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Previous: FIRST PALMETTO FINANCIAL CORP, 10-Q, 2000-05-15 |
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UNITED STATES 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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 0-19986
CELL GENESYS, INC. (Exact name of Registrant as specified in its Charter)
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342 Lakeside Drive, Foster City, California 94404
(Address of Principal Executive Offices including Zip Code)
(650) 425-4400
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
As of April 30, 2000, the number of outstanding shares of the Registrant's Common Stock was 33,706,880.
CELL GENESYS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risks
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Item 2: Changes in Securities and Use of Proceeds
Item 3: Defaults Upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Cell Genesys, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2000 1999
------------ -----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents, including restricted
cash of $369 for 1999 and 2000.................. $137,446 $5,300
Short-term investments............................ 112,963 44,987
Investment in Abgenix common stock................ 335,098 433,324
Prepaid expenses and other current assets......... 1,818 1,465
------------ -----------
Total current assets................................. 587,325 485,076
Property and equipment, net.......................... 3,848 4,198
Deposits and other assets............................ 368 409
------------ -----------
$591,541 $489,683
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................. $550 $1,124
Accrued compensation and benefits................. $763 $2,056
Deferred revenue.................................. 13,966 4,195
Accrued legal expenses............................ 216 712
Accrued acquisition and related costs............. 1,052 1,068
Accrued clinical trial costs...................... 696 715
Other accrued liabilities......................... 390 883
Current portion of property and equipment
financing....................................... 1,284 2,677
Accrued tax provision............................. 47,940 --
------------ -----------
Total current liabilities............................ 66,857 13,430
Noncurrent portion of property and equipment
financing......................................... 2,118 3,198
Redeemable convertible preferred stock............... 16,429 7,679
Stockholders' equity:
Common stock...................................... 34 33
Additional paid-in capital........................ 254,468 248,255
Accumulated other comprehensive income, principally
unrealized gains on investment of Abgenix...... 325,402 420,891
Accumulated deficit............................... (73,767) (203,803)
------------ -----------
Total stockholders' equity........................... 506,137 465,376
------------ -----------
$591,541 $489,683
============ ===========
See accompanying notes.
Cell Genesys, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
------------------------
2000 1999
------------ -----------
Revenue under collaborative agreements..... $4,600 $6,076
------------ -----------
Operating expenses:
Research and development................. 6,400 5,537
General and administrative .............. 1,659 1,095
------------ -----------
Total operating expenses................... 8,059 6,632
Equity in loss of Abgenix.................. -- (1,202)
Gain on sale of Abgenix stock.............. 190,236 --
Interest and other income.................. 2,090 937
Interest expense........................... (123) (278)
------------ -----------
Net income (loss) before income tax........ 188,744 (1,099)
Provision for income tax................... (47,940) --
------------ -----------
Net income (loss) before culumlative
effect of accounting change.............. 140,804 (1,099)
Cumulative effect of change in accounting.. (10,767) --
------------ -----------
Net income (loss).......................... $130,037 ($1,099)
============ ===========
Basic income (loss) per common share
before cumulative effect of
accounting change........................ $4.24 ($0.04)
Accounting change.......................... (0.32) --
------------ -----------
Basic income (loss) per common share....... $3.92 ($0.04)
============ ===========
Diluted income (loss) per common share
before cumulative effect of
accounting change........................ $3.85 ($0.04)
Accounting change.......................... (0.29) --
------------ -----------
Diluted income (loss) per common share.... $3.56 ($0.04)
============ ===========
Weighted average shares of common stock
outstanding - basic...................... 33,151 30,965
============ ===========
Weighted average shares of common stock
outstanding - diluted.................... 36,511 30,965
============ ===========
See accompanying notes.
Cell Genesys, Inc.
Condensed Cosolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
March 31,
----------------------
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit (loss).................................... $130,037 ($1,099)
Adjustments to reconcile net profit (loss) to net
cash used by operating activities:
Depreciation and amortization...................... 608 796
Gain on disposal of property and equipment......... (45) --
Equity in losses of Abgenix........................ -- 1,202
Changes to:
Prepaid expenses and other assets.................. (353) (396)
Accounts payable................................... (696) (564)
Accrued compensation and other benefits............ (1,293) (483)
Deferred revenue................................... 9,771 519
Accrued legal expenses............................. (496) (26)
Accrued acquisition and related costs.............. (16) (252)
Other accrued liabilities.......................... (390) (37)
Accrued tax provision.............................. 47,940 --
---------- ----------
Net cash provided by (used in) operating
activities............................. 185,067 (340)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments.................. (71,006) (10,930)
Sales of short-term investments...................... 2,994 4,000
Adjustment in accumulated other comprehensive
income from sale of Abgenix stock.................. 3,502 --
Proceeds from disposal of property and equipment..... 48 --
Capital expenditures................................. (220) --
Exercise of Abgenix warrants......................... (730) --
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Net cash used in investing activities......... (65,412) (6,930)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible
preferred stock.................................... 8,750 --
Proceeds from issuance of common stock............... 6,214 328
Proceeds from property and equipment financing....... -- 92
Payments under property and equipment
financing obligations.............................. (2,473) (821)
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Net cash provided by (used in) financing
activities............................. 12,491 (401)
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Net increase (decrease) in cash and cash equivalents.... 132,146 (7,671)
Cash and cash equivalents at beginning of period........ 5,300 14,086
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Cash and cash equivalents at end of period.............. $137,446 $6,415
========== ==========
See accompanying notes.
Cell Genesys, Inc.
Notes To Condensed Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
Organization and basis of presentation
Cell Genesys, Inc. ("Cell Genesys" or the "Company"), a Delaware corporation, is focused on the development and commercialization of gene therapies to treat cancer and other major, life-threatening diseases.
Comprehensive income (loss)
Cell Genesys recognized total comprehensive income of $37.0 million, including change in unrealized gain in investment of Abgenix, Inc. ("Abgenix") of $95.5 million, for the three months ended March 31, 2000, compared to total comprehensive loss of $1.2 million for the same period in the prior year.
2. Change in accounting
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted SAB 101 during the first quarter of 2000 and has reflected the cumulative effect of this accounting change as a single line item in the Statement of Operations. Under this change, the Company recognizes non-refundable, up-front payments and annual maintenance fee revenue ratably over the term of the related collaborative agreement.
3. Investment in Abgenix
Since 1996, the Company has maintained an investment in Abgenix. In December 1997 and January 1998, Abgenix completed private placements of securities reducing Cell Genesys' percentage ownership from 100 percent to approximately 54 percent. On July 2, 1998, Abgenix completed an initial public offering ("IPO"), reducing Cell Genesys' percentage ownership to approximately 40 percent. Prior to the IPO, Abgenix was a consolidated subsidiary and its financial results were presented accordingly. From July 2, 1998 to November 19, 1999, the Company's investment in Abgenix was accounted for under the equity method of accounting as a result of the reduced ownership position. On March 4, 1999, Abgenix completed the sale of an additional 3,000,000 shares of common stock in a public offering resulting in approximately $45.0 million in gross proceeds, which further reduced the Company's ownership percentage in Abgenix to approximately 22 percent. The difference between the cost of the investment (the carrying value of the net assets less the equity in loss of Abgenix immediately prior to the public offering) and the amount of the underlying equity in net assets of Abgenix immediately following each of the public offerings was accounted for in accordance with APB Opinion No. 18 "The Equity Method of Accounting for Investment in Common Stock" and Staff Accounting Bulletin No. 51. Accordingly, the Company recognized $9.8 million as a contribution to Stockholders' Equity upon completion of the Abgenix March 1999 public offering.
On November 19, 1999, Abgenix completed a private placement of 1.8 million shares of its common stock resulting in gross proceeds of approximately $75.0 million. Cell Genesys' ownership was thereby further reduced to approximately nineteen percent and accordingly, the Company no longer accounts for Abgenix's losses under the equity method of accounting. The Company's investment in Abgenix is now treated as available for sale and accounted for in accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities."
On February 11, 2000, Cell Genesys received net proceeds of approximately
$194.0 million from the sale of 966,000 shares of Abgenix common stock.
The transaction was completed as part of a secondary Abgenix offering in
which a total of 3,450,000 Abgenix shares were sold, with 966,000 of the
shares being sold by Cell Genesys. After the transaction, Cell Genesys
retains 4,852,068 shares (post-split), or approximately 12 percent, of
Abgenix common stock. The investment is carried at market value based on
a value of $69.06 per share on March 31, 2000. The total carrying amount
of the Company's investment in Abgenix at March 31, 2000 was $335.1
million.
CELL GENESYS, INC.
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 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 on Form 10-K for the year ended December 31, 1999 and the Company's current report on Form 8-K filed on January 27, 2000.
Overview
Since its inception in April 1988, Cell Genesys, Inc. ("Cell Genesys" or "the Company") has focused its research and product development efforts on human disease therapies which are based on innovative gene modification technologies. The Company's strategic objective is to develop and commercialize in vivo and/or ex vivo gene therapies to treat cancer and other major, life-threatening diseases, including hemophilia. Cell Genesys' clinical programs include GVAX® cancer vaccines in Phase II studies for prostate cancer and Phase I/II studies for lung cancer. GVAX® vaccines for prostate cancer and for lung cancer are being developed through a worldwide collaboration with the pharmaceutical division of Japan Tobacco Inc. ("JT"). In addition, Cell Genesys has preclinical programs which are evaluating potential gene therapies for hemophilia, cancer, cardiovascular disorders and Parkinson's disease. The Company also has assets outside of its core business which can be used to help maintain financial strength while product candidates are under development. These assets include Cell Genesys' 12 percent equity ownership of Abgenix, Inc. ("Abgenix", Nasdaq-AMEX: ABGX), which is focused on the development and commercialization of antibody therapies, and a licensing program in gene activation technology.
Cell Genesys believes that gene therapies are likely to be developed on a continuum, progressing from ex vivo (modification of cells outside the patient's body for injection as therapy) to in vivo (modification of cells within the patient's body to provide therapy). The Company's goal is to emphasize "off-the-shelf" products that enable gene therapy to be provided in out-patient settings. These potentially include both non- patient-specific therapies, which could be vialed pharmaceuticals for direct administration, and patient-specific gene therapy products, which could be packaged as "kits" for overnight cell processing at clinical laboratories.
During 1999, the Company reported encouraging data from its Phase I/II human clinical trials evaluating the GVAX® vaccine for prostate cancer. Data from the recently completed Phase I/II trial of GVAX® prostate cancer vaccine demonstrate evidence of clinical safety and preliminary evidence of antitumor effects as measured by levels of prostate specific antigen ("PSA") and by specific antibody formation. Based on positive results from this trial, the Company initiated two multicenter trials of GVAX® vaccine in prostate cancer which are both fully enrolled. Phase I/II clinical trials for GVAX® vaccine in lung cancer revealed preliminary indications of antitumor activity and the Company recently initiated a multicenter trial for GVAX® lung cancer vaccine.
An additional financial asset for Cell Genesys, aside from the Company's cash and holdings in Abgenix, is its licensing program for its gene activation technology which has brought in more than $23.0 million to date. In 1997, the Company signed a license agreement with Hoechst Marion Roussel, Inc. ("Hoechst Marion Roussel") now Aventis Pharmaceuticals, Inc. ("Aventis") providing access to the Company's intellectual property for gene-activated erythropoietin (EPO) and a second undisclosed protein. In exchange, the Company may receive up to $26.0 million in milestone payments and fees in addition to royalties on potential future sales of these two gene-activated products. To date, the Company has received over $15.0 million from this license agreement including a $2.0 million annual payment received in this quarter.
The Company's preclinical research is focused on studies of gene therapy in animal models for hemophilia cancer, restenosis and Parkinson's disease. For example, in hemophilia gene therapy studies, a single injection resulted in improved blood clotting and reduced number of bleeding episodes in a dog hemophilia model. Similarly, in studies for Parkinson's disease, a single injection of gene therapy essentially eliminated the need for daily L-dopa injections in mice with a Parkinson's-like condition. Cardiovascular gene therapy studies demonstrated the inhibition of smooth muscle proliferation in rabbit models of restenosis. During 1999, the Company expanded its collaboration with Mitotix, Inc. for p16/p27 genes to include applications in cancer gene therapy in addition to cardiovascular gene therapy. In addition, since the beginning of 1999, the Company entered into agreements relating to its gene delivery technologies with Entremed, Inc., Rigel Pharmaceuticals, Inc., Pharmacia & Upjohn and Clontech Laboratories, Inc., a wholly owned subsidiary of Becton Dickinson.
Cell Genesys ended the first quarter of 2000 with approximately $250.4 million in cash and short-term investments. The Company has maintained its financial position by relying on funding from various corporate collaborations and licensing agreements, as well as through expense management. The Company plans to continue to finance its operations, when possible, through corporate collaborations with established pharmaceutical and biotechnology companies. This funding strategy should allow the Company to develop its technologies as broadly as possible, to fund product development and to accelerate the commercialization of certain product opportunities. Such alliances are intended to provide financial resources for research, development, manufacturing capabilities, and marketing infrastructure, which will aid in the commercialization of potential disease therapies.
Results of Operations
Revenue decreased to $4.6 million for the three months ended March 31, 2000, from $6.1 million for the same prior year period. Higher revenue in 1999 reflected a $2.0 million gene activation milestone earned in the first quarter of 1999, partially offset by increased revenues as a result of the ramp-up of research and development activities funded under the Company's collaboration agreement with JT for selected targets in the company's GVAX® cancer vaccine program.
Research and development expenses were $6.4 million for the three months ended March 31, 2000, compared with $5.5 million for the three months ended March 31, 1999. The increase in research and development costs is primarily a result of advancing clinical trial programs and increased headcount and are expected to continue to increase in the future. The rate of increase depends on a number of factors including progress in research and development and especially in clinical trials.
General and administrative expenses were $1.7 million for the three months ended March 31, 2000, compared with $1.1 million for the three months ended March 31, 1999. The increase also resulted from additional headcount in administrative area to support expanded preclinical and clinical programs.
Interest and other income increased to $2.1 for the three months ended March 31, 2000, from $0.9 million for the three months ended March 31, 1999. The increase is a result of higher average cash balances during 2000 and higher interest rates compared to 1999. Interest expense decreased to $123,000 for the three months ended March 31, 2000, from $278,000 for the three months ended March 31, 1999, due primarily to reduced debt in the current year.
Cell Genesys had net income of $130.0 million for the three months ended March 31, 2000, compared to net loss of $1.1 million for the same period in the prior year. The increase in income was mainly due to realized gain on sale of Abgenix common stock this quarter, partially offset by $10.8 million revenue adjustment under the cumulative effect of accounting change following the adoption of SEC Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". The net loss of $1.1 million during the same prior year period included equity in loss of Abgenix of $1.2 million. From November 1999 forward, the Company no longer accounts for Abgenix's losses under the equity method of accounting because the Company's ownership in Abgenix fell below twenty percent.
Net Income (Loss) Per Share
Basic earnings per share is calculated using income available to common share owners divided by the weighted average of common shares outstanding during the reporting period. Diluted earnings per share is similar to Basic EPS except that the weighted average common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares, such as preferred stock, warrants and options, had been issued. The treasury stock method is used to calculate dilutive shares which reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the warrants and option assumed to be exercised.
Liquidity and Capital Resources
Cell Genesys has financed its operations primarily through the sale of equity securities, funding under collaborative arrangements and equipment financing. In February 2000, the Company received $194.0 million in net proceeds from the sale of 966,000 shares of Abgenix common stock. From inception through March 31, 2000, the Company has received $181.6 million in net proceeds from sale of Cell Genesys' stock, $151.9 million under collaborative agreements and utilized $28.2 million of property and equipment financings.At March 31, 2000, Cell Genesys' cash, cash equivalents and short-term investments totaled $250.4 million, compared to $50.3 million at December 31, 1999. The increase was due primarily to net proceeds from the sale of Abgenix common stock. At March 31, 2000, the Company held approximately 4.9 million shares (post-split) of Abgenix common stock, which had a market value of approximately $335.1 million.
Cell Genesys anticipates that fiscal year 2000 cash usage will not exceed $15.0 million, net of $194.0 million Abgenix stock proceeds, anticipated tax payments from the gain on the sale of Abgenix stock and any potential acquisition of a late stage product candidate. 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 of collaborative partners; the acquisition of new products or technologies; 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, 2000 together with payments to be received under the Company's collaborative agreements, license agreements and proceeds from the sale of Abgenix stock, during February 2000, will be sufficient to meet the Company's currently planned operating expenses in the near term.
Even though the Company's current cash and investments are expected to meet the its near term expenditures, progress in the Company's development programs and the likely increase in the number of programs will lead deplete the current cash resources and lead to the need to raise further capital. Therefore the company may continue to consider financing alternatives.
The Company anticipates that it will raise large amounts of capital in advance of actual capital expenditures. Therefore, liquidity and volatility of capital markets play a significant role in the decision to raise capital. The type of financing available to the company includes the sale of Abgenix securities and private or public placement of Cell Genesys equity securities. The company's evaluation processes regularly consider the liquidity of capital markets, dilution, shareholder value and tax consequences of each type of financing on shareholders. Most of the financing options available to the company have some type of negative consequence to shareholders. Given the volatile nature of the capital markets, decisions to raise capital may require actions that would impose a slightly negative consequence in order to reduce or minimize a more significant negative consequence to shareholders.
Risk Factors
We may have a need for substantial additional funds. We may need substantial additional funds for 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 2001. Beyond 2001, we may 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:
- continued scientific progress of research and development programs
- magnitude of such programs' expenses
- progress of preclinical and clinical testing
- time and costs involved in obtaining regulatory approvals
- costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending patent claims
- competing technological and market developments
- changes in collaborative relationships with Japan Tobacco and others
- terms of any additional collaborative arrangements into which we may enter
- our ability to establish research, development and commercialization arrangements pertaining to products other than those covered by existing collaborative arrangements
- cost of establishing manufacturing facilities
- cost of commercialization activities
- demand for our products, if and when approved
- potential redemption obligations in connection with conversion of the Series B convertible preferred stock
- our ability to realize the carrying value of the Abgenix stock due to its volatility
We expect to be able to raise additional funds through collaborative relationships, sales of some portion or all of our investment in Abgenix, additional equity or debt financings, 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. 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. There can be no assurance that opportunities for in- licensing technologies or for third party collaborations will continue to be available to us on acceptable terms. 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. Alternatively, we may need to seek funds through arrangements with collaborative partners or others that require us to relinquish rights to certain of our technologies or product candidates 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.
Our products are in developmental stage, are not approved for commercial sale and might not receive regulatory approval or become commercially viable. All of our potential gene therapy products are in research and development. We have not generated any revenues from the sale of products. We do not expect to generate any revenues from product sales 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.
We have not been profitable and may not become profitable in the future. We have incurred annual net losses since our inception. At March 31, 2000, our accumulated deficit was approximately $73.8 million. For the three months ended March 31, 2000, we incurred profit of $130.0 million. However, these profits were related to the sale of Abgenix stock and we expect to resume incurring operating losses in the future. We expect to incur substantial operating losses for at least the next several years due primarily to the expansion of research and development programs, including preclinical studies, clinical trials, manufacturing and to a lesser extent, from general and administrative expenses. We expect that losses will fluctuate from quarter to quarter and that these fluctuations may be substantial. We cannot guarantee 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.
Our gene therapy programs depend on new and unproven technologies. 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 also limited. Our GVAX® cancer vaccine is currently being tested in Phase I/II and Phase II human clinical trials to determine its safety and efficacy. None of our 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 potentially life-threatening. Unacceptable side effects may 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, we cannot guarantee that we will be permitted to undertake human clinical trials for any of our other products. Also, the results of this testing might not demonstrate the safety or efficacy of these products. Even if clinical trials are successful, we might not obtain regulatory approval for any indication. Finally, even if our products proceed successfully through clinical trials and receive regulatory approval, there is no guarantee that an approved product can be produced in commercial quantities at reasonable cost or that such a product will be successfully marketed.
We rely heavily on the development and protection of our intellectual property portfolio. The patent positions of pharmaceutical and biotechnology firms, including Cell Genesys, are generally uncertain and involve complex legal and factual questions. Cell Genesys currently has more than 230 issued or granted patents and more than 320 pending applications. 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 sure that we were the first creator of inventions covered by pending patent applications or that we were the first to file patent applications for these 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 any technology or genes required to commercialize our technologies or products at reasonable cost may have a material adverse effect on our business, results of operations or financial condition.
We may also have to engage in litigation, which could result in substantial cost to us, to enforce our patents, or to determine the scope and validity of other parties' proprietary rights. To determine the priority of inventions, the United States Patent and Trademark Office frequently declares interference proceedings. In Europe, other patents can be revoked through opposition proceedings. Such proceedings could result in an adverse decision as to the priority of our inventions.
We are currently involved in four separate interference and/or opposition proceedings with regard to:
a) gene activation technology
b) ex vivo gene therapy
c) certain retroviral vector technology
d) chimeric receptor technology
While we believe our position in each 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 in these areas. We may be involved in other interference and/or opposition 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, know-how and continuing technological innovation to develop and maintain our competitive position. Our competitors may independently develop similar or better proprietary information and techniques and disclose them publicly. 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 employee 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.
The fields of cancer vaccines and gene therapy is highly competitive. 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. In many instances, we compete with other commercial entities in acquiring products or technology from universities. 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 cancer vaccine 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 our competitors have substantially greater financial resources and larger research and development staffs than we do. Some of these competitors 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 ("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 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 and/or use contract facilities 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 expect that competition among products approved for sale will be based, among other things, on:
- product efficacy
- price
- safety
- reliability
- availability
- patent protection
- sales, marketing and 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 lengthy period between product conception and commercial sales.
Our stock price has fluctuated in the past and is likely to continue to be volatile in the future. The stock prices 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 may affect our stock price:
- fluctuations in our financial results
- announcements of technological innovations or new therapeutic products by us or our competitors
- announcements of changes in governmental regulation affecting us or our competitors
- announcements of regulatory approvals or disapprovals of our or our competitors' products
- developments in patent or other proprietary rights affecting us or our competitors
- public concern as to the safety of products developed by us or other biotechnology and pharmaceutical companies
- general market conditions
- fluctuations in the price of Abgenix stock
- severe fluctuations in price and volume in the stock market in general which are unrelated to our operating performance
- issuance of common stock upon conversion of the Series B preferred stock or exercise of outstanding warrants
- future sales of such common stock or other shares of common stock by existing stockholders
- the perception that such issuances or sales could occur
Our business is subject to extensive regulation and any failure to obtain required regulatory approvals could prevent or delay the commercialization of our products. Regulation by governmental authorities in the United States and foreign countries is important 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 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 laws also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of these products. The lengthy process of seeking these approvals, and the subsequent compliance with applicable federal laws, requires significant expenditures. Any delay or failure by us or our collaborators or licensees to obtain regulatory approvals could hinder 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.
In addition to laws and regulations enforced by the FDA, we are also subject to regulation under:
- Occupational Safety and Health Act
- Environmental Protection Act
- Toxic Substances Control Act
- Resource Conservation and Recovery Act
- Other present and potential future federal, state or local laws and regulations
Our manufacturing facilities are subject to licensing requirements of the California Department of Health Services. While not subject to license by the FDA, these 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 these 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 these regulatory requirements or obtain required approvals could impair our ability to develop these markets and have a material adverse effect on our results of operations and financial condition.
Our product development activities involve the use of hazardous materials and we may incur significant costs as a result of the need to comply with environmental laws. Our research and development activities involve the controlled use of hazardous materials, chemicals, viruses and radioactive compounds. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by applicable laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, we could be held liable for any damages that result, and any resulting liability could exceed our resources. We may also be required to incur significant costs to comply with environmental laws and regulations in the future.
We expect to depend on our strategic partners for the sales, marketing and distribution of our future products. We have no experience in sales, marketing or distribution of biopharmaceutical products. We expect to rely on sales and marketing expertise of potential corporate partners for our initial 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
- size and expertise of the partner's sales force in a particular market
- our overall strategic objectives
We may in the future be exposed to product liability claims and may be unable to obtain sufficient insurance coverage. Clinical trials or marketing of any of our potential products may expose us to liability claims resulting from the use of our products. These claims might be made by consumers, health care providers or by others selling our 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 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 or otherwise affect our financial condition. A product liability claim or recall could have a material adverse effect on our business, results of operations, financial condition and cash flow.
Sales of our future products will be influenced by the willingness of third-party payers to provide 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:
- government agencies
- private health care insurers and other health care payers such as health maintenance organizations
- self-insured employee plans
- Blue Cross/Blue Shield and similar plans
There is considerable pressure to reduce the cost of biotechnology and pharmaceutical products. In particular, reimbursement from government agencies, 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. Insurance coverage might not be provided by 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.
The pricing of our future products may be influenced in part by government controls. The continuing efforts of governmental and third-party payers to contain or reduce the costs of healthcare may impair 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 these proposals could have a material adverse effect on our business, results of operations, financial condition and cash flow.
We depend on our key technical and management personnel and collaborative partners to advance our technology, and the loss of these personnel or partners could impair the development of our products. 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 and results of operations. There is intense competition from other companies, research and academic institutions and other organizations for qualified personnel. 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 continue to recruit 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 agreements with a number of public and private medical institutions relating to the conduct of human clinical trials for our GVAX® cancer vaccine programs. The early termination of any of these clinical trial agreements would hinder the progress of our clinical trials including trials of GVAX® cancer vaccine for prostate cancer and lung cancer. If any of these relationships are terminated, the clinical trials might not be completed and the results might not be evaluated.
- University of California, San Francisco
- Dana Farber Partners Cancer Care
- The Johns Hopkins Medical Institutions
- US Oncology, Inc.
- University of Tokyo, IMSUT
- Providence Portland Medical Center
- Affiliated Research Centers
- Emory University
- University of Michigan
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 potentially 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.
Cell Genesys stockholders may be diluted by the exercise of outstanding stock options or warrants, the conversion of outstanding Series B preferred stock, or other issuances of our common stock. Substantially all the outstanding shares of Cell Genesys common stock are eligible for sale in the public market. Conversion of the Series B preferred stock or exercise of outstanding warrants would result in issuance of additional shares of common stock, diluting existing investors. The number of shares of common stock issued, and therefore the 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 Company's 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 common stock. In that event, the number of shares of common stock issued would be based on the lower of:
a) a fixed conversion price of $11.02 per share for the 694 remaining shares from the original issue of $20.0 million face value preferred stock, and $14.53 per share for the 875 shares issued from previously exercises call options for preferred stock.
b) the average of certain 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 above the fixed conversion price of $11.02 and $14.53 per share and consequently the conversion rate of the Series B preferred stock is currently based on the fixed conversion price. Should the market price decline below the fixed conversion rate, the greater the decline in the market price, the greater the number of shares issuable upon conversion of the Series B preferred stock.
On January 18, 2000, the Company received approximately $8.8 million from the issuance of 875 new Series B Convertible preferred shares following the exercise of call options for these shares. The newly issued preferred shares have a Fixed Conversion Price of $14.53 and other terms as defined by the Series B preferred stock agreements dated November 14, 1997. The call option right which was available under the terms of these agreements was triggered by the recent appreciation of Cell Genesys' stock price. Following the issuance of the new preferred shares, no further call options remain outstanding.
We may be subject to a redemption obligation in connection with requests by the holders of Series B preferred stock to convert their shares into common stock. If the holders of the Series B preferred stock decide to convert their shares into common stock, we would not be required to issue more than 5,624,000 shares of common stock, including those shares already issued on conversion, (which is 19.99 percent of the outstanding shares of common stock on November 14, 1997, or the "Share Limit"), unless we first obtained stockholder approval. If we did not obtain prior stockholder approval or an exemption from the requirement for stockholder approval from the Nasdaq-AMEX (the "Nasdaq-AMEX 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 the unconverted shares of Series B preferred stock, and the amount of these redemption obligations could become material if the common stock price declined below approximately $3.50 per share. Since we have not obtained stockholder approval or the Nasdaq-AMEX 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.
Impact of the Year 2000. In prior years, the Company had undertaken various initiatives to ensure that its information technology ("IT") and non-IT systems are Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts the Company had not identified any systems currently in use which require modification or replacement as a result of its Year 2000 initiatives. The Company is not aware of any material problems resulting from Year 2000 issues either with its research and development, its internal systems or the products or services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the normal course of business, the financial position of the Company is subject to a variety of risks, including market risk associated with interest rate movements. The Company regularly assesses these risks and has established policies and business practices to protect against these and other exposures. As a result, the Company does not anticipate material potential losses in these areas.
The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. For investment securities and debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Additionally, the Company has assumed its available for sale securities, comprised of corporate notes and commercial paper, are similar enough to aggregate those securities for presentation purposes. The average interest rate was calculated using the weighted average fixed rates under all contracts with Wells Fargo Bank, Transamerica Business Credit Corporation and FINOVA Credit Corporation
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate Fair Value
2004 March 31,
(IN THOUSANDS) 2000 2001 2002 2003 Thereafter Total 2000
------------------------------------------- --------- -------- ------- ---------- --------- ------------
Total Investments Securities......$164,763 $81,675 -- -- -- $246,438 $247,382
Average Interest Rate.......... 5.31% 7.23% -- -- -- 5.95%
Long-term Debt, including
Current Portion................. $1,142 $927 $632 $458 $243 $3,402 $3,402
Average Interest Rate.......... 11.80% 11.12% 10.51% 9.92% 9.92% 10.65%
PART II - Other Information
Part II. OTHER INFORMATIONItem 1. Litigation
none
Item 2. Changes in Securities and Use of Proceeds
none
Item 3. Defaults Upon Senior Securities
none
Item 4. Submission of Matters to a Vote of Security Holders
none
Item 5: Other Information
none
Item 6. Exhibits and Reports On Form 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
Current Report on Form 8-K filed on January 27, 2000
CELL GENESYS, INC.
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 15, 2000:
| CELL GENESYS, INC. |
| (Registrant) |
| By: | /s/ Matthew J. Pfeffer |
|
| |
| Matthew J. Pfeffer | |
| Vice President and Chief Financial Officer | |
| (Principal Accounting and Financial Officer) |
| Date: May 15, 2000 |
INDEX TO EXHIBITS
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