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SECURITIES AND EXCHANGE COMMISSION
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 SEPTEMBER 30, 1998 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
incorporation or organization) identification number)
342 Lakeside Drive, Foster City, California 94404
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(650) 425-4400
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 November 1, 1998, the number of outstanding shares of the
Registrant's Common Stock was 28,724,510.
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CELL GENESYS, INC.
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Consolidated Financial Statements:
a. Condensed Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997.....................................................................................3
b. Condensed Consolidated Statements of Operations - Three and Nine Months
Ended September 30, 1998 and 1997.....................................................................4
c. Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997...........................................................................5
d. Notes to Condensed Consolidated Financial Statements..................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................................19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..........................................................................19
SIGNATURES ..........................................................................................................19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CELL GENESYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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SEPTEMBER 30, DECEMBER 31,
1998 1997
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ASSETS (Unaudited)
Current assets:
Cash and cash equivalents .......................... $ 1,369 $ 10,631
Short-term investments ............................. 35,477 78,185
Prepaid expenses and other current assets .......... 3,485 2,943
--------- ---------
Total current assets .................................. 40,331 91,759
Property and equipment at cost, net ................... 6,660 13,815
Investments in unconsolidated subsidiary .............. 8,663 --
Other assets .......................................... 687 1,313
--------- ---------
$ 56,341 $ 106,887
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities ..... $ 5,355 $ 8,405
Deferred revenue ................................... -- 5,993
Accrued acquisition related costs .................. 839 1,648
Current portion of property and equipment financing 3,261 5,159
Contribution payable to related party .............. -- 3,750
Convertible note payable ........................... -- 15,000
--------- ---------
Total current liabilities ............................. 9,455 39,955
Non-current portion of property and equipment financing 6,120 11,082
Redeemable convertible preferred stock ................ 19,817 19,817
Minority interest in the equity of subsidiary ......... -- 17,392
Stockholders' equity:
Common stock ....................................... 28 28
Additional paid-in capital ......................... 206,564 199,495
Deferred compensation of subsidiary ................ -- (1,319)
Accumulated deficit ................................ (185,643) (179,563)
--------- ---------
Total stockholders' equity ............................ 20,949 18,641
--------- ---------
$ 56,341 $ 106,887
========= =========
</TABLE>
See accompanying notes
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CELL GENESYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- --------- ---------
(In thousands, except per share data)
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Revenue under collaborative agreements .... $ 4,186 $ 3,799 $ 11,684 $ 15,641
Operating expenses:
Research and development ............... 8,032 10,382 31,378 26,679
General and administrative ............. 1,683 2,473 6,897 7,539
Charge for purchased in-process
technology .......................... -- -- -- 72,270
Restructuring costs related to
acquisition ......................... -- -- -- 6,576
Charge for cross-license and settlement
(includes $7,500 equity in losses of
Xenotech joint venture associated
with cross-license and settlement) .. -- 3,750 -- 18,750
--------- --------- --------- ---------
Total operating expenses .................. 9,715 16,605 38,275 131,814
Equity in loss of unconsolidated
subsidiary ............................. (1,322) -- (1,322) --
Interest income ........................... 844 903 3,099 3,021
Interest expense .......................... (477) (615) (1,875) (1,685)
--------- --------- --------- ---------
Net loss before minority interest ......... (6,484) (12,518) (26,689) (114,837)
Loss attributed to minority interest ...... -- -- 4,192 --
--------- --------- --------- ---------
Net loss .................................. $ (6,484) $ (12,518) $ (22,497) $(114,837)
========= ========= ========= =========
Net loss per share ........................ $ (0.23) $ (0.45) $ (0.79) $ (5.33)
========= ========= ========= =========
Shares used in computing net loss
per share .............................. 28,437 27,706 28,328 21,534
========= ========= ========= =========
</TABLE>
See accompanying notes
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CELL GENESYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
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(In thousands)
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ...................................................... $ (22,497) $(114,837)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization .............................. 3,829 3,735
Minority interest in net loss of subsidiary ................ (4,192) --
Equity in losses of unconsolidated subsidiary .............. 1,322 --
Equity in losses of Xenotech joint venture ................. 118 838
Charge for purchased in-process technology ................. -- 72,270
Restructuring charges ...................................... -- 4,021
Charge for cross-license and settlement .................... -- 18,750
Changes net of adjustment:
Prepaid expenses and other assets .......................... (1,166) (324)
Accounts payable and other accrued liabilities ............. (7,757) (11,859)
Accrued acquisition related costs .......................... (809) (2,732)
--------- ---------
Net cash used in operating activities ................. (31,152) (30,138)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments ........................... (29,257) (31,875)
Maturities of short-term investments .......................... 14,831 10,997
Sales of short-term investments ............................... 50,295 36,571
Purchase of subsidiary, net of cash acquired .................. -- 862
Contributions to Xenotech joint venture ....................... (8) (802)
Capital expenditures .......................................... (151) (1,023)
Cash effect of applying equity method of accounting to the
investment in Abgenix ..................................... (642) --
--------- ---------
Net cash provided by investing activities ............. 35,068 14,730
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from minority interest investment in subsidiary ...... 3,944 --
Proceeds from issuance of common stock ........................ 1,100 697
Proceeds from property and equipment financing ................ -- 4,546
Payments of convertible note payable .......................... (15,000) --
Payments under property and equipment financing obligations ... (3,222) (3,098)
--------- ---------
Net cash provided by (used in) financing activities ... (13,178) 2,145
--------- ---------
Net decrease in cash and cash equivalents ........................ (9,262) (13,263)
Cash and cash equivalents at beginning of period ................. 10,631 20,935
--------- ---------
Cash and cash equivalents at end of period ....................... $ 1,369 $ 7,672
========= =========
</TABLE>
See accompanying notes
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CELL GENESYS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements at September 30,
1998 and for the three and nine months ended September 30, 1998 and 1997 include
the accounts of Cell Genesys, Inc. ("Cell Genesys"), and its consolidated
subsidiaries (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 periods are not
necessarily indicative of the results for the entire year. The balance sheet and
accompanying notes at December 31, 1997 have been condensed from the audited
financial statements included in the Company's annual report on Form 10-K. (See
also note 3 below.)
The condensed 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, 1997 included in its
filing on Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. Comprehensive income (loss) is
comprised of net income (loss) and other comprehensive income (loss). The
measurement and presentation of net income (loss) will not change. Other
comprehensive income (loss) includes certain changes to stockholders' equity of
the Company that are excluded from net income (loss). Specifically, SFAS 130
requires unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income (loss). Prior year
financial statements will be reclassified to conform to the requirements of SFAS
130.
Total comprehensive loss amounted to $6.3 million and $12.4 million for the
three months ended September 30, 1998 and 1997, and $22.3 million and $114.6
million for the nine months ended September 30, 1998 and 1997, respectively.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131. "Disclosures About Segments of an Enterprise and Related
Information"("SFAS 131"). SFAS 131 superseded SFAS 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 establishes standards for the way
that public business enterprises report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The adoption of SFAS 131 had no impact on the Company's results of
operations, financial position or disclosure of segment information.
In March 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132. "Employers' Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 does not change the
recognition of measurement of pension of postretirement benefit plans, but
revises and standardizes disclosure requirement for pensions and other
postretirement benefits. The adoption of SFAS 132 has no impact on the Company's
results of operations or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133. "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities.
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SFAS 133 is effective for years beginning after June 15, 1999 and is not
anticipated to have an impact on the Company's results of operations or
financial condition when adopted.
2. CHARGE FOR CROSS-LICENSE AND SETTLEMENT
On March 27, 1997, Cell Genesys announced that, along with Abgenix, Inc.
("Abgenix"), Xenotech, L.P. ("Xenotech", an equal joint venture of Abgenix and
Japan Tobacco) and Japan Tobacco, it had signed a comprehensive patent
cross-license and settlement agreement with GenPharm International, Inc. (a
subsidiary of Medarex, 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. In consideration for
the cross-license and settlement agreement, Cell Genesys issued a convertible
note for $15.0 million which was due and paid in full on September 30, 1998. The
entire amount of the note was recognized as expense by Abgenix 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.
During 1997, two patent milestones of $7.5 million each under the agreement were
met. Xenotech recognized expense of $15.0 million, $7.5 million of which was
paid in cash with the remainder to be paid in November 1998. During 1997,
Abgenix recognized an expense of $7.5 million for its contribution due to
Xenotech for its share of the patent milestone obligations. The balance of the
patent milestone obligations is the responsibility of Japan Tobacco. No
additional milestone payments will accrue under this agreement.
3. INVESTMENT IN ABGENIX AND MINORITY INTEREST
Since 1996, the Company has maintained an investment in Abgenix, Inc.
("Abgenix"). In December 1997 and January 1998, Abgenix completed private
placements of securities reducing Cell Genesys' percentage ownership from
approximately 100% to approximately 54%.
On July 2, 1998, Abgenix completed an initial public offering ("IPO") resulting
in gross proceeds of $23 million, reducing Cell Genesys' percentage ownership to
approximately 40%. From July 2, 1998 forward, the Company's investment in
Abgenix is accounted for under the equity method as a result of the reduced
ownership position. Prior to the IPO, Abgenix was a consolidated subsidiary and
its financial results were presented accordingly. At September 30, 1998, the
Company's investment in Abgenix was $8.6 million.
Summarized information for Abgenix at September 30, is as follows:
Abgenix, Inc.
Financial Highlights
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NINE MONTHS ENDED
Statement of operations SEPTEMBER 30, 1998
------------------
<S> <C>
Revenue $ 2,008
Operating loss (12,530)
Net loss $(12,301)
</TABLE>
Minority interest in the equity of subsidiary at December 31, 1997 represents
the minority stockholders' proportionate share of the equity in Abgenix. During
the period of 1998 prior to its IPO while Abgenix was a consolidated subsidiary,
losses of Abgenix totaling $4.2 million were attributed to the minority
stockholders.
4. POTENTIAL REDEMPTION OBLIGATION
The shares of the Company's Series B Convertible Preferred Stock (the "Series B
Preferred Stock") are convertible into shares of Common Stock of the Company
based on a conversion price of $11.02 per share, or if lower, 100% of the
average of certain specified trading prices during the 10 trading days preceding
such date of conversion (the "Floating Conversion Price"). The price of the
Company's Common Stock has recently traded below $11.02 per share and
consequently the conversion rate of the Series B Preferred Stock is based on the
Floating Conversion Price. The market prices for securities generally has
recently experienced severe volatility and substantial downturns, and in such
context the price of the Company's Common Stock recently has declined
substantially.
As the Floating Conversion Price is based on the market price of the Company's
Common Stock, the larger the decline in the price of the Common Stock, the
greater the number of shares which are issuable upon conversion of the Series B
Preferred Stock. Notwithstanding the foregoing, the Company is not obligated to
issue more shares of Common Stock upon conversion in excess of 19.99% of the
outstanding shares of Common Stock on November 14, 1997 (i.e. 5,624,000 shares)
(the "Share Limit") absent stockholder approval or pursuant to the grant of an
exemption by the Nasdaq Stock Market ("Approval or Exemption for Excess Share
Limit Issuances"). Until such time as the Company obtains Approval or Exemption
for Excess Share Limit Issuances, the Company would not be required to issue
shares of Common Stock in excess of the Share Limit pursuant to requests for
conversion of the Series B Preferred Stock, but in such event, may become
subject to an obligation to redeem shares of Common Stock issuable upon such
conversion, and the amount of such obligations could become material as a result
of a decline in the price of the Company's Common Stock below approximately
$3.70 per share. Since the Company's Common Stock has recently traded in a range
that has been below $3.70 per share and the Company has not obtained Approval
or Exemption for Excess Share Limit Issuances, the Company could currently
become subject to a redemption obligation in the event the number of shares of
Common Stock issuable upon conversion of the Series B Preferred Stock exceeds
the Share Limit. In addition, the redemption price of the Series B Preferred
Stock is based on the closing bid price of the Company's Common Stock on the
conversion date or the date immediately preceding the redemption date, as
applicable. Consequently, volatility in the price of the Company's Common Stock
could magnify the amount of any redemption obligation, and such amount could be
material as a result of such volatility. See Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk Factors --
Volatility of Stock Price -- and -- Shares Eligible for Future Sale; Dilution."
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements made in this Item other than statements of historical fact, including
statements about the Company's and its subsidiary's clinical trials, research
programs, product pipelines, current and potential corporate partnerships,
licenses and intellectual property, the adequacy of capital reserves and
anticipated operating results and cash expenditures are forward-looking
statements within the meaning of section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. As such, they are subject to
a number of uncertainties that could cause actual results to differ materially
from the statements made, including risks associated with the success of
research and product development programs, the issuance and validity of patents,
the development and protection of proprietary technology, the ability to raise
capital, operating expense levels and the ability to establish and retain
corporate partnerships. Reference is made to discussions about risks associated
with product development programs, intellectual property and other risks which
may affect the Company under "Risk Factors" below. The Company does not
undertake any obligation to update forward-looking statements. The following
should be read in conjunction with the Company's Annual Report for the year
ended December 31, 1997 included in its filing on Form 10-K, the Company's
Quarterly Reports on Form 10-Q, and the Company's Registration Statement
on Form S-3.
OVERVIEW
Since its inception in April 1988, Cell Genesys has focused its research and
product development efforts on human disease therapies which are based on
innovative gene modification technologies. Cell Genesys' strategic objective is
to develop and commercialize ex vivo and in vivo gene therapies to treat major,
life-threatening diseases and disorders. Cell Genesys' AIDS gene therapy
currently is in Phase II human clinical testing and is being developed through a
worldwide collaboration with Hoechst Marion Roussel. The Company is conducting
Phase I/II clinical trials for its GVAX(TM) cancer vaccine in lung cancer,
melanoma and prostate cancer. Preclinical studies have been conducted by Cell
Genesys for the treatment of other cancer indications as well as for hemophilia,
cardiovascular disease and Parkinson's disease. Cell Genesys' assets outside of
gene therapy include its licensing program in gene activation technology and its
40% ownership of Abgenix, Inc. ("Abgenix") which is focused on the development
and commercialization of antibody therapies.
During 1997 and 1998, Cell Genesys has continued to make progress in its gene
therapy programs. For the treatment of HIV infection, Phase II human clinical
studies were initiated for T cell AIDS gene therapy, based on the demonstration
of safety in earlier clinical studies and widespread medical reports about the
inability of current drug therapies to eradicate reservoirs of HIV, the
AIDS-causing virus. For the treatment of cancer, Phase I/II human clinical
studies of GVAX (TM) cancer vaccine for melanoma, lung and prostate cancer have
demonstrated safety and evidence of antitumor immunity. The Company's
preclinical programs in animal models of hemophilia, Parkinson's disease and
cardiovascular disease have shown evidence of activity in animal testing.
In May 1997, Cell Genesys acquired Somatix Therapy Corporation ("Somatix"),
establishing a leadership position in gene therapy. Product research and
development programs of the two companies were highly complementary, with Cell
Genesys focused on the treatment of AIDS and cancer, and Somatix focused on
cancer, central nervous system diseases and other disorders. Technology research
and development programs also were highly complementary, with synergies in the
retroviral and adenoviral vector programs of both companies and with new
adeno-associated viral and lentiviral vector programs contributed by Somatix.
Integration of the two companies was completed by the end of 1997, including
prioritizing the most promising programs and significantly reducing overall
expenses of the combined businesses. With the combined portfolio of product
opportunities, technologies and intellectual property, Cell Genesys believes it
has substantially increased its ability to develop and commercialize the most
promising gene therapies.
On July 2, 1998, Abgenix completed an initial public offering ("IPO") resulting
in gross proceeds of $23 million, reducing Cell Genesys' percentage ownership to
approximately 40%. From July 2, 1998 forward, the Company's investment in
Abgenix is accounted for under the equity method as a result of the reduced
ownership position. Prior to the IPO, Abgenix was a consolidated subsidiary and
its financial results were presented accordingly. As a result
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of the initial public offering and the equity method of accounting, the
Company's net assets were increased by approximately $23 million in July 1998.
On September 24, 1998, the Company announced the implementation of a corporate
restructuring plan to enable it to aggressively focus its resources on advancing
its clinical stage programs and reduce the Company's operating expenses by
approximately 30 percent. The corporate restructuring followed reports of
encouraging results in the Company's clinical trials of the Phase I/II trial of
GVAX(TM) vaccine for prostate cancer. The restructuring is consistent with the
long-standing practice of Cell Genesys' management to proactively manage its
business from a strategic standpoint and to consistently maintain the Company's
financial strength. The Company's net cash expenditures for 1998 in its gene
therapy operations (excluding Abgenix, which was not consolidated after July 2,
1998) are not expected to exceed approximately $27 million and the Company
intends to manage toward this net cash expenditure target. 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.
On September 30, 1998, the Company announced that a $2 million milestone payment
had been earned under the gene activation technology license agreement with
Hoechst Marion Roussel. This milestone payment relates to the initiation of a
Phase III clinical trial of gene-activated erythropoietin (EPO) by Hoechst
Marion Roussel which is developing gene-activated EPO in collaboration with
Transkaryotic Therapies, Inc. On October 12, 1998, the Company announced that
the European Patent Office will grant a broad patent covering the company's gene
activation technology. The patent (No. EP 0747485) specifies the use of gene
activation technology in a single step process in which the gene for the
therapeutic protein is activated or enhanced in the cell that is used for
production of the protein.
RESULTS OF OPERATIONS
As noted above, Abgenix's July 2, 1998 IPO reduced the Company's ownership
percentage to approximately 40%. As a result, Abgenix is now being accounted for
under the equity method of accounting and is no longer consolidated. In order to
provide more meaningful analysis of the Company's results of operations, the
following table sets forth the company's operations excluding the results of
Abgenix for such periods. Except as otherwise noted, the discussion which
follows relates to this table.
GENE THERAPY OPERATIONS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
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Cash, cash equivalents
indicated and short-term investments $36,846 $73,495
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ------------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenue $ 4,186 $ 3,454 $ 10,068 $ 14,640
Research and development expenses 8,032 6,726 22,651 18,564
General and administrative expenses 1,683 1,711 4,730 4,902
Charge for purchased in-process
technology and restructuring costs -- -- -- 78,846
Interest income 844 841 2,767 2,636
Interest expense (477) (378) (1,565) (1,204)
Net loss $ (5,162) $ (4,520) $(16,111) $(86,240)
</TABLE>
Revenue was $4.2 million and $10.0 million for the three and nine months ended
September 30, 1998 compared to $3.5 million and $14.6 million for the three and
nine months ended September 30, 1997, respectively. The decrease in revenue for
the nine-month period reflects the completion of the majority of the research
under the Company collaboration agreement with Hoechst Marion Roussel, Inc. for
Cell Genesys' AIDS gene therapy program and the shift to focus solely on human
clinical trials. The decrease in the three-month period was offset by other
license income. Hoechst Marion Roussel is funding this clinical development
program through 1998. In February 1997,
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Cell Genesys entered into an agreement to license the Company's gene activation
technology to Hoechst Marion Roussel for erythropoietin (EPO) and a second
undisclosed protein. The agreement provides for milestone payments and annual
maintenance fees, in addition to royalties on future sales of these two
potential gene-activated protein products. The Company recognized revenue,
pursuant to the agreement, of $4.0 million for each of the nine month periods
ended September 30, 1998 and 1997.
Research and development expenses were $8.0 million and $22.7 million for the
three and nine month periods ended September 30, 1998, and $6.7 million and
$18.6 million for the three and nine month periods ended September 30, 1997,
respectively. The increase reflects the costs of additional research staff
transferred following the acquisition of Somatix and expanding clinical
development activities for the Company's AIDS gene therapy and cancer gene
therapy programs. Research and development expenses generally represent
approximately 80% of the Company's total operating expenses, excluding the
effect of the non-recurring charge for the acquisition of Somatix and related
restructuring charges incurred in 1997. The Company expects that its research
and development expenditures will continue to increase to support additional
product development activities, particularly in the field of cancer, for which a
number of trials commenced in 1997 and 1998. The rate of increase depends on a
number of factors including progress in research and development, especially
clinical trials.
General and administrative expenses remained flat at $1.7 million for three
months ended September 30, 1998 and 1997, respectively. The consistent amount
reflects the Company's continuing efforts to control administrative
expenditures. General and administrative expenses for nine months ended
September 30, 1998, decreased to $4.7 million from $4.9 million, primarily due
to an insurance reimbursement for litigation expenses previously incurred.
Purchased in-process technology costs and restructuring costs related to the
acquisition of Somatix on May 30, 1997 totaling $78.9 million were incurred in
1997. 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. Other costs related to the acquisition consist primarily of
underwriting and other transaction related costs, employee severance payments,
consolidation of facilities and the write down of the book value of certain
fixed assets.
Interest income remained relatively consistent for the three and nine month
periods ended September 30, 1998 and 1997, with lower average cash balances
during 1998 being offset by higher interest rates. Interest expense increased to
$477,000 from $378,000 and to $1.6 million from $1.2 million for the three and
nine months ended September 30, 1998 and 1997, respectively. The increases
represent interest paid on the $15 million note payable to GenPharm and interest
expense from equipment financing activities during 1998.
Cell Genesys' net loss increased to $5.2 million from $4.5 million for the three
months ended September 30, 1998 and 1997, and decreased to $16.1 million from
$86.2 million for the nine months ended September 30, 1998 and 1997,
respectively. The decrease for the nine months period was due primarily to the
$78.9 million non-recurring charge for the acquisition of Somatix and related
costs recognized in the second quarter of 1997. Net losses from operations, 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 later stage human testing of its potential products.
Under the equity accounting method the Company recorded $1.3 million loss in
equity of Abgenix during the three months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cell Genesys along with its subsidiaries including Abgenix, consolidated through
June 30, 1998, has financed its operations primarily through the sale of equity
securities, funding under collaborative arrangements and equipment financing.
From inception through September 30, 1998, the Company received $170.0 million
in net proceeds from equity financings, $96.2 million under collaborative
agreements and utilized $26.6 million of property and equipment financings.
The Company's capital requirements depend on numerous factors, including: 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.
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<PAGE> 11
Cell Genesys' cash, cash equivalents and short-term investments totaled $36.8
million at September 30, 1998 compared to $73.5 million at December 31, 1997.
The decrease was primarily due to use of cash in operating activities and
repayment of the $15 million convertible GenPharm note. Revenues under the
agreement with Hoechst Marion Roussel are expected to decrease during 1998 and
most revenues from Hoechst Marion Roussel have been prepaid. The Company expects
the corporate restructuring plan announced during the third quarter of 1998 will
enable the Company to focus its resources on advancing its clinical stage
programs and will reduce the Company's operating expenses by approximately 30
percent.
Cell Genesys believes that its cash, cash equivalents and short-term investments
at September 30, 1998, together with payments to be received under the Company's
collaborative arrangements and license agreements and available financing under
lines of credit will be sufficient to meet the Company's operating expenses and
capital requirements at least through 1999. Thereafter, the Company will require
substantial and regular inflow of funds. Because of the Company's significant
long-term cash requirements, the Company regularly considers financing
alternatives, including the private or public sale of equity by Cell Genesys.
Any such transaction may be dilutive to existing stockholders. The Company may
also consider financing alternatives that would include sales of assets outside
of its gene therapy operations.
RISK FACTORS
Need for Substantial Additional Funds. We will need substantial additional funds
to do existing and planned preclinical and clinical trials to continue research
and development activities, and to establish manufacturing and marketing
capabilities for any products we may develop. We expect that our existing
capital resources, together with payments to be received under existing
collaborative agreements and amounts available under existing equipment
financing facilities, will enable us to maintain our operations at least through
1999. Beyond 1999, we will need to raise substantial additional capital to fund
our operations.
Our future capital requirements will depend on, and could increase as a result
of, many factors such as:
o continuation of the collaboration with Hoechst Marion Roussel
o continued scientific progress of research and development programs
o magnitude of such programs
o progress of preclinical and clinical testing
o time and costs involved in obtaining regulatory approvals
o costs involved in preparing, filing, prosecuting, maintaining,
enforcing and defending patent claims
o competing technological and market developments
o changes in collaborative relationships
o terms of any additional collaborative arrangements into which we may
enter
o our ability to establish research, development and commercialization
arrangements pertaining to products other than those covered by
existing collaborative arrangements
o cost of establishing manufacturing facilities
o cost of commercialization activities
o demand for our products, if and when approved
o potential redemption obligations in connection with conversion of
the Series B Convertible Preferred Stock. See "Notes to Condensed
Consolidated Financial Statements" note 4, "--Shares Eligible for
Future Sale, Dilution" and "--Possibility of Redemption."
There is no assurance that opportunities for in-licensing technologies or for
third party collaborations will continue to be available to us on acceptable
terms.
A major portion of our operating revenues come from a collaborative agreement
with Hoechst Marion Roussel signed in October 1995. Under the terms of the
agreement, Hoechst Marion Roussel can terminate its commitment at any time two
years after its anniversary date. Hoechst Marion Roussel is funding clinical
development for this program in 1998. There is no assurance that Hoechst Marion
Roussel will continue the agreement or that the level of funding will not vary
year to year. Our operating results would be adversely affected if Hoechst
Marion Roussel decides not to continue funding under this arrangement.
We expect to raise additional funds through additional equity or debt
financings, collaborative relationships, or otherwise. Because of our long-term
capital requirements, we may seek to access the public or private equity markets
whenever conditions are favorable, even if we do not have an immediate need for
additional capital at that time.
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<PAGE> 12
There can be no assurance that any such additional funding will be available to
us, or, if available, that it will be on acceptable terms. If we raise
additional funds by issuing equity securities, stockholders will incur immediate
dilution. If adequate funds are not available, we may be required to delay,
reduce the scope of, or eliminate one or more of our research, development and
clinical activities or we may need to seek funds through arrangements with
collaborative partners or others that require us to relinquish rights to certain
of our technologies, product candidates or products that we would otherwise seek
to develop or commercialize ourselves. Either of these events could have a
material adverse effect on our business, results of operations, financial
condition or cash flow.
Early Stage of Development; No Developed or Approved Products. All of our
potential gene therapy products are in research and development. We have not
sold any products or generated any revenues from the sale of products. We do not
expect to generate any such revenues for at least the next several years. Our
products currently under development will require significant additional
research and development efforts, including extensive preclinical and clinical
testing and regulatory approval, prior to commercial use. There can be no
assurance that our research and development efforts will be successful or that
any of our future products will ultimately be commercially successful. Even if
developed, our products may not receive regulatory approval or be successfully
introduced and marketed at prices that would permit us to operate profitably.
Operating Loss and Accumulated Deficit. We have incurred net losses since our
inception. At September 30, 1998, our accumulated deficit was approximately
$185.9 million. We incurred net losses of $22.5 million for the nine months
ended September 30, 1998. Such losses have resulted principally from expenses of
research and development programs and to a lesser extent, from general and
administrative expenses. In 1997, we incurred losses of $86.2 million, including
$78.9 million related to the acquisition of Somatix and $15 million related to
the cross license and settlement agreement with GenPharm. During the first six
months of 1998 while Abgenix was a consolidated subsidiary, we attributed
Abgenix losses totaling $4.2 million to the minority stockholders. Under the
equity method of accounting, we recorded $1.3 million loss in equity of Abgenix
during the three months ended September 30, 1998. We expect to incur substantial
losses for at least the next several years due primarily to the expansion of
research and development programs, including preclinical studies, clinical
trials and manufacturing. We expect that losses will fluctuate from quarter to
quarter and that such fluctuations may be substantial. There can be no assurance
that we will successfully develop, commercialize, manufacture or market any
products. We cannot guarantee that we will ever achieve or sustain product
revenues or profitability.
Technological Uncertainty. Gene therapy is a new technology. Existing
preclinical and clinical data on the safety and efficacy of gene therapy are
limited. Data relating to our specific gene therapy approaches are even more
limited. Our GVAX (TM) cancer vaccine and AIDS gene therapy are currently being
tested in Phase I/II and Phase II human clinical trials to determine their
safety and efficacy. None of the other products or therapies under development
are in human clinical trials. The results of preclinical studies do not predict
safety or efficacy in humans. Possible side effects of gene therapy may be
serious and life-threatening. There can be no assurance that unacceptable side
effects will not be discovered during preclinical and clinical testing of our
potential products or thereafter. There are many reasons that potential products
that appear promising at an early stage of research or development do not result
in commercialization. Although we are testing proposed products or therapies in
human clinical trials, there can be no assurance that we will be permitted to
undertake human clinical trials for any of our other products. Also, the results
of such testing might not demonstrate safety or efficacy. Even if clinical
trials are successful, there is no assurance that we will obtain regulatory
approval for any indication, that an approved product can be produced in
commercial quantities at reasonable cost or that such a product will be
successfully marketed.
Patents and Trade Secrets. The patent positions of pharmaceutical and
biotechnology firms, including Cell Genesys, are generally uncertain and involve
complex legal and factual questions. Although we are prosecuting patent
applications, we cannot be certain whether any given application will result in
the issuance of a patent or, if any patent is issued, whether it will provide
significant proprietary protection or will be invalidated. Also, patent
applications in the United States are confidential until patents are issued.
Publication of discoveries in scientific or patent literature tends to lag
behind actual discoveries by several months. Accordingly, we cannot be certain
that we were the first creator of inventions covered by pending patent
applications or that we were the first to file patent applications for such
inventions.
Our commercial success will also depend in part on not infringing the patents or
proprietary rights of others and not breaching licenses granted to us. We will
be required to obtain licenses to certain third party technology and genes
necessary to conduct our business. Any failure to license at reasonable cost any
technology or genes required to
12
<PAGE> 13
commercialize our technologies or products may have a material adverse effect on
our business, results of operations, financial condition or cash flow.
Litigation, which could result in substantial cost to us, may also be necessary
to enforce any patents issued to us, or to determine the scope and validity of
other parties' proprietary rights. To determine the priority of inventions, the
United States Patent Office frequently declares interference proceedings. Such
proceedings could result in an adverse decision as to the priority of our
inventions.
We are currently involved in three separate interference proceedings with regard
to:
(i) gene activation technology
(ii) ex vivo gene therapy
(iii) chimeric receptor technology
While we believe our position in each interference proceeding is strong, the
outcome of each proceeding cannot be predicted. An adverse result could have a
material adverse effect on our intellectual property position and our business.
We may be involved in other interference proceedings in the future. We believe
that there will continue to be significant litigation in the industry regarding
patent and other intellectual property rights.
We also rely on unpatented trade secrets and improvements, unpatented know-how
and continuing technological innovation to develop and maintain our competitive
position. No assurance can be given that others will not independently develop
similar or better proprietary information and techniques and disclose it. Also,
there can be no assurance that others will not gain access to our trade secrets,
or that we can meaningfully protect our rights to our unpatented trade secrets.
We require our employees and consultants to execute a confidentiality agreement
upon the commencement of an employment or consulting relationship with us. These
agreements provide that all confidential information developed by or made known
to an individual during the course of the employment or consulting relationship
generally must be kept confidential. In the case of employees, the agreements
provide that all inventions conceived by the individual while employed by us,
relating to our business are our exclusive property. These agreements may not
provide meaningful protection for our trade secrets in the event of unauthorized
use or disclosure of such information.
Competition. Competition in the field of gene therapy from other biotechnology
and pharmaceutical companies and from research and academic institutions is
intense and expected to increase. There are numerous competitors working on
products to treat each of the diseases for which we are seeking to develop
therapeutic products. Some competitors are pursuing a product development
strategy competitive with ours, particularly with respect to our human
monoclonal antibody program. Certain of these competitive products are in
substantially more advanced stages of product development and clinical trials.
Our competitors may develop technologies and products that are more effective
than ours, or that would render our technology and products less competitive or
obsolete. Many of these competitors have substantially greater financial
resources and larger research and development staffs than we do. In addition,
many of these competitors may have significantly greater experience than we do
in developing products, in undertaking preclinical testing and human clinical
trials of new pharmaceutical products, in obtaining United States Food and Drug
Administration (the "FDA") and other regulatory approvals of products, and in
manufacturing and marketing such products. Accordingly, our competitors may
obtain patent protection, or FDA approval and may commercialize products more
rapidly than we do. There can be no assurance that we will be able to obtain
certain biological materials necessary to support our research, development or
manufacturing of any of our planned therapies. If we are permitted to commence
commercial sales of products, we will also be competing with respect to
marketing capabilities and manufacturing efficiency, areas in which we have
limited or no experience. We expect to build additional clinical scale and
commercial scale manufacturing facilities if contract facilities are not
available in order to commercialize our products. We also expect to secure
funding for these and other product development activities through our partners
and future potential partners. We also compete with universities and other
research institutions in the development of products, technologies and
processes. In many instances, we compete with other commercial entities in
acquiring products or technology from universities.
We expect that competition among products approved for sale will be based, among
other things, on:
o product efficacy
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<PAGE> 14
o safety
o reliability
o availability
o price
o patent
o position
o sales
o marketing
o distribution capabilities
Our competitive positions also depend upon our ability to attract and retain
qualified personnel, obtain patent protection or otherwise develop proprietary
products or processes and secure sufficient funding for the often substantial
period between product conception and commercial sales.
The continuing efforts of governmental and third-party payers to contain or
reduce the costs of health care through various means may affect the revenues
and profitability of biotechnology and pharmaceutical companies like ours. In
the United States there have been, and we expect there to continue to be, a
number of federal and state proposals to control health care costs. We cannot
predict the effect health care reforms may have on our business. It is possible
that such reforms will have a material adverse effect on our business, results
of operations, financial condition or cash flow. In the United States and
elsewhere, sales of therapeutic products depend in part on the availability of
reimbursements to consumer from third party payers, such as government and
private insurance plans. If we succeed in bringing one or more products to the
market, our products might not be considered cost effective. In such event,
third party payers might not reimburse the consumer sufficiently to allow us to
sell our products on a competitive basis.
Volatility Of Stock Price. The market prices for securities of biopharmaceutical
and biotechnology companies (including Cell Genesys) have historically been
highly volatile. The market has from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance of
particular companies. The following factors, as well as those identified under
"--Shares Eligible for Future Sale; Dilution" below, may affect our stock price:
o fluctuations in our operating results
o announcements of technological innovations or new therapeutic
products by us or our competitors
o governmental regulation
o developments in patent or other proprietary rights
o public concern as to the safety of products developed by us or other
biotechnology and pharmaceutical companies
o general market conditions
Government Regulation. Regulation by governmental authorities in the United
States and foreign countries is a significant factor in the manufacture and
marketing of our proposed products and our research and development activities.
All of our products will require regulatory approval by governmental agencies
prior to commercialization. In particular, human therapeutic products must
undergo rigorous preclinical and clinical testing and other premarket approval
procedures by the FDA and similar authorities in foreign countries. Since
certain of our potential products involve the application of new technologies,
regulatory approvals may take longer than for products produced using more
conventional methods. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such products. The lengthy process of
seeking these approvals, and the subsequent compliance with applicable federal
statutes and regulations, requires the expenditure of substantial resources. Any
failure by us or our collaborators or licensees to obtain, or any delay in
obtaining regulatory approvals could adversely affect the marketing of our
products and our ability to receive product or royalty revenue.
In responding to a new drug application, or a product license application, the
FDA may grant marketing approvals, request additional information or further
research, or deny the application if it determines that the application does not
satisfy its regulatory approval criteria. Approvals may not be granted on a
timely basis, if at all, or if granted may not cover all the clinical
indications for which we are seeking approval. Also, an approval might contain
significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use.
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<PAGE> 15
In addition to laws and regulations enforced by the FDA, we are also subject to
regulation under:
o Occupational Safety and Health Act
o Environmental Protection Act
o Toxic Substances Control Act
o Resource Conservation and Recovery Act
o Other present and potential future federal, state or local laws and
regulations
Our research and development involves the controlled use of hazardous materials,
chemicals, viruses and various radioactive compounds. Although we believe our
safety procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, we cannot completely
eliminate the risk of accidental contamination or injury from these materials.
In the event of such an accident, we could be held liable for any damages that
result and any such liability could exceed our resources.
Our manufacturing facilities are subject to licensing requirements of the
California Department of Health Services. While not subject to license by the
FDA, such facilities are subject to inspection by the FDA as well as by the
California Department of Health Services. A separate license from the FDA is
required for commercial manufacture of any product. Failure to maintain such
licenses or to meet the inspection criteria of the FDA and the California
Department of Health Services would disrupt our manufacturing processes and have
a material adverse effect on our business, results of operations, financial
condition and cash flow.
For marketing outside the United States, we are subject to foreign regulatory
requirements governing human clinical trials and marketing approval for drugs
and devices. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary greatly from country to country.
Failure to comply with such regulatory requirements or obtain such approvals
could impair our ability to develop these markets and have a material adverse
effect on our business, results of operations, financial condition or cash flow.
Commercialization; Lack of Marketing Experience. We expect to rely on sales and
marketing expertise of potential corporate partners for our initial products. We
do not have any experience in sales, marketing or distribution of
biopharmaceutical products. The decision to market future products directly or
through corporate partners will be based on a number of factors including;
o market size and concentration
o size and expertise of the partner's sales force in a particular
market
o Company's overall strategic objectives
We are currently engaged in various stages of discussions with potential
partners. There can be no assurance that we will be able to establish such
relationships, if at all, on acceptable terms and conditions.
Product Liabilities and Insurance. Clinical trials or marketing of any of our
potential products may expose us to liability claims resulting from the use of
such products. These claims might be made directly by consumers, health care
providers or by others selling such products. We currently maintain product
liability insurance with respect to each of our clinical trials. There can be no
assurance that we will be able to maintain such insurance or that sufficient
coverage can be acquired at a reasonable cost. An inability to maintain
insurance at acceptable cost, or at all, could prevent or inhibit the clinical
testing or commercialization of our products. A product liability claim or
recall could have a material adverse effect on our business, results of
operations, financial condition and cash flow.
Hazardous Materials; Environmental Matters. Our research and development
activities involve the controlled use of hazardous materials, chemicals, viruses
and various radioactive compounds. We are subject to federal, state and local
laws and regulations governing the use, manufacture, storage, handling and
disposal of such materials and certain waste products. Although we believe that
our safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, we cannot completely
eliminate the risk of accidental contamination or injury from these materials.
In the event of such an accident, we could be held liable for any damages that
result, and any such liability could exceed our resources. We may be required to
incur significant costs
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<PAGE> 16
to comply with environmental laws and regulations in the future. Our business
may be materially adversely affected by current or future environmental laws or
regulations.
Reimbursement. In both domestic and foreign markets, sales of our potential
products will depend in part upon coverage and reimbursement from third-party
payers, including:
o health care organizations
o government agencies
o private health care insurers and other health care payers such
as health maintenance organizations
o self-insured employee plans
o Blue Cross/Blue Shield plans
There is considerable pressure to reduce the cost of drug products. In
particular, reimbursement from government agencies and insurers and large health
organizations may become more restricted in the future. Our potential products
represent a new mode of therapy and, while the cost-benefit ratio of the
products may be favorable, we expect that the costs associated with our products
will be substantial. There can be no assurance that our proposed products, if
successfully developed, will be considered cost-effective by third-party payers.
There can be no assurance that insurance coverage will be provided by such
third-party payers at all or without substantial delay. Even if such coverage is
provided, the approved reimbursement might not provide sufficient funds to
enable us to become profitable.
Uncertainty Of Pharmaceutical Pricing and Related Matters. The continuing
efforts of governmental and third-party payers to contain or reduce the costs of
healthcare through various means may have a material adverse effect on the
future revenues and profitability of biotechnology companies. For example, in
certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. In the United States, there
have been, and we expect that there will continue to be, a number of federal and
state proposals to implement similar government control. While we cannot predict
whether the government will adopt any such legislative or regulatory proposals,
the announcement or adoption of such proposals could have a material adverse
effect on our business, results of operations, financial condition and cash
flow.
Dependence Upon Key Personnel and Collaborative Relationships. We rely and will
continue to rely on our key management and scientific staff. The loss of key
personnel or the failure to recruit necessary additional qualified personnel
could have a material adverse effect on our business, results of operations,
financial condition or cash flow. There is intense competition from other
companies, research and academic institutions and other organizations for
qualified personnel in the areas of our activities. There is no assurance that
we will be able to continue to attract and retain the qualified personnel
necessary for the development of our business. We will need to recruit new
experts in the areas of clinical testing, manufacturing, marketing and
distribution and develop additional expertise in our existing personnel. If we
do not succeed in recruiting such personnel or developing such expertise, our
business could suffer significantly.
We have clinical trial arrangements with the National Institutes of Allergy and
Infectious Diseases covering the initial proof-of-principle study for AIDS gene
therapy being conducted in identical twin pairs. The study is now in Phase II
testing. We also have clinical trial arrangements with:
o University of California, San Francisco
o San Francisco General Hospital
o University of Colorado Health Sciences Center
o Massachusetts General Hospital
o University of California, Los Angeles
o ViRx, Inc.
o Aids Research Community Consortium
Covering our patient-specific configuration of its AIDS gene therapy, these
trials are also now in Phase II testing. The termination of these relationships
would hinder the progress of these clinical trials.
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<PAGE> 17
In addition, we have several clinical trial arrangements under our GVAX(TM)
program, including with The Johns Hopkins University covering a Phase I clinical
trial to treat prostate cancer patients and with the Dana Farber Cancer
Institute covering two Phase I clinical trials to treat lung cancer and melanoma
patients. If any of these relationships are terminated, the clinical trials
might not be completed and the results might not be evaluated.
We rely on the continued availability of outside scientific collaborators
performing research. These relationships generally may be terminated at any time
by the collaborator, typically by giving 30 days' notice. These scientific
collaborators are not our employees. As a result, we have limited control over
their activities and can expect that only limited amounts of their time will be
dedicated to our activities. Our agreements with these collaborators, as well as
those with our scientific consultants, provide that any rights we obtain as a
result of their research efforts will be subject to the rights of the research
institutions in such work. In addition, some of these collaborators have
consulting or other advisory arrangements with other entities that may conflict
with their obligations to us. For these reasons, there can be no assurance that
inventions or processes discovered by our scientific collaborators or
consultants will become our property.
Shares Eligible For Future Sale; Dilution. Substantially all the outstanding
shares of Cell Genesys Common Stock are eligible for sale in the public market.
The following factors, as well as others such as those identified above under
"--Volatility of Stock Price," could cause a decline in the market price of our
Common Stock:
o issuance of Common Stock upon conversion of the Series B
Preferred Stock
o issuance of Common Stock upon exercise of warrants
o future sales of such Common Stock or other shares of Common Stock by
existing stockholders
o the perception that such issuances or sales could occur
o severe fluctuations in price and volume in the stock market in
general which are unrelated to our operating performance
Conversion of the Series B Preferred Stock or exercise of the warrants would
result in issuance of additional shares of Common Stock. This would cause
dilution of existing investors. The number of shares of Common Stock issued, and
therefore the amount of dilution of existing investors, would increase as a
result of either (i) an event triggering the antidilution rights of any
outstanding shares of Series B Preferred Stock, or (ii) a decline in the market
price of the Common Stock immediately prior to conversion of the Series B
Preferred Stock.
The holders of the Series B Preferred Stock may choose at any time to convert
their shares into shares of Common Stock. In such event, the number of shares of
Common Stock issued would be based on a conversion price of $11.02 per share or,
if lower, the average of certain specified trading prices during the 10 trading
days preceding such date of conversion (the "Floating Conversion Price"). The
market price of the Common Stock has recently traded below $11.02 per share and
consequently the conversion rate of the Series B Preferred Stock is currently
based on the market price. The greater in decline in the market price, the
greater the number of shares issuable upon conversion of the Series B Preferred
Stock.
Potential Redemption Obligation. If the holders of the Series B Preferred Stock
elected to convert their shares, we would not be required to issue more than
5,624,000 shares of Common Stock (which is 19.99% of the outstanding shares of
Common Stock on November 14, 1997, or the "Share Limit"), unless we first
obtained stockholder approval or an exemption from the Nasdaq Stock Market from
the requirement to obtain stockholder approval. If we did not obtain stockholder
approval or the Nasdaq exemption, we would not be required to issue shares of
Common Stock in excess of the Share Limit pursuant to requests for conversion of
the Series B Preferred Stock. However, in such event, the holders of the Series
B Preferred Stock could require us to redeem certain shares of Series B
Preferred Stock, and the amount of these redemption obligations could become
material if the Common Stock price declined below approximately $3.70 per share.
Since the Common Stock has recently traded at a price below $3.70 per share and
we have not obtained stockholder approval or the Nasdaq exemption, we could
become subject to a material redemption obligation if the number of shares of
Common Stock issuable upon conversion of the Series B Preferred Stock exceeds
the Share Limit. The amount of the redemption obligation will increase as the
Common Stock price decreases because we are limited in the number of shares we
can issue upon conversion. Consequently, volatility in the price of the Common
Stock could magnify the amount of any redemption obligation.
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<PAGE> 18
IMPACT OF THE YEAR 2000
The Company has undertaken various initiatives to ensure that its information
technology (IT) and non-IT systems are Year 2000 compliant. Based on its
assessment efforts to date, the Company has not identified any systems currently
in use which require replacement as a result of its Year 2000 initiatives. The
Company currently anticipates that its Year 2000 identification, assessment,
remediation, testing and contingency planning efforts, which began in late 1997,
will be complete by the end of the second quarter of 1999. To date, no material
costs have been incurred in the Company's Year 2000 project plan and none are
currently anticipated.
The following is a breakdown by phase of the progress the Company has made to
date on its Year 2000 project plan:
<TABLE>
<CAPTION>
Phase Time Frame Percent Complete
- ----- ---------- ----------------
<S> <C> <C>
Initial identification and assessment Q4-- 1998 90%
Remediation Q4-- 1998 90%
Testing Q1-- 1999 70%
Contingency planning Q2-- 1999 50%
</TABLE>
The Company is reliant upon its vendors and collaborative partners to provide
Year 2000 compliant systems sufficiently before December 31, 1999. The Company
has surveyed all of its major vendors, collaborative partners and other third
party interests to determine whether their systems are Year 2000 compliant.
While no problems have yet come to our attention, we cannot guarantee that all
of the Company's key suppliers and partners will achieve Year 2000 compliance in
a timely manner. The failure of the Company's vendors and partners to
successfully address the Year 2000 issue could have a material adverse effect on
the Company's ability to successfully address its Year 2000 issue. Such failures
could materially affect the Company's results of operations, liquidity and
financial condition. Due to the general uncertainty of the Year 2000 readiness
of third parties, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity and financial condition.
The costs of the Company's Year 2000 project plan, the dates on which the
Company believes it will complete each phase of its Year 2000 project plan and
the process for contingency planning are based on management's best estimates,
which are derived from assumptions regarding future events, including the
continued availability of certain resources, third party remediation plans and
other factors. There can be no assurance that these estimates and plans will
prove to be accurate, and actual results could differ materially from those
currently anticipated.
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<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in Foster City, California,
on November 13, 1998:
CELL GENESYS, INC.
By: /S/ Matthew J. Pfeffer
--------------------------------------
Matthew J. Pfeffer
Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: November 13, 1998
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<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,369
<SECURITIES> 35,477
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,331
<PP&E> 6,660
<DEPRECIATION> 0
<TOTAL-ASSETS> 56,341
<CURRENT-LIABILITIES> 9,455
<BONDS> 0
19,817
0
<COMMON> 206,592
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 56,341
<SALES> 0
<TOTAL-REVENUES> 11,684
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 38,275
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,875
<INCOME-PRETAX> 22,497
<INCOME-TAX> 0
<INCOME-CONTINUING> 22,497
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,497
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.79
</TABLE>
