1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 --------------- FORM 10-Q --------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________ . COMMISSION FILE NUMBER: 0-20859 --------------- GERON CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 75-2287752 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION) 230 CONSTITUTION DRIVE, MENLO PARK, CA 94025 (ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 473-7700 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK $0.001 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class: Common Stock $0.001 par value Outstanding at May 4, 2001: 21,801,771 shares ================================================================================
2 GERON CORPORATION INDEX <TABLE> <S> <C> PART I. FINANCIAL INFORMATION Item 1: Consolidated Financial Statements............................................ 3 Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 3 2000....................................................................... Condensed Consolidated Statements of Operations for the three months ended 4 March 31, 2001 and 2000.................................................... Condensed Consolidated Statements of Cash Flows for the three months ended 5 March 31, 2001 and 2000.................................................... Notes to Consolidated Financial Statements................................... 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of 8 Operations................................................................. Item 3: Quantitative and Qualitative Disclosures About Market Risk................... 21 PART II. OTHER INFORMATION Item 1: Legal Proceedings............................................................ 22 Item 2: Changes In Securities and Use of Proceeds.................................... 22 Item 3: Defaults upon Senior Securities.............................................. 22 Item 4: Submission of Matters to a Vote of Security Holders.......................... 22 Item 5: Other Information............................................................ 22 Item 6: Exhibits and Reports on Form 8-K............................................. 22 SIGNATURES............................................................................ 23 </TABLE> 2
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GERON CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) <TABLE> <CAPTION> ASSETS MARCH 31, DECEMBER 31, 2001 2000 --------- --------- (UNAUDITED) <S> <C> <C> Current assets: Cash and cash equivalents .................................... $ 22,207 $ 29,985 Short-term investments ....................................... 42,307 3,040 Interest and other receivables ............................... 1,462 1,156 Other current assets ......................................... 266 414 --------- --------- Total current assets ................................. 66,242 34,595 Long-term investments .......................................... 25,199 62,760 Property and equipment, net .................................... 3,842 3,681 Deposits and other assets ...................................... 785 581 Intangibles .................................................... 11,697 12,413 --------- --------- $ 107,765 $ 114,030 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................. $ 1,076 $ 1,459 Accrued liabilities .......................................... 1,835 1,874 Current portion of capital lease obligations and equipment loans ..................................................... 895 923 Current portion of accrued research funding commitment ....... 3,502 3,869 --------- --------- Total current liabilities ............................ 7,308 8,125 Noncurrent portion of capital lease obligations and equipment loans ..................................................... 813 1,030 Accrued research funding commitment ............................ 9,283 9,551 Convertible debentures ......................................... 31,437 31,406 Commitments Stockholders' equity: Common stock ................................................. 22 22 Additional paid-in-capital ................................... 216,500 214,012 Deferred compensation ........................................ (415) (475) Accumulated deficit .......................................... (157,238) (149,802) Accumulated other comprehensive income ....................... 55 161 --------- --------- Total stockholders' equity ........................... 58,924 63,918 --------- --------- $ 107,765 $ 114,030 ========= ========= </TABLE> See accompanying notes. 3
4 GERON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------------------- 2000 2001 AS RESTATED ------------ ------------ <S> <C> <C> Revenues from collaborative agreements ................ $ 1,750 $ 1,250 License fees and royalties ............................ 47 21 ------------ ------------ Total revenues .................................... 1,797 1,271 Operating expenses: Research and development ............................ 6,712 5,812 General and administrative .......................... 3,915 4,424 ------------ ------------ Total operating expenses .......................... 10,627 10,236 ------------ ------------ Loss from operations .................................. (8,830) (8,965) Interest and other income ............................. 1,666 833 Interest and other expense ............................ (272) (352) ------------ ------------ Net loss .............................................. $ (7,436) $ (8,484) ============ ============ Basic and diluted net loss per share .................. $ (0.34) $ (0.45) ============ ============ Weighted average shares used in computing basic and diluted net loss per share .......................... 21,782,115 18,709,106 ============ ============ </TABLE> See accompanying notes. 4
5 GERON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CHANGE IN CASH AND CASH EQUIVALENTS (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------------- 2000 2001 AS RESTATED -------- ----------- <S> <C> <C> Cash flows from operating activities: Net loss .......................................................... $ (7,436) $ (8,484) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .................................. 341 376 Interest for convertible debentures ............................ 31 62 Issuance of common stock in exchange for services rendered ..... -- 2,253 Stock-based compensation ....................................... 2,462 -- Accretion of interest on research funding obligation ........... 123 123 Deferred compensation .......................................... 60 132 Loss on investment in unconsolidated subsidiary ................ 10 -- Changes in assets and liabilities: Other current and noncurrent assets ............................ 354 (24) Other current and noncurrent liabilities ....................... (672) 1,531 Translation adjustment ......................................... (59) (22) -------- -------- Net cash used in operating activities ............................... (4,786) (4,053) Cash flows from investing activities: Capital expenditures .............................................. (474) (160) Purchases of securities available-for-sale ........................ (20,108) (9,383) Proceeds from sales/calls of securities available-for-sale ........ 12,067 7,102 Proceeds from maturities of securities available-for-sale ......... 6,500 12,000 Accrued research funding payments ................................. (758) (383) -------- -------- Net cash (used in) provided by investing activities ................. (2,773) 9,176 Cash flows from financing activities: Proceeds from equipment loans ..................................... -- 79 Payments of obligations under capital leases and equipment loans .. (245) (305) Proceeds from issuance of common stock, net ....................... 26 39,793 -------- -------- Net cash (used in) provided by financing activities ................. (219) 39,567 -------- -------- Net (decrease) increase in cash and cash equivalents ................ (7,778) 44,690 Cash and cash equivalents at the beginning of the period ............ 29,985 7,835 -------- -------- Cash and cash equivalents at the end of the period .................. $ 22,207 $ 52,525 ======== ======== </TABLE> See accompanying notes. 5
6 GERON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying condensed consolidated unaudited balance sheet as of March 31, 2001 and condensed consolidated statements of operations for the three month period ended March 31, 2001 and 2000 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001 or any other period. These financial statements and notes should be read in conjunction with the financial statements for the year ended December 31, 2000, included in the Company's Annual Report on Form 10-K. The consolidated financial statements include the accounts of Geron Corporation, and its wholly owned subsidiary, Geron Bio-Med Ltd., a company organized under the laws of the United Kingdom. All material intercompany accounts, transactions and expenses have been eliminated in consolidation. The financial statements of the Company's subsidiary outside the United States are measured using the local currency as the functional currency. Assets and liabilities of this subsidiary are translated at the rates of exchange at the balance sheet date. The resultant translation adjustments are included in accumulated other comprehensive income/(loss), a separate component of stockholders' equity. Income and expense items are translated at average monthly rates of exchange. Certain reclassifications of prior year amounts have been made to conform to current year presentation. Net Loss Per Share Basic earnings (loss) per share is calculated using the weighted average number of common shares outstanding. Because the Company is in a net loss position, diluted earnings per share is also calculated using the weighted average number of common shares outstanding and excludes the effects of options, warrants and convertible securities which are antidilutive. Had the Company been in a net income position, diluted earnings per share would have included the shares used in the computation of basic net loss per share as well as an additional 2,027,748 and 2,104,315 shares for 2001 and 2000, respectively, related to outstanding options, warrants and convertible securities not included above (as determined using the treasury stock method at the estimated average market value). Comprehensive Income (Loss) Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in equity that are excluded from net income (loss). Specifically, unrealized holding gains on our available-for-sale securities of $144,000, which are included in stockholders' equity, and cumulative translation adjustment of $89,000 are included in accumulated other comprehensive income (loss). 2. CASH EQUIVALENTS AND INVESTMENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents in interest-bearing money market funds, municipal notes and commercial paper. As of March 31, 2001, the Company's investments consisted primarily of corporate notes with maturities ranging from three to 18 months. 6
7 3. CONVERTIBLE DEBENTURES Series C Debentures and Warrants On September 30, 1999, the Company sold $12,500,000 in series C two-percent coupon convertible debentures and warrants to purchase 1,100,000 shares of common stock to an institutional investor. The series C convertible debentures are convertible at any time by the holder at a fixed conversion price of $10.25 per share. The series C convertible debentures are convertible at the Company's option when the common stock has traded at a certain premium to the fixed conversion price for ten consecutive trading days. If unconverted, the debentures have a maturity date of September 30, 2002. The series C warrants to purchase 1,000,000 shares of common stock are exercisable at $12.50 per share and the series C warrants to purchase 100,000 shares of common stock are exercisable at $12.75 per share at the option of the holder through May 2001. In December 2000, the Company adopted Emerging Issues Task Force Issue No. 00-27, "Application of EITF Issue 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, to Certain Convertible Instruments" ("EITF 00-27"). Accordingly, the Company recognized $2,700,000 of additional imputed non-cash interest expense related to series C convertible debentures and warrants. In March 2000, series C convertible debentures with a face value of $6,250,000 plus accrued interest were converted into approximately 615,000 shares of Geron common stock at $10.25 per share. In addition, all of the series C warrants were exercised, which resulted in proceeds of $13,750,000 and the issuance of 1,100,000 shares of Geron common stock. As of March 31, 2001, series C convertible debentures with a face value of $6,250,000 and no series C warrants remained outstanding. Series D Debentures and Warrants On June 29, 2000, the Company sold $25,000,000 in series D zero coupon convertible debentures and warrants to purchase 834,836 shares of Geron common stock to an institutional investor. The debentures are convertible at any time by the holder at a fixed conversion price of $29.95 per share. In connection with the issuance of the series D convertible debentures, the Company recorded approximately $616,000 in interest expense for the difference between the fair value of the Company's common stock and the conversion price of the debentures on the closing date of the financing. The debentures convert at the Company's option when Geron common stock has traded at a certain premium to the fixed conversion price for five consecutive trading days. If unconverted, the debentures have a maturity date of June 29, 2003. The warrant to purchase 834,836 shares of Geron common stock is exercisable at $37.43 per share at the option of the holder through December 2001. The value of the warrant of $10,527,000 was determined using Black-Scholes and since the debentures were immediately convertible at the option of the holder, the entire warrant value was recorded as a charge to interest expense and a credit to additional paid-in-capital. In December 2000, the Company adopted EITF 00-27. Accordingly, the Company recognized an additional $10,500,000 in imputed non-cash interest expense related to series D convertible debentures and warrants. As of March 31, 2001, all of the series D convertible debentures and series D warrants remained outstanding. 4. 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 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 applications in oncology, drug discovery and regenerative medicine. As a result, the financial information disclosed herein materially represents all of the financial information related to the Company's principal operating segment. 7
8 5. CONSOLIDATED STATEMENT OF CASH FLOWS DATA <TABLE> <CAPTION> (IN THOUSANDS) THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, 2000 MARCH 31, 2001 AS RESTATED -------------- ------------------- <S> <C> <C> Supplementary investing and financing activities Common stock issued for services................... $ -- $ 709 Conversion of convertible debentures, net.......... $ -- $ 9,076 Net unrealized gain (loss) on equity investment.... $ (250) $ -- Net unrealized gain (loss) on available-for-sale $ 165 $ (25) securities......................................... </TABLE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW This Form 10-Q contains forward-looking statements that involve risks and uncertainties. We use words such as "anticipate", "believe", "plan", "expect", "future", "intend" and similar expressions to identify forward-looking statements. These statements appear throughout the Form 10-Q and are statements regarding our intent, belief, or current expectations, primarily with respect to our operations and related industry developments. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, in the section of this Item 2 titled "Additional Factors That May Affect Future Results," and elsewhere in this Form 10-Q. The following discussion should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. We are a biopharmaceutical company focused on discovering, developing and commercializing therapeutic and diagnostic products for applications in oncology and regenerative medicine, and research tools for drug discovery. Geron's product development programs are based upon three patented core technologies: telomerase, human embryonic stem cells and nuclear transfer. Since inception, substantially all of our revenues have been generated from license and research agreements with collaborators. In addition, we receive license payments and royalties from license and marketing agreements with various diagnostic and research tool collaborators. We recognize revenue from the license and research agreements with collaborators as the related research and development costs are incurred under the collaborative agreements. In January 2001, we regained our product rights for telomerase inhibitors from Pharmacia with the termination of the license agreement signed in 1997. Our drug discovery program continues at Geron in conjunction with our Japanese partner, Kyowa Hakko. Our results of operations have fluctuated from period to period and may continue to fluctuate in the future based upon the timing and composition of funding under our various collaborative agreements, as well as the progress of our research and development efforts and variations in the level of expenses related to developmental efforts during any given period. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results. We are subject to risks common to companies in our industry and at our stage of development, including risks inherent in our research and development efforts, reliance upon our collaborative partners, enforcement of our patent and proprietary rights, need for future capital, potential competition and uncertainty of regulatory approvals or clearances. In order for a product to be commercialized based on our research, we and our collaborators must conduct preclinical tests and clinical trials, demonstrate the efficacy and safety of our product candidates, obtain regulatory approvals or clearances and enter into manufacturing, distribution and marketing arrangements, as well as obtain market acceptance. We do not expect to receive revenues or royalties based on therapeutic products for a period of years, if at all. 8
9 RESULTS OF OPERATIONS Revenues We recognized revenues from collaborative agreements of $1.8 million for the three months ended March 31, 2001, compared to $1.3 million for the comparable period in 2000. Revenues in 2001 represented research support payments from our collaborative agreements with Pharmacia and Kyowa Hakko. Revenues in 2000 represented research support payments from our collaborative agreement with Pharmacia. Increased revenues in 2001 were a result of research funding from Kyowa Hakko. We expect revenues from collaborative agreements to decrease in the remainder of 2001 as compared to 2000 as a result of regaining our rights from Pharmacia. We receive license payments and royalties from license and marketing agreements with various diagnostic collaborators. We received royalties of $47,000 for the three months ended March 31, 2001, from Kyowa Medex, Intergen, Roche Diagnostics, and PharMingen (a Becton Dickinson company) on the sale of diagnostic kits to the research-use-only market and from Clontech from the sale of telomerase-immortalized cell lines, compared to $21,000 for the comparable period in 2000. We did not receive any license fees in the first quarter of 2001 or for the comparable period in 2000. Research and Development Expenses Research and development expenses were $6.7 million for the three months ended March 31, 2001, compared to $5.8 million for the comparable period in 2000. The increase in research and development expenses in the 2001 period compared to the 2000 period was primarily the result of increased scientific personnel expenses of $570,000 and increased scientific supplies of $230,000. We expect research and development expenses to increase in the future as a result of continued development of our therapeutic and diagnostic programs. General and Administrative Expenses General and administrative expenses were $3.9 million for the three months ended March 31, 2001, compared to $4.4 million for the comparable period in 2000. The decrease in general and administrative expenses in the 2001 period compared to the 2000 period was the result of reduced consulting expense of $2.9 million offset by $2.4 million of stock-based compensation related to extending the exercise period of certain options to purchase common stock. Interest and Other Income Interest income was $1.6 million for the three months ended March 31, 2001, compared to $793,000 for the comparable period in 2000. The increase in interest income for 2001 compared to 2000 was primarily the result of higher cash balances in 2001 than 2000. Interest earned in the future will depend on any future funding cycles and prevailing interest rates. We also received $79,000 in research payments under government grants for the three months ended March 31, 2001, compared to $40,000 for the comparable period in 2000. We expect income from government grants to decrease in the future. Interest and Other Expense Interest and other expense was $272,000 for the three months ended March 31, 2001, compared to $352,000 for the comparable period in 2000. The decrease in interest and other expense for 2001 compared to 2000 was primarily the result of lower expenses related to convertible debentures in 2001. Net Loss Net loss was $7.4 million for the three months ended March 31, 2001, compared to $8.5 million for the comparable period in 2000. The decrease in net loss for 2001 compared to 2000 was primarily the net result of higher operating expenses with increased revenues from collaborative agreements. We expect net loss to increase in the future as a result of increased operating expenses and reduced revenues from collaborative agreements. 9
10 LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and investments at March 31, 2001 totaled $89.7 million compared to $95.8 million at December 31, 2000. The decrease in cash, cash equivalents and investments in 2001 was the result of cash used for operations. We have an investment policy to invest these funds in liquid, investment-grade securities, such as interest-bearing money market funds, commercial paper and federal agency notes. Net cash used in operations was $4.8 million for the three months ended March 31, 2001 compared to $4.1 million for the comparable period in 2000. The increase was primarily a result of increased operating expenses in 2001. We expect net cash used in operations to increase as a result of increased research and development expenditures. Through March 31, 2001, we have invested approximately $11.5 million in property and equipment, of which approximately $7.7 million was financed through equipment financing. For the three months ended March 31, 2001, additions of equipment and leasehold improvements totaled approximately $474,000, none of which were financed through equipment financing arrangements. Minimum annual payments due under the equipment financing arrangements are expected to total $923,000, $803,000, $216,000 and $11,000 in 2001, 2002, 2003 and 2004, respectively. As of March 31, 2001, we had approximately $1.5 million available for borrowing under our equipment financing arrangements. The drawdown period under the equipment financing arrangements expires on October 31, 2001. We intend to renew the commitment for new equipment financing arrangements in 2001 to further fund equipment purchases. If we are unable to renew the commitment, then we will need to spend our own resources for equipment purchases. We have agreed to fund scientific research at academic and research institutions. Under these research arrangements, we are obligated to make minimum annual payments of approximately $4.7 million and $3.4 million in 2001 and 2002, respectively. As of March 31, 2001, we have made payments of approximately $1.1 million to academic and research institutions. We estimate that our existing capital resources, interest income and equipment financing will be sufficient to fund our current level of operations through December 31, 2002. Changes in our research and development plans or other changes affecting our operating expenses may result in the expenditure of available resources before such time, and in any event, we will need to raise substantial additional capital to fund our operations in the future. We intend to seek additional funding through strategic collaborations, public or private equity financings, capital lease transactions or other financing sources that may be available. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS Our business is subject to various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this Form 10-Q. Any of these risks could materially adversely affect our business, operating results and financial condition. OUR BUSINESS IS AT AN EARLY STAGE OF DEVELOPMENT AND WE MAY NOT DEVELOP ANY PRODUCTS THAT REACH CLINICAL TRIALS The study of the mechanisms of cellular aging and cellular immortality, including telomere biology and telomerase, the study of human embryonic stem cells, and the process of nuclear transfer are relatively new areas of research. Our business is at an early stage of development. We have not yet produced any products that have progressed to clinical trials and we may never do so. Our ability to produce products that progress to clinical trials is subject to our ability to, among other things: - continue to have success with our research and development efforts; - select therapeutic compounds for development; - obtain the required regulatory approvals; and - manufacture and market resulting products. If and when potential lead drug compounds or product candidates are identified through our research programs, they will require significant preclinical and clinical testing prior to regulatory approval in the United States and 10
11 elsewhere. In addition, we will also need to determine whether any of these potential products can be manufactured in commercial quantities at an acceptable cost. Our efforts may not result in a product that can be marketed. Because of the significant scientific, regulatory and commercial milestones that must be reached for any of our research programs to be successful, any program may be abandoned, even after significant resources have been expended. WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE FUTURE LOSSES; CONTINUED LOSSES COULD IMPAIR OUR ABILITY TO SUSTAIN OPERATIONS We have incurred net operating losses every year since our operations began in 1990. As of March 31, 2001, our accumulated deficit was approximately $157.2 million. Losses have resulted principally from costs incurred in connection with our research and development activities and from general and administrative costs associated with our operations. We expect to incur additional operating losses over the next several years as our research and development efforts and preclinical testing activities are expanded. Substantially all of our revenues to date have been research support payments under the collaboration agreements with Kyowa Hakko and Pharmacia. In 2001, we regained our rights to telomerase inhibitors from Pharmacia. Kyowa Hakko will provide additional research funding in 2001. We may be unsuccessful in entering into any new corporate collaboration that results in revenues. Even if we are able to obtain new collaboration arrangements with third parties, the revenues generated from these arrangements will be insufficient to continue or expand our research activities and otherwise sustain our operations. We are unable to estimate at this time the level of revenue to be received from the sale of diagnostic products and telomerase-immortalized cell lines, and do not currently expect to receive significant revenues from the sale of these products. Our ability to continue or expand our research activities and otherwise sustain our operations is dependent on our ability, alone or with others to, among other things, manufacture and market therapeutic products. We may never receive material revenues from product sales or if we do receive revenues, such revenues may not be sufficient to continue or expand our research activities and otherwise sustain our operations. WE WILL NEED ADDITIONAL CAPITAL TO CONDUCT OUR OPERATIONS AND DEVELOP OUR PRODUCTS, AND OUR ABILITY TO OBTAIN THE NECESSARY FUNDING IS UNCERTAIN We will require substantial capital resources in order to conduct our operations and develop our products. While we estimate that our existing capital resources, interest income and equipment financing arrangements will be sufficient to fund our current level of operations through December 31, 2002, we cannot guarantee that this will be the case. The timing and degree of any future capital requirements will depend on many factors, including: - the accuracy of the assumptions underlying our estimates for our capital needs in 2001 and beyond; - continued scientific progress in our research and development programs; - the magnitude and scope of our research and development programs; - our ability to maintain and establish strategic arrangements for research, development, clinical testing, manufacturing and marketing; - our progress with preclinical and clinical trials; - the time and costs involved in obtaining regulatory approvals; - the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims; and - the potential for new technologies and products. We intend to acquire additional funding through strategic collaborations, public or private equity financings, capital lease transactions or other financing sources that may be available. Additional financing may not be available on acceptable terms, or at all. Additional equity financings could result in significant dilution to stockholders. Further, in the event that additional funds are obtained through arrangements with collaborative partners, these arrangements may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves. If sufficient capital is not available, we may be 11
12 required to delay, reduce the scope of or eliminate one or more of our research or development programs, each of which could have a material adverse effect on our business. OUR INABILITY TO IDENTIFY AN EFFECTIVE INHIBITOR OF TELOMERASE MAY PREVENT US FROM DEVELOPING A VIABLE CANCER TREATMENT PRODUCT, WHICH WOULD ADVERSELY IMPACT OUR FUTURE BUSINESS PROSPECTS As a result of our drug discovery efforts to date, we have identified compounds in laboratory studies that demonstrate potential for inhibiting telomerase in humans. However, additional development efforts will be required before we select a lead compound for preclinical development and clinical trials as a telomerase inhibitor for cancer. We will have to conduct additional research before we can select a compound, and we may never identify a compound that will enable us to fully develop a commercially viable treatment for cancer. If and when selected, a lead compound may prove to have undesirable and unintended side effects or other characteristics affecting its safety or effectiveness that may prevent or limit its commercial use. In terms of safety, our discoveries may result in cancer treatment solutions that cause unacceptable side effects for the human body. Our discoveries may also not be as effective as is necessary to market a commercially viable product for the treatment of cancer. As a result, telomerase inhibition may need to be used in conjunction with other cancer therapies. Accordingly, it may become extremely difficult for us to proceed with preclinical and clinical development, to obtain regulatory approval or to market a telomerase inhibitor for the treatment of cancer. If we abandon our research for cancer treatment for any of these reasons or for other reasons, our business prospects would be materially and adversely affected. IF OUR ACCESS TO NECESSARY TISSUE SAMPLES, INFORMATION OR LICENSED TECHNOLOGIES IS RESTRICTED, WE WILL NOT BE ABLE TO DEVELOP OUR BUSINESS To continue the research and development of our therapeutic and diagnostic products, we need access to normal and diseased human and other tissue samples, other biological materials and related clinical and other information. We compete with many other companies for these materials and information. We may not be able to obtain or maintain access to these materials and information on acceptable terms, if at all. In addition, government regulation in the United States and foreign countries could result in restricted access to, or prohibiting the use of, human and other tissue samples. If we lose access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on our use of the information generated from tissue samples, our business will be materially harmed. SOME OF OUR COMPETITORS MAY DEVELOP TECHNOLOGIES THAT ARE SUPERIOR TO OR MORE COST-EFFECTIVE THAN OURS, WHICH MAY IMPACT THE COMMERCIAL VIABILITY OF OUR TECHNOLOGIES AND WHICH MAY SIGNIFICANTLY DAMAGE OUR ABILITY TO SUSTAIN OPERATIONS The pharmaceutical and biotechnology industries are intensely competitive. We believe that other pharmaceutical and biotechnology companies and research organizations currently engage in or have in the past engaged in efforts related to the biological mechanisms of cell aging and cell immortality, including the study of telomeres, telomerase, human embryonic stem cells and nuclear transfer. In addition, other products and therapies that could compete directly with the products that we are 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 competitors of ours. Many of the pharmaceutical companies developing and marketing these competing products have significantly greater financial resources and expertise than we do in: - research and development; - manufacturing; - preclinical and clinical testing; - obtaining regulatory approvals; and - marketing. 12
13 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 ours. These companies and institutions compete with us in recruiting and retaining qualified scientific and management personnel as well as in acquiring technologies complementary to our programs. There is also competition for access to libraries of compounds to use for screening. Should we fail to secure and maintain access to sufficiently broad libraries of compounds for screening potential targets, our business would be materially harmed. In addition to the above factors, we expect to face competition in the following areas: - 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. As a result of the foregoing, our competitors may develop more effective or more affordable products, or achieve earlier patent protection or product commercialization than us. Most significantly, competitive products may render the products that we develop obsolete. THE ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF OUR RESEARCH USING EMBRYONIC STEM CELLS AND NUCLEAR TRANSFER COULD PREVENT US FROM DEVELOPING OR GAINING ACCEPTANCE FOR COMMERCIALLY VIABLE PRODUCTS IN THIS AREA Our programs in regenerative medicine may involve the use of human embryonic stem cells that would be derived from human embryonic or fetal tissue. The use of human embryonic stem cells gives rise to ethical, legal and social issues regarding the appropriate use of these cells. In the event that our research related to human embryonic stem cells becomes the subject of adverse commentary or publicity, the market price for our common stock could be significantly harmed. Some groups have voiced opposition to our technology and practices. The concepts of cell regeneration, cell immortality, and genetic cloning have stimulated significant ethical debates in both the social and political arenas. We use human embryonic stem cells derived through a process that uses either donated embryos that are no longer needed following a successful in vitro fertilization procedure or donated fetal material as the starting material. Further, many research institutions, including some of our scientific collaborators, have adopted policies regarding the ethical use of human embryonic and fetal tissue. These policies may have the effect of limiting the scope of research conducted using human embryonic stem cells, resulting in reduced scientific progress. In addition, the United States government and its agencies currently do not fund research which involves the use of human embryonic tissue and may in the future regulate or otherwise restrict or prohibit the public or private use of human embryonic or fetal tissue. Our inability to conduct research using human embryonic stem cells due to such factors as government regulation or otherwise could have a material adverse effect on us. Finally, we acquired Roslin Bio-Med to gain the rights to nuclear transfer technology. The Roslin Institute produced Dolly the sheep in 1997 -- the first mammal cloned from an adult cell in history. Geron acquired exclusive rights to this technology for all areas except human cloning and certain other limited applications. Although we will not be pursuing human reproductive cloning, all of the techniques we continue to develop for use in agricultural cloning and our nuclear transfer work for organ regeneration are directly applicable to human cloning should some other group in the future decide to pursue this avenue. Negative associations with any or all of these practices could: - harm our ability to establish critical partnerships and collaborations; - prompt government regulation of our technologies; - cause delays in our research and development; and 13
14 - cause a decrease in the price of our stock. Also, if regulatory bodies were to ban nuclear transfer processes, our research using nuclear transfer technology could be cancelled and our business could be significantly harmed. PUBLIC ATTITUDES TOWARDS GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY APPROVAL OR PUBLIC PERCEPTION OF OUR PRODUCTS The commercial success of our product candidates will depend in part on public acceptance of the use of gene therapies for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. Adverse events in the field of gene therapy that have occurred or may occur in the future also may result in greater governmental regulation of our product candidates and potential regulatory delays relating to the testing or approval of our product candidates. Negative public reaction to gene therapy in the development of certain of our therapies could result in greater government regulation, stricter clinical trial oversight, restrictive commercial product labeling requirements of gene therapies, and could cause a decrease in the demand for any products that we may develop. The subject of genetically modified organisms has received negative publicity in Europe, which has aroused public debate. The adverse publicity in Europe could lead to greater regulation and trade restrictions on imports of genetically altered products. If similar adverse public reaction occurs in the United States, genetic research and resultant products could be subject to greater domestic regulation and could cause a decrease in the demand for our potential products. EVEN IF WE REACH CLINICAL TRIALS WITH ONE OR MORE OF OUR PRODUCTS, THEY MAY NOT RESULT IN ANY COMMERCIALLY VIABLE PRODUCTS We do not expect to generate any significant revenues from product sales for a period of several years. We may never generate revenues from product sales or become profitable because of a variety of risks inherent in our business, including risks that: - clinical trials may not demonstrate the safety and efficacy of our products; - completion of clinical trials may be delayed, or costs of clinical trials may exceed anticipated amounts; - we may not be able to obtain regulatory approval of our products, or may experience delays in obtaining such approvals; - we may not be able to manufacture our drugs economically on a commercial scale; - we and our licensees may not be able to successfully market our products; - physicians may not prescribe our products, or patients may not accept such products; - others may have proprietary rights which prevent us from marketing our products; and - competitors may sell similar, superior or lower-cost products. IMPAIRMENT OF OUR INTELLECTUAL PROPERTY RIGHTS MAY LIMIT OUR ABILITY TO PURSUE THE DEVELOPMENT OF OUR INTENDED TECHNOLOGIES AND PRODUCTS Our success will depend on our ability to obtain and enforce patents for our discoveries; however, legal principles for biotechnology patents in the United States and in other countries are not firmly established and the extent to which we will be able to obtain patent coverage is uncertain. Protection of our proprietary compounds and technology is critically important to our business. Our success will depend in part on our ability to obtain and enforce our patents and maintain trade secrets, both in the United States and in other countries. The patent positions of pharmaceutical and biopharmaceutical companies, including ours, are highly uncertain and involve complex legal and technical questions for which legal principles are not firmly 14
15 established. We may not continue to develop products or processes that are patentable, and it is possible that patents will not issue from any of our pending applications, including allowed patent applications. Further, our current patents, or patents that issue on pending applications, may be challenged, invalidated or circumvented, and our current or future patent rights may not provide proprietary protection or competitive advantages to us. In the event that we are unsuccessful in obtaining and enforcing patents, our business would be negatively impacted. Patent applications filed in the United States prior to November 29, 2000, are maintained in secrecy until patents issue. Publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by at least several months and sometimes several years. Therefore, the publications may reveal in the future that the persons or entities that we or our licensors name as inventors in our patents and patent applications may not have been the first to invent the inventions disclosed in the patent applications or patents, or file patent applications for these inventions. As a result, we may not be able to obtain patents from discoveries that we otherwise would consider patentable and that we consider to be significant to our future success. Patent prosecution or litigation may also be necessary to obtain patents, enforce any patents issued or licensed to us or to determine the scope and validity of our proprietary rights or the proprietary rights of another. We may not be successful in any patent prosecution or litigation. Patent prosecution and litigation in general can be extremely expensive and time consuming, even if the outcome is favorable to us. An adverse outcome in a patent prosecution, litigation or any other proceeding in a court or patent office could weaken our proprietary position, subject our business to significant liabilities to other parties, require disputed rights to be licensed from other parties or require us to cease using the disputed technology. WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS THAT ARE COSTLY TO DEFEND, AND WHICH MAY LIMIT OUR ABILITY TO USE DISPUTED TECHNOLOGIES AND PREVENT US FROM PURSUING RESEARCH AND DEVELOPMENT OR COMMERCIALIZATION OF POTENTIAL PRODUCTS Our commercial success depends significantly on our ability to operate without infringing patents and proprietary rights of others. Our technologies may infringe the patents or proprietary rights of others. In addition, we may become aware of discoveries and technology controlled by third parties that are advantageous to our research programs. In the event our technologies do infringe on the rights of others or we require the use of discoveries and technology controlled by third parties, we may be prevented from pursuing research, development or commercialization of potential products or may be required to obtain licenses to these patents or other proprietary rights or develop or obtain alternative technologies. We may not be able to obtain alternative technologies or any required license on commercially favorable terms, if at all. If we do not obtain the necessary licenses or alternative technologies, we may be delayed or prevented from pursuing the development of some potential products. Our breach of an existing license or failure to obtain alternative technologies or a license to any technology that we may require to develop or commercialize our products will significantly and negatively affect our business. Patent law relating to the scope and enforceability of claims in the technology fields in which we operate is still evolving, and the degree of future protection for any of our proprietary rights is highly uncertain. In this regard, patents may not issue from any of our patent applications or our existing patents may be found to be invalid by a court. In addition, our success may become dependent on our ability to obtain licenses for using the patented discoveries of others. We are aware of patent applications and patents that have been filed by others with respect to our technologies and we may have to obtain licenses to use these technologies. Moreover, other patent applications may be granted priority over patent applications that we or any of our licensors have filed. Furthermore, others may independently develop similar or alternative technologies, duplicate any of our technologies or design around the patented technologies we have developed. In the event that we are unable to acquire licenses to critical technologies that we cannot patent ourselves, we may be required to expend significant time and resources to develop alternative technology, and we may not be successful in this regard. If we cannot acquire or develop the necessary technology, we may be prevented from pursuing some of our business objectives. Moreover, one or more of our competitors could acquire or license the necessary technology. Any of these events could materially harm our business. We may be subject to claims or litigation as a result of entering into license agreements with third parties or infringing on the patents of others. For example, we signed a licensing and sponsored research agreement relating to our research relating to embryonic stem cells with The Johns Hopkins University School of Medicine in August 1997. Prior to signing this agreement, we had been informed by a third party that we and Johns Hopkins University would violate the rights of that third party and another academic institution in doing so. After a review of the correspondence with the third party and Johns Hopkins University, as well as related documents, including an issued United States patent, we believe that both we and Johns Hopkins University have substantial defenses to any claims 15
16 that might be asserted by the third party. We have agreed to provide indemnification to Johns Hopkins University relating to potential claims. However, any litigation resulting from this matter may divert significant resources, both financial and otherwise, from our research programs. We may be unsuccessful if the matter is litigated. If the outcome of litigation is unfavorable to us, our business could be materially and adversely affected. MUCH OF THE INFORMATION AND KNOW-HOW THAT IS CRITICAL TO OUR BUSINESS IS NOT PATENTABLE AND WE MAY NOT BE ABLE TO PREVENT OTHERS FROM OBTAINING THIS INFORMATION AND ESTABLISHING COMPETITIVE ENTERPRISES We sometimes rely on trade secrets to protect our proprietary technology, especially in circumstances in which patent protection is not believed to be appropriate or obtainable. We attempt to protect our proprietary technology in part by confidentiality agreements with our employees, consultants, collaborators and contractors. We cannot assure you that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors, any of which would harm our business significantly. SOME OF OUR PATENTS AND PATENT APPLICATIONS RELATING TO TELOMERASE MAY BE SUBJECT TO CHALLENGE Our patents and patent applications relating to telomerase are critically important to our development and commercialization of therapeutic and diagnostic products for applications in oncology and regenerative medicine. Patent applications covering cloned human telomerase and its uses are pending in several countries and patent prosecution is ongoing. Although we have been granted patents in the United Kingdom and Switzerland, we have received rejections in certain other countries and we may be unable to overcome those rejections or any others that we may encounter. In 1999, the United States Patent and Trademark Office suspended prosecution of two of our patent applications relating to cloned human telomerase pending possible declaration of an interference. This event signified that the United States Patent and Trademark Office had determined that at least one other entity had filed a patent application claiming cloned human telomerase or its uses. In an interference, among other things, the United States Patent and Trademark Office seeks to determine who made the claimed invention first; that party typically, although not always, is awarded the patent. The suspensions placed on our applications have now been lifted and prosecution has resumed. This does not mean that the United States Patent and Trademark Office will necessarily issue a patent to us for this subject matter, nor does it preclude the declaration of an interference either before or after such a patent is issued. If interferences or other challenges to our patents are not resolved promptly in our favor, our existing business relationships could be jeopardized and we could be delayed or prevented from entering into new collaborations or from commercializing telomerase products, which could materially harm our business. WE DEPEND ON OUR COLLABORATORS TO HELP US COMPLETE THE PROCESS OF DEVELOPING AND TESTING OUR PRODUCTS AND OUR ABILITY TO DEVELOP AND COMMERCIALIZE PRODUCTS MAY BE IMPAIRED OR DELAYED IF OUR COLLABORATIVE PARTNERSHIPS ARE UNSUCCESSFUL Our strategy for the development, clinical testing and commercialization of our products requires entering into collaborations with corporate partners, licensors, licensees and others. We are dependent upon the subsequent success of these other parties in performing their respective responsibilities and the continued cooperation of our partners. Our collaborators may not cooperate with us or perform their obligations under our agreements with them. We cannot control the amount and timing of our collaborators' resources that will be devoted to our research activities related to our collaborative agreements with them. Our collaborators may choose to pursue existing or alternative technologies in preference to those being developed in collaboration with us. Our ability to successfully develop and commercialize telomerase inhibition products depends on our corporate alliance with Kyowa Hakko. Our ability to successfully develop and commercialize telomerase diagnostic products depends on our corporate alliance with Roche Diagnostics. Under our collaborative agreements with these collaborators, we rely significantly on them, among other activities, to: - design and conduct advanced clinical trials in the event that we reach clinical trials; - fund research and development activities with us; 16
17 - pay us fees upon the achievement of milestones; and - co-promote with us any commercial products that result from our collaborations. The development and commercialization of products from these collaborations will be delayed if Kyowa Hakko or Roche Diagnostics fail to conduct these collaborative activities in a timely manner or at all. In addition, Kyowa Hakko or Roche Diagnostics could terminate their agreements with us and we may not receive any development or milestone payments. If we do not receive research funds or achieve milestones set forth in the agreements, or if Kyowa Hakko or Roche Diagnostics or any of our future collaborators breach or terminate collaborative agreements with us, our business may be materially harmed. OUR RELIANCE ON THE RESEARCH ACTIVITIES OF OUR NON-EMPLOYEE SCIENTIFIC ADVISORS AND OTHER RESEARCH INSTITUTIONS, WHOSE ACTIVITIES ARE NOT WHOLLY WITHIN OUR CONTROL, MAY LEAD TO DELAYS IN TECHNOLOGICAL DEVELOPMENTS We rely extensively and have relationships with scientific advisors at academic and other institutions, some of whom conduct research at our request. These scientific advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. We have limited control over the activities of these advisors and, except as otherwise required by our collaboration and consulting agreements, can expect only limited amounts of their time to be dedicated to our activities. If our scientific advisors are unable or refuse to contribute to the development of any of our potential discoveries, our ability to generate significant advances in our technologies will be significantly harmed. In addition, we have formed research collaborations with many academic and other research institutions throughout the world, including the Roslin Institute. These research facilities may have commitments to other commercial and non-commercial entities. We have limited control over the operations of these laboratories and can expect only limited amounts of time to be dedicated to our research goals. THE LOSS OF KEY PERSONNEL COULD SLOW OUR ABILITY TO CONDUCT RESEARCH AND DEVELOP PRODUCTS Our future success depends to a significant extent on the skills, experience and efforts of our executive officers and key members of our scientific staff. Competition for personnel is intense and we may be unable to retain our current personnel or attract or assimilate other highly qualified management and scientific personnel in the future. The loss of any or all of these individuals could harm our business and might significantly delay or prevent the achievement of research, development or business objectives. We also rely on consultants and advisors, including the members of our Scientific Advisory Board, who assist us in formulating our research and development strategy. We face intense competition for qualified individuals from numerous pharmaceutical, biopharmaceutical and biotechnology companies, as well as academic and other research institutions. We may not be able to attract and retain these individuals on acceptable terms. Failure to do so would materially harm our business. WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN SUFFICIENT INSURANCE ON COMMERCIALLY REASONABLE TERMS OR WITH ADEQUATE COVERAGE AGAINST POTENTIAL LIABILITIES IN ORDER TO PROTECT OURSELVES AGAINST PRODUCT LIABILITY CLAIMS Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing and marketing of human therapeutic and diagnostic products. We may become subject to product liability claims if the use of our products is alleged to have injured subjects or patients. This risk exists for products tested in human clinical trials as well as products that are sold commercially. We currently have no clinical trial liability insurance and we may not be able to obtain and maintain this type of insurance for any of our clinical trials. In addition, product liability insurance is becoming increasingly expensive. As a result, we may not be able to obtain or maintain product liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities which could have a material adverse effect on us. BECAUSE WE OR OUR COLLABORATORS MUST OBTAIN REGULATORY APPROVAL TO MARKET OUR PRODUCTS IN THE UNITED STATES AND FOREIGN JURISDICTIONS, WE CANNOT PREDICT WHETHER OR WHEN WE WILL BE PERMITTED TO COMMERCIALIZE OUR PRODUCTS Federal, state and local governments in the United States and governments in other countries have significant regulations in place that govern many of our activities. The preclinical testing and clinical trials of the products that we develop ourselves or that our collaborators develop are subject to intense government regulation and may 17
18 prevent us from creating commercially viable products from our discoveries. In addition, the sale by us or our collaborators of any commercially viable product will be subject to government regulation from several standpoints, including the processes of: - manufacturing; - advertising and promoting; - selling and marketing; - labeling; and - distributing. We may not obtain regulatory approval for the products we develop and our collaborators may not obtain regulatory approval for the products they develop. Regulatory approval may also entail limitations on the indicated uses of a proposed product. Because certain of our product candidates involve the application of new technologies and may be based upon a new therapeutic approach, such products may be subject to substantial additional review by various government regulatory authorities, and, as a result, we may obtain regulatory approvals for such products more slowly than for products based upon more conventional technologies. If, and to the extent that, we are unable to comply with these regulations, our ability to earn revenues will be materially and negatively impacted. The regulatory process, particularly for biopharmaceutical products like ours, is uncertain, can take many years and requires the expenditure of substantial resources. Any product that we or our collaborative partners develop must receive all relevant regulatory agency approvals or clearances, if any, before it may be marketed in the United States or other countries. 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 Food and Drug Administration in the United States and similar health authorities in foreign countries. The regulatory process, which includes extensive preclinical testing and clinical trials of each product in order to establish its safety and efficacy, is uncertain, can take many years and requires the expenditure of substantial resources. Data obtained from preclinical and clinical activities is susceptible to varying interpretations that could delay, limit or prevent regulatory agency approvals or clearances. In addition, delays or rejections may be encountered based upon changes in regulatory agency policy during the period of product development and/or the period of review of any application for regulatory agency approval or clearance for a product. Delays in obtaining regulatory agency approvals or clearances could: - significantly harm the marketing of any products that we or our collaborators develop; - impose costly procedures upon our activities or the activities of our collaborators; - diminish any competitive advantages that we or our collaborative partners may attain; or - adversely affect our ability to receive royalties and generate revenues and profits. Even if we commit the necessary time and resources, both economic and otherwise, the required regulatory agency approvals or clearances may not be obtained for any products developed by or in collaboration with us. If regulatory agency approval or clearance for a new product is obtained, this approval or clearance may entail limitations on the indicated uses for which it may be marketed that could limit the potential commercial use of the product. Furthermore, approved products and their manufacturers are subject to continual review, and discovery of previously unknown problems with a product or its manufacturer may result in restrictions on the product or manufacturer, including withdrawal of the product from the market. Failure to comply with regulatory requirements can result in severe civil and criminal penalties, including but not limited to: - recall or seizure of products; - injunction against manufacture, distribution, sales and marketing; and 18
19 - criminal prosecution. The imposition of any of these penalties could significantly impair our business, financial condition and results of operations. TO BE SUCCESSFUL, OUR PRODUCTS MUST BE ACCEPTED BY THE HEALTH CARE COMMUNITY, WHICH CAN BE VERY SLOW TO ADOPT OR UNRECEPTIVE TO NEW TECHNOLOGIES AND PRODUCTS Our products and those developed by our collaborative partners, if approved for marketing, may not achieve market acceptance since physicians, patients or the medical community in general may decide not to accept and utilize these products. The products that we are attempting to develop may represent substantial departures from established treatment methods and will compete with a number of traditional drugs and therapies manufactured and marketed by major pharmaceutical companies. The degree of market acceptance of any of our developed products will depend on a number of factors, including: - our establishment and demonstration to the medical community of the clinical efficacy and safety of our product candidates; - our ability to create products that are superior to alternatives currently on the market; - our ability to establish in the medical community the potential advantage of our treatments over alternative treatment methods; and - reimbursement policies of government and third-party payors. If the health care community does not accept our products for any of the foregoing reasons, or for any other reason, our business would be materially harmed. THE REIMBURSEMENT STATUS OF NEWLY-APPROVED HEALTH CARE PRODUCTS IS UNCERTAIN AND FAILURE TO OBTAIN REIMBURSEMENT APPROVAL COULD SEVERELY LIMIT THE USE OF OUR PRODUCTS Significant uncertainty exists as to the reimbursement status of newly approved health care products, including pharmaceuticals. If we fail to generate adequate third party reimbursement for the users of our potential products and treatments, then we may be unable to maintain price levels sufficient to realize an appropriate return on our investment in product development. In both domestic and foreign markets, sales of our products, if any, will depend in part on the availability of reimbursement from third-party payors, examples of which include: - government health administration authorities; - private health insurers; - health maintenance organizations; and - pharmacy benefit management companies. Both federal and state governments in the United States and foreign governments continue to propose and pass legislation designed to contain or reduce the cost of health care through various means. Legislation and regulations affecting the pricing of pharmaceuticals and other medical products may change or be adopted before any of our potential products are approved for marketing. Cost control initiatives could decrease the price that we receive for any product we may develop in the future. In addition, third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services and any of our potential products and treatments may ultimately not be considered cost effective by these third parties. Any of these initiatives or developments could materially harm our business. OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND IMPROPER HANDLING OF THESE MATERIALS BY OUR EMPLOYEES OR AGENTS COULD EXPOSE US TO SIGNIFICANT LEGAL AND FINANCIAL PENALTIES 19
20 Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. As a consequence, we are subject to numerous environmental and safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. We may be required to incur significant costs to comply with current or future environmental laws and regulations and may be adversely affected by the cost of compliance with these laws and regulations. Although we believe that our safety procedures for using, handling, storing and disposing of hazardous materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, state or federal authorities could curtail our use of these materials and we could be liable for any civil damages that result, the cost of which could be substantial. Further, any failure by us to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous chemicals or hazardous, infectious or toxic substances could subject us to significant liabilities, including joint and several liability under certain statutes, and any liability could exceed our resources and could have a material adverse effect on our business, financial condition and results of operations. Additionally, an accident could damage our research and manufacturing facilities and operations. Additional federal, state and local laws and regulations affecting us may be adopted in the future. We may incur substantial costs to comply with and substantial fines or penalties if we violate any of these laws or regulations. OUR STOCK PRICE HAS HISTORICALLY BEEN VERY VOLATILE Stock prices and trading volumes for many biopharmaceutical companies fluctuate widely for a number of reasons, including some reasons which may be unrelated to their businesses or results of operations such as media coverage, legislation and regulatory measures and the activities of various protest groups or organizations. This market volatility, as well as general domestic or international economic, market and political conditions, could materially and adversely affect the market price of our common stock and your return on your investment. Historically, our stock price has been extremely volatile. Between January 1998 and March 31, 2001, our stock has traded as high as $75.88 per share and as low as $3.50 per share. The significant market price fluctuations of our common stock are due to a variety of factors, including: - depth of the market for the common stock; - the experimental nature of our prospective products; - fluctuations in our operating results; - market conditions relating to the biopharmaceutical and pharmaceutical industries; - any announcements of technological innovations, new commercial products or clinical progress or lack thereof by us, our collaborative partners or our competitors; and - announcements concerning regulatory developments, developments with respect to proprietary rights and our collaborations. In addition, the stock market is subject to other factors outside our control that can cause extreme price and volume fluctuations. Securities class action litigation has often been brought against companies, including many biotechnology companies, when they experience volatility in the market price of their securities. Litigation brought against us could result in substantial costs and a diversion of management's attention and resources, which could adversely affect our business. THE SALE OF A SUBSTANTIAL NUMBER OF SHARES, INCLUDING SHARES THAT WILL BECOME ELIGIBLE FOR SALE IN THE NEAR FUTURE, MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK Sales of substantial number of shares of our common stock in the public market could significantly and negatively affect the market price for our common stock. As of March 31, 2001, we had 21,785,441 shares of common stock outstanding. Of these shares, 10,284,534 shares were issued (including shares issuable upon conversion or exercise of convertible notes or warrants) since December 1998 pursuant to private placements. Of these shares, 9,423,463 shares have been registered pursuant to shelf registration statements and therefore may be 20
21 resold (if not sold prior to the date hereof) in the public market and 861,071 of the remaining shares may be resold pursuant to Rule 144 into the public markets as early as March 9, 2002, upon the expiration of a lockup agreement with us. OUR UNDESIGNATED PREFERRED STOCK MAY INHIBIT POTENTIAL ACQUISITION BIDS; THIS MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND THE VOTING RIGHTS OF THE HOLDERS OF COMMON STOCK Our certificate of incorporation provides our Board of Directors with the authority to issue up to 3,000,000 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions of these shares without further vote or action by the stockholders. As of the date of this Form 10-Q, the Board of Directors still has authority to designate and issue up to 3,000,000 shares of preferred stock. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of shares of preferred stock may delay or prevent a change in control transaction without further action by our stockholders. As a result, the market price of our common stock may be adversely affected. The issuance of preferred stock may also result in the loss of voting control by others. PROVISIONS IN OUR CHARTER AND BYLAWS, AND PROVISIONS OF DELAWARE LAW, MAY INHIBIT POTENTIAL ACQUISITION BIDS FOR US, WHICH MAY PREVENT HOLDERS OF OUR COMMON STOCK FROM BENEFITING FROM WHAT THEY MAY BELIEVE MAY BE THE POSITIVE ASPECTS OF ACQUISITIONS AND TAKEOVERS In addition to the undesignated preferred stock, provisions of our charter documents and bylaws may make it substantially more difficult for a third party to acquire control of us and may prevent changes in our management, including provisions that: - prevent stockholders from taking actions by written consent; - divide the Board of Directors into separate classes with terms of office that are structured to prevent all of the directors from being elected in any one year; and - set forth procedures for nominating directors and submitting proposals for consideration at stockholders' meetings. Provisions of Delaware law may also inhibit potential acquisition bids for us or prevent us from engaging in business combinations. Either collectively or individually, these provisions may prevent holders of our common stock from benefiting from what they may believe are the positive aspects of acquisitions and takeovers, including the potential realization of a higher rate of return on their investment from these types of transactions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about Geron's market risk disclosures contains forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. Interest Rate Sensitivity. The fair value of our available-for-sale securities at March 31, 2001 was $89.2 million. These investments include $21.7 million of cash equivalents which are due in less than 90 days, $42.3 million of short-term investments which are due in less than one year and $25.2 million in long-term investments which are due in one to two years. Our investment policy is to manage our marketable securities portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio through the full investment of available funds. We diversify the marketable securities portfolio by investing in multiple types of investment grade securities. We primarily invest our marketable securities portfolio in short-term securities with at least an investment grade rating to minimize interest rate and credit risk as well as to provide for an immediate source of funds. Although changes in interest rates may affect the fair value of the marketable securities portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments are sold. Due to the nature of our investments, 21
22 which are primarily corporate and municipal notes and money market funds, we have concluded that there is no material market risk exposure. Foreign Currency Exchange Risk. Because we translate foreign currencies into United States dollars for reporting purposes, currency fluctuations can have an impact, though generally immaterial, on our results. We believe that our exposure to currency exchange fluctuation risk is insignificant primarily because our international subsidiary satisfies its financial obligations almost exclusively in its local currencies. For the three months ended March 31, 2001, there was an immaterial currency exchange impact from our intercompany transactions. However, the financial obligations of Geron to the Roslin Institute are stated in British pounds sterling over the next four years. This obligation may become more expensive for us if the United States dollar becomes weaker against the British pounds sterling. As of March 31, 2001, we did not engage in foreign currency hedging activities. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS None (b) REPORTS ON FORM 8-K (i) The Company filed a report on Form 8-K dated January 31, 2001 announcing the event of regaining telomerase inhibition rights from Pharmacia Corporation. 22
23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. GERON CORPORATION By: /s/ DAVID L. GREENWOOD ------------------------------------ David L. Greenwood Senior Vice President and Chief Financial Officer (Duly Authorized Signatory) Date: May 11, 2001 23