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EXHIBIT 99
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
You should carefully consider the risks described below before making an
investment decision regarding StemCells, Inc. We may face other risks not
described below that we do not presently know about or that we currently deem
immaterial.
Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. Consequentially, the
trading price of our common stock could decline, resulting in the loss of all or
part of your investment.
OUR TECHNOLOGY IS AT AN EARLY STAGE OF DISCOVERY AND DEVELOPMENT AND WE MAY
FAIL TO DEVELOP ANY PRODUCTS.
Our stem cell technology is at the early pre-clinical stage for the brain
stem cell and at the discovery phase for the liver and pancreas stem cells and
has not yet led to the development of any proposed product. We may fail to
discover the stem cells we are seeking, to develop any products, to obtain
regulatory approvals, to enter clinical trials, or to commercialize any
products. Any product using stem cell technology may fail to (i) survive and
persist in the desired location, (ii) provide the intended therapeutic benefits,
(iii) properly integrate into existing tissue in the desired manner, or (iv)
achieve benefits therapeutically equal to or better than the standard of
treatment at the time of testing. In addition, any such product may cause
undesirable side effects. Results of early pre-clinical research may not be
indicative of the results that will be obtained in later stages of preclinical
or clinical research. If the appropriate regulatory authorities do not approve
our products, or if we fail to maintain regulatory compliance, we would have
limited ability to commercialize our products, and our business and results of
operations would be harmed. Furthermore, since stem cells are a new form of
therapy, the marketplace may not accept any products we may develop.
If we do succeed in developing products, we will face many potential
obstacles such as the need to obtain regulatory approvals, and to develop or
obtain manufacturing, marketing and distribution capabilities. In addition, we
will face substantial additional risks such as product liability.
WE HAVE LIMITED LIQUIDITY AND CAPITAL RESOURCES AND MAY NOT OBTAIN THE
SIGNIFICANT CAPITAL RESOURCES WE WILL NEED TO SUSTAIN OUR RESEARCH AND
DEVELOPMENT EFFORTS.
We have limited liquidity and capital resources and must obtain substantial
additional capital to support our research and development programs, for
acquisition of technology and intellectual property rights, and, to the extent
we decide to undertake these activities ourselves, for pre-clinical and clinical
testing of our anticipated products, pursuit of regulatory approvals,
establishment of production capabilities, establishment of marketing and sales
capabilities and distribution channels, and general administrative expenses.
Even though we owned 126,193 shares of Modex Therapeutics Ltd., stock with
an estimated fair market value on June 30, 2000 of $19,220,165 based on the per
share price of approximately $152.00, which we converted from a market price of
247.50 Swiss francs on June 30, 2000, we are restricted from selling these
shares until December 23, 2000. On October 31, 2000, the market price on Modex
stock was 329.50 Swiss francs, which converts to $183.28 using the exchange
rates on that date, and represents an estimated fair market value of $23,128,598
for our holdings. The performance of Modex stock since Modex's initial public
offering does not predict its future value and the value of our holdings is
subject to change and could decrease significantly. If we decide to sell our
Modex shares, due to the relatively small trading volume in Modex shares and the
relatively large size of our holding, or other factors, we may not be able to
sell our Modex shares at their market value or at all, and we may have to sell
these shares at a significant discount to the market price. In addition,
fluctuations in currency exchange rates could decrease the proceeds we might
realize on a potential sale of Modex shares.
We intend to pursue our needed capital resources through equity and debt
financings, corporate alliances, grants and collaborative research arrangements.
Our ability to complete any such arrangements successfully will depend upon
market conditions and, more specifically, on continued progress in our
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research and development efforts. We may fail to obtain the necessary capital
resources from any such sources when needed or on terms acceptable to us. If we
do not obtain the necessary capital resources, we may have to delay, reduce or
eliminate some or all of our research and development programs or license our
technology or any potential products to third parties rather than
commercializing them ourselves.
WE HAVE PAYMENT OBLIGATIONS RESULTING FROM REAL PROPERTY OWNED OR LEASED BY
US IN RHODE ISLAND, WHICH ADVERSELY AFFECT OUR ABILITY TO FUND OUR STEM CELL
RESEARCH AND DEVELOPMENT.
Prior to our reorganization in 1999 and the resulting consolidation of all
functions in California, we carried out our former encapsulated cell therapy
programs at facilities in Lincoln, Rhode Island, where we also had our
administrative offices. Although we have vacated these facilities, we have
continuing obligations for lease payments and operating costs of approximately
$950,000 per year for our former science and administrative facility, which we
have leased through June 30, 2013, and debt service payments and operating costs
of approximately $1,000,000 per year for our former encapsulated cell therapy
pilot manufacturing facility. We are currently seeking to sublease the science
and administrative facility and to sell the pilot manufacturing facility, but
may not be able to do so. These continuing costs significantly reduce our cash
resources and adversely affect our ability to fund further development of our
stem cell technology. The lease for the science and administrative facility
contains a provision requiring occupancy of the premises and we currently are in
violation of this provision. The landlord has agreed not to take any action as a
result of this violation until November 19, 2000. We intend to seek an
additional period of forebearance from the landlord, but we cannot give any
assurance that the landlord will grant this additional forebearance or that we
will be able to sublease the premises during any additional period of time. If
the landlord decides to pursue its rights after any period of forebearance, we
may be required to pay the landlord the entire amount due for the rest of the
lease period.
WE MAY NEED BUT FAIL TO OBTAIN PARTNERS TO SUPPORT OUR STEM CELL DEVELOPMENT
EFFORTS AND TO COMMERCIALIZE OUR TECHNOLOGY.
Equity and debt financings alone may not be sufficient to fund the cost of
developing our stem cell technologies and we may need to rely on our ability to
reach partnering arrangements to provide financial support for our stem cell
discovery and development efforts. In addition, in order to successfully develop
and commercialize our technology, we may need to enter into a wide variety of
arrangements with corporate sponsors, pharmaceutical companies, universities,
research groups and others. While we have engaged, and expect to continue to
engage, in discussions regarding such arrangements, we have not reached any
agreement regarding any such arrangement and we may fail to obtain any such
agreement on terms acceptable to us, if at all. Even if we enter into these
arrangements, we may not be able to satisfy our obligations under them or renew
or replace them after their original terms. Furthermore, these arrangements may
require us to grant certain rights to third parties, including exclusive
marketing rights to one or more products, or may have other terms that are
burdensome to us, and may involve the acquisition of our securities. If any of
our collaborators terminates its relationship with us or fails to perform its
obligations in a timely manner, the development or commercialization of our
technology and potential products may be adversely affected.
We entered into a sponsored Research Agreement with the Scripps Research
Institute under which we funded certain research in return for license or
options to license the inventions resulting from the research. This agreement
expired on November 14, 2000 and we are negotiating with Scripps to extend the
term of this agreement or to enter into a new agreement. As of the date of this
report, we have not yet completed our negotiations with Scripps and we cannot
give any assurance that our negotiations will be successful. If we are unable to
extend the term of this agreement or enter into a new agreement, we will have to
find a replacement to perform this research or we will have to perform this
research ourselves. In either case, we may experience delay and additional
expense in connection with this research effort.
WE HAVE A HISTORY OF OPERATING LOSSES AND WE MAY FAIL TO OBTAIN REVENUES OR
BECOME PROFITABLE.
We have incurred $124,237,900 in operating losses through September 30, 2000
and expect to continue to incur substantial operating losses in the future in
order to conduct our research and development activities, and if those
activities are successful, to fund clinical trials and other expenses. These
expenses
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include the cost of acquiring technology, product testing, acquiring regulatory
approvals, establishing production, marketing, sales and distribution programs,
and administrative expenses. We have not earned any revenues from sales of any
product. All of our past revenues have been derived from, and any revenues we
may obtain for the foreseeable future are expected to be derived from,
cooperative agreements, research grants, investments and interest on invested
capital. We have no cooperative agreements and we have received only two
research grants for our stem cell technology, and we may not obtain any such
agreements or additional grants in the future, or receive any revenues from
them.
WE DO NOT ANTICIPATE RECEIVING FUTURE REVENUES FROM THE SALE OF OUR
ENCAPSULATED CELL TECHNOLOGY.
In December 1999, we sold our encapsulated cell therapy technology to
Neurotech S.A. While under the terms of the sale we may receive royalty and
other payments from Neurotech under certain circumstances, we do not anticipate
receiving any material payments from Neurotech in the near future, if at all.
WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS TO PROTECT OUR INTELLECTUAL
PROPERTY FROM INFRINGEMENT. NEVERTHELESS, SUCH PROTECTION IS UNCERTAIN AND, IF
GAINED, MAY OFFER ONLY LIMITED PROTECTION. IF WE ARE UNABLE TO PROTECT OUR
PATENTS AND PROPRIETARY RIGHTS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS WILL BE HARMED.
We own or license a number of patents or pending patent applications
covering human nerve stem cell cultures, central nervous system stem cell
cultures, neuroblast cultures, peripheral nervous system stem cell cultures, and
an animal model for liver failure. Patent protection for products such as those
we propose to develop is highly uncertain and involves complex and continually
evolving factual and legal questions. The governmental authorities that consider
patent applications can deny or significantly reduce the patent coverage
requested in an application before or after issuing the patent. Consequently, we
do not know whether any of our pending applications will result in the issuance
of patents, or if any existing or future patents will provide sufficient
protection or significant commercial advantage or if others will circumvent
these patents. Since patent applications are secret until patents are issued in
the United States or until the applications are published in foreign countries,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, we cannot be certain that we were the
first to make the inventions covered by each of our pending patent applications
or that we were the first to file patent applications for such inventions. Our
patents may not issue from our pending or future patent applications or, if
issued, may not be of commercial benefit to us, or may not afford us adequate
protection from competing products. In addition, third parties may challenge our
patents or governmental authorities may declare them invalid. In the event that
a third party has also filed a patent application relating to inventions claimed
in our patent applications, we may have to participate in proceedings to
determine priority of invention. This could result in substantial uncertainties
and cost for us, even if the eventual outcome is favorable to us, and the
outcome might not be favorable to us. Even if a patent issues, a court could
decide that the patent was issued invalidly.
IF OTHERS ARE FIRST TO DISCOVER AND PATENT ANY STEM CELLS WE ARE SEEKING TO
DISCOVER, WE COULD BE BLOCKED FROM FURTHER WORK ON THAT STEM CELL, AND OUR
BUSINESS WOULD BE HARMED.
Because the first person or entity to discover and obtain a valid patent to
a particular stem or progenitor cell may effectively block all others, it will
be important to our development efforts for us or our collaborators to be the
first to discover any stem cell that we are seeking. Failure to be the first
could prevent us from commercializing all of our research and development
related to such stem cell and have a material adverse effect on the Company.
WE MAY NEED TO OBTAIN LICENSES TO THIRD PARTY PATENTS, AND MAY NOT BE ABLE
TO GET THEM.
A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have received
patents relating to cell therapy, stem cells and other technologies potentially
relevant to or necessary for our expected products. We cannot predict which, if
any, of the applications will issue as patents. We are also aware of a number of
patent applications and patents claiming use of genetically modified cells to
treat disease, disorder or injury. We are aware of three patents issued to two
competitors claiming certain methods for enriching central nervous system stem
cells through gene modification of in vitro cultured cells. These patents were
issued or licensed to NeuralStem
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and Layton Bioscience. It is possible that NeuralStem or Layton Bioscience will
be able to produce commercially available stem cell products before we can.
These genetically modified cells may be effective in treating defective,
diseased or damaged central nervous system tissue.
If third party patents or patent applications contain claims infringed by
our technology and these claims are valid, we may be unable to obtain licenses
to these patents at a reasonable cost, if at all, and may also be unable to
develop or obtain alternative technology. If we are unable to obtain such
licenses at a reasonable cost, our business could be significantly harmed. We
may have to to defend ourselves in court against allegations of infringement of
third party patents. Patent litigation is very expensive and could consume
substantial resources and create significant uncertainties. An adverse outcome
in such a suit could subject us to significant liabilities to third parties,
require disputed rights to be licensed from third parties, or require us to
cease using such technology.
Proprietary trade secrets and unpatented know-how are also important to our
research and development activities. We cannot be certain that others will not
independently develop the same or similar technologies on their own or gain
access to our trade secrets or disclose such technology, or that we will be able
to meaningfully protect our trade secrets and unpatented know-how and keep them
secret.
We require our employees, consultants, and significant scientific
collaborators and sponsored researchers to execute confidentiality agreements
upon the commencement of an employment or consulting relationship with us. These
agreements may, however, fail to provide meaningful protection or adequate
remedies for us in the event of unauthorized use, transfer or disclosure of such
information or inventions.
We have obtained rights from universities and research institutions to
technologies, processes and compounds that we believe may be important to the
development of our products. Licensors may cancel our licenses or convert them
to non-exclusive licenses if we fail to use the relevant technology or otherwise
breach these agreements. Loss of such licenses could expose us to the risks of
third party patents and/or technology. We can give no assurance that any of
these licenses will provide effective protection against our competitors.
WE COMPETE WITH COMPANIES THAT HAVE SIGNIFICANT ADVANTAGES OVER US.
The market for therapeutic products that address degenerative diseases is
large and competition is intense. We expect competition to increase. We believe
that our most significant competitors will be fully integrated pharmaceutical
companies and more established biotechnology companies, such as Biogen, Inc. and
Genzyme, an Elan Corporation. These companies already produce or are developing
treatments for degenerative diseases that are not stem-cell based, and they have
significantly greater capital resources and expertise in research and
development, manufacturing, testing, obtaining regulatory approvals and
marketing than we do. Many of these potential competitors have significant
products approved or in development that could be competitive with our potential
products, and also operate large, well-funded research and development programs.
In addition, we expect to compete with smaller companies such as NeuralStem and
Layton Bioscience and with universities and other research institutions who are
developing treatments for degenerative diseases that are stem-cell based.
Our competitors may succeed in developing technologies and products that are
more effective than those being developed by us, or that would render our
technology obsolete or non-competitive.
The relative speed with which we and our competitors can develop products,
complete the clinical testing and approval processes, and supply commercial
quantities of a product to market will affect our ability to gather market
acceptance and market share. With respect to clinical testing, competition may
delay progress by limiting the number of clinical investigators and patients
available to test our potential products.
DEVELOPMENT OF OUR TECHNOLOGY WILL BE SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION.
Our research and development efforts, as well as any future clinical trials,
and the manufacturing and marketing of any products we may develop, will be
subject to extensive regulation by governmental authorities in the United States
and other countries. The process of obtaining U.S. Food and Drug
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Administration and other necessary regulatory approvals is lengthy, expensive
and uncertain. We or our collaborators may fail to obtain the necessary
approvals to commence or continue clinical testing or to manufacture or market
our potential products in reasonable time frames, if at all. In addition, the
United States Congress and other legislative bodies may enact regulatory reforms
or restrictions on the development of new therapies that could adversely affect
the regulatory environment in which we operate or the development of any
products we may develop.
We base our research and development on the use of human stem and progenitor
cells obtained from fetal tissue. The federal and state governments and other
jurisdictions impose restrictions on the use of fetal tissue. These restrictions
change from time to time and may become more onerous. Additionally, we may not
be able to identify or develop reliable sources for the cells necessary for our
potential products--that is, sources that follow all state and federal
guidelines for cell procurement. Further, we may not be able to obtain such
cells in the quantity or quality sufficient to satisfy the commercial
requirements of our potential products. As a result, we may be unable to develop
or produce our products in a profitable manner.
We may apply for status under the Orphan Drug Act for certain of our
therapies, in order to gain a seven year period of marketing exclusivity for
those therapies. The U.S. Congress in the past considered, and in the future
again may consider, legislation that would restrict the extent and duration of
the market exclusivity of an orphan drug. If enacted, such legislation could
prevent us from obtaining some or all of the benefits of the existing statute
even if we were to apply for and be granted orphan drug status with respect to a
potential product.
WE DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL.
We are highly dependent on the principal members of our management and
scientific staff and certain of our outside consultants, including the members
of our scientific advisory board, our chief executive officer, each of our vice
presidents and the directors of our neural stem cell and liver stem cell
programs. Although we have entered into employment agreements with some of these
individuals, they may terminate their agreements at any time. We currently have
outside consultants and interim personnel in key management and scientific
positions who are not permanent employees. Loss of services of any of these
individuals could have a material adverse effect on our operations, because
these individuals possess management experience or specialized scientific skills
which we do not otherwise have and which we may not be able to replace. In
addition, our operations are dependent upon our ability to attract and retain
additional qualified scientific and management personnel. More generally, we may
not be able to attract and retain the personnel we need on acceptable terms
given the competition for experienced personnel among pharmaceutical,
biotechnology and health care companies, universities and research institutions.
If we lose the services of these key personnel or are unable to attract and
retain additional qualified personnel, we may have to delay, reduce or eliminate
some or all of our research and development programs.
On September 22, 2000 we announced that George Dunbar, our acting President
and Chief Executive Officer, would be phasing out his service. Mr. Dunbar will
continue in his position on a reduced time basis during this transition period.
We are actively seeking to hire a permanent chief executive officer, but we can
give no assurance that we will be able to find a candidate possessing the
necessary qualifications. If we are unable to hire and retain a qualified chief
executive officer, our business and operations could suffer materially.
HEALTHCARE INSURERS AND OTHER ORGANIZATIONS MAY NOT PAY FOR OUR PRODUCTS OR
MAY IMPOSE LIMITS ON REIMBURSEMENTS.
In both domestic and foreign markets, sales of potential products are likely
to depend in part upon the availability and amounts of reimbursement from third
party health care payor organizations, including government agencies, private
health care insurers and other health care payors such as health maintenance
organizations and self-insured employee plans. There is considerable pressure to
reduce the cost of therapeutic products, and government and other third party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic products,
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and by refusing, in some cases, to provide any coverage for uses of approved
products for disease indications for which the Food and Drug Administration has
not granted marketing approval. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. We can give no
assurance that reimbursement will be provided by such payors at all or without
substantial delay, or, if such reimbursement is provided, that the approved
reimbursement amounts will be sufficient to enable us to sell products we
develop on a profitable basis. Changes in reimbursement policy could also
adversely affect the willingness of pharmaceutical companies to collaborate with
us on the development of our stem cell technology.
In certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. We expect that there will
continue to be a number of Federal and state proposals to implement government
control over health care costs. Efforts at healthcare reform are likely to
continue in future legislative sessions. We do not know what legislative
proposals Federal or state governments will adopt or what actions Federal, state
or private payers for healthcare goods and services may take in response to
healthcare reform proposals or legislation. We cannot predict the effect
government control and other healthcare reforms may have on our business.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
Our operating results have varied, and may in the future continue to vary,
significantly from quarter to quarter due to a variety of factors. These factors
include the receipt of one-time license or milestone payments under
collaborative agreements, costs associated with the wind-down of our
encapsulated cell therapy programs, variation in the level of expenses related
to our research and development efforts, receipt of grants or other support for
our research and development efforts, and other factors. Quarterly comparisons
of our financial results are not necessarily meaningful and you should not rely
upon them as an indication of future performance. Our stock price may be
volatile and this volatility could result in lawsuits or make it difficult to
raise capital. The market price for our common stock has been volatile and could
decline below the offering price for the shares. We believe that the market
price for our common stock could fluctuate substantially due to some or all of
the risk factors enumerated above.
The stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have especially affected the market price of
the stock of many high technology and health care-related companies. Such
fluctuations have often been unrelated to the operating performance of these
companies. Nonetheless, these broad market fluctuations may negatively affect
the market price of our common stock. In the past, companies that have
experienced volatility in the market price of their stock have been the objects
of securities class action litigation. If we were the object of securities class
action litigation, we could incur material costs and suffer a diversion of our
management's attention and resources. In addition, volatility in our stock price
may make it difficult for us to obtain additional capital resources through
financings on terms acceptable to us.
EVENTS WITH RESPECT TO OUR SHARE CAPITAL COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE.
Sales of substantial amounts of our common stock on the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. In particular, as of October 31, 2000, we had outstanding stock
options to purchase approximately 2,566,530 shares of common stock, at an
average exercise price of approximately $4.402 per share, subject to adjustment
in certain circumstances. Of this total, options covering approximately 941,309
shares are currently exercisable at an average exercise price of approximately
$4.742 per share.
