ITEM 1. BUSINESS
Geron Corporation ("Geron" or the "Company") is a biopharmaceutical company focused on discovering and developing therapeutic and diagnostic products to treat cancer and other age-related degenerative diseases. The Company is uniquely positioned to pursue this goal given its breakthrough discoveries surrounding telomeres, telomerase and embryonic stem cells. Telomeres are structures at the ends of chromosomes that the Company has shown act as a molecular "clock" of cellular aging. Telomerase is an enzyme which appears to stop the "clock" and confers cellular immortality. By manipulating telomere length through telomerase regulation, the Company aims to kill cancer cells where telomerase is abnormally turned on. Conversely, the Company seeks to increase the lifespan of normal cells, where telomerase is normally turned off, to treat age-related diseases such as atherosclerosis, macular degeneration and osteoporosis. Embryonic stem cells are telomerase positive and therefore have an unlimited ability to divide. They have the capability to turn into any and all cell types and tissues in the body. The Company aims to use human embryonic stem cells as a source of replacement cells for transplantation medicine to treat patients suffering from congestive heart failure, Parkinson's Disease, diabetes, osteoarthritis, osteoporosis, cancers, skin disorders and other age-related conditions.
The Company and its collaborators have established that the fundamental aspects of the telomere clock and the ability of telomerase to impart cellular immortality in normal body cells and embryonic stem cells are important to many age-related degenerative diseases and conditions, including cancer. Thus, the Company believes it has a broadly applicable proprietary platform for discovering and developing novel therapeutics and diagnostics as well as cell and gene therapy approaches for such diseases. Geron intends to build upon its leadership position in the field of telomere biology, telomerase regulation and embryonic stem cells by continuing to selectively collaborate with pharmaceutical companies and research institutions and protect its leadership position with an extensive patent portfolio. The Company owns 23 issued United States patents and over 46 United States patent applications and has licensed 20 issued United States patents and over 40 United States patent applications.
Cancer, age-related degenerative diseases and other conditions including skin aging, atherosclerosis, osteoporosis, macular degeneration, congestive heart failure, diabetes, Parkinson's and Alzheimer's diseases are difficult and costly to diagnose and 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. This will place a steadily growing financial burden on the health care system. New technology in the diagnosis and treatment of these diseases and conditions should lead to attractive commercial opportunities. For example, the worldwide cancer treatment market is currently $9.1 billion and growing at a rate of 8% per annum. In the United States alone, over 1.2 million new cases of cancer are expected to be diagnosed and approximately 563,000 cancer deaths are expected to occur in 1999.
Geron and collaborators have demonstrated both in vitro and in vivo that telomeres, the repeated sequences of DNA located at the ends of chromosomes, shorten throughout a normal cell's replicative lifespan. In addition, 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 is believed to occur in many tissues throughout the body and may contribute to many age-related degenerative diseases and conditions through a direct and destructive effect on surrounding tissues. Geron scientists, with collaborators, have cloned and characterized the two critical components of telomerase that convey its activity, the RNA component and the catalytic protein component. Among its many findings with respect to these two biologically important components, Geron has shown that expression of the protein gene in normal cells results in telomerase activity which halts telomere erosion and dramatically extends the normal lifespan of the cell while maintaining normal (youthful) gene expression and preventing the onset of senescence. Further, Geron scientists and collaborators have shown that cellular immortality via telomerase gene transfer does not cause malignant or cancerous changes in the treated cells.
Cancer cells escape senescence and maintain an extended ability to divide. They continue to divide past the senescent fate of normal cells by virtue of activated oncogenes and inactivated tumor suppressor genes. Geron and collaborators have shown that for tumor cells to attain life threatening characteristics, or to metastasize throughout the body, they generally must become immortal through an alteration which prevents their telomeres from shortening. In all cancer types studied to date, telomerase is abnormally reactivated, thereby conferring cellular immortality. Data shows that telomerase is present in the vast majority of tumor biopsies in the 20 - 30 types of cancer that have been studied, including breast, prostate, lung, colon and bladder cancers. Thus, Geron believes that telomerase inhibition has the potential to be a universal and highly specific cancer therapy. Geron and partners are using proprietary screening technologies to identify small molecule compounds that selectively inhibit telomerase. Medicinal chemistry and combinatorial chemistry are being used to optimize these compounds. Animal models of human tumor growth have been developed to test the appropriateness of lead compounds for clinical drug development.
Telomerase is also expressed in another cell type with vast potential for clinical medicine: the human embryonic stem cell. Dr. James Thomson and colleagues at the University of Wisconsin-Madison, and Dr. John Gearhart of Johns Hopkins University have successfully derived human embryonic stem ("hES") and human embryonic germ ("hEG") cells, respectively, and maintained them in culture. Human embryonic stem and germ cells are different from every other human stem cell previously derived in that they have the capability to turn into any and all cell types and tissues in the body. These cells, licensed to Geron, hold great promise as a universal source of replacement cells for transplantation and for use in screens and functional genomics for pharmaceutical research and development. Further, this promise is enhanced by Geron's telomerase technology which can potentially increase the lifespan of differentiated cells produced from hES or hEG cells. The technology combination positions Geron to potentially supply an unlimited number of young human cells and tissues for therapeutic uses in the body and for drug discovery purposes. In addition, further research with hES and hEG cells will improve our understanding of reproductive and developmental biology. This could lead to better treatments for infertility and the discovery of new approaches to treat a wide variety of diseases and developmental disorders.
The Company is focused on three therapeutic and diagnostic product development programs: (i) TELOMERASE INHIBITION AND DETECTION -- developing telomerase inhibitors as potentially universal and highly specific cancer therapies and telomerase assays for the detection of cancer; (ii) TELOMERASE ACTIVATION AND EXPRESSION -- developing genetic or drug therapies to modulate telomere length, thereby regulating cell aging or senescence which contributes to degenerative diseases; and (iii) EMBRYONIC STEM CELL THERAPIES -- generating a broad array of cell types from human embryonic stem or germ cells for use in transplantation medicine, pharmaceutical research and development and the study of human developmental biology. 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, gene sequencing, gene expression microarray analysis, gene cloning, vectorology and gene transfer technologies.
The Company's strategy combines the following key elements: a focus on telomeres and telomerase in mortal and immortal cells as molecular and biological targets and embryonic stem cells to generate immortal cells and tissues; building therapeutic and diagnostic discovery programs on this scientific platform; selective formation of strategic partnerships; retention of rights to develop and market products; 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, and cell division plays a critical role in the normal growth, maintenance and repair of human tissue. However, in the human body, cell division is a limited process. Depending on the tissue type, cells generally divide only 60 to 100 times in the course of their normal lifespan. Geron and collaborators have demonstrated that telomeres, the repeated sequences of DNA located at the ends of chromosomes, 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, telomeres shorten, and once telomeres reach a certain short length, cell division halts and the cell enters a state known as senescence.
Cellular aging or senescence, although influenced by environmental factors, is a genetically determined process. Although senescent cells no longer divide, they generally 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 degenerative diseases and conditions.
Recent work published by Geron and collaborators demonstrates that telomeres not only serve as a molecular "clock" for cellular aging, but that telomerase, when introduced into normal cells, is capable of restoring telomere length or resetting the "clock" and increasing the lifespan of cells without altering their "youthful" functions.
Normal cells have the potential to bypass senescence and become cancerous when random or inherited mutations activate oncogenes or 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. Research suggests 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 enzyme, composed of an RNA and a catalytic protein component. Telomerase is functionally active in reproductive cells to ensure the full complement of genetic information is passed from generation to generation. Telomerase is also present at low levels or is periodically activated in certain hematopoietic (blood), skin and gastrointestinal cells. However, these cells continue to age and gradually lose telomeric DNA, which suggests that telomerase may not be essential for their normal functioning. With telomerase present at adequate levels, telomeres do not shorten and cell senescence is averted. Research has shown that telomerase is not present in most normal cells and tissues after birth, but that during tumor formation or progression, telomerase is abnormally reactivated in all major cancer types. However, unlike the mutations which cause cancer, telomerase does not contribute to the dysfunctional behavior of tumor cells; its presence enables cancer cells to maintain telomere length, providing them with indefinite replicative capacity or cellular immortality. This important distinction explains how selected activation of telomerase can be beneficial for the treatment of certain age-related diseases, while telomerase inhibition in cancer patients can provide a novel way to cause tumor cells to age and ultimately die.
Embryonic Stem and Germ Cells
Another cell type which expresses telomerase at relatively high, constant levels is the human embryonic stem ("hES") cell. Derived from donated in vitro fertilized (IVF) blastocysts, hES cells have unique characteristics which make them useful for multiple new therapeutic, pharmaceutical and scientific applications. Human embryonic germ ("hEG") cells derived from donated fetal material share many of the properties of hES cells, the most important of which is unique to hES and hEG cells: they are both pluripotent -- capable of forming into all of the different cell types in the body. Specifically they have the potential to form derivatives of all three cellular layers, including the gut epithelium (endoderm); cartilage, bone, and smooth and striated muscle (mesoderm); and neural epithelium, embryonic ganglia and stratified squamous epithelium (ectoderm).
Embryonic stem cells are also self-renewing, consistent with their natural expression of telomerase. The continual steady state activity of telomerase in hES cells conveys replicative immortality. Under appropriate in vitro conditions, hES cells repopulate themselves indefinitely while remaining in the undifferentiated state. Therefore, they are expected to be a continuous source of normal pluripotent cells. Telomerase activity in hEG
cells is not as well characterized. Human embryonic stem cells maintain a structurally normal set of chromosomes (including the sex chromosomes, XX or XY) even after prolonged growth in culture. They do not, for example, have any additions, deletions or rearrangements in their chromosomal structure as is characteristic of cell lines derived from tumors or immortalized by viruses.
The ability of hES cells to propagate indefinitely in the undifferentiated state without losing pluripotency is a unique characteristic that distinguishes them from all other "multipotent" stem cells discovered to date in humans. Other stem cells such as blood or gut stem cells express telomerase at low levels or only periodically, and therefore age. The Company believes hES cells can be expanded on an industrial scale for commercial purposes.
The availability of hES and hEG cells opens extraordinary opportunities to (i) enable development of transplantation therapies, (ii) re-tool pharmaceutical research and development practices, and (iii) accelerate research in human developmental biology. Moreover, hES and potentially hEG cells should provide an immediate, alternative source and industrial supply of starting material, relieving the need to continually resource primary human embryonic or fetal-derived tissues. Much of the research necessary for product development work can be performed on these cells now made available by Dr. Thomson's and Dr. Gearhart's discoveries.
MARKET OPPORTUNITY
Cancer, age-related diseases and other conditions including skin aging, atherosclerosis, osteoporosis, macular degeneration, congestive heart failure, diabetes and Parkinson's and Alzheimer's are difficult and costly to diagnose and 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. Of the 2.2 million Americans who died in 1991, 1.6 million were elderly (65 years or older). Seven in 10 of these deaths can be attributed to either heart disease, cancer or stroke. A breakthrough technology in the diagnosis and treatment of these diseases and conditions should provide attractive commercial opportunities.
Cancer
The incidence of cancer increases dramatically with age. Cancer ranks as the leading cause of death in women over 55 and as the second leading cause for men over 55 years of age. Twenty five percent of people over the age of 65 will develop invasive cancers. In the United States, approximately 8.2 million people alive today have a history of cancer, and since 1990, approximately 12 million new cancer cases have been diagnosed including cancers of the lung, colon, breast, prostate, pancreas, ovary, kidney and bladder, along with lymphomas and leukemia. Despite significant medical advances, cancer researchers and clinicians have had little impact on cancer mortality rates. Each year, cancer will claim more than a half-million lives, or more than 1,500 per day. Since 1990, there have been approximately five million cancer deaths in the United States. Within the next decade, largely because of population aging, cancer may become the leading cause of death.
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. Overall annual direct medical costs for cancer currently amount to $37 billion with treatment of breast, lung, and prostate cancers accounting for over half of those costs. 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 Degenerative Diseases and Conditions
There are numerous other diseases and conditions for which 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 $6 billion, while the market for drugs addressing osteoporosis and osteoarthritis is approximately $3.1 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 to treat their causes rather than their symptoms.
Embryonic Stem and Germ Cell Therapies
The derivation of hES and hEG cells is a fundamental discovery that holds great promise for three major areas of biomedicine: transplantation medicine, pharmaceutical research and development and human developmental biology.
Transplantation Medicine. Because of the expected capability of hES and hEG cells to produce virtually unlimited quantities of any cell in the body, their potential therapeutic impact in transplantation medicine is enormous. In addition, they have the potential to be genetically engineered to prevent their immune rejection by the transplant recipient. Examples of medically relevant cells that could potentially be developed for transplantation therapies in humans include the following:
Cardiomyocytes. Heart muscle cells do not proliferate during adult life. When heart muscle is damaged by injury, the functional heart muscle is replaced with non-functional scar tissue. Congestive heart failure, a common consequence of heart muscle or valve damage, affects nearly five million people in the United States with 400,000 new cases diagnosed each year. In addition, about 1.5 million people each year suffer from myocardial infarction, the primary cause of heart muscle damage, and about one third of them die. Treatment of heart disease in the United States costs $117 billion annually. Mouse cardiomyocytes derived from mouse embryonic stem ("ES") cells have been prepared and injected into the hearts of recipient adult mice. It has been reported that the injected cardiomyocytes repopulated the myocardial tissue and stably integrated with host myocardial cells. These results suggest that the development of hES or hEG cell-derived cardiomyocytes for cellular transplantation therapy for congestive heart failure and myocardial infarction in humans will be technically feasible.
Hematopoietic stem cells (blood forming cells). Bone marrow transplantation is a life saving procedure used in treating pediatric and adult cancers. In 1995, there were approximately 12,500 bone marrow transplants performed in North America. The number of procedures performed dramatically underserves the medical need. The main factor which limits the number of procedures that can be performed is tissue or donor availability. Blood-forming stem cells potentially could be developed from hES or hEG cells as has been done using mouse ES and EG cells. This would increase the availability of these cells and reduce reliance on donors. Further, hES or hEG cell-derived hematopoietic stem cells potentially could be genetically engineered to resist infection by such agents as the HIV virus and used in a transplant setting for the treatment of AIDS, or possibly used for the treatment of patients with sickle cell anemia.
Endothelial cells (blood vessel cells). Mouse endothelial cells have been derived from mouse ES cells. Similarly, in humans, blood vessel forming cells potentially could be generated from hES cells and used to re-line blood vessels for the purpose of treating atherosclerosis, a condition which contributes to over 650,000 deaths annually in the United States. hES-derived endothelial cells potentially could also be used for generating new blood vessels in damaged regions of the heart, brain, or lower extremities to treat angina, stroke and arterial insufficiency.
Islet cells (pancreatic cells that produce insulin). The 1.4 million patients in the United States with Insulin Dependant Diabetes Mellitus potentially could be treated with islet cells derived from hES cells. Such
human cells are unavailable today and could provide a lifelong cure for this disease. Health costs related to the treatment of diabetes runs over $90 billion annually.
Neurons. It has been demonstrated that mouse neurons can be derived from mouse embryonic stem and germ cells. Human neurons derived from hES or hEG cells could potentially be prepared for the treatment of (i) the over one million people in the United States who suffer from Parkinson's disease, (ii) the 500,000 individuals who suffer a stroke each year, and (iii) over four million Americans affected with Alzheimer's disease. Treatment costs for patients suffering from Parkinson's, Alzheimer's and stroke could total $5.7 billion by the year 2001.
Fibroblast and keratinocyte cells (skin cells). Fibroblast and keratinocyte cells of mice have been observed in cultures of differentiated mouse ES cells. Geron scientists expect that comparable human skin cells could be produced from hES cells and used for wound healing and the treatment of burns.
Chondrocytes (cartilage cells). Chondrocytes could potentially be generated from hES cells for cartilage replacement in treating osteoarthritis which affects over 16 million Americans, or rheumatoid arthritis which affects over two million persons in the United States. The treatment of osteoarthritis alone cost Americans $1.8 billion in 1996.
Pharmaceutical research and development. The potential to produce and supply unlimited quantities of normal human cells of virtually any tissue type could have a major impact on pharmaceutical research and development. Until now, the only cell lines available for this work were either animal in origin or abnormal transformed human cells. It may be possible to produce permanent, stable sources of normal human differentiated cells for drug screening and testing, drug toxicology studies, as well as new drug target identification. Further, because hES cells express telomerase and can therefore undergo multiple rounds of a sophisticated type of genetic engineering called gene targeting, cellular models of human disease could be developed for use in drug development. Finally, cell lines derived from hES or hEG cells may be useful for developing screens for teratogens (drugs causing birth defects), extending the capability of current assays based on bacterial and mouse systems.
Human reproductive and developmental biology. Unraveling the biology of hES and hEG cells as they differentiate into functional cell types in vitro offers a unique platform to understand and harness nature's mechanisms of embryonic development and tissue differentiation and repair. Such understanding has potential for contributing to (i) the treatment of fertility disorders which affect one out of every six couples in the United States trying to become pregnant, (ii) the prevention of premature pregnancy loss, estimated to be 15% of recognized pregnancies in the United States, and (iii) the diagnosis and prevention of birth defects which afflict 3% of live births in the United States.
Until now, the early developmental events which naturally occur during human embryogenesis have been inaccessible to direct study. The availability of hES and hEG cells may facilitate a molecular understanding of how specific human tissues and organs develop -- research which cannot be pursued today without utilizing human embryos or fetuses. Further, it is possible that novel genes which fundamentally control tissue differentiation could be identified by the application of genomic technologies to cultured hES and hEG cells as they differentiate into a variety of functional cell types. These new gene products have potential to be developed into therapeutic proteins for treating wound healing, stroke, myocardial infarction, spinal cord injury and tissue regeneration.
These potential clinical applications would utilize suspensions of purified hES- and hEG-derived differentiated cells administered by injection. With further technical development, complex multi-cellular solid tissues and organs could potentially be developed for application in organ support therapies for lung, kidney, liver, cardiac and brain diseases. While the biomedical and therapeutic promise of hES and hEG cells is vast, it should be re-emphasized that the additional research and development required to realize this potential is significant.
STRATEGY
Geron's strategy is to be the leading biopharmaceutical company in the discovery and development of therapeutic and diagnostic products based upon the Company's understanding of telomere, telomerase and embryonic stem cell biology. 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 all tissues of the body, the Company believes it has established a broadly applicable, proprietary platform for discovering and developing novel small molecule therapeutics, cell and gene 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 shortest development path for therapeutic and diagnostic products and the highest likelihood for success. Geron is currently working in three program areas: (i) the inhibition and detection of telomerase for the treatment and diagnosis of cancer; (ii) the modulation of biological processes leading to and regulating cell aging or senescence which contribute to degenerative diseases and (iii) embryonic stem cell therapies for cell transplantation therapies, accelerating drug discovery and the study of developmental biology.
Form Strategic Partnerships. Geron has established and intends to continue to establish collaborations and alliances with pharmaceutical companies, other biotechnology companies and leading academic institutions to enhance its research, development and commercialization capabilities. Geron has entered into a three-company strategic alliance with Kyowa Hakko Kogyo Co., Ltd. ("Kyowa Hakko"), a leading oncology company in Japan, and Pharmacia & Upjohn S.p.A ("Pharmacia & Upjohn"), a global leader in oncology, for the development and marketing of a telomerase inhibitor to treat cancer. The Company has also established a clinical development partnership with Roche Diagnostics GmbH ("Roche Diagnostics"), the global leader in diagnostics, to develop telomerase-based products for use in cancer diagnosis and treatment planning.
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 or co-promote products on key therapeutic and diagnostic applications of discoveries resulting from 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, cellular immortality and stem cells either as employees or exclusive collaborators. Further, the Company is aggressively pursuing a broad and extensive patent portfolio internationally and in the United States to protect its proprietary technology. To date, the Company owns 23 issued United States patents and over 46 United States patent applications and has licensed 20 issued United States patents and over 40 United States patent applications. Geron also owns or has licensed three issued foreign patents and numerous patent applications.
RESEARCH PROGRAMS
Telomerase Inhibition and Detection
Geron intends to discover and develop a small molecule telomerase inhibitor, which, by blocking the activity of telomerase, will allow telomeres in cancer cells to resume shortening, ultimately leading to cancer cell death. In addition, the Company's intention is to develop clinical products using telomerase as a marker in cancer diagnosis, prognosis, patient monitoring and screening.
Telomerase is not present in most normal cells, and as a result, normal 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 - 30 different cancer types studied, including the ten most prevalent cancers of prostate, breast, lung, colon, bladder, uterus, pancreas and ovary, along with lymphomas, leukemias,
melanomas and brain tumors. In all of these cancers, a very 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. Research by Geron and other independent groups has demonstrated that a telomerase inhibitor can block cancer cells from using telomerase to maintain telomere length. As a result, telomeres shorten as the cancer cells continue to divide until a critically short length is reached, at which point the cancer cells enter crisis. In some cases, cancer cells have a more immediate response to loss of telomerase activity, undergoing rapid cell death. Geron scientists and others have inhibited human telomerase in tumor cell lines in culture using molecules which block the function of the RNA or the essential protein component of telomerase. Based on these positive results, Geron is aggressively pursuing the identification of telomerase inhibitors as potential lead compounds for clinical development. While it has identified several strategies for inhibiting telomerase activity, including antisense technology and genetic regulation, 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 pharmaceutical and commercial profile -- oral bioavailability, compound stability and low manufacturing cost. Geron and partners are using proprietary screening technologies employing combinatorial chemistry to identify small molecule compounds that selectively inhibit telomerase. Traditional medicinal chemistry and rapid parallel synthesis techniques are being used to optimize these compounds. Cell and animal models, as well as cell-based models of human tumor growth, have been developed to test the appropriateness of lead compounds for development.
To advance this program, Geron has pursued the cloning and characterization of the genes for the essential components of telomerase: the RNA template of telomerase ("hTR") and the catalytic reverse transcriptase protein component ("hTERT"). The cloning of hTR by Geron in 1994 and of hTERT, in collaboration with Dr. Thomas Cech of the University of Colorado in 1997, has allowed the development of proprietary assays for discovering and characterizing telomerase inhibitors. In addition, Geron has developed proprietary screening technology, assembled a structurally diverse library of more than 100,000 small molecule compounds and established medicinal and combinatorial and nucleic acid chemistry capabilities. As a result of the combined screening efforts, Geron and its corporate partners have identified several classes of compounds that demonstrate telomerase inhibition and are actively pursuing structure/activity relationship studies. Geron believes that its assays and screening methods provide a strong competitive advantage in view of the difficulty and specialized skills required for their development and use. The company's patent portfolio includes issued patents for the RNA and catalytic protein components of telomerase as well as 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 lose their immortality. 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 current anti-cancer therapies.
Geron 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 many 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, Geron believes that telomerase is not biologically critical for these tissues, and Geron predicts that telomerase inhibitors are unlikely to have a significant negative effect on them.
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 established a strategic alliance with Pharmacia & Upjohn, a global leader in
oncology, for a complementary worldwide collaboration in telomerase inhibition. This collaboration with Pharmacia & Upjohn has recently been enhanced by accessing the high throughput screening capabilities and the two million compound libraries of Pharmacopoeia, Incorporated ("Pharmacopoeia") via an alliance between Pharmacia & Upjohn and Pharmacopoeia which includes telomerase inhibition. Geron has established research collaborations for the study of telomerase inhibition with the National Cancer Institute, Memorial Sloan-Kettering Cancer Center, and the Lawrence Berkeley National Laboratory, and for the study of telomere biology with Stanford University, the University of Colorado, the University of Texas Southwestern Medical School at Dallas, the Dana Farber Cancer Institute, and the University of California, San Francisco.
Diagnostics. Geron 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, and patient monitoring and screening. While 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 by clinicians of the biological significance of telomerase activity in cancer.
Geron has developed several proprietary assays for the detection of telomerase which are 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 second generation assay detects hTR, 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 methods to detect the presence of telomerase. The Company was also the first to report the cloning of hTERT, the human telomerase reverse transcriptase component of telomerase. The first patent for the hTERT protein component of human telomerase has been issued in the United Kingdom and is co-owned by Geron and the University of Colorado and exclusively licensed to Geron. Further, the United States Patent and Trademark Office has issued patents for the detection of telomerase activity or its components including patents for the TRAP assay and diagnostic methods based on hTR detection.
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. Data from other published studies support clinical application of telomerase in diagnosis, staging, monitoring and screening for bladder, cervical and other cancers. In several reports, the sensitivity and specificity of telomerase-based assays have proven superior to standard methods in the detection of cancer in patient samples. The Company intends to proceed with development of its telomerase detection technology, in collaboration with Roche Diagnostics, as a novel and important diagnostic for cancer.
Telomerase Activation and Expression
Geron seeks to develop cell, gene and drug therapies to modulate biological processes leading to and regulating cell aging or senescence which contribute to degenerative diseases. As normal cells divide, they eventually exhaust their capacity for renewal and become senescent, at which point they display an altered pattern of gene expression and an altered function. An integral part of this program is the extensive investigation of changes in gene expression as cells age and the analysis of gene expression when telomerase is introduced into cells at various times prior to senescence. The Company is applying proprietary gene transfer technologies, gene expression systems and small molecule screening technology to develop therapeutic agents to target, postpone and modulate the destructive genetic changes that occur in senescent cells.
Research at Geron and the University of Texas Southwestern Medical Center at Dallas has shown that the activation of telomerase in normal human cells extends their cellular lifespan without causing cancerous changes. Such telomerase expression prevents the senescent gene expression pattern and preserves the youthful function of these cells. Geron has continued investigations aimed at defining the differences in gene expression between young and senescent cells using high density DNA arrays to efficiently monitor gene
expression in young and senescent cell cultures. This has allowed for a detailed description of genes whose deregulation is associated with senescence. Such genes can serve as markers in drug discovery screens to identify small molecules capable of activating telomerase and thus suppressing the altered gene expression patterns in senescent cells. Geron has entered into an agreement with Synteni (an Incyte company) for the use of their microarray technology for gene expression analysis. In addition, Geron maintains research collaborations with a number of institutes to support its telomerase activation program including, Lawrence Berkeley National Laboratory, Stanford University and the University of Tennessee, Memphis.
The onset of diseases such as skin aging, atherosclerosis, osteoporosis, arthritis, and macular degeneration is associated with dysfunction of specific cell types. The effects of senescence on these cell types contribute to the disease. For each of these cell types, Geron scientists have introduced the hTERT gene and observed expression of telomerase, maintenance of telomere length and extension of these cells' normal lifespan. The Company believes that these telomerized cells will have extensive applications in research, production of engineered cells and tissues and in the treatment of age-related diseases. To pursue the applications of this technology, Geron scientists are working with collaborators at Duke University, the University of California at Los Angeles, the Memorial Sloan-Kettering Cancer Center and Stanford University.
Geron is developing proprietary gene vectors using the hTERT promoter to drive expression of a gene that directly or indirectly kills that cell. These systems are being tested in animal models. Specifically targeting cancer cells should reduce the toxicity of the therapy to normal cells. Studies are also planned to measure potential synergies of hTERT immunotherapy with traditional chemotherapeutic, surgical and radiological cancer therapies.
Embryonic Stem Cell Therapies
Human embryonic stem ("hES") and germ ("hEG") cells are embryonic and fetal derived cells, respectively, that are unique in that they are capable of differentiation into any and all types of cells and tissues in the body. Moreover, hES cells have been shown to be telomerase positive and capable of essentially immortal growth in the differentiated state.
Geron collaborators at the University of Wisconsin-Madison have now succeeded in isolating and culturing human embryonic stem cells. As published in Science, these undifferentiated cells can be expanded in culture and can be induced to differentiate both in vitro and in in vivo animal models into all primary tissue types including cardiac and skeletal muscle, neuronal and epithelial tissue.
The Company believes that hES and hEG cells offer significant advantages over other stem cells, which have limited ability to proliferate and differentiate in culture. With the derivation of hES and hEG cells, Geron has a new set of product development opportunities in (i) transplantation medicine, (ii) pharmaceutical research and development and (iii) the study of human developmental biology.
The availability of hES and hEG cells allows for the first time a thorough genomic analysis of gene expression patterns that control early human development. Identification and functional assignment of these human developmental genes will enhance our understanding of the molecular events that control early human development with application toward the prevention of birth defects, treatment of infertility disorders and the discovery of gene products that enhance tissue differentiation and repair. The Company plans to apply its microassay technologies in order to identify these genes and to seek corporate partners to develop and commercialize those gene products with therapeutic potential.
By combining cellular differentiation technologies with Geron's proprietary telomerase gene transfer immortalization platform, the Company plans to develop immortalized human cell lines useful for application in drug discovery screens. Unlike transformed cells which have been engineered to express certain surface receptors, for example, as targets for drug discovery, cells derived from hES or hEG cells will retain the complete normal signal transduction pathways downstream from the surface receptors. Screens based on such cells can therefore not only be used to identify components that bind to the surface receptor, but also those which act with intracellular pathways resulting in desired alterations in gene expression consistent with the desired pharmacologic action of the drug being discovered.
Finally, by combining culture scale-up, telomerase gene transfer, cell differentiation and genetic selection technologies with gene targeting techniques, purified cell populations can be potentially manufactured for application in tissue regeneration therapies. Degenerative tissues in such conditions as heart failure, diabetes, stroke, arthritis, and atherosclerosis could potentially be restored by the injection of youthful, functional cells derived from pluripotent hES cells. The Company's intention is to assemble the required technologies, personnel, licenses and collaborations to enable the development of these tissue regeneration approaches.
STRATEGIC PARTNERSHIPS
Geron believes that its broad scientific platform will generate significant opportunities for a variety of strategic partnership arrangements. Geron has established and intends to continue to establish selective collaborations with leading pharmaceutical and diagnostic companies to enhance its research, development and commercialization capabilities. In each of these strategic collaborations, the Company has retained 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 (the "Kyowa Hakko Agreement"). 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 7, 2000, 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. In March 1997, the Kyowa Hakko Agreement was amended to extend its term until April 2000 and to make certain other changes in connection with the signing of the Pharmacia & Upjohn Agreement (as defined below).
Pharmacia & Upjohn Collaboration
In March 1997, the Company signed a License and Research Collaboration Agreement (the "Pharmacia & Upjohn Agreement") with Pharmacia & Upjohn to collaborate in the discovery, development and commercialization of a new class of anti-cancer drugs that inhibit telomerase. Under the collaboration, Pharmacia & Upjohn will provide $15.0 million of research funding over three years. In addition, the Company is entitled to receive future payments upon the achievement of certain contractual milestones relating to drug development and regulatory progress, as well as royalty payments on future product sales. Further, the Company has an option to exercise co-promotion rights in the United States. The companies also signed a Stock Purchase Agreement providing for an initial equity investment of $2.0 million in Geron by Pharmacia & Upjohn, at a premium, which was completed in January 1997. In addition on April 25, 1997 and March 27, 1998, Pharmacia & Upjohn purchased an aggregate of $8.0 million ($4.0 million on each date) of Geron Common Stock at a premium. Through the Pharmacia & Upjohn and Kyowa Hakko Agreements, the Company has granted to Pharmacia & Upjohn and Kyowa Hakko exclusive worldwide rights to its telomerase inhibition technology, with exception to certain antisense, gene therapy and vaccine technologies outside Asia, for the treatment of cancer in humans. This collaboration with Pharmacia & Upjohn has recently been enhanced by accessing the high throughput screening capabilities and the two million compound library of
Pharmacopoeia, via an alliance between Pharmacia & Upjohn and Pharmacopoeia which includes telomerase inhibition.
The Company incurred operating expenses of $19.4 million, $18.3 million and $17.4 million in 1998, 1997 and 1996, respectively. Of these expenditures, $6.7 million, $6.7 million and $5.2 million related to costs incurred for research and development activities attributable to strategic partnerships in 1998, 1997 and 1996, respectively. The Company funded the remaining expenditures. No milestone payments have been received or earned to date.
Diagnostic Collaborations
Kyowa Medex Co., Ltd. ("Kyowa Medex") has licensed the Company's TRAP assay technology; Dako Corporation ("Dako") has licensed the Company's hTR in situ hybridization detection technology; and PharMingen (a Becton Dickinson company) has licensed the Company's TRAP assay and telomere length measurement technology, each on a non-exclusive basis for sale to the research-use-only market. Roche Diagnostics GmbH ("Roche") has licensed all telomerase and telomere length assay technologies, including TRAP, hTR, hTERT, and immunoassays, for research-use-only and in vitro diagnostics in cancer. All telomerase licenses previously licensed to Boehringer Mannheim GmbH ("Boehringer Mannheim") have been transferred to Roche Diagnostics following the acquisition of Boehringer Mannheim by Roche. The TRAP assay research-use-only license originally granted to Oncor Inc. ("Oncor") has been transferred to the Intergen Company ("Intergen") following the acquisition of Oncor's research reagent division by Intergen. Oncor commenced commercial sale of the TRAP-eze(TM) kit in May 1996, followed by Boehringer Mannheim and Kyowa Medex in late 1996.
Since mid-1998, Oncor's TRAP-eze(TM) and other TRAP-related products are marketed under the Intergen label. Boehringer Mannheim's telomerase-related products are now marketed under the Roche label. PharMingen began selling its TeloQuant(TM) telomere length assay kit in 1997 and its TeloQuant(TM) telomere length and TRAP assay kit in 1998. Although the Company does not expect royalties from the sale of these kits to be significant, the use of these kits 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, Johns Hopkins University, the Children's Hospital of Los Angeles, Madigan Army Medical Center and the University of Texas Southwestern Medical Center at Dallas.
In December 1997, the Company entered into a License, Product and Marketing Agreement with Boehringer Mannheim to develop and commercialize research and clinical diagnostic products for cancer on an exclusive, worldwide basis. Under the Agreement, Boehringer Mannheim provided reimbursement in the amount of $500,000 for research previously conducted and is responsible for all clinical, regulatory, manufacturing, marketing and sales efforts and expenses. The Company is entitled to receive future payments upon achievement of certain contractual milestones relating to levels of product sales, as well as royalties on product sales. Further, the Company has an option at its sole discretion to exercise co-promotion rights with respect to in vitro diagnostic products in the United States. After the acquisition of Boehringer Mannheim by Roche in early 1998, all licenses and agreements pertaining to telomerase-based cancer diagnostics entered into with Boehringer Mannheim have been transferred to Roche Diagnostics. It is expected that the combined clinical and technical expertise of Boehringer Mannheim and Roche Diagnostics will enhance the telomerase diagnostic product development.
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 telomere and telomerase biology and in support of its Telomerase Inhibition and Detection with the National Cancer Institute, the Memorial Sloan-Kettering Cancer Center, Lawrence Berkeley National Laboratory, Stanford University, the University of Colorado, the University of Texas Southwestern Medical School at Dallas, the Dana Farber Cancer Institute, the University of California at San Francisco, The Cleveland Clinic, Johns Hopkins University, the Children's Hospital of Los Angeles and Madigan Army Medical. In support of its Telomerase Activation and Expression program, Geron has established collaborations with laboratories including the Lawrence Berkeley National Laboratory, Stanford University, the University of Tennessee, Memphis, Duke University, the University of California at Los Angeles and the Memorial Sloan-Kettering Cancer Center. Geron has established exclusive license and collaboration agreements in support of its Embryonic Stem Cell Therapies program with the University of California at San Francisco, Johns Hopkins University 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 23 issued United States patents and over 46 United States patent applications and has licensed 20 issued United States patents and over 40 United States patent applications, as well as three issued foreign patents and numerous international filings under the Patent Cooperation Treaty, and has 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, cellular immortality and embryonic stem cell technology. For example, the United States Patent and Trademark Office has issued Geron five patents for telomerase inhibitor screening technology. 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, six of which have issued. The Company has licensed several issued United States patents relating to telomerase activity-based cancer diagnostic and prognostic methods. In addition, the Company owns several United States patents and an allowed United States patent application for the TRAP assay and improvements to the TRAP assay. One patent relating to reagents used in the assay has issued from the United States Patent and Trademark Office. The Company's telomerase RNA detection technology is the subject of several patents that have issued from the United States Patent and Trademark Office. The Company has also filed patent applications relating to the catalytic subunit of telomerase and has been granted a patent in the United Kingdom to the catalytic protein component of telomerase. The Company has patents and a patent application relating to its technologies for identifying genes that are differentially expressed in different cell types or at different stages of cellular development. The United States Patent and Trademark Office has 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. The Company has licensed several patent applications relating to Embryonic Stem Cells including the issued patent relating to Primate Embryonic Stem Cells and methods for obtaining and maintaining them has issued from the United States Patent and Trademark Office.
SCIENTIFIC ADVISORS AND CONSULTANTS
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, developmental biology, 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. 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:
STEPHEN BENKOVIC, PH.D., is Professor of Chemistry at the Pennsylvania State University and is a member of the Company's SAB. Dr. Benkovic is a member of the Chemical Society and the recipient of the 1998 Chemical Pioneer Award given by the American Institute of Chemists. He is an internationally recognized expert in protein chemistry, including the enzymology of DNA polymerases.
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 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 National Institutes of Health ("NIH") Program Advisory Panel on the Human Genome (1989 - 90) and the Advisory Council of the National Center for Human Genome Research (1990 - 95).
ROBERT N. BUTLER, M.D., is a gerontologist and psychiatrist with broad experience in aging research and advocacy and is a member of the Company's SAB. 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 NIH, a position he held until 1982. He currently serves on the National Advisory Council of the National Institute on Aging. Dr. Butler also serves as editor-in-chief of the journal Geriatrics and is the author of approximately 300 scientific and medical articles. In 1976, he won the Pulitzer Prize for his book, "Why Survive? Being Old in America."
JUDITH CAMPISI, PH.D., is a Senior Scientist and Acting Chair, Department of Cancer Biology, Lawrence Berkeley National Laboratory. She has been an Established Investigator of the American Heart Association and currently has a MERIT Award from the National Institute on Aging ("NIA"), and serves on its Board of Scientific Counselors. Her major interests are the cellular and molecular biology of senescence and tumorigenesis.
VINCENT CRISTOFALO, PH.D., is a Professor of Biochemistry and Molecular Pharmacology, and President of Lankenau Medical Research Center, Jefferson Health System, Pennsylvania 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 NIA 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.
LEONARD GUARENTE, PH.D., is a Professor of Biology at the Massachusetts Institute of Technology and a member of the Company's SAB. Dr. Guarente has studied mechanisms of eukaryotic transcriptional regulation over the past 18 years. More recently, his lab has turned its focus to identifying causes of aging by identifying genes and mechanisms that control lifespan in the model system S. Cerevisiae and in mice. His lab has also begun a study of the WRN1 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 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 the University of California at San Francisco in 1988, Dr. Hanahan was with the Cold Spring Harbor Laboratory for nine years, where he developed technologies for recombinant DNA and molecular cloning and established transgenic mouse models to study cancer and autoimmune diseases.
LEONARD HAYFLICK, PH.D., is a Professor of Anatomy at the School of Medicine of the University of California at San Francisco, 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, was a founding member of the Council of the NIA, 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 and is a member of the Company's SAB. 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 and acting as former chair of the Genome Research Review Committee for NIH's National Center for Human Genome. 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 and is internationally known for his pioneering work in hematopoiesis, growth factors, and cytokines. He is also currently incumbent of the Enid A. Haupt Chair of Cell Biology, Memorial Sloan-Kettering Cancer Center. Dr. Moore received the William B. Coley Award For Distinguished Research in Immunology by the Cancer Research Institute in June 1995.
ROGER A. PEDERSEN, PH.D., is a Professor of Obstetrics, Gynecology and Reproductive Sciences at the University of California at San Francisco, where he teaches developmental genetics and mammalian embryology. He received his B.A. degree from Stanford University, and his Ph.D. at Yale University. He
completed his postdoctoral research at the Johns Hopkins University. Since 1991 he has served as Series Editor of Current Topics in Developmental Biology. He has written numerous original publications and reviews on early mouse development, and co-produced two instructional videotapes on the use of mice in transgenic and gene targeting research.
JERRY W. SHAY, PH.D., is a Professor of Cell Biology and Neuroscience at the University of Texas Southwestern Medical Center at Dallas and is a member of 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. Dr. Shay has numerous publications, honors and patents. He is also on the editorial board for the Journal of Clinical Pathology.
JAMES A. THOMSON, V.M.D., PH.D., is a Staff Pathologist and Associate Research Animal Veterinarian at the University of Wisconsin-Madison. He is known for the first successful derivation of human embryonic stem cells. Dr. Thomson has numerous awards and publications as well as an issued United States patent for primate embryonic stem cells.
JAMES D. WATSON, PH.D., is 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 at 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.
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 of 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, 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 97 full-time employees at December 31, 1998, of whom 36 hold Ph.D. degrees and 17 hold other advanced degrees. Of the total workforce, 78 are engaged in, or directly support, the Company's research and development activities and 19 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:
RONALD W. EASTMAN has served as President, Chief Executive Officer and a 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, and Vice President of Corporate Development since April 1997. From 1979 until joining the Company, Mr. Greenwood held various positions with J.P. Morgan & Co. Incorporated, an international banking firm, and its subsidiaries, J.P. Morgan Securities Inc. and Morgan Guaranty Trust Company of New York. Mr. Greenwood holds a B.A. from Pacific Lutheran University and an M.B.A. from Harvard Business School.
ELAINE R. HAMILTON has served as Vice President of Human Resources of the Company since June 1998. From 1984 until joining the Company, Ms. Hamilton was the head of Human Resources for Metricom Inc., International Network Services and Portola Packaging and in Human Resources management at FMC Corporation. Ms. Hamilton holds a B.A. in Education and Psychology from the University of Iowa and an M.S. in Human Resources and Organization Development from the University of California at San Francisco.
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 the 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.
THOMAS B. OKARMA, PH.D., M.D., has served as Vice President of Research and Development of the Company since May 1998. From December 1997 until May 1998, Dr. Okarma was Vice President of Cell Therapies. From 1985 until joining the Company, Dr. Okarma, the scientific founder of Applied Immune Sciences, Inc., served initially as Vice President of Research and Development and then as its chairman and chief executive officer until 1995 when it was acquired by Rhone-Poulenc Rorer. From 1980 to 1985, Dr. Okarma was a member of the faculty of the Department of Medicine at Stanford University School of Medicine. Dr. Okarma holds a A.B. from Dartmouth College and a M.D. and Ph.D. from Stanford University.
ITEM 2.
ITEM 2. PROPERTIES
Geron currently leases approximately 41,000 square feet of office space at 194 Constitution Drive, 200 Constitution Drive and 230 Constitution Drive, Menlo Park, California. The 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. The Company believes that its existing facilities are adequate to meet its requirements for the near term.
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 years ending December 31, 1998 and 1997 are as follows:
As of December 31, 1998, there were approximately 728 stockholders of record. The Company is engaged 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. As long as any Series A Convertible Preferred Stock is outstanding, no dividend whatsoever may be declared or paid upon, nor shall any distribution be made upon any junior securities without written consent of the holders of a majority of the outstanding shares of Series A Convertible Preferred Stock, voting together as a class.
RECENT SALES OF UNREGISTERED SECURITIES
On December 10, 1998, the Company entered into an agreement to sell $15.0 million in convertible zero coupon debentures to investment funds managed by three institutional investors. The debentures are convertible by the holders at a fixed conversion price of $10.00 per share. One-half of the proceeds were funded upon signing the agreement. The second half will be funded upon registration of the underlying Common Stock. The Company has agreed to register the resale of the underlying Common Stock under the Securities Act of 1933. The debentures convert at the Company's option when the Common Stock has traded at a certain premium to the fixed conversion price for five consecutive trading days. The investors also received warrants to purchase up to $7.5 million of additional Geron Common Stock at a price of $12.00 per share and will be issued identical warrants upon funding of the remaining $7.5 million of convertible debentures. The debentures and warrants were issued under a private placement in Section 4(2) of the Securities Exchange Act of 1933.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Geron is a biopharmaceutical company focusing on discovering and developing therapeutic and diagnostic products based upon the Company's understanding of human embryonic stem cells and of telomeres and telomerase in cells -- fundamental biological platforms underlying cancer and other age-related degenerative 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, 1998 and 1997, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California February 12, 1999
GERON CORPORATION
BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
See accompanying notes.
GERON CORPORATION
STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
See accompanying notes.
GERON CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
See accompanying notes.
GERON CORPORATION
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
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 focused on discovering and developing therapeutic and diagnostic products to treat cancer and other age-related degenerative 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 a period of 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
In 1997, the Company adopted Statement of Financial Accounting Standard No. 128, "Earnings Per Share," ("SFAS 128"), which required the Company to simplify its calculation of earnings per share. SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods presented have been restated, where appropriate, to conform to SFAS 128.
Basic and diluted net loss per share for 1996 have also been retroactively restated to apply the requirements of Staff Accounting Bulletin No. 98, issued by the SEC in February 1998 ("SAB 98"). Under SAB 98, certain shares of Common Stock and options and warrants to purchase shares of Common Stock issued at prices substantially below the per share price of shares sold in the Company's initial public offering previously included in the computation of shares outstanding pursuant to Staff Accounting Bulletin Nos. 55, 62 and 83 are now excluded from the computation as their effect is antidilutive under SFAS 128.
Pro forma basic and diluted net loss per share for 1996 has been computed as described above and also gives effect to the conversion of convertible Preferred Stock which automatically converted to common shares upon closing of the Company's initial public offering in 1996.
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of shares used in calculation of basic and diluted and pro forma basic and diluted net loss per share follows:
Had the Company been in a net income position, diluted earnings per share would have included the shares used in the computation of pro forma basic net loss per share as well as an additional 1,370,960, 936,782 and 823,214 shares related to outstanding options and warrants not included above (as determined using the treasury stock method at the estimated average market value) for 1998, 1997 and 1996, respectively.
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
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 dependent on future performance under collaborative agreements, are recognized as revenue when received assuming the Company has no remaining obligations. 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.
Comprehensive Loss
The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 130, ("SFAS 130"), "Reporting Comprehensive Income," in June 1997. SFAS 130 establishes
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
standards for reporting and display of comprehensive income (loss) and its components as part of the Company's full set of financial statements and is effective for fiscal years beginning after December 31, 1997. The Company adopted SFAS 130 in it fiscal year ended December 31, 1998.
Other Recent Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-5, "Reporting for the Costs of Start-Up Activities," ("SOP 98-5"). The Company is required to expense all start-up costs related to new operations as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP 98-5 is adopted. The Company expects that the adoption of SOP 98-5 will not have a material impact on its financial position or results of operations. Geron will be required to implement SOP 98-5 for the year ending December 31, 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133"). The Company is required to adopt SFAS 133 for the year ending December 31, 2000. SFAS 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Because Geron currently holds no derivative financial instruments and does not currently engage in hedging activities, adoption of SFAS 133 is expected to have no material impact on Geron's financial condition and results of operations.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform to current year presentation.
2. FINANCIAL INSTRUMENTS AND CREDIT RISK
Cash Equivalents and Securities Available-for-Sale
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company is subject to credit risk related to its cash equivalents and securities available-for-sale. The Company places its cash and cash equivalents in money market funds, municipal notes and commercial paper. The Company's investments include corporate notes in U.S. corporations and municipal securities with maturities ranging from three to 21 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.
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of available-for-sale securities at December 31, 1998 and 1997:
As of December 31, 1998 and 1997, the difference between the fair value and the amortized cost of available-for-sale securities was immaterial.
Other Assets
The Company presently holds notes receivable of $250,000 ($330,000 in 1997) from employees of the Company. These notes, which in general bear no interest, are collateralized by certain personal assets of the employees and are being paid in a series of installments over four years ending December 31, 2002.
Other Fair Value Disclosures
At December 31, 1998, the fair value of the notes receivable from employees is $221,000. 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 $2,068,000. 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, stated at cost, is comprised of the following:
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Property and equipment at December 31, 1998 and 1997 includes assets under capitalized leases of approximately $2,882,000 and $3,465,000, respectively. Accumulated amortization related to leased assets was approximately $1,482,000 and $1,725,000 at December 31, 1998 and 1997, respectively.
4. CAPITAL LEASE OBLIGATIONS AND EQUIPMENT LOANS
The Company has lease and equipment loan credit lines available of $3,000,000 of which approximately $2,300,000 was unused and available at December 31, 1998. The drawdown period under the lease and equipment loan credit lines expires on July 31, 1999. The obligations under the equipment loans are secured by the equipment financed, bear interest at fixed rates of approximately 11% and are due in monthly installments through November 2002. 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.
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 $641,000 in 1999, $666,000 in 2000, $693,000 in 2001 and $58,000 in 2002. 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 $637,000 and $581,000 for the years ended December 31, 1998 and 1997, respectively.
6. CONVERTIBLE DEBENTURES
On December 10, 1998, the Company entered into an agreement to sell $15,000,000 in convertible zero coupon debentures to investment funds managed by three institutional investors. The debentures are convertible at any time by the holders at a fixed conversion price of $10.00 per share. One-half of the proceeds were funded upon signing the agreement and the remaining $7,500,000 will be funded upon the registration of the underlying Common Stock. The debentures convert at the Company's option when the Common Stock has traded at a certain premium to the fixed conversion price for five consecutive trading days. In December 1998, the Company recorded approximately $562,000 in interest expense in connection with this financing for the difference between the fair market value of the Common Stock on the date of issuance and the conversion
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
price of the debentures. An additional $562,000 in interest expense is expected to be recorded upon the funding of the remaining $7,500,000 of convertible debentures in 1999.
In connection with the issuance of the convertible debentures, the Company also issued warrants to purchase 625,000 shares of Common Stock at $12.00 per share. The warrants are exercisable at any time through June 2000. The value of the warrants was determined to be approximately $719,000. The proceeds of $7,500,000 from the issuance of the debentures were allocated between the debentures and the warrants. The convertible debentures, which are recorded at a discount, are being accreted to the redemption amount over the three year term using the interest method. Warrants to purchase an additional 625,000 shares with the same terms will be issued upon funding of the remaining $7,500,000 of convertible debentures.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 27, 1998, the Company completed a private placement with two institutional investors for the sale of 15,000 shares of Series A Redeemable Convertible Preferred Stock (the "Series A Preferred Stock") with a par value of $0.001 and a stated value of $1,000 per share resulting in proceeds of $15,000,000. The Series A Preferred Stock is convertible into the number of shares of Common Stock of the Company equal to the stated value plus a premium of 6% per annum divided by a conversion price. The premium on the Series A Preferred Stock is accreted and treated as a dividend. The premium has been accrued through December 31, 1998 with the offsetting charge recorded to accumulated deficit. The conversion price of the Series A Preferred Stock is based on the market price of the Common Stock during a pricing period preceding conversion, up to a conversion price cap of $16.88. The Series A Preferred Stock is subject to redemption at the Company's option if the market price of the Common Stock exceeds or falls below certain thresholds.
On November 6, 1998, 11,548 shares of Series A Preferred Stock were converted into 2,173,446 shares of Common Stock. The number of shares of Common Stock issued in November 1998 met the maximum threshold of shares of Common Stock that could be issued without obtaining stockholder approval under NASD regulations. Because the Company has not obtained stockholder approval to issue additional shares of Common Stock as of December 31, 1998, the remaining 3,452 shares of Series A Preferred Stock (with a book value of $3,452,000) are now redeemable at the option of the holders of Series A Preferred Stock, have been reclassified as Redeemable Convertible Preferred Stock and are excluded from Stockholders' Equity. In addition, the 6% premium on the outstanding shares of Series A Preferred Stock will be accreted to the value of the outstanding Series A Preferred Stock.
The holders of Series A Preferred Stock have no voting power and are not entitled to receive any dividends. As long as the Series A Preferred Stock is outstanding, no dividends may be declared or paid upon, nor shall any distribution be made upon any junior securities without written consent of the holders of a majority of the outstanding shares of Series A Preferred Stock, voting together as a class.
8. 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 the 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.
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Warrants
In December 1998, in connection with the sale of convertible debentures to three institutional investors, the Company issued warrants to purchase 625,000 shares of Common Stock at $12.00 per share. The warrants are exercisable at any time through June 2000. The value of these warrants in connection with the financing was determined to be approximately $719,000. Warrants to purchase an additional 625,000 shares with the same terms will be issued upon the funding of the remaining $7,500,000 of convertible debentures.
In August 1997, in conjunction with a license agreement, the Company issued a warrant to purchase 25,000 shares of Common Stock at $6.75 per share. The warrant is exercisable through August 2007.
In June 1994, in conjunction with the Series C Preferred Stock financing, the Company issued warrants to purchase 3,253 shares of Common Stock at $9.28 per share. The warrants are exercisable through June 1999.
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.
1992 Stock Option Plan
The Company administers the 1992 Stock Option Plan (the "Plan"). The options granted under this Plan may be either incentive stock options or nonstatutory stock options. As of December 31, 1998, the Company had reserved 4,271,137 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 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 four or five years from the date of the option grant, with a portion vesting after six months and the remainder vesting ratably over the remaining period. Options granted under the Plan prior to July 1996 (the date of the Company's initial public offering) 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. In 1998 and 1997, the Company repurchased none and 18,737 shares, respectively, in accordance with these repurchase rights. As of December 31, 1998, 9,717 shares remained subject to repurchase.
On September 18, 1998, the Board of Directors approved a resolution to offer all employees holding outstanding options to purchase Common Stock of the Company under the Company's 1992 Stock Option Plan with exercise prices in excess of the closing price of the Company's Common Stock on September 17, 1998 of $4.75 the option to exchange all such options for new incentive and/or nonstatutory stock options. Each such new incentive and/or nonstatutory stock option was on the same terms as the surrendered option, except that (i) the exercise price was equal to the closing price of the Company's Common Stock as reported on September 17, 1998 of $4.75, (ii) the vesting period of each exchanged option as set forth in the applicable stock option agreement was extended for one year beginning from the original vesting commencement date, (iii) no exchanged option could be exercised or sold by the optionee prior to September 18, 1999, except due to the involuntary termination of the employee by the Company or his or her death or permanent disability, and (iv) options so exchanged were exchanged for the maximum number of incentive stock options permitted under applicable rules and regulations. In connection with this option exchange program, options to purchase 1,148,224 shares of Common Stock were cancelled and regranted. In addition, the Company recorded deferred compensation of approximately $1,300,000 and recognized approximately $334,000 in compensation GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
expense in 1998. The remaining deferred compensation is being amortized over the remaining vesting term of the options.
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. As of December 31, 1998, 125,000 options have been granted under the Directors' Option Plan.
Aggregate option activity for the 1992 Stock Option Plan and Directors' Stock Option Plan is as follows:
As of December 31, 1998 and 1997, there were 762,038 and 1,229,900 exercisable options outstanding at a weighted average exercise price of $3.20 and $3.44, respectively.
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 and options granted to non-employee directors 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 GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
developed for use in valuing employee stock options and options granted to non-employee directors. 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 4.25% to 5.62%, 5.79% to 6.85% and 5.68% to 6.70% for 1998, 1997 and 1996 respectively; a dividend yield of 0.0% for 1998, 1997 and 1996; a volatility factor of the expected market price of the Company's Common Stock of 1.078 for 1998, 1.1 for 1997 and 0.7 for 1996; and a weighted average expected life of the options of 5 years for 1998, 1997 and 1996.
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 60-month period. Deferred compensation expense recognized in 1998, 1997 and 1996 related to these options grants totaled $289,000.
The weighted average fair value of options granted during 1998, 1997 and 1996 with an exercise price below the fair market value of the Company's Common Stock on the date of grant was $3.79, $6.69 and $2.84, respectively. The weighted average fair value of options granted during 1998, 1997 and 1996 with an exercise price equal to the fair market value of the Company's Common Stock on the date of grant was $5.81, $7.65 and $3.03, respectively. The weighted average fair value of options granted during 1998, 1997 and 1996 with an exercise price greater than the fair market value of the Company's Common Stock on the date of grant was $0.11, none and $0.20, respectively.
The Company grants options to consultants from time to time in exchange for services performed for the Company. In general, these options vest over the contractual period of the consulting arrangement. In 1998, the Company granted options to consultants to purchase 26,550 shares of the Company's Common Stock. The fair value of these option grants was determined to be approximately $197,000 and is being amortized to expense over the vesting term of the options. In addition, the Company will record any additional increase in the value of the option grants as the options vest. In 1997, the Company granted options to consultants to purchase 55,288 shares of the Company's Common Stock. The amortized fair value of these options was determined to be immaterial in 1997.
The Company also grants stock to consultants and research institutions in exchange for services performed for the Company. In 1998 and 1997, the Company issued 4,772 and 15,865 shares of Common Stock, respectively, in exchange for services. For these stock grants, the Company recognized an expense equal to the fair market value of the granted shares on the date of grant. In 1998 and 1997, the Company recognized approximately $172,000 and $146,000 of research and development expenses in connection with stock grants to consultants and research institutions.
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:
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 1998 reflects expense for four years' vesting while pro forma data for 1999 will reflect compensation expense for five 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 35% of the eligible employees have participated in the Purchase Plan. The Company does not recognize compensation cost related to employee purchase rights under the Purchase Plan. Approximately, 54,000 and 33,000 shares have been issued under the Purchase Plan as of December 31, 1998 and 1997, respectively. 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: risk-free interest rates ranging from 4.58% to 5.51% and 5.62% to 5.68% for 1998 and 1997, respectively; a dividend yield of 0.0% for 1998 and 1997; a volatility factor of the expected market price of the Company's Common Stock of 1.078 and 1.1 for 1998 and 1997, respectively; and an expected life of the purchase right of 6 months for 1998 and 1997. Based upon these assumptions, the pro forma compensation cost estimated for the fair value of the employees' purchase rights was approximately $136,000 and $42,000 for 1998 and 1997, respectively and has been included in the above pro forma information. There were no shares issued under the Purchase Plan in 1996.
At December 31, 1998, 4,152,017 shares of Common Stock are reserved for issuance upon exercise of options currently outstanding and options available for grant under the 1992 Stock Option Plan, 1996 Directors' Option Plan, 1996 Employee Stock Purchase Plan and exercise of warrants.
9. COLLABORATIVE AGREEMENTS
In April 1995, the Company entered into a License and Research Collaboration Agreement with Kyowa Hakko (the "Kyowa Hakko Agreement"). 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 7, 2000, 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. In March 1997, the Kyowa Hakko Agreement was amended to extend its term until April 2000 and to make certain other changes in connection with the signing of the Pharmacia & Upjohn Agreement (as defined below).
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In March 1997, the Company signed a License and Research Collaboration Agreement (the "Pharmacia & Upjohn Agreement") with Pharmacia & Upjohn to collaborate in the discovery, development and commercialization of a new class of anti-cancer drugs that inhibit telomerase. Under the collaboration, Pharmacia & Upjohn will provide $15.0 million of research funding over three years. In addition, the Company is entitled to receive future payments upon the achievement of certain contractual milestones relating to drug development and regulatory progress, as well as royalty payments on future product sales. Further, the Company has an option to exercise co-promotion rights in the United States. The companies also signed a Stock Purchase Agreement providing for an initial equity investment of $2.0 million in Geron by Pharmacia & Upjohn, at a premium, which was completed in January 1997. In addition on April 25, 1997 and March 27, 1998, Pharmacia & Upjohn purchased an aggregate of $8.0 million ($4.0 million on each date) of Geron Common Stock at a premium. Through the Pharmacia & Upjohn and Kyowa Hakko Agreements, the Company has granted to Pharmacia & Upjohn and Kyowa Hakko exclusive worldwide rights to its telomerase inhibition technology, with exception to certain antisense, gene therapy and vaccine technologies outside Asia, for the treatment of cancer in humans. This collaboration with Pharmacia & Upjohn has recently been enhanced by accessing the high throughput screening capabilities and the two million compound library of Pharmacopoeia, Incorporated ("Pharmacopoeia") via an alliance between Pharmacia & Upjohn and Pharmacopoeia which includes telomerase inhibition.
In March 1997, the Company entered into a three-way agreement with Pharmacia & Upjohn and Kyowa Hakko to clarify the rights and obligations of the parties under the two existing agreements and formalize a high level of cooperation among all of the parties. These rights include coordination of research and development, licensing of technology, manufacturing, disclosure of know-how and co-marketing and co-promotion of products. Under the three-way collaboration, the original individual agreements between the Company and Kyowa Hakko and the Company and Pharmacia & Upjohn remain intact.
Costs associated with research and development activities attributable to the above agreements approximate revenue recognized. Under these agreements, revenues of approximately $6,700,000, $6,700,000 and $5,200,000 were recognized in 1998, 1997 and 1996, respectively. No milestone payments have been received or earned to date.
In December 1997, the Company entered into a License, Product and Marketing Agreement with Boehringer Mannheim to develop and commercialize research and clinical diagnostic products for cancer on an exclusive, worldwide basis. Under the Agreement, Boehringer Mannheim provided reimbursement for research previously conducted and is responsible for all clinical, regulatory, manufacturing, marketing and sales efforts and expenses. The Company is entitled to receive future payments upon achievement of certain contractual milestones relating to levels of product sales, as well as royalties on product sales. Further, the Company has an option to exercise co-promotion rights in the United States. After the acquisition of Boehringer Mannheim by Roche in early 1998, all licenses and agreements pertaining to telomerase-based cancer diagnostics entered into with Boehringer Mannheim have been transferred to Roche Diagnostics. In accordance with the agreement, the Company received a $500,000 research reimbursement payment in January 1998.
10. INCOME TAXES
As of December 31, 1998, the Company had federal and state net operating loss carryforwards of approximately $52,800,000 and $5,300,000, respectively. The federal net operating loss carryforwards will expire at various dates beginning in 2006 through 2018, if not utilized. The state net operating loss carryforwards will expire at various dates beginning in 1997 through 2002.
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.
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $4,400,000 and $4,100,000 during the years ended December 31, 1997 and 1996, respectively.
Approximately $800,000 of the valuation allowance for deferred tax assets relates to benefits of stock option deductions which, when recognized, will be allocated directly to contributed capital.
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.
11. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or laboratory equipment that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions in operations, including, among other things, a temporary inability to process transactions, send checks, perform research and development activities or engage in similar normal business activities.
Based on a recent assessment, the Company has determined that it will be required to modify or replace certain portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. These software programs include the Company's accounting package and voicemail system. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed in a timely manner, the Year 2000 issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its significant suppliers, service providers and corporate partners to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company's total Year 2000 project cost and estimated time to complete include the estimated costs and time associated with the impact of third party Year 2000 issues and is based on presently available information. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be upgraded or converted and would not have an adverse effect on the Company's systems. Such suppliers, service providers and corporate partners include the Company's payroll service provider, local financial institutions and website maintenance organization.
The Company will utilize both internal and external resources to replace and test software for Year 2000 modifications. Approximately half of the Company's Year 2000 (Y2K) scheduled work is complete. The remaining work is scheduled to be completed by the end of the second quarter of 1999, which is prior to any
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
anticipated impact on its operating systems. The Y2K project phases include: (1) inventorying and prioritizing business critical systems; (2) Y2K compliance analysis; (3) remediation activities including repairing or replacing identified systems; (4) testing; and (5) developing contingency plans. An inventory of business critical financial, informational and operational systems, including laboratory equipment, has been completed. Compliance analysis is approximately 80% complete for these systems. Remediation activities vary by department, however, on the average, remediation activities are approximately 50% complete. Testing of the Company's information technology infrastructure is 75% complete. Testing of business critical application programs is 75% complete. The Company believes that with the completed modifications, the Y2K issue will not pose significant operational problems for its computer systems and equipment. However, if such modifications and conversions are not made, or are not completed in a timely fashion, the Year 2000 issue could have a material impact on the operations of the Company, the precise degree of which cannot be known at this time.
The total cost of the Year 2000 project is estimated at $200,000 and is being funded through current cash holdings. Of the total project cost, approximately $100,000 is attributable to the purchase of new software and equipment which will be capitalized. The remaining $100,000, which will be expensed as incurred, is not expected to have a material effect on the Company's results of operations. To date, the Company has incurred approximately $60,000 ($40,000 capitalized for new systems and $20,000 expensed), related to the assessment of, and preliminary efforts on, its Year 2000 project.
The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties.
Although the Company does not believe that it will incur any material costs or experience material disruptions in its business associated with preparing its internal systems for the year 2000, there can be no assurance that the Company will not experience serious unanticipated negative consequences and/or material costs caused by undetected errors or defects in the technology used in its internal systems, which are composed of third party software and third party hardware that contains embedded software. The most reasonably likely worst case scenarios would include: (i) corruption of data contained in the Company's internal information systems, (ii) hardware failure, and (iii) the failure of infrastructure services provided by government agencies and other third parties (e.g., electricity, phone service, water, transport, Internet services, etc.). The Company is in the process of implementing action plans for the remediation of high risk areas and is scheduled to implement remediation plans for medium to low risk areas during the remainder of fiscal 1999. The Company expects its contingency plans to include, among other things, manual "work-arounds" for software and hardware failures, finding alternate vendors for supplies and equipment as well as substitution of systems, if necessary.
12. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") in its fiscal year ended December 31, 1998. SFAS 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or
GERON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
decision making group, in making decisions how to allocate resources and assess performance. The Company's chief decision maker, as defined under SFAS 131, is the Chief Executive Officer. To date, the Company has viewed its operations as principally one segment, the discovery and development of therapeutic and diagnostic products for the treatment of cancer and other age-related degenerative diseases. As a result, the financial information disclosed herein materially represents all of the financial information related to the Company's principal operating segment.
13. 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 section captioned "Proposal 1: Election of Directors" contained in the Company's Definitive Proxy Statement related to the Annual Meeting of Stockholders to be held May 28, 1999, 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 sections 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.
- --------------- + Certain portions of this Exhibit have been omitted for which confidential treatment has been requested and filed separately with the Securities and Exchange Commission.
* Incorporated by reference to Exhibit 10.1 on the Registrant's Form 8-K filed on January 24, 1997.
** Incorporated by reference to identically numbered exhibits filed with the Registrant's Registration Statement on Form S-1 which became effective on July 30, 1996.
*** Incorporated by reference to Exhibit 3.3 filed with the Registrant's Registration Statement on Form S-1 which became effective July 30, 1996.
**** Incorporated by reference to Exhibit 3.4 filed with the Registrant's Registration Statement on Form S-1 which became effective July 30, 1996.
***** Incorporated by reference to identically numbers exhibits filed with Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997.
****** Incorporated by reference to identically numbered exhibits filed with Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997.
******* Incorporated by reference to identically numbered exhibits filed with Registrants' Registration Statement on Form S-3 which became effective on July 17, 1998.
******** Incorporated by reference to identically numbered exhibits filed on the Registrant's Form 8-K filed on December 17, 1998.
+ Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on December 17, 1998.
# Incorporated by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on December 17, 1998.
@ Incorporated by reference to identically numbered exhibit of the Registrant's Form 10-K filed on March 31, 1998.
(b) REPORTS ON FORM 8-K.
(i) The Company filed the following reports on Form 8-K relating to the issuance of convertible debentures:
Form 8-K Report Date: December 10, 1998 Filing Date: December 17, 1998 Item 5: Other Events Item 7(c): Exhibits
(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 16th day of March, 1999.
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 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
- --------------- + Certain portions of this Exhibit have been omitted for which confidential treatment has been requested and filed separately with the Securities and Exchange Commission.
* Incorporated by reference to Exhibit 10.1 on the Registrant's Form 8-K filed on January 24, 1997.
** Incorporated by reference to identically numbered exhibits filed with the Registrant's Registration Statement on Form S-1 which became effective on July 30, 1996.
*** Incorporated by reference to Exhibit 3.3 filed with the Registrant's Registration Statement on Form S-1 which became effective July 30, 1996.
**** Incorporated by reference to Exhibit 3.4 filed with the Registrant's Registration Statement on Form S-1 which became effective July 30, 1996.
***** Incorporated by reference to identically numbers exhibits filed with Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997.
****** Incorporated by reference to identically numbered exhibits filed with Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997.
******* Incorporated by reference to identically numbered exhibits filed with Registrants' Registration Statement on Form S-3 which became effective on July 17, 1998.
******** Incorporated by reference to identically numbered exhibits filed on the Registrant's Form 8-K filed on December 17, 1998.
+ Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on December 17, 1998.
# Incorporated by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on December 17, 1998.
@ Incorporated by reference to identically numbered exhibit of the Registrant's Form 10-K filed on March 31, 1998.