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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 MARCH 31, 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 (I.R.S. employer
of 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 May 1, 1998, the number of outstanding shares of the
Registrant's Common Stock was 28,340,173.
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CELL GENESYS, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
a. Condensed Consolidated Balance Sheets - March 31, 1998 and
December 31, 1997....................................................................................3
b. Condensed Consolidated Statements of Operations - Three Months
Ended March 31, 1998 and 1997........................................................................4
c. Condensed Consolidated Statements of Cash Flows -Three Months Ended
March 31, 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...............................................16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.........................................................................17
SIGNATURE ..........................................................................................................17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CELL GENESYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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MARCH 31, DECEMBER 31,
1998 1997
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ASSETS (Unaudited)
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Current assets:
Cash and cash equivalents............................................ $ 1,511 $ 10,631
Short-term investments............................................... 79,827 78,185
Prepaid expenses and other current assets............................ 2,174 2,943
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Total current assets.................................................... 83,512 91,759
Property and equipment at cost, net..................................... 13,583 13,815
Deposits and other assets, net.......................................... 1,369 1,313
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$ 98,464 $ 106,887
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities....................... $ 8,693 $ 8,405
Deferred revenue from related parties................................ 4,394 5,993
Accrued acquisition related costs.................................... 1,332 1,648
Current portion of property and equipment financing.................. 4,894 5,159
Contribution payable to related party................................ 3,750 3,750
Convertible note payable............................................. 15,000 15,000
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Total current liabilities............................................... 38,063 39,955
Noncurrent portion of property and equipment financing.................. 10,496 11,082
Redeemable convertible preferred stock.................................. 19,817 19,817
Minority interest in the equity of subsidiary........................... 18,726 17,392
Stockholders' equity:
Common stock......................................................... 28 28
Additional paid-in capital........................................... 200,304 199,495
Deferred compensation of subsidiary.................................. (1,619) (1,319)
Accumulated deficit.................................................. (187,351) (179,563)
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Total stockholders' equity.............................................. 11,362 18,641
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$ 98,464 $ 106,887
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See accompanying notes
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CELL GENESYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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THREE MONTHS ENDED MARCH 31,
1998 1997
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(In thousands except per share data)
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Revenue under collaborative agreements with related parties ................. $ 4,564 $ 7,849
Operating expenses:
Research and development ................................................. 12,467 8,279
General and administrative ............................................... 2,984 2,136
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 .................................................... 15,451 25,415
Interest income ............................................................. 1,225 1,064
Interest expense ............................................................ (671) (288)
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Net loss before minority interest ........................................... (10,333) (16,790)
-----------------------------------
Loss of consolidated subsidiary attributed to minority interest . ........... 2,646 --
-----------------------------------
Net loss .................................................................... $ (7,687) $(16,790)
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Basic and diluted net loss per share ........................................ $ (0.27) $ (1.01)
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Shares used in computing basic and diluted net loss per share ............... 28,211 16,546
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CELL GENESYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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THREE MONTHS ENDED MARCH 31,
1998 1997
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(In thousands)
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................... $ (7,687) $ (16,790)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization........................................... 1,388 1,109
Amortization of deferred compensation of subsidiary..................... 149 --
Minority interest in net loss of subsidiary............................. (2,646) --
Equity in losses of Xenotech joint venture.............................. 115 96
Charge for cross-license and settlement................................. -- 15,000
Changes to:
Prepaid expenses and other assets....................................... 484 (1,402)
Accounts payable and other accrued liabilities.......................... 231 (2,561)
Deferred revenue from related parties................................... (1,599) (7,859)
Accrued acquisition related costs....................................... (316) --
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Net cash used in operating activities.............................. (9,881) (12,407)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments........................................ (19,435) (15,946)
Maturities of short-term investments....................................... 6,000 2,919
Sales of short-term investments............................................ 11,703 22,954
Contributions to Xenotech joint venture.................................... (117) (83)
Capital expenditures....................................................... (54) (998)
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Net cash provided by (used in) investing activities................ (1,903) 8,846
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from minority interest in subsidiary.............................. 3,982 --
Proceeds from issuance of common stock..................................... 213 279
Proceeds from property and equipment financing............................. -- 5,137
Payments under property and equipment financing obligations................ (1,531) (679)
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Net cash provided by financing activities.......................... 2,664 4,737
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Net increase (decrease) in cash and cash equivalents.......................... (9,120) 1,176
Cash and cash equivalents at beginning of period.............................. 10,631 20,935
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Cash and cash equivalents at end of period.................................... $ 1,511 $ 22,111
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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 March
31, 1998 and for the three months ended March 31, 1998 and 1997 include the
accounts of Cell Genesys, Inc., including its subsidiaries Abgenix, Inc. and,
from May 30, 1997, the date of acquisition, 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 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 filing on Form 10-K.
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.
COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of SFAS 130 had no impact on the Company's net loss or
shareholders' equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive income
(loss). Prior year financial statements will be reclassified to conform to the
requirements of SFAS 130.
For the three months ended March 31, 1998 and 1997, total
comprehensive loss amounted to $7.8 million and $16.9 million, respectively.
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)
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. As consideration for the cross-license and settlement
agreement, Cell Genesys issued a note due September 30, 1998 for $15.0 million,
convertible into shares of Cell Genesys common stock, at $8.62 per share. Of
this note, $3.75 million was contributed to, then paid by Xenotech. 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
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2. CHARGE FOR CROSS-LICENSE AND SETTLEMENT (CONTINUED)
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, of which $3.75
million was paid in cash and $3.75 million is accrued at March 31, 1998. The
balance of the patent milestone obligations is the responsibility of Japan
Tobacco. No additional milestone payments will accrue under this agreement.
3. MINORITY INTEREST
Minority interest in the equity of subsidiary represents the minority
stockholders' proportionate share of the equity of Abgenix, Inc. (Abgenix). In
December 1997, Abgenix issued 2,846,542 shares of Series B redeemable
convertible preferred stock at $6.50 per share to the minority shareholders for
net aggregate proceeds of $17.0 million (net of $1.5 million of issuance costs).
In addition, at December 31, 1997, Abgenix held subscriptions for 421,143 shares
of Series B redeemable convertible preferred stock. Proceeds of $2.7 million
(net of $81,000 of issuance costs) from these subscriptions were received in
January 1998. Also in January 1998, Abgenix issued 160,000 shares of Series C
redeemable convertible preferred stock at $8.00 per share for net proceeds of
$1.3 million. At March 31, 1998 and December 31, 1997, the Company owned
approximately 54% and 55%, respectively, of Abgenix. The Company attributed $2.6
million of the losses of Abgenix for the first quarter 1998 to the minority
stockholders.
4. ABGENIX' INITIAL PUBLIC OFFERING
On April 22, 1998, Abgenix filed a Registration Statement on Form
S-1, as amended, with the SEC for an initial public offering of its common
stock. Abgenix proposes to register 3,000,000 shares of common stock, excluding
the underwriters' over-allotments. After the completion of the offering, Cell
Genesys' ownership percentage of Abgenix is expected to decrease from 54% as of
March 31, 1998 to approximately 40%.
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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 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 and are subject to a number of uncertainties that could
cause actual results to differ materially from the statements made, including
risks associated with the success of research and product development programs,
the issuance and validity of patents, the development and protection of
proprietary technology, 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 the Company's Annual Report for the year ended
December 31, 1997 included in its filing on Form 10-K.
OUTLOOK
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. Two types of cancer gene
therapies, for which Cell Genesys currently has worldwide rights, are in Phase
I/II human clinical testing for the treatment of colon cancer, lung cancer,
melanoma and prostate cancer. Preclinical studies are being conducted by Cell
Genesys for the treatment of other cancer indications as well as for hemophilia,
cardiovascular disease and neurologic conditions. Cell Genesys' assets outside
of gene therapy include its licensing program in gene activation technology and
its Abgenix subsidiary, which is focused on the development and
commercialization of antibody therapies.
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
attract new corporate collaborations to advance product candidates through
development and commercialization and also has expanded its opportunities to
license additional therapeutic genes from other companies and research
institutes needed to create new gene therapies.
During 1997, Cell Genesys made extensive progress in its gene therapy
programs. For the treatment of HIV infection, Phase II human clinical studies
were expanded using T cell AIDS gene therapy, based on encouraging data from
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 were initiated
using T cell cancer gene therapy for colon cancer and using the GVAX (TM) cancer
vaccine for melanoma, lung cancer and prostate cancer. Hemophilia gene therapy
entered preclinical testing and demonstrated long-term production of a blood
clotting protein that is deficient in patients with hemophilia. Cardiovascular
gene therapy continued to show promise in preclinical testing for the prevention
or inhibition of restenosis following angioplasty. In Cell Genesys' central
nervous system gene therapy program, progress was achieved in preclinical
studies evaluating the potential to slow or halt the degeneration of certain
brain cells in Parkinson's disease. A new treatment indication, the management
of uncontrollable pain associated with fatal illness, is also being evaluated.
In the human monoclonal antibody program (being pursued through the
Company's 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
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could provide a marketing advantage. Abgenix 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. Abgenix currently has five antibody products in
development. Abgenix' lead product candidate, ABX-CBL, is in confirmatory Phase
II trials for treating steroid-resistant graft versus host disease (GVHD), a
frequent, fatal and currently untreatable complication of allogeneic bone marrow
transplants. ABX-CBL has been tested in various acute transplant related
conditions including GVHD, kidney and corneal transplant rejection in 90
patients to date. Clinical trials have been initiated for a second antibody
product, ABX-IL8, for the treatment of moderate to severe psoriasis.
The Company's consolidated net cash expenditures for 1998 in its
current operations are not expected to exceed approximately $25 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.
RESULTS OF OPERATIONS
Revenue decreased to $4.6 million from $7.8 million for the three
months ended March 31, 1998 and 1997, respectively. In 1995, the Company entered
into a collaboration agreement with Hoechst Marion Roussel, Inc. for Cell
Genesys' AIDS gene therapy program. A portion of the decrease in revenue
reflects the completion of the majority of the research under this program and
the current focus on human clinical trials. Hoechst Marion Roussel will continue
to fund this clinical development program through 1998. In February 1997, 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 of
$2.0 million and $4.0 million for the three months ended March 31, 1998 and
1997, respectively, pursuant to the agreement. Revenues resulting from the
Company's joint venture ("Xenotech") with JT Immunotech in its human monoclonal
antibody program also decreased in the first quarter of 1998 compared to the
prior year due to the completion of the majority of research activities.
Research and development expenses increased to $12.5 million from
$8.3 million for the three months ended March 31, 1998 and 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.
The increase also reflects Abgenix' contract manufacturing costs related to its
lead antibody product candidate. 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 cross-license and settlement. 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. The rate of
increase depends on a number of factors including progress in research and
development, especially clinical trials.
General and administrative expenses increased to $3.0 million from
$2.1 million for the three months ended March 31, 1998 and 1997, respectively.
The increase reflects growth in administrative staff and outside services
required to support expanded research and development programs, including
facilities expenses related to Abgenix' lease of independent facilities and
hiring of independent administrative staff during the first quarter of 1997. The
Company expects these expenses to increase as these programs expand.
For the three months ended March 31, 1997, the Company recognized a
$15 million non-recurring, non-cash charge related to the Company's
cross-license and settlement agreement with GenPharm International, Inc.
Interest income increased to $1.2 million from $1.1 million for the
three months ended March 31, 1998 and 1997, respectively. The increase was due
to higher average cash balances due to equity financings completed in the fourth
quarter 1997 by both Cell Genesys and Abgenix. Interest expense increased to
$671,000 from $288,000 for the three months ended March 31, 1998 and 1997,
respectively, due to higher levels of property and equipment financing and
interest paid on the note payable to GenPharm.
Cell Genesys' net loss decreased to $7.7 million from $16.8 million
for the three months ended March 31, 1998 and 1997, respectively. Increased
operating expenses for the first quarter 1998 were offset by the non-
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recurring $15.0 million charge recognized for the same period in 1997. In
addition, the Company attributed $2.6 million of the losses of Abgenix for the
first quarter 1998 to the minority stockholders. Net loss, 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 late stage human testing of its potential
products.
LIQUIDITY AND CAPITAL RESOURCES
Cell Genesys has financed its operations primarily through the sale
of equity securities, funding under collaborative arrangements and equipment
financing. From inception through March 31, 1998, the Company received $169.1
million in net proceeds from equity financings, $95.9 million under
collaborative agreements and utilized $26.2 million of property and equipment
financings.
At March 31, 1998, Cell Genesys' cash, cash equivalents and
short-term investments totaled $81.3 million, compared to $88.8 million at
December 31, 1997. This decrease of $7.5 million was primarily due to use of
cash in operating activities.
On March 27, 1997, the Company announced that, along with 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. 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 $15.0 million, convertible into shares
of Cell Genesys common stock, at $8.62 per share. Of this note, $3.75 million
was contributed to, then paid by Xenotech. 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, of which $3.75 million was paid in cash and $3.75 million
is accrued at March 31, 1998. The balance of the patent milestone obligations is
the responsibility of Japan Tobacco. No additional milestone payments will
accrue under this agreement.
Cell Genesys anticipates that consolidated net cash expenditures will
not exceed $25 million in 1998. Revenues under the agreement with Hoechst Marion
Roussel are expected to decrease in 1998 and have been prepaid by Hoechst Marion
Roussel. In addition, the above referenced note payable to GenPharm will come
due September 30, 1998 and, depending on the Cell Genesys stock price at that
time, may require cash settlement at the option of the holder. Payment by
Abgenix of the second milestone due GenPharm will also be due in 1998. The
Company expects its cash requirements to increase significantly in the future.
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.
Cell Genesys believes that its available cash, cash equivalents and
short-term investments at March 31, 1988, together with payments to be received
under the Company's collaborative arrangements and license agreements and $2.5
million in equipment financing available for capital equipment purchases will be
sufficient to meet the Company's operating expenses and capital requirements at
least through 1999. Thereafter, the Company will require substantial additional
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 and by its subsidiary Abgenix. Any such
transaction may be dilutive to existing stockholders. On April 22, 1998, Abgenix
filed a Registration Statement on Form S-1, as amended, with the SEC for an
initial public offering of its common stock.
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RISK FACTORS
Need for Substantial Additional Funds. The Company and its
subsidiary, Abgenix, will require substantial additional funds to continue
existing and planned preclinical and clinical trials and its research and
development activities, and to establish manufacturing and marketing
capabilities for any products it may develop. The Company expects that its
existing capital resources, together with payments to be received under existing
collaborative agreements and amounts available under existing equipment
financing facilities, will enable the Company to maintain the Company's
operations at least through 1999. Beyond such time, the Company and Abgenix will
need to raise substantial additional capital to fund its operations.
The Company's future capital requirements will depend on, and could
increase as a result of, many factors, including, but not limited to, the
continuation of the collaboration with Hoechst Marion Roussel, continued
scientific progress in its research and development programs, the magnitude of
such programs, the progress of preclinical and clinical testing, the time and
costs involved in obtaining regulatory approvals, the costs involved in
preparing, filing, prosecuting, maintaining, enforcing and defending patent
claims, competing technological and market developments, changes in
collaborative relationships, the terms of any additional collaborative
arrangements into which the Company may enter, the Company's ability to
establish research, development and commercialization arrangements pertaining to
products other than those covered by existing collaborative arrangements, the
cost of establishing manufacturing facilities, the cost of commercialization
activities, and the demand for the Company's products if and when approved.
There is no assurance that opportunities for in-licensing technologies or for
third party collaborations will continue to be available to the Company on
acceptable terms.
A major portion of the Company's operating revenues are derived from
a collaborative agreement with Hoechst Marion Roussel signed in October 1995.
Under the terms of the agreement, Hoechst Marion Roussel has the ability to
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. The Company's operating
results would be adversely affected should Hoechst Marion Roussel decide not to
continue funding under this arrangement.
Cell Genesys expects to raise additional funds through additional
equity or debt financings, collaborative relationships, or otherwise. Because of
these long-term capital requirements, the Company and its subsidiary, Abgenix,
may seek to access the public or private equity markets whenever conditions are
favorable, even if it does not have an immediate need for additional capital at
that time. On April 22, 1998, Abgenix filed a Registration Statement on Form
S-1, as amended, with the SEC for an initial public offering of its common
stock. There can be no assurance that any such additional funding will be
available to the Company, or, if available, that it will be on acceptable terms.
If additional funds are raised by issuing equity securities, further dilution to
stockholders may result. If adequate funds are not available, the Company may be
required to delay, reduce the scope of, or eliminate one or more of its
research, development and clinical activities or to seek to obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates or
products that the Company would otherwise seek to develop or commercialize
itself, any of which could have a material adverse effect on the Company's
business, results of operations, financial condition or cash flow.
Early Stage Of Development; No Developed Or Approved Products. Cell
Genesys' potential gene therapy products are in research and development. No
revenues have been generated from the sale of any of such products, nor are any
such revenues expected for at least the next several years. The products
currently under development by Cell Genesys 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 Cell Genesys' research and development efforts will be successful
or that any commercially successful products will ultimately be developed by
Cell Genesys. Even if developed, these products may not receive regulatory
approval or be successfully introduced and marketed at prices that would permit
Cell Genesys to operate profitably.
Technological Uncertainty. Gene therapy is a new technology, and
existing preclinical and clinical data on the safety and efficacy of gene
therapy are limited. Data relating to Cell Genesys' specific gene therapy
approaches are even more limited. The Company's T cell gene therapy for cancer,
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 Cell Genesys'
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 Cell Genesys is testing proposed products or
therapies in human clinical trials, there can be no assurance that Cell Genesys
will be permitted to undertake human clinical trials for any of its other
products or that the results of such testing will demonstrate safety or
efficacy. Even if clinical trials are successful,
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<PAGE> 12
there is no assurance that Cell Genesys will obtain regulatory approval for any
indication, or that an approved product can be produced in commercial quantities
at reasonable cost, or 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. While Cell Genesys is prosecuting patent
applications, it cannot be certain whether any given application will result in
the issuance of a patent or, if any patent is issued, whether it will provide
significant proprietary protection or will be invalidated. Because patent
applications in the United States are confidential until patents are issued and
publication of discoveries in the scientific or patent literature tends to lag
behind actual discoveries by several months, Cell Genesys cannot be certain that
it was the first creator of inventions covered by pending patent applications or
that it was the first to file patent applications for such inventions.
The commercial success of the Company will also depend in part on
not infringing the patents or proprietary rights of others and not breaching
licenses granted to Cell Genesys. The Company will be required to obtain
licenses to certain third party technology and genes necessary to conduct its
business. Any failure by the Company to license at reasonable cost any
technology or genes required to commercialize its technologies or products may
have a material adverse effect on the Company's business, results of operations,
financial condition or cash flow.
Litigation, which could result in substantial cost to the Company,
may also be necessary to enforce any patents issued to Cell Genesys, or to
determine the scope and validity of other parties' proprietary rights. To
determine the priority of inventions, interference proceedings are frequently
declared by the United States Patent Office that could result in substantial
costs to the Company and may result in an adverse decision as to the priority of
Cell Genesys' inventions. Cell Genesys is currently involved in three separate
interference proceedings with regard to: (i) gene activation technology, (ii) ex
vivo gene therapy, and (iii) chimeric receptor technology. While the Company
believes its position in each interference proceeding is strong, the outcome of
each proceeding cannot be predicted, and an adverse result could have a material
adverse effect on the Company's intellectual property position and its business.
The Company may be involved in other interference proceedings in the future.
Cell Genesys believes that there will continue to be significant litigation in
the industry regarding patent and other intellectual property rights.
Cell Genesys also relies on unpatented trade secrets and
improvements, unpatented know-how and continuing technological innovation to
develop and maintain its competitive position. No assurance can be given that
others will not independently develop substantially equivalent proprietary
information and techniques, or otherwise gain access to the Company's trade
secrets or disclose such technology, or that the Company can meaningfully
protect its rights to its unpatented trade secrets.
Cell Genesys requires its employees and consultants to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with it. 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 Cell Genesys, relating to its business are the
exclusive property of Cell Genesys. These agreements may not provide meaningful
protection for the Company's trade secrets in the event of unauthorized use or
disclosure of such information.
Competition. 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 Cell Genesys is
seeking to develop therapeutic products. Some competitors are pursuing a product
development strategy competitive with Cell Genesys, particularly with respect to
the Company's human monoclonal antibody program. Certain of these competitive
products are in substantially more advanced stages of product development and
clinical trials. The Company's competitors may develop technologies and products
that are more effective than those being developed by Cell Genesys, or that
would render the Company's technology and products less competitive or obsolete.
Many of these competitors have substantially greater financial resources and
larger research and development staffs than Cell Genesys. In addition, many of
these competitors may have significantly greater experience than Cell Genesys 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, Cell Genesys'
competitors may succeed in obtaining patent protection, receiving FDA approval
or commercializing products more rapidly than Cell Genesys. There can be no
assurance that the Company will be able to obtain certain biological materials
necessary to support its research, development or manufacturing of any of its
planned therapies. If the Company is permitted to commence commercial sales of
products, it will also be competing with respect to marketing capabilities and
manufacturing efficiency, areas in which it has limited or no experience. It is
anticipated that the Company will build additional clinical scale and commercial
scale manufacturing facilities to the extent that contract facilities are not
available in order to commercialize its products. It is also anticipated that
the Company will secure funding for
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<PAGE> 13
these and other product development activities through its partners and future
potential partners. Cell Genesys also competes with universities and other
research institutions in the development of products, technologies and
processes. In many instances, Cell Genesys competes with other commercial
entities in acquiring products or technology from universities.
Cell Genesys expects that competition among products approved for
sale will be based, among other things, on product efficacy, safety,
reliability, availability, price, patent, position, and sales, marketing and
distribution capabilities. Cell Genesys' competitive positions also depend upon
its ability to attract and retain qualified personnel, obtain patent protection
or otherwise develop proprietary products or processes and secure sufficient
capital resources for the often substantial period between product conception
and commercial sales.
The levels of revenues and profitability of biotechnology and
pharmaceutical companies such as the Company may be affected by the continuing
efforts of governmental and third-party payers to contain or reduce the costs of
health care through various means. In the United States there have been, and
Cell Genesys expects that there will continue to be, a number of federal and
state proposals to control health care costs. Cell Genesys cannot predict the
effect health care reforms may have on its business, and no assurance can be
given that any such reforms will not have a material adverse effect on the
Company's business, results of operations, financial condition or cash flow. In
the United States and elsewhere, sales of therapeutic products are dependent in
part on the availability of reimbursements to the consumer from third party
payers, such as government and private insurance plans. If the Company succeeds
in bringing one or more products to the market, there can be no assurance that
these products will be considered cost effective and that reimbursement to the
consumer will be available or will be sufficient to allow the Company to sell
its products on a competitive basis.
Operating Loss And Accumulated Deficit. Cell Genesys has incurred net
losses since its inception. At March 31, 1998, Cell Genesys' accumulated deficit
was approximately $187.4 million. Such losses have resulted principally from
expenses incurred in its research and development programs, the acquisition of
Somatix and other new technologies, and to a lesser extent, from general and
administrative expenses. In 1997, Cell Genesys incurred losses of $123.5
million, including $78.9 million related to the acquisition of Somatix and $22.5
million related to the Cross-License and Settlement Agreement with GenPharm. The
Company expects 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. Cell Genesys expects
that losses will fluctuate from quarter to quarter and that such fluctuations
may be substantial. There can be no assurance that the Company will successfully
develop, commercialize, manufacture or market its products or ever achieve or
sustain product revenues or profitability.
Volatility Of Stock Price. The market prices for securities of
biopharmaceutical and biotechnology companies (including Cell Genesys) have
historically been highly volatile, and the market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. Factors such as fluctuations in
Cell Genesys' operating results, announcements of technological innovations or
new therapeutic products by Cell Genesys or its competitors, governmental
regulation, developments in patent or other proprietary rights, public concern
as to the safety of products developed by the Company or other biotechnology and
pharmaceutical companies, and general market conditions may have a significant
effect on the market price of the Cell Genesys' Common Stock.
Government Regulation. Regulation by governmental authorities in the
United States and foreign countries is a significant factor in the manufacture
and marketing of Cell Genesys' proposed products and its research and
development activities. All of Cell Genesys' 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 Cell Genesys' 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 Cell Genesys
or its collaborators or licensees to obtain, or any delay in obtaining,
regulatory approvals could adversely affect the marketing of any products
developed by Cell Genesys, and its 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 Cell Genesys is seeking approval or may contain
significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use.
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<PAGE> 14
In addition to laws and regulations enforced by the FDA, Cell Genesys
is also subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state or local laws and regulations. Cell Genesys' research and development
involves the controlled use of hazardous materials, chemicals, viruses and
various radioactive compounds. Although Cell Genesys believes its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, Cell Genesys could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
The manufacturing facilities of Cell Genesys 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 result in disruption to the
manufacturing processes of the Company and would have a material adverse effect
on the Company's business, results of operations, financial condition and cash
flow.
For marketing outside the United States, Cell Genesys is 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 the Company's ability to develop these
markets and have a material adverse effect on the Company's business, results of
operations, financial condition or cash flow.
Commercialization; Lack Of Marketing Experience. It is anticipated
that the Company will rely on sales and marketing expertise of potential
corporate partners for its initial products. Cell Genesys does 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 market size and concentration,
the size and expertise of the partner's sales force in a particular market and
the Company's overall strategic objectives. Cell Genesys is currently engaged in
various stages of discussions with potential partners. There can be no assurance
that Cell Genesys 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 Cell Genesys' potential products may expose the Company 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.
Cell Genesys and Abgenix currently maintain product liability insurance with
respect to each company's clinical trials. There can be no assurance that the
Company will be able to maintain such insurance or, if maintained, 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 products developed by the Company. A
product liability claim or recall could have a material adverse effect on the
Company's business, results of operations, financial condition and cash flow.
Hazardous Materials; Environmental Matters. Cell Genesys' research
and development activities involve the controlled use of hazardous materials,
chemicals, viruses and various radioactive compounds. Cell Genesys is 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 Cell Genesys believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by such laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any such liability
could exceed the resources of the Company. The Company may be required to incur
significant costs to comply with environmental laws and regulations in the
future. The Company's operations, business or assets may be materially adversely
affected by current or future environmental laws or regulations.
Reimbursement. In both domestic and foreign markets, sales of the
Company's potential products will depend in part upon coverage and reimbursement
from third-party payers, including health care organizations, government
agencies, private health care insurers and other health care payers such as
health maintenance organizations, self-insured employee plans and the 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. Cell Genesys' potential products represent a new mode of therapy and,
while the cost-benefit ratio of the products may be favorable, Cell Genesys
expects that the costs associated with the Company's products will be
substantial. There can be no assurance that the Company's proposed products, if
successfully developed, will be considered cost-effective by third-party payers,
that insurance coverage will be available or, if available, that such
third-party payers' reimbursement policies will not adversely affect the
Company's ability to sell its products on a profitable basis. In addition, there
can be no assurance that
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<PAGE> 15
insurance coverage will be provided by such third-party payers at all or without
substantial delay or, if such coverage is provided, that the approved
reimbursement will provide sufficient funds to enable the Company to become
profitable.
Uncertainty Of Pharmaceutical Pricing And Related Matters. The future
revenues and profitability of and availability of capital for biotechnology
companies may be materially adversely affected by the continuing efforts of
governmental and third-party payers to contain or reduce the costs of healthcare
through various means. 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 Cell Genesys expects that there will
continue to be, a number of federal and state proposals to implement similar
government control. While Cell Genesys cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could have a material adverse effect on the Company's
business, results of operations, financial condition and cash flow.
Dependence Upon Key Personnel And Collaborative Relationships. Cell
Genesys' success is highly dependent on the retention of principal members of
management and scientific staff and the recruitment of additional qualified
personnel. The loss of key personnel or the failure to recruit necessary
additional qualified personnel could have a material adverse effect on the
Company's 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
Cell Genesys' activities. There is no assurance that the Company will be able to
continue to attract and retain the qualified personnel necessary for the
development of its business. These activities are expected to require the
addition of new personnel with expertise in the areas of clinical testing,
manufacturing, marketing and distribution and the development of additional
expertise by existing personnel. The failure to acquire such personnel or
develop such expertise could have a material adverse effect on the Company's
business, results of operations, financial condition and cash flow.
Cell Genesys has 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 now in Phase II testing. Cell Genesys also has clinical trial arrangements
with the University of California San Francisco, San Francisco General Hospital,
the University of Colorado Health Sciences Center, Massachusetts General
Hospital, the University of California Los Angeles, ViRx, Inc. and the Aids
Research Community Consortium covering Cell Genesys' patient-specific
configuration of its AIDS gene therapy also now in Phase II testing. If these
relationships were terminated, progress of clinical testing would be adversely
affected.
In addition, the Company has several clinical trial arrangements
under its 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. In the event that any of these relationships are
terminated, the completion and evaluation of clinical trials could be adversely
affected.
In addition, the Company has several clinical trial arrangements
under its T cell gene therapy program for cancer, including with University of
California, San Francisco, Stanford University and PRN Research, Inc. In the
event that any of these relationships are terminated, the completion and
evaluation of clinical trials could be adversely affected
The Company will depend, in part, 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. The Company's scientific collaborators are not employees of
Cell Genesys. As a result, the Company has limited control over their activities
and can expect that only limited amounts of their time will be dedicated to the
Company's activities. The Company's agreements with these collaborators, as well
as those with the Company's scientific consultants provide that any rights the
Company obtains as a result of the research efforts of these individuals 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 the Company. For
these reasons, there can be no assurance that inventions or processes discovered
by the Company's scientific collaborators or consultants will become the
property of the Company.
Shares Eligible For Future Sale; Dilution. Substantially all of the
Company's shares are eligible for sale in the public market. The issuance of
common stock upon conversion of the Series B preferred stock and convertible
note and upon exercise of the warrants, as well as future sales of such common
stock or of shares of common stock by existing stockholders, or the perception
that such sales could occur, could adversely affect the market price of the
common stock. Conversion of the Series B preferred stock and the convertible
note and exercise of the warrants for shares of common stock could adversely
affect the market price of the common stock. In addition, investors could
experience substantial dilution upon conversion of the Series B preferred stock
into common stock as a result of either (i) a decline in the market price of the
Company's common stock immediately prior to conversion, or (ii) an event
triggering the antidilution rights of any outstanding shares of Series B
preferred stock.
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<PAGE> 16
IMPACT OF THE YEAR 2000
The Company has initiated modification of its information technology
systems to recognize the year 2000 and has begun converting critical hardware
and data processing systems. The Company expects the project to be substantially
complete by early 1999. The Company does not expect this project to have a
significant effect on operations, and the costs of modification are expected to
be insignificant. In addition, the Company is evaluating significant vendors and
other third parties which could have an effect on the Company's operations to
ensure Year 2000 compliance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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<PAGE> 17
PART II. OTHER INFORMATION
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 May 14, 1998:
CELL GENESYS, INC.
By: /s/ KATHLEEN SEREDA GLAUB
-----------------------------------
Kathleen Sereda Glaub,
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
Date: May 14, 1998
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<PAGE> 18
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,511
<SECURITIES> 79,827
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 83,512
<PP&E> 32,095
<DEPRECIATION> 18,512
<TOTAL-ASSETS> 98,464
<CURRENT-LIABILITIES> 38,063
<BONDS> 0
19,817
0
<COMMON> 200,332
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 98,464
<SALES> 0
<TOTAL-REVENUES> 4,564
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,451
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 671
<INCOME-PRETAX> (7,687)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,687)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,687)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
