular and molecular mechanisms
that regulate the proliferation, differentiation and survival of neural
progenitor cells in the brain and spinal cord, both during development and in
adulthood. Dr. Rao serves as a consultant for Geron's human embryonic stem cell
based neural disease program.
Jerry W. Shay, Ph.D., is a Professor of Cell Biology and Neuroscience at
the University of Texas Southwestern Medical Center at Dallas. Dr. Shay's
research focuses on molecular mechanisms of tumorigenesis and immortalization
with a particular emphasis on cancer of the breast. Dr. Shay has numerous
publications, honors and patents. He is also on the editorial board for the
Journal of Clinical Pathology.
Ian Wilmut, OBE, B.Sc., Ph.D., D.Sc., F.Med.Sci., is Professor of the
Division of Biological Science of the University of Edinburgh and is the head of
the Geron Bio-Med nuclear transfer team. Professor Wilmut has received numerous
prizes, including the Sir John Hammond Prize by the British Society of Animal
Production, the Golden Plate Award by the American Academy of Achievement of
Science and Technology, the Lord Lloyd of Kilgerran Prize by the Foundation of
Science and Technology, and the Order of the British Empire from the Queen of
England in 1999. He is the leader of the team that cloned Dolly, the first
animal to develop after nuclear transfer from an adult cell, and is an
internationally recognized expert in the field of nuclear transfer. Current
research areas include early mammalian development, embryo manipulation, nuclear
transfer and gene targeting in mice, cattle, sheep and pigs.
Judi Weissinger, Ph.D., is the CEO of Weissinger Solutions, a consulting
firm that provides strategic regulatory guidance for the development of
therapeutic products. Dr. Weissinger has served as a regulatory officer for
Rhone-Poulenc Rorer, Applied Immune Sciences and Glaxo, Inc. Dr. Weissinger also
served for over nine years at the FDA. Dr. Weissinger has extensive regulatory
expertise in the fields of cell and gene therapy and consults with Geron on
several projects.
Woodring E. Wright, M.D., Ph.D., is a Professor of Cell Biology and
Neuroscience at the University of Texas Southwestern Medical Center at Dallas.
He is widely recognized as a leading molecular biologist working in the field of
cellular senescence and the molecular basis of muscle development.
Geron Ethics Advisory Board
In July 1998, we created an ethics advisory board whose members represent a
variety of philosophical and theological traditions with broad knowledge in
health care ethics. The advisory board functions as an independent entity,
consulting and giving advice to us on the ethical aspects of our work. Members
of the advisory board have no financial interest in Geron.
As of December 31, 2002, the ethics advisory board consisted of the
following individuals:
Karen Lebacqz, Ph.D., is the Robert Gordon Sproul Professor of Theological
Ethics at the Pacific School of Religion in the Graduate Theological Union,
Berkeley, California. She has published extensively on ethics and genetics as
well as research ethics and served on the National Commission for the Protection
of Human Subjects of Biomedical and Behavioral Research.
Albert Jonsen, Ph.D., is Professor Emeritus of Ethics in Medicine and
former chairperson of the Department of Medical History and Ethics, School of
Medicine, University of Washington. He has contributed chapters to more than 70
books on medicine and health care and his articles have appeared in numerous
publications.
Ted Peters, Ph.D., is Professor of Systematic Theology at Pacific Lutheran
Theological Seminary. He conducts research at the Center for Theology and the
National Sciences where he is principal investigator for a research project on
"Theological and Ethical Implications of the Human Genome Initiative." He is
also editor of Genetics: Issues of Social Justice.
16
Ernle W. D. Young, Ph.D., is Clinical Professor of Ethics in the Department
of Medicine and Pediatrics at Stanford University School of Medicine, a
Co-Director of Stanford University's Center for Biomedical Ethics, the Clinical
Ethics Consultant to Stanford University Hospital and to Veterans' Affairs
hospitals in Palo Alto and Fresno, California. He has published extensively on
issues in bioethics.
Laurie Zoloth-Dorfman, Ph.D., is Professor of Medical Ethics and Humanities
of the Feinberg School of Medicine at Northwestern University and a Co-Founder
of The Ethics Practice, a group which provides education services and
consultation on bioethics to health care providers and health care systems. She
has published on bioethics, religion, and health care.
Executive Officers of the Company
The following table sets forth certain information with respect to the
executive officers of Geron Corporation:
Name Age Position
- ---------------------------------------- ----- ------------------------------------------------
Thomas B. Okarma, Ph.D., M.D. .......... 57 President, Chief Executive Officer and Director
David L. Greenwood ..................... 51 Chief Financial Officer, Senior Vice President
Corporate Development and Treasurer
David J. Earp, Ph.D., J.D. ............. 38 Vice President, Intellectual Property
Calvin B. Harley, Ph.D. ................ 50 Chief Scientific Officer
Melissa A. Kelly ....................... 39 Vice President, Oncology
Jane S. Lebkowski, Ph.D. ............... 47 Vice President, Regenerative Medicine
William D. Stempel, J.D. ............... 49 Vice President, General Counsel and Secretary
Thomas B. Okarma, Ph.D., M.D., has served as our President, Chief Executive
Officer and director since July 1999. He is also a director of Geron Bio-Med
Limited, a United Kingdom company and wholly-owned subsidiary of Geron. From May
1998 until July 1999, Dr. Okarma was the Vice President of Research and
Development. From December 1997 until May 1998, Dr. Okarma was Vice President of
Cell Therapies. From 1985 until joining us, Dr. Okarma, the scientific founder
of Applied Immune Sciences, Inc., served initially as Vice President of Research
and Development and then as its chairman, chief executive officer and a
director, until 1995 when it was acquired by Rhone-Poulenc Rorer. Dr. Okarma was
a Senior Vice President at Rhone-Poulenc Rorer from the time of the acquisition
of Applied Immune Sciences, Inc. until December 1996. From 1980 to 1985, Dr.
Okarma was a member of the faculty of 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.
David L. Greenwood has served as our Chief Financial Officer and Treasurer
since August 1995, Vice President of Corporate Development from April 1997 until
August 1999 and Senior Vice President of Corporate Development since August
1999. He is a director of Geron Bio-Med Limited, a United Kingdom company, a
wholly-owned subsidiary of Geron, and Clone International Pty Ltd., an
Australian company. From 1979 until joining us, Mr. Greenwood held various
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.
David J. Earp, J.D., Ph.D., joined us in June 1999 and has served as our
Vice President of Intellectual Property since October 1999. From 1992 until
joining us, Dr. Earp was with the intellectual property law firm of Klarquist
Sparkman Campbell Leigh and Whinston, LLP where his practice focused on
biotechnology patent law. Dr. Earp holds a B.S. in microbiology from the
University of Leeds, England, a Ph.D. in biochemistry and molecular biology from
The University of Cambridge, England, and conducted postdoctoral research at the
University of California at Berkeley/U.S.D.A. Plant Gene Expression Center. He
received his J.D., magna cum laude from the Northwestern School of Law of Lewis
and Clark College in Portland, Oregon.
Calvin B. Harley, Ph.D., has served as our Chief Scientific Officer since
July 1996. From May 1994 until July 1996, Dr. Harley was Vice President of
Research and from April 1993 to May 1994, Dr. Harley was Director, Cell Biology.
Dr. Harley was an Associate Professor from 1989 until joining us, and from 1982
to 1989, an Assistant Professor of Biochemistry at McMaster University. Dr.
Harley was also an executive of the Canadian Association
17
on Gerontology, Division of Biological Sciences from 1987 to 1991. Dr. Harley
holds a B.S. from the University of Waterloo, a Ph.D. from McMaster University,
and conducted postdoctoral work at the University of Sussex and the University
of California at San Francisco.
Melissa A. Kelly, has served as our Vice President of Oncology since
January 2003, Vice President of Corporate Development since April 2002 and
General Manager of Research and Development Technologies since April 2001. Ms.
Kelly joined us in November 1998 as Director of Corporate Development. From 1990
to 1998, Ms. Kelly worked at Genetics Institute, Inc., serving initially as
Assistant Treasurer and then as Associate Director of Preclinical Operations
where she was responsible for all business development, regulatory, and project
management activities for the Preclinical Development function. From 1985 to
1990, Ms. Kelly held financial management positions at several companies in the
high technology industry. Ms. Kelly graduated summa cum laude with a B.S. in
Accounting from Boston College and received an M.B.A. in finance with high
distinction from Babson College.
Jane S. Lebkowski, Ph.D., has served as our Vice President of Regenerative
Medicine since August 1999. Since joining us in April 1998 and until August
1999, Dr. Lebkowski served as Senior Director, Cell and Gene Therapies.
Formerly, Dr. Lebkowski was employed at Applied Immune Sciences from 1986 to
1995 where she served as Vice President, Research and Development. In 1995,
Applied Immune Sciences was acquired by Rhone-Poulenc Rorer, at which time Dr.
Lebkowski was appointed Vice President, Discovery & Product Development. Dr.
Lebkowski graduated Phi Beta Kappa with a B.S. in Chemistry and Biology from
Syracuse University and received her Ph.D. from Princeton University.
William D. Stempel, J.D., has served as our Vice President and General
Counsel since January 2001 and Secretary since May 2001. From 1998 until joining
us, Mr. Stempel was the General Counsel at UCSF Stanford Health Care in San
Francisco. From 1987 to 1998, Mr. Stempel was Deputy General Counsel at Yale
University where he worked in a wide range of areas including intellectual
property, medical affairs and research administration. Mr. Stempel holds B.A.
and J.D. degrees from Yale University. He is a member of the bars of the States
of California, Connecticut and New York, and the United States District Courts
for the District of Connecticut, Southern District of New York and Eastern
District of New York.
Employees
As of December 31, 2002, we had 92 full-time employees of whom 30 hold
Ph.D. degrees and 10 hold other advanced degrees. Of the total workforce, 71
were engaged in, or directly support, our research and development activities
and 21 were engaged in business development, finance and administration. On
January 21, 2003, we announced a restructuring under which we reduced our
research staff by 29 employees and our support staff by 11 employees, leaving us
with 52 full-time employees. We also retain outside consultants. None of our
employees is covered by a collective bargaining agreement, nor have we
experienced work stoppages. We consider relations with our employees to be good.
Restructurings
In separate actions in June 2002 and January 2003 and in response to
external capital market conditions, we restructured the company in order to
conserve cash and focus our internal resources on our most advanced product
development programs, including GRN163, our lead anti-cancer product and
regenerative medicine programs based on neural cells, cardiomyocytes and
pancreatic islet cells. These restructurings resulted in a total combined
reduction of approximately 64% of our work force in Menlo Park, California and
Edinburgh, Scotland.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business is subject to various risks, including those described below.
You should carefully consider these risk factors, together with all of the other
information included in this Form 10-K. Any of these risks could materially
adversely affect our business, operating results and financial condition.
Our business is at an early stage of development.
The science and technology of telomere biology and telomerase, human
embryonic stem cells, and nuclear transfer are relatively new. Our business is
at an early stage of development. Our ability to produce products that progress
to and through clinical trials is subject to our ability to, among other things:
18
o continue to have success with our research and development efforts;
o select therapeutic compounds for development;
o obtain the required regulatory approvals; and
o manufacture and market resulting products.
When potential lead drug compounds or product candidates are identified
through our research programs, they will require significant preclinical and
clinical testing prior to regulatory approval in the United States and
elsewhere. In addition, we will also need to determine whether any of these
potential products can be manufactured in commercial quantities at an acceptable
cost. Our efforts may not result in a product that can be marketed. Because of
the significant scientific, regulatory and commercial milestones that must be
reached for any of our development programs to be successful, any program may be
abandoned, even after significant resources have been expended.
We have a history of operating losses and anticipate future losses; continued
losses could impair our ability to sustain operations.
We have incurred operating losses every year since our operations began in
1990. As of December 31, 2002, our accumulated deficit was approximately $225.8
million. Losses have resulted principally from costs incurred in connection with
our research and development activities and from general and administrative
costs associated with our operations. We expect to incur additional operating
losses as our development efforts and clinical testing activities are expanded.
Substantially all of our revenues to date have been research support payments
under collaboration agreements. We may be unsuccessful in entering into any new
corporate collaboration that results in revenues. Even if we are able to obtain
new collaboration arrangements with third parties the revenues generated from
these arrangements may not be sufficient alone to continue or expand our
research or development activities and otherwise sustain our operations.
We are unable to estimate at this time the level of revenue to be received
from the sale of diagnostic products and telomerase-immortalized cell lines, and
do not currently expect to receive significant revenues from the sale of these
products. Our ability to continue or expand our research activities and
otherwise sustain our operations is dependent on our ability, alone or with
others to, among other things, manufacture and market therapeutic products.
We may never receive material revenues from product sales or if we do
receive revenues, such revenues may not be sufficient to continue or expand our
research or development activities and otherwise sustain our operations.
We will need additional capital to conduct our operations and develop our
products, and our ability to obtain the necessary funding is uncertain.
We will require substantial capital resources in order to conduct our
operations and develop our products. While we estimate that our existing capital
resources, interest income and equipment financing arrangements will be
sufficient to fund our current and planned operations through December 31, 2004,
we cannot guarantee that this will be the case. The timing and degree of any
future capital requirements will depend on many factors, including:
o the accuracy of the assumptions underlying our estimates for our
capital needs in 2003 and beyond;
o continued scientific progress in our research and development
programs;
o the magnitude and scope of our research and development programs;
o our ability to maintain and establish strategic arrangements for
research, development, clinical testing, manufacturing and marketing;
o our progress with preclinical and clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o the costs involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims; and
o the potential for new technologies and products.
19
We intend to acquire additional funding through strategic collaborations,
public or private equity financings, capital lease transactions or other
financing sources that may be available. Additional financing may not be
available on acceptable terms, or 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,
these arrangements may require us to relinquish rights to some of our
technologies, product candidates or products that we would otherwise seek to
develop and commercialize ourselves. If sufficient capital is not available, we
may be required to delay, reduce the scope of or eliminate one or more of our
programs, any of which could have a material adverse effect on our business.
We may be unable to identify a safe and effective inhibitor of telomerase that
can be developed into a commercially viable cancer treatment product, which
would adversely impact our future business prospects.
As a result of our drug discovery efforts to date, we have identified
compounds in laboratory studies that demonstrate potential for inhibiting
telomerase in humans. We have selected one of these compounds, GRN163, as a lead
compound for development as a telomerase inhibitor for cancer. Further research
is required to determine if this compound can be fully developed as an
efficacious, safe and commercially viable treatment for cancer.
This compound, and other compounds we have identified, may prove to have
undesirable and unintended side effects or other characteristics adversely
affecting its safety, efficacy or cost-effectiveness that would likely prevent
or limit its commercial use. Accordingly, it may not be appropriate for us to
proceed with clinical development, to obtain regulatory approval or to market a
telomerase inhibitor for the treatment of cancer. If we abandon our research for
cancer treatment for any of these reasons or for other reasons, our business
prospects would be materially and adversely affected.
If our access to necessary tissue samples, information or licensed technologies
is restricted, we will not be able to develop our business.
To continue the research and development of our therapeutic and diagnostic
products, we need access to normal and diseased human and other tissue samples,
other biological materials and related clinical and other information. We
compete with many other companies for these materials and information. We may
not be able to obtain or maintain access to these materials and information on
acceptable terms, if at all. In addition, government regulation in the United
States and foreign countries could result in restricted access to, or
prohibiting the use of, human and other tissue samples. If we lose access to
sufficient numbers or sources of tissue samples, or if tighter restrictions are
imposed on our use of the information generated from tissue samples, our
business will be materially harmed.
Some of our competitors may develop technologies that are superior to or more
cost-effective than ours, which may impact the commercial viability of our
technologies and which may significantly damage our ability to sustain
operations.
The pharmaceutical and biotechnology industries are intensely competitive.
Other pharmaceutical and biotechnology companies and research organizations
currently engage in or have in the past engaged in efforts related to the
biological mechanisms that are the focus of our programs in oncology and
regenerative medicine, including the study of telomeres, telomerase, human
embryonic stem cells, and nuclear transfer. In addition, other products and
therapies that could compete directly with the products that we are seeking to
develop and market currently exist or are being developed by pharmaceutical and
biopharmaceutical companies and by academic and other research organizations.
Many companies are also developing alternative therapies to treat cancer
and, in this regard, are competitors of ours. Many of the pharmaceutical
companies developing and marketing these competing products have significantly
greater financial resources and expertise than we do in:
o research and development;
o manufacturing;
o preclinical and clinical testing;
o obtaining regulatory approvals; and
o marketing.
20
Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large and established
companies. Academic institutions, government agencies and other public and
private research organizations may also conduct research, seek patent protection
and establish collaborative arrangements for research, clinical development and
marketing of products similar to ours. These companies and institutions compete
with us in recruiting and retaining qualified scientific and management
personnel as well as in acquiring technologies complementary to our programs.
In addition to the above factors, we expect to face competition in the
following areas:
o product efficacy and safety;
o the timing and scope of regulatory consents;
o availability of resources;
o reimbursement coverage;
o price; and
o patent position, including potentially dominant patent positions of
others.
As a result of the foregoing, our competitors may develop more effective or
more affordable products, or achieve earlier patent protection or product
commercialization than we do. Most significantly, competitive products may
render the products that we develop obsolete.
The ethical, legal and social implications of our research using embryonic stem
cells and nuclear transfer could prevent us from developing or gaining
acceptance for commercially viable products in this area.
Our programs in regenerative medicine may involve the use of human
pluripotent stem cells that would be derived from human embryonic or fetal
tissue. The use of human embryonic stem cells gives rise to ethical, legal and
social issues regarding the appropriate use of these cells. In the event that
our research related to human embryonic stem cells becomes the subject of
adverse commentary or publicity, the market price for our common stock could be
significantly harmed.
Some groups have voiced opposition to our technology and practices. The
concepts of cell regeneration, cell immortality, and nuclear transfer have
stimulated significant debate in social and political arenas. We use human
pluripotent stem cells derived through a process that uses as the starting
material donated embryos created for in vitro fertilization procedures but no
longer needed or suitable for that use. Many research institutions, including
some of our scientific collaborators, have adopted policies regarding the
ethical use of human embryonic tissue. These policies may have the effect of
limiting the scope of research conducted using human embryonic stem cells,
resulting in reduced scientific progress. In addition, the United States
government and its agencies have in recent years refused to fund research which
involves the use of human embryonic tissue. President Bush announced on August
9, 2001 that he would permit federal funding of research on human embryonic stem
cells using the limited number of embryonic stem cell lines that had already
been created, but relatively few federal grants have been made so far. The
President's Council on Bioethics will monitor stem cell research, and the
guidelines and regulations it recommends may include restrictions on the scope
of research using human embryonic or fetal tissue. The Council issued a report
in July 2002 that recommended "that the federal government undertake a
thorough-going review of present and projected practices of human embryo
research, with the aim of establishing appropriate institutions to advise and
shape federal policy in this arena." Our inability to conduct research using
human embryonic stem cells due to such factors as government regulation or
otherwise could have a material adverse effect on us.
Finally, we acquired Roslin Bio-Med to gain the rights to somatic cell
nuclear transfer technology. We acquired exclusive rights to this technology for
all areas except human reproductive cloning and certain other limited
applications. Although we will not be pursuing human reproductive cloning, the
use of nuclear transfer to produce embryonic stem cells (referred to as
"therapeutic cloning") could provide scientific insights that would help us
advance our research. Government-imposed restrictions with respect to any or all
of these practices could:
o harm our ability to establish critical partnerships and
collaborations;
o prompt government regulation of our technologies;
21
o cause delays in our research and development; and
o cause a decrease in the price of our stock.
The U.S. Congress has recently considered legislation that would ban human
therapeutic cloning as well as reproductive cloning. Such a bill was passed by
the House of Representatives, although not by the Senate, and many legislators
reportedly favor such a ban. The July 2002 report of the President's Council on
Bioethics recommended a four-year moratorium on therapeutic cloning. If human
therapeutic cloning is restricted or banned, our ability to commercialize those
applications could be significantly harmed. Also, if regulatory bodies were to
ban nuclear transfer processes, our research using nuclear transfer technology
could be canceled and our business could be significantly harmed.
Entry into clinical trials with one or more products may not result in any
commercially viable products.
We do not expect to generate any significant revenues from product sales
for a period of several years. We may never generate revenues from product sales
or become profitable because of a variety of risks inherent in our business,
including the following risks:
o clinical trials may not demonstrate the safety and efficacy of our
products;
o completion of clinical trials may be delayed, or costs of clinical
trials may exceed anticipated amounts;
o we may not be able to obtain regulatory approval of our products, or
may experience delays in obtaining such approvals;
o we may not be able to manufacture our drugs economically on a
commercial scale;
o we and our licensees may not be able to successfully market our
products;
o physicians may not prescribe our products, or patients may not accept
such products;
o others may have proprietary rights which prevent us from marketing our
products; and
o competitors may sell similar, superior or lower-cost products.
Impairment of our intellectual property rights may limit our ability to pursue
the development of our intended technologies and products.
Protection of our proprietary technology is critically important to our
business. Our success will depend in part on our ability to obtain and enforce
our patents and maintain trade secrets, both in the United States and in other
countries. The patent positions of pharmaceutical and biopharmaceutical
companies, including ours, are highly uncertain and involve complex legal and
technical questions. In particular, legal principles for biotechnology patents
in the United States and in other countries are evolving, and the extent to
which we will be able to obtain patent coverage to protect our technology, or
enforce issued patents, is uncertain. Further, our patents may be challenged,
invalidated or circumvented, and our patent rights may not provide proprietary
protection or competitive advantages to us. In the event that we are
unsuccessful in obtaining and enforcing patents, our business would be
negatively impacted.
Publication of discoveries in scientific or patent literature tends to lag
behind actual discoveries by at least several months and sometimes several
years. Therefore, the persons or entities that we or our licensors name as
inventors in our patents and patent applications may not have been the first to
invent the inventions disclosed in the patent applications or patents, or file
patent applications for these inventions. As a result, we may not be able to
obtain patents for discoveries that we otherwise would consider patentable and
that we consider to be extremely significant to our future success.
Where several parties seek patent protection for the same technology, the
U.S. Patent Office may declare an interference proceeding in order to ascertain
the party to which the patent should be issued. Patent interferences are
typically complex, highly contested legal proceedings, subject to appeal. They
are usually expensive and prolonged, and can cause significant delay in the
issuance of patents. Moreover, parties that receive an adverse decision in an
interference can lose important patent rights. In our Form 10-K filings for 1999
and 2000, we reported that the U.S. Patent Office had suspended examination of
two of our patent applications relating to telomerase
22
pending a possible declaration of interference. The U.S. Patent Office lifted
those suspensions and, in 2001, issued to us a U.S. patent with claims covering
cloned human telomerase. While this was a positive development, it does not mean
that the risk of an interference has been eliminated.
The interference process can also be used to challenge a patent that has
been issued to another party. In 2001, the U.S. Patent Office granted our
request for the declaration of an interference between one of our pending
applications relating to nuclear transfer and an issued patent, held by the
University of Massachusetts. We requested this interference in order to clarify
our patent rights in nuclear transfer technology. In March 2002, a second
interference was declared involving our patent application and a patent
application held by Infigen Inc. Both of these interferences are now ongoing.
Based on a review of publicly available information, we believe that the
technology at issue in both of these interferences was invented first at the
Roslin Institute and is encompassed within our nuclear transfer license.
However, we do not have access to the other party's invention records, and, as
in any legal proceeding, the outcome is uncertain.
Outside of the U.S., certain jurisdictions, such as Europe and Australia,
permit oppositions to be filed against the granting of patents. Because our
intent is to commercialize products internationally, securing both proprietary
protection and freedom to operate outside of the U.S. is important to us. We are
involved in both opposing the grant of patents to others through such opposition
proceedings, and in defending against oppositions filed by others.
If interferences, oppositions or other challenges to our patent rights are
not resolved promptly in our favor, our existing business relationships may be
jeopardized and we could be delayed or prevented from entering into new
collaborations or from commercializing certain products, which could materially
harm our business.
Patent litigation may also be necessary to enforce patents issued or
licensed to us or to determine the scope and validity of our proprietary rights
or the proprietary rights of another. We may not be successful in any patent
litigation. Patent litigation can be extremely expensive and time-consuming,
even if the outcome is favorable to us. An adverse outcome in a patent
litigation or any other proceeding in a court or patent office could subject our
business to significant liabilities to other parties, require disputed rights to
be licensed from other parties or require us to cease using the disputed
technology.
If we fail to meet our obligations under license agreements, we may face loss of
our rights to key technologies on which our business depends.
Our business depends on our three core technology platforms, each of which
is based in part on patents licensed from third parties. Those third-party
license agreements impose obligations on us, such as payment obligations and
obligations to diligently pursue development of commercial products under the
licensed patents. If a licensor believes that we have failed to meet our
obligations under a license agreement, the licensor could seek to limit or
terminate our license rights, which would most likely lead to costly and
time-consuming litigation. During the period of any such litigation our ability
to carry out the development and commercialization of potential products could
be significantly and negatively affected. If our license rights were ultimately
lost, our ability to carry on our business based on the affected technology
platform would be severely affected.
We may be subject to litigation that will be costly to defend or pursue and
uncertain in its outcome.
Our business may bring us into conflict with our licensees, licensors, or
others with whom we have contractual or other business relationships, or with
our competitors or others whose interests differ from ours. If we are unable to
resolve those conflicts on terms that are satisfactory to all parties, we may
become involved in litigation brought by or against us. That litigation is
likely to be expensive and may require a significant amount of management's time
and attention, at the expense of other aspects of our business. The outcome of
litigation is always uncertain, and in some cases could include judgments
against us that require us to pay damages, enjoin us from certain activities, or
otherwise affect our legal or contractual rights, which could have a significant
effect on our business.
We may be subject to infringement claims that are costly to defend, and which
may limit our ability to use disputed technologies and prevent us from pursuing
research and development or commercialization of potential products.
Our commercial success depends significantly on our ability to operate
without infringing patents and the proprietary rights of others. Our
technologies may infringe the patents or proprietary rights of others. In
addition,
23
we may become aware of discoveries and technology controlled by third parties
that are advantageous to our research programs. In the event our technologies do
infringe on the rights of others or we require the use of discoveries and
technology controlled by third parties, we may be prevented from pursuing
research, development or commercialization of potential products or may be
required to obtain licenses to those patents or other proprietary rights or
develop or obtain alternative technologies. We may not be able to obtain
alternative technologies or any required license on commercially favorable
terms, if at all. If we do not obtain the necessary licenses or alternative
technologies, we may be delayed or prevented from pursuing the development of
some potential products. Our failure to obtain alternative technologies or a
license to any technology that we may require to develop or commercialize our
products will significantly and negatively affect our business.
Much of the information and know-how that is critical to our business is not
patentable and we may not be able to prevent others from obtaining this
information and establishing competitive enterprises.
We sometimes rely on trade secrets to protect our proprietary technology,
especially in circumstances in which patent protection is not believed to be
appropriate or obtainable. We attempt to protect our proprietary technology in
part by confidentiality agreements with our employees, consultants,
collaborators and contractors. We cannot assure you that these agreements will
not be breached, that we would have adequate remedies for any breach, or that
our trade secrets will not otherwise become known or be independently discovered
by competitors, any of which would harm our business significantly.
We depend on our collaborators to help us complete the process of developing and
testing our products and our ability to develop and commercialize products may
be impaired or delayed if our collaborative partnerships are unsuccessful.
Our strategy for the development, clinical testing and commercialization of
our products requires entering into collaborations with corporate partners,
licensors, licensees and others. We are dependent upon the subsequent success of
these other parties in performing their respective responsibilities and the
continued cooperation of our partners. Our collaborators may not cooperate with
us or perform their obligations under our agreements with them. We cannot
control the amount and timing of our collaborators' resources that will be
devoted to our research activities related to our collaborative agreements with
them. Our collaborators may choose to pursue existing or alternative
technologies in preference to those being developed in collaboration with us.
Under agreements with collaborators, we rely significantly on them, among
other activities, to:
o design and conduct advanced clinical trials in the event that we reach
clinical trials;
o fund research and development activities with us;
o pay us fees upon the achievement of milestones; and
o market with us any commercial products that result from our
collaborations.
The development and commercialization of potential products will be delayed
if collaborators fail to conduct these activities in a timely manner or at all.
In addition, our collaborators could terminate their agreements with us and we
may not receive any development or milestone payments. If we do not achieve
milestones set forth in the agreements, or if our collaborators breach or
terminate their collaborative agreements with us, our business may be materially
harmed.
Our reliance on the research activities of our non-employee scientific
consultants and other research institutions, whose activities are not wholly
within our control, may lead to delays in technological developments.
We rely extensively and have relationships with scientific consultants at
academic and other institutions, some of whom conduct research at our request.
These scientific consultants are not our employees and may have commitments to,
or consulting or advisory contracts with, other entities that may limit their
availability to us. We have limited control over the activities of these
consultants and, except as otherwise required by our collaboration and
consulting agreements, can expect only limited amounts of their time to be
dedicated to our activities. If our scientific consultants are unable or refuse
to contribute to the development of any of our potential discoveries, our
ability to generate significant advances in our technologies will be
significantly harmed.
24
In addition, we have formed research collaborations with many academic and
other research institutions throughout the world, including the Roslin
Institute. These research facilities may have commitments to other commercial
and non-commercial entities. We have limited control over the operations of
these laboratories and can expect only limited amounts of time to be dedicated
to our research goals.
The loss of key personnel could slow our ability to conduct research and develop
products.
Our future success depends to a significant extent on the skills,
experience and efforts of our executive officers and key members of our
scientific staff. Competition for personnel is intense and we may be unable to
retain our current personnel or attract or assimilate other highly qualified
management and scientific personnel in the future. The loss of any or all of
these individuals could harm our business and might significantly delay or
prevent the achievement of research, development or business objectives.
We also rely on consultants and advisors who assist us in formulating our
research and development strategy. We face intense competition for qualified
individuals from numerous pharmaceutical, biopharmaceutical and biotechnology
companies, as well as academic and other research institutions. We may not be
able to attract and retain these individuals on acceptable terms. Failure to do
so would materially harm our business.
We may not be able to obtain or maintain sufficient insurance on commercially
reasonable terms or with adequate coverage against potential liabilities in
order to protect ourselves against product liability claims.
Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of human therapeutic and
diagnostic products. We may become subject to product liability claims if the
use of our products is alleged to have injured subjects or patients. This risk
exists for products tested in human clinical trials as well as products that are
sold commercially. We currently have no clinical trial liability insurance and
we may not be able to obtain and maintain this type of insurance for any of our
clinical trials. In addition, product liability insurance is becoming
increasingly expensive. As a result, we may not be able to obtain or maintain
product liability insurance in the future on acceptable terms or with adequate
coverage against potential liabilities which could have a material adverse
effect on us.
Because we or our collaborators must obtain regulatory approval to market our
products in the United States and foreign jurisdictions, we cannot predict
whether or when we will be permitted to commercialize our products.
Federal, state and local governments in the United States and governments
in other countries have significant regulations in place that govern many of our
activities. The preclinical testing and clinical trials of the products that we
develop ourselves or that our collaborators develop are subject to extensive
government regulation and may prevent us from creating commercially viable
products from our discoveries. In addition, the sale by us or our collaborators
of any commercially viable product will be subject to government regulation from
several standpoints, including the processes of:
o manufacturing;
o advertising and promoting;
o selling and marketing;
o labeling; and
o distributing.
We may not obtain regulatory approval for the products we develop and our
collaborators may not obtain regulatory approval for the products they develop.
Regulatory approval may also entail limitations on the indicated uses of a
proposed product. Because certain of our product candidates involve the
application of new technologies and may be based upon a new therapeutic
approach, such products may be subject to substantial additional review by
various government regulatory authorities, and, as a result, we may obtain
regulatory approvals for such products more slowly than for products based upon
more conventional technologies. If, and to the extent that, we are unable to
comply with these regulations, our ability to earn revenues will be materially
and negatively impacted.
The regulatory process, particularly for biopharmaceutical products like
ours, is uncertain, can take many years and requires the expenditure of
substantial resources. Any product that we or our collaborative partners develop
25
must receive all relevant regulatory agency approvals or clearances before it
may be marketed in the United States or other countries. Generally, biological
drugs and non-biological drugs are regulated more rigorously than medical
devices. In particular, human pharmaceutical therapeutic products are subject to
rigorous preclinical and clinical testing and other requirements by the Food and
Drug Administration in the United States and similar health authorities in
foreign countries. 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 is susceptible to
varying interpretations that could delay, limit or prevent regulatory agency
approvals or clearances. In addition, delays or rejections may be encountered as
a result of changes in regulatory agency policy during the period of product
development and/or the period of review of any application for regulatory agency
approval or clearance for a product. Delays in obtaining regulatory agency
approvals or clearances could:
o significantly harm the marketing of any products that we or our
collaborators develop;
o impose costly procedures upon our activities or the activities of our
collaborators;
o diminish any competitive advantages that we or our collaborative
partners may attain; or
o adversely affect our ability to receive royalties and generate
revenues and profits.
Even if we commit the necessary time and resources, economic and otherwise,
the required regulatory agency approvals or clearances may not be obtained for
any products developed by or in collaboration with us. If regulatory agency
approval or clearance for a new product is obtained, this approval or clearance
may entail limitations on the indicated uses for which it may be marketed that
could limit the potential commercial use of the 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 the product or manufacturer, including withdrawal of the product
from the market. Failure to comply with regulatory requirements can result in
severe civil and criminal penalties, including but not limited to:
o recall or seizure of products;
o injunction against manufacture, distribution, sales and marketing; and
o criminal prosecution.
The imposition of any of these penalties could significantly impair our
business, financial condition and results of operations.
To be successful, our products must be accepted by the health care community,
which can be very slow to adopt or unreceptive to new technologies and products.
Our products and those developed by our collaborative partners, if approved
for marketing, may not achieve market acceptance since physicians, patients or
the medical community in general may decide to not accept and utilize these
products. The products that we are attempting to develop may represent
substantial departures from established treatment methods and will compete with
a number of traditional drugs and therapies manufactured and marketed by major
pharmaceutical companies. The degree of market acceptance of any of our
developed products will depend on a number of factors, including:
o our establishment and demonstration to the medical community of the
clinical efficacy and safety of our product candidates;
o our ability to create products that are superior to alternatives
currently on the market;
o our ability to establish in the medical community the potential
advantage of our treatments over alternative treatment methods; and
o reimbursement policies of government and third-party payors.
If the health care community does not accept our products for any of the
foregoing reasons, or for any other reason, our business would be materially
harmed.
26
The reimbursement status of newly-approved health care products is uncertain and
failure to obtain reimbursement approval could severely limit the use of our
products.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, including pharmaceuticals. If we fail to generate
adequate third party reimbursement for the users of our potential products and
treatments, then we may be unable to maintain price levels sufficient to realize
an appropriate return on our investment in product development.
In both domestic and foreign markets, sales of our products, if any, will
depend in part on the availability of reimbursement from third-party payors,
examples of which include:
o government health administration authorities;
o private health insurers;
o health maintenance organizations; and
o pharmacy benefit management companies.
Both federal and state governments in the United States and 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 our potential products are approved for
marketing. Cost control initiatives could decrease the price that we receive for
any product we may develop in the future. In addition, third-party payors are
increasingly challenging the price and cost-effectiveness of medical products
and services and any of our potential products and treatments may ultimately not
be considered cost effective by these third parties. Any of these initiatives or
developments could materially harm our business.
Our products are likely to be expensive to manufacture, and they may not be
profitable if we are unable to significantly reduce the costs to manufacture
them.
Both GRN163 and our hESC-based products are likely to be significantly more
expensive to manufacture than most other drugs currently on the market today.
Oligonucleotides are large molecules with complex chemistry, and the cost of
manufacturing even a short oligonucleotide like GRN163 is considerably greater
than the cost of making most small-molecule drugs. Our present manufacturing
processes are conducted at a relatively small scale and are at an early stage of
development. We hope to substantially reduce manufacturing costs by process
improvements, as well as through scale increases. If we are not able to do so,
however, and depending on the pricing of the product, the profit margin on
GRN163 may be significantly less than that of most drugs on the market today.
Similarly, we currently make differentiated cells from hESCs on a laboratory
scale, at a high cost per unit of measure. The cell-based therapies we are
developing based on hESCs will probably require large quantities of cells. We
continue to develop processes to scale up production of the cells in a
cost-effective way. If we cannot continue to improve our manufacturing
processes, we may not be able to charge a high enough price for our cell therapy
products, even if they are safe and effective, to make a profit. If we are
unable to realize significant profits from our potential products, our business
would be materially harmed.
Our activities involve hazardous materials and improper handling of these
materials by our employees or agents could expose us to significant legal and
financial penalties.
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive compounds. As a
consequence, we are subject to numerous environmental and safety laws and
regulations, including those governing laboratory procedures, exposure to
blood-borne pathogens and the handling of biohazardous materials. We may be
required to incur significant costs to comply with current or future
environmental laws and regulations and may be adversely affected by the cost of
compliance with these laws and regulations.
Although we believe that our safety procedures for using, handling, storing
and disposing of hazardous materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be eliminated. In the event of such an accident,
state or federal authorities could curtail our use of these materials and we
could be liable for any civil damages that result, the cost of which
27
could be substantial. Further, any failure by us to control the use, disposal,
removal or storage of, or to adequately restrict the discharge of, or assist in
the cleanup of, hazardous chemicals or hazardous, infectious or toxic substances
could subject us to significant liabilities, including joint and several
liability under certain statutes, and any liability could exceed our resources
and could have a material adverse effect on our business, financial condition
and results of operations. Additionally, an accident could damage our research
and manufacturing facilities and operations.
Additional federal, state and local laws and regulations affecting us may
be adopted in the future. We may incur substantial costs to comply with these
laws and regulations and substantial fines or penalties if we violate any of
these laws or regulations.
Our stock price has historically been very volatile.
Stock prices and trading volumes for many biopharmaceutical companies
fluctuate widely for a number of reasons, including factors which may be
unrelated to their businesses or results of operations such as media coverage,
legislation and regulatory measures and the activities of various interest
groups or organizations. This market volatility, as well as general domestic or
international economic, market and political conditions, could materially and
adversely affect the market price of our common stock and the return on your
investment.
Historically, our stock price has been extremely volatile. Between January
1998 and December 31, 2002, our stock has traded as high as $75.88 per share and
as low as $3.33 per share. The significant market price fluctuations of our
common stock are due to a variety of factors, including:
o depth of the market for the common stock;
o the experimental nature of our prospective products;
o fluctuations in our operating results;
o market conditions relating to the biopharmaceutical and pharmaceutical
industries;
o any announcements of technological innovations, new commercial
products or clinical progress or lack thereof by us, our collaborative
partners or our competitors; or
o announcements concerning regulatory developments, developments with
respect to proprietary rights and our collaborations.
In addition, the stock market is subject to other factors outside our
control that can cause extreme price and volume fluctuations. Securities class
action litigation has often been brought against companies, including many
biotechnology companies, which then experience volatility in the market price of
their securities. Litigation brought against us could result in substantial
costs and a diversion of management's attention and resources, which could
adversely affect our business.
The sale of a substantial number of shares may adversely affect the market price
for our common stock.
Sales of substantial number of shares of our common stock in the public
market could significantly and negatively affect the market price for our common
stock. As of December 31, 2002, we had 24,766,821 shares of common stock
outstanding. Of these shares, approximately 10,894,534 shares were issued
(including shares issuable upon conversion or exercise of convertible notes or
warrants) since December 1998 pursuant to private placements. Of these shares,
approximately 9,833,463 shares have been registered pursuant to shelf
registration statements and therefore may be resold (if not sold prior to the
date hereof) in the public market and approximately 1,061,071 of the remaining
shares may be resold pursuant to Rule 144 into the public markets.
Our undesignated preferred stock may inhibit potential acquisition bids; this
may adversely affect the market price for our common stock and the voting rights
of the holders of common stock.
Our certificate of incorporation provides our Board of Directors with the
authority to issue up to 3,000,000 shares of undesignated preferred stock and to
determine the rights, preferences, privileges and restrictions of these shares
without further vote or action by the stockholders. As of the date of this Form
10-K, 50,000 shares of preferred stock have been designated Series A Junior
Participating Preferred Stock and the Board of Directors still has authority to
designate and issue up to 2,950,000 shares of preferred stock. The rights of the
holders of common
28
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
shares of preferred stock may delay or prevent a change in control transaction
without further action by our stockholders. As a result, the market price of our
common stock may be adversely affected. The issuance of preferred stock may also
result in the loss of voting control by others.
Provisions in our share purchase rights plan, charter and bylaws, and provisions
of Delaware law, may inhibit potential acquisition bids for us, which may
prevent holders of our common stock from benefiting from what they believe may
be the positive aspects of acquisitions and takeovers.
Our Board of Directors has adopted a share purchase rights plan, commonly
referred to as a "poison pill". This plan entitles existing stockholders to
rights, including the right to purchase shares of common stock, in the event of
an acquisition of 15% or more of our outstanding common stock. Our share
purchase rights plan could prevent stockholders from profiting from an increase
in the market value of their shares as a result of a change of control of Geron
by delaying or preventing a change of control. In addition, our Board of
Directors has the authority, without further action by our stockholders, to
issue additional shares of common stock, to fix the rights and preferences of,
and to issue authorized but undesignated shares of preferred stock.
In addition to our share purchase rights plan and the undesignated
preferred stock, provisions of our charter documents and bylaws may make it
substantially more difficult for a third party to acquire control of us and may
prevent changes in our management, including provisions that:
o prevent stockholders from taking actions by written consent;
o divide the Board of Directors into separate classes with terms of
office that are structured to prevent all of the directors from being
elected in any one year; and
o set forth procedures for nominating directors and submitting proposals
for consideration at stockholders' meetings.
Provisions of Delaware law may also inhibit potential acquisition bids for
us or prevent us from engaging in business combinations. Either collectively or
individually, these provisions may prevent holders of our common stock from
benefiting from what they may believe are the positive aspects of acquisitions
and takeovers, including the potential realization of a higher rate of return on
their investment from these types of transactions.
Item 2. Properties
We currently lease approximately 65,000 square feet of office space at 200,
230 and 255 Constitution Drive, Menlo Park, California. The lease for 200 and
230 Constitution Drive expires in July 2004, with an option to renew the lease
for an additional period of two and one-half years. The lease for 255
Constitution Drive expires in April 2005 with an option to extend the term to
coincide with the end date of the extension period for 200 and 230 Constitution
Drive. We intend to sub-lease this space. We also currently lease 900 square
feet of office space at Roslin Biotechnology Centre, Roslin, Midlothian, United
Kingdom. The lease for the office space expires in May 2005. We believe that the
existing facilities are adequate to meet our requirements for the near term.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
29
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
Market Information
Our common stock trades on The Nasdaq Stock Market[RegTM] under the symbol
GERN. The high and low closing sales prices (excluding retail markup, markdowns
and commissions) of our stock for the years ending December 31, 2002 and 2001
are as follows:
High Low
------------ -----------
Year ended December 31, 2002
First quarter .................... $ 10.150 $ 7.090
Second quarter ................... $ 8.320 $ 4.230
Third quarter .................... $ 5.580 $ 3.560
Fourth quarter ................... $ 4.300 $ 3.470
Year ended December 31, 2001
First quarter .................... $ 20.313 $ 9.875
Second quarter ................... $ 15.480 $ 9.484
Third quarter .................... $ 18.580 $ 9.070
Fourth quarter ................... $ 14.000 $ 8.230
As of December 31, 2002, there were approximately 889 stockholders of
record. We are engaged in a highly dynamic industry, which often results in
significant volatility of our common stock price.
Dividend Policy
We have never paid cash dividends on our capital stock and do not
anticipate paying cash dividends in the foreseeable future, but intend to retain
our capital resources for reinvestment in our business. Any future determination
to pay cash dividends will be at the discretion of the Board of Directors and
will be dependent upon our financial condition, results of operations, capital
requirements and other factors as the Board of Directors deems relevant.
Recent Sales of Unregistered Securities
In September 2002, in conjunction with a consulting services agreement, we
issued a warrant to purchase 50,000 shares of common stock. The warrant is
exercisable at any time through August 2012 at $4.00 per share. In exchange for
the warrant, we will receive consulting services over the one-year term of the
consulting agreement. We have agreed to register the underlying shares of this
warrant by the fifth anniversary of the issuance date.
In August 2002, in conjunction with a consulting services agreement, we
issued a warrant to purchase 100,000 shares of common stock. The warrant is
exercisable at any time through August 2012 at $4.20 per share. In exchange for
the warrant, we will receive consulting services over the one-year term of the
consulting agreement. We do not have an obligation to register the underlying
shares of this warrant.
30
Item 6. Selected Consolidated Financial Data
Year Ended December 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------- -------------- -------------- -------------- --------------
(In thousands, except share and per share data)
Consolidated Statement of Operations
Data:
Revenues from collaborative agreements $ 566 $ 3,280 $ 6,500 $ 5,244 $ 6,706
License fees and royalties ................ 682 340 109 168 91
----------- ----------- ----------- ----------- -----------
Total revenues ............................ 1,248 3,620 6,609 5,412 6,797
Operating expenses:
Research and development .................. 31,573 29,018 23,548 20,571 15,619
Acquired in-process research
technology(1) ............................ -- -- -- 23,403 --
General and administrative ................ 5,375 9,621 9,273 5,574 3,769
----------- ----------- ----------- ----------- -----------
Total operating expenses .................. 36,948 38,639 32,821 49,548 19,388
----------- ----------- ----------- ----------- -----------
Loss from operations ...................... (35,700) (35,019) (26,212) (44,136) (12,591)
Interest and other income ................. 2,549 5,860 5,922 3,263 2,666
Conversion expense(2) ..................... -- (11,910) -- -- --
Interest and other expense ................ (757) (1,004) (12,284) (5,503) (907)
----------- ----------- ----------- ----------- -----------
Loss before cumulative effect of a
change in accounting principle ........... (33,908) (42,073) (32,574) (46,376) (10,832)
Cumulative effect of a change in
accounting principle(3) .................. -- -- (13,259) -- --
----------- ----------- ----------- ----------- -----------
Net loss .................................. (33,908) (42,073) (45,833) (46,376) (10,832)
Accretion of redemption value of
redeemable convertible preferred
stock .................................... -- -- -- (73) (578)
----------- ----------- ----------- ----------- -----------
Net loss applicable to common
stockholders ............................. $ (33,908) $ (42,073) $ (45,833) $ (46,449) $ (11,410)
=========== =========== =========== =========== ===========
Basic and diluted net loss per share:
Loss per share before cumulative effect
of a change in accounting principle ...... $ (1.37) $ (1.90) $ (1.56) $ (3.00) $ (1.00)
Cumulative effect of a change in
accounting principle ..................... -- -- (0.64) -- --
----------- ----------- ----------- ----------- -----------
Net loss per common share ................. $ (1.37) $ (1.90) $ (2.20) $ (3.00) $ (1.00)
=========== =========== =========== =========== ===========
Shares used in computing net loss per
common share ............................. 24,661,733 22,121,833 20,869,791 15,489,035 11,439,084
=========== =========== =========== =========== ===========
- ------------
(1) In May 1999, we recognized $23.4 million as acquired in-process research
technology expense for the value of the nuclear transfer technology license
obtained through the acquisition of Roslin Bio-Med.
(2) In November 2001, we amended the terms of the series D convertible
debentures and warrants and converted a portion of the outstanding series D
convertible debentures. We recognized $11.9 million as conversion expense
related to this amendment and conversion.
(3) In November 2000, we adopted a new accounting principle which retroactively
affected the calculation of the beneficial conversion features associated
with the series C convertible debentures issued in September 1999 and the
series D convertible debentures issued in June 2000. We recognized an
additional $13.3 million in imputed non-cash interest expense to reflect
the change in accounting principle.
31
December 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- ------------
(Dollars in thousands)
Consolidated Balance Sheet Data:
Cash, restricted cash, cash equivalents
and marketable securities ................ $ 47,517 $ 79,641 $ 95,785 $ 42,923 $ 40,423
Working capital ........................... 41,386 71,552 89,230 36,117 38,215
Total assets .............................. 60,669 96,231 114,030 63,701 44,456
Noncurrent liabilities .................... 21,545 24,377 41,987 29,527 8,101
Redeemable convertible preferred stock..... -- -- -- -- 3,610
Accumulated deficit ....................... (225,783) (191,875) (149,802) (103,969) (57,520)
Total stockholders' equity ................ 29,741 61,542 63,918 26,226 29,191
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipate", "believe", "plan", "expect",
"future", "intend" and similar expressions to identify forward-looking
statements. These statements appear throughout the Form 10-K and are statements
regarding our intent, belief, or current expectations, primarily with respect to
our operations and related industry developments. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of
this Form 10-K. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us and described in the section of Item 1 titled "Additional
Factors That May Affect Future Results," and elsewhere in this Form 10-K.
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto included in Part I, Item 8
of this Form 10-K.
We are a biopharmaceutical company focused on developing and
commercializing therapeutic and diagnostic products for applications in oncology
and regenerative medicine, and research tools for drug discovery. Our product
development programs are based upon three patented core technologies:
telomerase, human embryonic stem cells and nuclear transfer.
In January 2002, we resolved a federal lawsuit with the Wisconsin Alumni
Research Foundation (WARF) and entered into a new license for the
commercialization of human embryonic stem cell technology. The new agreement
supersedes the earlier license, and resolves all issues related to the lawsuit
filed by WARF against us in August 2001. We do not expect an adverse accounting
impact on our financial condition or results of operations related to this new
license agreement.
Our telomerase technology has continued to be in demand by companies
exploring treatments for cancer and other applications. In January 2002, we
signed a license agreement with Genetic Therapy, Inc. for our telomerase
promoter technology for therapeutic products targeting cancer. In July 2002, we
signed a license agreement with Variagenics, Inc. for telomerase technology for
pharmacogenomics applications. In November 2002, we signed a license agreement
with PanCel Corporation for the use of telomerase to develop and commercialize
macroencapsulated immortalized primary human pancreatic islet cells for the
treatment of diabetes. In each of these license agreements, we received a
license fee and will receive royalties and milestone payments on future product
sales.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported. Note 1 of Notes to Consolidated Financial Statements describes
the significant accounting policies used in the preparation of the consolidated
financial statements. Certain of these significant accounting policies are
considered to be critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the
presentation of our financial statements and requires management to make
difficult, subjective or complex judgments that could have a material effect on
32
our financial condition and results of operations. Specifically, critical
accounting estimates have the following attributes: 1) we are required to make
assumptions about matters that are highly uncertain at the time of the estimate;
and 2) different estimates we could reasonably have used, or changes in the
estimate that are reasonably likely to occur, would have a material effect on
our financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be
determined with certainty. We base our estimates on historical experience and on
various other assumptions believed to be applicable and reasonable under the
circumstances. These estimates may change as new events occur, as additional
information is obtained and as our operating environment changes. These changes
have historically been minor and have been included in the consolidated
financial statements as soon as they became known. Based on a critical
assessment of our accounting policies and the underlying judgments and
uncertainties affecting the application of those policies, management believes
that our consolidated financial statements are fairly stated in accordance with
accounting principles generally accepted in the United States, and present a
meaningful presentation of our financial condition and results of operations.
In preparing our consolidated financial statements to conform with
accounting principles generally accepted in the United States, we make estimates
and assumptions that affect the amounts reported in our financial statements and
accompanying notes. These estimates include useful lives for fixed assets for
depreciation calculations, estimated lives for license agreements related to
deferred revenue and assumptions for valuing options and warrants. Actual
results could differ from these estimates.
We consider that the following are critical accounting policies:
Revenue Recognition
Since our inception, a substantial portion of our revenues has been
generated from license and research agreements with collaborators. We recognize
cost reimbursement revenue under these collaborative agreements as the related
research and development costs are incurred. We recognize milestone fees upon
completion of specified milestones according to contract terms. Deferred revenue
represents the portion of research payments received which has not been earned.
We also have several license, option and marketing agreements with various
oncology, diagnostics, research tools, agriculture and biologics production
companies. With each of these agreements, we may receive nonrefundable license
payments in cash or equity securities, option payments in cash or equity
securities, royalties on future sales of products, milestone payments, or any
combination of these items. We recognize nonrefundable signing or license fees
that are not dependent on future performance under these agreements as revenue
when received and over the term of the arrangement if we have continuing
performance obligations. We recognize option payments as revenue over the period
of the option agreement. We recognize milestone payments upon completion of
specified milestones according to contract terms. We generally recognize
royalties as revenue upon receipt.
We receive income from United States government grants that support our
research efforts in defined research projects. These grants generally provide
for reimbursement of approved costs incurred as defined in the various grants.
Income associated with these grants is recognized upon receipt of reimbursement
and is included in interest and other income on the consolidated statements of
operations.
Intangible Asset and Research Funding Obligation
In May 1999, we completed the acquisition of Roslin Bio-Med Ltd., a
privately held company formed by the Roslin Institute in Midlothian, Scotland.
In connection with this acquisition, we formed a research collaboration with the
Roslin Institute and committed approximately $20,000,000 in research funding
over six years. Using an effective interest rate of 6%, this research funding
obligation had a net present value of $17,200,000 and has been capitalized as an
intangible asset that is being amortized as research and development expense
over six years. Imputed interest is also being accreted to the value of the
research funding obligation and is recognized as interest expense.
33
Research and Development Expenses
All research and development costs are expensed as incurred. The value of
acquired in-process research and development is charged to expense on the date
of acquisition. Research and development expenses include, but are not limited
to, payroll and personnel expense, lab supplies, preclinical studies, raw
materials to manufacture clinical trial drugs, manufacturing costs, sponsored
research at other labs, consulting, legal fees and research-related overhead.
Accrued liabilities for raw materials to manufacture clinical trial drugs,
manufacturing costs, patent legal fees and sponsored research reimbursement fees
are included in accrued liabilities and included in research and development
expenses.
Employee Stock Plans
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," we
elected to continue to apply the provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
our employee stock option and stock purchase plans. We are generally not
required under APB Opinion No. 25 and related interpretations to recognize
compensation expense in connection with our employee stock option and stock
purchase plans. We are required by SFAS No. 123 to present, in the Notes to
Consolidated Financial Statements, the pro forma effects on reported net income
and earnings per share as if compensation expense had been recognized based on
the fair value method of accounting prescribed by SFAS No. 123.
Results of Operations
Our 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 our various collaborative agreements, as well as the progress of
our research and development efforts and variations in the level of expenses
related to developmental efforts during any given period. Results of operations
for any period may be unrelated to results of operations for any other period.
In addition, historical results should not be viewed as indicative of future
operating results. We are subject to risks common to companies in our industry
and at our stage of development, including risks inherent in our research and
development efforts, reliance upon our collaborative partners, enforcement of
our patent and proprietary rights, need for future capital, potential
competition and uncertainty of regulatory approvals or clearances. In order for
a product to be commercialized based on our research, we and our collaborators
must conduct preclinical tests and clinical trials, demonstrate the efficacy and
safety of our product candidates, obtain regulatory approvals or clearances and
enter into manufacturing, distribution and marketing arrangements, as well as
obtain market acceptance. We do not expect to receive revenues or royalties
based on therapeutic products for a period of years, if at all.
Revenues
We recognized revenues from collaborative agreements of $566,000 in fiscal
2002 compared to $3.3 million in fiscal 2001 and $6.5 million in fiscal 2000.
Revenues in 2002 primarily reflected the final research support payment from our
collaborative agreement with Kyowa Hakko. Revenues in 2001 and 2000 primarily
represented research support payments from our collaborative agreements with
Kyowa Hakko and Pharmacia. In 2002, Kyowa Hakko ceased their research funding to
us as contractually agreed. The decrease in revenues in 2001 was a result of
terminating our agreement with Pharmacia in January 2001. We recognize revenue
under collaborative agreements as we incur the related research and development
costs. We received $2.0 million in funding payments under the Kyowa Hakko
agreement in each of 2001 and 2000, respectively. We did not receive any funding
payments from Kyowa Hakko in 2002. We recognized $1.3 million and $5.0 million
in revenue for funding payments received under the Pharmacia agreement in 2001
and 2000, respectively. We did not recognize any revenue under the Pharmacia
agreement in 2002.
We have entered into license and option agreements with companies involved
with oncology, diagnostics, research tools, agriculture and biologics
production. In each of these agreements, we have granted certain rights to our
technologies. In connection with the agreements, we are entitled to receive
license fees, option fees, milestone payments and royalties on future sales, or
any combination. We recognized license and option fee revenues of $492,000 and
$200,000 in 2002 and 2001, respectively related to our various agreements. No
license or option fees were recognized in 2000. Also, we received royalties of
$190,000, $140,000 and $109,000 in 2002, 2001 and 2000, respectively on product
sales of telomerase diagnostic kits to the research-use-only market and
cell-based
34
research products. License and royalty revenues are dependent upon additional
agreements being signed and future product sales. We expect to recognize revenue
of $543,000 in 2003, $215,000 in 2004, $137,000 in 2005, $137,000 in 2006 and
$541,000 thereafter related to our existing deferred revenue. Current revenues
may not be predictive of future results.
Research and Development Expenses
Research and development expenses were $31.6 million, $29.0 million and
$23.5 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The increase in 2002 from 2001 was primarily the result of
increased costs of $2.5 million related to raw materials and manufacturing
expenses for GRN163. The increase in 2001 from 2000 was primarily the result of
increased scientific personnel expenses of $3.2 million, increased sponsored
research of $424,000 and increased scientific supplies of $1.1 million. We
expect research expenses to decrease in the future as a result of staff
reductions in 2002 and 2003 and focusing efforts on our most advanced programs.
In our oncology area, we have concentrated our resources on two areas:
GRN163, a telomerase inhibitor drug and a telomerase therapeutic vaccine.
Currently GRN163 is in animal toxicology studies. Upon conclusive results from
those animal studies, we expect to enter Phase 1 clinical studies with this
product in 2003. We are currently sponsoring a Phase 1 clinical study at Duke
University Medical Center for a telomerase therapeutic vaccine for patients with
prostate cancer. In 2002, we have enrolled half of the 24 patients we intend to
treat in the Phase 1 trial. Thus far, all of the treated patients have responded
appropriately to the vaccine and no adverse reactions have been seen. The
results of this study will be further evaluated in 2003 and 2004. Future
clinical progress of this product will depend on the study results.
In our regenerative medicine area, we have concentrated our resources on
four specific cell types: hESC-derived neural cells for spinal cord injury and
Parkinson's disease, hematopoietic cells for transplantation, cardiomyocytes for
heart failure and pancreatic islet cells for diabetes. We are engaged in animal
proof-of-concept testing for these cell types. If these tests are successful, we
will continue clinical development of these products in accordance with FDA
guidelines.
According to industry statistics, it generally takes 10 to 15 years to
research, develop and bring to market a new prescription medicine in the United
States. Drug development in the U.S. is a process that includes multiple steps
defined by the FDA under applicable statutes, regulations and guidance
documents. After the preclinical research process of identifying, selecting and
testing in animals a potential pharmaceutical compound, the clinical development
process begins with the filing of an Initial Drug Application (IND). If
successful, an IND allows opportunity for clinical study of the potential new
medicine. Clinical development typically involves three phases of study: Phase
1, 2, and 3. The most significant costs associated with clinical development are
the Phase 3 trials, which tend to be the longest and largest studies conducted
during the drug development process. After the completion of a successful
preclinical and clinical development program, a New Drug Application (NDA) must
be filed with the FDA, which includes among other things very large amounts of
preclinical and clinical data and results and manufacturing-related information
necessary to support requested approval of the product. The NDA must be reviewed
by the FDA.
In light of the steps and complexities involved, the successful development
of our products is highly uncertain. Actual product timelines and costs are
subject to enormous variability and are very difficult to predict, as our
clinical development programs are updated and changed to reflect the most recent
clinical and preclinical data and other relevant information. In addition,
various statutes and regulations also govern or influence the manufacturing,
safety reporting, labeling, storage, recordkeeping and marketing of each
product. The lengthy process of seeking these regulatory reviews and approvals,
and the subsequent compliance with applicable statutes and regulations, require
the expenditure of substantial resources. Any failure by us to obtain, or any
delay in obtaining, regulatory approvals could materially adversely affect our
business. In responding to an NDA submission, the FDA may grant marketing
approval, may request additional information, may deny the application if it
determines that the application does not provide an adequate basis for approval,
and may also refuse to review an application that has been submitted if it
determines that the application does not provide an adequate basis for filing
and review. We cannot assure you that any approval required by the FDA will be
obtained on a timely basis, if at all.
For a more complete discussion of the risks and uncertainties associated
with completing development of potential products, see the sub-section titled
"Because we or our collaborators must obtain regulatory approval to
35
market our products in the United States and foreign jurisdictions, we cannot
predict whether or when we will be permitted to commercialize our products" and
"Entry into clinical trials with one or more products may not result in any
commercially viable products" in the section of Item 1 entitled "Additional
Factors That May Affect Future Results," and elsewhere in this Form 10-K.
General and Administrative Expenses
General and administrative expenses were $5.4 million, $9.6 million and
$9.3 million for the years ended December 31, 2002, 2001 and 2000, respectively.
The decrease in 2002 from 2001 was due to reduced personnel-related costs of
$914,000 as a result of the restructuring in June 2002, reduced business
consulting expenses of $2.2 million and reduced legal expenses of $1.0 million.
The increase in 2001 from 2000 was the result of a net increase in personnel
related costs of $741,000 and legal expenses of $793,000 offset by reduced
business consulting expenses of $1.5 million. We expect general and
administrative expenses to decrease in the near future as a result of the
reductions in staffing in June 2002 and January 2003.
Interest and Other Income
Interest income was $1.8 million, $5.0 million and $5.4 million for the
years ended December 31, 2002, 2001 and 2000, respectively. The decrease in 2002
as compared to 2001 and 2000 was primarily due to lower interest rates and
decreasing cash and investment balances. Interest earned in the future will
depend on any future funding cycles and prevailing interest rates. We also
received $770,000, $794,000 and $400,000 in research payments under government
grants for the years ended December 31, 2002, 2001 and 2000, respectively. We
expect income from government grants to decrease in the future.
Interest and Other Expense
Interest and other expense was $757,000, $1.0 million and $12.3 million for
the years ended December 31, 2002, 2001 and 2000, respectively. The decrease in
interest and other expense in 2002 was primarily the result of reduced equipment
loan payments. The decrease in interest and other expense for 2001 was primarily
the result of lower expenses related to convertible debentures. In connection
with the issuance of series D convertible debentures in June 2000, we recorded
approximately $616,000 in interest expense for the difference between the fair
value of our common stock on the date of signing and the conversion price of the
debentures. In addition, we recorded the $10.5 million value of the warrant
issued with the series D convertible debentures as a charge to interest expense
and an increase to additional-paid-in capital.
At the end of 2000, we adopted Emerging Issues Task Force Issue No. 00-27,
"Application of EITF Issue 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, to
Certain Convertible Instruments" ("EITF 00-27"). This new principle required us
to modify the way we calculated the interest expense recognized for the
difference between the fair value of our common stock on the closing date of the
convertible debenture financing and the conversion price of the debentures. We
were required to apply this new accounting principle retroactively to the
September 1999 series C convertible debenture issuance. As a result of adopting
this new accounting principle, we recognized $13.3 million in imputed non-cash
interest expense and have recorded this charge as a cumulative effect of a
change in accounting principle in 2000.
Conversion Expense
In connection with the restructuring agreement for our series D convertible
debentures in November 2001, we modified the terms of $10.0 million of our
outstanding series D convertible debentures by reducing the conversion price to
92% of the closing bid price on the date of conversion by the investor and, as a
result, we recorded $7.2 million as conversion expense. The conversion expense
was calculated as the difference between the fair market value of the common
stock issued on the date of conversion and the fair market value of common stock
that would have been issued under the original agreement.
We also modified the terms of the remaining $15.0 million of our series D
convertible debentures to extend the maturity date to June 30, 2005, increase
the yield on the debenture to 2.5%, and fix the conversion price at $20.00 per
share. In addition, we modified the terms of the related warrants that were
originally issued with our series D convertible debentures to reset the exercise
price of 40% of the warrants to $15.625 per share and extend
36
the exercise period to June 30, 2003 (series D-1 warrants) and 60% of the
warrants to $25.00 per share and extend the exercise period to December 31, 2006
(series D-2 warrants). The difference between the current fair values of the
original series D warrants and the amended series D-1 and D-2 warrants was
recorded as conversion expense of $3.4 million. We also recorded the remaining
$15.0 million of the amended series D convertible debentures at a fair value of
$16.3 million with the offsetting difference of $1.3 million being recorded as
conversion expense. The fair values used in calculating the conversion expense
associated with the series D-1 and D-2 warrants and the amended series D
convertible debentures were based on values determined through the assistance of
an independent valuation.
As of December 31, 2002, we had $15.0 million of series D convertible
debentures outstanding. The $1.3 million excess of the initial fair value over
the face value of the debentures is being amortized over the life of the
debentures as a reduction to interest expense ($355,000 in 2002 and $59,000 in
2001). We are also accruing 2.5% interest on the amended debentures as interest
expense over the life of the debentures ($375,000 in 2002 and $54,000 in 2001).
Net Loss
Losses before cumulative effect of a change in accounting principle were
$33.9 million, $42.1 million and $32.6 million for the years ended December 31,
2002, 2001 and 2000, respectively. Net losses after cumulative effect of a
change in accounting principle were $33.9 million, $42.1 million and $45.8
million for the years ended December 31, 2002, 2001 and 2000, respectively. The
decrease in net loss in 2002 compared to 2001 was the net result of reduced
revenues from collaborative agreements offset by lower conversion expense
related to convertible debentures. The decrease in net loss in 2001 compared to
2000 was the net result of higher operating expenses, conversion expense related
to amending series D convertible debentures and warrants, decreased revenues
from collaborative agreements and reduced interest expense and cumulative effect
of a change in accounting principle.
Liquidity and Capital Resources
Cash, restricted cash, cash equivalents and marketable securities at
December 31, 2002 were $47.5 million compared to $79.6 million at December 31,
2001 and $95.8 million at December 31, 2000. We have an investment policy to
invest these funds in liquid, investment grade securities, such as
interest-bearing money market funds, corporate notes, commercial paper and
municipal securities. The decrease in cash, restricted cash, cash equivalents
and marketable securities in 2002 and 2001 was the result of cash used in
operations.
Net cash used in operations was $31.3 million in 2002, $22.4 million in
2001 and $13.9 million in 2000. The increase in net cash used in operations in
2002 was primarily the result of increased research and development expenses and
a decrease in revenues. We expect that our net cash used in operations will
decrease in 2003 as a result of reductions in staffing in June 2002 and January
2003.
Through December 31, 2002, we have invested approximately $12.3 million in
property and equipment, of which approximately $8.3 million was financed through
an equipment financing arrangement. Minimum annual payments due under the
equipment financing facility are expected to total $367,000, $176,000, $146,000
and $55,000 in 2003, 2004, 2005 and 2006, respectively. As of December 31, 2002,
we had approximately $1.1 million available for borrowing under our equipment
financing facilities. The drawdown period under the equipment financing
facilities expires on September 30, 2003. We intend to renew the commitment for
new equipment financing facilities in 2003 to further fund equipment purchases.
If we are unable to renew the commitment, then we will need to spend our own
resources for equipment purchases.
In June 2000, we sold $25.0 million in series D zero coupon convertible
debentures and warrants to purchase 834,836 shares of our common stock to an
institutional investor. The debentures were convertible at any time by the
holder at a fixed conversion price of $29.95 per share. If unconverted, the
debentures had a maturity date of June 29, 2003. The warrants to purchase
834,836 shares of common stock were exercisable at $37.43 per share at the
option of the holder through December 2001. In November 2001, $10.0 million of
series D convertible debentures were converted by the holder into approximately
1,011,000 shares of our common stock at a conversion price of $9.89 per share,
reflecting a modification of the terms of these debentures. We amended the terms
of the remaining $15.0 million of series D convertible debentures to carry a
2.5% coupon, have a fixed conversion price of $20.00 per share and have the
maturity date extended to June 2005. We also amended the outstanding series
37
D warrants. The amended series D-1 warrant to purchase 333,935 shares of our
common stock is exercisable at $15.625 per share through June 30, 2003. The
amended series D-2 warrant to purchase 500,901 shares of our common stock is
exercisable at $25.00 per share through December 31, 2006. As of December 31,
2002, $15.0 million of series D convertible debentures and series D-1 and D-2
warrants to purchase 834,836 shares of our common stock remained outstanding.
In December 2001, we sold $7.3 million of our common stock under our equity
line financing facility and issued approximately 758,000 shares. This line
expired in September 2002.
In June 2002, we restructured the organization to focus our resources on
our most advanced product development programs. In the process, we reduced our
research staff by 33 employees and our support staff by 10 employees, a
reduction of approximately 30% of our work force in Menlo Park, California and
Edinburgh, Scotland. We recorded a restructuring charge of $706,000, of which
$625,000 related to research and development expense and $81,000 related to
general and administrative expense. As of December 31, 2002, no further amounts
were due as a result of this restructuring.
In January 2003, we reduced our research staff by 29 employees and our
support staff by 11 employees. We changed the organization in order to
concentrate our resources on the continued development of our lead anti-cancer
product, GRN163, and our regenerative medicine products based on human embryonic
stem cells (hESCs). We expect to record a restructuring charge in the first
quarter of 2003 of approximately $670,000, of which $390,000 relates to research
and development expense and $280,000 relates to general and administrative
expense.
Our contractual obligations for the next five years, and thereafter are as
follows:
Principal Payments Due by Period
------------------------------------------------------------
Less Than
Contractual Obligations(1) Total 1 Year 1-3 Years 4-5 Years After 5 Years
- ----------------------------------------- ---------- ---------- ----------- ----------- --------------
(Amounts in thousands)
Convertible debentures(2) ............... $15,000 -- $15,000 -- --
Equipment loans ......................... 744 $ 367 377 -- --
Operating leases ........................ 2,032 1,096 936 -- --
Research funding(3) ..................... 10,687 3,187 7,133 $367 --
Product manufacturing(4) ................ 1,750 1,750 -- -- --
------- ------ ------- ---- --
Total contractual cash obligations ..... $30,213 $6,400 $23,446 $367 $--
======= ====== ======= ==== ===
- ------------
(1) This table does not include any milestone payments under research
collaborations or license agreements as the timing and likelihood of such
payments are not known.
(2) Our convertible debentures may be converted to common stock prior to their
maturity date and therefore may not require use of our capital resources.
(3) Research funding is comprised of sponsored research commitments at various
academic laboratories around the world, including the Roslin Institute.
(4) In July 2002, we entered into a manufacturing agreement to produce
GMP-grade GRN163 for preclinical and clinical studies.
We estimate that our existing capital resources, interest income and
equipment financing facilities will be sufficient to fund our current level of
operations through December 31, 2004. Changes in our research and development
plans or other changes affecting our operating expenses may result in the
expenditure of available resources before such time, and in any event, we will
need to raise substantial additional capital to fund our operations in the
future. We intend to seek additional funding through strategic collaborations,
public or private equity financings, equipment loans or other financing sources
that may be available.
38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk disclosures contains
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
Credit Risk. We place our cash, restricted cash, cash equivalents, and
marketable securities with three financial institutions in the United States.
Generally, these deposits may be redeemed upon demand and therefore, bear
minimal risk. Deposits with banks may exceed the amount of insurance provided on
such deposits. Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of marketable securities.
Marketable securities consist of high-grade corporate bonds and U.S. government
agency securities. Our investment policy, approved by our Board of Directors,
limits the amount we may invest in any one type of investment, thereby reducing
credit risk concentrations.
Interest Rate Sensitivity. The fair value of our cash equivalents and
marketable securities at December 31, 2002 was $46.9 million. These investments
include $4.5 million of cash and cash equivalents which are due in less than 90
days, $35.4 million of short-term investments which are due in less than one
year and $7.0 million in long-term investments which are due in one to two
years. Our investment policy is to manage our marketable securities portfolio to
preserve principal and liquidity while maximizing the return on the investment
portfolio through the full investment of available funds. We diversify the
marketable securities portfolio by investing in multiple types of investment
grade securities. We primarily invest our marketable securities portfolio in
short-term securities with at least an investment grade rating to minimize
interest rate and credit risk as well as to provide for an immediate source of
funds. Although changes in interest rates may affect the fair value of the
marketable securities portfolio and cause unrealized gains or losses, such gains
or losses would not be realized unless the investments are sold. Due to the
nature of our investments, which are primarily corporate notes and money market
funds, we have concluded that there is no material market risk exposure.
Foreign Currency Exchange Risk. Because we translate foreign currencies
into United States dollars for reporting purposes, currency fluctuations can
have an impact, though generally immaterial, on our results. We believe that our
exposure to currency exchange fluctuation risk is insignificant primarily
because our international subsidiary satisfies its financial obligations almost
exclusively in its local currency. For the fiscal 2002 year end, there was an
immaterial currency exchange impact from our intercompany transactions. However,
our financial obligations to the Roslin Institute are stated in British pounds
sterling over the next three years. This obligation may become more expensive
for us if the United States dollar becomes weaker against the British pounds
sterling. As of December 31, 2002, we did not engage in foreign currency hedging
activities.
39
Item 8. Consolidated 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 consolidated balance sheets of Geron
Corporation as of December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Geron
Corporation at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 8 to the consolidated financial statements, in 2000
the Company changed its method of accounting for convertible debentures in
accordance with Emerging Issues Task Force ("EITF") 00-27, "Application of EITF
Issue 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, to Certain Convertible
Instruments."
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 10, 2003
40
GERON CORPORATION
CONSOLIDATED BALANCED SHEETS
December 31,
-----------------------------
2002 2001
------------- -------------
(In thousands, except
shares and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 4,604 $ 18,773
Restricted cash ......................................................... 530 530
Marketable securities ................................................... 42,383 60,338
Interest and other receivables .......................................... 704 1,297
Notes receivable from related parties ................................... 433 223
Prepaid assets .......................................................... 2,115 703
---------- ----------
Total current assets .................................................. 50,769 81,864
Equity investments in licensees .......................................... 365 699
Notes receivable from related parties .................................... 162 292
Property and equipment, net .............................................. 2,444 3,587
Deposits and other assets ................................................ 245 241
Intangible assets, net ................................................... 6,684 9,548
---------- ----------
$ 60,669 $ 96,231
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 1,594 $ 1,338
Accrued compensation .................................................... 789 1,272
Accrued liabilities ..................................................... 949 1,715
Current portion of deferred revenue ..................................... 543 767
Current portion of equipment loans ...................................... 367 825
Current portion of research funding obligation .......................... 5,141 4,395
---------- ----------
Total current liabilities ............................................. 9,383 10,312
Noncurrent portion of deferred revenue ................................... 1,030 1,097
Noncurrent portion of equipment loans .................................... 377 299
Noncurrent portion of research funding obligation ........................ 3,822 6,686
Convertible debentures ................................................... 16,316 16,295
Commitments ..............................................................
Stockholders' equity:
Preferred stock, $0.001 par value; 3,000,000 shares authorized; no shares
issued and outstanding at December 31, 2002 and 2001 .................. -- --
Common stock, $0.001 par value; 100,000,000 shares authorized; 24,766,821
and 24,481,774 shares issued and outstanding at December 31, 2002 and
2001, respectively .................................................... 25 24
Additional paid-in-capital .............................................. 256,097 253,595
Deferred compensation ................................................... (209) (234)
Accumulated deficit ..................................................... (225,783) (191,875)
Accumulated other comprehensive (loss) income ........................... (389) 32
---------- ----------
Total stockholders' equity ............................................ 29,741 61,542
---------- ----------
$ 60,669 $ 96,231
========== ==========
See accompanying notes.
41
GERON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------
2002 2001 2000
-------------- -------------- --------------
(In thousands, except shares and per share
amounts)
Revenues from collaborative agreements .......................... $ 566 $ 3,280 $ 6,500
License fees and royalties ...................................... 682 340 109
----------- ----------- -----------
Total revenues ............................................... 1,248 3,620 6,609
Operating expenses:
Research and development ....................................... 31,573 29,018 23,548
General and administrative ..................................... 5,375 9,621 9,273
----------- ----------- -----------
Total operating expenses ..................................... 36,948 38,639 32,821
----------- ----------- -----------
Loss from operations ............................................ (35,700) (35,019) (26,212)
Interest and other income ....................................... 2,549 5,860 5,922
Conversion expense .............................................. -- (11,910) --
Interest and other expense ...................................... (757) (1,004) (12,284)
----------- ----------- -----------
Loss before cumulative effect of a change in accounting principle (33,908) (42,073) (32,574)
Cumulative effect of a change in accounting principle ........... -- -- (13,259)
----------- ----------- -----------
Net loss ........................................................ $ (33,908) $ (42,073) $ (45,833)
=========== =========== ===========
Basic and diluted net loss per share:
Loss per share before cumulative effect of a change in
accounting principle ........................................... $ (1.37) $ (1.90) $ (1.56)
Cumulative effect of a change in accounting principle ........... -- -- (0.64)
----------- ----------- -----------
Net loss per common share ....................................... $ (1.37) $ (1.90) $ (2.20)
----------- ----------- -----------
Shares used in computing net loss per common share .............. 24,661,733 22,121,833 20,869,791
=========== =========== ===========
See accompanying notes.
42
GERON CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other Total
--------------------- Paid-In Deferred Accumulated Comprehensive Stockholders'
Shares Amount Capital Compensation Deficit Income (Loss) Equity
---------- -------- ------------ -------------- ------------- --------------- --------------
(In thousands, except shares)
Balances at December 31, 1999 ...... 17,381,095 $ 17 $ 131,113 $ (853) $ (103,969) $ (82) $ 26,226
Net loss ........................... -- -- -- -- (45,833) -- (45,833)
Net change in unrealized gain
(loss) on marketable securities ... -- -- -- -- -- 333 333
Cumulative translation adjustment .. -- -- -- -- -- (90) (90)
-----------
Comprehensive loss ................. (45,590)
Issuance of common stock in
connection with equity line
less issuance costs of $9 ......... 87,654 1 2,491 -- -- -- 2,492
Issuance of common stock in
connection with private
investor financing ................ 380,855 -- 9,000 -- -- -- 9,000
Beneficial conversion feature
related to convertible
debentures issued ................. -- -- 616 -- -- -- 616
Conversion of convertible
debentures ........................ 915,069 1 9,076 -- -- -- 9,077
Issuance of warrants to
purchase common stock in
connection with convertible
debenture financing ............... -- -- 10,527 -- -- -- 10,527
Issuance of warrants to
purchase common stock in exchange
for services ...................... -- -- 3,780 -- -- -- 3,780
Issuance of common stock in
exchange for services ............. 62,866 1 1,318 -- -- -- 1,319
Issuance of common stock to
certain research institutions ..... 58,149 -- 691 -- -- -- 691
Issuance of common stock upon
exercise of warrants .............. 2,400,000 2 29,392 -- -- -- 29,394
Issuance of common stock under
employee stock plans, net ......... 495,124 -- 2,749 -- -- -- 2,749
Amortization of deferred
compensation ...................... -- -- -- 378 -- -- 378
Effect of a change in
accounting principle, beneficial
conversion related to convertible
debentures issued ($10,527 in 2000
and $2,732 in 1999) ............... -- -- 13,259 -- -- -- 13,259
----------- ---- ---------- ----------- ----------- ----------- -----------
Balances at December 31, 2000 ...... 21,780,812 22 214,012 (475) (149,802) 161 63,918
Net loss ........................... -- -- -- -- (42,073) -- (42,073)
Net change in unrealized gain
(loss) on marketable securities
and equity investments in licensees -- -- -- -- -- (99) (99)
Cumulative translation adjustment .. -- -- -- -- -- (30) (30)
-----------
Comprehensive loss ................. (42,202)
Issuance of common stock in
connection with equity line ....... 757,885 1 7,252 -- -- -- 7,253
Conversion of convertible
debentures ........................ 1,646,638 1 27,122 -- -- -- 27,123
Issuance of warrants to purchase
common stock in exchange for
services .......................... -- -- 86 -- -- -- 86
Issuance of warrants to purchase
common stock to certain
institutions ...................... -- -- 992 -- -- -- 992
Stock-based compensation related
to issuance of common stock
and options in exchange for
services .......................... 2,473 -- 1,717 -- -- -- 1,717
Issuance of common stock to
certain research institutions ..... 100,000 -- 1,066 -- -- -- 1,066
Issuance of common stock upon
exercise of warrants .............. 27,341 -- 449 -- -- -- 449
Issuance of common stock under
employee stock plans, net ......... 166,625 -- 899 -- -- -- 899
Amortization of deferred
compensation ...................... -- -- -- 241 -- -- 241
----------- ---- ---------- ----------- ----------- ----------- -----------
Balances at December 31, 2001 ...... 24,481,774 24 253,595 (234) (191,875) 32 61,542
Net loss ........................... -- -- -- -- (33,908) -- (33,908)
Net change in unrealized gain
(loss) on marketable securities
and equity investments in licensees -- -- -- -- -- (437) (437)
Cumulative translation adjustment .. -- -- -- -- -- 16 16
-----------
Comprehensive loss ................. (34,329)
Issuance of common stock in
acquisition of technology ......... 210,000 1 1,584 -- -- -- 1,585
Issuance of warrants to purchase
common stock in exchange for
services .......................... -- -- 612 -- -- -- 612
Stock-based compensation related
to issuance of common stock and
options in exchange for services .. 2,601 -- 42 -- -- -- 42
Issuance of common stock under
employee stock plans, net ......... 72,446 -- 264 -- -- -- 264
Deferred compensation related
to 401(k) contributions ........... -- -- -- (209) -- -- (209)
Amortization of deferred
compensation ...................... -- -- -- 234 -- -- 234
----------- ---- ---------- ----------- ----------- ----------- -----------
Balances at December 31, 2002 ...... 24,766,821 $ 25 $ 256,097 $ (209) $ (225,783) $ (389) $ 29,741
=========== ==== ========== =========== =========== =========== ===========
See accompanying notes.
43
GERON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------------
2002 2001 2000
--------------- ------------- -------------
(In thousands)
Cash flows from operating activities
Net loss ...................................................................... $(33,908) $ (42,073) $ (45,833)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................ 1,492 1,264 1,411
Gain on investments .......................................................... -- 132 --
Loss on equity investments in licensees ...................................... 235 18 --
Conversion expense related to modification of series D convertible
debentures and warrants .................................................... -- 11,910 --
Amortization of intangible assets, principally research related .............. 2,864 2,865 2,864
Interest related to beneficial conversion feature ............................ -- -- 24,402
Accretion of discount on convertible debentures .............................. -- -- 8
Interest expense related to convertible debentures, net of premium
amortization ............................................................... 21 102 148
Issuance of common stock in exchange for acquired in-process
research technology ........................................................ 1,585 -- --
Accretion of interest on research funding obligation ......................... 491 490 491
Expense related to common stock issued for services rendered ................. 18 4,310 3,995
Amortization of deferred compensation ........................................ 234 241 378
Changes in assets and liabilities:
Interest and other receivables .............................................. 593 (141) (451)
Prepaid assets .............................................................. (800) (339) 35
Notes receivable from related parties ....................................... (63) (183) (19)
Equity investments in licensees ............................................. -- (1,010) --
Deposits and other assets ................................................... (4) 58 (48)
Accounts payable ............................................................ 256 (121) 138
Accrued compensation ........................................................ (692) 656 (104)
Accrued liabilities ......................................................... (742) 1,007 536
Deferred revenue ............................................................ (291) 1,314 550
Research funding payments ................................................... (2,609) (2,829) (2,190)
Translation adjustment ...................................................... (23) (94) (233)
---------- --------- ---------
Net cash used in operating activities ...................................... (31,343) (22,423) (13,922)
Cash flows from investing activities
Capital expenditures .......................................................... (328) (1,106) (1,181)
Purchases of marketable securities ............................................ (31,558) (54,505) (62,334)
Proceeds from maturities of marketable securities ............................. -- 28,209 16,480
Proceeds from sales/calls of marketable securities ............................ 49,176 31,290 15,526
---------- --------- ---------
Net cash provided by (used in) investing activities ........................ 17,290 3,888 (31,509)
Cash flows from financing activities
Proceeds from issuance of convertible debentures and warrants ................. -- -- 25,000
Proceeds from equipment loans ................................................. 498 102 201
Payments of obligations under capital leases and equipment loans .............. (878) (931) (1,218)
Proceeds from issuance of common stock, net ................................... 264 8,152 43,598
---------- --------- ---------
Net cash (used in) provided by financing activities ........................ (116) 7,323 67,581
---------- --------- ---------
Net (decrease) increase in cash and cash equivalents .......................... (14,169) (11,212) 22,150
Cash and cash equivalents, at beginning of year ............................... 18,773 29,985 7,835
---------- --------- ---------
Cash and cash equivalents, at end of year ..................................... $ 4,604 $ 18,773 $ 29,985
========== ========= =========
See accompanying notes.
44
GERON CORPORATION
NOTES TO CONSOLIDATED 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 developing and commercializing therapeutic and diagnostic products for
applications in oncology and regenerative medicine, and research tools for drug
discovery. Geron's product development programs are based upon three patented
core technologies: telomerase, human embryonic stem cells and nuclear transfer.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of Geron
Corporation and its wholly-owned subsidiary, Geron Bio-Med Ltd., a United
Kingdom company. Intercompany accounts and transactions have been eliminated.
The financial statements of the Company's subsidiary outside the United States
are measured using the local currency as the functional currency. Assets and
liabilities of this subsidiary are translated at the rates of exchange at the
balance sheet date. The resultant translation adjustments are included in
accumulated other comprehensive income (loss), a separate component of
stockholders' equity. Income and expense items are translated at average monthly
rates of exchange.
Net Loss Per Share
Basic earnings (loss) per share is based on weighted average shares
outstanding and excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings (loss) per share includes any dilutive
effect of options, warrants and convertible securities.
A reconciliation of shares used in calculation of basic and diluted net
loss per share follows:
Year Ended December 31,
-----------------------------------------
2002 2001 2000
------------- ------------- -------------
(In thousands, except share and per share
amounts)
Loss before cumulative effect of a change in accounting principle $ (33,908) $ (42,073) $ (32,574)
Cumulative effect of a change in accounting principle ............... -- -- (13,259)
----------- ----------- -----------
Net loss ............................................................ $ (33,908) $ (42,073) $ (45,833)
=========== =========== ===========
Basic and Diluted Net Loss Per Share:
Loss per share before cumulative effect of a change in
accounting principle ............................................... $ (1.37) $ (1.90) $ (1.56)
Cumulative effect of a change in accounting principle ............... -- -- (0.64)
----------- ----------- -----------
Basic and diluted net loss per common share ......................... $ (1.37) $ (1.90) $ (2.20)
=========== =========== ===========
Weighted average shares of common stock outstanding used in
computing net loss per common share ................................ 24,661,733 22,121,833 20,869,791
=========== =========== ===========
Had the Company been in a net income position, diluted earnings per share
would have included the shares used in the computation of basic net loss per
share as well as an additional 822,545, 1,454,846 and 2,069,229 shares for 2002,
2001 and 2000, respectively related to outstanding options, warrants and
convertible securities not included above (as determined using the treasury
stock method at the estimated average market value).
45
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies (Continued)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents and Marketable Debt 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 is
subject to credit risk related to its cash equivalents and securities
available-for-sale. The Company places its cash and cash equivalents in money
market funds, municipal notes and commercial paper. The Company's investments
include corporate notes in United States corporations with original maturities
ranging from 5 to 20 months.
The Company classifies its marketable debt securities as
available-for-sale. Available-for-sale securities are recorded at fair value
with unrealized gains and losses reported in accumulated other comprehensive
income (loss) in stockholders' equity. Fair values for investment securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. Realized gains and losses are included in interest and other income
and are derived using the specific identification method for determining the
cost of securities sold and have been 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. See Note 2 on Financial
Instruments and Credit Risk.
Revenue Recognition
Since Geron's inception, a substantial portion of its revenues has been
generated from license and research agreements with collaborators. The Company
recognizes revenue under these collaborative agreements 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.
The Company also has several license, option and marketing agreements with
various oncology, diagnostics, research tools, agriculture and biologics
production companies. With each of these agreements, the Company receives
nonrefundable license payments in cash or equity securities, option payments in
cash or equity securities, royalties on future sales of products, milestone
payments, or any combination of these items. Nonrefundable signing or license
fees that are not dependent on future performance under these agreements are
recognized as revenue when received and over the term of the arrangement if the
Company has continuing performance obligations. Option payments are recognized
as revenue over the period of the option agreement. Milestone payments are
recognized upon completion of specified milestones according to contract terms.
Royalties are generally recognized upon receipt.
The Company receives income from United States government grants that
support the Company's research efforts in defined research projects. These
grants generally provided for reimbursement of approved costs incurred as
defined in the various grants. Income associated with these grants is recognized
upon receipt of reimbursement and is included in interest and other income.
Restricted Cash
As of December 31, 2002 and 2001, the Company held $530,000 in a
certificate of deposit as collateral on an unused line of credit.
46
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies (Continued)
Marketable and Non-Marketable Equity Investments in Licensees
Equity in nonpublic companies is carried at the lower of cost or net
realizable value. Equity in public companies is carried at the market value as
of the balance sheet date. Unrealized gains and losses are included as a
separate component of stockholders' equity. Realized gains or losses are
included in interest and other income and are derived using the specific
identification method. Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity Securities",
requires companies to determine whether a decline in fair value below the
amortized cost basis is other than temporary. If a decline in fair value is
determined to be other than temporary, SFAS 115 requires the carrying value of
the debt or equity security to be written down to its fair value. No such
writedowns were recorded in the years ended December 31, 2002, 2001 and 2000.
Derivative Financial Instruments
The Company retains a warrant to purchase common stock in a private
company. In accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS
133), the Company accounts for the warrant as a derivative financial instrument.
Accordingly, the warrant is recorded at fair value as of the balance sheet date
based on the Black-Scholes valuation of such instruments in comparable companies
and other indicators of the investment's value. Any gains or losses in fair
value are recorded in interest and other income. The Company does not use
derivative financial instruments for trading or speculative purposes. See Note 3
on Marketable and Non-Marketable Equity Investments in Licensees.
The Company's exposure to currency exchange fluctuation risk is
insignificant. Geron Bio-Med, Ltd., the Company's international subsidiary,
satisfies its financial obligations almost exclusively in its local currency.
For 2002 there was an insignificant currency exchange impact from intercompany
transactions. The Company does not engage in foreign currency hedging
activities.
Intangible Asset and Research Funding Obligation
In May 1999, we completed the acquisition of Roslin Bio-Med Ltd., a
privately held company formed by the Roslin Institute in Midlothian, Scotland.
In connection with this acquisition, we formed a research collaboration with the
Roslin Institute and committed approximately $20,000,000 in research funding
over six years. Using an effective interest rate of 6%, this research funding
obligation had a net present value of $17,200,000 and has been capitalized as an
intangible asset that is being amortized as research and development expense
over six years. Imputed interest is also being accreted to the value of the
research funding obligation and is recognized as interest expense.
Research and Development Expenses
All research and development costs are expensed as incurred. The value of
acquired in-process research and development is charged to expense on the date
of acquisition. Research and development expenses include, but are not limited
to, payroll and personnel expense, lab supplies, preclinical studies, raw
materials to manufacture clinical trial drugs, manufacturing costs, sponsored
research at other labs, consulting, legal fees and research-related overhead.
Accrued liabilities for raw materials to manufacture clinical trial drugs,
manufacturing costs, patent legal fees and sponsored research reimbursement fees
are included in accrued liabilities and included in research and development
expenses.
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. Leasehold improvements are amortized over the
remaining term of the lease.
47
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies (Continued)
Employee Stock Plans
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company elected to continue to apply the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock option and stock purchase plans. The Company
is generally not required under APB Opinion No. 25 and related interpretations
to recognize compensation expense in connection with its employee stock option
and stock purchase plans. The Company is required by SFAS No. 123 to present, in
the Notes to Consolidated Financial Statements, the pro forma effects on
reported net income and earnings per share as if compensation expense had been
recognized based on the fair value method of accounting prescribed by SFAS No.
123.
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,
-----------------------------------------
2002 2001 2000
------------- ------------- -------------
(In thousands, except per share amounts)
Net loss ..................................................... $ (33,908) $ (42,073) $ (45,833)
Add back:
Deferred compensation and consultant option expense ......... 283 585 586
Deduct:
Stock-based employee and consultant compensation
expense determined under SFAS 123 .......................... (10,422) (9,275) (5,682)
--------- --------- ---------
Pro forma net loss ........................................... $ (44,047) $ (50,763) $ (50,929)
========= ========= =========
Basic and diluted net loss per share as reported ............. $ (1.37) $ (1.90) $ (2.20)
Basic and diluted pro forma net loss per share ............... $ (1.79) $ (2.29) $ (2.44)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and employee stock
purchase plans have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair market value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options, nor do they necessarily represent the effects of
employee stock options on reported net income (loss) for future years.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net loss and other
comprehensive income (loss). Other comprehensive income (loss) includes certain
changes in equity that are excluded from net loss.
The components of accumulated other comprehensive income (loss) are as
follows:
December 31,
--------------------
2002 2001
---------- -------
(In thousands)
Unrealized holding gain (loss) on available-for-sale
securities and marketable equity investments in
licensees ......................................... $ (316) $ 120
Foreign currency translation adjustments ........... (73) (88)
------ -----
$ (389) $ 32
====== =====
48
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies (Continued)
Concentrations of Customers and Suppliers
The majority of the Company's revenue was earned in the United States. One
customer (a research collaborator) accounted for 40% of the Company's 2002
revenues. Two customers accounted for 35% and 55% of the Company's 2001 revenues
and 76% and 22% of the Company's 2000 revenues. In January 2001, the Company and
one significant customer, accounting for 35% of 2001 revenues and 76% of 2000
revenues, agreed to terminate its agreement. No revenues were earned from this
customer in 2002.
The Company has contracted with third-party manufacturers to produce
GMP-grade drugs for preclinical and clinical studies. The Company has also
contracted for raw materials to supply those manufacturers. Should the Company
not be able to obtain sufficient quantities of raw materials or GMP-grade drugs
from its third-party sources or other third-party sources, certain development
and clinical activities may be delayed.
Other Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
141, "Business Combinations." SFAS 141 supersedes APB 16, "Business
Combinations," and SFAS 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." SFAS 141 requires the purchase method of accounting for
all business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company adopted SFAS 141 on January 1, 2002 and
the adoption had no material effect on its financial condition or results of
operations.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets." SFAS 142 supersedes APB 17, "Intangible Assets," and requires the
discontinuance of goodwill amortization. In addition, SFAS 142 includes
provisions regarding the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the testing for impairment of existing goodwill and other
intangibles. SFAS 142 is required to be applied for fiscal years beginning after
December 15, 2001, with certain early adoption permitted. The Company adopted
SFAS 142 on January 1, 2002 and the adoption had no material effect on its
financial condition or results of operations.
In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. The Company adopted SFAS 143 on January 1, 2002 and
the adoption had no material effect on its financial condition or results of
operations.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which supersedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS 144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. However, SFAS 144
retains the fundamental provisions of SFAS 121 for: 1) recognition and
measurement of the impairment of long-lived assets to be held and used; and 2)
measurement of long-lived assets to be disposed of by sale. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The Company
adopted SFAS 144 on January 1, 2002 and the adoption had no material effect on
its financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item. Under SFAS No.145, such gains and losses should be
classified as extraordinary only if they meet the criteria of APB Opinion No.
30. In addition, SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic
49
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies (Continued)
effects that are similar to sale-leaseback transactions. SFAS No. 145 became
effective at varying dates from May 2002 with early adoption encouraged. The
Company early adopted this accounting principle as of December 31, 2001 and
recognized $7,240,000 as conversion expense for the conversion and modification
of its Series D convertible debentures. The conversion expense was calculated as
the difference between the fair market value of the common stock issued on the
date of conversion and the fair market value of common stock that would have
been issued under the original agreement. See Note 8 on Convertible Debentures.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" and requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than at the date of an entity's commitment
to an exit plan. The statement further establishes fair value as the objective
for initial measurement of the liability and that employee benefit arrangements
requiring future service beyond a "minimum retention period" be recognized over
the future service period. SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002. The Company does not expect the
adoption of SFAS No. 146 to have a material effect on its financial condition or
results of operations.
In November 2002, the FASB issued Financial Interpretation No. 45,
"Guarantor's Accounting and Disclosure requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). The initial recognition
and initial measurement provisions apply on a prospective basis to guarantees
issued or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements in the Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company does not have any guarantees nor does it provide any
guarantees for others. The Company does not expect the adoption of FIN 45 to
have a material effect on its financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition to SFAS No. 123's
fair value method of accounting for stock-based compensation. SFAS No. 148 also
amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28,
"Interim Financial Reporting," to require disclosure in the summary of
significant accounting policies the effect of stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. SFAS No. 148's amendment of the transition and annual disclosure
requirements of SFAS No. 123 are effective for fiscal years ending after
December 15, 2002, with earlier application permitted. SFAS No. 148's amendment
of the disclosure requirements of Opinion No. 28 is effective for financial
reports containing condensed consolidated financial statements for interim
periods beginning after December 15, 2002. The Company has adopted the
disclosure requirements of SFAS No. 148.
In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). The consolidation
requirements of Interpretation 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim periods beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company does not have variable interest
entities and does not expect the adoption of FIN 46 to have a material effect on
its financial condition or results of operations.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to current year presentation. Marketable securities in the prior year were
classified as short-term and long-term investments and prepaid assets in the
prior year were classified as other current assets.
50
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Financial Instruments and Credit Risk
Cash Equivalents and Marketable Debt Securities Available-for-Sale
The following is a summary of available-for-sale securities at December
31, 2002 and 2001:
Estimated Fair Value
----------------------
2002 2001
--------- ----------
(In thousands)
Included in cash and cash equivalents:
Money market fund ............................... $ 4,519 $16,352
Municipal note .................................. -- 2,000
------- -------
$ 4,519 $18,352
======= =======
Restricted cash:
Certificate of deposit .......................... $ 530 $ 530
======= =======
Short-term investments (due in less than 1 year):
Corporate notes ................................. $35,392 $50,170
======= =======
Long-term investments (due in 1-2 years):
Corporate notes ................................. $ 6,991 $10,168
======= =======
As of December 31, 2002 and 2001, the difference between the fair value and
the amortized cost of available-for-sale securities was $(316,000) and $120,000,
respectively.
Notes Receivable from Related Parties
The Company presently holds notes receivable of $595,000 from present or
former employees of the Company related to housing costs following relocation.
For the year ended December 31, 2002, 2001, and 2000 five, five and three
employees, respectively, had notes receivable to the Company. These notes, which
in general bear no interest, are collateralized by certain real property assets
of the employees. One of the notes receivable is to be paid in full by March
2003, two of the notes receivable are to be paid in full by August 2003, and one
note is to be paid in full by October 2003. The one remaining note is being paid
in a series of installments over two years ending March 2004.
Other Fair Value Disclosures
At December 31, 2002, the fair value of the notes receivable from employees
is $571,000. 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.
At December 31, 2002, the fair value of the equipment loans approximates
the carrying value of $744,000. 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.
At December 31, 2002, the fair value of the convertible debentures
approximates the carrying value of $16,316,000. 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 and the
Black-Scholes pricing model.
Credit Risk
The Company places its cash, restricted cash, cash equivalents, and
marketable securities with three financial institutions in the United States.
Generally, these deposits may be redeemed upon demand and therefore, bear
minimal risk. Deposits with banks may exceed the amount of insurance provided on
such deposits. Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of marketable
51
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Financial Instruments and Credit Risk (Continued)
securities. Marketable securities consist of high-grade corporate bonds and U.S.
government agency securities. The Company's investment policy, approved by the
Board of Directors, limits the amount the Company may invest in any one type of
investment, thereby reducing credit risk concentrations.
3. Marketable and Non-Marketable Equity Investments in Licensees
In connection with its license agreement with Clone International Pty Ltd.
signed in December 2000, the Company received equity equal to 33% of the
outstanding stock of Clone International. The Company received 500 ordinary,
fully paid shares with full voting rights. The Company initially recorded its
investment at $16,000, which was equal to 33% of the assets of Clone
International in December 2000. In accordance with the equity method of
accounting, the Company decreased its carrying value of the investment by its
proportionate share of Clone International's losses up to the carrying value of
the investment. Any decreases were included in interest and other income. In
2001, Clone International incurred a net operating loss and the Company
decreased its carrying value in the investment by $16,000, the Company's
proportionate share of the loss. As the Company's share of Clone International's
operating losses exceeds the original carrying value of its investment, the
Company has discontinued the application of the equity method as of December 31,
2001. The carrying value of Clone International equity was zero at December 31,
2002 and 2001. The Company does not have any funding obligations under this
license.
In connection with its license agreement with ProLinia, Inc., the Company
received a warrant to purchase 1,500,000 shares of ProLinia common stock at an
exercise price of $0.40 per share. The warrant, which contains a cashless
exercise feature, expires on May 17, 2008. Statement of Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities," requires derivative instruments to be recorded at fair value.
Accordingly, the warrant is recorded at fair value as of the balance sheet date
based on the Black-Scholes valuation of such instruments in comparable companies
and other known indicators of the investment's value and is included in the
balance sheet under equity investments in licensees. Any resulting change in
fair value is considered a realized gain or loss and is included in interest and
other income. There was an insignificant change between the original fair value
of the ProLinia warrants and the fair value at December 31, 2002.
4. Property and Equipment
Property and equipment, stated at cost, is comprised of the following:
December 31,
-------------------------
2002 2001
----------- -----------
(In thousands)
Furniture and computer equipment ....................... $ 2,872 $ 2,809
Lab equipment .......................................... 5,358 5,250
Leasehold improvements ................................. 4,062 4,050
-------- --------
12,292 12,109
Less accumulated depreciation and amortization ......... (9,848) (8,522)
-------- --------
$ 2,444 $ 3,587
======== ========
Property and equipment at December 31, 2002 and 2001 includes assets under
capitalized leases and equipment loans of approximately $3,314,000 and
$2,142,000 respectively. Accumulated amortization related to leased assets was
approximately $2,189,000 and $1,379,000 at December 31, 2002 and 2001,
respectively.
52
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Equipment Loans
In 2002, the Company renewed its equipment financing facilities and had
approximately $1,100,000 available for borrowing as of December 31, 2002. The
drawdown period under the equipment financing facilities expires on September
30, 2003. The obligations under the previous equipment loans, which are secured
by the equipment financed, bear interest at fixed rates of approximately 9% and
are due in monthly installments through June 2006.
Future minimum principal payments on equipment loans are as follows:
Equipment
Loans
---------------
(In thousands)
Years ending December 31:
2003 ....................................... $367
2004 ....................................... 176
2005 ....................................... 146
2006 ....................................... 55
----
Total minimum principal payments ......... $744
====
6. Accrued Liabilities
Accrued liabilities consist of the following:
December 31,
--------------------
2002 2001
--------- --------
(In thousands)
Consultant commitments ................ $ 33 $ 82
Annual report ......................... 80 133
Sponsored research agreements ......... 232 225
Legal expenses ........................ 525 1,177
Other ................................. 79 98
------ ------
$ 949 $1,715
====== ======
7. Operating Lease Commitment
On March 25, 1996, the Company leased two facilities under two five-year
non-cancelable operating leases. In 2001, the Company exercised the first of two
options to extend the lease period on the two original 1996 leases for two and
one half years (until July 31, 2004), and assumed an operating lease on a third
facility. The lease on the third facility expires on April 30, 2005, and Geron
has an option to extend the term to January 31, 2007, to coincide with the end
date of the second extension option under the leases on the first two
facilities. Future minimum payments under non-cancelable operating leases are
approximately $1,096,000 in 2003, $814,000 in 2004 and $122,000 in 2005. Rent
expense under operating leases was approximately $994,000, $710,000 and $612,000
for the years ended December 31, 2002, 2001 and 2000, respectively. Base rent
under each of the three leases increases annually by between 4% to 4.17%.
8. Convertible Debentures
Series C Debentures
On September 30, 1999, the Company sold $12,500,000 in series C convertible
two-percent coupon debentures and warrants to purchase 1,100,000 shares of
common stock to an institutional investor. The series C convertible debentures
were convertible at any time by the holder at a fixed conversion price of $10.25
per share. The series C convertible debentures were convertible at the Company's
option when the common stock has traded at a certain
53
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Convertible Debentures (Continued)
premium to the fixed conversion price for ten consecutive trading days. If
unconverted, the debentures had a maturity date of September 30, 2002. The
series C warrants to purchase 1,000,000 shares of common stock were exercisable
at $12.50 per share and the series C warrants to purchase 100,000 shares of
common stock were exercisable at $12.75 per share at the option of the holder
through May 2001.
In March 2000, series C convertible debentures with a face value of
$6,250,000 plus accrued interest were converted into 615,069 shares of Geron
common stock at $10.25 per share. In addition, all of the series C warrants were
exercised which resulted in proceeds of $13,750,000 and the issuance of
1,100,000 shares of Geron common stock. This debenture contained a beneficial
conversion feature equal to the difference of the market price of the Company's
common stock at the date of issue and the conversion price. In December 2000,
the Company adopted Emerging Issues Task Force Issue No. 00-27, "Application of
EITF Issue 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, to Certain
Convertible Instruments" ("EITF 00-27"). Accordingly, the Company recognized
$2,700,000 of additional imputed non-cash interest expense related to the
beneficial conversion feature of the series C convertible debentures as a
cumulative effect of a change in accounting principle, with an offset to
additional paid-in-capital.
In November 2001, all of the remaining $6,250,000 of series C convertible
debentures plus accrued interest were converted into 635,516 shares of Geron
common stock. As of December 31, 2002, no series C convertible debentures and no
series C warrants remained outstanding.
Series D Debentures
On June 29, 2000, the Company sold $25,000,000 in series D zero coupon
convertible debentures and warrants to purchase 834,836 shares of Geron common
stock to an institutional investor. The debentures were convertible at any time
by the holder at a fixed conversion price of $29.95 per share. The payment
obligations under the series D debentures rank senior to all other obligations
and while outstanding, no other debt can be issued that would take higher
priority. In connection with the issuance of the series D convertible
debentures, the Company recorded approximately $616,000 in interest expense for
the difference between the fair value of the Company's common stock and the
conversion price of the debentures on the closing date of the financing. The
debentures converted at the Company's option when Geron common stock has traded
at a certain premium to the fixed conversion price for five consecutive trading
days. If unconverted, the debentures had a maturity date of June 29, 2003. The
warrant to purchase 834,836 shares of Geron common stock was exercisable at
$37.43 per share at the option of the holder through December 2001. The value of
the warrant of $10,527,000 was determined using Black-Scholes and since the
debentures were immediately convertible at the option of the holder, the entire
warrant value was recorded as a charge to interest expense and a credit to
additional paid-in-capital in 2000. This debenture contained a beneficial
conversion feature equal to the difference of the market price of the Company's
common stock at the date of issue and the conversion price. In December 2000,
the Company adopted EITF 00-27. Accordingly, the Company recognized an
additional $10,527,000 in imputed non-cash interest expense related to the
beneficial conversion feature of the series D convertible debentures as a
cumulative effect of a change in accounting principle, with an offset to
additional paid-in-capital.
In November 2001, the Company modified the terms of $10,000,000 of
outstanding series D convertible debentures by reducing the conversion price to
$9.89 per share (92% of the closing bid price on the date of conversion by the
investor and converted the debentures into 1,011,122 shares of Geron common
stock). As a result, the Company recognized $7,240,000 as conversion expense.
The conversion expense was calculated as the difference between the fair market
value of the common stock issued on the date of conversion and the fair market
value of common stock that would have been issued under the original agreement.
The Company also modified the terms of the remaining $15,000,000 of series
D convertible debentures to extend the maturity date to June 30, 2005, increase
the yield on the debenture to 2.5%, and fix the conversion price at $20.00 per
share. In addition, the Company modified the terms of the related outstanding
warrants that were
54
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Convertible Debentures (Continued)
originally issued with the series D debentures to reset the exercise price of
40% of the warrants to $15.625 per share and extend the exercise period to June
30, 2003 (series D-1 warrants) and 60% of the warrants to $25.00 per share and
extend the exercise period to December 31, 2006 (series D-2 warrants). The
difference between the current fair values of the original series D warrants and
the amended series D-1 and D-2 warrants was recorded as conversion expense of
$3,370,000. The Company also recorded the remaining $15,000,000 of the amended
series D convertible debentures at a fair value of $16,300,000 with the
offsetting difference of $1,300,000 being recorded as conversion expense. The
excess of the fair value over the face value of the debentures is being
amortized over the life of the amended series D convertible debentures as a
reduction to interest expense, $355,000 in 2002 and $59,000 in 2001. The Company
is also accruing 2.5% interest on the amended series D convertible debentures as
interest expense over the life of the debentures, $375,000 in 2002 and $54,000
in 2001. The fair values used in calculating the conversion expense associated
with the series D-1 and D-2 warrants and the amended series D convertible
debentures were based on values determined through an independent valuation.
As of December 31, 2002, $15,000,000 of series D convertible debentures and
series D warrants to purchase 834,836 shares of Geron common stock remained
outstanding.
9. Intangible Asset and Research Funding Obligation
In May 1999, the Company completed the acquisition of Roslin Bio-Med Ltd.,
a privately held company formed by the Roslin Institute in Midlothian, Scotland.
In connection with this acquisition, the Company formed a research collaboration
with the Roslin Institute and committed approximately $20,000,000 in research
funding over six years. Using an effective interest rate of 6%, this research
funding obligation had a net present value of $17,200,000. As of December 31,
2002 and 2001, the present value of our remaining commitment was $8,963,000 and
$11,081,000, respectively. Payments totaling $2,609,000 and $2,829,000 were made
to the Roslin Institute under the research funding obligation in 2002 and 2001,
respectively. Imputed interest of $491,000 and $490,000 was accreted to the
value of the research funding obligation and was recognized as interest expense
in 2002 and 2001, respectively.
The transaction was accounted for using the purchase method of accounting.
The purchase price was allocated among the acquired basic research in the form
of a license in the nuclear transfer technology, the research agreement with the
Institute and the net tangible assets of Roslin Bio-Med Ltd. The value of the
nuclear transfer technology of $23,400,000 was reflected as acquired in-process
research technology expense and the value of the research agreement of
$17,200,000 has been capitalized as an intangible asset and is being amortized
over six years as research and development expense, $2,865,000 each in 2002,
2001 and 2000. Research and development expense related to this commitment is
expected to be $2,865,000 in 2003, $2,865,000 in 2004 and $955,000 in 2005.
10. Acquisition of In-Process Research Technology
Effective March 5, 2002, the Company purchased certain intellectual
property related to oligonucleotide N3' -- P5' phosphoramidates from Lynx
Therapeutics, Inc. The acquisition price was $2,500,000, of which $1,000,000
was paid in cash and 210,000 shares of Geron common stock. The total
acquisition price was charged to research and development expense. The Company
acquired the research technology from Lynx Therapeutics, Inc. for use solely in
performing research related to its GRN163 anti-cancer therapeutic program. The
Company must further the research and development of the technology before it
can enter into clinical trials for a potential commercial application. The
Company concluded that this technology has no alternative future use, and
accordingly, expensed the value of the acquired research technology at the time
of acquisition.
55
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Stockholders' Equity
Warrants
Warrants outstanding to purchase Geron common stock as of December 31,
2002 are exercisable upon grant and are detailed as follows:
Issuance Date Exercise Price Number of Shares Expiration Date
- ------------------ -------------- ---------------- ---------------
September 2002 $ 4.00 50,000 September 2012
August 2002 $ 4.20 100,000 August 2012
November 2001 $ 15.63 333,935 June 2003
November 2001 $ 25.00 500,901 December 2006
September 2001 $ 9.07 5,000 September 2011
August 2001 $ 14.60 100,000 August 2011
August 2001 $ 22.56 9,000 July 2006
August 2000 $ 31.69 5,000 August 2010
July 2000 $ 6.75 25,000 July 2010
March 2000 $ 67.09 200,000 March 2010
March 2000 $ 12.50 100,000 March 2010
October 1998 $ 5.78 6,500 October 2008
August 1997 $ 6.75 25,000 August 2007
---------
1,460,336
=========
1992 Stock Option Plan
The Company administers the 1992 Stock Option Plan (the "1992 Plan"). The
options granted under the 1992 Plan may be either incentive stock options or
nonstatutory stock options. As of December 31, 2002, the Company had reserved
6,994,362 shares of common stock for issuance under the 1992 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 of the
underlying common stock on the date of grant. If, at the time the Company grants
an option, 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 of the
underlying common stock and shall not be exercisable more than five years after
the date of grant. The 1992 Plan expired in August 2002 and no further options
grants can be made from this 1992 Plan.
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 1992 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 2002 and 2001, the Company did not
repurchase any shares, in accordance with these repurchase rights. As of
December 31, 2002, no shares remained subject to repurchase.
On September 18, 1998, the Board of Directors approved a resolution to
offer all employees holding outstanding options to purchase common stock of the
Company under the 1992 Plan with exercise prices in excess of the closing price
of the Company's common stock on September 17, 1998 of $4.75, the option to
exchange all such options for new incentive and/or nonstatutory stock options.
Each such new incentive and/or nonstatutory stock option was on the same terms
as the surrendered option, except that (i) the exercise price was equal to the
closing price of the Company's common stock as reported on September 17, 1998 of
$4.75, (ii) the vesting period of each exchanged option as set forth in the
applicable stock option agreement was extended for one year beginning from the
original vesting commencement date, (iii) no exchanged option could be exercised
or sold by the optionee prior
56
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Stockholders' Equity (Continued)
to September 18, 1999, except due to the involuntary termination of the employee
by the Company or his or her death or permanent disability, and (iv) options so
exchanged were exchanged for the maximum number of incentive stock options
permitted under applicable rules and regulations. In connection with this option
exchange program, options to purchase 1,148,224 shares of common stock were
cancelled and regranted. In addition, the Company recorded deferred compensation
of approximately $1,300,000 in 1998. The remaining deferred compensation is
being amortized over the remaining vesting term of the options. The Company
recognized compensation expense related to this option exchange of approximately
$234,000 in 2002 and $241,000 each in 2001 and 2000, respectively.
2002 Equity Incentive Plan
In May 2002, the Company's stockholders approved the adoption of the 2002
Equity Incentive Plan (the "2002 Plan") to replace the 1992 Plan. The Company
administers the 2002 Plan. The 2002 Plan provides for grants to employees of the
Company and any parent or subsidiary of the Company (including officers and
employee directors) of either incentive stock or nonstatutory stock options and
stock purchase rights to employees (including officers and employee directors)
and consultants (including non-employee directors) of the Company or any parent
or subsidiary of the Company. As of December 31, 2002, the Company had reserved
5,000,000 shares of common stock for issuance under the 2002 Plan. Options
granted under the 2002 Plan expire no later than ten years from the date of
grant. For incentive stock options, the option price shall be equal to 100% of
the fair market value of the underlying common stock on the date of grant. All
other stock option prices are determined by the Administrator. If, at the time
the Company grants an option, 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 of the underlying common stock and shall not be exercisable more than five
years after the date of grant.
Options to purchase shares of common stock generally vest over a period of
four years from the date of the option grant, with a portion vesting after six
months and the remainder vesting ratably over the remaining period. Under
certain circumstances, options may be exercised prior to vesting, subject to the
Company's right to repurchase shares subject to such option at the exercise
price paid per share. The Company's repurchase rights would generally terminate
on a vesting schedule identical to the vesting schedule of the exercised option.
In 2002, the Company did not repurchase any shares, in accordance with these
repurchase rights. As of December 31, 2002, no shares remained subject to
repurchase.
Directors' Stock 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.
In May 1999, the stockholders approved an amendment to increase the number of
authorized shares to 500,000 shares of common stock. As of December 31, 2002,
492,500 options have been granted under the Directors' Option Plan.
57
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Stockholders' Equity (Continued)
Aggregate option activity for the 1992 Stock Option Plan, 2002 Equity
Incentive Plan and the Directors' Stock Option Plan is as follows:
Outstanding Options
Shares --------------------------------- Weighted
Available Number of Price Per Average
For Grant Shares Share Exercise Price
--------------- ------------- ----------------- ---------------
Balance at December 31, 1999 .......... 742,337 3,297,522 $ 0.34-$17.00 $ 7.11
Additional shares authorized ......... 800,000 -- $ -- $ --
Options granted ...................... (315,471) 315,471 $ 15.50-$47.19 $ 25.62
Options exercised .................... -- (458,580) $ 0.78-$27.00 $ 5.14
Options forfeited .................... 342,131 (342,131) $ 0.82-$35.00 $ 10.37
---------- ---------
Balance at December 31, 2000 .......... 1,568,997 2,812,282 $ 0.34-$47.19 $ 9.11
Additional shares authorized ......... 1,050,000 -- $ -- $ --
Options granted ...................... (2,508,176) 2,508,176 $ 8.23-$19.13 $ 13.05
Options exercised .................... -- (120,505) $ 0.34-$22.56 $ 4.12
Options forfeited .................... 171,264 (171,264) $ 0.82-$40.75 $ 15.71
---------- ---------
Balance at December 31, 2001 .......... 282,085 5,028,689 $ 0.82-$47.19 $ 10.97
Additional shares authorized ......... 5,000,000 -- $ -- $ --
Options granted ...................... (2,058,366) 2,058,366 $ 3.76-$ 9.23 $ 4.73
Options exercised .................... -- (16,357) $ 0.82-$11.85 $ 4.89
Options forfeited .................... 764,521 (764,521) $ 3.76-$47.19 $ 12.04
1992 Plan options expired ............ (517,919) -- $ -- $ --
---------- ---------
Balance at December 31, 2002 .......... 3,470,321 6,306,177 $ 0.82-$41.13 $ 8.82
========== =========
Information about stock options outstanding as of December 31, 2002 is as
follows:
Options Outstanding
----------------------------------------------------------------
Weighted Average Weighted Average Remaining
Exercise Price Range Number Exercise Price Contractual Life (in years)
- ---------------------- ------------ ------------------ ----------------------------
$ 0.82-$ 3.76 1,602,819 $ 3.64 9.25
$ 3.89-$ 6.24 1,272,588 $ 4.89 6.17
$ 6.63-$10.50 1,359,767 $ 8.56 8.51
$ 10.56-$41.13 2,071,003 $ 15.41 7.56
---------
$ 0.82-$41.13 6,306,177 $ 8.82 7.91
=========
As of December 31, 2002 and 2001, there were 3,170,023 and 2,105,204
exercisable options outstanding at a weighted average exercise price of $9.40
and $9.20, respectively.
During the year ended December 31, 2001, the Company extended the exercise
period and accelerated the vesting schedule on 246,900 outstanding options to
two former members of the Board of Directors and recognized $2,392,000 in
compensation expense for the difference between the exercise price of the
options and the fair market value of the Company's common stock on the date of
the respective award modifications. No such action was taken in 2002.
Stock Based Compensation
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 and options granted
to non-employee directors 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
58
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Stockholders' Equity (Continued)
employee stock options and options granted to non-employee directors. Under APB
25, the Company generally recognizes no compensation expense with respect to
such awards since the exercise price of the stock option equals the fair market
value of the underlying common stock on the grant date.
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 proscribed 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 2.47% to 4.69% for 2002,
3.39% to 5.29% for 2001 and 5.06% to 6.80% for 2000; a dividend yield of 0.0%
for 2002, 2001 and 2000; a volatility factor of the expected market price of the
Company's common stock of 0.881 for 2002, 1.013 for 2001 and 1.032 for 2000; and
a weighted average expected life of the options of 4 years for 2002 and 5 years
for 2001 and 2000.
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 was being
amortized over the vesting period of the individual options, generally a
60-month period. Deferred compensation expense recognized in 2000 related to
these options grants totaled approximately $137,000. No amounts were recorded in
2002 and 2001 since the deferred compensation was fully amortized by 2000.
There were no options granted with an exercise price below fair market
value of the Company's common stock on the date of grant for 2002, 2001 and
2000. The weighted average fair value of options granted during 2002, 2001 and
2000 with an exercise price equal to the fair market value of the Company's
common stock on the date of grant was $3.05, $10.08 and $20.17, respectively.
There were no options granted with an exercise price greater than the fair
market value of the Company's common stock in 2002, 2001 and 2000.
The Company grants options to consultants from time to time in exchange for
services performed for the Company. In general, these options vest over the
contractual period of the consulting arrangement. The Company granted options to
consultants to purchase 4,558, 24,234 and 18,771 shares of the Company's common
stock in 2002, 2001 and 2000, respectively. The fair value of these options is
being amortized to expense over the vesting term of the options. In addition,
the Company will record any additional increase in the fair value of the option
grant as the options vest. The Company recorded expense of $18,000, $249,000 and
$121,000 for the fair value of these options in 2002, 2001 and 2000,
respectively. As of December 31, 2002, no unamortized fair value of options to
consultants remained outstanding.
The Company also grants common stock to consultants and research
institutions in exchange for services performed for the Company. In 2002 and
2001, the Company issued 2,601 and 100,876 shares of common stock, respectively,
in exchange for services. For these stock grants, the Company recognized an
expense equal to the fair market value of the granted shares on the date of
grant. In 2002, 2001 and 2000, the Company recognized approximately $24,000,
$1,066,000 and $1,889,000, respectively, of expense in connection with stock
grants to consultants and research institutions.
59
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Stockholders' Equity (Continued)
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,
-----------------------------------------
2002 2001 2000
------------- ------------- -------------
(In thousands, except per share amounts)
Net loss ............................................ $ (33,908) $ (42,073) $ (45,833)
Add back:
Deferred compensation and consultant option expense 283 585 586
Deduct:
Stock-based employee and consultant compensation
expense determined under SFAS 123 ................. (10,422) (9,275) (5,682)
--------- --------- ---------
Pro forma net loss .................................. $ (44,047) $ (50,763) $ (50,929)
========= ========= =========
Basic and diluted net loss per share as reported .... $ (1.37) $ (1.90) $ (2.20)
Basic and diluted pro forma net loss per share ...... $ (1.79) $ (2.29) $ (2.44)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and employee stock
purchase plans have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair market value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options, nor do they necessarily represent the effects of
employee stock options on reported net income (loss) for future years.
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 35% of the eligible employees have participated in the Purchase
Plan in 2002. The Company does not recognize compensation cost related to
employee purchase rights under the Purchase Plan.
Approximately 213,000, 155,000 and 108,000 shares have been issued under
the Purchase Plan as of December 31, 2002, 2001 and 2000, respectively. 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: risk-free
interest rates ranging from 1.17% to 1.27% for 2002, 1.81% to 3.65% for 2001 and
5.96% to 6.06% for 2000; a dividend yield of 0.0% for 2002, 2001 and 2000; a
volatility factor of the expected market price of the Company's common stock of
0.881 for 2002, 1.013 for 2001 and 1.032 for 2000; and an expected life of the
purchase right of 6 months for 2002, 2001 and 2000. Based upon these
assumptions, the pro forma compensation cost estimated for the fair value of the
employees' purchase rights was approximately $101,000 for 2002, $211,000 for
2001 and $160,000 for 2000 has been included in the above pro forma information.
As of December 31, 2002, 86,771 shares were available for issuance under the
1996 Employee Stock Purchase Plan.
60
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Stockholders' Equity (Continued)
Common Shares Reserved for Future Issuance
Common stock reserved for future issuance as of December 31, 2002 is as
follows:
Convertible debentures ............... 752,671
Outstanding options .................. 6,306,177
Options available for grant .......... 3,470,321
Employee stock purchase plan ......... 86,771
Warrants outstanding ................. 1,460,336
----------
Total .............................. 12,076,276
==========
Share Purchase Rights Plan
On July 20, 2001, the Company's Board of Directors adopted a share purchase
rights plan and declared a dividend distribution of one right for each
outstanding share of common stock to stockholders of record as of July 31, 2001.
Each right entitles the holder to purchase one unit consisting of one
one-thousandth of a share of Series A Junior Participating Preferred Stock for
$100 per unit. Under certain circumstances, if a person or group acquires 15% or
more of Geron outstanding common stock, holders of the rights (other than the
person or group triggering their exercise) will be able to purchase, in exchange
for the $100 exercise price, shares of the Company's common stock, par value
$0.001 per share, or of any company into which the Company is merged having a
value of $200. The rights expire on July 31, 2011 unless extended by the
Company's Board of Directors. As of December 31, 2002, no rights were
exercisable into any shares of common stock.
401(k) Plan
The Company sponsors a defined-contribution savings plan under Section
401(k) of the Internal Revenue Code covering all full-time U.S. employees
("Geron 401K Plan"). Participating employees may contribute up to the annual
Internal Revenue Service contribution limit. The Geron 401K Plan also permits
discretionary matching and profit sharing contributions to be made by the
Company. The Geron 401K Plan is intended to qualify under Section 401 of the
Internal Revenue Code so that contributions by employees or by the Company, and
income earned on the contributions, are not taxable to employees until withdrawn
from the Geron 401K Plan. Contributions by the Company, if any, will be
deductible by the Company when made. At the direction of each participant, the
assets of the Geron 401K Plan are invested in any of 14 different investment
options.
In December 2002, the Board of Directors approved a matching contribution
equal to 100% of each employee's 2002 contributions. The matching contribution
is invested in Geron's common stock and vests ratably over four years for each
year of service completed by the employee, commencing from the date of hire,
until it is fully vested when the employee has completed four years of service.
The Company's accrual for matching the 2002 employee contributions under this
plan was approximately $548,000, of which $339,000 was fully vested as of
December 31, 2002 and $263,000 was recorded as research and development expense
and $76,000 was recorded as general and administrative expense. As of December
31, 2002, the unvested amount of $209,000 was recorded as deferred compensation
and will be amortized as compensation expense over the remaining three year
vesting period. The Company provided the matching contribution in January 2003.
Private Financing
In March 2000, the Company sold a total of 380,855 shares of common stock
and warrants to purchase 300,000 shares of Geron common stock to a single
investor for $9,000,000. Warrants to purchase 100,000 shares of common stock are
exercisable at $12.50 per share and the warrants to purchase 200,000 shares of
common stock are exercisable at $67.09 per share by the holder at any time
through February 2010. As of December 31, 2002, all of the warrants issued with
the private financing remained outstanding.
61
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Stockholders' Equity (Continued)
Equity Line
In September 2000, the Company entered into an agreement with an
institutional investor for an equity financing facility covering the sale of up
to $50,000,000 of the Company's common stock over 24 months. Under the
agreement, shares would be sold at the Company's discretion at a discount to the
then current market price of the Company's common stock on the day of sale. The
Company controls the amount and timing of each sale of stock. In December 2001,
the Company sold $7,253,000 of the Company's common stock under the equity line
financing facility. In connection with the drawdown, the Company issued 757,885
shares. The Company did not issue any common stock under the equity line
financing facility in 2002. The equity line commitment period expired in
September 2002.
12. Collaborative Agreements
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 provided $20,000,000 of research funding
over six years to support the Company's program to discover and develop in
certain Asian countries a telomerase inhibitor for the treatment of cancer. All
of this research funding had been received as of December 31, 2001. This
research led to the discovery of GRN163. The Company is entitled to receive
future payments totaling $7,500,000 upon the achievement of certain contractual
milestones relating to drug development and regulatory progress, as well as
royalty payments on future product sales. Kyowa Hakko has rights to co-develop
and market GRN163 and other compounds selected under the collaboration in Asia.
Kyowa Hakko also purchased $2,500,000 of Geron common stock in connection with
the Company's initial public offering.
In March 1997, the Company signed a License and Research Collaboration
Agreement (the "Pharmacia Agreement") with Pharmacia Corporation to collaborate
in the discovery, development and commercialization of a new class of
anti-cancer drugs that inhibit telomerase. Under the collaboration, Pharmacia
provided $20,000,000 of research funding over four years. In addition, Pharmacia
purchased $10,000,000 of Geron common stock at a premium over two years. In
January 2001, Geron and Pharmacia agreed to terminate the license and research
collaboration agreement. Pharmacia returned all product rights for telomerase
inhibitors to the Company.
Costs associated with research and development activities attributable to
the above agreements approximated revenue recognized. Under these agreements,
revenues of approximately $500,000, $3,250,000 and $6,500,000, were recognized
in 2002, 2001 and 2000, respectively. No milestone payments have been received
or earned to date.
In December 1997, the Company entered into a License, Product and Marketing
Agreement with Boehringer Mannheim (the "Boehringer Mannheim Agreement") to
develop and commercialize certain research and clinical diagnostic products for
cancer on an exclusive, worldwide basis. Under the Boehringer Mannheim
Agreement, Boehringer Mannheim provided reimbursement for research previously
conducted and is responsible for all clinical, regulatory, manufacturing,
marketing and sales efforts and expenses. 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.
After the acquisition of Boehringer Mannheim by Roche in early 1998, all
licenses and agreements pertaining to telomerase-based cancer diagnostics
entered into with Boehringer Mannheim have been transferred to Roche
Diagnostics. In accordance with the Boehringer Mannheim Agreement, the Company
received royalty payments from Roche of approximately $30,000 in 2002 and
$31,000 each in 2001 and 2000, respectively.
In March 1999, the Company entered into an exclusive License, Product and
Marketing Agreement with Clontech (the "Clontech Agreement") to develop,
manufacture and sell six cell lines. Under the terms of the Clontech Agreement,
Clontech was responsible for manufacturing and marketing of products resulting
from the use of the Company's telomerase technology. The Clontech Agreement
provides for Clontech to pay an up-front technology licensing fee of $50,000,
and for Clontech and Geron to equally share operating profits generated from
62
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Collaborative Agreements (Continued)
the sale of the cell lines. Specifically, the Company was entitled to receive
reimbursement funding of the greater of $25,000 or 10% of sales on December 31,
1999, December 31, 2000, and December 31, 2001. Clontech launched its first
product using the Company's telomerase technology in September 1999. The Company
recognized approximately $29,000, $46,000 and $29,000 in shared profits from
sales of cell lines in 2002, 2001 and 2000, respectively. The Clontech Agreement
has been terminated by mutual agreement as of January 31, 2003.
13. Income Taxes
As of December 31, 2002, the Company had federal net operating loss
carryforwards of approximately $161,000,000 which will expire at various dates
beginning 2006 through 2022, if not utilized. The Company also had federal
research and development tax credit carryforwards of approximately $4,100,000
which will expire at various dates beginning in 2007 through 2022, if not
utilized.
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 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Significant components of the Company's deferred tax assets as of December
31 are as follows:
2002 2001
------------ ------------
(In thousands)
Net operating loss carryforwards .................... $ 56,900 $ 45,400
Research credits .................................... 6,600 3,800
Capitalized research and development ................ 8,500 6,100
Other -- net ........................................ 4,000 1,500
--------- ---------
Total deferred tax assets ......................... 76,000 56,800
Valuation allowance for deferred tax assets ......... (76,000) (56,800)
--------- ---------
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
$19,200,000, $9,200,000 and $6,100,000 during the years ended December 31, 2002,
2001 and 2000, respectively.
Approximately $2,800,000 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.
14. Restructuring Charge
In June 2002, Geron restructured its organization to focus resources on its
most advanced product development programs. In the process, Geron reduced its
research staff by 33 employees and its support staff by 10 employees, a
reduction of approximately 30% of Geron's work force in Menlo Park, California
and Edinburgh, Scotland. Geron recorded a restructuring charge, consisting
mostly of salaries, severance and other personnel related costs of $706,000, of
which $625,000 related to research and development expense and $81,000 related
to general and administrative expense. As of December 31, 2002, no further
amounts were due as a result of this restructuring. See Subsequent Event note
below.
15. Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in fiscal year ended December 31, 1998. SFAS 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and
63
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Segment Information (Continued)
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS 131 also establishes standards
for related disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions how to
allocate resources and assess performance. The Company's chief decision maker,
as defined under SFAS 131, is the Chief Executive Officer. To date, the Company
has viewed its operations as principally one segment, the discovery and
development of therapeutic and diagnostic products for oncology and regenerative
medicine, and research tools for drug discovery. As a result, the financial
information disclosed herein materially represents all of the financial
information related to the Company's principal operating segment.
16. Statement of Cash Flows Data
Years Ended December 31,
-------------------------------------
2002 2001 2000
---------- ------------ ---------
(In thousands)
Supplementary information
Interest paid ....................................................... $ 87 $ 153 $ 250
Supplementary investing and financing activities:
Notes receivable from stockholders .................................. $ -- $ -- $ 70
Conversion of convertible debentures ................................ $ -- $ 16,513 $9,077
Premium on convertible debentures ................................... $ -- $ (1,300) $ --
Issuance of warrants to purchase common stock and common
stock issued for prior year services .............................. $ 636 $ -- $1,098
Unrealized gain (loss) on equity investments ........................ $ (322) $ (293) $ (50)
Net unrealized gain (loss) on available-for-sale securities ......... $ (338) $ 194 $ 384
Deferred compensation on 401(k) contribution ........................ $ 209 $ -- $ --
Interest expense for the year ended December 31, 2002, 2001 and 2000 was
$600,000, $847,000 and $12,040,000, respectively.
17. Quarterly Results (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ----------- ----------- -----------
(In thousands, except per share amounts)
Year Ended December 31, 2002
Revenues ............................................ $ 626 $ 111 $ 218 $ 293
Operating expenses .................................. 11,760 9,599 7,660 7,929
Net loss ............................................ (10,475) (9,008) (7,196) (7,229)
Basic and diluted net loss per common share ......... $ (0.43) $ (0.37) $ (0.29) $ (0.29)
Year Ended December 31, 2001
Revenues ............................................ $ 1,797 $ 585 $ 615 $ 623
Operating expenses .................................. (10,627) (8,006) (11,099) (8,907)
Net loss ............................................ (7,436) (6,081) (9,112) (19,444)
Basic and diluted net loss per common share ......... $ (0.34) $ (0.28) $ (0.42) $ (0.85)
Basic and diluted net losses per share are computed independently for each
of the quarters presented. Therefore, the sum of the quarters may not be equal
to the full year net loss per share amounts.
64
GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Subsequent Event
In January 2003, the Company announced that it is changing its organization
in order to concentrate its resources on the continued development of its lead
anti-cancer product, GRN163, and its regenerative medicine products based on
human embryonic stem cells (hESCs). In the process, Geron reduced its research
staff by 29 employees and its support staff by 11 employees. The Company expects
to record a restructuring charge in the first quarter of 2003 of approximately
$670,000, of which $390,000 relates to research and development expense and
$280,000 relates to general and administrative expense.
65
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 section captioned "Proposal 1: Election of
Directors" contained in the Company's Definitive Proxy Statement related to the
Annual Meeting of Stockholders to be held May 30, 2003, 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.
Item 14. Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date of
this Annual Report on Form 10-K, Geron's principal executive officer and
principal financial officer have concluded that Geron's disclosure controls and
procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the Exchange Act) are effective to ensure that information
required to be disclosed by Geron in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in Geron's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation and up to the filing date of this Annual Report on Form 10-K.
We have not identified any significant deficiencies or material weaknesses, and
therefore there were no corrective actions taken.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote.
66
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Consolidated Financial Statements
Included in Part II of this Report:
Page
-----
Report of Ernst & Young LLP, Independent Auditors ....................................... 40
Consolidated Balance Sheets -- December 31, 2002 and 2001 ............................... 41
Consolidated Statements of Operations -- Years ended December 31, 2002, 2001 and 2000 ... 42
Consolidated Statement of Stockholders' Equity -- Years ended December 31, 2002, 2001 and
2000 ................................................................................... 43
Consolidated Statements of Cash Flows -- Years ended December 31, 2002, 2001 and 2000 ... 44
Notes to Consolidated Financial Statements .............................................. 45
(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
15(a)(1).
(3) Exhibits.
Exhibit
Number Description
- ---------------- --------------------------------------------------------------------------------------------
2.1 (1)+ Sale and Purchase Agreement dated May 3, 1999, among the Registrant and each of the
shareholders of Roslin
2.2 (1) Escrow Agreement dated May 3, 1999, among the Registrant, a committee acting for and on
behalf of the Warrantors, and U.S. Bank Trust National Association
3.1 Amended and Restated Certificate of Incorporation of Registrant
3.2* Certificate of Amendment of Restated Certificate of Incorporation of Geron Corporation
3.3* Bylaws of Registrant
4.1 (3) Form of Common Stock Certificate
4.2 (4) Registration Rights Agreement dated March 27, 1998, among the Registrant and certain
investors
4.3 (5) Registration Rights Agreement dated as of December 10, 1998, among the Registrant and
certain investors
4.4 (6) Registration Rights Agreement, dated April 30, 1999, by and among the Registrant and each
of the Shareholders of Roslin
4.5 (7) Registration Rights Agreement dated as of September 30, 1999, by and between the
Registrant and RGC International Investors, LDC
4.5 (8) Form of Warrant
4.5 (9) Form of Debenture
4.6 (10) Rights Agreement, dated as of July 20, 2001, by and between Geron Corporation and U.S.
Stock Transfer Corporation, as Rights Agent, which includes the form of Certification of
Designations of the Series A Junior Participating Preferred Stock of Geron Corporation as
Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase
Preferred Shares as Exhibit C
4.7 (11) Amendment No. 1 to Registration Rights Agreement dated as of November 9, 2001, by and
between Registrant and RGC International Investors, LDC
4.8 (12) Series D Amended and Restated Convertible Debentures dated as of November 9, 2001
4.9 (13) Amended and Restated Series D-1 Stock Purchase Warrant to purchase 333,935 shares of
common stock issued by Registrant to RGC International Investors, LDC, dated as of
November 9, 2001
67
Exhibit
Number Description
- ------------------- ------------------------------------------------------------------------------------------
4.10(14) Amended and Restated Series D-2 Stock Purchase Warrant to purchase 500,901 shares of
common stock issued by Registrant to RGC International Investors, LDC, dated as of
November 9, 2001
4.11(45) Form of Indenture
4.12(46) Common Stock Purchase Agreement dated March 5, 2002, by and between Registrant and
Lynx Therapeutics, Inc.
10.1 (3) Form of Indemnification Agreement
10.2 (15) 1992 Stock Option Plan, as amended
10.3 (3) 1996 Employee Stock Purchase Plan
10.4 (16) 1996 Directors' Stock Option Plan, as amended
10.5 (48) 2002 Equity Incentive Plan
10.6 (3)+ Agreement with Respect to Option dated August 31, 1992 between Registrant and Cold
Spring Harbor Laboratory and Amendments No. 1 and 2 thereto dated May 3, 1993 and
January 1994
10.7 (3)+ Patent License Agreement dated September 8, 1992 between Registrant and University of
Texas Southwestern Medical Center at Dallas
10.8 (3)+ Sponsored Research Agreement dated as of September 8, 1992 between the Registrant and
University of Texas Southwestern Medical Center at Dallas
10.9 (3)+ Exclusive License Agreement dated February 2, 1994 between the Registrant and the Regents
of the University of California
10.10(3)+ 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(3)+ Standard Nonexclusive License Agreement dated January 1, 1996 between the Registrant and
Wisconsin Alumni Research Foundation
10.12(3) Business Park Lease dated March 25, 1996 between the Registrant and David D. Bohannon
Organization
10.13(3) Business Park Lease dated March 25, 1996 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(3) Equipment Financing Agreement dated January 5, 1992 between the Registrant and Lease
Management Services, Inc.
10.15(3) Master Lease Agreement dated January 5, 1993 between the Registrant and Lease
Management Services, Inc.
10.20(3) Note Secured by Second Deed of Trust dated December 1993 between the Registrant and
Calvin B. Harley
10.23(3) Common Stock Warrant dated May 4, 1994, issued by the Registrant to Cold Spring Harbor
Laboratory
10.25(17) Common Stock Purchase Agreement dated December 20, 1996 between the Registrant and
Pharmacia & Upjohn S.p.A.
10.26(18)+ License and Research Collaboration Agreement dated March 23, 1997 between Registrant
and Pharmacia & Upjohn S.p.A.
10.27(18)+ Amendment No. 2 to License and Research Collaboration Agreement dated April 24, 1995
between the Registrant and Kyowa Hakko Kogyo Co., Ltd. dated March 23, 1997
10.28(18)+ Three Party Agreement dated March 23, 1997 by and among Registrant, Kyowa Hakko
Kogyo Co., Ltd. and Pharmacia & Upjohn S.p.A.
10.29(18)+ Common Stock Purchase Agreement dated March 23, 1997 between Registrant and
Pharmacia & Upjohn S.p.A.
10.30(18) Intellectual Property License Agreement dated December 9, 1996 between Registrant and
University Technology Corporation
10.33(18) First Amendment to Note Secured by Deed of Trust with Harley
68
Exhibit
Number Description
- -------------------- --------------------------------------------------------------------------------------------
10.35(19)+ License Agreement dated August 1, 1997 between Registrant and The Johns Hopkins
University
10.36(19)+ Research Agreement dated August 1, 1997 between Registrant and The Johns Hopkins
University
10.37(20)+ License, Product Development, and Marketing Agreement by and between Registrant and
Boehringer Mannheim, GmbH
10.38(21) Securities Purchase Agreement dated as of March 27, 1998 between Registrant and certain
investors
10.40(22) Securities Purchase Agreement dated as of December 10, 1998 among the Registrant and
certain investors
10.42(1)+ Research and License Agreement dated May 3, 1999 by and between the Registrant, Roslin,
and the Institute
10.43(1)+ License Agreement dated May 3, 1999, among the Registrant, Roslin and the Institute
10.44(23) Amendment No. 1 to the Securities and Purchase Agreement, dated as of June 17, 1999, by
and among the Registrant and certain investors
10.45(23) Amendment No. 1 to the Registration Rights Agreement, dated as of June 17, 1999, by and
among the Registrant and certain investors
10.46(24) Securities Purchase Agreement dated as of September 30, 1999 between Registrant and RGC
International Investors, LDC
10.47(25) License Agreement with Wisconsin Alumni Research Foundation
10.48(26) Option Agreement with Wisconsin Alumni Research Foundation
10.49(27) Amendment to the License Agreement with Wisconsin Alumni Research Foundation
10.50(28) Secured Loan Agreement, dated as of August 10, 1999, by and between David J. Earp and
Andrea L. Earp and the Registrant
10.51(29) Letter to Thomas Okarma, dated as of October 7, 1999, extending License and Research
Collaboration Agreement between Pharmacia & Upjohn and the Registrant
10.52(30) Amendment No. 3 to the License and Research Collaboration Agreement, dated as of
January 24, 2000, by and between the Registrant and Kyowa Hakko Kogyo Co., Ltd.
10.53(31) Securities Purchase Agreement by and between Registrant and private investor dated
March 9, 2000
10.54(32) Warrant to purchase 100,000 shares of common stock issued by Registrant to private investor
dated March 9, 2000
10.55(33) Warrant to purchase 200,000 shares of common stock issued by Registrant to private investor
dated March 9, 2000
10.56(34) Securities Purchase Agreement dated as of June 29, 2000, by and between Registrant and the
Purchaser
10.57(35) Registration Rights Agreement dated as of June 29, 2000, by and between Registrant and the
Purchaser
10.58(36) Series D Zero Coupon Convertible Debenture
10.59(37) Warrant to purchase 834,836 shares of common stock issued by Registrant to the Purchaser,
dated as of June 29, 2000
10.60(38) Common Stock Purchase Agreement, dated as of September 6, 2000, by and between the
Registrant and Acqua Wellington
10.61(39) First Amendment to Intellectual Property License Agreement dated July 23, 2001, by and
among Registrant and University Technology Corporation
10.62(40) Common Stock Purchase Agreement dated as of August 30, 2001, by and among Registrant
and University Technology Corporation
10.63(41) Common Stock Warrant Agreement issued by Registrant to University Technology
Corporation, dated as of August 30, 2001
69
Exhibit
Number Description
- ------------------- ----------------------------------------------------------------------------------------
10.64(42) Restructuring Agreement dated as of November 9, 2001, by and between Registrant and RGC
International Investors, LDC
10.65(43) First Amendment to Lease and Assignment and Assumption of Lease among the Registrant,
iPrint Technologies, Inc. and Bohannon Development Company
10.66(44) License Agreement dated as of January 8, 2002, by and between Registrant and Wisconsin
Alumni Research Foundation.
10.67(47)+ Purchase Agreement dated as of March 5, 2002, by and between Registrant and Lynx
Therapeutics, Inc.
21.1* List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see signature page)
- ------------
+ 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 identically numbered exhibits filed with the
Registrant's Annual Report on Form 10-K filed on March 13, 2000.
(1) Incorporated by reference to identically numbered exhibits filed on the
Registrant's Form 8-K filed on May 18, 1999.
(3) Incorporated by reference to identically numbered exhibits filed with the
Registrant's Registration Statement on Form S-1 which became effective on
July 30, 1996.
(4) Incorporated by reference to Exhibit 10.39 of the Registrant's Current
Report on Form 8-K filed on April 2, 1998.
(5) Incorporated by reference to Exhibit 10.41 of the Registrant's Current
Report on Form 8-K filed on December 17, 1998.
(6) Incorporated by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K filed on May 18, 1999.
(7) Incorporated by reference to Exhibit 99.2 of the Registrant's Current
Report on Form 8-K filed on October 7, 1999.
(8) Incorporated by reference to Exhibit 4.2 of the Registrant's Current
Report on Form 8-K filed on December 17, 1998.
(9) Incorporated by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K filed on December 17, 1998.
(10) Incorporated by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K filed on July 20, 2001.
(11) Incorporated by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K filed on November 9, 2001.
(12) Incorporated by reference to Exhibit 4.2 of the Registrant's Current
Report on Form 8-K filed on November 9, 2001.
(13) Incorporated by reference to Exhibit 4.3 of the Registrant's Current
Report on Form 8-K filed on November 9, 2001.
(14) Incorporated by reference to Exhibit 4.4 of the Registrant's Current
Report on Form 8-K filed on November 9, 2001.
(15) Incorporated by reference to Exhibit 99.1 of the Registrant's Registration
Statement on Form S-8 filed on December 23, 1999.
(16) Incorporated by reference to Exhibit 99.2 of the Registrant's Registration
Statement on Form S-8 filed on December 23, 1999.
(17) Incorporated by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed on January 24, 1997.
(18) Incorporated by reference to identically numbered exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the period ended March 31,
1997.
(19) Incorporated by reference to identically numbered exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the period ended September
30, 1997.
70
(20) Incorporated by reference to identically numbered exhibits filed with
Registrant's Annual Report on Form 10-K filed on March 31, 1998.
(21) Incorporated by reference to Exhibit 10.39 of the Registrant's Current
Report on Form 8-K filed on April 2, 1998.
(22) Incorporated by reference to Exhibit 10.40 of the Registrant's Current
Report on Form 8-K filed on December 17, 1998.
(23) Incorporated by reference to identically numbered exhibits filed with
Registrant's Registration Statement on Form S-3 filed on April 2, 1998.
(24) Incorporated by reference to Exhibit 99.1 of the Registrant's Current
Report on Form 8-K filed on October 5, 1999.
(25) Incorporated by reference to Exhibit 10.1 filed with Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1999.
(26) Incorporated by reference to Exhibit 10.2 filed with Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1999.
(27) Incorporated by reference to Exhibit 10.3 filed with Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1999.
(28) Incorporated by reference to Exhibit 10.11 of the Registrant's Annual
Report on Form 10-K filed on March 13, 2000.
(29) Incorporated by reference to Exhibit 10.12 of the Registrant's Annual
Report on Form 10-K filed on March 13, 2000.
(30) Incorporated by reference to Exhibit 10.13 of the Registrant's Annual
Report on Form 10-K filed on March 13, 2000.
(31) Incorporated by reference to Exhibit 4.7 of the Registrant's Quarterly
Report on Form 10-Q filed on May 15, 2000.
(32) Incorporated by reference to Exhibit 4.8 of the Registrant's Quarterly
Report on Form 10-Q filed on May 15, 2000.
(33) Incorporated by reference to Exhibit 4.9 of the Registrant's Quarterly
Report on Form 10-Q filed on May 15, 2000.
(34) Incorporated by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K filed on July 6, 2000.
(35) Incorporated by reference to Exhibit 4.2 of the Registrant's Current Report
on Form 8-K filed on July 6, 2000.
(36) Incorporated by reference to Exhibit 4.3 of the Registrant's Current Report
on Form 8-K filed on July 6, 2000.
(37) Incorporated by reference to Exhibit 4.4 of the Registrant's Current Report
on Form 8-K filed on July 6, 2000.
(38) Incorporated by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K filed on September 26, 2000.
(39) Incorporated by reference to Exhibit 4.1 of the Registrant's Registration
Statement on Form S-3 filed on September 27, 2001.
(40) Incorporated by reference to Exhibit 4.2 of the Registrant's Registration
Statement on Form S-3 filed on September 27, 2001.
(41) Incorporated by reference to Exhibit 4.3 of the Registrant's Registration
Statement on Form S-3 filed on September 27, 2001.
(42) Incorporated by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed on November 9, 2001.
(43) Incorporated by reference to identically numbered exhibits filed with
Registrant's Annual Report on Form 10-K filed on March 1, 2002.
(44) Incorporated by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed on January 18, 2002.
(45) Incorporated by reference to Exhibit 4.1 of the Registrant's Registration
Statement on Form S-3 filed on January 29, 2002.
(46) Incorporated by reference to Exhibit 4.1 of the Registrant's Registration
Statement on Form S-3 filed on March 7, 2002.
(47) Incorporated by reference to Exhibit 10.1 of the Registrant's Registration
Statement on Form S-3 filed on March 7, 2002.
(48) Incorporated by reference to Appendix 2 of the Registrant's Definitive
Proxy Statement filed on April 2, 2002.
71
(b) Reports on Form 8-K.
None.
(c) Index to Exhibits.
72
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 28th day of February, 2003.
GERON CORPORATION
By: /s/ THOMAS B. OKARMA
--------------------------------------
Thomas B. Okarma
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, Thomas B. Okarma
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 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/ THOMAS B. OKARMA President, Chief Executive Officer and February 28, 2003
- ------------------------------- Director (Principal Executive Officer)
Thomas B. Okarma
/s/ DAVID L. GREENWOOD Chief Financial Officer, Senior Vice February 28, 2003
- ------------------------------- President of Corporate Development
David L. Greenwood and Treasurer (Principal Financial
and Accounting Officer)
/s/ ALEXANDER E. BARKAS Director February 28, 2003
- -------------------------------
Alexander E. Barkas
/s/ EDWARD V. FRITZKY Director February 28, 2003
- -------------------------------
Edward V. Fritzky
/s/ THOMAS D. KILEY Director February 28, 2003
- -------------------------------
Thomas D. Kiley
/s/ ROBERT B. STEIN Director February 28, 2003
- -------------------------------
Robert B. Stein
/s/ JOHN P. WALKER Director February 28, 2003
- -------------------------------
John P. Walker
/s/ PATRICK J. ZENNER Director February 28, 2003
- -------------------------------
Patrick J. Zenner
73
GERON CORPORATION
SARBANES-OXLEY ACT SECTION 302(A)CERTIFICATION
I, Thomas B. Okarma, Chief Executive Officer of Geron Corporation, certify
that:
1. I have reviewed this annual report on Form 10-K of Geron Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 28, 2003
/s/ THOMAS B. OKARMA
- ----------------------------------------
Thomas B. Okarma
President and Chief Executive Officer
74
GERON CORPORATION
SARBANES-OXLEY ACT SECTION 302(A) CERTIFICATION
I, David L. Greenwood, Chief Financial Officer of Geron Corporation, certify
that:
1. I have reviewed this annual report on Form 10-K of Geron Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 28, 2003
/s/ DAVID L. GREENWOOD
- ----------------------------------------
David L. Greenwood
Senior Vice President and
Chief Financial Officer
75
EXHIBIT INDEX
Exhibit
Number Description
- ---------------- --------------------------------------------------------------------------------------------
2.1(1)+ Sale and Purchase Agreement dated May 3, 1999, among the Registrant and each of the
shareholders of Roslin
2.2(1) Escrow Agreement dated May 3, 1999, among the Registrant, a committee acting for and on
behalf of the Warrantors, and U.S. Bank Trust National Association
3.1 Amended and Restated Certificate of Incorporation of Registrant
3.2* Certificate of Amendment of Restated Certificate of Incorporation of Geron Corporation
3.3* Bylaws of Registrant
4.1 (3) Form of Common Stock Certificate
4.2 (4) Registration Rights Agreement dated March 27, 1998, among the Registrant and certain
investors
4.3 (5) Registration Rights Agreement dated as of December 10, 1998, among the Registrant and
certain investors
4.4 (6) Registration Rights Agreement, dated April 30, 1999, by and among the Registrant and each
of the Shareholders of Roslin
4.5 (7) Registration Rights Agreement dated as of September 30, 1999, by and between the
Registrant and RGC International Investors, LDC
4.5 (8) Form of Warrant
4.5 (9) Form of Debenture
4.6 (10) Rights Agreement, dated as of July 20, 2001, by and between Geron Corporation and U.S.
Stock Transfer Corporation, as Rights Agent, which includes the form of Certification of
Designations of the Series A Junior Participating Preferred Stock of Geron Corporation as
Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase
Preferred Shares as Exhibit C
4.7 (11) Amendment No. 1 to Registration Rights Agreement dated as of November 9, 2001, by and
between Registrant and RGC International Investors, LDC
4.8 (12) Series D Amended and Restated Convertible Debentures dated as of November 9, 2001
4.9 (13) Amended and Restated Series D-1 Stock Purchase Warrant to purchase 333,935 shares of
common stock issued by Registrant to RGC International Investors, LDC, dated as of
November 9, 2001
4.10(14) Amended and Restated Series D-2 Stock Purchase Warrant to purchase 500,901 shares of
common stock issued by Registrant to RGC International Investors, LDC, dated as of
November 9, 2001
4.11(45) Form of Indenture
4.12(46) Common Stock Purchase Agreement dated March 5, 2002, by and between Registrant and
Lynx Therapeutics, Inc.
10.1 (3) Form of Indemnification Agreement
10.2 (15) 1992 Stock Option Plan, as amended
10.3 (3) 1996 Employee Stock Purchase Plan
10.4 (16) 1996 Directors' Stock Option Plan, as amended
10.5 (48) 2002 Equity Incentive Plan
10.6 (3)+ Agreement with Respect to Option dated August 31, 1992 between Registrant and Cold
Spring Harbor Laboratory and Amendments No. 1 and 2 thereto dated May 3, 1993 and
January 1994
10.7 (3)+ Patent License Agreement dated September 8, 1992 between Registrant and University of
Texas Southwestern Medical Center at Dallas
10.8 (3)+ Sponsored Research Agreement dated as of September 8, 1992 between the Registrant and
University of Texas Southwestern Medical Center at Dallas
10.9 (3)+ Exclusive License Agreement dated February 2, 1994 between the Registrant and the Regents
of the University of California
76
Exhibit
Number Description
- ------------------ -----------------------------------------------------------------------------------------
10.10(3)+ 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(3)+ Standard Nonexclusive License Agreement dated January 1, 1996 between the Registrant and
Wisconsin Alumni Research Foundation
10.12(3) Business Park Lease dated March 25, 1996 between the Registrant and David D. Bohannon
Organization
10.13(3) Business Park Lease dated March 25, 1996 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(3) Equipment Financing Agreement dated January 5, 1992 between the Registrant and Lease
Management Services, Inc.
10.15(3) Master Lease Agreement dated January 5, 1993 between the Registrant and Lease
Management Services, Inc.
10.20(3) Note Secured by Second Deed of Trust dated December 1993 between the Registrant and
Calvin B. Harley
10.23(3) Common Stock Warrant dated May 4, 1994, issued by the Registrant to Cold Spring Harbor
Laboratory
10.25(17) Common Stock Purchase Agreement dated December 20, 1996 between the Registrant and
Pharmacia & Upjohn S.p.A.
10.26(18)+ License and Research Collaboration Agreement dated March 23, 1997 between Registrant
and Pharmacia & Upjohn S.p.A.
10.27(18)+ Amendment No. 2 to License and Research Collaboration Agreement dated April 24, 1995
between the Registrant and Kyowa Hakko Kogyo Co., Ltd. dated March 23, 1997
10.28(18)+ Three Party Agreement dated March 23, 1997 by and among Registrant, Kyowa Hakko
Kogyo Co., Ltd. and Pharmacia & Upjohn S.p.A.
10.29(18)+ Common Stock Purchase Agreement dated March 23, 1997 between Registrant and
Pharmacia & Upjohn S.p.A.
10.30(18) Intellectual Property License Agreement dated December 9, 1996 between Registrant and
University Technology Corporation
10.33(18) First Amendment to Note Secured by Deed of Trust with Harley
10.35(19)+ License Agreement dated August 1, 1997 between Registrant and The Johns Hopkins
University
10.36(19)+ Research Agreement dated August 1, 1997 between Registrant and The Johns Hopkins
University
10.37(20)+ License, Product Development, and Marketing Agreement by and between Registrant and
Boehringer Mannheim, GmbH
10.38(21) Securities Purchase Agreement dated as of March 27, 1998 between Registrant and certain
investors
10.40(22) Securities Purchase Agreement dated as of December 10, 1998 among the Registrant and
certain investors
10.42(1)+ Research and License Agreement dated May 3, 1999 by and between the Registrant, Roslin,
and the Institute
10.43(1)+ License Agreement dated May 3, 1999, among the Registrant, Roslin and the Institute
10.44(23) Amendment No. 1 to the Securities and Purchase Agreement, dated as of June 17, 1999, by
and among the Registrant and certain investors
10.45(23) Amendment No. 1 to the Registration Rights Agreement, dated as of June 17, 1999, by and
among the Registrant and certain investors
10.46(24) Securities Purchase Agreement dated as of September 30, 1999 between Registrant and RGC
International Investors, LDC
10.47(25) License Agreement with Wisconsin Alumni Research Foundation
77
Exhibit
Number Description
- ------------------- --------------------------------------------------------------------------------------------
10.48(26) Option Agreement with Wisconsin Alumni Research Foundation
10.49(27) Amendment to the License Agreement with Wisconsin Alumni Research Foundation
10.50(28) Secured Loan Agreement, dated as of August 10, 1999, by and between David J. Earp and
Andrea L. Earp and the Registrant
10.51(29) Letter to Thomas Okarma, dated as of October 7, 1999, extending License and Research
Collaboration Agreement between Pharmacia & Upjohn and the Registrant
10.52(30) Amendment No. 3 to the License and Research Collaboration Agreement, dated as of
January 24, 2000, by and between the Registrant and Kyowa Hakko Kogyo Co., Ltd.
10.53(31) Securities Purchase Agreement by and between Registrant and private investor dated
March 9, 2000
10.54(32) Warrant to purchase 100,000 shares of common stock issued by Registrant to private investor
dated March 9, 2000
10.55(33) Warrant to purchase 200,000 shares of common stock issued by Registrant to private investor
dated March 9, 2000
10.56(34) Securities Purchase Agreement dated as of June 29, 2000, by and between Registrant and the
Purchaser
10.57(35) Registration Rights Agreement dated as of June 29, 2000, by and between Registrant and the
Purchaser
10.58(36) Series D Zero Coupon Convertible Debenture
10.59(37) Warrant to purchase 834,836 shares of common stock issued by Registrant to the Purchaser,
dated as of June 29, 2000
10.60(38) Common Stock Purchase Agreement, dated as of September 6, 2000, by and between the
Registrant and Acqua Wellington
10.61(39) First Amendment to Intellectual Property License Agreement dated July 23, 2001, by and
among Registrant and University Technology Corporation
10.62(40) Common Stock Purchase Agreement dated as of August 30, 2001, by and among Registrant
and University Technology Corporation
10.63(41) Common Stock Warrant Agreement issued by Registrant to University Technology
Corporation, dated as of August 30, 2001
10.64(42) Restructuring Agreement dated as of November 9, 2001, by and between Registrant and RGC
International Investors, LDC
10.65(43) First Amendment to Lease and Assignment and Assumption of Lease among the Registrant,
iPrint Technologies, Inc. and Bohannon Development Company
10.66(44) License Agreement dated as of January 8, 2002, by and between Registrant and Wisconsin
Alumni Research Foundation.
10.67(47)+ Purchase Agreement dated as of March 5, 2002, by and between Registrant and Lynx
Therapeutics, Inc.
21.1* List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see signature page)
- ------------
+ 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 identically numbered exhibits filed with the
Registrant's Annual Report on Form 10-K filed on March 13, 2000.
(1) Incorporated by reference to identically numbered exhibits filed on the
Registrant's Form 8-K filed on May 18, 1999.
(3) Incorporated by reference to identically numbered exhibits filed with the
Registrant's Registration Statement on Form S-1 which became effective on
July 30, 1996.
(4) Incorporated by reference to Exhibit 10.39 of the Registrant's Current
Report on Form 8-K filed on April 2, 1998.
78
(5) Incorporated by reference to Exhibit 10.41 of the Registrant's Current
Report on Form 8-K filed on December 17, 1998.
(6) Incorporated by reference to Exhibit 4.1 of the Registrant's Current Report
on Form 8-K filed on May 18, 1999. (7) Incorporated by reference to Exhibit
99.2 of the Registrant's Current Report on Form 8-K filed on October 7,
1999.
(8) Incorporated by reference to Exhibit 4.2 of the Registrant's Current Report
on Form 8-K filed on December 17, 1998.
(9) Incorporated by reference to Exhibit 4.1 of the Registrant's Current Report
on Form 8-K filed on December 17, 1998.
(10) Incorporated by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K filed on July 20, 2001.
(11) Incorporated by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K filed on November 9, 2001.
(12) Incorporated by reference to Exhibit 4.2 of the Registrant's Current
Report on Form 8-K filed on November 9, 2001.
(13) Incorporated by reference to Exhibit 4.3 of the Registrant's Current
Report on Form 8-K filed on November 9, 2001.
(14) Incorporated by reference to Exhibit 4.4 of the Registrant's Current
Report on Form 8-K filed on November 9, 2001.
(15) Incorporated by reference to Exhibit 99.1 of the Registrant's Registration
Statement on Form S-8 filed on December 23, 1999.
(16) Incorporated by reference to Exhibit 99.2 of the Registrant's Registration
Statement on Form S-8 filed on December 23, 1999.
(17) Incorporated by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed on January 24, 1997.
(18) Incorporated by reference to identically numbered exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the period ended March 31,
1997.
(19) Incorporated by reference to identically numbered exhibits filed with
Registrant's Quarterly Report on Form 10-Q for the period ended September
30, 1997.
(20) Incorporated by reference to identically numbered exhibits filed with
Registrant's Annual Report on Form 10-K filed on March 31, 1998.
(21) Incorporated by reference to Exhibit 10.39 of the Registrant's Current
Report on Form 8-K filed on April 2, 1998.
(22) Incorporated by reference to Exhibit 10.40 of the Registrant's Current
Report on Form 8-K filed on December 17, 1998.
(23) Incorporated by reference to identically numbered exhibits filed with
Registrant's Registration Statement on Form S-3 filed on April 2, 1998.
(24) Incorporated by reference to Exhibit 99.1 of the Registrant's Current
Report on Form 8-K filed on October 5, 1999.
(25) Incorporated by reference to Exhibit 10.1 filed with Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1999.
(26) Incorporated by reference to Exhibit 10.2 filed with Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1999.
(27) Incorporated by reference to Exhibit 10.3 filed with Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1999.
(28) Incorporated by reference to Exhibit 10.11 of the Registrant's Annual
Report on Form 10-K filed on March 13, 2000.
(29) Incorporated by reference to Exhibit 10.12 of the Registrant's Annual
Report on Form 10-K filed on March 13, 2000.
(30) Incorporated by reference to Exhibit 10.13 of the Registrant's Annual
Report on Form 10-K filed on March 13, 2000.
(31) Incorporated by reference to Exhibit 4.7 of the Registrant's Quarterly
Report on Form 10-Q filed on May 15, 2000.
79
(32) Incorporated by reference to Exhibit 4.8 of the Registrant's Quarterly
Report on Form 10-Q filed on May 15, 2000.
(33) Incorporated by reference to Exhibit 4.9 of the Registrant's Quarterly
Report on Form 10-Q filed on May 15, 2000.
(34) Incorporated by reference to Exhibit 4.1 of the Registrant's Current Report
on Form 8-K filed on July 6, 2000.
(35) Incorporated by reference to Exhibit 4.2 of the Registrant's Current Report
on Form 8-K filed on July 6, 2000.
(36) Incorporated by reference to Exhibit 4.3 of the Registrant's Current Report
on Form 8-K filed on July 6, 2000.
(37) Incorporated by reference to Exhibit 4.4 of the Registrant's Current Report
on Form 8-K filed on July 6, 2000.
(38) Incorporated by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed on September 26, 2000.
(39) Incorporated by reference to Exhibit 4.1 of the Registrant's Registration
Statement on Form S-3 filed on September 27, 2001.
(40) Incorporated by reference to Exhibit 4.2 of the Registrant's Registration
Statement on Form S-3 filed on September 27, 2001.
(41) Incorporated by reference to Exhibit 4.3 of the Registrant's Registration
Statement on Form S-3 filed on September 27, 2001.
(42) Incorporated by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed on November 9, 2001.
(43) Incorporated by reference to identically numbered exhibits filed with
Registrant's Annual Report on Form 10-K filed on March 1, 2002.
(44) Incorporated by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K filed on January 18, 2002.
(45) Incorporated by reference to Exhibit 4.1 of the Registrant's Registration
Statement on Form S-3 filed on January 29, 2002.
(46) Incorporated by reference to Exhibit 4.1 of the Registrant's Registration
Statement on Form S-3 filed on March 7, 2002.
(47) Incorporated by reference to Exhibit 10.1 of the Registrant's Registration
Statement on Form S-3 filed on March 7, 2002.
(48) Incorporated by reference to Appendix 2 of the Registrant's Definitive
Proxy Statement filed on April 2, 2002.
80