<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended March 31, 1998
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: 0-20859
GERON CORPORATION
Delaware 75-2287752
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 Constitution Drive, Menlo Park, CA 94025
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 473-7700
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.001 par value
(Title of Class)
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 such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class: Common Stock $0.001 par value Outstanding at May 8, 1998: 11,170,897
================================================================================
<PAGE> 2
GERON CORPORATION
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Balance Sheets as of March 31, 1998 and December 31, 1997
Condensed Statements of Operations for the three months ended
March 31, 1998 and 1997
Condensed Statements of Cash Flows for the three months ended
March 31, 1998 and 1997
Notes to Financial Statements
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Item 2: Changes In Securities
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
SIGNATURES
</TABLE>
2
<PAGE> 3
GERON CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,186 $ 4,122
Short-term investments 11,397 17,475
Interest and other receivables 263 866
Other current assets 696 1,016
-------- --------
Total current assets 39,542 23,479
Property and equipment, net 2,191 2,404
Deposits and other assets 170 173
-------- --------
$ 41,903 $ 26,056
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 407 $ 723
Accrued compensation 334 431
Accrued liabilities 647 605
Deferred revenue -- 975
Current portion of capital lease obligations and
equipment loans 975 1,006
-------- --------
Total current liabilities 2,363 3,740
Noncurrent portion of capital lease obligations and
equipment loans 1,069 1,250
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value; 3,000,000 shares
authorized; 15,000 and no shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively -- --
Common stock, $0.001 par value; 25,000,000 shares
authorized; 11,146,539 and 10,795,913 shares issued
and outstanding at March 31, 1998 and December 31, 1997,
respectively 11 11
Additional paid-in-capital 87,080 67,879
Notes receivable from stockholders (2) --
Deferred compensation (642) (714)
Accumulated deficit (47,976) (46,110)
-------- --------
Total stockholders' equity 38,471 21,066
-------- --------
$ 41,903 $ 26,056
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
GERON CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenues from collaborative agreements $ 2,225 $ --
License fees & royalties 25 28
------------ ------------
Total revenues 2,250 28
Operating expenses:
Research and development 3,668 3,935
General and administrative 826 765
------------ ------------
Total operating expenses 4,494 4,700
------------ ------------
Loss from operations (2,244) (4,672)
Interest and other income 459 323
Interest and other expense (82) (99)
------------ ------------
Net loss $ (1,867) $ (4,448)
============ ============
Basic and diluted net loss per share $ (0.17) $ (0.44)
============ ============
Shares used in computing basic and
diluted net loss per share 10,897,680 10,178,271
============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
GERON CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,867) $ (4,448)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 281 309
Issuance of common and preferred stock in exchange
for services rendered 10 12
Deferred compensation 105 72
Changes in assets and liabilities:
Interest and other receivables 603 63
Other current assets 320 (101)
Deposits and other assets 3 54
Accounts payable (316) (243)
Accrued compensation (97) (364)
Accrued liabilities 42 (28)
Deferred revenue (975) --
-------- --------
Net cash used in operating activities (1,891) (4,674)
Cash flows from investing activities:
Capital expenditures (68) (254)
Purchases of securities available-for-sale -- (6,109)
Proceeds from maturities of securities
available-for-sale 6,079 5,000
-------- --------
Net cash provided by (used in) investing activities 6,011 (1,363)
Cash flows from financing activities:
Proceeds from equipment loans 68 142
Payments of obligations under capital leases and
equipment loans (280) (293)
Proceeds from issuance of common and preferred stock,
net 19,156 2,153
-------- --------
Net cash provided by financing activities 18,944 2,002
-------- --------
Net increase (decrease) in cash and cash equivalents 23,064 (4,035)
Cash and cash equivalents at the beginning of the period 4,122 12,357
-------- --------
Cash and cash equivalents at the end of the period $ 27,186 $ 8,322
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed unaudited balance sheet as of March 31, 1998 and
condensed statements of operations for the three-month periods ended March
31, 1998 and 1997 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. These financial statements should be read in conjunction
with the financial statements for the year ended December 31, 1997, included
in the Company's Annual Report on Form 10-K.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share," ("SFAS 128"),
which requires the Company to simplify the calculation of earnings per share
and achieve comparability with the recently issued International Accounting
Standard No. 33, "Earnings Per Share." SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods presented have been restated, where appropriate, to conform to
SFAS 128.
A reconciliation of shares used in calculation of basic and diluted net loss
per share follows:
<TABLE>
<CAPTION>
THREE MONTHS
(In thousands, except share and per share data) ENDED MARCH 31,
1998 1997
------------ ------------
<S> <C> <C>
Net loss $ (1,867) $ (4,448)
============ ============
Weighted average shares of Common Stock outstanding
used in computing basic and diluted net loss per
share 10,897,680 10,178,271
Basic and diluted net loss per share $ (0.17) $ (0.44)
============ ============
</TABLE>
Had the Company been in a net income position, diluted earnings per share
would have included the shares used in the computation of basic net
loss per share as well as the number of common shares issuable upon
conversion of the Series A Convertible Preferred Stock and common shares
related to outstanding options and warrants (as determined using the treasury
stock method at the estimated average market value) for the three months
ended March 31, 1998 and 1997.
6
<PAGE> 7
2. OTHER RECENT ACCOUNTING PRONOUCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard 130, ("SFAS 130"),"Reporting Comprehensive Income," in
June 1997. Under SFAS 130, the Company is required to display comprehensive
income (loss) and its components as part of the Company's full set of
financial statements. Comprehensive income (loss) is comprised of net income
(loss) and other comprehensive income (loss). The measurement and
presentation of net income (loss) will not change. Other comprehensive income
(loss) includes certain changes in equity of the Company that are excluded
from net income (loss). Specifically, SFAS 130 requires unrealized holding
gains and losses on the Company's available-for-sale securities, which are
currently reported in the Company's accumulated deficit, to be included in
other comprehensive income (loss). During the first quarter of 1998 and 1997,
total comprehensive loss amounted to $1.9 million and $4.4 million,
respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information," which require additional
disclosure to be adopted beginning December 31, 1998. SFAS 131 requires that
the Company report financial and descriptive information about its reportable
operating segments. The Company is evaluating the impact, if any, of SFAS 131
on its future financial statement disclosure.
3. CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
places its cash and cash equivalents in interest-bearing money market funds,
commercial paper, corporate master notes, and repurchase agreements with
United States financial institutions. As of March 31, 1998, the Company's
investments consisted primarily of corporate notes with maturities ranging
from 3 to 12 months.
4. PREFERRED STOCK
On March 27, 1998, the Company completed a private placement with two
institutional investors for the sale of 15,000 shares of Series A Convertible
Preferred Stock with a stated value of $1,000 per share resulting in proceeds
of $15.0 million. The Series A Convertible Preferred Stock is convertible
into the number of shares of Common Stock of the Company equal to the stated
value plus a premium of 6% per annum divided by a conversion price. The
conversion price of the Preferred Stock is based on the market price or the
Common Stock during a pricing period preceding conversion, up to a conversion
price cap of $16.88. With limited exceptions, during the nine month period
following issuance, the Preferred Stock is convertible only after the market
price of the Common Stock equals or exceeds $15 per share. The Preferred
Stock is subject to redemption at the Company's option if the market price of
the Common Stock exceeds or falls below certain thresholds. The Company has
agreed to register the resale of the underlying Common Stock under the
Securities Act of 1933.
7
<PAGE> 8
GERON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of certain factors set forth under the heading "Risk Factors" in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997
and in the section of this Item 2 titled "Additional Factors That May Affect
Future Results".
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
Geron is a biopharmaceutical company focused on discovering and developing
therapeutic and diagnostic products based upon the company's understanding of
telomeres and telomerase in cells, fundamental biological mechanisms underlying
cancer and other age-related diseases.
On March 27, 1998, the Company completed a private placement with two
institutional investors for the sale of 15,000 shares of Series A Convertible
Preferred Stock with a stated value of $1,000 per share resulting in proceeds of
$15.0 million. The Series A Convertible Preferred Stock is convertible into the
number of shares of Common Stock of the Company equal to the stated value plus a
premium of 6% per annum divided by a conversion price. The conversion price of
the Preferred Stock is based on the market price of the Common Stock during a
pricing period preceding conversion, up to a conversion price cap of $16.88.
With limited exceptions, during the nine month period following issuance, the
Preferred Stock is convertible only after the market price of the Common Stock
equals or exceeds $15 per share. The Preferred Stock is subject to redemption at
the Company's option if the market price of the Common Stock exceeds or falls
below certain thresholds. The Company agreed to register the resale of the
underlying common stock under the Securities Act of 1933.
In accordance with the Stock Purchase Agreement with Pharmacia & Upjohn, S.p.A.
("Pharmacia & Upjohn"), in March 1998, Pharmacia & Upjohn purchased $4.0 million
of Geron Common Stock at a premium.
The Company's results of operations have fluctuated from period to period and
may continue to fluctuate in the future based upon the timing and composition of
funding under various collaborative agreements, as well as the progress of its
research and development efforts. Results of operations for any period may be
unrelated to results of operations for any other period. In addition, historical
results should not be viewed as indicative of future operating results. Geron is
subject to risks common to companies in its industry and at its stage of
development, including risks inherent in its research and development efforts,
reliance upon collaborative partners, enforcement of patent and proprietary
rights, need for future capital, potential competition and uncertainty of
regulatory approvals or clearances. In order for a product to be commercialized
based on the Company's research, it will be necessary for Geron and its
collaborators to conduct preclinical tests and clinical trials, demonstrate
efficacy and safety of the Company's product candidates, obtain regulatory
approvals or clearances and enter into manufacturing, distribution and marketing
arrangements, as well as obtain market acceptance. The Company does not expect
to receive revenues or royalties based on therapeutic products for a period of
years. See "Additional Factors That May Affect Future Results."
8
<PAGE> 9
RESULTS OF OPERATIONS
REVENUES
Contract revenues were $2.2 million and none for the three months ended March
31, 1998 and 1997, respectively. Contract revenues in 1998 were from research
support payments under the Company's collaborative agreements with Pharmacia &
Upjohn (the "Pharmacia & Upjohn Agreement") and Kyowa Hakko Kogyo, Co. Ltd. (the
"Kyowa Hakko Agreement"). Research support payments of $1.0 million and $4.0
million under the Kyowa Hakko Agreement were received in April 1998 and 1997,
respectively. The Pharmacia & Upjohn Agreement was signed in March 1997 and the
Company received its first quarterly research support payment of 1.25 million
in April 1997. The Company recognizes revenue as related research and
development costs are incurred under the collaborative agreements. Contract
revenues are expected to decrease as a result of reduced research funding under
the Kyowa Hakko Agreement.
The Company receives license payments and royalties from license and marketing
agreements with various diagnostic collaborators. No license fee payments were
received in 1997 or the first quarter of 1998. Royalties of $25,000 and $28,000
were received from licensees, including Oncor, Kyowa Medex, Boehringer Mannheim
and PharMingen on the sale of diagnostic kits to the research-use-only market
for the three months ended March 31, 1998 and 1997, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $3.7 million and $3.9 million for the
three months ended March 31, 1998 and 1997, respectively. The slight decrease
was primarily due to a decrease in facilities related expenditures for the three
months ended March 31, 1998. In 1997, the Company incurred additional facilities
costs related to the expansion of its operations to two buildings and the
enhancement of several laboratory operations. The Company expects research and
development and related facilities expenses to increase in the future as a
result of continued development of its research programs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $826,000 and $765,000 for the three
months ended March 31, 1998 and 1997, respectively. The overall increase in
expenses for 1998 was primarily due to higher legal, filing and communication
costs.
INTEREST AND OTHER INCOME
Interest income was $330,000 and $318,000 for the three months ended March 31,
1998 and 1997, respectively. The increase was due to higher average cash and
investment balances as a result of the sale of equity securities to Pharmacia &
Upjohn and completion of the Company's convertible preferred stock financing,
both of which occurred at the end of the first quarter. Interest earned in the
future will depend on the Company's funding cycles and prevailing interest
rates. The Company also received $129,000 and $5,000 in research payments under
government grants for the three months ended March 31, 1998 and 1997,
respectively. The Company does not expect income from government grants to be
significant in the foreseeable future.
INTEREST AND OTHER EXPENSE
Interest and other expenses were $82,000 and $99,000 for the three months ended
March 31, 1998 and 1997, respectively. The decrease was due to lower outstanding
lease obligations as a result of certain leases expiring during the quarter. The
Company expects interest and other expense to remain consistent with prior years
as expiring leases are replaced with new leases over the coming year.
9
<PAGE> 10
NET LOSS
Net loss was $1.9 million and $4.4 million for the three months ended March 31,
1998 and 1997, respectively. The decrease was due primarily to the timing of the
recognition of contract revenue from the Kyowa Hakko and Pharmacia & Upjohn
agreements. The agreement with Pharmacia & Upjohn was signed in March 1997 and
no contract revenue was recognized until the second quarter of 1997. In
addition, the Company did not recognize any contract revenue from the Kyowa
Hakko Agreement in the first quarter of 1997, as it had been previously
recognized in 1996. Net loss is expected to increase as a result of decreased
funding from Kyowa Hakko.
LIQUIDITY AND CAPITAL RESOURCES
On March 27, 1998, the Company completed a private placement with two
institutional investors for the sale of 15,000 shares of Series A Convertible
Preferred Stock with a stated value of $1,000 per share resulting in proceeds of
$15.0 million. The Series A Convertible Preferred Stock is convertible into the
number of shares of Common Stock of the Company equal to the stated value plus a
premium of 6% per annum divided by a conversion price. The conversion price of
the Preferred Stock is based on the market price of the Common Stock during a
pricing period preceding conversion, up to a conversion price cap of $16.88.
With limited exceptions, during the nine-month period following issuance, the
Preferred Stock is convertible only after the market price of the Common Stock
equals or exceeds $15 per share. The Preferred Stock is subject to redemption at
the Company's option if the market price of the Common Stock exceeds or falls
below certain thresholds. The Company agreed to register the resale of the
underlying common stock under the Securities Act of 1933.
In accordance with the Stock Purchase Agreement with Pharmacia & Upjohn, in
March 1998, Pharmacia & Upjohn purchased $4.0 million of Geron Common Stock at a
premium.
Cash, cash equivalents and short-term investments at March 31, 1998 were $38.6
million compared to $21.3 million at March 31, 1997. The increase in cash, cash
equivalents and short-term investments in the three months ended March 31, 1998
was primarily due to the completion of the Company's private placement and the
sale of equity securities to Pharmacia & Upjohn. It is the Company's investment
policy to invest these funds in liquid, investment-grade securities, such as
interest-bearing money market funds, corporate master notes, commercial paper,
repurchase agreements with United States financial institutions and federal
agency notes.
Net cash used in operations decreased to $1.9 million for the three months ended
March 31, 1998 compared to $4.7 million for the comparable period in 1997. The
decrease resulted primarily from a lower net loss recognized in 1998. As
discussed above, significantly more revenue was recognized from the Kyowa Hakko
and Pharmacia & Upjohn collaborative agreements in the first quarter of 1998
than in the first quarter of 1997.
For the three months ended March 31, 1998, additions of equipment and leasehold
improvements totaled approximately $68,000, all of which were financed through
equipment financing arrangements. At March 31, 1998, the Company had
approximately $524,000 available for borrowing under its equipment financing
facility.
The Company estimates that its existing capital resources including proceeds
from the private placement, payments under the Pharmacia & Upjohn Agreement,
interest income and equipment financing will be sufficient to fund its current
and planned operations through 1999. There can be no assurance, however, that
changes in the Company's research and development plans or other changes
affecting the Company's operating expenses will not result in the expenditure of
available resources before such time, and in any event, the Company will need to
raise substantial additional capital to fund its operations in future periods.
The Company intends to seek additional funding through collaborative
arrangements, public or private equity financings, capital lease transactions or
other financing sources that may be available.
10
<PAGE> 11
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Specifically, the Company
wishes to alert readers that, except for the historical information contained
herein, the matters discussed in this report constitute forward-looking
statements that are dependent on certain risks and uncertainties. These and
other factors that may cause actual results to differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company
are described below.
TECHNOLOGICAL UNCERTAINTY
The study of the mechanisms of cellular aging and cellular immortality,
including telomere biology and telomerase, is a relatively new area of research,
and there can be no assurance that this research will lead to the discovery or
development of any therapeutic or diagnostic product. If and when potential lead
drug compounds or product candidates are identified through the Company's
research programs, they will require significant preclinical and clinical
testing prior to regulatory approval in the United States and elsewhere, and
there can be no assurance that any of these efforts will result in a product
that can be marketed. Because of the significant additional scientific,
regulatory and commercial milestones that must be reached for the Company's
research programs to be successful, there can be no assurance that any program
will not be abandoned after significant resources have been expended. The
abandonment of any research program could have a material adverse effect on the
Company.
As a result of its drug discovery efforts to date, the Company has identified
compounds in in vitro studies that demonstrate potential for inhibiting
telomerase in vivo. However, additional development efforts will be required
prior to the selection of a lead compound for preclinical development and
clinical trials as a telomerase inhibitor for cancer. If and when selected, a
lead compound may prove to have undesirable and unintended side effects or other
characteristics affecting its efficacy or safety that may prevent or limit its
commercial use. For example, telomerase is active in reproductive cells and
transiently expressed in certain hematopoietic (blood) and gastrointestinal
cells. There can be no assurance that any product based on the inhibition of
telomerase will not adversely affect such cells and result in unacceptable side
effects. In addition, it is expected that telomerase inhibition will have
delayed efficacy as telomeres resume normal shortening and, as a result, will in
most cases, be used in conjunction with other cancer therapies. There can be no
assurance that the delayed efficacy of a telomerase inhibitor will not have a
material adverse effect on the preclinical and clinical development, ability to
obtain regulatory approval or marketability of a telomerase inhibitor for the
treatment of cancer. The abandonment of the Telomerase Inhibition and Detection
program would have a material adverse effect on the Company.
With respect to the development and commercial application of the Company's
proprietary telomerase detection technology, there is, as yet, insufficient
clinical data to confirm its full utility to diagnose, prognose, monitor patient
status and screen for cancer. Although the Company's licensees, Oncor,
Boehringer Mannheim, Kyowa Medex and PharMingen have commenced the sale of kits
for research use, additional development work and regulatory consents will be
necessary prior to the introduction of tests for clinical use.
With respect to the Company's Genomics of Aging program, the Company has
identified certain genes that are expressed differentially in senescent cells
versus replicatively young cells. However, the Company has not identified any
lead compounds that have been demonstrated to modulate such gene expression, and
there can be no assurance that any such lead compound will be discovered or
developed. The part of the Company's Genomics of Aging program that is designed
to modulate telomere length is at an early stage of development. While telomere
length and replicative capacity have been extended in vitro, there can be no
assurance that the Company will discover a compound that will modulate telomere
length or increase replicative capacity effectively for clinical use. The
Company's Primordial Stem Cell program is also at an early stage. While primate
Primordial Stem ("PS") cells have been isolated and allowed to expand and
differentiate into numerous cell types, there can be no assurance that the
Company's efforts to isolate the human primordial stem cell and develop products
therefrom will result in any commercial applications.
11
<PAGE> 12
The Company may become aware of technology controlled by third parties that is
advantageous to the Company's programs. There can be no assurance that the
Company will be able to acquire or license such technology on reasonable terms,
if at all. In the event that the Company is unable to acquire such technology,
the Company may be required to expend significant time and resources to develop
similar technology, and there can be no assurance that it will be successful in
this regard. If the Company cannot acquire or develop necessary technology, it
may be prevented from pursuing certain business objectives. Moreover, a
competitor of the Company could acquire or license such technology. Any such
event could have a material adverse effect on the Company.
EARLY STAGE OF DEVELOPMENT
Geron is at an early stage in the development of therapeutic and diagnostic
products. The Company has not yet selected a lead compound for any of its drug
development programs. In order to identify and select such a compound, it must
have access to sufficient numbers of chemical compounds and resources, of which
there can be no assurance. Products that may result from the Company's research
and development programs are not expected to be commercially available for a
number of years, if at all. The Company's program to identify a telomerase
inhibitor is currently at the drug discovery stage, while the Company's other
programs are currently focused on research efforts prior to drug discovery or
preclinical development. It is difficult to predict when, if ever, the Company
will select a lead compound for drug development as a telomerase inhibitor. In
addition, there can be no assurance that the Company's other programs will move
beyond their current stage. Assuming the Company's research advances and the
Company is able to identify and select a lead compound for telomerase
inhibition, certain preclinical development efforts will be necessary to
determine whether the potential product has sufficient safety to enter clinical
trials. If such a potential product receives authorization from the United
States Food and Drug Administration (the "FDA") to enter clinical trials, then
it will most likely be subjected to a multiphase, multicenter clinical study to
determine its safety and efficacy. It is not possible to predict the length or
extent of clinical trials or the period of any required patient follow-up.
Assuming clinical trials of any potential product are successful and other data
are satisfactory, the Company will submit an application to the FDA and
appropriate regulatory bodies in other countries to seek permission to market
the product. The review process at the FDA is substantial and lengthy, and there
can be no assurance that the FDA will approve the Company's application or will
not require additional clinical trials or other data prior to approval.
Furthermore, even if such approval is ultimately obtained, delays in the
approval process could have a material adverse effect on the Company. In
addition, there can be no assurance that any potential product will be capable
of being produced in commercial quantities at a reasonable cost or that such
product will be successfully marketed. Based on the foregoing, the Company does
not anticipate being able to commence marketing of any therapeutic products for
a period of years, if at all. There can be no assurance that any of the
Company's product development efforts will be successfully completed, that
regulatory approvals will be obtained, or that the Company's products, if any,
will achieve market acceptance.
DEPENDENCE ON STRATEGIC AND RESEARCH COLLABORATIONS
The Company's strategy for the development, clinical testing and
commercialization of its products includes entering into collaborations with
corporate partners, licensors, licensees and others, and the Company is
dependent upon the subsequent success of these other parties in performing their
respective responsibilities. The success of any collaboration depends on the
continued cooperation of its partners, as to which there can be no assurance.
The amount and timing of resources to be devoted to activities by its
collaborators are not within the direct control of the Company. There can be no
assurance that such partners will perform their obligations as expected or that
the Company will derive any benefits from such arrangements. There can also be
no assurance that the Company's current collaborators or any future
collaborators will not pursue existing or alternative technologies in preference
to those being developed in collaboration with the Company.
12
<PAGE> 13
The Company currently has no manufacturing infrastructure and no marketing or
sales organization, and intends to rely in substantial part on its current and
future strategic partners for the manufacture of any product and the principal
marketing and sales responsibilities for any such product. To the extent the
Company chooses not to or is unable to establish such arrangements, the Company
will require substantially greater capital to undertake its own manufacturing,
marketing and sales of any product.
In April 1995, the Company entered into a License and Research Collaboration
Agreement with Kyowa Hakko (the "Kyowa Hakko Agreement") for the development and
commercialization in certain Asian countries of a telomerase inhibitor for the
treatment of cancer. Under the collaboration, Kyowa Hakko provides certain
funding for the Company's research and development activities and is responsible
for all clinical, regulatory, manufacturing, marketing and sales efforts and
expenses in the covered territory. The Kyowa Hakko Agreement provides that Kyowa
Hakko will not pursue research and development independent of its collaboration
with Geron with respect to telomerase inhibition for the treatment of cancer in
humans until April 7, 2000, at the earliest. The Kyowa Hakko Agreement also
provides in general that, while Geron exercises significant influence during the
research phase, Kyowa Hakko exercises significant influence during the
development and commercialization phases of the collaboration. In March 1997,
the Kyowa Hakko Agreement was amended to extend its term until April 2000 and to
make certain other changes in connection with the signing of the Pharmacia &
Upjohn Agreement (as defined below).
On March 23, 1997 the Company signed a License and Research Collaboration
Agreement (the "Pharmacia & Upjohn Agreement") with Pharmacia & Upjohn, S.p.A.
to collaborate in the discovery, development and commercialization of a new
class of anticancer drugs that inhibit telomerase. Under the collaboration,
Pharmacia & Upjohn will provide certain funding of the Company's research and
development activities and will be primarily responsible for all clinical,
regulatory, manufacturing, marketing and sales efforts and expenses. Geron has
certain promotion rights with corresponding clinical expense obligations. As
with the Kyowa Hakko Agreement, the Company exercises significant influence
during the research phase of the collaboration while Pharmacia & Upjohn will
exercise significant influence during the development and commercialization
phases of the collaboration. Through the Pharmacia & Upjohn and Kyowa Hakko
Agreements, the Company has granted to Pharmacia & Upjohn and Kyowa Hakko
exclusive worldwide rights to its telomerase inhibition technology, with
exception to certain antisense, gene therapy and vaccine technologies outside
Asia, for the treatment of cancer in humans. If and when a telomerase inhibitor
is selected for development and commercialization under the Agreements, the
Company will be significantly dependent upon the activities of Pharmacia &
Upjohn and Kyowa Hakko for the successful commercialization of such product. Any
failure of Pharmacia & Upjohn and Kyowa Hakko to develop or commercialize a
telomerase inhibitor (if and when selected) will have a material adverse effect
on the Company.
In December 1997, the Company entered into a License, Product and Marketing
Agreement with Boehringer Mannheim to develop and market research and clinical
diagnostic products to study and diagnose cancer on an exclusive, worldwide
basis. Under the collaboration Boehringer Mannheim will provide reimbursement
for research previously conducted and will be primarily responsible for all
clinical, regulatory, manufacturing, marketing and sales efforts and expenses.
In addition, the Company is entitled to receive future payments upon achievement
of certain contractual milestones relating to level of product sales, as well as
royalties on product sales. Further, the Company has an option to exercise
certain co-promotion rights in the United States. If and when a telomerase-based
diagnostic kit is developed and commercialized under the agreement with
Boehringer Mannheim, the Company will be significantly dependent upon the
activities of Boehringer Mannheim for the successful manufacturing and
commercialization of such product.
The Company has also entered into licensing arrangements with several diagnostic
companies for the Company's telomerase detection technology. However, because
these licenses are limited to the research-use-only market, such arrangements
are not expected to generate significant commercial revenues.
13
<PAGE> 14
There can be no assurance that the Company will be able to negotiate additional
strategic arrangements in the future on acceptable terms, if at all, or that
such strategic arrangements will be successful. In the absence of such
arrangements, the Company may encounter significant delays in introducing any
product or find that the research, development, manufacture, marketing or sale
of any product is adversely affected. In the event that the Company does not
enter into such arrangements, it may be materially adversely affected.
The Company has relationships with collaborators and scientific advisors at
academic and other institutions, some of whom conduct research at the Company's
request. These collaborators and scientific advisors are not employees of the
Company and may have commitments to, or consulting or advisory contracts with,
other entities that may limit their availability to the Company. The Company has
limited control over the activities of these collaborators and advisors and,
except as otherwise required by its collaboration and consulting agreements, can
expect only limited amounts of their time to be dedicated to the Company's
activities.
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNCERTAINTY OF PATENT PROTECTION
Protection of the Company's proprietary compounds and technology is important to
the Company's business. The Company owns 10 issued United States patents and
over 56 United States patent applications and has licensed 18 issued United
States patents and over 46 United States patent applications, as well as
international filings under the Patent Cooperation Treaty and pending foreign
national patent applications corresponding to certain of these United States
applications. Geron's success will depend in part on its ability to obtain and
enforce its patents and maintain trade secrets, both in the United States and in
other countries. The patent positions of pharmaceutical and biopharmaceutical
companies, including the Company, are highly uncertain and involve complex legal
and technical questions for which legal principles are not firmly established.
There can be no assurance that the Company will continue to develop products or
processes that are patentable or that patents will issue from any of the pending
applications, including even allowed patent applications. There can also be no
assurance that the Company's current patents, or patents that issue on pending
applications, will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide proprietary protection or competitive
advantages to the Company. Because (i) patent applications in the United States
are maintained in secrecy until patents issue, (ii) patent applications are not
generally published until many months or years after they are filed and (iii)
publication of technological developments in the scientific and patent
literature often occurs long after the date of such developments, the Company
cannot be certain that the inventors on its or its licensors' patents and patent
applications were the first to invent the inventions disclosed in the patent
applications or patents or that it or its licensors were the first to file
patent applications for such inventions. Patent prosecution to issue patents and
litigation to establish the validity of patents, to defend against patent
infringement claims of others and to assert infringement claims against others
can be expensive and time consuming even if the outcome is favorable to the
Company. If the outcome of patent prosecution or litigation is unfavorable to
the Company, the Company could be materially adversely affected.
Patent law relating to the scope and enforceability of claims in the fields in
which the Company operates is still evolving. The degree of future protection
for the Company's proprietary rights, therefore, is highly uncertain. In this
regard, there can be no assurance that independent patents will issue from each
of the United States patent applications referenced above, which include many
interrelated applications directed to common or related subject matter. The
Company is aware of certain patent applications and patents that have been filed
by others with respect to telomerase and telomere length technology. In
addition, there are a number of issued patents and pending applications owned by
others directed to differential display, stem cell and other technologies
relating to the Company's research, development and commercialization efforts.
There can be no assurance that the Company's technology can be developed and
commercialized without a license to such patents or that such patent
applications will not be granted priority over patent applications filed by the
Company or its licensors. Furthermore, there can be no assurance that others
will not independently develop similar or alternative technologies to those of
the Company, duplicate any of the
14
<PAGE> 15
Company's technologies or design around the patented technologies developed by
the Company or its licensors, any of which may have a material adverse effect on
the Company.
The commercial success of the Company depends significantly on its ability to
operate without infringing patents and proprietary rights of others. There can
be no assurance that the Company's technologies do not and will not infringe the
patents or proprietary rights of others. In the event of such infringement, the
Company may be enjoined from pursuing research, development or commercialization
of its potential products or may be required to obtain licenses to these patents
or other proprietary rights or to develop or obtain alternative technologies.
There can be no assurance that the Company will be able to obtain alternative
technologies or any required license on commercially favorable terms, if at all,
and if any such license is or alternative technologies are not obtained, the
Company may be delayed or prevented from pursuing the development of certain of
its potential products. The Company's breach of an existing license or failure
to obtain or delay in obtaining alternative technologies or a license to any
technology that it may require to develop or commercialize its products may have
a material adverse effect on the Company. Also, the Company may be subject to
claims or litigation as a result of entering into a license. In this regard, the
Company signed a licensing and sponsored research agreement relating to its
Primordial Stem Cell program with The Johns Hopkins University School of
Medicine ("JHU") on August 1, 1997, after having been informed by a third party
that the Company and JHU would violate the rights of that third party and
another academic institution with which that third party claimed to be
affiliated by way of contract (collectively "Third Party") in doing so. After a
review of the correspondence with the Third Party and JHU as well as related
documents, including an issued U.S. patent, the Company believes that the Third
Party's claims, if asserted, would fall into three general categories: patent
infringement, misuse of confidential information and breach of contract. The
Company believes that it and JHU have substantial defenses to any claims that
might be asserted by such Third Party and has provided indemnification to JHU
relating to such potential claims. However, any litigation resulting from this
matter may divert significant resources, both financial and otherwise, from the
Company's research programs and there can be no assurance that the Company would
be successful in any such litigation. If the outcome of any such litigation is
unfavorable to the Company, the Company could be materially and adversely
affected.
Litigation may also be necessary to enforce any patents issued or licensed to
the Company or to determine the scope and validity of the Company's or anothers'
proprietary rights. The Company could incur substantial costs if litigation is
required to defend itself in patent suits or other intellectual property
litigation brought by others or if Geron initiates such suits. There can be no
assurance that the Company's issued or licensed patents would be held valid or
infringed in a court of competent jurisdiction or that a patent held by another
will be held invalid or not infringed in such court. An adverse outcome in
litigation or an interference to determine priority or other proceeding in a
court or patent office could subject the Company to significant liabilities to
other parties, require disputed rights to be licensed from other parties or
require the Company to cease using such technology, any of which could have a
material adverse effect on the Company.
Geron also relies on trade secrets to protect its proprietary technology,
especially in circumstances in which patent protection is not believed to be
appropriate or obtainable. Geron attempts to protect its proprietary technology
in part by confidentiality agreements with its employees, consultants and
certain contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors.
The Company is party to various license agreements which give it rights to use
certain technologies in its research, development and commercialization
activities. Disputes have arisen and may continue to arise as to the
inventorship and corresponding rights in know-how and inventions resulting from
the joint creation or use of intellectual property by the Company and its
licensors, research collaborators and consultants. There can be no assurance
that the Company will be able to continue to license such technologies on
commercially reasonable terms, if at all, or to maintain the exclusivity of its
exclusive licenses. The failure of the Company to maintain exclusive or other
rights to such technologies could have a material adverse effect on the Company.
15
<PAGE> 16
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will require substantial capital resources in order to conduct its
operations. The Company's future capital requirements will depend on many
factors, including, among others, continued scientific progress in its research
and development programs; the magnitude and scope of these activities; the
ability of the Company to maintain and establish strategic arrangements for
research, development, clinical testing, manufacturing and marketing; progress
with preclinical and clinical trials; the time and costs involved in obtaining
regulatory approvals; the costs involved in preparing, filing, prosecuting,
maintaining, defending and enforcing patent claims; or the potential for new
technologies and products. The Company intends to seek such additional funding
through strategic collaborations, public or private equity financings and
capital lease transactions; however, there can be no assurance that additional
financing will be available on acceptable terms, if at all. Additional equity
financings could result in significant dilution to stockholders. Further, in the
event that additional funds are obtained through arrangements with collaborative
partners, such arrangements 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. If sufficient capital
is not available, the Company may be required to delay, reduce the scope of or
eliminate one or more of its research or development programs, each of which
could have a material adverse effect on the Company. Based on current
projections, the Company estimates that its existing capital resources including
the proceeds from the private placement completed in March 1998 and payments
under the Pharmacia & Upjohn Agreement, interest income, grant funding and
equipment financing will be sufficient to fund its current and planned
operations through 1999. There can be no assurance that the assumptions
underlying such estimates are correct or that such funds will be sufficient to
meet the capital needs of the Company during such period.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT
Geron has incurred net operating losses in every year of operation since its
inception in 1990. Losses have resulted principally from costs incurred in
connection with the Company's research and development activities and from
general and administrative costs associated with the Company's operations. The
Company expects to incur additional operating losses over the next several years
as the Company's research and development efforts and preclinical testing are
expanded. Substantially all of the Company's revenues to date have been research
support payments under the collaborative agreements with Kyowa Hakko and
Pharmacia & Upjohn. Research support payments under the Kyowa Hakko Agreement
expire in April 1998. Research payments under the Pharmacia & Upjohn Agreement
expire in January 2000. The Company is unable to estimate at this time the level
of revenue to be received from the sale of diagnostic products, but does not
expect to receive significant revenues from the sale of research-use-only kits.
The Company's ability to achieve profitability is dependent on its ability,
alone or with others, to select therapeutic compounds for development, obtain
the required regulatory approvals and manufacture and market resulting products.
There can be no assurance when or if the Company will receive material revenues
from product sales or achieve profitability. Failure to generate significant
additional revenues and achieve profitability could impair the Company's ability
to sustain operations.
SUBSTANTIAL COMPETITION; RISK OF TECHNOLOGICAL OBSOLESCENCE
The pharmaceutical and biopharmaceutical industries are intensely competitive.
The Company believes that certain pharmaceutical and biopharmaceutical companies
as well as certain research organizations currently engage in or have in the
past engaged in efforts related to the biological mechanisms of cell aging and
cell immortality, including the study of telomeres, telomerase and stem cell
technologies. In addition, other products and therapies that could compete
directly with the products that the Company is seeking to develop and market
currently exist or are being developed by pharmaceutical and biopharmaceutical
companies, and by academic and other research organizations. Many companies are
also developing alternative therapies to treat cancer and, in this regard, are
competitive with the Company. The pharmaceutical companies developing and
marketing such competing products have significantly greater financial resources
and expertise in research and development, manufacturing, preclinical and
clinical
16
<PAGE> 17
testing, obtaining regulatory approvals and marketing than the Company. Smaller
companies may also prove to be significant competitors, particularly through
collaborative arrangements with large and established companies. Academic
institutions, government agencies and other public and private research
organizations may also conduct research, seek patent protection and establish
collaborative arrangements for research, clinical development and marketing of
products similar to those of the Company. These companies and institutions
compete with the Company in recruiting and retaining qualified scientific and
management personnel as well as in acquiring technologies complementary to the
Company's programs. There is also competition for access to libraries of
compounds to use for screening. Any inability of the Company to secure and
maintain access to sufficiently broad libraries of compounds for screening
potential targets would have a material adverse effect on the Company. In
addition to the above factors, Geron will face competition with respect to
product efficacy and safety, the timing and scope of regulatory consents,
availability of resources, reimbursement coverage, price and patent position,
including potentially dominant patent positions of others. There can be no
assurance that competitors will not develop more effective or more affordable
products, or achieve earlier patent protection or product commercialization than
the Company or that such products will not render the Company's products
obsolete.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the principal members of its scientific and
management staff, the loss of whose services might significantly delay or
prevent the achievement of research, development or business objectives. In
addition, the Company relies on consultants and advisors, including the members
of its Scientific Advisory Board, to assist the Company in formulating its
research and development strategy. Retaining and attracting qualified scientific
and management personnel, consultants and advisors is critical to the Company's
success. The Company faces competition for qualified individuals from numerous
pharmaceutical, biopharmaceutical and biotechnology companies, as well as
academic and other research institutions. There can be no assurance that the
Company will be able to attract and retain such individuals on acceptable terms
and the failure to do so would have a material adverse effect on the Company.
ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF PRIMORDIAL STEM CELL THERAPIES
The Company's Primordial Stem Cell program may involve the use of PS cells that
would be derived from human embryonic tissue, and therefore may raise certain
ethical, legal and social issues regarding the appropriate utilization of this
tissue. The use of embryonic tissue in scientific research is an issue of
national interest. Many research institutions, including certain of the
Company's scientific collaborators, have adopted policies regarding the ethical
use of these types of human tissue. These policies may have the effect of
limiting the scope of research conducted in this area, resulting in reduced
scientific progress. The Company has established an Ethics Advisory Board
comprised of independent and recognized medical ethicists to provide advice to
the Company. In addition, the United States government and its agencies
currently do not fund research which involves the use of such tissue and may in
the future regulate or otherwise restrict its use. The inability of the Company
to conduct research on these cells due to such factors as government regulation
or otherwise could have a material adverse effect on the program. In the event
the Company's research related to PS cell therapies becomes the subject of
adverse commentary or publicity, the Company's name and goodwill could be
adversely affected.
GOVERNMENT REGULATION
The preclinical testing and clinical trials of any products developed by the
Company or its collaborative partners and the manufacturing, labeling, sale,
distribution, marketing, advertising and promotion of any new products resulting
therefrom are subject to regulation by federal, state and local governmental
authorities in the United States, the principal one of which is the FDA, and by
similar agencies in other countries in which products developed by the Company
or its collaborative partners may be tested and marketed (each of such federal,
state, local and other authorities and agencies is referred to herein as a
"Regulatory Agency"). Any product developed by the Company or its collaborative
partners must receive all relevant Regulatory Agency approvals or clearances, if
any, before it may be marketed in a particular country. The regulatory process,
which includes extensive preclinical testing and clinical trials of each
17
<PAGE> 18
product in order to establish its safety and efficacy, is uncertain, can take
many years and requires the expenditure of substantial resources. Data obtained
from preclinical and clinical activities are susceptible to varying
interpretations which could delay, limit or prevent Regulatory Agency approval
or clearance. In addition, delays or rejections may be encountered based upon
changes in Regulatory Agency policy during the period of product development
and/ or the period of review of any application for Regulatory Agency approval
or clearance for a product. Delays in obtaining Regulatory Agency approvals or
clearances could adversely affect the marketing of any products developed by the
Company or its collaborative partners, impose costly procedures upon the
Company's and its collaborative partners' activities, diminish any competitive
advantages that the Company or its collaborative partners may attain and
adversely affect the Company's ability to receive royalties and generate
revenues and profits. There can be no assurance that, even after such time and
expenditures, any required Regulatory Agency approvals or clearances will be
obtained for any products developed by or in collaboration with the Company.
Moreover, if Regulatory Agency approval or clearance for a new product is
obtained, such approval or clearance may entail limitations on the indicated
uses for which it may be marketed that could limit the potential market for any
such product. Furthermore, approved products and their manufacturers are subject
to continual review, and discovery of previously unknown problems with a product
or its manufacturer may result in restrictions on such product or manufacturer,
including withdrawal of the product from the market. In general, failure to
comply with FDA requirements can result in severe civil and criminal penalties,
including but not limited to recall or seizure of product, injunction against
manufacture, distribution, sales and marketing and criminal prosecution.
NO ASSURANCE OF MARKET ACCEPTANCE; UNCERTAINTY OF PHARMACEUTICAL PRICING; IMPACT
OF HEALTH CARE REFORM MEASURES
There can be no assurance that any products successfully developed by the
Company or its collaborative partners, if approved for marketing, will achieve
market acceptance. The products which the Company is attempting to develop will
compete with a number of traditional drugs and therapies manufactured and
marketed by major pharmaceutical companies, as well as new products currently
under development by such companies and others. The degree of market acceptance
of any products developed by the Company will depend on a number of factors,
including the establishment and demonstration in the medical community of the
clinical efficacy and safety of the Company's product candidates, their
potential advantage over alternative treatment methods and reimbursement
policies of government and third-party payors. There is no assurance that
physicians, patients or the medical community in general will accept and utilize
any products that may be developed by the Company or its collaborative partners.
In both domestic and foreign markets, sales of the Company's products, if any,
will depend in part on the availability of reimbursement from third-party payors
such as government health administration authorities, private health insurers,
health maintenance organizations, pharmacy benefit management companies and
other organizations. Both federal and state governments in the United States and
foreign governments continue to propose and pass legislation designed to contain
or reduce the cost of health care through various means. Legislation and
regulations affecting the pricing of pharmaceuticals and other medical products
may change or be adopted before any of the Company's potential products are
approved for marketing. Cost control initiatives could decrease the price that
the Company receives for any product it may develop in the future and have a
material adverse effect on the Company. In addition, third-party payors are
increasingly challenging the price and cost-effectiveness of medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products, including pharmaceuticals. There can be no
assurance that the Company's potential products will be considered cost
effective or that adequate third-party reimbursement will be available to enable
Geron to maintain price levels sufficient to realize an appropriate return on
its investment in product development. In any such event, the Company may be
materially adversely affected.
REGULATIONS RELATING TO THE ENVIRONMENT AND HAZARDOUS MATERIALS
The Company's research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive compounds. As a
consequence, the Company is subject to numerous
18
<PAGE> 19
environmental and safety laws and regulations. There can be no assurance that
the Company will not be required to incur significant costs to comply with
current or future environmental laws and regulations or that the Company will
not be adversely affected by the cost of compliance with such laws and
regulations. Although the Company believes that its safety procedures for using,
handling, storing 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 eliminated. In the event
of such an accident, the Company's use of these materials could be curtailed by
state or federal authorities, the Company could be held liable for any damages
that result and any such liability could have a material adverse effect on the
Company.
POTENTIAL PRODUCT LIABILITY CLAIMS; ABSENCE OF INSURANCE
Although the Company believes it does not currently have any exposure to product
liability claims, the Company's future business will expose it to potential
product liability risks that are inherent in the testing, manufacturing and
marketing of human therapeutic and diagnostic products. The Company currently
has no clinical trial liability insurance and there can be no assurance that it
will be able to obtain and maintain such insurance for any of its clinical
trials. In addition, there can be no assurance that the Company will be able to
obtain or maintain product liability insurance in the future on acceptable terms
or with adequate coverage against potential liabilities.
CONTROL BY MANAGEMENT AND CURRENT STOCKHOLDERS
Executive officers and directors of the Company, together with entities
affiliated with them, own or control approximately 10% of the outstanding shares
of Common Stock and may be able to influence significantly the election of the
Company's Board of Directors and other corporate actions requiring stockholder
approval, as well as significantly influence the direction and policies of the
Company.
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock in the public market could
adversely affect the market price of the Common Stock. The Company had
outstanding approximately 11,142,670 shares of Common Stock and 15,000 shares of
Series A Convertible Preferred Stock (the "Series A Preferred Stock") as of
March 30, 1998. As of April 24, 1998, 3,071,018 shares of Common Stock were
reserved for issuance upon exercise of the Company's outstanding options and
warrants and an additional 1,993,355 shares of Common Stock were reserved for
issuance upon conversion of the Series A Preferred Stock. Pharmacia & Upjohn
S.p.A. has agreed not to sell the 696,787 shares (including the 255,102 shares
purchased in March 1998) held by it until April 2000, after which time such
shares will be freely transferable in accordance with Regulation S promulgated
under the Securities Act of 1933, as amended ("the Securities Act"). Except for
the shares of Common Stock issued to Pharmacia & Upjohn S.p.A., all of the
Company's outstanding shares of Common Stock are freely tradeable without
restriction under the Securities Act unless held by affiliates of the Company.
In addition, certain holders of Common Stock and securities convertible into or
exercisable for shares of Common Stock have certain registration rights under a
registration rights agreement among such holders and the Company.
POSSIBLE VOLATILITY OF STOCK PRICE
There has been a history of significant volatility in the market price for
shares of biopharmaceutical companies, and it is likely that the market price of
the Common Stock will be similarly volatile. Prices for the Common Stock may be
influenced by many factors, including the depth of the market for the Common
Stock, investor perception of the Company, fluctuations in the Company's
operating results and market conditions relating to the biopharmaceutical and
pharmaceutical industries. In addition, the market price of the Common Stock may
be influenced by announcements of technological innovations, new commercial
products or clinical progress or the lack thereof by the Company, its
collaborative partners or its competitors. In addition, announcements concerning
regulatory developments, developments with respect
19
<PAGE> 20
to proprietary rights and the Company's collaborations as well as other factors
could also have a significant impact on the Company's business and the market
price of the Common Stock.
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS; CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to 3,000,000
shares of undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without further vote or action by the
Company's stockholders. In March 1998, the Board of Directors designated 15,000
shares of Series A Convertible Preferred Stock. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company. In addition, certain provisions of the Company's charter documents,
including the inability of stockholders to take actions by written consent and
the staggered election of the Company's Board of Directors, and certain
provisions of Delaware law could delay or make difficult a merger, tender offer
or proxy contest involving the Company.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send checks, or engage in
similar normal business activities.
The Company has started an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost is estimated at approximately $200,000 which includes $100,000 of
new software that will be capitalized and $100,000 that will be expensed as
incurred. As of March 31, 1998, the Company has not incurred any expenses for
the Year 2000 project.
POSSIBLE DILUTION FROM CONVERSION OF SERIES A PREFERRED STOCK
The number of shares of Common Stock issuable upon conversion of the Series A
Convertible Preferred Stock is not fixed and could result in substantial
dilution to current stockholders. Further, sales of the underlying shares of
Common Stock could adversely affect the market price of the Common Stock. As of
April 24, 1998, 15,000 shares of the Company's Series A Convertible Preferred
Stock were issued and outstanding. Each share of the Series A Convertible
Preferred Stock is convertible into such number of shares of Common Stock as is
determined by dividing the stated value ($1,000) of the share of Series A
Convertible Preferred Stock (as such value is increased by a premium based on
the number of days the Series A Convertible Preferred Stock is held) by the then
current Conversion Price(which is determined by reference to the then current
market price). If converted on April 22, 1998, the Series A Preferred Stock
would have been convertible into approximately 1,328,904 shares of Common Stock,
but this number of shares could be significantly larger or smaller depending on
the trading price of the Common Stock at the time of conversion. The shares of
Series A Preferred Stock are not registered and may be sold only if registered
under the Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. The shares of Common Stock into which the Series
A Preferred Stock may be converted have been registered pursuant to a
Registration Statement on Form S-3 that was filed on April 24, 1998. In the
event the Company is not able to register the underlying Common Stock or the
holders of the Preferred Stock are otherwise unable to sell the underlying
Common Stock, the Company could be subject to various penalties, including the
right of the holders of the Preferred Stock to cause redemption of the Preferred
Stock at a premium.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On March 27, 1998, the Company designated and issued
15,000 shares of Series A Convertible Preferred Stock
with a stated value of $1,000 per share (the "Series A
Preferred Stock"), for aggregate proceeds of
$15,000,000. The shares were sold to funds affiliated
with two institutional investors, Rose Glen Capital
Management, L.P. and Citadel Investment Group, in a
private placement exempt from the registration
requirements of the Securities Act of 1933, as amended
(the "Act") pursuant to Regulation D.
Each share of Series A Preferred Stock is convertible
into the number of shares of the Company's Common Stock,
equal to (i) the stated value ($1,000) plus a premium of
6% per annum of the stated value from the date of
issuance of the Series A Preferred Stock (the "Issue
Date"), divided by (ii) the Conversion Price. The
Conversion Price is equal to the lesser of (i) 95% of
the average closing bid prices of the Common Stock for
any five consecutive trading days during the twenty
consecutive trading day period ending on the day prior
to the date of conversion (the "Market Price") and (ii)
$16.88. However, for conversions taking place prior to
December 27, 1998, if any, the Conversion Price is equal
to the lesser of (i) (a) 100% of the Market Price, if
the Market Price is greater than $12.50 or (b) 105% of
the Market Price, if the Market Price is less than
$12.50 and (ii) $16.88.
Subject to certain limited exceptions, the holders of
the Series A Preferred Stock are subject to limits on
the number of shares they can convert at any one time.
Unless the price at which the Common Stock trades on the
Nasdaq National Market ("Nasdaq") on the date of
conversion is greater than or equal to either (i) 120%
of the Market Price or (ii) $15.00, the following limits
apply: Prior to 270 days from the Issue Date, the Series
A Preferred Stock may not be converted; beginning 271
days from the Issue Date, each holder of the Series A
Preferred Stock may only convert up to 33.3% of its
initial holding of the Series A Preferred Stock;
beginning 301 days from the Issue Date, each holder of
the Series A Preferred Stock may only convert up to
66.6% of its initial holding of the Series A Preferred
Stock and beginning 331 days from the Issue Date, all of
the Series A Preferred Stock may be converted. The
Series A Preferred Stock is subject to redemption at the
Company's option if the market price of the Common Stock
exceeds or falls below certain thresholds. The Company
has agreed to register the underlying Common Stock for
resale.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
21
<PAGE> 22
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
(i) The Company filed the following reports on
Form 8-K relating to the issuance of certain
press releases and the issuance of
convertible preferred stock:
Form 8-K
Report Date: January 13, 1998
Filing Date: February 11, 1998
Item 5: Other Events
Item 7(c): Exhibits
Form 8-K
Report Date: March 27, 1998
Filing Date: April 2, 1998
Item 5: Other Events
Item 7(c): Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GERON CORPORATION
By: /s/ David L. Greenwood
--------------------------------
David L. Greenwood
Chief Financial Officer, Treasurer and
Secretary (Duly Authorized Signatory and
Principal Financial and Accounting
Officer)
Date: May 13, 1998
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
23
<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> 27,186
<SECURITIES> 11,397
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39,542
<PP&E> 6,189
<DEPRECIATION> (3,998)
<TOTAL-ASSETS> 41,903
<CURRENT-LIABILITIES> 2,363
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 38,460
<TOTAL-LIABILITY-AND-EQUITY> 41,903
<SALES> 0
<TOTAL-REVENUES> 2,250
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,494
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82
<INCOME-PRETAX> (1,867)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,867)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
