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                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

 

                                   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, 1996

 

                                       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.)



 

                  200 CONSTITUTION DRIVE, MENLO PARK, CA 94025

                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

 

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 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 14, 1997, there were 10,213,771 shares of Common Stock

outstanding. The aggregate market value of voting stock held by non-affiliates

of the Registrant was approximately $76,068,067 based upon the closing price of

the Common Stock on March 14, 1997 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.

 

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                      DOCUMENTS INCORPORATED BY REFERENCE

 

     Portions of the Proxy Statement of Registrant for the 1997 Annual Meeting

of Stockholders to be filed with the Securities and Exchange Commission not

later than 120 days after the close of the Registrant's fiscal year are

incorporated into Part III of this Form 10-K.

 

     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 heading "Factors That May

Affect Future Results of Operations".

 

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                                     PART I

 

ITEM 1. BUSINESS

 

     Geron Corporation ("Geron" or the "Company") is a biopharmaceutical company

exclusively focused on discovering and developing therapeutic and diagnostic

products based upon common biological mechanisms underlying cancer and other

age-related diseases. As the pioneer in researching these mechanisms, the

Company focuses on telomeres, which are structures at the ends of chromosomes

that the Company has shown act as a molecular "clock" of cellular aging, and

telomerase, an enzyme which appears to stop the "clock" and confers cellular

immortality. The Company and its collaborators have established that these

mechanisms play a role in cancer and many other age-related diseases and

conditions, and thus the Company believes it has a broadly applicable,

proprietary platform for discovering and developing novel small molecule

therapeutics and diagnostics for such diseases. The most advanced of the

Company's three therapeutic programs is in the area of telomerase inhibition for

the treatment of cancer. Geron intends to build upon its leadership position in

the field of telomere biology and telomerase regulation by selectively

collaborating with companies and research institutions and by aggressively

pursuing an extensive patent portfolio. The Company owns four issued United

States patents and over 30 United States patent applications and has licensed

eight issued United States patents and over 30 United States patent

applications.

 

     Cancer and other age-related diseases and conditions, such as skin aging,

atherosclerosis, osteoporosis and macular degeneration, are difficult and costly

to diagnose and/or treat. In many cases, entirely effective means of diagnosing

and treating these diseases and conditions are not currently available. Further,

with the progressive "graying" of the population, the incidence of cancer and

other age-related diseases and conditions is expected to increase and to place a

steadily growing financial burden on the health care system. Significant

improvements in the diagnosis and treatment of these diseases and conditions are

expected to offer attractive commercial opportunities. For example, the current

cancer drug therapy market in the United States is over $3.8 billion, having

grown at an annual compounded rate in excess of 15% since 1985.

 

     Geron's scientific approach focuses on telomere shortening and telomerase

regulation as common biological mechanisms underlying cancer and other

age-related diseases and conditions. Geron and its collaborators have

demonstrated both in vivo and in vitro that telomeres, the repeated sequences of

DNA located at the ends of chromosomes, shorten throughout a normal cell's

replicative lifespan. The Company and its collaborators have also shown that

when telomeres reach a certain short length, cells stop dividing and become

senescent. Senescent cells display an altered pattern of gene expression

compared to replicatively young cells that leads to an imbalance in the

production of proteins and other cell products. This occurs in many tissues

throughout the body and can have a direct and destructive effect on surrounding

tissues and appears to contribute to many age-related diseases and conditions.

 

     Cancer cells escape senescence and maintain an extended ability to divide

through mutations. Geron and its collaborators have shown that for most

cancerous tumors to attain life threatening size, or for cancer to metastasize

throughout the body, cancer cells must become immortal through an alteration

which prevents their telomeres from shortening with each division. In all

cancers types studied to date, a germ line enzyme called telomerase is

abnormally reactivated in these cancer cells to repair their telomeres with each

cell division, thereby conferring cellular immortality. Geron has shown

telomerase to be present in all of the over 20 types of cancer that it has

studied, including breast, prostate, lung, colon and bladder cancers. The

Company believes that telomerase inhibition has the potential to be a universal

and highly specific cancer therapy. Geron and its collaborators are using

proprietary screening technologies to identify small molecule compounds that

selectively inhibit telomerase. Traditional medicinal chemistry and

combinatorial chemistry are being used to optimize these compounds, and animal

models of human tumor growth have been developed to test appropriateness for

pre-clinical development.

 

     In order to develop novel therapeutic and diagnostic products, the Company

is initially focused on three programs: (i) Telomerase Inhibition and

Detection -- developing both telomerase inhibitors as potentially universal and

highly specific cancer therapies and telomerase assays for the detection of

cancer; (ii) Genomics of Aging -- regulating the pattern of destructive gene

expression in senescent cells to treat various age-related

 

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diseases; and (iii) Primordial Stem Cell Therapies -- generating a broad array

of cell types from Primordial Stem cells for aiding in drug discovery and

development and for cellular transplantation. In support of these programs, the

Company employs advanced drug discovery technologies, including proprietary

assays, high throughput screening, combinatorial chemistry, proprietary

differential gene display techniques, protein purification and gene sequencing.

 

     The Company's strategy combines the following key elements: a focus on

fundamental biological mechanisms of cellular aging and cellular immortality to

treat cancer and other age-related diseases and conditions; building therapeutic

discovery and diagnostic programs on its common scientific platform; selective

pursuit of strategic collaborations; retention of rights to develop and market

products independently; and continued enhancement of its proprietary leadership

position in the field.

 

SCIENTIFIC BACKGROUND: CELLULAR AGING AND CELLULAR IMMORTALIZATION

 

     Cells are the building blocks for all tissues in the human body. Cell

division plays an important role in the normal growth, maintenance and repair of

human tissue. However, cell division is a limited process -- depending on the

tissue type -- cells generally divide only 60 to 100 times in the course of

their normal lifespans. When cells reach the end of their replicative capacity,

they senesce. Cellular aging or senescence, although influenced by environmental

factors, is a genetically determined process. Geron and its collaborators have

demonstrated that telomeres, the repeated sequences of DNA at the ends of

chromosome, are key genetic elements involved in this process. Telomeres are

important because they protect chromosomes from degradation and fusion. Each

time a normal cell divides, however, telomeres shorten. Thus, it appears that

telomeres serve as a molecular "clock" governing normal cell replication and

lifespan.

 

     Geron has demonstrated that once telomeres reach a certain short length,

cell division halts, and the cell enters a state known as cell senescence.

Although senescent cells have stopped dividing, they remain metabolically active

and, importantly, demonstrate an altered pattern of gene expression. In

senescent cells, certain genes normally expressed by young and healthy cells are

turned off or down-regulated while other genes are turned on or up-regulated,

creating an imbalance of proteins and other gene products that Geron believes

has a direct and destructive effect on the surrounding tissue. Geron believes

that this dysfunction at the cellular level, which occurs in numerous tissues

throughout the body, causes or contributes to age-related diseases and

conditions.

 

     The converse of cell senescence occurs in cancer cells. Normal cells have

the potential to become cancerous when random mutations activate various

oncogenes and deactivate tumor suppressor genes. With each mutation,

pre-cancerous cells become increasingly aberrant and uncontrolled, and may begin

to generate a tumor mass. The Company believes, however, that most cells which

undergo such changes are eliminated when telomere shortening leads to either

cell senescence or chromosomal instability and cell death. Geron's and its

collaborators' research indicates that for most cancerous tumors to attain life

threatening size, or for cancer to metastasize throughout the body, some cancer

cells must become immortal, which occurs through the activation of telomerase.

 

     Telomerase is a complex germ line enzyme, composed of RNA and protein

components, that maintains telomere length by resynthesizing the DNA that is

lost each time a cell divides. The result is that telomeres do not shorten and

cell death is averted. Geron's research has shown that telomerase is abnormally

reactivated in all major cancer types and that, conversely, it is not present in

most normal cell types. Telomerase enables cancer cells to maintain telomere

length, providing them with indefinite replicative capacity or cellular

immortality. Cellular immortality is responsible for most cancerous tumors

attaining life threatening size and/or cancers metastasizing throughout the

body.

 

     Telomerase is expressed in certain normal cells. Telomerase is present at

high levels and telomeres are very long in reproductive cells. In addition,

telomerase is functionally active in germ line cells to ensure the full

complement of genetic information is passed from generation to generation.

Telomerase is also present at very low levels in certain hematopoietic (blood),

skin and gastrointestinal cells and may function to give these cells somewhat

increased replicative capacity. However, these cells continue to age and

gradually lose telomeric DNA, which suggests that telomerase may not be

essential for their normal functioning.

 

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     Primordial Stem ("PS") cells are germ line cells that appear for only a

short period after fertilization. These cells differentiate into the many types

of cells found in the body. PS cells are the only known normal cells which are

immortal and have the potential to differentiate into any cell or tissue in the

body. Prior to differentiation, PS cells express telomerase activity. Studies

indicate, however, that once PS cells have differentiated into particular

tissues or cells, telomerase activity is repressed and the differentiated cells

are destined to follow the senescence pathway.

 

MARKET OPPORTUNITY

 

     Cancer and other age-related diseases and conditions, including skin aging,

atherosclerosis, osteoporosis and macular degeneration, are difficult and/or

costly to diagnose and treat. In many cases, effective means of diagnosing and

treating these diseases and conditions are not currently available. Further,

with the progressive "graying" of the population, the incidence of cancer and

other age-related diseases and conditions is expected to increase. By the year

2010, the over-65 population in the United States is expected to double to

approximately 64 million people, and worldwide, this population will increase to

over one billion. Significant improvements in the diagnosis and treatment of

these diseases and conditions will provide attractive commercial opportunities.

 

  Cancer

 

     The incidence of cancer increases dramatically with age. Eighty-five

percent of cancers diagnosed occur in people over the age of 50. People over the

age of 65 have, on average, a ten times greater risk of dying from cancer than

the under-65 population.

 

     In the United States, over ten million people alive today have a history of

cancer and well over one million people will be diagnosed each year with cancers

of the lung, colon, breast, prostate, pancreas, ovary, kidney and bladder, along

with lymphomas, leukemia and other cancers. Despite significant medical

advances, cancer researchers and clinicians have had little impact on cancer

mortality rates. Each year, cancer is expected to claim more than a half-million

lives, or approximately 25% of the total projected deaths in the United States.

Within the next decade, largely because of population aging, cancer may become

the leading cause of death in industrialized nations.

 

     Cancer therapy relies heavily on three treatment modalities: surgery, to

remove the tumor mass; radiation, to destroy tumors localized to a small region;

and chemotherapy, to eliminate tumor cells in diffuse parts of the body. Surgery

is an invasive procedure that may not remove the entire cancer, and the use of

radiation is limited to certain areas of the body. While drug therapies are less

invasive than surgery or radiation, many drugs used to treat cancer attack

rapidly dividing cells indiscriminately, damaging normal as well as cancer

cells. Further, when a drug is effective initially against a particular cancer,

it is often not effective against other types of cancer and, over time, the

particular cancer can become resistant to that drug and progress. The current

cancer drug therapy market in the United States is over $3.8 billion having

grown at an annual compounded rate in excess of 15% over the past decade. The

Company believes that a telomerase inhibitor could overcome the limitations of

current therapies and potentially be a universal and highly specific drug

treatment for cancer.

 

  Other Age-related Diseases and Conditions

 

     There are numerous other diseases and conditions for which the incidence

increases dramatically with age, including skin aging, atherosclerosis,

osteoporosis and macular degeneration. There are significant unmet medical needs

associated with these diseases and conditions. Many current therapies simply

address the symptoms of these diseases and conditions. Despite the limitation of

current therapies, drugs targeting these diseases and conditions represent some

of the largest selling pharmaceuticals. For example, the United States market

for cardiovascular drugs is approximately $10 billion, while the market for

drugs addressing osteoporosis and osteoarthritis is approximately $5 billion.

The market for retinoids used for skin therapy exceeds $3 billion. The Company's

focus on cellular aging and cellular immortality is designed to produce

therapeutics that address these diseases and conditions, and treat their causes

rather than their symptoms.

 

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STRATEGY

 

     Geron's strategy is to become the leading biopharmaceutical company

exclusively focused on discovering and developing therapeutic and diagnostic

products based upon common biological mechanisms underlying cancer and other

age-related diseases and conditions. The key elements of this strategy are

described below:

 

     Focus on Fundamental Mechanisms of Cellular Aging and Cellular

Immortality. Geron focuses its research on fundamental mechanisms of cellular

aging and cellular immortality. These include telomere shortening and telomerase

regulation. As the pioneer in researching and modulating these mechanisms, which

affect many tissues of the body, the Company believes it has established a

broadly applicable, proprietary platform for discovering and developing novel

small molecule therapeutics and diagnostics for cancer and other age-related

diseases.

 

     Develop High Value Programs with a Common Scientific Platform. Geron's

strategy is to leverage its expertise in cellular aging and cellular immortality

to develop those programs which offer the highest likelihood and shortest

development path for therapeutic and diagnostic products. Geron is currently

working in three program areas: (i) the detection and inhibition of telomerase

for the diagnosis and treatment of cancer; (ii) genomics of aging for skin

aging, atherosclerosis, osteoporosis and macular degeneration; and (iii)

primordial stem cell therapies for aiding in drug discovery and development and

cell transplantation.

 

     Pursue Strategic Collaborations. Geron has established and will continue to

establish collaborations selectively with pharmaceutical and diagnostic

companies and leading academic institutions to enhance its research, development

and commercialization capabilities. Geron has entered into a strategic alliance

with Kyowa Hakko Kogyo Co., Ltd. ("Kyowa Hakko"), a leading oncology company in

Japan, for the development and marketing in certain Asian countries of a

telomerase inhibitor to treat cancer. The Company has also signed a Heads of

Agreement (non-binding letter of intent) with Pharmacia & Upjohn S.p.A

("Pharmacia & Upjohn"), a global leader in oncology, for a complementary

worldwide collaboration in telomerase inhibition. In addition, the Company has

established technology and clinical development collaborations with leading

diagnostic companies. Finally, Geron has formed numerous research and clinical

collaborations with the leading experts in the fields of cellular aging and

cellular immortality.

 

     Retain the Ability to Develop and Market Products Independently. Geron

believes that its broad scientific platform will continue to generate

opportunities for a variety of collaborative arrangements. The Company intends

to retain significant rights to develop and market products on key therapeutic

and diagnostic applications of discoveries in its research programs.

 

     Enhance Proprietary Leadership Position. Geron intends to maintain its

scientific leadership and accelerate its research programs by continuing to

attract and retain leaders in the fields of cellular aging and cellular

immortality, either as employees or research collaborators. The Company is

aggressively pursuing a broad and extensive patent portfolio to protect its

proprietary technology, including drug discovery and diagnostic technologies. To

date, the Company owns four issued United States patents and over 30 United

States patent applications and has licensed eight issued United States patents

and over 30 United States patent applications.

 

RESEARCH PROGRAMS

 

     Geron will exploit its proprietary scientific platform to discover and

develop novel therapeutics and diagnostics for cancer and other age-related

diseases and conditions. Across its programs, the Company employs advanced drug

discovery technologies, including proprietary assays, high-throughput screening,

combinatorial chemistry, proprietary differential gene expression techniques,

protein purification and gene sequencing.

 

  Telomerase Inhibition and Detection

 

     Geron's intention is to discover and develop a small molecule telomerase

inhibitor, which, by blocking the activity of telomerase, will allow cancer cell

telomeres to resume shortening, ultimately leading to cancer cell

 

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death. In addition, the Company's intention is to develop telomerase as a marker

for cancer diagnosis, prognosis, monitoring and screening applications.

 

     Telomerase is not present in most normal cells, and as a result, these

cells exhibit telomere shortening. In contrast, telomerase is abnormally active

in cancer cells, causing telomere length to be maintained, which Geron believes

confers immortality to cancer cells in malignant tumors. Research has shown that

telomerase is present in all of the over 20 different cancer types that Geron

and its collaborators have studied, including the ten most prevalent cancers of

prostate, breast, lung, colon, bladder, uterus, and ovary, along with lymphomas

and leukemias, melanomas and pancreatic cancer. In all of these cancers, a high

percentage of tumor samples contain telomerase. Because telomerase is present in

all cancer types evaluated and is not biologically active in most normal cells,

telomerase appears to be a universal and highly specific marker of cancer. These

characteristics combine to make telomerase an attractive target for inhibition

to treat cancer, and for detection to diagnose cancer.

 

     Therapeutics. Geron's research has demonstrated that a telomerase inhibitor

can block cancer cells from using telomerase to maintain telomere length. As a

result, the telomeres in the cancer cells shorten as the cells continue to

divide, until reaching a critically short length, at which point the cancer

cells die. Geron scientists have blocked human telomerase in tumor cell lines in

vitro using an antisense compound to the human telomerase RNA component. In this

experiment, blocking telomerase led to telomere shortening and cancer cell

death. Based on these results, Geron is aggressively pursuing the identification

of telomerase inhibitors as potential lead compounds for preclinical

development. While it has identified several strategies for inhibiting

telomerase activity, Geron is primarily focused on developing a small molecule

inhibitor. The Company believes the small molecule approach will produce a

development candidate with a more favorable commercial profile -- oral

bioavailability, compound stability and low manufacturing cost. Geron and its

collaborators are using proprietary screening technologies to identify small

molecule compounds that selectively inhibit telomerase. Traditional medicinal

chemistry and combinatorial chemistry are being used to optimize these compounds

and animal models of human tumor growth have been developed to test

appropriateness for preclinical development.

 

     To advance this program, Geron has developed proprietary screening

technology, assembled a structurally diverse library of more than 100,000 small

molecules and established medicinal and combinatorial chemistry capabilities.

Specifically, the Company has developed a substantial automated high throughput

screening effort for the identification of telomerase inhibitors using

proprietary assays based on human telomerase. Geron is using this proprietary

screening capability to screen diverse small molecule compounds that Geron has

either acquired or created through its internal combinatorial chemistry

capabilities. As a result of its screening efforts, Geron and its collaborators

have identified several classes of compounds that demonstrate telomerase

inhibition and are actively pursuing structure/activity relationship studies to

develop lead compounds. Geron believes that these screens provide a strong

competitive advantage in view of the extreme difficulty and specialized skills

required for their development and use. More importantly, the United States

Patent and Trademark Office has recently allowed a patent application on one of

Geron's telomerase inhibitor screens.

 

     Geron believes that blocking telomerase activity will cause the affected

cancer cells to resume telomere shortening during cell division and thus lose

their immortality. When telomeres reach a critically short length, cancer cells

will die. Telomerase inhibition is therefore expected to have delayed efficacy

as cancer cell telomeres resume normal shortening. Although Geron envisions that

a telomerase inhibitor could be effective as a stand-alone treatment in certain

cases, it is expected that in most cases a telomerase inhibitor will be used in

conjunction with traditional anti-cancer therapies.

 

     The Company believes that a telomerase inhibitor will be an effective

therapeutic for a broad range of cancers, although there may be certain

limitations to its use. Because telomerase is present in reproductive cells, a

telomerase inhibitor, like almost all current cancer agents in current use, may

have a negative impact on such cells. Telomerase is also transiently expressed

in certain cells in the hematopoietic (blood), skin and gastrointestinal tract.

However, Geron scientists and others have demonstrated that these tissues age

and show gradual telomere shortening during the course of cell division. As a

result, the Company believes that

 

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telomerase is not biologically critical for these tissues and that telomerase

inhibitors are unlikely to have as significant a negative effect on them as

currently used anti-cancer agents.

 

     Geron has established a strategic alliance with Kyowa Hakko, a leading

oncology company in Japan, for the development and commercialization in certain

Asian countries of a telomerase inhibitor for the treatment of cancer. Geron has

also entered into a Heads of Agreement (non-binding letter of intent) with

Pharmacia & Upjohn S.p.A, a global leader in oncology, for a complementary

worldwide collaboration in telomerase inhibition. The Company has established

research collaborations for the study of telomerase inhibition with the National

Cancer Institute and the Memorial Sloan-Kettering Institute for Cancer Research,

and for the study of telomere biology with Cold Spring Harbor Laboratory.

 

     Diagnostics. The Company believes that telomerase is a universal and highly

specific marker of cancer and, therefore, the detection and quantification of

telomerase may have significant clinical utility for cancer diagnosis,

prognosis, patient monitoring and screening. While most current cancer

diagnostics apply to a single or limited number of cancer types,

telomerase-based diagnostics could potentially address a broad range of cancer

types. The Company also believes that the availability of telomerase-based

diagnostics for cancer, which are likely to reach the market before

telomerase-based therapeutics, will enhance the commercial opportunity for a

telomerase inhibitor by increasing the understanding of clinicians of the

biological significance of telomerase activity in cancer.

 

     The Company has developed several proprietary assays for the detection of

telomerase based on its activity or components. The first generation assay is

the Telomeric Repeat Amplification Protocol ("TRAP") assay which can be used to

detect telomerase activity in malignant tumor tissue. The United States Patent

and Trademark Office recently allowed Geron a patent for the TRAP assay. The

second generation assay detects the RNA component of human telomerase, which was

first cloned by Geron scientists. This enables the Company to use proprietary in

situ hybridization and other detection methods to detect the presence of

telomerase. The United States Patent and Trademark Office has issued to Geron a

patent relating to the RNA component of human telomerase as well as allowed

United States patent applications directed to cancer prognosis and detection of

specific types of cancer based on telomerase activity. The Company is also the

exclusive licensee of an issued United States patent which covers cancer

diagnostic applications of its telomerase detection technologies.

 

     Geron is overseeing preclinical studies to assess the full potential of its

telomerase detection technology. Data from two such studies indicate telomerase

levels correlate with clinical outcome in breast cancer and neuroblastoma

patients. The Company intends to proceed with development of its telomerase

detection technology as a novel and important diagnostic for numerous cancers.

 

     Oncor Inc. ("Oncor"), Boehringer Mannheim GmBH ("Boehringer Mannheim") and

Kyowa Medex Co., Ltd. ("Kyowa Medex") have licensed the Company's TRAP assay

technology; Dako Corporation ("Dako") has licensed the Company's RNA detection

technology; and Pharmingen has also licensed telomere length measurement

technology, each on a non-exclusive basis for sale to the research-use-only

market. Oncor commenced commercial sale of the TRAP-eze(TM) kit in May 1996,

followed by Boehringer Mannheim and Kyowa Medex in late 1996. Although the

Company does not expect royalties from the sale of these kits to be significant,

their use is expected to stimulate additional studies of telomerase activity by

academic laboratories. The Company has also established research collaborations

for the study of telomerase detection with The Cleveland Clinic, the University

of Texas, San Antonio, Johns Hopkins, Children's Hospital of Los Angeles and the

University of Texas Southwestern Medical Center at Dallas.

 

  Genomics of Aging

 

     Geron seeks to develop therapeutics to modulate the biological processes

leading to and regulating cell aging or senescence. The Company is applying

proprietary genomics and screening techniques to target and modulate the

destructive genetic changes that occur in senescent cells. Geron has entered

into research collaborations with several research institutions to support its

Genomics of Aging program, including Lawrence Berkeley Laboratory, the

University of Groningen (The Netherlands) and the University of Washington.

 

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     The goal of Geron's Genomics of Aging program is to treat age-related

diseases and conditions by small molecule drugs which modulate the destructive

pattern of gene expression that occurs in cells as they exhaust their

replicative capacity or become senescent. Geron's approach to genomics is unique

in that it focuses on the differences in gene expression between replicatively

young versus senescent cells. Geron believes there is a significant advantage in

defining differences in gene expression between young and senescent cells and

utilizing senescent cells in drug discovery screens. Many genomics companies use

diseased tissue for research and drug discovery, but diseased tissue is complex

in structure and varies from patient to patient. By comparison, Geron believes

that senescent cells are more representative of the disease process and provide

a homogeneous and reproducible population of cells for both gene and drug

discovery.

 

     Geron has developed proprietary high throughput genetic analysis techniques

called "Enhanced Differential Display" and "Subtractive Differential Display".

The United States Patent and Trademark Office recently issued Geron a patent for

the Enhanced Differential Display methodology. These technologies have enabled

the Company to identify genes, including those which express products at low

levels, and gene products that are differentially expressed by replicatively

young versus senescent cells. The Company is using these genes and their

products in automated screens for discovering small molecule drugs that

counteract the destructive effects that may be caused by the altered patterns of

gene expression associated with cell senescence.

 

     The Company's Genomics of Aging program is targeted at a wide range of

age-related diseases and conditions. Geron's initial focus is on skin aging,

atherosclerosis, osteoporosis, and macular degeneration.

 

     Geron and its collaborators have established that when dermal fibroblasts

age, or senesce, they undergo numerous changes in gene expression. Geron and its

collaborators have discovered over 100 gene markers that are differentially

expressed in replicatively young versus senescent dermal fibroblasts. Some of

these gene markers appear to be associated with gene products destructive to the

extracellular matrix. The Company believes that these and other changes in gene

expression contribute to the characteristic age-related atrophy of skin.

Reversing or offsetting the effects of such altered gene expression in senescent

fibroblasts by targeted and cell-based drug discovery could provide an effective

treatment for dermal atrophy and problems with wound healing in aging adults.

The Unites States Patent and Trademark Office recently issued Geron a patent for

methods to extend the replicative capacity of fibroblasts using specific types

of small organic molecules known as PARP inhibitors.

 

     Atherosclerotic plaques frequently form in blood vessels at areas of

turbulent blood flow, such as the vessels in the heart. Geron and its

collaborators have shown that endothelial cells lining arteries with turbulent

blood flow, where cell turnover and thus cell division is high, have shorter

telomeres than cells in regions with less blood turbulence and cell turnover.

Further, some gene products differentially expressed in senescent endothelial

cells have been shown to play a role in atherosclerosis. The Company believes

that altering expression of the senescence-associated genes and their products

in the vascular endothelium could provide a unique and effective therapy for

atherosclerosis.

 

     Geron also believes that maintaining telomere length in somatic cells will

be clinically useful because cell lifespan will be extended and the onset of

cell senescence will be postponed. The Company and its collaborators have

demonstrated in vitro that telomere length and replicative senescence can be

modulated with synthetic compounds and that activating telomerase will maintain

telomere length. As the first and fundamental step toward transiently activating

telomerase in somatic cells, the Company is working to complete the cloning of

telomerase and its regulators. Geron has already cloned, and has received an

issued United States patent relating to, the RNA component of human telomerase.

Geron believes that the complete cloning of the telomerase enzyme and its

regulators may also provide the Company with the next generation of telomerase

inhibitor screens, new reagents for telomerase detection, and other markers

useful in cancer diagnosis.

 

  Primordial Stem Cell Therapies

 

     Geron seeks to generate a broad array of cell types from PS cells for

aiding in drug discovery and development and cellular transplantation. PS cells

are germ line cells that are unique in that they (i) have an unlimited ability

to replicate, and therefore, can be expanded indefinitely; and (ii) are capable

of differentia-

 

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tion into any and all types of cells and tissues in the body. The Company

believes that PS cells offer significant advantages over other stem cells, which

do not proliferate well in culture and have limited ability to differentiate;

for example, the hematopoietic stem cells do not expand in vitro and are capable

of becoming only blood cells.

 

     Initially, Geron plans to use PS cells as a unique source of cells that

cannot otherwise be grown in culture, for example cardiomyocytes and neurons.

These cells can be used at Geron for its own research or sold to third parties

for drug discovery assays. Geron also plans to pursue in vitro and in vivo

applications using PS cells derived from non-human primates. These cells were

derived at the University of Wisconsin-Madison and are currently licensed

exclusively to Geron. These cells have been shown to have unlimited replicative

capacity and the ability to differentiate into numerous cell types. The Company

is in the early stages of research directed towards controlling the

differentiation of PS cells.

 

STRATEGIC COLLABORATIONS

 

     Geron believes that its broad scientific platform will generate significant

opportunities for a variety of strategic collaborative arrangements. Geron has

established and will continue to establish selectively collaborations with

leading pharmaceutical and diagnostic companies to enhance its research,

development and commercialization capabilities. In each of these strategic

collaborations, the Company will seek to retain significant rights to

participate in the commercial success of its products.

 

  Kyowa Hakko Collaboration

 

     In April 1995, the Company entered into a License and Research

Collaboration Agreement with Kyowa Hakko. Under the Kyowa Hakko Agreement, Kyowa

Hakko agreed to provide $16.0 million of research funding over four years to

support the Company's program to discover and develop in certain Asian countries

a telomerase inhibitor for the treatment of cancer. In addition, the Company is

entitled to receive future payments totaling $11.5 million 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 Geron Common Stock in connection with the Company's

initial public offering. Under the Kyowa Hakko Agreement, Geron exercises

significant influence during the research phase and Kyowa Hakko exercises

significant influence during the development and commercialization phases. Kyowa

Hakko will pay for all clinical expenses associated with product approval in the

licensed territory, which includes the countries of China, Hong Kong, India,

Indonesia, Japan, Kampuchea, Korea, Laos, Malaysia, Myan Mar, the Philippines,

Singapore, Taiwan, Thailand and Vietnam. The Kyowa Hakko Agreement provides that

Kyowa Hakko will not pursue research and development independent of its

collaboration with Geron with respect to telomerase inhibition for the treatment

of cancer in humans until April 24, 1999, at the earliest. Kyowa Hakko may

terminate the agreement only in the event of breach or bankruptcy by Geron or in

the event that both parties agree that it is no longer reasonably practical to

pursue further research and development of an inhibitor of telomerase.

 

  Pharmacia & Upjohn Collaboration

 

     On December 20, 1996, the Company signed a Heads of Agreement (non-binding

letter of intent) with Pharmacia & Upjohn to collaborate in the discovery,

development and commercialization of telomerase inhibitors for the treatment of

cancer. The Heads of Agreement states that Geron and Pharmacia & Upjohn will use

their best efforts to complete negotiations of a definitive agreement. The

companies also signed a Stock Purchase Agreement providing for an initial equity

investment of $2.0 million in Geron by Pharmacia & Upjohn, which was completed,

at a premium, in January 1997. The definitive agreement will include provisions

for additional equity, research support and milestone payments. Geron will also

receive royalties on sales and United States co-promotion rights. The

collaboration with Pharmacia & Upjohn strategically and financially complements

Geron's existing alliance with Kyowa Hakko.

 

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  Diagnostic Collaborations

 

     Geron has entered into non-exclusive royalty bearing license agreements

with Oncor and Boehringer Mannheim for use of the Company's TRAP assay as a kit

for the research-use-only market. Kyowa Medex has obtained a royalty bearing

license for Japan for the TRAP assay for both the research-use-only market and

the clinical diagnostics market. Oncor commenced commercial sale of the

TRAP-eze(TM) kit during the second quarter of 1996 and Boehringer Mannheim and

Kyowa Medex commenced sales during the fourth quarter of 1996. The Company has

also entered into non-exclusive royalty-bearing license agreements with Dako for

use of Geron's telomerase RNA detection technology and Pharmingen for use of

Geron's TRAP assay and telomere length measurement technology both for the

research-use-only market on a worldwide basis.

 

RESEARCH COLLABORATIONS

 

     The Company has entered into and intends to continue to enter into research

agreements selectively with leading academic and research institutions to

enhance significantly its research and development capabilities. Under these

agreements, the Company generally provides funding for scientific research in

exchange for exclusive commercial rights to the results of such research. In

each of these agreements, the Company seeks to retain rights to develop and

market applications of any discoveries made under such collaborations by

obtaining options to license exclusively any technology developed under such

programs, including patents or patent applications filed in connection with such

programs.

 

     The Company has established collaborations for the study of telomeres and

telomerase and the discovery and development of a telomerase inhibitor with the

National Cancer Institute, the Memorial Sloan-Kettering Institute for Cancer

Research, the University of Colorado, Cold Spring Harbor Laboratory, the

University of Texas Southwestern Medical Center at Dallas, Children's Hospital

of Los Angeles, The Cleveland Clinic and the University of Texas, San Antonio.

In support of its Genomics of Aging program, Geron has established

collaborations with Lawrence Berkeley Laboratory, Baylor College of Medicine,

Aarhus University (Denmark), University of Groningen (The Netherlands) and the

University of Washington. Geron has established an exclusive license and

collaboration agreement in support of its PS Cell Therapies program with the

University of California at San Francisco and the licensing arm of the

University of Wisconsin-Madison.

 

PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS

 

     Protection of the Company's proprietary compounds and technology is

important to the Company's business. The Company owns four issued United States

patents and over 30 United States patent applications and has licensed eight

issued United States patents and over 30 United States patent applications, as

well as international filings under the Patent Cooperation Treaty and pending

foreign national patent applications corresponding to certain of these United

States applications. The Company's policy is to seek, when appropriate, patent

protection for its lead compounds, gene discoveries, screening technologies and

certain other proprietary technologies through licensing and by filing patent

applications in the United States and certain other countries. The Company

believes its patent filings and patent licenses and options may provide

protection for its drug discovery and diagnostics development programs and that

its patent applications disclose useful discoveries in the field of telomere

biology and telomerase regulation as well as cellular senescence and cellular

immortality. For example, the United States Patent and Trademark Office recently

allowed a patent application for a telomerase inhibitor screen. The Company's

screening efforts have resulted in the identification of several compounds that

inhibit human telomerase in vitro and the Company has filed United States patent

applications on certain of these chemical classes of telomerase inhibitors,

three of which have been recently allowed. The Company has licensed an issued

United States patent relating to telomerase activity-based cancer diagnostic

methods, as well as allowed United States patent applications relating to cancer

prognosis and detection of specific types of cancer based on telomerase

activity. In addition, the Company's United States patent application for the

TRAP assay has recently been allowed, and the Company owns several United States

pending patent applications directed to improvements to the TRAP assay. The

Company's telomerase RNA detection technology is the subject of several patent

applications. One patent relating to reagents used in the assay has recently

issued from the United States Patent and Trademark Office. The Company has also

filed patent applications on its technologies for identifying genes that are

differentially

 

                                       10

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expressed in different cell types or at different stages of cellular

development, and the United States Patent and Trademark Office has recently

issued a patent relating to the Company's "Enhanced Differential Display"

technology, as well as a patent for methods to increase the replicative capacity

of skin cells.

 

     While the Company believes its patents and patent applications provide a

competitive advantage in its efforts to discover, develop and market useful

therapeutic and diagnostic products, the patent positions of pharmaceutical and

biopharmaceutical companies, including the Company, are highly uncertain and

involve complex legal and technical questions for which legal principles are not

firmly established. There can be no assurance that the Company has developed or

will continue to develop products or processes that are patentable or that

patents will issue from any of the pending applications, including patent

applications that have been allowed. There can also be no assurance that the

Company's current patents, or patents that issue on pending applications, will

not be challenged, invalidated or circumvented, or that the rights granted

thereunder will provide proprietary protection or competitive advantages to the

Company. Because (i) patent applications in the United States are maintained in

secrecy until patents issue, (ii) patent applications are not generally

published until many months or years after they are filed and (iii) publication

of technological developments in the scientific and patent literature often

occur long after the date of such developments, the Company cannot be certain

that its or its licensors' patents and patent applications name as inventors

were the first to invent the inventions disclosed in the patent applications or

patents or that it or its licensors were the first to file patent applications

for such inventions. Litigation to establish the validity of patents, to defend

against patent infringement claims of others and to assert infringement claims

against others can be expensive and time consuming even if the outcome is

favorable to the Company. If the outcome of patent prosecution or litigation is

unfavorable to the Company, the Company could be materially adversely affected.

 

     Patent law relating to the scope and enforceability of claims in the

technology fields in which the Company operates is still evolving. The degree of

future protection for the Company's proprietary rights, therefore, is highly

uncertain. In this regard, there can be no assurance that independent patents

will issue from each of the United States patent applications referenced above,

which include many interrelated applications directed to common or related

subject matter. The Company is aware of certain patent applications that have

been filed by others with respect to telomerase and telomere length. In this

regard, Iowa State University has filed United States and corresponding foreign

patent applications claiming methods and reagents relating to the RNA component

of human telomerase, and Isis Pharmaceuticals, Inc. has filed United States and

corresponding foreign patent applications relating to oligonucleotide-like

reagents asserted to have telomere length modulating activity. In addition,

there are a number of issued patents and pending applications owned by others

directed to differential display, stem cell and other technologies relating to

the Company's research, development and commercialization efforts. There can be

no assurance that the Company's technology can be developed and commercialized

without a license to such patents or that patent applications of others will not

be granted priority over patent applications filed by the Company. Furthermore,

there can be no assurance that others will not independently develop similar or

alternative technologies to those of the Company, duplicate any of the Company's

technologies, or design around the patented technologies developed by the

Company or its licensors, any of which may have a material adverse effect on the

Company.

 

     The commercial success of the Company depends significantly on its ability

to operate without infringing patents and proprietary rights of others. There

can be no assurance that the Company's technologies do not and will not infringe

the patents or proprietary rights of others. In the event of such infringement,

the Company may be enjoined from pursuing research, development or

commercialization of its potential products or may be required to obtain

licenses to these patents or other proprietary rights or to develop or obtain

alternative technology. There can be no assurance that the Company will be able

to obtain alternative technologies or any required license on commercially

favorable terms, if at all, and if any such license is or alternative

technologies are not obtained, the Company may be delayed or prevented from

pursuing the development of certain of its potential products. The Company's

breach of an existing license or failure to obtain or delay in obtaining

alternative technologies or a license to any technology that it may require to

develop or commercialize its products may have a material adverse effect on the

Company. In this regard, the Company has been in discussion with a research

institution with respect to a research collaboration for the

 

                                       11

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development of certain technology related to its Primordial Stem Cell Therapies

program. A third party notified the Company that if the Company enters into such

an arrangement, the Company will violate the rights of such third party.

Although the Company believes that such an arrangement may be important to the

Primordial Stem Cell Therapies program, the Company does not believe that it is

essential to such program or the Company. As of the date of this Form 10-K, the

Company has made no decision whether to enter into such an arrangement and, in

any event, must yet complete scientific and legal due diligence and successfully

negotiate the terms of such an arrangement, as to which there can be no

assurance. If such an arrangement is entered into, the Company believes it has

substantial defenses to any claims that might be asserted by such third party.

 

     Litigation may also be necessary to enforce any patents issued or licensed

to the Company or to determine the scope and validity of another's proprietary

rights. The Company could incur substantial costs if litigation is required to

defend itself in patent suits or other intellectual property litigation brought

by third parties or if Geron initiates such suits. There can be no assurance

that the Company's issued or licensed patents would be held valid or infringed

in a court of competent jurisdiction or that a patent held by another will be

held invalid or not infringed in such court. An adverse outcome in litigation or

an interference to determine priority or other proceeding in a court or patent

office could subject the Company to significant liabilities to other parties,

require disputed rights to be licensed from other parties or require the Company

to cease using such technology, any of which could have a material adverse

effect on the Company.

 

     Geron also relies on trade secrets to protect its proprietary technology,

especially in circumstances in which patent protection is not believed to be

appropriate or obtainable. Geron attempts to protect its proprietary technology

in part by confidentiality agreements with its employees, consultants and

certain contractors. There can be no assurance that these agreements will not be

breached, that the Company would have adequate remedies for any breach, or that

the Company's trade secrets will not otherwise become known or be independently

discovered by competitors.

 

     The Company is party to various license agreements which give it rights to

use certain technologies in its research, development and commercialization

activities. Disputes have arisen and may continue to arise as to the

inventorship and corresponding rights in know-how and inventions resulting from

the joint creation or use of intellectual property by the Company and its

licensors, research collaborators and consultants. There can be no assurance

that the Company will be able to continue to license such technologies on

commercially reasonable terms, if at all, or to maintain the exclusivity of its

exclusive licenses. In this regard, the Company's license with the licensing arm

of the University of Wisconsin-Madison for PS cells derived from primates is

currently exclusive until 1998 and non-exclusive thereafter. The failure of the

Company to maintain exclusive or other rights to such technologies could have a

material adverse effect on the Company.

 

SCIENTIFIC ADVISORS

 

     The Company has consulting agreements with a number of leading academic

scientists and clinicians who serve as members of its Scientific Advisory Board

("SAB") or as consultants. These individuals are distinguished scientists and

clinicians with expertise in the areas of genetics of aging, cell senescence,

telomerase, cell biology and molecular biology.

 

     The SAB was established to consult with the Company with respect to

scientific programs and strategies. The individuals also provide important

contacts throughout the broader scientific community. The SAB meets as a whole

or in smaller groups at least once per year to focus on general strategy and

certain scientific issues. Individual members are called upon on an ad hoc basis

as appropriate.

 

     Each SAB member has entered into an agreement with the Company covering the

terms of his or her position as a member of the SAB. Each member provides

services on an as-needed basis. Certain SAB members hold options to purchase or

have purchased Common Stock of the Company. In addition, members of the SAB are

reimbursed for out-of-pocket expenses incurred in attending each meeting. Most

members of the SAB are employed by institutions other than the Company and may

have commitments to, or consulting or advisory agreements, with other entities

that may limit their availability to the Company.

 

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     The Company's SAB members and consultants include the following

individuals:

 

     ELIZABETH BLACKBURN, PH.D., is a Professor and Chair of the Department of

Microbiology and Immunology at the University of California at San Francisco and

a member of the National Academy of Sciences. Dr. Blackburn is known for her

pioneering characterization of telomeres and for her co-discovery of telomerase

with Dr. Carol Greider in 1985 and subsequent characterization of this important

enzyme.

 

     GUNTER K. BLOBEL, M.D., PH.D., is an investigator at the Howard Hughes

Medical Institute, Rockefeller University and is a member of the Company's SAB.

Dr. Blobel is a member of the National Academy of Sciences, the recipient of the

1993 Lasker Award and past president of the American Society for Cell Biology.

He is well known for his work in protein translocation and is now turning much

of his research focus to nuclear trafficking.

 

     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

and 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 the Eli Lilly Award

in Microbiology (1978), 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 NAS/NRC study on the Human Genome

Project (1987-88), the NIH Program Advisory Panel on the Human Genome (1989-90)

and the Advisory Council of the National Center for Human Genome Research

(1990-1995).

 

     ROBERT N. BUTLER, M.D., is a gerontologist and psychiatrist with broad

experience in aging research and advocacy. In 1982, he founded the first, and

still the only, 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 of the National

Institutes of Health, 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 National Institute on Aging, and serves on the NIA Board of

Scientific Counselors. Her major interest is the cellular and molecular biology

of senescence and tumorigenesis.

 

     VINCENT CRISTOFALO, PH.D., is a Professor of Pathology and Laboratory

Medicine, and Director of the Center for Gerontological Research, Medical

College of Pennsylvania and Hahnemann University and is a member of the

Company's SAB. In addition, he is professor emeritus at the University of

Pennsylvania and adjunct professor at the Wistar Institute. He sits on the Board

of Scientific Counselors of the National Institute on Aging and the Department

of Veterans Affairs Geriatrics and Gerontology Advisory Committee, as well as

numerous editorial boards.

 

     JOHN GEARHART, PH.D., is a Professor of Gynecology and Obstetrics,

Physiology, Comparative Medicine, and Population Dynamics at the School of

Medicine of Johns Hopkins University, where he is also the Director of the

Division of Genetics and the Preimplantation Genetics Diagnosis Program. Dr.

Gearhart has been a leader in the utilization of transgenic models and in the

development of new transgenic and embryonic stem cell technologies.

 

     CAROL GREIDER, PH.D., is a Senior Staff Scientist at the Cold Spring Harbor

Laboratory and is a member of the Company's SAB. She is known for her

co-discovery of telomerase with Dr. Elizabeth Blackburn. Her pioneering work on

the molecular mechanisms of this enzyme and its role in cellular immortalization

is widely recognized.

 

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     LEONARD GUARANTE, PH.D., has studied mechanisms of eukaryotic

transcriptional regulation over the past 17 years. More recently, his lab has

turned its focus to identifying causes of aging by identifying genes that

control lifespan in the model system S. cerevisiae. His lab has also begun a

study of the WRN gene, mutations in which give rise to Werner's Syndrome, a

human disease characterized by premature aging.

 

     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 ("UCSF") and is a member of

the Company's SAB. His major research interests are the cellular and genetic

mechanisms of tumor development and autoimmunity. Prior to joining UCSF 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, and is a member of

the Company's SAB. 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, is editor-in-chief of

Experimental Gerontology, was a founding member of the Council of the National

Institute on Aging, and recently authored the popular book, "How and Why We

Age."

 

     ERIC LANDER, PH.D., is a Professor of Biology at the Massachusetts

Institute of Technology and serves as the Director of the Whitehead

Institute/MIT Center for Genome Research. Dr. Lander is active in several

organizations involved in human genetics research, including serving on the

board of directors for the Genetic Society of America, acting as former chair of

the Genome Research Review Committee for NIH's National Center for Human Genome

Research and is a member of the Company's SAB. He brings broad experience in

human and mammalian genetic research.

 

     GEORGE M. MARTIN, M.D., is Professor of Pathology, Adjunct Professor of

Genetics and Director of Alzheimer's Disease Research Center, University of

Washington School of Medicine. He has held various positions in the departments

of pathology and genetics at the University of Washington School of Medicine

since 1957, and was appointed director of the Alzheimer's Disease Research

Center in 1985. Dr. Martin's recent awards include a Research Medal granted by

the American Aging Association in 1992 and the Robert W. Kleemeier Award given

by the Gerontological Society of America in 1993.

 

     MALCOLM MOORE, PH.D., is a Professor of Biology at the Sloan-Kettering

Division, Cornell Graduate School of Medical Sciences. He is also currently

incumbent of the Enid A. Haupt Chair of Cell Biology, Memorial Sloan-Kettering

Cancer Center. Dr. Moore most recently received the William B. Coley Award For

Distinguished Research in Immunology by the Cancer Research Institute (June

1995).

 

     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 in 1965, and his Ph.D. in 1970 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, the

University of Texas Southwestern Medical Center at Dallas and is a member of the

Company's SAB. Dr. Shay's research focuses on molecular mechanisms of

tumorigenesis and immortalization with a particular emphasis on cancer of the

breast.

 

     JAMES D. WATSON, PH.D., is the President of Cold Spring Harbor Laboratory

and is a member of the Company's SAB. Dr. Watson is the former head of the NIH

Human Genome Project and is famous for his

 

                                       14

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1953 discovery with Francis Crick of the double helical structure of DNA for

which he received the Nobel Prize.

 

     WOODRING E. WRIGHT, M.D., PH.D., is a Professor of Cell Biology and

Neuroscience, the University of Texas Southwestern Medical Center at Dallas and

is a member of the Company's SAB. He is widely recognized as a leading molecular

biologist working in the field of cellular senescence and on the molecular basis

of muscle development.

 

BUSINESS ADVISORS

 

     The Company has also established a Business Advisory Board to advise it on

strategic business matters. Each member of the Business Advisory Board has

entered into an agreement with the Company covering the terms of the position

and provides services on an as-needed basis. The members of the Company's

Business Advisory Board are:

 

     JACK L. BOWMAN has over 30 years of health care management experience, most

recently as company group chairman of Johnson & Johnson. Prior to Johnson &

Johnson, Mr. Bowman was with American Cyanamid, where his positions included

President of Lederle Laboratories, and Ciba-Geigy Pharmaceuticals.

 

     ROBERT A. SWANSON is a founder of Genentech, Inc., served as its Chief

Executive Officer from 1976 to 1990, and has been Chairman of the Board since

1990. Prior to forming Genentech, Mr. Swanson was a partner with Kleiner &

Perkins venture capital partnership in San Francisco, and from 1970 to 1974, he

was an investment officer with Citicorp Venture Capital Ltd. He serves on the

Board of Fellows of the Faculty of Medicine at Harvard University and is a

member of the Biology Visiting Committee of, and has served as a Trustee for,

the Massachusetts Institute of Technology. Mr. Swanson is a member of the Royal

Swedish Academy of Engineering Sciences and a member of the Board of Molten

Metal Technology, Inc.

 

     ANDERS P. WIKLUND has spent 30 years with Kabi and Pharmacia group

companies where he served as the President and CEO of Kabi Vitrum, Inc. and Kabi

Pharmacia, Inc. He also worked as part of the Corporate Business Development

function of Pharmacia and then Pharmacia & Upjohn and was actively involved in

forming strategic alliances with United States biotechnology companies and with

merger and acquisitions on the group level. He is presently an advisor to

numerous United States and European companies and serves on the Board of

Directors for several private and public biotechnology companies.

 

GOVERNMENT REGULATION

 

     Regulation by governmental entities in the United States and other

countries will be a significant factor in the preclinical and clinical testing,

production, labeling, sale, distribution, marketing, advertising and promotion

of any products developed by the Company or its strategic partners. Most of the

Company's or its strategic partners' products will require regulatory approval

or clearance by governmental agencies prior to commercialization. The nature and

the extent to which such regulation may apply to the Company or its strategic

partners will vary depending on the nature of any such products. Generally,

biological drugs and non-biological drugs are regulated more rigorously than

medical devices. In particular, human pharmaceutical therapeutic products,

including a telomerase inhibitor, are subject to rigorous preclinical and

clinical testing and other requirements by the United States Food and Drug

Administration ("FDA") in the United States and similar health authorities in

foreign countries. Various federal and, in some cases, state statutes and

regulations also govern or influence the manufacturing, safety, labeling,

distribution, storage, record keeping and marketing of such products. The

process of obtaining these approvals or clearances is uncertain and the process

and the subsequent compliance with appropriate federal and foreign statutes and

regulations are time consuming and require the expenditure of substantial

resources.

 

     Generally, to gain FDA pre-market approval for a biopharmaceutical product,

a company first must conduct extensive preclinical studies in the laboratory and

in animal model systems to gain preliminary information on a product's potential

efficacy and to identify any safety problems. The results of these studies are

submitted as a part of an investigational new drug application ("IND"), which

must become effective before human clinical trials of an investigational drug

can start. To commercialize any products, the Company

 

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or its strategic partners will be required to sponsor and file an IND and will

be responsible for initiating and overseeing a series of clinical studies to

demonstrate the safety, purity, efficacy and potency in the case of biological

drugs, or safety and efficacy in the case of non-biological drugs that are

necessary to obtain FDA approval of any such products. Clinical trials are

normally done in three phases (Phase I -- safety and pharmacologic assessment;

Phase II -- a small efficacy study; and Phase III -- 200-1000 patient studies to

provide substantial evidence of safety and effectiveness) which generally take

three to six or more years to complete. After completion of clinical trials of a

new product, FDA marketing approval must be obtained. If the product is

classified as a non-biological drug, the Company or its strategic partner will

be required to file a new drug application ("NDA") and receive approval before

commercial marketing of the drug. In the case of a biological drug, an

Establishment License Application ("ELA") and Product License Application

("PLA") must be filed with and approved by the FDA before marketing can occur.

If a given recombinant product is considered to be a well-characterized

biological drug under the FDA's new program, only a Biological License

Application ("BLA") combining elements of an ELA and a PLA may be required.

These testing and approval processes are uncertain and require substantial time

and the expenditure of substantial resources, and there can be no assurance that

any such approval will be granted on a timely basis, if at all. NDAs or PLAs

/ELAs submitted to the FDA can take, on average, two to five years to receive

approval, and the FDA must confirm that good laboratory, clinical and

manufacturing practices were maintained as well as determine that safety,

purity, efficacy and potency (in the case of a biological drug) or safety and

efficacy (in the case of a non-biological drug) have been established. If

questions arise during the FDA review process, approval can take more than five

years. Even if FDA regulatory approvals are obtained, a marketed product is

subject to continual review, and later discovery of previously unknown problems

or failure to comply with the applicable regulatory requirements may result in

restrictions on the marketing of a product or withdrawal of the product from the

market as well as possible civil or criminal sanctions, including but not

limited to recall or seizure of product, injunction against manufacture,

distribution, sales and marketing and criminal prosecution. For marketing

outside the United States, the Company will also be subject to foreign

regulatory requirements governing human clinical trials and marketing approval

for pharmaceutical products. The requirements governing the conduct of clinical

trials, product licensing, pricing and reimbursement vary widely from country to

country. Any diagnostic products to be developed by the Company or its strategic

partners are likely to be regulated by the FDA as medical devices rather than

drugs. The nature of the FDA requirements applicable to such medical diagnostic

devices depends on their classification by the FDA. A diagnostic device

developed by the Company or a strategic partner would initially be classified as

a Class III device, and would most likely require pre-market approval. Obtaining

pre-market approval involves the costly and time-consuming process, comparable

to that for new drugs, of conducting laboratory studies, obtaining an

investigational device exemption to conduct clinical tests, filing a pre-market

approval application ("PMA") and obtaining review and approval of the PMA by the

FDA. Such review and approval may take 12-18 months or more. The process from

laboratory to clinical studies to FDA review and approval of a PMA, which

approval cannot be assured on a timely basis, if at all, can take several years

or more. Both drugs and devices are subject to FDA current good manufacturing

practice regulations ("GMPs"), often even at the clinical trial stages. Both

drug and device GMPs specify extensive validation and record keeping

requirements, including the maintenance of product compliance files, as well as

require compliance with various standards governing personnel, equipment and raw

materials, including product stability requirements. There can be no assurance

that the Company or its collaborators or contract manufacturers, if any, will be

able to establish or maintain compliance with the GMP regulations on a

continuing basis. Failure to establish or maintain GMP compliance or compliance

with other FDA requirements could have a material adverse effect on the

Company's business.

 

     The Company's research and development activities involve the controlled

use of hazardous materials, chemicals and various radioactive materials. The

Company is subject to federal, state and local laws and regulations governing

the use, storage, handling and disposal of such materials and certain waste

products. Although the Company believes that its safety procedures for using,

handling, storing and disposing of such materials comply with the standards

prescribed by state and federal laws and regulations, the risk of accidental

contamination or injury from these materials cannot be completely eliminated. In

the event of such an

 

                                       16

   18

 

accident, the Company's use of these materials could be curtailed by state or

federal authorities, the Company could be held liable for any damages that

result and any liability could exceed the resources of the Company.

 

COMPETITION

 

     The pharmaceutical and biopharmaceutical industries are intensely

competitive. The Company believes that certain pharmaceutical and

biopharmaceutical companies as well as certain research organizations currently

engage in or have in the past engaged in efforts related to the biological

mechanisms of cell aging and cell immortality, including the study of telomeres

and telomerase. In addition, other products and therapies that could compete

directly with the products that the Company is seeking to develop and market

currently exist or are being developed by pharmaceutical and biopharmaceutical

companies, and by academic and other research organizations. Many companies are

also developing alternative therapies to treat cancer and, in this regard, are

competitive with the Company. The pharmaceutical companies developing and

marketing such competing products have significantly greater financial resources

and expertise in research and development, manufacturing, preclinical and

clinical testing, obtaining regulatory consents and marketing than the Company.

Smaller companies may also prove to be significant competitors, particularly

through collaborative arrangements with large and established companies.

Academic institutions, government agencies and other public and private research

organizations may also conduct research, seek patent protection and establish

collaborative arrangements for research, clinical development and marketing of

products similar to those of the Company. These companies and institutions

compete with the Company in recruiting and retaining qualified scientific and

management personnel as well as in acquiring technologies complementary to the

Company's programs. There is also competition for access to libraries of

compounds to use for screening. Any inability of the Company to secure and

maintain access to sufficiently broad libraries of compounds for screening

potential targets would have a material adverse effect on the Company. In

addition to the above factors, Geron will face competition with respect to

product efficacy and safety, the timing and scope of regulatory consents,

availability of resources, reimbursement coverage, price and patent position,

including potentially dominant patent positions of others. There can be no

assurance that competitors will not develop more effective or more affordable

products, or achieve earlier patent protection or product commercialization than

the Company or that such products will not render the Company's products

obsolete.

 

EMPLOYEES

 

     The Company had 89 full-time employees at December 31, 1996, of whom 30

hold Ph.D. degrees and 18 hold other advanced degrees. Of the total workforce,

75 are engaged in, or directly support, the Company's research and development

activities and 14 are engaged in business development, finance and

administration. The Company also retains outside consultants. None of the

Company's employees is covered by a collective bargaining agreement, nor has the

Company experienced work stoppages. The Company considers relations with its

employees to be good.

 

EXECUTIVE OFFICERS OF THE COMPANY

 

     The following table sets forth certain information with respect to the

executive officers of the Company as of December 31, 1996:

 





               NAME                    AGE                           POSITION

- -----------------------------------    ---         --------------------------------------------

                                             

Ronald W. Eastman                      45          President, Chief Executive Officer and

                                                   Director

David L. Greenwood                     45          Chief Financial Officer, Treasurer and

                                                   Secretary

Richard T. Haiduck                     49          Vice President of Corporate Development

Calvin B. Harley, Ph.D.                44          Chief Scientific Officer

Jeryl L. Hilleman                      39          Vice President of Operations

Kevin R. Kaster, Esq.                  37          Vice President of Intellectual Property and

                                                   Chief Patent Counsel

Michael D. West, Ph.D.                 44          Vice President of New Technologies and

                                                   Director



 

                                       17

   19

 

     RONALD W. EASTMAN has served as President, Chief Executive Officer and

Director of the Company since May 1993. From 1978 until joining the Company, Mr.

Eastman was employed with American Cyanamid Co., most recently as a Vice

President and General Manager of Lederle Laboratories, American Cyanamid's

pharmaceutical business. Mr. Eastman holds a B.A. from Williams College and an

M.B.A. from Columbia University.

 

     DAVID L. GREENWOOD has served as Chief Financial Officer, Treasurer and

Secretary of the Company since July 1995. From 1979 until joining the Company,

Mr. Greenwood held various management 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.

 

     RICHARD T. HAIDUCK has served as Vice President of Corporate Development of

the Company since October 1993. From March 1991 until joining the Company, Mr.

Haiduck was employed by ASB Meditest, a mobile medical testing company, as

Senior Vice President of Field Operations. From December 1989 to February 1991,

he was Chief Executive Officer of Lifescreen, Inc., a health screening company,

and from 1975 to 1989, Mr. Haiduck held various positions with Abbott

Laboratories, Inc., a pharmaceutical company. Mr. Haiduck holds a B.S. from

Miami University and an M.B.A. from Xavier University.

 

     CALVIN B. HARLEY, PH.D., has served as Chief Scientific Officer of the

Company since July 1996. From May 1994 until July 1996, Dr. Harley was the Vice

President of Research of the Company and from April 1993 to May 1994, Dr. Harley

was Director, Cell Biology of the Company. Dr. Harley was an Associate Professor

from 1989 until joining the Company, 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 University of Waterloo and a Ph.D. from McMaster University,

and conducted postdoctoral work at the University of Sussex and the University

of California at San Francisco.

 

     JERYL L. HILLEMAN has served as Vice President of Operations of the Company

since July 1995. From June 1992 until July 1995, Ms. Hilleman served as Vice

President of Administration and Finance of the Company. From 1987 until joining

the Company, Ms. Hilleman served as Vice President, Finance and Operations of

Cytel Corporation, a biotechnology company. Ms. Hilleman holds an A.B. from

Brown University and an M.B.A. from the Wharton Graduate School of Business.

 

     KEVIN R. KASTER, ESQ., has served as Vice President of Intellectual

Property and Chief Patent Counsel of the Company since June 1994. From September

1991 until joining the Company, Mr. Kaster was employed with Affymax, N.V., a

biotechnology company, as Director, Intellectual Property. From May 1988 until

September 1991, Mr. Kaster was a patent attorney with Cetus Corporation, a

biotechnology company. Prior to his employment with Cetus Corporation, he served

as an Associate Biologist and then as a Patent Technician with Eli Lilly and

Company, a pharmaceutical company. Mr. Kaster holds a B.S. in Chemistry and

Molecular Biology from Vanderbilt University and a J.D. from Indiana University.

 

     MICHAEL D. WEST, PH.D., the founder of the Company, has served as a

Director of the Company since November 1990 and as Vice President of New

Technologies of the Company since October 1993. From February 1993 until October

1993, Dr. West served as Executive Vice President of Business Development of the

Company, and from March 1992 until February 1993, he was Executive Vice

President and Chief Scientific Officer of the Company. From November 1990 until

March 1992, Dr. West served as President of the Company. Prior to joining the

Company, Dr. West was a Senior Research Scientist at the University of Texas

Southwestern Medical Center at Dallas in the Department of Cell Biology and

Neuroscience and, from 1989 to 1990, was a Postdoctoral Research Fellow in the

same department. Dr. West holds a B.S. from Rensselaer Polytechnic Institute, an

M.S. from Andrews University and a Ph.D. from Baylor College of Medicine.

 

                                       18

   20

 

ITEM 2. PROPERTIES

 

     Geron currently leases approximately 17,000 square feet of office space at

194 Constitution Drive and 200 Constitution Drive, Menlo Park, California. The

Company's lease for such office space expires in January 2002, with an option to

renew the lease for two additional periods of two and one-half years each. The

Company intends to use this space for general office and biomedical research and

development purposes.

 

     In March 1996, the Company entered into a lease for an additional 24,000

square feet of office space at 230 Constitution Drive, Menlo Park, California,

with possession taken in November 1996. The Company's lease for such office

space expires in January 2002, with an option to renew the lease for two

additional periods of two and one-half years each. The Company intends to use

this space for general office purposes. The Company believes that its existing

facilities are adequate to meet its requirements for the near term.

 

     In December 1996, the Company entered into a sublease agreement with a

non-affiliated company for approximately 12,350 square feet of office space at

230 Constitution Drive. The sublease for such office space expires in March

1998, with an option to extend for 90 days. The Company believes that this

sublease will not affect the Company's facility requirements in the foreseeable

future.

 

ITEM 3. LEGAL PROCEEDINGS

 

     The Company is not a party to any material legal proceedings.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

     None.

 

                                    PART II

 

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER

         MATTERS

 

MARKET INFORMATION

 

     The Company's Common Stock trades on The Nasdaq National Market under the

symbol "GERN". The high and low closing sales prices (excluding retail markup,

markdowns and commissions) of the Company's stock for the period beginning July

30, 1996 (the date of the Company's initial public offering) and ending December

31, 1996 are as follows:

 





                                                                    HIGH         LOW

                                                                   -------     -------

                                                                         

        Year ended December 31, 1996

          Third quarter (beginning July 30, 1996)................  $ 7.000     $ 6.875

          Fourth quarter.........................................  $13.250     $12.875



 

     As of December 31, 1996, there were approximately 166 stockholders of

record. The Company participates in a highly dynamic industry, which often

results in significant volatility of the Company's Common Stock price.

 

DIVIDEND POLICY

 

     The Company has never paid cash dividends on its capital stock and does not

anticipate paying cash dividends in the foreseeable future, but intends to

retain its capital resources for reinvestment in its business. Any future

determination to pay cash dividends will be at the discretion of the Board of

Directors and will be dependent upon the Company's financial condition, results

of operations, capital requirements and other such factors as the Board of

Directors deems relevant.

 

                                       19

   21

 

ITEM 6.  SELECTED FINANCIAL DATA

 





                                                          YEARS ENDED DECEMBER 31,

                                       --------------------------------------------------------------

                                          1996         1995         1994         1993         1992

                                       ----------   ----------   ----------   ----------   ----------

                                              (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

                                                                            

STATEMENTS OF OPERATIONS DATA:

Revenues from collaborative agreement

  with related party.................  $    5,235   $    5,490   $       --   $       --   $       --

License fees and royalties...........          58           --           --           --           --

Operating expenses:

  Research and development...........      14,260       11,321        8,099        3,975          726

  General and administrative.........       3,161        2,888        2,397        2,220          661

                                         --------      -------     --------      -------      -------

          Total operating expenses...      17,421       14,209       10,496        6,195        1,387

                                         --------      -------     --------      -------      -------

Loss from operations.................     (12,128)      (8,719)     (10,496)      (6,195)      (1,387)

Interest and other income............       1,826          919          638          351           27

Interest and other expense...........        (385)        (399)        (320)        (103)          --

                                         --------      -------     --------      -------      -------

Net loss.............................  $  (10,687)  $   (8,199)  $  (10,178)  $   (5,947)  $   (1,360)

                                         ========      =======     ========      =======      =======

Net loss per share(1)................  $    (2.07)  $    (5.25)  $    (7.91)  $    (4.84)  $    (1.25)

Shares used in computing net loss per

  share..............................   5,151,113    1,562,937    1,286,211    1,229,982    1,091,450



 





                                                                DECEMBER 31,

                                       --------------------------------------------------------------

                                          1996         1995         1994         1993         1992

                                       ----------   ----------   ----------   ----------   ----------

                                                           (DOLLARS IN THOUSANDS)

                                                                            

BALANCE SHEET DATA:

Cash, cash equivalents and short-term

  investments........................  $   24,269   $   15,553   $   13,915   $   11,931   $    1,259

Working capital......................      21,468       12,115       12,410       10,247        1,014

          Total assets...............      28,788       19,749       17,072       14,406        1,670

Noncurrent portion of capital lease

  obligations and equipment loans....       1,644        1,654        1,647        1,360          117

Accumulated deficit..................     (36,471)     (25,773)     (17,604)      (7,405)      (1,457)

          Total stockholders'

            equity...................      23,591       14,308       13,689       11,293        1,288



 

- ---------------

 

(1) See Note 1 of Notes to Financial Statements for information concerning the

    calculation of net loss per share.

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

        OF OPERATIONS

 

OVERVIEW

 

     Geron is a biopharmaceutical company exclusively focused on discovering

therapeutic and diagnostic products based upon common biological mechanisms

underlying cancer and other age-related diseases. The Company's results of

operations have fluctuated from period to period and will continue to fluctuate

in the future based upon the timing and composition of funding under various

collaborative agreements. 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. The following

discussion should be read in conjunction with the audited financial statements

and notes thereto included in Part II, Item 8 of this Report on Form 10-K.

 

     In December 1996, the Company signed a Heads of Agreement (non-binding

letter of intent) with Pharmacia & Upjohn S.p.A. to collaborate in the

discovery, development and commercialization of a new class of anti-cancer

drugs. The Heads of Agreement states that both companies will use their best

efforts to complete negotiations of a definitive agreement. In conjunction with

the Heads of Agreement, Pharmacia & Upjohn purchased $2,000,000 of Geron Common

Stock at a premium in January 1997.

 

                                       20

   22

 

     Geron is subject to risks common to companies in its industry and at its

stage of development, including risks inherent in its research and development

efforts, reliance upon collaborative partners, enforcement of patent and

proprietary rights, need for future capital, potential competition and

uncertainty of regulatory approvals or clearances. In order for a product to be

commercialized based on the Company's research, it will be necessary for Geron

and its collaborators to conduct preclinical tests and clinical trials,

demonstrate efficacy and safety of the Company's product candidates, obtain

regulatory approvals or clearances and enter into manufacturing, distribution

and marketing arrangements, as well as obtain market acceptance. The Company

does not expect to receive revenues or royalties based on therapeutic products

for many years. See "Additional Factors That May Affect Future Results".

 

RESULTS OF OPERATIONS

 

  Revenues

 

     The Company recognized revenues of $5.2 million in fiscal 1996 compared to

$5.5 million in fiscal 1995 and no revenues in fiscal 1994. The revenues were

research support payments under the Company's collaborative agreement with Kyowa

Hakko. The Company recognizes revenue as the related research and development

costs are incurred under the Kyowa Hakko agreement. Annual funding payments of

$4.0 million and $7.0 million were received under the Kyowa Hakko agreement in

fiscal 1996 and 1995, respectively. The agreement with Kyowa Hakko was signed in

April 1995.

 

     In June 1996, the Company entered into a license and marketing agreement

with Kyowa Medex in connection with its telomerase diagnostic technology. The

agreement provided for a $50,000 license fee payment to the Company which was

recognized in 1996 and royalty payments on product sales. No license fee revenue

was recognized during 1995 and 1994. In addition, royalties from Oncor and Kyowa

Medex were received on the sale of diagnostic kits to the research-use-only

market in 1996. No royalties were received in 1995 and 1994.

 

  Research and Development Expenses

 

     Research and development expenses were $14.3 million, $11.3 million and

$8.1 million for the years ended December 31, 1996, 1995 and 1994, respectively.

The increases in 1996 and 1995 were primarily due to increases in scientific

staffing, expanded patent related activities, amortization of deferred

compensation and greater purchases of research materials and laboratory supplies

for the expansion of the Company's research programs. The Company expects

research and development expenses to increase in the future as a result of

continued development of its therapeutic and diagnostic programs.

 

  General and Administrative Expenses

 

     General and administrative expenses were $3.2 million, $2.9 million and

$2.4 million for the years ended December 31, 1996, 1995 and 1994, respectively.

The increases in 1996 and 1995 were primarily due to increases in staffing,

amortization of deferred compensation, higher legal, travel and other expenses

related to business development and other costs of being a public company.

 

  Interest and Other Income

 

     Interest income was $1.1 million, $643,000 and $440,000 for the years ended

December 31, 1996, 1995 and 1994, respectively. The increases in 1996 and 1995

were due to higher average cash and investment balances as a result of the sale

of equity securities, completion of the Company's initial public offering and

research funding received under the Kyowa Hakko collaborative agreement.

Interest earned in the future will depend on the Company's funding cycles and

prevailing interest rates. The Company also received $714,000, $276,000 and

$198,000 in research payments under government grants for the years ended

December 31, 1996, 1995 and 1994, respectively. The Company does not expect

income from government grants to be substantially more significant in the

future.

 

                                       21

   23

 

  Interest and Other Expense

 

     Interest and other expense were $385,000, $399,000 and $320,000 for the

years ended December 31, 1996, 1995 and 1994, respectively. The decrease in 1996

was due to lower outstanding capital lease obligations as a result of certain

leases expiring during the year. Higher outstanding capital lease balances

existed during 1995 and 1994. The Company expects interest and other expense to

increase as it intends to increase equipment financing in the near future.

 

  Net Loss

 

     Net loss was $10.7 million, $8.2 million and $10.2 million for the years

ended December 31, 1996, 1995 and 1994, respectively. Increase in net loss for

1996 was primarily due to the increase in operating expenses during that year.

The decrease in net loss from 1994 to 1995 was the result of the recognition of

revenue from research support payments from the Kyowa Hakko collaborative

agreement which more than offset the increase in operating expenses for that

year.

 

LIQUIDITY AND CAPITAL RESOURCES

 

     The Company has funded its operations primarily through public and private

equity financings. The Company has also received additional funding from

collaborative agreements, grant revenues, interest income and equipment

financing. On July 30, 1996, the Company completed an initial public offering of

2,000,000 shares of Common Stock at $8.00 per share. In addition to and in

conjunction with the offering, Kyowa Hakko purchased 312,500 shares of Common

Stock at $8.00 per share. The total net proceeds from the initial public

offering and the Kyowa Hakko stock purchase were approximately $16.7 million.

These funds are being used to fund research and development expenses, laboratory

and equipment purchases and other working capital and general corporate

purposes.

 

     Cash, cash equivalents and short-term investments at December 31, 1996 were

$24.3 million compared to $15.6 million at December 31, 1995 and $13.9 million

at December 31, 1994. It is the Company's investment policy to invest these

funds in liquid, investment grade securities, such as interest-bearing money

market funds, corporate master notes, commercial paper, repurchase agreements

with United States financial institutions and federal agency notes. The increase

in cash, cash equivalents and short-term investments for 1996 was primarily due

to the completion of the Company's initial public offering in July 1996.

 

     Net cash used in operations was $9.9 million, $6.3 million and $10.1

million for the years ended December 31, 1996, 1995 and 1994, respectively.

Increase in net cash used in operations for 1996 was primarily due to higher

expenses incurred as a result of expanded research and development programs. The

decrease in net cash used in operations from 1994 to 1995 was a result of the

receipt of research funding from Kyowa Hakko which more than offset the increase

in research and development expenditures in that year.

 

     Through December 31, 1996, the Company had invested approximately $5.4

million in property and equipment, of which approximately $4.5 million was

financed through equipment financing. Minimum annual payments due under the

equipment financing facility are expected to total $1.3 million, $924,000,

$515,000 and $261,000 in 1997, 1998, 1999 and 2000, respectively. As of December

31, 1996, the Company had approximately $1.0 million available for borrowing

under its equipment financing facility.

 

     The Company estimates that its existing capital resources, payments under

the Kyowa Hakko collaborative agreement, interest income and equipment financing

will be sufficient to fund its current and planned operations through the first

quarter of 1998. There can be no assurance, however, that changes in the

Company's research and development plans or other changes affecting the

Company's operating expenses will not result in the expenditure of available

resources before such time, and in any event, the Company will need to raise

substantial additional capital to fund its operations in future periods. The

Company intends to seek additional funding through strategic collaborations,

public or private equity financings, capital lease transactions or other

financing sources that may be available.

 

                                       22

   24

 

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

 

     The Company desires to take advantage of the "safe harbor" provisions of

the Private Securities Litigation Reform Act of 1995. Specifically, the Company

wishes to alert readers that, except for the historical information contained

herein, the matters discussed in this report constitute forward-looking

statements that are dependent on certain risks and uncertainties. These and

other factors that may cause actual results to differ materially from those

expressed in any forward-looking statements made by or on behalf of the Company

are described below.

 

TECHNOLOGICAL UNCERTAINTY

 

     The study of the mechanisms of cellular aging and cellular immortality,

including telomere biology and telomerase, is a relatively new area of research,

and there can be no assurance that this research will lead to the discovery or

development of any therapeutic or diagnostic product. If and when potential lead

drug compounds or product candidates are identified through the Company's

research programs, they will require significant preclinical and clinical

testing prior to regulatory approval in the United States and elsewhere, and

there can be no assurance that any of these efforts will result in a product

that can be marketed. Because of the significant additional scientific,

regulatory and commercial milestones that must be reached for the Company's

research programs to be successful, there can be no assurance that any program

will not be abandoned after significant resources have been expended. The

abandonment of any research program could have a material adverse effect on the

Company.

 

     As a result of its drug discovery efforts to date, the Company has

identified compounds in in vitro studies that demonstrate potential for

inhibiting telomerase in vivo. However, additional development efforts will be

required prior to the selection of a lead compound for preclinical development

and clinical trials as a telomerase inhibitor for cancer. If and when selected,

a lead compound may prove to have undesirable and unintended side effects or

other characteristics affecting its efficacy or safety that may prevent or limit

its commercial use. For example, telomerase is active in reproductive cells and

transiently expressed in certain hematopoietic (blood), skin, gastrointestinal

and other cells. There can be no assurance that any product based on the

inhibition of telomerase will not adversely affect such cells and result in

unacceptable side effects. In addition, it is expected that telomerase

inhibition will have delayed efficacy as telomeres resume normal shortening and,

as a result, will in most cases, be used in conjunction with traditional cancer

therapies. There can be no assurance that the delayed efficacy of a telomerase

inhibitor will not have a material adverse effect on the preclinical and

clinical development, ability to obtain regulatory approval or marketability of

a telomerase inhibitor for the treatment of cancer. The abandonment of the

Telomerase Inhibition and Detection program would have a material adverse effect

on the Company.

 

     With respect to the development and commercial application of the Company's

proprietary telomerase detection technology, there is, as yet, insufficient

clinical data to confirm its full utility to diagnose, prognose, monitor or

screen for cancer. Although the Company's licensees, Oncor, Boehringer Mannheim

and Kyowa Medex have commenced the sale of diagnostic kits for research use,

additional development work and regulatory consents will be necessary prior to

the introduction of tests for clinical use. With respect to the Company's

Genomics of Aging program, the Company has identified certain genes that are

expressed differentially in senescent cells versus replicatively young cells.

However, the Company has not identified any lead compounds that have been

demonstrated to modulate such gene expression, and there can be no assurance

that any such lead compound will be discovered or developed. The part of the

Company's Genomics of Aging program that is designed to modulate telomere length

is at an early stage of development. While telomere length and replicative

capacity have been extended in vitro, there can be no assurance that the Company

will discover a compound that will modulate telomere length or increase

replicative capacity effectively for clinical use. The Company's Primordial Stem

Cell Therapies program is also at a very early stage. While primate PS cells

have recently been isolated and allowed to differentiate into numerous cell

types, there can be no assurance that the Company's efforts in this program will

result in any commercial applications.

 

                                       23

   25

 

     The Company may become aware of technology controlled by third parties that

is advantageous to the Company's business. There can be no assurance that the

Company will be able to acquire or license such technology on reasonable terms,

if at all. In the event that the Company is unable to acquire such technology,

the Company may be required to expend significant time and resources to develop

similar technology, and there can be no assurance that it will be successful in

this regard. If the Company cannot acquire or develop necessary technology, it

may be prevented from pursuing its business objectives. Moreover, a competitor

of the Company could acquire or license such technology. Any such event would

have a material adverse effect on the Company.

 

EARLY STAGE OF DEVELOPMENT

 

     Geron is at an early stage in the development of therapeutic and diagnostic

products. The Company has not yet selected a lead compound for any of its drug

development programs. In order to identify and select such a compound, it must

have access to sufficient numbers of chemical compounds and resources, of which

there can be no assurance. Products that may result from the Company's research

and development programs are not expected to be commercially available for a

significant number of years, if at all. The Company's program to identify a

telomerase inhibitor is currently at the drug discovery stage, while the

Company's other programs are currently focused on research efforts prior to drug

discovery or preclinical development. It is difficult to predict when, if ever,

the Company will select a lead compound for drug development as a telomerase

inhibitor. In addition, there can be no assurance that the Company's other

programs will move beyond their current stage. Assuming the Company's research

advances and the Company is able to identify and select a lead compound for

telomerase inhibition, certain preclinical development efforts will be necessary

to determine whether the potential product has sufficient safety to enter

clinical trials. If such a potential product receives authorization from the

United States Food and Drug Administration ("FDA") to enter clinical trials,

then it will most likely be subjected to a multiphase, multicenter clinical

study to determine its safety and efficacy. It is not possible to predict the

length or extent of clinical trials or the period of any required patient

follow-up, but it is presently expected to extend at least several years.

Assuming clinical trials of any potential product are successful and other data

are satisfactory, the Company will submit an application to the FDA and

appropriate regulatory bodies in other countries to seek permission to market

the product. Typically, the review process at the FDA takes several years, and

there can be no assurance that the FDA will approve the Company's application or

will not require additional clinical trials or other data prior to approval.

Furthermore, even if such approval is ultimately obtained, delays in the

approval process could have a material adverse effect on the Company. In

addition, there can be no assurance that any potential product will be capable

of being produced in commercial quantities at a reasonable cost or that such

product will be successfully marketed. Based on the foregoing, the Company does

not anticipate being able to commence marketing of any therapeutic products for

many years, if at all. There can be no assurance that any of the Company's

product development efforts will be successfully completed, that regulatory

approvals will be obtained, or that the Company's products, if any, will achieve

market acceptance.

 

DEPENDENCE ON STRATEGIC AND RESEARCH COLLABORATIONS

 

     The Company's strategy for the development, clinical testing and

commercialization of its products includes entering into collaborations with

corporate partners, licensors, licensees and others, and the Company is

dependent upon the subsequent success of these other parties in performing their

respective responsibilities. The success of any collaboration depends on the

continued cooperation of its partners, as to which there can be no assurance.

The amount and timing of resources to be devoted to activities by its

collaborators are not within the direct control of the Company. There can be no

assurance that such partners will perform their obligations as expected or that

the Company will derive any revenue from such arrangements. There can also be no

assurance that the Company's current collaborators or any future collaborators

will not pursue existing or alternative technologies in preference to those

being developed in collaboration with the Company.

 

     The Company currently has no manufacturing infrastructure and no marketing

or sales organization, and intends to rely in substantial part on its current

and future strategic partners for the manufacture of any product and the

principal marketing and sales responsibilities for any such product. To the

extent the

 

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Company chooses not to or is unable to establish such arrangements, the Company

will require substantially greater capital to undertake its own manufacturing,

marketing and sales of any product.

 

     In April 1995, the Company entered into a License and Research

Collaboration Agreement with Kyowa Hakko (the "Kyowa Hakko Agreement") for the

development and commercialization in certain Asian countries of a telomerase

inhibitor for the treatment of cancer. Under the collaboration, Kyowa Hakko

provides certain funding for the Company's research and development activities

and is responsible for all clinical, regulatory, manufacturing, marketing and

sales efforts and expenses in the covered territory. The Kyowa Hakko Agreement

provides that Kyowa Hakko will not pursue research and development independent

of its collaboration with Geron with respect to telomerase inhibition for the

treatment of cancer in humans until April 24, 1999, at the earliest. The Kyowa

Hakko Agreement also provides in general that, while Geron exercises significant

influence during the research phase, Kyowa Hakko exercises significant influence

during the development and commercialization phases of the collaboration. There

can be no assurance that the collaboration will be successful. The Company has

also entered into licensing arrangements with several diagnostic companies for

the Company's telomerase detection technology. However, because these licenses

are limited to the research-use-only market, such arrangements are not expected

to generate significant commercial revenues.

 

     In December 1996, the Company signed a Heads of Agreement (non-binding

letter of intent) with Pharmacia & Upjohn S.p.A. There can be no assurance that

a definitive agreement will be signed or that the Company will be able to

negotiate additional strategic arrangements in the future on acceptable terms,

if at all, or that such strategic arrangements will be successful. In the

absence of such arrangements, the Company may encounter significant delays in

introducing any product into certain markets or find that the research,

development, manufacture, marketing or sale of any product in such markets is

adversely affected. In the event that the Company does not enter into such

arrangements, it may be materially adversely affected.

 

     The Company has relationships with collaborators and scientific advisors at

academic and other institutions, some of whom conduct research at the Company's

request. These collaborators and scientific advisors are not employees of the

Company and may have commitments to, or consulting or advisory contracts with,

other entities that may limit their availability to the Company. The Company has

limited control over the activities of these collaborators and advisors and,

except as otherwise required by its collaboration and consulting agreements, can

expect only limited amounts of their time to be dedicated to the Company's

activities.

 

DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNCERTAINTY OF PATENT PROTECTION

 

     Protection of the Company's proprietary compounds and technology is

important to the Company's business. The Company owns four issued United States

patents and over 30 United States patent applications and has licensed eight

issued United States patents and over 30 United States patent applications, as

well as international filings under the Patent Cooperation Treaty and pending

foreign national patent applications corresponding to certain of these United

States applications. Geron's success will depend in part on its ability to

obtain and enforce its patents and maintain trade secrets, both in the United

States and in other countries. The patent positions of pharmaceutical and

biopharmaceutical companies, including the Company, are highly uncertain and

involve complex legal and technical questions for which legal principles are not

firmly established. There can be no assurance that the Company has developed or

will continue to develop products or processes that are patentable or that

patents will issue from any of the pending applications, including even allowed

patent applications. There can also be no assurance that the Company's current

patents, or patents that issue on pending applications, will not be challenged,

invalidated or circumvented, or that the rights granted thereunder will provide

proprietary protection or competitive advantages to the Company. Because (i)

patent applications in the United States are maintained in secrecy until patents

issue, (ii) patent applications are not generally published until many months or

years after they are filed and (iii) publication of technological developments

in the scientific and patent literature often occurs long after the date of such

developments, the Company cannot be certain that its or its licensors' patents

and patent applications name as inventors were the first to invent the

inventions disclosed in the patent applications or patents or that it or its

licensors were the first to file patent applications for such inventions.

Litigation to establish the validity of

 

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patents, to defend against patent infringement claims of others and to assert

infringement claims against others can be expensive and time consuming even if

the outcome is favorable to the Company. If the outcome of patent prosecution or

litigation is unfavorable to the Company, the Company could be materially

adversely affected.

 

     Patent law relating to the scope and enforceability of claims in the fields

in which the Company operates is still evolving. The degree of future protection

for the Company's proprietary rights, therefore, is highly uncertain. In this

regard, there can be no assurance that independent patents will issue from each

of the United States patent applications referenced above, which include many

interrelated applications directed to common or related subject matter. The

Company is aware of certain patent applications that have been filed by others

with respect to telomerase and telomere length modulation. In this regard, Iowa

State University has filed United States and corresponding foreign patent

applications claiming methods and reagents relating to the RNA component of

human telomerase, and Isis Pharmaceuticals, Inc. has filed United States and

corresponding foreign patent applications relating to oligonucleotide-like

reagents asserted to have telomere length modulating activity. In addition,

there are a number of issued patents and pending applications owned by others

directed to differential display, stem cell and other technologies relating to

the Company's research, development and commercialization efforts. There can be

no assurance that the Company's technology can be developed and commercialized

without a license to such patents or that such patent applications will not be

granted priority over patent applications filed by the Company. Furthermore,

there can be no assurance that others will not independently develop similar or

alternative technologies to those of the Company, duplicate any of the Company's

technologies or design around the patented technologies developed by the Company

or its licensors, any of which may have a material adverse effect on the

Company.

 

     The commercial success of the Company depends significantly on its ability

to operate without infringing patents and proprietary rights of others. There

can be no assurance that the Company's technologies do not and will not infringe

the patents or proprietary rights of others. In the event of such infringement,

the Company may be enjoined from pursuing research, development or

commercialization of its potential products or may be required to obtain

licenses to these patents or other proprietary rights or to develop or obtain

alternative technologies. There can be no assurance that the Company will be

able to obtain alternative technologies or any required license on commercially

favorable terms, if at all, and if any such license is or alternative

technologies are not obtained, the Company may be delayed or prevented from

pursuing the development of certain of its potential products. The Company's

breach of an existing license or failure to obtain or delay in obtaining

alternative technologies or a license to any technology that it may require to

develop or commercialize its products may have a material adverse effect on the

Company. In this regard, the Company