<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Period From _____ to _____
Commission File Number: 0-19986
--------
CELL GENESYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 94-3061375
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
342 Lakeside Drive, Foster City, California 94404
(Address of principal executive offices and zip code)
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 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 _____
------
As of August 15, 1997, the number of outstanding shares of the Registrant's
Common Stock was 27,687,641.
================================================================================
<PAGE>
CELL GENESYS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
PART I. FINANCIAL INFORMATION
1. Financial Statements:
a. Condensed Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996 3
b. Condensed Consolidated Statements of Operations - Three and Six Months
Ended June 30, 1997 and 1996 4
c. Condensed Consolidated Statements of Cash Flows -Six Months Ended
June 30, 1997 and 1996 5
d. Notes to Condensed Consolidated Financial Statements 6
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION 12
4. Submission of Matters to a Vote of Security Holders 12
6. Exhibits and Reports on Form 8-K 13
SIGNATURE 13
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CELL GENESYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-----------------------------
1997 1996
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,134 $ 20,935
Short-term investments 60,171 64,649
Prepaid expenses and other current assets 2,979 1,165
-----------------------------
Total current assets 74,284 86,749
Property and equipment at cost, net 14,849 12,485
Deposits and other assets, net 1,819 575
-----------------------------
$ 90,952 $ 99,809
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,677 $ 1,669
Accrued compensation and benefits 1,170 1,414
Deferred revenue from related parties 8,444 12,164
Accrued construction costs 65 2,118
Accrued legal expenses 704 1,986
Accrued acquisition related costs 5,252 -
Other accrued liabilities 3,082 439
Current portion of property and equipment financing 5,063 2,822
-----------------------------
Total current liabilities 26,457 22,612
Noncurrent portion of property and equipment financing 12,436 6,133
Convertible note payable 15,000 -
Stockholders' equity:
Common stock 28 16
Additional paid-in capital 195,518 127,318
Accumulated deficit (158,487) (56,270)
-----------------------------
Total stockholders' equity 37,059 71,064
-----------------------------
$ 90,952 $ 99,809
=============================
</TABLE>
See accompanying notes
3
<PAGE>
CELL GENESYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1996 1997 1996
------------------------------------------------------------------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Revenue under collaborative agreements
with related parties $ 3,992 $ 6,210 $ 11,896 $ 10,601
Operating expenses:
Research and development 8,017 6,299 16,351 12,988
Charge for purchased in-process technology 72,270 - 72,270 -
Restructuring costs related to acquisition 6,576 - 6,576 -
General and administrative 2,930 1,714 5,066 3,472
Charge for cross-license and
settlement (includes $3,750
equity in losses of Xenotech
joint venture associated with
cross-license and settlement) - - 15,000 -
------------------------------------------------------------
Total operating expenses 89,793 8,013 115,263 16,460
Interest income 1,055 1,061 2,119 2,295
Interest expense (783) (291) (1,071) (592)
------------------------------------------------------------
Net loss $ (85,529) $ (1,033) $ (102,319) $ (4,156)
============================================================
Net loss per share $ (4.20) $ (0.06) $ (5.55) $ (0.26)
============================================================
Shares used in computing net loss per
share 20,438 16,335 18,447 16,287
============================================================
</TABLE>
See accompanying notes.
4
<PAGE>
CELL GENESYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996
----------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (102,319) $ (4,156)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 2,356 1,827
Equity in losses of Xenotech joint venture 133 1,989
Charge for purchased in-process technology 72,270 -
Restructuring charges 4,021 -
Charge for cross-license and settlement 15,000 -
Changes, excluding effect of acquisition, to:
Prepaid expenses and other assets (1,135) 78
Accounts payable (861) 646
Accrued compensation and benefits (1,241) (144)
Deferred revenue from related parties (3,720) 310
Accrued construction costs (2,053) (35)
Accrued legal expenses (1,323) 570
Other accrued liabilities (1,050) (181)
----------------------------
Net cash used in operating activities (19,922) 904
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (23,287) (51,310)
Maturities of short-term investments 2,919 16,782
Sales of short-term investments 24,948 38,806
Purchase of subsidiary, net of cash acquired 2,842 -
Contributions to Xenotech joint venture (83) (1,300)
Capital expenditures (284) (82)
---------------------------
Net cash provided by investing activities 7,055 2,896
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from property and equipment financing 4,546 -
Payments under property and equipment financing
obligations (1,768) (1,213)
Proceeds from issuance of common stock 288 942
---------------------------
Net cash provided by (used in) financing activities 3,066 (271)
---------------------------
Net increase (decrease) in cash and cash equivalents (9,801) 3,529
Cash and cash equivalents at beginning of period 20,935 8,190
---------------------------
Cash and cash equivalents at end of period $ 11,134 $ 11,719
===========================
</TABLE>
See accompanying notes.
5
<PAGE>
CELL GENESYS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements at June 30, 1997 and
1996 and for the three and six months ended June 30, 1997 and 1996 include the
accounts of Cell Genesys, Inc., including its subsidiaries Abgenix, Inc. and
Somatix Therapy Corporation (collectively, the "Company"). These statements are
unaudited, but include all of the adjustments, consisting only of normal
recurring adjustments, which the management of the Company considers necessary
for a fair presentation of the Company's financial position at such dates and
the operating results and cash flows of those periods. The results of the
interim period are not necessarily indicative of the results for the entire
year.
The consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
Annual Report for the year ended December 31, 1996 included in its filing on
Form 10-K/A.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. Common equivalent shares from stock options are excluded
from the calculation as their effect is antidilutive. In February 1997, the
Financial Accounting Standards Board issued Statement No. 128, Earnings per
Share, which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share. There will be no impact on the Company's loss per share calculations
for the periods presented or any prior periods.
2. CHARGE FOR CROSS LICENSE AND SETTLEMENT
On March 27, 1997, the Company announced that, along with Abgenix,
Xenotech, L.P. ("Xenotech", an equal joint venture of Abgenix and Japan Tobacco,
Inc.) and Japan Tobacco, it had signed a comprehensive patent cross-license and
settlement agreement with GenPharm International, Inc. that resolved all related
litigation and claims between the parties. The cross-license agreement includes
a worldwide royalty free cross-license to all issued and related patent
applications pertaining to the generation of fully human monoclonal antibody
technologies in genetically modified strains of mice. The Company also obtained
a license to certain technology in the field of gene therapy held by GenPharm.
As consideration for the cross-license and settlement agreement, Cell Genesys
issued a note due September 30, 1998 for $15 million, convertible into shares of
Cell Genesys common stock at $9.00 per share. The conversion price is
potentially subject to adjustment on February 28, 1998. Of this note, $3.75
million was contributed to, then paid by Xenotech. The entire amount of the
note is included in expense in the first quarter of 1997 based on an independent
valuation analysis of technology acquired. In addition, Japan Tobacco also made
a cash payment to GenPharm. The agreement also calls for two milestone payments
of $7.5 million each based on the issuance of certain patents in the future to
be made by Xenotech.
3. ACQUISITION OF SOMATIX THERAPY CORPORATION
On May 30, 1997, the Company acquired Somatix Therapy Corporation
("Somatix"). Under the terms of the merger agreement, Somatix became a wholly-
owned subsidiary of Cell Genesys in a tax-free reorganization and stock-for-
stock merger. Somatix stockholders received 0.385 shares of Cell Genesys stock
for each share of Somatix stock. A total 11,089,706 shares were issued to
Somatix stockholders. The acquisition was accounted for under the purchase
method of accounting. The purchase price of approximately $70.9 million,
comprised of $67.9 million of common stock and $3.0 million of transaction
costs, was allocated to the acquired assets and assumed liabilities based upon
their estimated fair value. The fair value of the net
6
<PAGE>
assets acquired, including in-process technology, was estimated based on an
independent valuation. The purchase price was allocated as follows:
<TABLE>
(In thousands)
<S> <C>
Purchased in-process technology $ 72,270
Purchased intangibles 500
Liabilities assumed in excess
of assets acquired (1,870)
---------------
$ 70,900
===============
</TABLE>
The amount allocated to purchased in-process technology was charged to
operations in the current period ended June 30, 1997. Purchased intangible
assets consisting of the assembled workforce is being amortized over the
estimated useful life of three years using the straight-line method. The
operations of Somatix are included in the Company's consolidated operating
results from May 31, 1997 forward.
In addition, the Company recognized $6.6 million in the current period
ended June 30, 1997 for restructuring and integration expenses related to the
acquisition.
Pro Forma Financial Information
The following unaudited pro forma information presents the results of
operations of the Company and Somatix for the six month period ended June 30,
1996 and 1997 as if the acquisition had been consummated as of the beginning of
the periods presented. This pro forma information does not purport to be
indicative of what would have occurred had the acquisitions been made as of
those dates or of results which may occur in the future. The pro forma
information does not include the charge for purchased in-process technology of
$72.3 million or other transaction-related restructuring costs totaling $6.6
million which were recognized as expense during the current period ended June
30, 1997, relating to the acquisition of Somatix.
<TABLE>
<CAPTION>
Six months ended June 30,
1997 1996
----------------------------------------
(In thousands, except per share data)
(Unaudited)
<S> <C> <C>
Total revenues $ 11,896 $ 10,601
Net loss (32,029) (15,164)
Net loss per share $ (1.16) $ (0.58)
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OUTLOOK
Cell Genesys (the "Company) is focused on the development and
commercialization of gene therapies to treat major life-threatening diseases,
including AIDS and cancer. The Company's objective is to commercialize both ex
vivo gene therapy with genetically engineered human immune cells and in vivo
gene therapies. On May 30, 1997, the Company completed a merger with Somatix
Therapy Corporation ("Somatix"). The merger is expected to strengthen the
Company's position in the field of gene therapy. Since its inception in 1988,
the Company has funded its research and development activities primarily through
the sale of equity, corporate partnerships and leaseline financings. The
Company has been unprofitable since its inception and has incurred a cumulative
net loss of $158 million as of June 30, 1997. The following discussion
constitutes forward looking statements insofar as it relates to progress in the
Company's research and development programs and clinical trials, product
expectations, in-licensing plans, expected cash expenditures and expense levels,
and the adequacy of the Company's available resources. Actual results could
differ materially from the statements made due to a number of factors, including
those set forth in "Risk Factors" below.
In the Company's lead gene therapy program, safety results for the
Company's Phase I clinical trial testing AIDS gene therapy indicated no
treatment-related safety problems. The Company is currently in Phase II
clinical testing of this therapy. Additional clinical studies of Cell Genesys'
AIDS gene therapy will be conducted during 1997, including an evaluation of an
improved manufacturing process involving the genetic modification of both killer
T cells and helper T cells as well as a reduction in cell processing time to
less than two weeks. In addition, a new pilot study will evaluate whether the
combination of AIDS gene therapy and antiviral drugs can delay the recurrence of
HIV infection, which has been generally observed in patients who stop their
antiviral drug therapy. This pilot study will help determine whether the gene
therapy can reduce the requirement for long-term treatment with combinations of
three or more antiviral drugs. The Company anticipates efficacy data from
certain of these trials in the first half of 1998. In June 1997, the United
States Food and Drug Administration (FDA) cleared an Investigational New Drug
application (IND) to initiate human clinical testing for its initial cancer gene
therapy product candidate for advanced colon cancer. The Company also plans to
initiate human clinical studies of a second generation GVAX cancer vaccine in
the third quarter of 1997. A new product format utilizing an adenoviral vector
will reduce patient-specific cell processing for this vaccine to two days at the
treatment site. This vaccine will be tested in lung cancer and melanoma. In
addition, a non-patient specific format based on genetically-modified cell lines
will be tested in prostate cancer. The Company has additional ongoing research
programs in stem cell gene therapy and other gene delivery technologies. The
Company believes that such programs may provide opportunities for collaborative
arrangements with third parties that could also provide additional funding to
the Company.
In the Company's human monoclonal antibody program (being pursued through
its subsidiary, Abgenix), the Company has developed transgenic technology to
create strains of mice capable of producing human monoclonal antibodies. These
transgenic mice contain the majority of human antibody genes and could produce
multiple product candidates. The Company believes that fully human antibodies
should avoid the allergic reactions seen with antibodies containing mouse
proteins, which should make them better suited to long-term therapy and could
provide a marketing advantage. The Company is focused on the development and
commercialization of monoclonal antibodies to treat a wide range of serious
diseases, including transplantation-associated conditions, inflammation,
autoimmune disorders and cancer. The Company currently has three antibody
products in development. The Company's most advanced product, ABX-CBL, is in
Phase II trials for treating steroid-resistant graft versus host disease (GVHD),
a frequent, fatal and currently untreatable complication of allogeneic bone
marrow transplants. To date, ABX-CBL has been used in clinical studies with
over 50 patients, with an approximated response rate of 90% in acute
transplantation-associated disorders. A second antibody product, ABX-IL8, is
expected to enter clinical trials in late 1997 for the treatment of moderate to
severe psoriasis.
On May 30, 1997, the Company acquired Somatix Therapy Corporation
("Somatix"). Under the terms of the merger agreement, Somatix became a wholly-
owned subsidiary of Cell Genesys in a tax-free reorganization and stock-for-
stock merger. The Company expects the acquisition to significantly strengthen
key research and development programs and expand corporate partnering
opportunities.
8
<PAGE>
The Company's net cash expenditures for 1997 in its current operations are
not expected to exceed approximately $22 million, excluding one-time merger
related expenditures, and the Company intends to manage toward this net cash
expenditure target. Costs incurred or accrued related to the merger include a
charge for the purchase of in-process research and development of $72.3 million
and restructuring charges of $6.6 million and are primarily non-cash. The
Company may from time to time evaluate opportunities to acquire or in-license
other potential products and technologies. Expenses associated with in-
licensing such products may constitute unbudgeted expenses.
RESULTS OF OPERATIONS
Revenue decreased to $4.0 million from $6.2 million for the three months
ended June 30, 1997 compared to the same period in 1996. This is primarily a
result of the $2.0 million milestone payment earned in the second quarter of
1996 from the Company's ongoing collaboration with HMR for the Company's AIDS
gene therapy program. The increase from $10.6 million to $11.9 million for the
six month periods ending June 30, 1996 and 1997 reflects revenue recorded in
February 1997 upon execution of an agreement with Hoechst Marion Roussel, Inc.
("HMR") to license the Company's gene activation technology for erythropoietin
(EPO) and a second undisclosed protein. The agreement provides for milestone
payments and fees, in addition to royalties on any future sales of these two
potential gene-activated protein products. Additional revenues resulted from
the human monoclonal antibody program of Xenotech, an equal joint venture
between Abgenix and JT Immunotech USA Inc.
Research and development expenses increased from $6.3 million and $13.0
million for the three and six months ended June 30, 1996 to $8.0 million and
$16.4 million for the three and six months ended June 30, 1997, respectively.
The increase reflects costs related to Abgenix facilities as well as contract
manufacturing cost related to an antibody product candidate, ABX-IL8. The
increase also reflects additional staff hired for the gene therapy business and
outside costs, including manufacturing and clinical costs, for the company's
patient-specific HIV gene therapy trial which was initiated June 1996. Also
contributing to the growth were legal fees incurred in defending and maintaining
the Company's intellectual property positions. As a result of the settlement of
litigation with GenPharm International, Inc. in March 1997, certain of these
legal expenses are expected to be lower for the remainder of 1997. Research and
development expenses generally represent approximately 80% of total operating
expenses, excluding the effect of non-recurring charges such as the cross
license and litigation settlement and charges related to the acquisition of
Somatix. The Company expects that its research and development expenditures,
including expansion of facilities, will continue to increase to support
additional product development activities particularly in the field of cancer,
where multiple trials are expected to commence in the third quarter of 1997. The
rate of increase depends on a number of factors including progress in research
and development, especially clinical trials.
Purchased in-process technology costs and costs related to the acquisition
of Somatix Therapy Corporation on May 30, 1997 totaling $78.9 million were
incurred in the three month period ended June 30, 1997. No such costs were
incurred in 1996. The fair value of the net assets acquired in the acquisition
including in-process technology were estimated based on independent valuations
of the acquired net assets. Costs related to the acquisition consist primarily
of employee severance payments, consolidation of facilities and the write down
of the book value of certain fixed assets.
General and administrative expenses increased from $1.7 million and $3.5
million for the three and six months ended June 30, 1996 to $2.9 million and
$5.1 million for the three and six months ended June 30, 1997, respectively. The
increase reflects growth in administrative staff and outside services required
to support expanded research and development programs. The Company expects
these expenses to increase as these programs expand.
Interest income remained consistent at $1.1 million for the three months
ended June 30, 1996 and 1997 and $2.3 million and $2.1 million for the six
months ended June 30, 1996 and 1997, respectively, due to similar average cash
balances available for investment. Interest expense increased from $291,000
and $592,000 for the three and six months ended June 30, 1996 to $783,000 and
$1.1 million for the three and six months ended June 30, 1997, respectively.
The increase was due to increased borrowings under lease financing and interest
payable on the convertible note issued in March 1997 as part of the cross
license and settlement agreement with GenPharm.
9
<PAGE>
The Company's net loss increased from $1.0 million and $4.2 million for
the three and six months ended June 30, 1996 to $85.5 million and $102.3 million
for the three and six months ended June 30, 1997, respectively, primarily due to
$78.9 million in non-recurring charges for the acquisition of Somatix and
related costs. In addition, in the six month period ended June 30, 1997, the
Company recognized a $15 million non-recurring, non-cash charge for cross
license and settlement costs incurred as part of the Company's agreement with
GenPharm. Losses, excluding non-recurring charges, are expected to continue and
are likely to increase in future years as operating expenses rise, particularly
as the Company incurs expenses related to manufacturing and human testing of its
potential products.
At December 31, 1996, the Company had available net operating loss and
research credit carryforwards for federal income tax purposes of approximately
$52 million and $2 million, respectively, which expire in the years 2003 through
2011.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of
equity securities, funding under collaborative arrangements and equipment
financing. From inception through June 30, 1997, the Company has received
$125.4 million in net proceeds from equity financing and $83.5 million under
collaborative agreements, and utilized $23.7 million in property and equipment
financing.
At June 30, 1997, the Company's cash, cash equivalents and short-term
investments totaled $71.3 million, compared to $85.6 million at December 31,
1996. The decrease was primarily due to the use of cash in operating
activities, excluding $72.3 million non-cash charge for purchased in-process
technology and the $15 million non-cash charge for cross license and settlement
with GenPharm which was financed by a convertible note.
The Company expects its cash requirements to increase significantly in the
future. The Company's capital requirements depend on numerous factors,
including payments relating to the acquisition of Somatix; the progress of the
Company's research and development programs; preclinical and clinical trials;
clinical and commercial scale manufacturing requirements; the attraction and
maintenance of collaborative partners; the acquisition of new products or
technologies; and the cost of litigation, patent interference proceedings or
other legal proceedings or their resolution.
In March 1997, Cell Genesys announced that, together with Abgenix, Xenotech
and Japan Tobacco, it had signed a comprehensive patent cross-license and
settlement agreement with GenPharm that resolved all related litigation and
claims between the parties. The cross-license agreement includes a worldwide
royalty free cross-license to all issued and related patent applications
pertaining to the generation of fully human monoclonal antibody technologies in
genetically modified strains of mice. Cell Genesys also obtained a license to
certain technology in the field of gene therapy held by GenPharm. As
consideration for the cross-license and settlement agreement, Cell Genesys
issued a note due September 30, 1998 for $15 million, convertible into shares of
Cell Genesys common stock at the initial conversion price of $9.00 per share.
The conversion price is potentially subject to adjustment on February 28, 1998.
Of this note, $3.75 million was contributed to, then paid by Xenotech. The
entire amount of the note is included in expense in the first quarter of 1997
based on an independent valuation analysis of technology acquired. In addition,
Japan Tobacco also made a cash payment to GenPharm. The agreement also calls for
two milestone payments of $7.5 million each based on the issuance of certain
patents in the future to be made by Xenotech.
Under its current collaborations, the Company is responsible for funding a
portion of its research and development efforts. Substantial capital may be
required to carry out additional product development and to commercialize
products under the current collaborations and the Company's self-funded efforts.
The Company believes that its available cash, cash equivalents and short-
term investments at June 30, 1997, together with payments to be received under
the Company's collaborative arrangements with HMR, and $5.9 million in property
and equipment financing available for tenant improvements and capital equipment
purchases will be sufficient to meet the Company's operating expenses and
capital requirements at least through 1998. Thereafter, the Company will
require substantial additional funds. Because of the Company's significant
long-term cash requirements, it will seek to raise additional capital if
conditions in the public equity markets are favorable, even if the Company does
not have an immediate need for additional cash at that time.
10
<PAGE>
RISK FACTORS
There are significant risks associated with the Company's plans and goals,
including but not limited to the success of the Company's research and
development programs; the lengthy, expensive and uncertain regulatory approval
process; uncertainties and costs associated with obtaining third party licenses,
obtaining patent protection, protecting trade secrets, enforcing intellectual
property rights important to the Company's business and avoiding infringement of
others' intellectual property; competitive products; and the availability of
capital to fund the Company's operations and capital requirements. Litigation,
which could result in substantial cost to the Company, may also be necessary to
enforce any patents issued to the Company or to determine the scope and validity
of other parties' proprietary rights. Some or all of these factors may affect
the Company's goals to file INDs, advance product candidates through the
clinical trial process, to commercialize products and secure financing either
through corporate partnerships or additional equity offerings. Even if the
Company's goals are fully achieved, the Company does not anticipate
commercialization of any product for several years.
Because of the novelty of the Company's gene therapy technology, clinical
trials are more difficult than for products based on more traditional
technologies. In addition, a variety of factors could hinder or delay progress
in clinical trials of the Company's products or require their discontinuance,
including results of ongoing preclinical studies by the Company or others,
technical or manufacturing difficulties, clinical trial results for the
Company's or competing products, intellectual property disputes with third
parties, and/or delays relating to the review process by the FDA. Although
preliminary results of the Company's Phase I clinical testing of AIDS gene
therapy reported to date have shown no treatment-related safety problems, there
can be no assurance that this therapy will be tolerated over an extended period
of time or that the clinical efficacy of this therapy will be demonstrated. In
June 1997, the United States Food and Drug Administration (FDA) cleared an
Investigational New Drug application (IND) to initiate human clinical testing
for its initial cancer gene therapy product candidate for advanced colon cancer.
There can be no assurance that the clinical efficacy of this therapy will be
demonstrated.
The Company believes that a human antibody product such as that being
developed through its subsidiary, Abgenix, could be clinically superior to
products containing mouse protein, and that it could have marketing advantages
over such other products. However, until human testing has taken place, it is
not certain that human antibody products will demonstrate these advantages.
Countervailing marketing factors, such as relative price, undesirable side
effects, and/or relative marketing expertise, may serve to offset or outweigh
these advantages.
There is no assurance that opportunities for in-licensing products or for
third party collaborations will be available to the Company on acceptable terms.
Securing such opportunities and retaining such collaborators, as well as a
variety of other factors, such as progress in the Company's research and
development programs (including clinical trials), receipt of anticipated
contract revenues (some of which are dependent on milestones), competitive
factors, and the costs associated with prosecuting and defending the Company's
intellectual property rights, may affect the Company's ability to manage to its
targeted net cash expenditures in 1997, and also may affect the adequacy of the
Company's resources to fund operations and capital requirements at least through
1998. In this regard, a major portion of the Company's operating revenues are
derived from a collaborative agreement with HMR signed in October 1995. Under
the terms of the agreement, HMR has the ability to terminate its commitment at
any time two years after its anniversary date. The Company's operating results
would be adversely affected should HMR decide not to continue funding under this
arrangement.
Failure to achieve the Company's goals could have a material adverse impact
on the Company's results of operations and financial condition and its ability
to raise additional capital. Stockholders and potential investors should
carefully consider the risks associated with the Company and should be aware
that these risks may negatively impact the Company's stock price.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 30, 1997 in the annual stockholders' meeting, a quorum of
stockholders of the Company approved the following proposals:
(i.) Proposal to approve and adopt the amended and restated agreement
and plan of merger and reorganization, dated as of January 12,
1997 (as amended and restated as of March 27, 1997, the "Merger
Agreement",) among Cell Genesys, Somatix Therapy Corporation, a
corporation organized under the laws of the State of Delaware
("Somatix") and S Merger Corp., a corporation organized under the
laws of the state of Delaware ("Merger Sub") and a direct wholly
owned subsidiary of Cell Genesys, and to approve the merger (the
"Merger") of Merger Sub with and into Somatix pursuant to the
Merger Agreement and the issuance of common stock, par value
$.001 per share, of Cell Genesys (the "Cell Genesys Common Stock"
pursuant to the Merger.)
(ii.) Proposal to approve and adopt an amendment of the Certificate of
Incorporation of Cell Genesys to increase the number of shares
authorized for issuance to 80,000,000.
(iii.) Proposal to approve a special grant, effective as of the
effective time of the Merger (the "Effective Time"), to each of
the eight independent directors of Cell Genesys as the Effective
Time, of an option to purchase 30,000 shares of Cell Genesys
Common Stock.
(iv.) Election of Directors
(v.) Proposal to approve an amendment to Cell Genesys' 1989 Incentive
Stock Plan to increase the number of shares of Cell Genesys
Common Stock reserved for issuance by 1,750,000 shares to a total
of 5,445,000 shares.
(vi.) Proposal to ratify the appointment of Ernst & Young LLP as
independent auditors of Cell Genesys for the fiscal year ending
December 31, 1997.
The following table shows the results of the voting on these matters.
(i.) For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
11,549,576 114,090 31,816 3,678,911
(ii.) For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
11,265,309 968,999 44,270 3,095,815
(iii.) For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
11,483,077 309,292 48,958 3,553,066
(iv.) Director For Withheld
-------- --- --------
Stephen A. Sherwin 14,495,077 879,316
Raju S. Kucherlapati 14,501,577 872,816
James M. Gower 14,493,085 881,308
Joseph E. Maroun 14,501,077 873,316
Peter Barton Hutt 14,488,385 886,008
Eugene L. Step 14,491,977 882,416
(v.) For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
8,441,022 3,196,576 57,884 3,678,911
(vi.) For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
15,268,738 89,124 16,531 0
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None.
b) Reports on Form 8-K
The Company reported on Form 8-K dated May 30, 1997, the
acquisition of Somatix Therapy Corporation.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized:
Date: August 14, 1997 CELL GENESYS, INC.
/s/ KATHLEEN SEREDA GLAUB
-------------------------
Kathleen Sereda Glaub
Senior Vice President and Chief Financial Officer
(On Behalf of the Registrant and as Registrant's
Principal Financial and Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,134
<SECURITIES> 60,171
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 74,284
<PP&E> 14,849
<DEPRECIATION> 0
<TOTAL-ASSETS> 90,952
<CURRENT-LIABILITIES> 26,457
<BONDS> 0
0
0
<COMMON> 195,546
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 90,952
<SALES> 0
<TOTAL-REVENUES> 11,896
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 115,263
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,071
<INCOME-PRETAX> (102,319)
<INCOME-TAX> 0
<INCOME-CONTINUING> (102,319)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (102,319)
<EPS-PRIMARY> 0
<EPS-DILUTED> (5.55)
</TABLE>
