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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 473-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $0.001 PAR VALUE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 7, 2000, there were 18,607,078 shares of Common Stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the registrant was approximately $996,412,682 based upon the closing price of
the Common Stock on March 7, 2000 on The Nasdaq National Market. Shares of
Common Stock held by each officer, director and holder of five percent or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Potential risks and uncertainties
include, without limitation, those mentioned in this report and in particular,
the factors described below in Part II, Item 7, under the heading "Additional
Factors That May Affect Future Results."
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PART I
ITEM 1. BUSINESS
OUR TECHNOLOGY
Telomeres and Telomerase: Their role in cellular aging and cancer
Cells are the building blocks for all tissues in the human body, and cell
division plays a critical role in the normal growth, maintenance and repair of
human tissue. However, in the human body, cell division is a limited process.
Depending on the tissue type, cells generally divide only 60 to 100 times during
the course of their normal lifespan.
We and our collaborators, have shown that telomeres, located at the ends of
chromosomes, are key genetic elements involved in regulation of the cellular
aging process. Our work has shown that each time a normal cell divides,
telomeres shorten. Once telomeres reach a certain short length, cell division
halts and the cell enters a state known as senescence or aging. Our
collaborators have used mouse models to show that this type of cellular aging
can cause numerous age-related degenerative changes in mammals. We believe that
this cellular aging process, which occurs in numerous tissues throughout the
human body, causes or contributes to chronic degenerative diseases and
conditions including chronic liver disease, AIDS, macular degeneration or a
chronic disease of the eyes often leading to vision loss, atherosclerosis or
narrowing of arteries which reduces blood flow to internal organs, and impaired
wound healing.
We and our collaborators have demonstrated that telomeres serve as a
molecular "clock" for cellular aging and that the enzyme telomerase, when
introduced into normal cells, is capable of restoring telomere length or
resetting the "clock," thereby increasing the lifespan of cells without altering
their normal function or causing them to become cancerous. Human telomerase, a
complex enzyme, is composed of a ribonucleic acid component, also known as RNA
or hTR, and a protein component, also called hTERT. In 1994, we cloned the gene
for hTR and in 1997, in collaboration with Dr. Thomas Cech at the University of
Colorado, Boulder, we cloned the hTERT gene.
Our work and that of others has shown that telomerase is not present in
most normal cells and tissues, but that during tumor progression, telomerase is
abnormally reactivated in all major cancer types. We have shown that unlike the
mutations which cause cancer, the presence of telomerase only enables cancer
cells to maintain telomere length, providing them with indefinite replicative
capacity. Inhibiting telomerase activity should result in telomere shortening
and therefore the aging and eventual death of the cancer cell.
Human Pluripotent Stem Cells: A potential source for the manufacturing of
replacement cells and tissues
Stem cells generally are self-renewing primitive cells that can develop
into functional, differentiated cells. Human pluripotent stem cells are unique
because they can develop into all cells and tissues in the body. There are two
types of human pluripotent stem cells, also called hPSCs: human embryonic stem
cells, also known as hES cells, which are derived by our collaborators from
donated in vitro fertilized blastocysts or very early-stage embryos; and human
embryonic germ cells also known as hEG cells, which are derived from donated
fetal material.
In addition to their pluripotent characteristics, hES cells express
telomerase and can therefore multiply or replicate indefinitely. The ability of
hES cells to divide indefinitely in the undifferentiated state without losing
pluripotency is a unique characteristic that distinguishes them from all other
stem cells discovered to date in humans. Other stem cells such as blood or gut
stem cells express telomerase at very low levels or only periodically; they
therefore age, limiting their use in research or therapeutic applications. Human
embryonic stem cells also maintain a structurally normal set of chromosomes even
after prolonged growth in culture. They do not, for example, have any abnormal
additions, deletions or rearrangements in their chromosomal structure as is
characteristic of cell lines derived from tumors or immortalized by viruses.
Although not as well characterized as hES cells, we believe that hEG cells will
share most of the characteristics of hES cells.
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We intend to use hPSC technology to
- enable development of transplantation therapies by providing standard
starting material for the manufacture of cells and tissues,
- facilitate pharmaceutical research and development practices by providing
cells for screening, and assigning function to newly discovered genes,
and
- accelerate research in human developmental biology by identifying the
genes that control human development.
Nuclear Transfer: A potential mechanism for generating genetically matched
cells and tissues
Nuclear transfer is a method for generating human cells and whole animals
whose genetic material is derived solely from the nucleus of a single cell
obtained from a single individual. In this process, the nucleus containing all
of the chromosomal DNA is removed, or enucleated, from the egg cell and replaced
with the nucleus containing all of the chromosomal DNA from a donor somatic or
non-reproductive cell. Fusion between the resulting egg cell and the donor
somatic nucleus results in a new cell which gains a complete set of chromosomes
derived entirely from the donor nucleus. After a brief culture period, the
resulting embryo is implanted into the uterus of a female animal, where it can
develop and produce the live birth of a cloned offspring. The offspring is a
genetic clone of the animal from which the donor nucleus was obtained.
In early 1997, Dr. Ian Wilmut and his colleagues at the Roslin Institute
demonstrated with the birth of Dolly, the sheep, that the nucleus of an adult
cell can be transferred to an enucleated egg to create cloned offspring. The
birth of Dolly was significant because it demonstrated the ability of egg cell
cytoplasm, also known as the portion of the cell outside of the nucleus, to
reprogram an adult nucleus. Reprogramming enables the adult differentiated cell
nucleus to express all the genes required for full embryonic development of the
adult animal. Since Dolly was cloned, the technique has been used to clone mice,
goats and cattle from donor cells obtained from adult mice, goats and cattle,
respectively.
In 1999, we acquired Roslin Bio-Med Ltd., a commercial subsidiary of the
Roslin Institute which pioneered the use of nuclear transfer technology for the
creation of cloned animals, in order to complement and strengthen our technology
platform. We also entered into a research collaboration with the Roslin
Institute to focus on understanding the molecular mechanisms used by animal egg
cell cytoplasm to reprogram adult animal nuclei.
A key objective of our collaboration with the Roslin Institute is to learn
how to confer the reprogramming capability normally found in the egg cell
cytoplasm to the cytoplasm of a somatic cell in order to eliminate reliance on
harvested eggs. In this way, we believe that transplantable genetically-matched
cells could be derived from pluripotent stem cells generated through nuclear
transfer using adult cells taken from the intended transplant recipient. Such
cells would not trigger immune rejection because they would match exactly the
tissue antigens of the transplant recipient. We intend to develop this
technology to produce genetically-matched cells for use in repairing organs
damaged by degenerative disease.
COMMERCIAL OPPORTUNITIES FOR OUR PROGRAMS
Oncology
Cancer is a group of diseases characterized by uncontrolled growth and
spread of abnormal cells. The American Cancer Society estimates that
approximately 1.2 million cancer cases will be diagnosed in the year 2000.
Overall annual costs associated with cancer currently amount to $107 billion in
the United States alone. Because telomerase is detectable in more than 30 human
cancer types and in over 80 percent of cancer samples studied, we believe that a
telomerase inhibitor could overcome the limitations of current cancer therapies
and potentially be a broadly applicable and highly specific drug treatment for
cancer.
We are working to discover and develop telomerase inhibitors; oncolytic, or
cancer killing, viruses; and telomerase vaccines, for anti-cancer therapies. We
also intend to continue to develop and commercialize products using telomerase
as a marker for cancer diagnosis, prognosis, patient monitoring and screening.
We
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believe that we have achieved a dominant position in telomerase research and in
telomerase intellectual property which gives us a significant advantage in the
discovery and development of oncology products based on telomerase.
Telomerase Inhibition. Telomerase activation is necessary for most cancer
cells to replicate indefinitely thereby enabling tumor growth and metastasis.
One of our strategies for the development of anti-cancer therapies is to inhibit
telomerase activity in cancer cells. Inhibiting telomerase activity should
result in telomere shortening and therefore the aging and eventual death of the
cancer cell. Because telomerase is not expressed in most normal cells, the
telomerase inhibition therapies described below are not expected to be cytotoxic
to normal cells. We have focused our efforts on two approaches to produce a
telomerase inhibitor effective in the treatment of cancer. Both approaches have
produced compounds which should advance to animal studies in 2000. We and our
collaborators have research programs focused upon our telomerase-inhibiting
molecules with the goal of advancing an inhibitor to clinical development.
Oligonucleotides. We have designed and synthesized a special class of
short-chain nucleic acid-like molecules, also known as oligonucleotides, to
target the RNA component of telomerase. These oligonucleotides have demonstrated
highly potent telomerase inhibitory activity at sub-nanomolar, or very low,
concentrations in both biochemical assays and various cellular systems. Based on
these promising results, we plan to initiate tests of these molecules in animal
models of cancer in the coming year. We hold rights to this class of
oligonucleotides for telomerase inhibition, and have also developed several new
oligonucleotide-based chemistries for which we have filed our own patent
applications.
Small Molecules. Through high-throughput screening of highly diverse
chemical compound libraries, we have identified classes of small molecule
compounds that are effective telomerase inhibitors which are being evaluated by
us and our collaborators, Pharmacia & Upjohn and Kyowa Hakko. As a result of our
recent confirmation of telomerase inhibition by these small molecules in cell
culture, both of our collaborators have extended their funded research
collaborations with us.
Oncolytic Virus. Our second anti-cancer therapeutic strategy is based on
viruses which have been manipulated or engineered to have oncolytic, or
cancer-killing properties and which would selectively target and destroy cancer
cells. We are developing customized adenoviruses, also known as common cold
viruses, that will infect and kill cancer cells which express telomerase and not
normal cells which do not express telomerase. To pursue this goal, we have
cloned the region of the hTERT gene that is responsible for turning on or off
the activity of telomerase in a cell, called the promoter sequence. We have
demonstrated that this promoter is only turned on in telomerase-positive cells,
and is turned off in normal somatic cells.
We are using the hTERT promoter to turn on the genes which are required for
the adenovirus to replicate. Our data indicate that when tumor cells are
infected with the adenovirus which contains the hTERT promoter, the virus
multiplies or replicates within the cancer cells and causes the rupture and
death, or lysis, of the tumor cells. When these same adenoviruses containing the
hTERT promoter infect normal somatic tissue, there is no effect on the cells. We
are currently evaluating this oncolytic virus in both local and metastatic
animal tumor models. We believe that these oncolytic viruses could be used to
treat many types of primary and metastatic cancers.
Telomerase Vaccine. Our third approach to developing an anti-cancer therapy
is a telomerase vaccine. Telomerase is present in the majority of human cancer
cells but is absent in most normal somatic cells. In this approach, we deliver
telomerase to special immune cells called dendritic cells which instruct the
immune system to detect cells that express telomerase and kill them.
We are conducting research to confirm the safety and efficacy of telomerase
dendritic cell vaccine therapies. We are also developing procedures for direct
immunization of patients using telomerase. This direct method of vaccination
would eliminate the need for manipulation of dendritic cells in culture and
could potentially allow simple vaccination procedures to be available for all
cancer patients.
Cancer Diagnostics. Telomerase is a broadly applicable and highly specific
marker for cancer because it is detectable in more than 30 human cancer types
and in over 80 percent of cancer samples studied. We believe that the detection
of telomerase may have significant clinical utility for cancer diagnosis,
prognosis,
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monitoring and screening. Current cancer diagnostics apply only to a single or
limited number of cancer types because they rely on molecules expressed only by
particular cancer types; telomerase-based diagnostics could potentially address
a broad range of cancers.
We have developed several proprietary assays for the detection of
telomerase which are based on its activity or the presence of its RNA or protein
components. The first-generation assay is the Telomeric Repeat Amplification
Protocol, or "TRAP," assay which can be used to detect telomerase activity in
human tissue or cells in culture. The second generation assays detect the
presence of hTR and hTERT in human tissues and body fluids. We own issued
patents for the detection of telomerase activity and the components of
telomerase including patents for the TRAP assay and diagnostic methods based on
telomerase detection. To date, our licensees have commercialized ten
research-use-only kits that incorporate our technology.
We are working with Roche Diagnostics to develop the full clinical
potential of our telomerase detection technology. Research data shows that an
assay for telomerase is a more sensitive and specific test for screening bladder
cancer than other commercially available tests. We believe that this and other
data support the clinical application of telomerase assays in diagnosis,
staging, monitoring and screening for bladder, cervical, prostate and other
cancers.
Research Tools for Drug Discovery
Genomics. The Human Genome Project, an international research program
conducted by the United States Department of Energy and the National Institutes
of Health, is nearing completion with the goal of sequencing and mapping every
human gene within the genome. Despite this catalogue of human gene sequences,
little is known about when or in what cells genes are expressed or how they
function. The next major hurdle is to determine the function of these genes and
to use this information to develop new diagnostic and therapeutic approaches for
many diseases.
Pluripotent stem cells are especially suitable to help define the function
of genes involved in cell proliferation, differentiation and metabolism. The
effects of adding or knocking out specific genes in hPSCs can be monitored,
providing evidence for the function of the gene on a particular proliferation or
differentiation process. We are now developing screening procedures using hPSCs
to identify the function of multiple genes simultaneously. Identification of the
function of genes will allow the selection of genes that would be good targets
for drug development.
Immortalized Cells for Research. Scientists study specific cells from
targeted tissues in order to understand their biological function. In these
studies, cells are usually isolated from tissue and propagated in tissue
culture. The progressive changes in biological activity, morphology, and
proliferation as a result of tissue culture potentially limit the utility of
these cells in parallel experiments and long term research. Because of these
limitations, most research laboratories utilize transformed cell lines for their
experimental studies. Cells can be transformed by viral mechanisms, by using
viruses to cause the cells to grow indefinitely in culture. However, they have
abnormal characteristics compared to non-transformed cells. For this reason,
such transformed cells are not good models of normal tissues in the human body.
The telomerase-immortalized cells are ideal for use in biological research
because these cells proliferate indefinitely and function in culture in the same
manner as the normal, mortal cells from which they were derived. Moreover,
telomerase-immortalized cells can function in the body to form normal tissue and
their capacity to differentiate into mature tissue is maintained. Their
maintenance of normal physical and biological characteristics while retaining
proliferative capacity allows them to be a constant source of cells for repeat
and long-term studies on the function of cells both in culture and in the body.
Telomerase-immortalized cells can be used to study any of the normal biological
pathways in cells and can be used to screen for factors which influence the
appropriate function of those cells. Moreover, telomerase-immortalized cells
taken from diseased tissues can be used to explore the mechanism of the disease
process and to develop interventions to prevent or treat that disease.
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We distribute the human telomerase gene under material transfer agreements
to academic laboratories worldwide in order to generate new applications and to
preserve our commercialization rights in these applications. To date, we have
material transfer agreements with over 300 academic laboratories worldwide.
To distribute our telomerase immortalized cell lines commercially, we
established an alliance with Clontech, to distribute telomerase immortalized
cell lines to the not-for-profit research market for basic research
applications. Under the alliance, we execute licenses with, and receive license
fees from, commercial entities that are supplied by Clontech.
Drug Screens. Three of the major hurdles of pharmaceutical drug development
are (i) identification of compounds with activity in diseased tissue; (ii)
understanding the metabolism and biodistribution of the compound; and (iii)
determination of the potential toxic side effects of the compound. Undesirable
activity of a compound being evaluated as a candidate drug in any one of these
areas can impact the development and commercialization of the drug. The earlier
in development that a compound is found to have undesirable characteristics, the
faster these characteristics can be potentially corrected. This potentially
translates into reduced costs and time in drug development, and less harmful
exposure to patients in clinical trials.
Many prospective new drugs fail in clinical trials because of toxicity to
the liver or because of poor uptake, distribution, or elimination of the active
compound in the human body. Much of the efficacy and safety of a drug will
depend on how that drug is metabolized into an active or inactive form, and on
the toxic metabolites that might be generated in the process. Hepatocytes, the
major cells of the liver, metabolize most compounds and thereby affect a drug's
pharmacological characteristics.
There are no completely effective systems available today to accurately
determine the metabolism or toxicity of a compound in human livers. Rat and
mouse models only approximate human metabolism. The development of several drugs
has been terminated late in human clinical trials because rodent systems
utilized early in the development process failed to predict that the drug would
be toxic to humans. Human hepatocyte cell lines available today do not have the
same attributes as their normal counterparts in the body and must be transformed
in order to maintain their proliferative capacity in culture. Access to fresh
primary human liver tissue to be used in toxicity studies is very unreliable and
substantial variability can be observed depending on the individual donor, the
time and process of collection, and the culture conditions for the experiments.
We believe telomerase-immortalized hepatocytes would serve as a consistent
source of normal human liver tissue which would more closely predict the impact
of a new drug on human livers in the body. We believe that
telomerase-immortalized hepatocytes which retain normal drug metabolism enzymes
would revolutionize toxicity testing, address the largest bottleneck in new drug
research and accelerate the drug development process. To meet this need, we are
creating immortalized hepatocytes using two methods. First, we will apply our
telomerase technology to immortalize human hepatocytes. In every cell system
tested, telomerase-immortalized cells have been shown to function comparably to
their normal non-immortalized counterparts. Therefore, telomerase-immortalized
hepatocytes should also function comparably to hepatocytes in a whole human
liver in the body. Second, we are developing procedures to differentiate hPSCs
into hepatocyte precursors and eventually into mature hepatocytes. Functional
hepatocytes, developed by either immortalization by telomerase or derivation
from hPSCs, would provide a consistent and reliable source of material for
extensive and reproducible compound testing.
We intend to commercialize these cells to more accurately determine the
potential toxicity and metabolism of a new candidate drug. In addition, the
availability of immortalized hepatocytes from numerous individuals would allow a
more thorough understanding of the effects of a drug candidate on a specific
individual, allowing full development of the field of pharmacogenomics whereby a
compound's activity will be correlated with an individual's genetic make-up.
Regenerative Medicine
The preceding product opportunities are examples of how we plan to use each
of our three technology platforms. Additional opportunities arise from their
combination. The integration of our three scientific platforms:
telomerase-immortalized cells, hPSCs and nuclear transfer technologies allow the
development of
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cell based therapies that would have broad application for the treatment of
chronic degenerative diseases which are occurring with increasing frequency in
our aging population. We are developing two basic approaches to restore organ
function lost to chronic diseases: gene-based therapies and cell based
therapies.
We are developing gene-based therapies by which the hTERT gene is
transferred directly to cells to extend their replicative capacity and thereby
restore normal function. We expect that the restoration of telomerase activity
in a controlled manner directly in the body will have therapeutic applications
for the treatment of blood, skin, liver and immune disorders where deficiencies
in cell proliferation have been noted.
In cell-based therapies, differentiated cells derived from hPSCs would be
directly injected into the affected tissue where they would integrate into the
target tissue and thereby restore organ function. This approach is particularly
applicable for the regeneration of tissues that do not normally divide in the
body. Such cells include cardiomyocytes or heart muscle cells, neural cells,
hepatic cells and pancreatic (LOGO) islet cells. We are currently developing the
following cell types and therapeutic approaches.
Chronic Liver Disease. There are over 25,000 deaths in the United States
every year due to chronic liver disease. This number is expected to increase
with the growing number of people who are infected with hepatitis B and C
viruses. Each year over $9 billion is spent at hospitals in the United States
alone for the treatment and management of patients with chronic liver diseases.
Liver regeneration is not observed in most patients with chronic liver
disease. Compromised liver function and chronic liver disease can result from
prolonged exposure to various harmful factors such as chemical toxins, chronic
alcohol intake, autoimmune inflammation, metabolic disorders, viral infections
and others. Patients with advanced stages of chronic liver diseases often suffer
from other complications such as diabetes, bleeding disorders, portal
hypertension or localized high blood pressure, edema or fluid retention, mental
dysfunction, immune dysfunction, kidney failure and liver cancer, eventually
leading to death. Treatment for patients with advanced liver disease usually
consists of liver transplantation. Despite some success with this procedure, the
majority of candidate patients do not receive transplants due to low organ
availability.
Telomerase is not normally expressed in human liver cells and recent
studies have shown that shortened telomere lengths are observed in the livers of
patients with chronic liver diseases. Studies in mice, in which the RNA
component of the telomerase gene has been removed, show that these animals have
increased sensitivity to liver damage. Restoring telomerase activity in those
mice results in the restoration of hepatic regenerative capacity.
We plan to utilize our technology platforms in several different formats to
treat liver diseases. In one application, we are developing methods to generate
telomerase activity in hepatocytes. In this approach, using gene-based therapy,
the telomerase gene is delivered directly to the liver to determine if
telomerase can restore the regenerative capacity of the damaged liver. As a
second approach, using cell-based therapy, we will apply the same techniques
being developed to produce human hepatocytes for drug discovery to create
hepatocytes for therapeutic intervention in liver disease. Several potential
alternative cell-based therapies are being explored. The first is an external
device which would incorporate immortalized human hepatocytes to supplement the
patient's own liver function during acute flares of chronic liver disease. The
second is the transplantation of immortalized hepatocytes into the patient's
liver to seed and stimulate hepatocyte repopulation. Successful development of
these therapies potentially could provide therapeutic alternatives for the high
proportion of patients who are not candidates for liver transplantation or for
whom transplantable organs are not available.
Heart Disease. Heart muscle cells, also known as cardiomyocytes, do not
regenerate during adult life. When heart muscle is damaged by injury or
decreased blood flow, functional contracting heart muscle is replaced with
nonfunctional scar tissue. Congestive heart failure, a common consequence of
heart muscle or valve damage, affects more than four million people in the
United States. This year, it is estimated that about 1.1 million people will
have a heart attack, which is the primary cause of heart muscle damage.
We intend to use cardiomyocytes derived from hPSCs to treat heart disease.
Proof of concept of our approach has been demonstrated in mice. Mouse embryonic
stem cells were used to derive mouse cardiomyocytes. When injected into the
hearts of recipient adult mice, the cardiomyocytes repopulated the
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heart tissue and stably integrated into the muscle tissue of the adult heart.
These results suggest that hPSC-derived cardiomyocytes could be developed for
cellular transplantation therapy in humans suffering from congestive heart
failure and heart attacks. We have derived human cardiomyocytes from hPSCs and
observed their normal contractile function. We plan to test these cardiomyocytes
in animal models to establish the safety and efficacy of this cell-based
therapy.
Parkinson's Disease, Stroke and Spinal Cord Injury. The major neural cells
of the nervous system typically do not regenerate after injury. If a nerve cell
is damaged due to disease or injury, there is no treatment at present to restore
lost function. Millions of patients worldwide suffer from injury to or disorders
associated with degeneration of the nervous system. Strokes are caused by blood
clots or local bleeding in the brain and result in the death or degeneration of
critical brain cells. Over 500,000 Americans suffer strokes each year. Stroke
patients are often permanently compromised by loss of cognitive motor and
sensory functions. There is no treatment available today except costly long-term
rehabilitation programs which have limited utility in restoring function. Over
one million Americans suffer from Parkinson's disease, a neurological disorder
caused by the progressive degeneration of specific cells within the brain that
control certain motor functions. In the case of spinal cord injuries, patients
are often left partly or wholly paralyzed because nerve cells in the spinal cord
have been severed and cannot regenerate. Such patients are permanently disabled,
often institutionalized, some requiring life support.
Embryonic stem cell-derived neurons have been used to treat nervous system
disorders in animal models. Mouse embryonic stem cells were stimulated to
differentiate into neural cells which, when transplanted into mice with
neurological disorders, helped to restore normal function. In the case of spinal
cord injuries, neurons derived from animal embryonic stem cells produced partial
recovery of the animal's ability to move and bear weight when injected into the
spinal cord injury site.
We have derived the major types of neural cells from hPSCs cells in
culture--human neurons, astrocytes, and oligodendrocytes. We have devoted a
significant portion of our research activities to develop procedures that should
enable us to produce these neural cells for transplantation therapy in humans.
We will first test these cells in appropriate animal models to determine whether
they can restore normal neural function. We intend to repair the damaged
portions of patients' nervous systems by transplanting differentiated neurons
produced from hPSCs.
Skin. The skin is a major organ system of the body whose deterioration with
age impacts not just human physical health but also our appearance and
self-esteem. The thinning and increased wrinkling of older skin is symptomatic
of impaired wound healing and results in increased frequency of chronic ulcers.
Skin cancers are more prevalent than any other form of cancer and are believed
to be caused in part by aging of skin cells.
We have initiated a major skin program based upon the activation of
telomerase in skin cells. Our scientists and collaborators as well as other
researchers have established that skin cells age in tissue culture and in the
body with loss of telomeric DNA, and that restoration of telomerase activity is
capable of dramatically extending the healthy lifespan of these cells in
culture. Animal models of telomere loss also correlate cellular aging with
thinning of skin, graying of hair, chronic ulcerative lesions at areas of
stress, and reduced ability to repair wounds. Our approach to the therapeutic
use of telomerase activation in skin includes both small molecule drug discovery
as well as biological and genetic methods of introducing telomerase into various
skin cells.
Diabetes. It is estimated that there are as many as one million Americans
suffering from the type of diabetes known as Insulin Dependent Diabetes
Mellitus. Normally, certain cells in the pancreas called the islet (LOGO) cells
produce insulin which promotes the uptake of the sugar glucose by cells in the
human body. Degeneration of pancreatic islet (LOGO) cells results in a lack of
insulin in the bloodstream which results in diabetes. Although diabetics can be
treated with daily injections of insulin, these injections enable only
intermittent glucose control. As a result, patients with diabetes suffer chronic
degeneration of many organs, including the eye, kidney, nerves and blood
vessels. In some cases, patients with diabetes have been treated with islet
(LOGO) cell transplantation. However, poor availability of suitable sources for
islet (LOGO) cell transplantation and the complications of the required
co-administration of immunosuppressive drugs make this approach impractical as a
treatment for the growing numbers of individuals suffering from diabetes.
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By integrating our three scientific platforms: telomerase-immortalization,
hPSCs and nuclear transfer, we intend to derive histocompatible, or
genetically-matched, insulin-producing islet (LOGO) cells for transplantation.
Pilot studies are underway with collaborators to determine the effects of
telomerase expression on primary (LOGO) cells derived from human islet tissue.
In addition, we are devising techniques to differentiate islet (LOGO) cells from
hPSCs which would be used in studies of animal models of diabetes. We intend to
derive long-lived, transplantable islet (LOGO) cells which could support the
patient's insulin requirements for life.
Other Applications
Xenotransplantation. The demand for organ transplantation far outweighs the
number of human organs available. It is estimated that there are over 150,000
people worldwide waiting for an organ. In the United States, more than 60,000
individuals were registered on transplant waiting lists at the end of 1998. That
year, however, less than half of the people listed received solid organ
transplants. The demand for organ transplantation will continue to increase as
improved technical skills and anti-rejection medication make whole organ
transplantation a realistic option for groups of people previously considered
not eligible for transplantation--for example, those suffering from diabetes or
those over age 55.
Programs to increase the number of registered donors are extremely
important--but these programs alone will not solve the problem of organ
shortage. One solution under consideration by the medical, pharmaceutical and
biotechnology communities is xenotransplantation--the process of transplanting
cells, tissues or organs from one species to another, for example, from an
animal to a human. This approach potentially could be used either as a bridge to
human organ transplantation or as long term therapy in the form of a permanent
transplant.
Pigs are the preferred source for xenotransplantation because they have
organs of comparable size and anatomy to human organs. Through nuclear transfer,
we intend to produce pigs that have been genetically modified to make their
organs more suitable for transplantation to humans without causing an acute
immune rejection. Acute immune rejection of transplanted pig organs is caused by
natural human antibodies which recognize and react to certain sugar structures
present in the blood vessels of the transplanted pig tissue. We intend to delete
from the pig genome the gene for the enzyme which generates the key sugar
structure that triggers the immune rejection. Once we have created the desired
donor animal, cloning of that animal via nuclear transfer would enable the
cost-effective and scalable production of identical animals for clinical trials.
Cloned herds of pigs which would no longer carry the foreign sugar structure
could become a commercial source of organs that would not be rejected by the
recipients' immune system. Such cloned pigs would serve as sources for multiple
transplantable organs such as hearts, kidneys and pancreases. Our
xenotransplantation program is conducted at Geron Bio-Med, located within the
Roslin Institute in Scotland.
Transgenic Animals. We intend to apply our nuclear transfer technology to
clone animals that have been genetically engineered to produce proteins for
human therapeutic use. For example, herds which carry the genes to make human
antibodies could be cloned, thereby allowing for the large-scale production of
therapeutic antibodies or vaccines.
Agriculture. We intend to use nuclear transfer and gene targeting for
applications in agriculture that improve livestock by producing unlimited
numbers of genetically identical animals with superior commercial qualities.
Such applications can be extended to major agricultural sectors, such as beef,
dairy, pig and chicken, to provide large numbers of animals with superior
characteristics of disease resistance, longevity, growth rate or product
quality. We are focusing our research collaboration at the Roslin Institute on
developing more efficient nuclear transfer procedures suitable for agricultural
applications.
COMMERCIALIZATION
We believe that our broad scientific platforms will generate significant
opportunities for a variety of strategic collaborations. We have established and
intend to continue to establish selective collaborations with leading
pharmaceutical, diagnostic and technology companies to enhance our research,
development and commercialization capabilities and to participate in
commercialization opportunities. In each of these strategic
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collaborations and in future collaborations, we retain and intend to retain
co-promotion rights to participate in the commercial success of our products.
Kyowa Hakko Collaboration
In April 1995, we entered into a license and research collaboration
agreement with Kyowa Hakko. Under the agreement, Kyowa Hakko agreed to provide
$16.0 million of research funding over four years to support our program to
discover and develop in several Asian countries a telomerase inhibitor for the
treatment of cancer. All of this research funding had been received as of
December 31, 1999. In addition, we are entitled to receive future payments upon
the achievement of certain contractual milestones relating to drug development
and regulatory progress, as well as royalty payments on product sales. Kyowa
Hakko also purchased $2.5 million of our common stock in connection with our
initial public offering. Under the Kyowa Hakko Agreement, we exercise
significant influence during the research phase and Kyowa Hakko exercises
significant influence during the development and commercialization phases. Kyowa
Hakko has agreed that it will not pursue independently telomerase inhibition for
the treatment of cancer in humans until March 2002. In February 2000, we amended
our agreement with Kyowa Hakko to extend the research and compound selection
periods under the original agreement to March 2002. We are entitled to receive
additional research funding as part of this extension subject to the terms of
the agreement.
Pharmacia & Upjohn Collaboration
In March 1997, we signed a license and research collaboration agreement
with Pharmacia & Upjohn to collaborate in the discovery, development and
commercialization of a new class of anti-cancer drugs that inhibit telomerase.
Under the collaboration, Pharmacia & Upjohn agreed to provide research funding
over three years. As of December 31, 1999, $13.8 million of research funding had
been received. In addition, we are entitled to receive future payments upon the
achievement of certain contractual milestones relating to drug development and
regulatory progress, as well as royalty payments on future product sales. We
also signed a stock purchase agreement with Pharmacia & Upjohn which provided
for equity investments of $2.0 million in January 1997, $4.0 million in April
1997 and $4.0 million in March 1998. Pharmacia & Upjohn purchased each round of
our common stock at a premium. This collaboration with Pharmacia & Upjohn was
enhanced in 1999 by accessing the high throughput screening capabilities and the
three million compound library of Pharmacopoeia, via an alliance between
Pharmacia & Upjohn and Pharmacopoeia which includes telomerase inhibition. In
October 1999, Pharmacia & Upjohn exercised an option to extend the research and
compound selection periods for an additional year to March 2002. The agreement
provides for additional research funding to us as part of this extension.
Through our agreements with Kyowa Hakko and Pharmacia & Upjohn, we have
granted to them exclusive worldwide rights to our telomerase inhibition
technology for the treatment of cancer in humans.
Roslin Institute Collaboration
In May 1999, we completed the acquisition of Roslin Bio-Med Ltd., a company
formed by the Roslin Institute in Midlothian, Scotland, in order to complement
and strengthen our technology platforms. Under the terms of the agreement, we
purchased all outstanding shares of Roslin Bio-Med in exchange for 2.1 million
shares of our common stock and Roslin Bio-Med became a wholly owned United
Kingdom subsidiary known as Geron Bio-Med Ltd. In addition, the Roslin Institute
transferred to us the exclusive rights to the patent applications covering
nuclear transfer technology for all animal and human-based biomedical
applications, excluding human reproductive cloning. The license covers all
animal and human-based biomedical applications with the exception of the
production of therapeutic proteins in the milk of ruminants and rabbits, and the
modification of milk composition for nutraceutical use.
In connection with this acquisition, we also formed a research
collaboration with the Roslin Institute and have agreed to provide approximately
$20.0 million in applied research funding over six years. Under this
collaboration, we retain exclusive license rights to commercialize the results
of the research. This alliance brings together three complementary technologies:
telomerase immortalization, human pluripotent stem cells
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and nuclear transfer technologies. We and the Roslin Institute will focus on
generating genetically-matched human cells and tissues with extended replicative
capacity for use in repairing organ damage caused by a range of degenerative
diseases, including chronic liver disease, heart disease, neurologic diseases,
skin conditions and diabetes, while also advancing work underway at the Roslin
Institute on the development of genetically modified cloned animals for
applications in xenotransplantation and agriculture.
Clontech Marketing Agreement
In March 1999, we entered into a development and license agreement with
Clontech to market the Infinity(TM) product family of primary human cell lines
immortalized with the enzyme telomerase. Under the terms of the agreement,
Clontech manufactures and markets products resulting from the use of our
telomerase technology to the not-for-profit research market. Clontech also
supplies products to the biotechnology and pharmaceutical industries under
licenses to be executed between us and the individual commercial companies.
Under the Clontech agreement, Clontech paid us an up-front fee of $50,000 for
development activities. We will equally share operating profits with Clontech
from the sales of the Infinity(TM) Cell Lines, while we will retain all
licensing revenues.
In 1999, Clontech launched the telomerase-immortalized hTERT-RPE1 human
retinal pigment epithelial cell line and the hTERT-BJ1 human fibroblast cell
line. We and Clontech plan to expand the family of Infinity Cell Lines in the
future.
Diagnostic Collaborations
Research-Use-Only Kits. Roche Diagnostics has licensed all telomerase and
telomere length assay technologies, including TRAP, hTR, hTERT, and
immunoassays, for research-use-only kits in cancer. All telomerase licenses
previously licensed to Boehringer Mannheim were transferred to Roche Diagnostics
following their acquisition of Boehringer Mannheim. Boehringer Mannheim's
telomerase-related products are now marketed under the Roche Diagnostics label.
In late 1996, Boehringer Mannheim commenced commercial sale of the TRAP research
kit. In 1999, Roche Diagnostics launched three additional research kits.
Examples of other companies marketing research-use-only kits under license
include the following:
- In 1999, Roche Diagnostics entered into a sublicense agreement with Dako
under which Dako has received non-exclusive rights to develop antibody
mediated telomerase detection assays for research and clinical diagnostic
applications in oncology. We will receive royalties from products
commercialized under this sublicense.
- Kyowa Medex Co. has licensed our TRAP assay technology on a non-exclusive
basis for the research-use-only market in Japan and commenced commercial
sale of the TRAP kit in late 1996.
- We licensed the TRAP assay for research-use-only to Oncor Inc. and it has
been subsequently transferred to the Intergene Company following the
acquisition of Oncor's research reagent division by Intergen.
- PharMingen has licensed our TRAP assay and telomere length measurement
technology on a non-exclusive basis for sale to the research-use-only
market.
Although we do not expect royalties from the sale of these kits to be
significant, the use of these kits has stimulated additional studies of
telomerase activity by academic laboratories and standardized the methodology
used to evaluate the role of telomerase in cancer.
In Vitro Diagnostics. In addition to the rights described above related to
research-use-only kits, our December 1997 license, product and marketing
agreement with Boehringer Mannheim also granted Boehringer Mannheim rights to
develop and commercialize clinical in vitro diagnostic products for cancer on an
exclusive, worldwide basis. Under the agreement, Boehringer Mannheim provided
reimbursement in the amount of $500,000 for research previously conducted and is
responsible for all clinical, regulatory, manufacturing, marketing and sales
efforts and expenses. We are entitled to receive future payments upon
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achievement of certain contractual milestones relating to levels of product
sales, as well as royalties on product sales. Further, we have an option at our
sole discretion to exercise co-promotion rights with respect to in vitro
diagnostic products in the United States. After the acquisition of Boehringer
Mannheim by Roche Diagnostics in 1998, all telomerase licenses previously
licensed to Boehringer Mannheim were transferred to Roche Diagnostics following
their acquisition of Boehringer Mannheim.
RESEARCH COLLABORATIONS
We selectively enter into, and intend to continue to enter into,
collaborative research agreements with leading academic and research
institutions. We design these collaborative agreements to significantly enhance
our research and development capabilities while enabling us to obtain commercial
rights to intellectual property developed through the research collaboration.
Under these agreements, we generally provide funding or other resources for
scientific research in return for exclusive commercial rights to materials and
discoveries arising out of this research. We seek to retain rights to
commercially develop and market discoveries made under these research programs
by obtaining options to exclusively license technology developed under them,
including patents and patent applications filed in connection with these
research programs.
As of December 31, 1999, we have collaborative research agreements in
support of our oncology program with a number of institutions, including Duke
University, Lawrence Berkeley National Laboratory, the National Cancer
Institute, Madigan Army Medical Center, Stanford University, the University of
Colorado, the University of Texas Southwestern Medical School at Dallas, the
University of California at San Francisco, and the University of Pittsburgh. We
have collaborative research agreements in support of our research of
telomerase-immortalized cells with numerous institutions, including Duke
University, the Lawrence Berkeley National Laboratory, the Memorial
Sloan-Kettering Cancer Center, Stanford University, and the University of
California at Los Angeles. We have exclusive license and collaborative research
agreements in support of our human pluripotent stem cell research and
regenerative medicine program with the Johns Hopkins University, the University
of California at San Francisco, the University of Edinburgh and the University
of Wisconsin-Madison.
PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS
Geron's three core technology platforms are supported by a broad
intellectual property portfolio of issued patents and pending patent
applications. We currently own or have licensed over 58 issued or allowed United
States patents, 17 granted foreign patents and over 265 patent applications that
are pending around the world.
Our policy is to seek, when appropriate, patent protection for inventions
in our core technology platforms as well as ancillary technologies that support
these platforms or otherwise provide a competitive advantage to us. We achieve
this by filing patent applications for discoveries made by us alone or made in
conjunction with our scientific collaborators and strategic partners. Typically,
although not always, we file patent applications in the United States and
internationally through the Patent Cooperation Treaty. In addition, we obtain
licenses or options to acquire licenses from other organizations to patent
filings that may be useful in advancing our scientific and commercial programs.
We hold rights in more than 30 issued United States patents relating to
telomerase. We currently have an issued United States patent covering purified
human telomerase, and exclusive rights to issued Swiss and United Kingdom
patents covering the cloned gene that encodes the human telomerase protein
component. We also have exclusive rights to an issued United Kingdom patent
covering the promoter that regulates the activity of this gene. With respect to
telomerase diagnostics, our portfolio includes 21 issued United States patents
and nine issued foreign patents. The patents cover compositions of the RNA and
protein components of telomerase, the TRAP assay for detecting telomerase
activity, telomerase activity detection kits, and methods of diagnosing disease
states, such as cancer. Our portfolio also includes issued United States patents
and pending applications relating to telomerase inhibitors, including nucleic
acids and small molecule telomerase inhibitors. We also own several patent
applications directed to oligonucleotide nucleic acid chemistry.
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With respect to our pluripotent stem cells, we own or have licensed several
United States and foreign national patent applications relating to embryonic
stem cells and germ cells, and methods for obtaining and maintaining them,
including an issued United States patent covering primate embryonic stem cells.
As part of our acquisition of Roslin Bio-Med, we acquired a license for a
number of United States and foreign national patent applications directed to
nuclear transfer, including the "quiescence" and "MAGIC" technologies. The
quiescence technology relates to the use of donor cell nuclei that are in
resting or quiescent state for nuclear transfer. The MAGIC technology combines a
number of technical advances that provide enhanced nuclear transfer efficiency.
Two United Kingdom patents, as well as patents in New Zealand and South Africa
have now been granted, and one United States patent application has been
allowed, covering the quiescence technology. Patents to the MAGIC technology
have also been granted in New Zealand and South Africa. We also have filed
additional patent applications to cover inventions that have been produced as a
result of our current research collaboration at the Roslin Institute.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
countries is a significant factor in the development, manufacture and marketing
of our proposed products and in our ongoing research and product development
activities. The nature and extent to which such regulation applies to us will
vary depending on the nature of any products which may be developed by us. We
anticipate that many, if not all, of our products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic and vaccine products are subject to rigorous preclinical and
clinical testing and other approval procedures of the Food & Drug
Administration, or FDA, and similar regulatory authorities in European and other
countries. Various governmental statutes and regulations also govern or
influence testing, manufacturing, safety, labeling, storage and recordkeeping
related to such products and their marketing. The process of obtaining these
approvals and the subsequent compliance with appropriate statutes and
regulations require the expenditure of substantial time and money. Any failure
by us or our collaborators to obtain, or any delay in obtaining affect the
marketing of any products developed by us, and prevent us from generating
product revenues and obtaining adequate cash to continue present and planned
operations.
FDA Approval Process
Prior to commencement of clinical studies involving humans, preclinical
testing of new pharmaceutical products is generally conducted on animals in the
laboratory to evaluate the potential efficacy and the safety of the product. The
results of these studies are submitted to the FDA as a part of an
Investigational New Drug application, which must become effective before
clinical testing in humans can begin. Typically, human clinical evaluation
involves a time consuming and costly three-phase process. In Phase I, clinical
trials are conducted with a small number of people to assess safety and to
evaluate the pattern of drug distribution and metabolism within the body. In
Phase II, clinical trials are conducted with groups of patients afflicted with a
specific disease in order to determine preliminary efficacy, optimal dosages and
expanded evidence of safety. In Phase III, large-scale, multi-center,
comparative trials are conducted with patients afflicted with a target disease
in order to provide enough data to demonstrate the efficacy and safety required
by the FDA. The FDA closely monitors the progress of each of the three phases of
clinical testing and may, at its discretion, re-evaluate, alter, suspend, or
terminate the testing based upon the data which have been accumulated to that
point and its assessment of the risk/benefit ratio to the patient. Monitoring of
all aspects of the study to minimize risks is a continuing process. Reports of
all adverse events must be made to the FDA.
The results of the preclinical and clinical testing on a non-biologic drug
and certain diagnostic drugs are submitted to the FDA in the form of a New Drug
Application, or NDA, for approval prior to commencement of commercial sales. In
the case of vaccines or gene and cell therapies the results of clinical trials
are submitted as a Biologics License Application. In responding to a NDA or
Biologics License Application, the FDA may grant marketing approval, request
additional information or deny the application if the FDA determines that the
application does not satisfy its regulatory approval criteria. There can be no
assurance that approvals will be granted on a timely basis, if at all, for any
of our products. Similar procedures are in place in countries outside the United
States.
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European and Other Regulatory Approval
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities in Europe and other countries will likely be
necessary prior to commencement of marketing the product in such countries. The
regulatory authorities in each country may impose their own requirements and may
refuse to grant, or may require additional data before granting, an approval
even though the relevant product has been approved by the FDA or another
authority. As with the FDA, the regulatory authorities in the European Union, or
EU, countries and other developed countries have lengthy approval processes for
pharmaceutical products. The process for gaining approval in particular
countries varies, but generally follows a similar sequence to that described for
FDA approval. In Europe, the European Committee for Proprietary Medicinal
Products provides a mechanism for EU-member states to exchange information on
all aspects of product licensing. The EU has established a European agency for
the evaluation of medical products, with both a centralized community procedure
and a decentralized procedure, the latter being based on the principle of
licensing within one member country followed by mutual recognition by the other
member countries.
Other Regulations
We are also subject to various United States, federal, state, local and
international laws, regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices and the use and disposal of
hazardous or potentially hazardous substances, including radioactive compounds
and infectious disease agents, used in connection with our research work. We
cannot accurately predict the extent of government regulation which might result
from future legislation or administrative action.
SCIENTIFIC ADVISORS AND CONSULTANTS
We have consulting agreements with a number of leading academic scientists
and clinicians. These individuals serve as members of our Scientific Advisory
Board or as key consultants with respect to our scientific programs and
strategies. They are distinguished scientists and clinicians with expertise in
numerous scientific fields, including the genetics of aging, pluripotent stem
cells, nuclear transfer, cell senescence and telomere and telomerase biology, as
well as developmental biology, cellular biology, and molecular biology.
We established the advisory board to provide us with expert advice and
consultation on our scientific programs and strategies. Members of the advisory
board also serve as important contacts for us throughout the broader scientific
community. The advisory board meets at least once annually as a whole or in
smaller groups to focus on general strategy and certain specific scientific
issues. We contact individual members of the advisory board to provide advice
and consultation on an ad hoc basis, as appropriate.
We retain each member of the advisory board according to the terms of a
consulting agreement between the advisory board member and us. Under such
consulting agreements, certain advisory board members hold options to purchase
our common stock, subject to the vesting requirements contained in the
consulting agreements. In addition, we pay advisory board members a consulting
fee and reimburse them for out-of-pocket expenses incurred in attending each
advisory board meeting. Most members of the advisory board are employed by
institutions other than ours, and therefore may have commitments to, or
consulting or advisory agreements with, other entities or academic institutions
that may limit their availability to us.
As of December 31, 1999, our advisory board members and key consultants
included the following individuals:
STEPHEN BENKOVIC, PH.D., is Professor of Chemistry at the Pennsylvania
State University and is a member of our Scientific Advisory Board. Dr. Benkovic
is a member of the Chemical Society and the recipient of the 1998 Chemical
Pioneer Award given by the American Institute of Chemists. He is an
internationally recognized expert in protein chemistry, including the enzymology
of DNA polymerases.
DAVID BOTSTEIN, PH.D., is Professor and Chairman of the Department of
Genetics, Stanford University School of Medicine. He was elected to the National
Academy of Sciences in 1981 and to the Institute of Medicine in 1993. His
current research activities include studies of yeast genetics and cell biology,
linkage mapping of human genes predisposing to manic-depressive illness and the
development and maintenance of the Saccharomyces Genome Database on the World
Wide Web. He has received numerous awards, including
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the Genetics Society of America Medal (1985) and the Allen Award of the American
Society of Human Genetics (1989). Dr. Botstein has served on numerous committees
including the National Institutes of Health ("NIH") Program Advisory Panel on
the Human Genome (1989 - 90) and the Advisory Council of the National Center for
Human Genome Research (1990 - 95).
ROBERT N. BUTLER, M.D., is a gerontologist and psychiatrist with broad
experience in aging research and advocacy. In 1982, he founded the first
department of geriatrics at a United States medical school -- the Department of
Geriatrics and Adult Development at the Mount Sinai Medical Center -- where he
continues to serve as Professor. Since 1990, he has also been Director of the
International Longevity Centers. In 1975, he became the founding director of the
National Institute on Aging ("NIA") of the NIH, a position he held until 1982.
He currently serves on the National Advisory Council of the National Institute
on Aging. Dr. Butler also serves as editor-in-chief of the journal Geriatrics
and is the author of approximately 300 scientific and medical articles. In 1976,
he won the Pulitzer Prize for his book, "Why Survive? Being Old in America."
JUDITH CAMPISI, PH.D., is a Senior Scientist and Acting Chair, Department
of Cancer Biology, Lawrence Berkeley National Laboratory. She has been an
Established Investigator of the American Heart Association and currently has a
MERIT Award from the NIA, and serves on its Board of Scientific Counselors. Her
major interests are the cellular and molecular biology of senescence and
tumorigenesis.
JOHN CLARK, OBE, FRSE, PH.D., is Head of the Division of Molecular Biology
at the Roslin Institute and is the leader of Geron Bio-Med's gene targeting
team. Dr. Clark was a scientific founder of PPL Therapeutics, plc and is also a
Professor in the Division of Biology at Edinburgh University. He received the
Order of the British Empire from the Queen of England in 1997 for his
contribution to biotechnology and particularly his pioneering work on the
modification of milk composition by genetic engineering of livestock. He was
elected to the Royal Society of Edinburgh in 1999. Current research areas
include use of genetically modified animals for biomedical and agricultural
applications and fundamental studies of the control of gene expression.
DOUGLAS HANAHAN, PH.D., is a Professor of Biochemistry in the Department of
Biochemistry and Biophysics and Associate Director of the Hormone Research
Institute, University of California at San Francisco and is a member of our
Scientific Advisory Board. His major research interests are the cellular and
genetic mechanisms of tumor development and autoimmunity. Prior to joining the
University of California at San Francisco in 1988, Dr. Hanahan was with the Cold
Spring Harbor Laboratory for nine years, where he developed technologies for
recombinant DNA and molecular cloning and established transgenic mouse models to
study cancer and autoimmune diseases.
LEONARD HAYFLICK, PH.D., is a Professor of Anatomy at the School of
Medicine of the University of California at San Francisco. Dr. Hayflick is best
known for his pioneering work in tissue culture, where he discovered the finite
replicative capacity of normal human cells which he interpreted as aging at the
cellular level. This phenomenon is known as the "Hayflick Limit" and Dr.
Hayflick is widely known as the "father" of cellular gerontology. Dr. Hayflick
has published over 200 papers and is the recipient of numerous national and
international research awards and honors, was President of the Gerontological
Society of America, was a founding member of the Council of the NIA, and
recently authored the popular book, "How and Why We Age."
RUDOLF JAENISCH, PH.D., is a Professor of Biology at the Massachusetts
Institute of Technology, a member of the Whitehead Institute for Biomedical
Research and a member of our Scientific Advisory Board. Dr. Jaenisch is
internationally known for his research on the control of gene expression in
mammalian development and genetic disease. He has recently turned his attention
to the use of mammalian cloning technology to distinguish epigenetic and genetic
alterations in the genome and their role in growth and development.
MALCOLM MOORE, PH.D., is a Professor of Biology at the Sloan-Kettering
Division, Cornell Graduate School of Medical Sciences and is internationally
known for his pioneering work in hematopoiesis, growth factors, and cytokines.
He is also currently incumbent of the Enid A. Haupt Chair of Cell Biology,
Memorial Sloan-Kettering Cancer Center. Dr. Moore received the William B. Coley
Award For Distinguished Research in Immunology by the Cancer Research Institute
in June 1995.
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ROGER A. PEDERSEN, PH.D., is a Professor of Obstetrics, Gynecology and
Reproductive Sciences at the University of California at San Francisco, where he
teaches developmental genetics and mammalian embryology. He received his B.A.
degree from Stanford University, and his Ph.D. at Yale University. He completed
his postdoctoral research at the Johns Hopkins University. Since 1991 he has
served as Series Editor of Current Topics in Developmental Biology. He has
written numerous original publications and reviews on early mouse development,
and co-produced two instructional videotapes on the use of mice in transgenic
and gene targeting research.
JERRY W. SHAY, PH.D., is a Professor of Cell Biology and Neuroscience at
the University of Texas Southwestern Medical Center at Dallas and is a member of
our Scientific Advisory Board. Dr. Shay's research focuses on molecular
mechanisms of tumorigenesis and immortalization with a particular emphasis on
cancer of the breast. Dr. Shay has numerous publications, honors and patents. He
is also on the editorial board for the Journal of Clinical Pathology.
JAMES D. WATSON, PH.D., is President of Cold Spring Harbor Laboratory and
is a member of our Scientific Advisory Board. Dr. Watson is the former head of
the NIH Human Genome Project and is famous for his 1953 discovery with Francis
Crick of the double helical structure of DNA for which he received the Nobel
Prize.
IAN WILMUT, B.SC., PH.D., D.SC., F.MED.SCI., is Professor of the Division
of Biological Science of the University of Edinburgh and is the head of the
Geron Bio-Med nuclear transfer team. Professor Wilmut has received numerous
prizes, including the Sir John Hammond Prize by the British Society of Animal
Production, the Golden Plate Award by the American Academy of Achievement of
Science and Technology, the Lord Lloyd of Kilgerran Prize by the Foundation of
Science and Technology, and the Order of the British Empire from the Queen of
England in 1999. He is the leader of the team that cloned Dolly, the first
animal to develop after nuclear transfer from an adult cell, and is an
internationally recognized expert in the field of nuclear transfer. Current
research areas include early mammalian development, embryo manipulation, nuclear
transfer and gene targeting in mice, cattle, sheep and pigs.
WOODRING E. WRIGHT, M.D., PH.D., is a Professor of Cell Biology and
Neuroscience at the University of Texas Southwestern Medical Center at Dallas
and is a member of our Scientific Advisory Board. He is widely recognized as a
leading molecular biologist working in the field of cellular senescence and on
the molecular basis of muscle development.
GERON ETHICS ADVISORY BOARD
In July 1998, we created an Ethics Advisory Board whose members represent a
variety of philosophical and theological traditions with broad knowledge in
health care ethics. The advisory board functions as an independent entity,
consulting and giving advice to us on the ethical aspects of our work. Members
of the advisory board have no financial interest in Geron.
As of December 31, 1999, the Ethics Advisory Board consisted of the
following individuals:
KAREN LEBACQZ, PH.D., is the Robert Gordon Sproul Professor of Theological
Ethics at the Pacific School of Religion in the Graduate Theological Union,
Berkeley, California. She has published extensively on ethics and genetics as
well as research ethics and served on the National Commission for the Protection
of Human Subjects of Biomedical and Behavioral Research.
MICHAEL M. MENDIOLA, PH.D., is Assistant Professor of Christian ethics at
the Pacific School of Religion in the Graduate Theological Union, Berkeley,
California. He is a published author on the role of religious ethics in public
discourse and is currently the project director of the Bay Area Faith and Health
Consortium.
TED PETERS, PH.D., is Professor of Systematic Theology at Pacific Lutheran
Theological Seminary. He conducts research at the Center for Theology and the
National Sciences where he is principle investigator for a research project on
"Theological and Ethical Implications of the Human Genome Initiative". He is
also editor of Genetics: Issues of Social Justice.
ERNLE W. D. YOUNG, PH.D., is Clinical Professor of Ethics in the Department
of Medicine and Pediatrics at Stanford University School of Medicine, a
Co-Director of Stanford University's Center for Biomedical
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Ethics, the Clinical Ethics Consultant to Stanford University Hospital and to
Veterans' Affairs hospitals in Palo Alto and Fresno, California. He has
published extensively on issues in bioethics.
LAURIE ZOLOTH-DORFMAN, PH.D., is Associate Professor of Social Ethics and
Director of the Program in Jewish Studies at San Francisco State University and
a Co-Founder of The Ethics Practice, a group which provides education services
and consultation on bioethics to health care providers and health care systems.
She has published on bioethics, religion, and health care.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers of Geron Corporation:
NAME AGE POSITION
---- --- --------
Thomas B. Okarma, Ph.D., M.D. ............ 54 President, Chief Executive Officer and
Director
David L. Greenwood........................ 48 Chief Financial Officer, Senior Vice
President Corporate Development, Treasurer
and Secretary
David J. Earp, Ph.D. J.D. ................ 35 Vice President, Intellectual Property
Calvin B. Harley, Ph.D.................... 47 Chief Scientific Officer
Jane S. Lebkowski, Ph.D................... 44 Vice President, Cell and Gene Therapies
Richard L. Tolman, Ph.D................... 58 Vice President, Drug Discovery
THOMAS B. OKARMA, PH.D., M.D., has served as our President, Chief Executive
Officer and director since July 1999. He is also a director of Geron Bio-Med
Limited, a United Kingdom company. From May 1998 until July 1999, Dr. Okarma was
the Vice President of Research and Development. From December 1997 until May
1998, Dr. Okarma was Vice President of Cell Therapies. From 1985 until joining
us, Dr. Okarma, the scientific founder of Applied Immune Sciences, Inc., served
initially as Vice President of Research and Development and then as its
chairman, chief executive officer and a director, until 1995 when it was
acquired by Rhone-Poulenc Rorer. Dr. Okarma was a Senior Vice President at
Rhone-Poulenc Rorer from the time of the acquisition of Applied Immune Sciences,
Inc. until December 1996. From 1980 to 1985, Dr. Okarma was a member of the
faculty of the Department of Medicine at Stanford University School of Medicine.
Dr. Okarma holds a A.B. from Dartmouth College and a M.D. and Ph.D. from
Stanford University.
DAVID L. GREENWOOD has served as our Chief Financial Officer, Treasurer and
Secretary since August 1995, Vice President of Corporate Development since April
1997 and Senior Vice President of Corporate Development since August 1999. He is
also a Director of Geron Bio-Med Limited, a United Kingdom company. From 1979
until joining us, Mr. Greenwood held various positions with J.P. Morgan & Co.
Incorporated, an international banking firm, and its subsidiaries, J.P. Morgan
Securities Inc. and Morgan Guaranty Trust Company of New York. Mr. Greenwood
holds a B.A. from Pacific Lutheran University and an M.B.A. from Harvard
Business School.
DAVID J. EARP, J.D., PH.D., joined us in June 1999 and has served as our
Vice President, Intellectual Property since October 1999. From 1992 until
joining us, Dr. Earp was with the intellectual property law firm of Klarquist
Sparkman Campbell Leigh and Whinston, LLP where his practice focused on
biotechnology patent law. Dr. Earp holds a B.S. in microbiology from the
University of Leeds, England, a Ph.D. in biochemistry and molecular biology from
The University of Cambridge, England, and conducted postdoctoral research at the
University of California at Berkeley. He received his J.D., Magna cum laude from
the Northwestern School of Law of Lewis and Clark College in Portland, Oregon.
CALVIN B. HARLEY, PH.D., has served as our Chief Scientific Officer since
July 1996. From May 1994 until July 1996, Dr. Harley was Vice President of
Research and from April 1993 to May 1994, Dr. Harley was Director, Cell Biology.
Dr. Harley was an Associate Professor from 1989 until joining us, and from 1982
to 1989, an Assistant Professor of Biochemistry at McMaster University. Dr.
Harley also was the Chair of the Canadian Association on Gerontology, Division
of Biological Sciences from October 1989 to October 1991 and Chairman Elect from
1987 to 1989. Dr. Harley holds a B.S. from the University of Waterloo and a
Ph.D.
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from McMaster University, and conducted postdoctoral work at the University of
Sussex and the University of California at San Francisco.
JANE S. LEBKOWSKI, PH.D., has served as our Vice President of Cell and Gene
Therapies since August 1999. Since joining us in April 1998 and until August
1999, Dr. Lebkowski served as Senior Director, Cell and Gene Therapies.
Formerly, Dr. Lebkowski was employed at Applied Immune Sciences, from 1986 to
1995 where she served as Vice President, Research and Development. In 1995,
Applied Immune Sciences was acquired by Rhone-Poulenc Rorer, at which time Dr.
Lebkowski was appointed Vice President, Discovery & Product Development. Dr.
Lebkowski graduated Phi Beta Kappa with a B.S. in Chemistry and Biology from
Syracuse University and received her Ph.D. from Princeton University.
RICHARD L. TOLMAN, PH.D., has served as our Vice President of Drug
Discovery since August 1999. From December 1998 until August 1999, Dr. Tolman
served as Senior Director, Medicinal Chemistry overseeing the program to
discover and develop a small molecule telomerase inhibitor. From 1973 until
joining us, Dr. Tolman was employed at the Merck Research Laboratories where he
served as Senior Director, Medicinal Chemistry. He received a B.A. in Chemistry
with Honors from Brigham Young University and earned a Ph.D. with distinction
from the University of Utah.
EMPLOYEES
As of December 31, 1999, we had 103 full-time employees of whom 40 hold
Ph.D. degrees and 16 hold other advanced degrees. Of the total workforce, 76 are
engaged in, or directly support, our research and development activities and 27
are engaged in business development, finance and administration. We also retain
outside consultants. None of our employees is covered by a collective bargaining
agreement, nor have we experienced work stoppages. We consider relations with
our employees to be good.
ITEM 2. PROPERTIES
Geron currently leases approximately 41,000 square feet of office space at
194 Constitution Drive, 200 Constitution Drive and 230 Constitution Drive, Menlo
Park, California. The lease for the office space expires in January 2002, with
an option to renew the lease for two additional periods of two and one-half
years each. We intend to use this space for general office and biomedical
research and development purposes. We also currently lease 900 square feet of
office space at Roslin Biotechnology Centre, Roslin, Midlothian, United Kingdom.
The lease for the office space expires in May 2005. We believe that the existing
facilities are adequate to meet our requirements for the near term.
ITEM 3. LEGAL PROCEEDINGS
Geron is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders of Geron was held pursuant to notice on
December 10, 1999, at 9:00 a.m. local time at Geron headquarters in Menlo Park,
California. There were present at the meeting, in person or represented by
proxy, the holders of 12,933,145 shares of common stock. The matters voted on at
the meeting and the votes cast are as follows:
(a) The approval of an amendment to Geron's Certificate of
Incorporation to increase the number of authorized shares from 25,000,000
shares to 35,000,000 shares is hereby approved. There were 12,328,019
shares of common stock voting in favor, 494,203 shares of common stock
voting against and 170,923 shares of common stock abstaining.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Geron's common stock trades on the Nasdaq Stock Market(R) under the symbol
GERN. The high and low closing sales prices (excluding retail markup, markdowns
and commissions) of Geron's stock for the years ending December 31, 1999 and
1998 are as follows:
HIGH LOW
------- -------
Year ended December 31, 1999
First quarter.......................................... $13.188 $ 9.875
Second quarter......................................... $12.875 $ 9.250
Third quarter.......................................... $12.250 $10.500
Fourth quarter......................................... $14.875 $ 9.500
Year ended December 31, 1998
First quarter.......................................... $14.375 $ 8.500
Second quarter......................................... $12.125 $ 9.000
Third quarter.......................................... $ 9.875 $ 4.219
Fourth quarter......................................... $17.188 $ 5.063
As of December 31, 1999, there were approximately 807 stockholders of
record. Geron is engaged in a highly dynamic industry, which often results in
significant volatility of our common stock price.
DIVIDEND POLICY
Geron has never paid cash dividends on our capital stock and does not
anticipate paying cash dividends in the foreseeable future, but intends to
retain our capital resources for reinvestment in our business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon Geron's financial condition, results of
operations, capital requirements and other factors as the Board of Directors
deems relevant.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ---------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues from collaborative
agreements....................... $ 5,244 $ 6,706 $ 7,175 $ 5,235 $ 5,490
License fees and royalties......... 168 91 78 58 --
----------- ----------- ----------- ---------- --------
Total revenues........... 5,412 6,797 7,253 5,293 5,490
Operating expenses:
Research and development........... 20,571 15,619 15,139 14,260 11,321
Acquired research technology....... 23,403 -- -- -- --
General and administrative......... 5,574 3,769 3,120 3,161 2,888
----------- ----------- ----------- ---------- --------
Total operating
expenses............... 49,548 19,388 18,259 17,421 14,209
----------- ----------- ----------- ---------- --------
Loss from operations............... (44,136) (12,591) (11,006) (12,128) (8,719)
Interest and other income.......... 3,263 2,666 1,757 1,826 919
Interest and other expense......... (5,503) (907) (392) (385) (399)
----------- ----------- ----------- ---------- --------
Net loss........................... $ (46,376) $ (10,832) $ (9,641) $ (10,687) $ (8,199)
Accretion of redemption value of
redeemable convertible preferred
stock............................ (73) (578) -- -- --
----------- ----------- ----------- ---------- --------
Net loss applicable to common
stockholders..................... $ (46,449) $ (11,410) $ (9,641) $ (10,687) $ (8,199)
=========== =========== =========== ========== ========
Basic and diluted net loss per
share............................ $ (3.00) $ (1.00) $ (0.91) $ (2.23) $ (9.77)
=========== =========== =========== ========== ========
Shares used in computing basic and
diluted net loss per share....... 15,489,035 11,439,084 10,551,054 4,789,388 839,490
=========== =========== =========== ========== ========
DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.............................. $ 39,287 $ 24,469 $ 21,597 $ 24,269 $ 15,553
Working capital............................ 32,481 22,261 19,739 21,468 12,115
Total assets............................... 63,701 44,456 26,056 28,788 19,749
Noncurrent liabilities..................... 29,527 8,101 1,250 1,644 1,654
Redeemable convertible preferred stock..... -- 3,610 -- -- --
Accumulated deficit........................ (103,969) (57,520) (46,110) (36,469) (25,782)
Total stockholders' equity................. 26,226 29,191 21,066 23,591 14,308
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipate", "believe", "plan", "expect",
"future", "intend" and similar expressions to identify forward-looking
statements. These statements appear throughout the Form 10-K and are statements
regarding our intent, belief, or current expectations, primarily with respect to
our operations and related industry developments. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of
this Form 10-K. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us and described in the section of this Item 7 titled "Additional
Factors That May Affect Future Results," and elsewhere in this Form 10-K.
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The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto included in Part I, Item 8
of this Form 10-K.
We are a biopharmaceutical company focused on discovering, developing and
commercializing therapeutic and diagnostic products for applications in
oncology, drug discovery and regenerative medicine. Our product development
programs are based upon three patented, independent and synergistic
technologies: telomerase, human pluripotent stem cells and nuclear transfer.
Since inception, substantially all of our revenues have been generated from
license and research agreements with collaborators. In addition, we receive
license payments and royalties from license and marketing agreement with various
diagnostic and research tool collaborators. We recognize revenue from the
license and research agreements with collaborators as the related research and
development costs are incurred under the collaborative agreements.
In March 2000, we sold a total of 380,855 shares of our common stock and
300,000 warrants to purchase our common stock to a single investor for $9
million. We structured the sale of securities in two parts. We priced the first
$6.4 million of common stock at $50.32 per share, and 200,000 warrants are
exercisable at $67.09 per share. We priced the remaining $2.6 million of common
stock at $10.25 per share, and the remaining 100,000 warrants are exercisable at
$12.50 per share. The common stock and the stock underlying the warrants are not
registered for resale and are subject to a two-year prohibition on sale by
agreement. As of March 9, 2000, all of the warrants were outstanding.
In January 2000, we extended our three-way license and research
collaboration agreement with Kyowa Hakko and Pharmacia & Upjohn. The agreement
extends the research and compound selection periods by one additional year to
March 2002 and provides for additional research funding over the next two years.
In May 1999, we completed the acquisition of Roslin Bio-Med Ltd., a
privately held company formed by the Roslin Institute in Midlothian, Scotland.
As part of the acquisition, we formed a research collaboration with the Roslin
Institute which obligated us to provide $20.0 million in research funding over
the next six years which has a net present value of $17.2 million. In exchange
for all of the outstanding shares of Roslin Bio-Med, we issued 1,891,371 shares
of our common stock with a fair value of $22.2 million. In addition, in exchange
for the outstanding fully vested stock options in Roslin Bio-Med, we issued
fully vested options to purchase 208,629 shares our common stock with a fair
value of $2.2 million. The total purchase price of $44.4 million also included
acquisition costs of $2.9 million. Under the terms of the agreement, Roslin
Bio-Med became our wholly owned United Kingdom subsidiary and is known as Geron
Bio-Med.
We accounted for the transaction using the purchase method. We allocated
the purchase price between the acquired basic research in the form of a license
in the nuclear transfer technology, the research agreement with the Roslin
Institute and the net tangible assets of Roslin Bio-Med. We expensed the value
of the nuclear transfer technology of $23.4 million as acquired research expense
and capitalized the value of the research agreement of $17.2 million as an
intangible asset and are amortizing this asset over the next six years.
On September 30, 1999, we sold $12.5 million series C convertible
two-percent coupon debentures and warrants to purchase 1,100,000 shares of
common stock to an institutional investor. The debentures are convertible at any
time by the holder at a fixed conversion price of $10.25 per share. The
debentures convert at our option when our common stock has traded at a specified
premium to the fixed conversion price for ten consecutive trading days. The
warrants to purchase 1,000,000 shares of common stock are exercisable at $12.50
per share and the warrants to purchase 100,000 shares of common stock are
exercisable at $12.75 per share at the option of the holder until June 2, 2001.
Our 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 our various collaborative agreements, as well as the progress of
our research and development efforts and variations in the level of expenses
related to developmental efforts during any given period. 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. We are subject to risks common to companies in our industry
and at our stage of development, including risks inherent in our research and
development efforts, reliance upon our collaborative
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partners, enforcement of our 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 our research,
we and our collaborators must conduct preclinical tests and clinical trials,
demonstrate the efficacy and safety of our product candidates, obtain regulatory
approvals or clearances and enter into manufacturing, distribution and marketing
arrangements, as well as obtain market acceptance. We do not expect to receive
revenues or royalties based on therapeutic products for a period of years, if at
all.
RESULTS OF OPERATIONS
Revenues
We recognized revenues from collaborative agreements of $5.2 million in
fiscal 1999 compared to $6.7 million in fiscal 1998 and $7.2 million in fiscal
1997. Revenues in 1999 and 1998 represented research support payments from our
collaborative agreements with Kyowa Hakko and Pharmacia & Upjohn. Declining
revenues in 1999 and 1998 were a result of reduced research funding from Kyowa
Hakko as contractually agreed in 1998. Revenues in 1997 also included a one-time
payment by Boehringer Mannheim for reimbursement of past research efforts. We
recognize revenue under collaboration agreements as we incur the related
research and development costs. We received annual funding payments of $1.0
million and $4.0 million under the Kyowa Hakko agreement in 1998 and 1997,
respectively. We did not receive any funding payments from Kyowa Hakko in 1999.
We received funding payments totaling $5.0 million each in fiscal 1999 and 1998
under the Pharmacia & Upjohn agreement. We expect revenues from collaborative
agreements to increase in 2000 as compared to 1999 as a result of the renewed
research commitments from Kyowa Hakko and Pharmacia & Upjohn. As a result of the
extensions, these agreements provide for additional funding from Kyowa Hakko and
Pharmacia & Upjohn over the next two years.
We receive license payments and royalties from license and marketing
agreements with various diagnostic and research tool collaborators. We received
a license fee payment of $75,000 in 1999 under our product marketing agreement
with Clontech. We did not receive any license fee payments in 1998 or 1997. In
fiscal 1999, we received $85,000 in royalties on the sale of diagnostic kits to
the research-use-only market from Intergen, Kyowa Medex, Roche Diagnostics and
PharMingen compared to $91,000 received in fiscal 1998. In 1999, we also
recognized $9,000 in shared profits from sales of cell-based research products
from Clontech. Sales of these cell-based research products began in September
1999.
Research and Development Expenses
Research and development expenses were $20.6 million, $15.6 million and
$15.1 million for the years ended December 31, 1999, 1998 and 1997. The increase
in 1999 from 1998 was primarily the result of the amortization of the research
funding obligation to the Roslin Institute of $1.9 million, increased license
fees for research technology of $1.0 million and increased personnel related
costs of $800,000. The increase in 1998 from 1997 was primarily a result of
increased personnel costs of $500,000 for additional scientific staff. We expect
research and development expenses to increase significantly in the future as a
result of the continued development of our therapeutic and diagnostic programs.
Acquired Research Expenses
Acquired research expenses were the result of the acquisition of Roslin
Bio-Med in May 1999. We used the purchase method of accounting. We allocated the
purchase price between the acquired basic research in the form of a license to
the nuclear transfer technology, the research agreement with the Roslin
Institute and the net tangible assets of Roslin Bio-Med. We expensed the value
of the nuclear transfer technology of $23.4 million as acquired research expense
and capitalized the value of the research agreement of $17.2 million as an
intangible asset. The total purchase price of $44.4 million also included
acquisition costs of $2.9 million.
The license to the nuclear transfer technology was the only significant
asset of Roslin Bio-Med. We intend to enhance the research and development of
the nuclear transfer technology by combining it with our other technology
platforms. Before we can enter into clinical trials for a potential commercial
application, we
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must expand the research and development of the combined technology platforms.
Future products, if any, may take several years to develop and commercialize and
will require substantial additional funds. We may never be able to create a
commercial product from the nuclear transfer technology. Although we have the
right to sublicense the nuclear transfer technology, we expect any future
collaborations or sublicenses to fund future research and development and not
recover the cost of the basic nuclear transfer technology that we acquired. We
are using this technology for one research project. We have concluded that this
technology has no alternative future use, and accordingly, have expensed the
value of the acquired research technology at the time of the acquisition.
General and Administrative Expenses
General and administrative expenses were $5.6 million, $3.8 million and
$3.1 million for the years ended December 31, 1999, 1998 and 1997, respectively.
The increase in 1999 from 1998 was primarily the result of increased business
consulting expenses of $600,000, increased personnel related costs of $600,000,
increased facilities maintenance costs of $300,000 and increased legal and
accounting expenses of $300,000. The increase in 1998 from 1997 was primarily a
result of increased personnel costs of approximately $420,000 for additional
administrative personnel and bonus accruals. In addition, expenses in 1998 also
reflected increases in public and investor relations expense; legal, accounting
and consulting fees; supplies and expensed office equipment and other taxes and
filing fees.
Interest and Other Income
Interest income was $2.3 million, $1.9 million and $1.4 million for the
years ended December 31, 1999, 1998 and 1997, respectively. The increase in 1999
and 1998 was due to higher average cash and investment balances as a result of
the sale of debt and equity securities in 1999. Interest earned in the future
will depend on any future funding cycles and prevailing interest rates. We also
received $1.0 million, $734,000 and $369,000 in research payments under
government grants for the years ended December 31, 1999, 1998 and 1997,
respectively. We expect income from government grants to decrease in the future.
Interest and Other Expense
Interest and other expense was $5.5 million, $907,000 and $392,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. The increase in
interest and other expense in 1999 over 1998 was primarily the result of the
various convertible debenture financings during 1999. In connection with the
issuance of $7.5 million of series B convertible debentures in June 1999, we
recorded approximately $563,000 in interest expense for the difference between
the fair value of our common stock on the date of signing and the conversion
price of the debentures.
When we issued the series C convertible debentures, we did not have
sufficient authorized common shares to permit the series C convertible debenture
holder to fully convert the series C convertible debentures and exercise the
warrants. If we did not obtain stockholder approval to increase our authorized
common shares to allow for the full conversion of the series C convertible
debentures and exercise of series C warrants prior to March 31, 2000, we would
have been in default under the debenture and would have been obligated to redeem
the debentures at the request of the series C convertible debenture holder at
the greater of 115% of the principal amount of the debentures or an amount equal
to the fair value of our common stock the debentures would have been converted
into plus expenses. In December 1999, we obtained the necessary stockholder
approval to issue additional shares of common stock in order for the holder of
the series C convertible debentures to convert their shares into our common
stock and exercise their warrants. Prior to obtaining stockholder approval to
increase the number of authorized common shares, we recognized $625,000 of
interest expense related to the potential penalty on redemption up through the
date our stockholders authorized the additional shares to be issued.
On the date of issuance of the series C convertible debentures, we recorded
approximately $305,000 in interest expense for the difference between the fair
value of our common stock on September 30, 1999 and the conversion price of the
debentures. We determined the value of the warrants to be $2,732,000. In
accordance
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with Emerging Issue Task Force Issue No. 98-5, which was effective for
transactions with a commitment date after May 20, 1999, we recorded this value
as an increase to additional paid-in-capital with a related charge to interest
expense. We recorded this amount at the time when our stockholders approved the
increase to the number of our authorized common shares to an amount sufficient
to allow for the full conversion of the series C convertible debentures and
exercise of the series C warrants.
Interest and other expense in 1999 also included approximately $312,000 of
imputed interest for the accretion of our research funding obligation to the
Roslin Institute.
In December 1998, we recorded approximately $562,000 in interest expense in
connection with the sale of series A convertible debentures, for the difference
between the fair market value of our common stock on the date of issuance and
the conversion price of the series A convertible debentures. We recorded the
series A convertible debentures at a discount and were amortizing the debentures
to the redemption amount prior to the conversion of the debentures into common
stock.
Net Loss
Net losses were $46.4 million, $10.8 million and $9.6 million for the years
ended December 31, 1999, 1998 and 1997, respectively. The increase in net loss
for 1999 was primarily the result of the charge for acquired research technology
in connection with the acquisition of Roslin Bio-Med and the amortization of the
research funding obligation to the Roslin Institute. The increase in net loss
for 1998 was primarily the result of increased operating expenses during the
year and lower research support payments from Kyowa Hakko.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investments at December 31, 1999 were $42.9
million compared to $40.4 million at December 31, 1998 and $21.6 million at
December 31, 1997. We have an investment policy to invest these funds in liquid,
investment grade securities, such as interest-bearing money market funds,
corporate notes, commercial paper and municipal securities. The increase in
cash, cash equivalents and investments in 1999 was primarily the result of the
sale of convertible debentures in June 1999 and September 1999. The increase in
cash, cash equivalents and investments in 1998 was the result of sale of our
convertible preferred stock in March 1998 and our sale of convertible debentures
in December 1998.
Net cash used in operations was $13.6 million in 1999 and $7.8 million in
1998. Cash used in operations in 1999 was primarily the result of the net loss
for the year of $46.4 million offset partially by non-cash charges including
purchased research technology expense of $23.4 million. We expect that our net
cash used in operations will increase in 2000 as a result of increased research
and development expenditures.
Through December 31, 1999, we have invested approximately $9.9 million in
property and equipment, of which approximately $7.5 million was financed through
equipment financing. Minimum annual payments due under the equipment financing
facility are expected to total $1.2 million, $876,000, $752,000 and $159,000 in
2000, 2001, 2002 and 2003, respectively. As of December 31, 1999, we had
approximately $1.2 million available for borrowing from our equipment financing
facility. The drawdown period under the equipment financing facility expires on
July 31, 2000. We intend to renew the commitment for a new equipment financing
facility in 2000 to further fund equipment purchases. If we are unable to renew
the commitment, then we will need to spend our own resources for equipment
purchases.
We have agreed to fund scientific research at academic and research
institutions. Under these research arrangements, we are obligated to make
minimum annual payments of approximately $2.8 million and $2.4 million in 2000
and 2001, respectively. We also formed a research collaboration agreement with
the Roslin Institute, which obligated us to provide approximately $20.0 million
in research funding over the next six years of which $2.3 million was paid in
1999. We intend to continue to maintain and develop relationships with academic
and research institutions.
In 1998 and 1997, Pharmacia & Upjohn made equity investments in our common
stock totaling $10.0 million at a premium. In 2000, Pharmacia & Upjohn and Kyowa
Hakko both extended their research
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funding commitment for an additional year. We expect to receive additional
funding from Pharmacia & Upjohn in each of the next two years to fund our future
development efforts. We also expect to receive additional funding from Kyowa
Hakko over the next two years. We will seek further funding through other
strategic collaborations, public or private equity financing, or other financing
sources.
In March 1998, we completed a private placement with two institutional
investors for the sale of 15,000 shares of series A preferred stock with a
stated value of $1,000 per share resulting in proceeds of $15.0 million. In
November 1998, 11,548 shares of series A convertible preferred stock converted
into 2,173,446 shares of our common stock and in April 1999, we redeemed the
remaining 3,452 shares of series A preferred stock for $3.7 million. The total
redemption value included the 6% premium on the outstanding book value of the
series A preferred stock. As of December 31, 1999, no shares of series A
preferred stock remained outstanding.
In December 1998, we sold $15.0 million in convertible zero coupon
debentures and warrants to purchase 1,250,000 shares our common stock to
investment funds managed by three institutional investors. We received one-half
of the proceeds upon signing the agreement which resulted in the issuance of
$7.5 million series A convertible debentures and warrants to purchase 625,000
shares of our common stock. During 1999, all of the series A convertible
debentures converted into 750,000 shares of our common stock at $10.00 per
share. As of December 31, 1999, none of series A warrants had been exercised.
In June 1999, we sold $7.5 million of our series B convertible debentures
and warrants to purchase an additional 625,000 shares of our common stock. The
series B debentures are convertible at any time by the holders at a fixed
conversion price of $10.00 per share. The series B warrants are exercisable at
$12.00 per share by the holders of series B convertible debentures. As of
December 31, 1999, $3.0 million of the principal amount of the series B
convertible debentures were outstanding. As of December 31, 1999, none of the
series B warrants had been exercised.
In September 1999, we sold $12.5 million in series C convertible
two-percent coupon debentures and warrants to purchase 1,100,000 shares of our
common stock to an institutional investor. The debentures are convertible at any
time by the holder at a fixed conversion price of $10.25 per share. We can
convert the debentures when the our common stock has traded at a certain premium
to the fixed conversion price for ten consecutive trading days. The warrants to
purchase 1,000,000 shares of our common stock are exercisable at $12.50 per
share and the warrants to purchase 100,000 shares of our common stock are
exercisable at $12.75 per share. We determined the value of the warrants to be
approximately $2.7 million and recorded this amount as interest expense. As of
December 31, 1999, all of the series C convertible debentures were outstanding.
As of December 31, 1999, none of the series C warrants had been exercised.
As of March 9, 2000, the remainder of principal of the series B convertible
debentures have been converted into 300,000 shares of our common stock and
approximately $6.3 million of principal of the series C convertible debentures
have been converted into approximately 615,000 shares of our common stock.
As of March 9, 2000, institutional investors have exercised series A
warrants to purchase 625,000 shares of our common stock, series B warrants to
purchase 375,000 shares of our common stock and series C warrants to purchase
1,100,000 shares of our common stock. We received total proceeds of
approximately $25.8 million from the exercise of these warrants.
In March 2000, we sold a total of 380,855 shares of our common stock and
300,000 warrants to purchase our common stock to a single investor for $9
million. We structured the sale of securities in two parts. We priced the first
$6.4 million of common stock at $50.32 per share, and 200,000 warrants are
exercisable at $67.09 per share. We priced the remaining $2.6 million of common
stock at $10.25 per share, and the remaining 100,000 warrants are exercisable at
$12.50 per share. The common stock and the stock underlying the warrants are not
registered for resale and are subject to a two-year prohibition on sale by
agreement. As of March 9, 2000, all of the warrants were outstanding.
We estimate that our existing capital resources, payments expected to be
made under the Kyowa Hakko and Pharmacia & Upjohn collaborative agreements,
interest income and equipment financing will be sufficient to fund our current
level of operations through June 2002. Changes in our research and development
plans or other changes affecting our operating expenses may not result in the
expenditure of available resources before
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such time, and in any event, we will need to raise substantial additional
capital to fund our operations in the future. We intend to seek additional
funding through strategic collaborations, public or private equity financings,
capital lease transactions or other financing sources that may be available.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
All of our computer hardware and software has been upgraded for Year 2000
compliance. All of our key vendors have provided assurance that they are Year
2000 compliant. While there were no Year 2000 related problems at the
transaction in the Year 2000, we are maintaining our contingency plans in the
event any problems arise in the future.
The statement contained in the foregoing Year 2000 readiness disclosures is
subject to protection under Year 2000 Information and Readiness Disclosure Act.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below. You should carefully consider
these risk factors, together with all of the other information included in this
Form 10-K, before you decide whether to purchase shares of our common stock. Any
of these risks could materially adversely affect our business, operating results
and financial condition.
This document contains forward-looking statements that involve risks and
uncertainties. You should not rely on these forward-looking statements. We use
words such as "anticipate," believe," "plans" "expect," "future," "intend" and
similar expressions to identify forward-looking statements. These statements
appear throughout the document and are statements regarding our intent, belief,
or current expectations, primarily with respect to our operations and related
industry developments. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Form 10-K.
Our actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks faced by us and
described in the preceding pages and elsewhere in this document.
OUR BUSINESS IS AT AN EARLY STAGE OF DEVELOPMENT AND WE MAY NOT DEVELOP ANY
PRODUCTS THAT REACH CLINICAL TRIALS
The study of the mechanisms of cellular aging and cellular immortality,
including telomere biology and telomerase, the study of human pluripotent stem
cells, and the process of nuclear transfer are relatively new areas of research.
Our business is at an early stage of development. We have not yet produced any
products that have progressed to clinical trials and we may never do so. Our
ability to produce products that progress to clinical trials is subject to our
ability to, among other things:
- continue to have success with our research and development efforts;
- select therapeutic compounds for development;
- obtain the required regulatory approvals; and
- manufacture and market resulting products.
If and when potential lead drug compounds or product candidates are
identified through our research programs, they will require significant
preclinical and clinical testing prior to regulatory approval in the United
States and elsewhere. In addition, we will also need to determine whether any of
these potential products can be manufactured in commercial quantities at an
acceptable cost. Our efforts may not result in a product that can be marketed.
Because of the significant scientific, regulatory and commercial milestones that
must be reached for any of our research programs to be successful, any program
may be abandoned, even after significant resources have been expended.
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WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE FUTURE LOSSES; CONTINUED
LOSSES COULD IMPAIR OUR ABILITY TO SUSTAIN OPERATIONS
We have incurred net operating losses every year since our operations began
in 1990. As of December 31, 1999, our accumulated deficit was approximately
$104.0 million. Losses have resulted principally from costs incurred in
connection with our research and development activities and from general and
administrative costs associated with our operations. We expect to incur
additional operating losses over the next several years as our research and
development efforts and preclinical testing activities are expanded.
Substantially all of our revenues to date have been research support payments
under the collaboration agreements with Kyowa Hakko and Pharmacia & Upjohn. The
agreements provide that through 2001, Kyowa Hakko and Pharmacia & Upjohn will
provide additional funding. We may be unsuccessful in entering into any new
corporate collaboration that results in revenues. Even if we are able to obtain
new collaboration arrangements with third parties the revenues generated from
these arrangements will be insufficient to continue or expand our research
activities and otherwise sustain our operations.
We are unable to estimate at this time the level of revenue to be received
from the sale of diagnostic products, and do not currently expect to receive
significant revenues from the sale of research-use-only kits. Our ability to
continue or expand our research activities and otherwise sustain our operations
is dependent on our ability, alone or with others to, among other things,
manufacture and market therapeutic products.
We may never receive material revenues from product sales or that such
revenues, if any, will be sufficient to continue or expand our research
activities and otherwise sustain our operations.
WE WILL NEED ADDITIONAL CAPITAL TO CONDUCT OUR OPERATIONS AND DEVELOP OUR
PRODUCTS, AND OUR ABILITY TO OBTAIN THE NECESSARY FUNDING IS UNCERTAIN
We will require substantial capital resources in order to conduct our
operations and develop our products. While we estimate that our existing capital
resources, payments under the Kyowa Hakko and Pharmacia & Upjohn collaborative
agreements, interest income and equipment financing will be sufficient to fund
our current level of operations through June 2002, we cannot guarantee that this
will be the case. The timing and degree of any future capital requirements will
depend on many factors, including:
- the accuracy of the assumptions underlying our estimates for our capital
needs in 2000 and beyond;
- continued scientific progress in our research and development programs;
- the magnitude and scope of our research and development program