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
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.
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.
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
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
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.
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-
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.
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
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
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.
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.
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
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
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
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:
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.
ITEM 2.
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
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:
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
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(1) See Note 1 of Notes to Financial Statements for information concerning the calculation of net loss per share.
ITEM 7.
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
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders Geron Corporation
We have audited the accompanying balance sheets of Geron Corporation at December 31, 1996 and 1995, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Geron Corporation at December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP Palo Alto, California February 21, 1997
GERON CORPORATION
BALANCE SHEETS
See accompanying notes.
GERON CORPORATION
STATEMENTS OF OPERATIONS
See accompanying notes.
GERON CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
See accompanying notes.
GERON CORPORATION
STATEMENTS OF CASH FLOWS
See accompanying notes.
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Geron Corporation ("Geron" or the "Company") was incorporated in the State of Delaware on November 29, 1990. Geron 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. Principal activities to date have included obtaining financing, recruiting management and technical personnel, securing operating facilities and conducting research and development. The Company has no therapeutic products currently available for sale and does not expect to have any therapeutic products commercially available for sale for several years, if at all. These factors indicate that the Company's ability to continue its research and development activities is dependent upon the ability of management to obtain additional financing as required.
Net Loss Per Share
Except as noted below, net loss per share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and warrants are excluded from the computation as their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, common and common equivalent shares issued at prices substantially below the public offering price during the 12-month period prior to the initial filing of the initial public offering have been included in the calculation as if they were outstanding for all periods through July 30, 1996 (using the treasury stock method and the initial public offering price of $8.00 per share).
As described above, the antidilutive effect of certain stock options is included in the calculation of loss per share for all periods through July 30, 1996, but is excluded from the calculation after that date. Additionally, the effect of common shares issued upon conversion of preferred stock is included in the loss per share calculation for all periods subsequent to the date of conversion. The following supplemental per share data is provided to show the calculation on a consistent basis for all periods presented. It has been computed as described above, including the retroactive effect from the date of issuance to the conversion of convertible preferred stock which automatically converted to common shares upon closing of the Company's initial public offering.
Supplemental net loss per share is as follows:
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Related party revenue consists of revenue from one collaboration agreement. The Company recognizes revenue as the related research and development costs are incurred. Milestone fees are recognized upon completion of specified milestones according to contract terms. Deferred revenue represents the portion of research payments received which have not been earned. Nonrefundable signing or licensing fees that are not
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
dependent on future performance under collaborative agreements are recognized as revenue when received. Royalties are generally recognized upon receipt.
Depreciation and Amortization
The Company records property and equipment at cost and calculates depreciation using the straight-line method over the estimated useful lives of the assets, generally four years. Furniture and equipment leased under capital leases is amortized over the useful lives of the assets. Leasehold improvements are amortized over the remaining term of the lease.
2. FINANCIAL INSTRUMENTS
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents in commercial paper, master notes, and repurchase agreements with U.S. financial institutions. The Company's short-term investments include corporate notes and U.S. Government securities with maturities ranging from 3 to 12 months.
The Company classifies its marketable equity and debt securities as available-for-sale. Available-for-sale securities are recorded at fair value with unrealized gains and losses reported in the accumulated deficit. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Realized gains and losses are included in interest and other income and are derived using the specific identification method for determining the cost of securities sold and have been immaterial to date. Declines in market value judged other-than-temporary result in a charge to interest income. Dividend and interest income are recognized when earned.
The following is a summary of available-for-sale securities at December 31, 1996 and 1995:
As of December 31, 1996 and 1995, the difference between the fair value and the amortized cost of available-for-sale securities was immaterial. As of December 31, 1996 and 1995, the average portfolio duration was approximately three months and the contractual maturity of any single investment did not exceed one year.
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Notes Receivable from Officers
The Company presently holds notes receivable of $624,000 ($817,000 in 1995) from officers of the Company. These notes, which in general bear no interest, are collateralized by certain personal assets of the officers and are generally due at December 31, 1998. The notes have certain amortization schedules for periodic payments with the final payment to be made at the end of 1998.
Other Fair Value Disclosures
At December 31, 1996, the fair value of the notes receivable from officers is $515,000. The fair value was estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms of borrowers of similar credit quality.
The fair value of the equipment loans approximates the carrying value of $1,726,000. The fair value was estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
Property and equipment at December 31, 1996 and 1995 includes assets under capitalized leases of approximately $2,767,000 and $2,719,000, respectively. Accumulated amortization related to leased assets was approximately $1,146,000 and $987,000 at December 31, 1996 and 1995, respectively.
4. CAPITAL LEASE OBLIGATIONS AND EQUIPMENT LOANS
The Company has lease and equipment loan credit lines available of $2,000,000 of which approximately $1,035,000 was unused and available at December 31, 1996. The drawdown period under the lease and equipment loan credit lines expires on April 30, 1997. The obligations under the equipment loans are secured by the equipment financed, bear interest at fixed rates of approximately 13% and are due in monthly installments through December 2000. Under the terms of the master lease agreement, ownership of the leased equipment will transfer to the Company at the end of the lease term.
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under capital leases and principal payments on equipment loans are as follows:
5. OPERATING LEASE COMMITMENTS
On March 25, 1996, the Company leased two facilities under two five-year noncancelable operating leases. Future minimum payments under noncancelable operating leases are approximately $593,000 in 1997, $617,000 in 1998, $642,000 in 1999, $668,000 in 2000 and $694,000 in 2001.
The Company has the option to extend the term of both leases for two additional periods of two and one half years each. Rent expense under operating leases was approximately $298,000 and $273,000 for the years ended December 31, 1996 and 1995, respectively.
In December 1996, the Company entered into a sublease agreement with a non-affiliated company for approximately 12,350 square feet of office space under which the Company will receive a monthly rental fee of $18,525. The sublease for such office space expires in March 1998, with an option to extend for 90 days.
6. STOCKHOLDERS' EQUITY
Capital Stock
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 Kogyo Co., Ltd. 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. Concurrent with the closing of the offering, all outstanding shares of Preferred Stock converted to Common Stock at various ratios. Additional shares of Preferred Stock were issued upon conversion to Common Stock in accordance with certain anti-dilution provisions.
In July 1996, the Company effected a 1-for-3.4 reverse stock split. All share and per share amounts have been adjusted to reflect this stock split retroactively. In connection with this stock split, the Company also effected a change in the authorized number of shares of Preferred Stock.
Warrants
In February 1994, in conjunction with a research agreement, the Company issued a warrant to purchase 47,058 shares of Common Stock at $7.65 per share. The warrant is exercisable through February 2004.
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In June 1994, in conjunction with the Series C Preferred Stock financing, the Company issued warrants to purchase 9,190 shares of Common Stock at $9.38 per share. The warrants are exercisable through June 1999.
1992 Stock Option Plan
In July 1996, the Company amended the 1992 Stock Option Plan ("the Plan") to increase the number of shares available for issuance thereunder and to comply with certain requirements of Rule 16b-3 of the Securities and Exchange Act of 1934, as amended, and the Internal Revenue Code of 1986, as amended. The options granted under this Plan may be either incentive stock options or nonstatutory stock options. As of December 31, 1996, the Company had reserved 2,554,411 shares of Common Stock for issuance under the Plan. Options granted under this Plan expire no later than ten years from the date of grant. For incentive stock options and nonstatutory stock options, the option price shall be at least 100% and 85%, respectively, of the fair market value on the date of grant. If, at the time the Company grants an option, and the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price shall be at least 110% of the fair market value and shall not be exercisable more than five years after the date of grant.
Options to purchase shares of Common Stock generally vest over a period of five years from the date of the option grant, with one-tenth vesting after six months and the remainder vesting ratably over the following 54 months. Options under the plan are generally immediately exercisable; however, any unvested shares issued are subject to repurchase rights whereby the Company has the option to repurchase any unvested shares upon termination of employment at the original exercise price. During 1996, the Company granted options to purchase 841,068 shares of Common Stock, of which 18,207 shares with a weighted-average fair value of $4.42, were exercised and are subject to repurchase. In 1996 and 1995, the Company repurchased 3,970 and 5,147 shares, respectively, in accordance with these repurchase rights. As of December 31, 1996, 115,397 shares remained subject to repurchase. At December 31, 1996, 1,996,180 shares of Common Stock are reserved for issuances upon exercise of options currently outstanding and options available for grant under the 1992 Stock Option Plan and exercise of warrants.
Under the Plan, employees may exercise options in exchange for a note receivable to the Company. As of December 31, 1996, notes receivable from stockholders of $119,000 were outstanding. These notes generally bear interest at 6% and are due and payable in one lump sum on the earlier of 30 days after the date the maker transfers for value any of the shares of the Company's Common Stock purchased with the note, or three years from the date of the note.
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Aggregate option activity is as follows:
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and the related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Financial Accounting Standards Board Statement No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation," requires use of option pricing valuation models that were not developed for use in valuing employee stock options. Under APB 25, the Company generally recognizes no compensation expense with respect to such awards.
Pro forma information regarding net loss and net loss per share is required by SFAS 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by the Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates ranging from 5.68% to 6.70% and 5.34% to 7.90% for 1996 and 1995, respectively; a dividend yield of 0.0%; a volatility factor of the expected market price of the Company's Common Stock of 0.7; and a weighted average expected life of the options of 5 years. Options granted prior to the Company's initial public offering on July 30, 1996 have a volatility factor of 0.0.
The Company has recorded deferred compensation of approximately $1,300,000 for the difference between the grant price and the deemed fair value of certain of the Company's Common Stock options granted in 1996. This amount is being amortized over the vesting period of the individual options, generally a
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
60-month period. Deferred compensation expense recognized in 1996 totaled $289,000. The weighted average fair value of options granted during 1996 with an exercise price below the deemed fair value of the Company's Common Stock on the date of grant was $3.69. The weighted average fair value of options granted during 1996 with an exercise price equal to the deemed fair value of the Company's Common Stock on the date of grant was $8.72.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options using the straight-line method. The Company's pro forma information follows:
The effects of applying SFAS 123 for pro forma disclosures are not likely to be representative of the effects on reported net loss for future years. Pro forma net loss for the year ended December 31, 1996 reflects expense for two years' vesting while pro forma data for 1997 will reflect compensation expense for three years' vesting of outstanding stock options.
Employee Stock Purchase Plan
In July 1996, the Company adopted the 1996 Employee Stock Purchase Plan ("Purchase Plan") and reserved an aggregate of 300,000 shares of Common Stock for issuance thereunder. Under the terms of the Purchase Plan, employees can choose to have up to 10% of their annual salary withheld to purchase the Company's Common Stock. The purchase price of the stock is 85% of the lower of the subscription date fair market value and the purchase date fair market value. Approximately 50% of the eligible employees have participated in the Purchase Plan. The Company does not recognize compensation cost related to employee purchase rights under the Plan. No shares have been issued under the Purchase Plan as of December 31, 1996. To comply with the pro forma reporting requirements of SFAS 123, compensation cost is estimated for the fair value of the employees' purchase rights using the Black-Scholes model with the following weighted average assumptions for those rights granted in 1996: risk-free interest rate of 5.64%; dividend yield of 0.0%; a volatility factor of the expected market price of the Company's Common Stock of 0.7; and an expected life of the purchase right of 6 months. Based upon these assumptions, the compensation cost estimated for the fair value of the employees' purchase rights was immaterial and therefore not included in the pro forma information.
Directors' Option Plan
In July 1996, the Company adopted the 1996 Directors' Stock Option Plan and reserved an aggregate of 250,000 shares of Common Stock for issuance thereunder. No shares have been issued under the Directors' Option Plan as of December 31, 1996.
7. COLLABORATIVE AGREEMENT
In April 1995, the Company entered into a license and research collaboration agreement with a pharmaceutical company. Under the agreement, the Company granted an exclusive license to the pharmaceutical company to make, use and sell products based on telomerase inhibition technology within a specified
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
territory in exchange for royalty payments, payments for certain research and development activities and payments due on achieving specified development milestones. Costs associated with research and development activities attributable to this agreement approximate revenue recognized. Under this agreement, revenues of approximately $5,200,000 and $5,500,000 and none were recognized in 1996, 1995 and 1994, respectively. No milestone payments have been received or earned to date.
8. INCOME TAXES
As of December 31, 1996, the Company had federal and State net operating loss carryforwards of approximately $33,900,000 and $4,300,000, respectively. The federal net operating loss carryforwards will expire at various dates beginning in 2006 through 2011, if not utilized. The State net operating loss carryforwards will expire at various dates beginning in 1997 through 2001.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets as of December 31 are as follows:
Because of the Company's history of losses, the net deferred tax asset has been fully offset by a valuation allowance. The valuation allowance increased by approximately $3,800,000 and $4,000,000 during the years ended December 31, 1995 and 1994, respectively.
Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization.
9. SUBSEQUENT EVENTS
In December 1996, the Company signed a Heads of Agreement (non-binding letter of intent) with an international pharmaceutical company. In conjunction with the Heads of Agreement, the companies also signed a noncancelable Stock Purchase Agreement pursuant to which the partner purchased $2,000,000 of Geron Common Stock at a premium in January 1997.
10. STATEMENT OF CASH FLOWS DATA
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
The information required by this Item concerning the Company's directors is incorporated by reference from the sections captioned "Proposal 1: Election of Directors" contained in the Company's Definitive Proxy Statement related to the Annual Meeting of Shareholders to be held May 23, 1997, to be filed by the Company with the Securities and Exchange Commission (the "Proxy Statement").
IDENTIFICATION OF EXECUTIVE OFFICERS
The information required by this Item concerning the Company's executive officers is set forth in Part I of this Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the section captioned "Executive Compensation" contained in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the section captioned "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the section captioned "Certain Transactions" and "Executive Compensation" contained in the Proxy Statement.
PART IV
ITEM 14.
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS.
Included in Part II of this Report:
(2) FINANCIAL STATEMENT SCHEDULES.
Financial statement schedules are omitted because they are not required or the information is disclosed in the financial statements listed in item 14(a)(1).
(3) EXHIBITS.
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(B) REPORTS ON FORM 8-K.
None filed.
(C) INDEX TO EXHIBITS.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Menlo Park, State of California, on the 20th day of March, 1997.
GERON CORPORATION
By /s/ RONALD W. EASTMAN
------------------------------------ Ronald W. Eastman President and Chief Executive Officer
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Ronald W. Eastman and David L. Greenwood, and each one of them, attorneys-in-fact for the undersigned, each with the power of substitution, for the undersigned in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his/her name.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
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