| CELL GENESYS INC ITEM 1A RISK FACTORS Investors should carefully consider the risks described below before making an investment decision |
| The risks described below are not the only ones facing our company |
| Additional risks not currently known to us or that we currently believe are immaterial may also impair our business operations |
| Our business could be harmed by any of these risks |
| The trading price of our common stock could decline, and our ability to repay our convertible notes could be impaired, due to any of these risks, and investors may lose all or part of their investment |
| In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Annual Report on Form 10-K, including our consolidated financial statements and related notes |
| Risks Related to Our Company Our products are in developmental stage, are not approved for commercial sale and might not ever receive regulatory approval or become commercially viable |
| All of our potential cancer immunotherapies and oncolytic virus therapies are in research and development |
| We do not expect to generate any revenues from product sales for at least the next several years |
| Our products currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercial use |
| Our research and development efforts may not be successful, and any of our future products may not be ultimately commercially successful |
| Even if developed, our products may not receive regulatory approval or be successfully introduced and marketed at prices that would permit us to operate profitably |
| Our cancer immunotherapies and oncolytic virus therapies must undergo exhaustive clinical testing and may not prove to be safe or effective |
| If any of our proposed products are delayed or fail, we may have to curtail our operations |
| There are many reasons that potential products that appear promising at an early stage of research or development do not result in commercially successful products |
| Clinical trials may be suspended or terminated if safety issues are identified, if our investigators or we fail to comply with regulations governing clinical trials or for other reasons |
| Although we and our investigators are testing some of our proposed products and therapies in human clinical trials, we cannot guarantee that we, the FDA, foreign regulatory authorities or the Institutional Review Boards at our research institutions will not suspend or terminate any of our clinical trials, that we will be permitted to undertake human clinical trials for any of our products or that adequate numbers of patients can be recruited for our clinical trials |
| Also, the results of this testing might not demonstrate the safety or efficacy of these products |
| Even if clinical trials are successful, we might not obtain regulatory approval for any indication |
| Preclinical and clinical data can be interpreted in many different ways, and FDA or foreign regulatory officials could interpret data that we consider promising differently, which could halt or delay our clinical trials or prevent regulatory approval |
| Finally, even if our products proceed successfully through clinical trials and receive regulatory approval, there is no guarantee that an approved product can be manufactured in commercial quantities at reasonable cost or that such a product will be successfully marketed |
| Our programs utilize new technologies |
| Existing preclinical and clinical data on the safety and efficacy of our programs are limited |
| Our GVAX cancer immunotherapies and oncolytic virus therapies are currently being tested in human clinical trials to determine their safety and efficacy |
| The results of preclinical or earlier stage clinical trials do not necessarily predict safety or efficacy in humans |
| Our products in later stage clinical trials may fail to show desired safety and efficacy, despite having progressed through preclinical or early clinical trials |
| Serious and potentially life-threatening side effects may be discovered during preclinical and clinical testing of our potential products or thereafter, which could delay, halt or interrupt clinical trials of our products, and could result in the FDA or other regulatory authorities denying approval of our drugs for any or all indications |
| Clinical trials are very costly and time-consuming, especially the typically larger Phase 3 clinical trials such as the VITAL-1 and VITAL-2 trials of our GVAX immunotherapy for prostate cancer |
| The VITAL-1 and VITAL-2 trials of our GVAX immunotherapy for prostate cancer are our first Phase 3 clinical trials |
| We 15 _________________________________________________________________ [68]Table of Contents cannot exactly predict if and when any of our current clinical trials will be completed |
| Many factors affect patient enrollment in clinical trials, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, competing clinical trials and new therapies approved for the conditions that we are investigating |
| In addition to delays in patient enrollment, other unforeseen developments, including delays in obtaining regulatory approvals to commence a study, delays in identifying and reaching agreement on acceptable terms with prospective clinical trial sites, lack of effectiveness during clinical trials, unforeseen safety issues, uncertain dosing issues, inability to monitor patients adequately during or after treatment, our or our investigators’ failure to comply with FDA or other health authority regulations governing clinical trials, and an inability or unwillingness of medical investigators to follow our clinical protocols, could prevent or delay completion of a clinical trial and increase its costs, which could also prevent or delay any eventual commercial sale of the therapy that is the subject of the trial |
| Each of our two Phase 3 clinical trials of GVAX immunotherapy for prostate cancer involves a comparison to a Taxotere chemotherapy regimen, which is the currently approved standard of care for this patient group |
| However, there can be no assurance that this chemotherapy regimen will continue to be commonly used to treat these patients in the future |
| Should another chemotherapy regimen be shown to be more effective than the Taxotere chemotherapy regimen, we may need to conduct additional comparative clinical trials in the future |
| We have not been profitable absent the gains on sales of Abgenix common stock and certain upfront or non-recurring license fees |
| We expect to continue to incur substantial losses and negative cash flow from operations and may not become profitable in the future |
| We have incurred an accumulated deficit since our inception |
| At December 31, 2005, our accumulated deficit was dlra308dtta9 million |
| Our accumulated deficit would be substantially higher absent the gains we have realized on sales of our Abgenix common stock |
| For the year ended December 31, 2005, we recorded a net loss of dlra64dtta9 million |
| We expect to incur substantial operating losses for at least the next several years and potentially longer |
| This is due primarily to the expansion of development programs, clinical trials and manufacturing activities and, to a lesser extent, general and administrative expenses, at a time when we have yet to realize any product revenues |
| We also have substantial lease obligations related to our manufacturing and headquarter facilities |
| We expect that losses will fluctuate from quarter to quarter and that these fluctuations may be substantial |
| We cannot guarantee that we will successfully develop, manufacture, commercialize or market any products, or that we will ever achieve profitability |
| We will need substantial additional funds to continue operations, and our ability to generate funds depends on many factors beyond our control |
| We will need substantial additional funds for existing and planned preclinical and clinical trials, to continue research and development activities, for lease obligations related to our manufacturing and headquarter facilities, for principal and interest payments related to our debt financing obligations, for potential settlements to the IRS and other tax authorities and to establish marketing capabilities for any products we may develop |
| At some point in the future, we will also need to raise additional capital to further fund our operations |
| In July 2005, the IRS issued to us a Notice of Proposed Adjustment (“NOPA”) seeking to disallow dlra48dtta7 million of net operating losses which we deducted for the 2000 fiscal year and seeking a dlra3dtta4 million penalty for substantial underpayment of tax in fiscal 2000 |
| We responded to the NOPA in September 2005, disagreeing with the conclusions reached by the IRS in the NOPA and seeking to resolve this matter at the Appeals level |
| We had previously recorded a liability for this and other federal and state tax contingencies, including estimated interest expense |
| If we are unsuccessful in defending the tax filing positions that we have previously taken, then potentially our liability for federal and state tax contingencies could be significantly higher than the dlra32dtta6 million that we have recorded as of December 31, 2005 |
| We continue to believe that our tax positions comply with all applicable tax laws, and we continue to vigorously defend against the NOPA using all administrative and legal processes available to us |
| 16 _________________________________________________________________ [69]Table of Contents Our future capital requirements will depend on, and could increase as a result of, many factors, such as: • the progress and scope of our internally funded research, development, clinical, manufacturing and commercialization activities; • our ability to establish new collaborations and the terms of those collaborations; • our ability to reach a favorable resolution with the IRS with respect to their audit of our fiscal 2000 federal tax return, or to other potential tax assessments; • competing technological and market developments; • the time and cost of regulatory approvals; • the extent to which we choose to commercialize our future products through our own sales and marketing capabilities; • the costs we incur in obtaining, defending and enforcing patent and other proprietary rights or gaining the freedom to operate under the patents of others; • our success in acquiring and integrating complementary products, technologies or businesses; and • the extent to which we choose to expand and develop our manufacturing capacities, including manufacturing capacities necessary to meet potential commercial requirements |
| If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research, development, manufacturing or clinical activities |
| We plan to raise additional funds through collaborative business relationships, additional equity or debt financings, or otherwise, but we may not be able to do any of the foregoing on favorable terms, or at all |
| Because of our long-term capital requirements, we may seek to access the public or private debt and equity markets and/or sell our own debt or equity securities |
| Additional funding may not be available to us, and, if available, may not be on acceptable terms |
| Opportunities for outlicensing technologies or for third-party collaborations may not be available to us on acceptable terms, or at all |
| If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research, development, manufacturing or clinical activities |
| In addition, we may decide to raise additional capital when conditions are favorable, even when we do not have an immediate need for additional capital at that time |
| If we raise additional funds by issuing equity securities, stockholders will incur immediate dilution |
| Alternatively, we may need to seek funds through arrangements with collaborative partners or others that require us to relinquish rights to technologies or product candidates that we would otherwise seek to develop or commercialize ourselves |
| Either of these events could have a material adverse effect on our business, results of operations, financial condition or cash flow |
| Currently, we do not have collaborative partners for the further development of our GVAX cancer immunotherapies |
| Although we are in active discussions with potential partners for our GVAX immunotherapy for prostate cancer, we may not be successful in entering into collaborative partnerships on favorable terms, if at all |
| Certain of our oncolytic virus therapy products are being developed under our global strategic alliance with Novartis, and Novartis has future commercialization rights for these products |
| Also, we can give no assurance that our alliance with Novartis will continue, as Novartis periodically has the option of terminating the alliance at its discretion |
| We announced in 2005 the development of a novel technology for the production of monoclonal antibody products which is outside our core business focus and which therefore may represent an outlicensing opportunity |
| There can be no assurance that we will be successful in our efforts to raise capital through such outlicensing activities |
| Failure to enter into new corporate relationships may limit our future success |
| 17 _________________________________________________________________ [70]Table of Contents We plan to use potential future operating losses and our federal and state net operating loss carryforwards to offset taxable income from revenue generated from operations or from the sale of Abgenix common stock |
| However, our ability to use net operating loss carryforwards could be limited as a result of potential future issuances of equity securities |
| We plan to use our current year operating losses to offset taxable income from any revenue generated from operations, corporate collaborations or from the sale of Abgenix common stock |
| To the extent that our taxable income exceeds any current year operating losses, we plan to use our net operating loss carryforwards to offset income that would otherwise be taxable |
| However, our use of federal net operating loss carryforwards could be limited in the future by the provisions of Section 382 of the Internal Revenue Code depending upon the timing and amount of additional equity securities that we might potentially issue |
| State net operating loss carryforwards may be similarly limited |
| Our ability to manufacture our products is uncertain, which may delay or impair our ability to develop, test and commercialize our products |
| We have built our own manufacturing facility to operate according to the FDA’s current Good Manufacturing Practices (cGMP) regulations for the manufacture of products for clinical trials and to support the potential commercial launch of our GVAX cancer immunotherapy product candidates |
| We are under significant lease obligations for our manufacturing facility |
| We may be unable to establish and maintain our manufacturing facility for increased scale within our planned timelines and budget, which could have a material adverse effect on our product development timelines |
| Our manufacturing facility will be subject to ongoing, periodic inspection by the FDA and other regulatory bodies to ensure compliance with cGMP Our failure to follow and document our adherence to such cGMP regulations or other regulatory requirements may lead to significant delays in the availability of products for commercial use or clinical study, may result in the termination or hold on a clinical study, or may delay or prevent filing or approval of marketing applications for our products |
| We also may encounter problems with the following: • achieving consistent and acceptable production yield and costs; • meeting product release specifications; • shortages of qualified personnel; • shortages of raw materials; • shortages of key contractors or contract manufacturers; and • ongoing compliance with cGMP regulations and other expectations from FDA and other regulatory bodies |
| Failure to comply with applicable regulations could also result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could harm our business |
| Developing advanced manufacturing techniques and process controls is required to fully utilize our facility |
| The manufacturing techniques and process controls, as well as the product release specifications, required for our GVAX cancer immunotherapies and oncolytic virus therapies are more complex and less well-established than those required for other biopharmaceutical products, including small molecules, therapeutic proteins and monoclonal antibodies |
| We may not be able to develop these techniques and process controls to manufacture and evaluate our products effectively to meet the demands of regulatory agencies, clinical testing and commercial production |
| Advances in manufacturing techniques may render our facility and equipment inadequate or obsolete |
| In addition, during the course of the development and testing of our products, we may make and have made improvements to processes, formulations or manufacturing methods or employ different manufacturing facilities |
| Such changes may be made to improve the product’s potential efficacy, make it easier to 18 _________________________________________________________________ [71]Table of Contents manufacture at scale, reduce variability or the chance of contamination of the product, or for other reasons |
| As a result, certain of the products we are currently testing in clinical trials, including our most advanced products, are not identical to those used in previous clinical trials from which we have reported clinical data |
| We may be required to conduct certain laboratory studies to demonstrate the comparability of our products if we introduce additional manufacturing changes |
| We cannot guarantee that the results of studies using the current versions of our products will be as successful as the results of earlier studies conducted using different versions of our products |
| If we are unable to manufacture our products for any reason, our options for outsourcing manufacturing are currently limited |
| We are unaware of available contract manufacturing facilities on a worldwide basis in which our GVAX product candidates can be manufactured under cGMP regulations, a requirement for all pharmaceutical products |
| It would take a substantial period of time for a contract manufacturing facility that has not been producing our particular products to begin producing them under cGMP regulations |
| Our manufacturing facility is subject to the licensing requirements of the United States Drug Enforcement Administration (DEA), the California Department of Health Services and foreign regulatory authorities |
| While not yet subject to license by the FDA, our facility is subject to inspection by the FDA, as well as by the DEA and the California Department of Health Services |
| Failure to obtain or maintain these licenses or to meet the inspection criteria of these agencies would disrupt our manufacturing processes and have a material adverse effect on our business, results of operations, financial condition and cash flow |
| In order to produce our products in the quantities that we believe will be required to meet anticipated market demand, we will need to increase, or “scale up,” the production process by a significant factor over the current level of production |
| If we are unable to do so, are delayed, or if the cost of this scale up is not economically feasible for us, we may not be able to produce our products in a sufficient quantity to meet the requirements for product launch or future demand |
| Logistical arrangements for wide-spread distribution of our products for clinical and commercial purposes may prove to be impractical or prohibitively expensive which could hinder our ability to commercialize our products |
| We depend on clinical trial arrangements with public and private medical institutions to advance our technology, and the loss of these arrangements could impair the development of our products |
| We have arrangements with a number of public and private medical institutions, and individual investigators, for the conduct of human clinical trials for our GVAX cancer immunotherapy programs and oncolytic virus therapies |
| In some cases, trials may be conducted by institutions without our direct control or monitoring |
| The early termination of any of these clinical trial arrangements, the failure of these institutions to comply with the regulations and requirements governing clinical trials, or reliance upon results of trials that we have not directly conducted or monitored could hinder the progress of our clinical trial programs or our development decisions |
| If any of these relationships are terminated, the clinical trials might not be completed, and the results might not be evaluable |
| Failure to comply with foreign regulatory requirements governing human clinical trials and marketing approval for drugs and devices could prevent us from conducting our clinical trials or selling our products in foreign markets, which may adversely affect our operating results and financial condition |
| For development and marketing of drugs and biologics outside the United States, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country and may require us to perform additional testing and expend additional resources |
| The time required to obtain approvals outside the United States may differ from that required to obtain FDA approval |
| We may not obtain foreign regulatory approvals on a timely basis, if at all |
| Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other countries or by the FDA Failure to comply with these regulatory requirements or obtain required approvals could impair our ability to conduct clinical trials in foreign markets or commercially develop foreign markets for our products and may have a material adverse effect on our results of operations and financial condition |
| 19 _________________________________________________________________ [72]Table of Contents If our proposed products are not effectively protected by issued patents or if we are not otherwise able to protect our proprietary information, we will be more vulnerable to competitors, and our business could be adversely affected |
| We rely heavily on the development and protection of our intellectual property portfolio |
| The patent positions of pharmaceutical and biotechnology firms, including ours, are generally uncertain and involve complex legal and factual questions |
| As of December 31, 2005, we had approximately 358 US and foreign patents issued or granted to us or available to us based on licensing arrangements and approximately 319 US and foreign applications pending in our name or available to us based on licensing arrangements |
| Although we are prosecuting patent applications, we cannot be certain whether any given application will result in the issuance of a patent or, if any patent is issued, whether it will provide significant proprietary protection or whether it will be invalidated |
| Also, depending upon their filing date, patent applications in the United States are confidential until patents are published or issued |
| Publication of discoveries in scientific or patent literature tends to lag behind actual discoveries by several months |
| Accordingly, we cannot be sure that we were the first creator of inventions covered by pending patent applications or that we were the first to file patent applications for these inventions |
| In addition, to the extent we license our intellectual property to other parties, we may incur expenses as a result of contractual agreements in which we indemnify these licensing parties against losses incurred if practicing our intellectual property infringes upon the rights of others |
| Our intellectual property and freedom to operate may be challenged by others, which, if such a challenge were successful, could have a material adverse effect on our business, results of operations, financial condition and cash flow |
| The patent positions and proprietary rights of pharmaceutical and biotechnology firms, including ours, are generally uncertain and involve complex legal and factual questions |
| Our commercial success depends in part on not infringing the patents or proprietary rights of others, not breaching licenses granted to us and ensuring that we have the necessary freedom to operate and commercialize our products |
| We are aware of competing intellectual property relating to both our GVAX cancer immunotherapy and oncolytic virus therapy |
| While we believe we have freedom to operate for both of these programs and are aware of no issued patents that could prevent us from commercializing the products we are currently developing, others may challenge that position, and from time to time we have received communications from third parties claiming to have conflicting rights relating to components of our products |
| We periodically review the status of our products in development in response to these communications and more generally to ensure that we maintain freedom to operate with respect all patents and proprietary rights of others |
| Nonetheless, if any such claim were successful, we could be required to obtain licenses to a third party’s technologies or biological or chemical reagents in order to market our products |
| Moreover, we may choose to voluntarily seek such a license in order to avoid the expense and uncertainty of fully defending our position |
| In either such event, the failure to license any technologies or biological or chemical reagents required to commercialize our technologies or products at reasonable cost may have a material adverse effect on our business, results of operations, financial condition and cash flow |
| We may have to engage in litigation, which could result in substantial cost, to enforce our patents or to determine the scope and validity of other parties’ proprietary rights |
| To determine the priority of inventions, the United States Patent and Trademark Office (USPTO) frequently declares interference proceedings |
| In Europe, patents can be revoked through opposition proceedings |
| These proceedings could result in an adverse decision as to the priority of our inventions |
| We are currently involved in an interference proceeding related to one of our technologies |
| We have filed an appeal of the final decision from the USPTO relating to an interference proceeding pending since 1996 with Applied Research Systems Holding NV (ARS) concerning a patent and patent application related to gene activation technology |
| ARS has also appealed the decision |
| The result of the appeal is uncertain at this time |
| We are not currently involved in any other interference proceedings |
| We were recently informed that one of our patents for gene activation technology was denied in an appeal proceeding in Europe, which adversely 20 _________________________________________________________________ [73]Table of Contents affects our ability to receive royalties on sales of products employing this technology under certain of our license agreements |
| We cannot predict the outcome of these proceedings |
| An adverse result in any of these proceedings could have an adverse effect on our intellectual property position in these areas and on our business as a whole |
| If we lose in any such proceeding, our patents or patent applications that are the subject matter of the proceeding may be invalidated or may not be permitted to issue as patents |
| Consequently, we may be required to obtain a license from the prevailing party in order to continue the portion of our business that relates to the proceeding |
| Such license may not be available to us on acceptable terms or on any terms, and we may have to discontinue that portion of our business |
| We may be involved in other interference and/or opposition proceedings in the future |
| We believe that there will continue to be significant litigation in the industry regarding patent and other intellectual property rights |
| Our competitive position may be adversely affected by our limited ability to protect and control unpatented trade secrets, know-how and other technological innovation |
| Our competitors may independently develop similar or better proprietary information and techniques and disclose them publicly |
| Also, others may gain access to our trade secrets, and we may not be able to meaningfully protect our rights to our unpatented trade secrets |
| We require our employees and consultants to execute confidentiality agreements upon the commencement of employment or consulting relationships with us |
| These agreements provide that all confidential information developed by or made known to an individual during the course of the employment or consulting relationship generally must be kept confidential |
| In the case of employees, the agreements provide that all inventions relating to our business conceived by the employee while employed by us are our exclusive property |
| These agreements may not provide meaningful protection for our trade secrets in the event of unauthorized use or disclosure of such information |
| Our competitors may develop therapies for the diseases that we are targeting that are more advanced or more effective than ours, which could adversely affect our competitive position, or they may commercialize products more rapidly than we do, which may adversely affect our competitive position |
| There are many companies pursuing programs for the treatment of cancer |
| Some of these competitors are large biotechnology or pharmaceutical companies, such as Amgen, Bristol-Myers Squibb, Genentech, Novartis, Roche and sanofi-aventis Group, which have greater experience and resources than we do in developing products, in undertaking preclinical testing and human clinical trials of new pharmaceutical products, in obtaining FDA and other regulatory approvals of products, and in manufacturing and marketing new therapies |
| We are also competing with other biotechnology companies which have prostate cancer immunotherapy products in various stages of clinical development such as Dendreon Corporation, Therion Biologics Corporation and Onyvax, Ltd |
| Some competitors are pursuing product development strategies that are similar to ours, particularly with respect to our cancer immunotherapy and oncolytic virus therapy programs |
| Certain of these competitors’ products are in more advanced stages of product development and clinical trials |
| We compete with other clinical-stage companies and institutions for clinical trial participants, which could reduce our ability to recruit participants for our clinical trials |
| Delay in recruiting clinical trial participants could adversely affect our ability to bring a product to market prior to our competitors |
| Our competitors may develop technologies and products that are more effective than ours, or that would render our technology and products less competitive or obsolete |
| Our competitive position and those of our competitors can vary based on the performance of products in clinical trials |
| In addition, our competitors may obtain patent protection or FDA or other regulatory approvals and commercialize products more rapidly than we do, which may impact future sales of our products |
| We also may not have the access that some of our competitors have to biological materials necessary to support the research, development or manufacturing of planned therapies |
| If we are permitted by the FDA or other regulatory agencies to commence commercial sales of products, we will also be competing with respect to 21 _________________________________________________________________ [74]Table of Contents marketing capabilities and manufacturing efficiency, areas in which we have limited or no experience |
| We expect that competition among products approved for sale will be based, among other things, on: • product efficacy; • price; • safety; • reliability; • availability; • reimbursement; • patent protection; and • sales, marketing and distribution capabilities |
| Our competitive position also depends upon our ability to attract and retain qualified personnel, develop proprietary products or processes, and secure sufficient funding for the often-lengthy period between product conception and commercial sales |
| To the extent we depend on strategic partners to sell, market or distribute our products, we will have reduced control over the success of the sales, marketing and distribution of our future products |
| We have no experience in sales, marketing or distribution of biopharmaceutical products |
| We may in the future rely on sales, marketing and distribution expertise of potential corporate partners for our initial products |
| The decision to market future products directly or through corporate partners will be based on a number of factors, including: • market size and concentration; • size and expertise of the partner’s sales force in a particular market; and • our overall strategic objectives |
| If we choose to rely on strategic partners for the sale, marketing or distribution of our future products, we will have less control over the success of our products and will depend heavily upon our partners’ abilities and dedication to our products |
| We cannot assure you that these future strategic partnerships will be available on favorable terms, if at all, nor can we assure you that they will enhance our business |
| We may in the future be exposed to product liability claims, which could adversely affect our business, results of operations, financial condition and cash flow |
| Clinical trials or marketing of any of our potential products may expose us to liability claims resulting from the use of our products |
| These claims might be made by clinical trial participants and associated parties, consumers, health care providers or sellers of our products |
| We currently maintain product liability insurance with respect to each of our clinical trials |
| We may not be able to maintain insurance or obtain sufficient coverage at a reasonable cost, given the increasing cost of insurance in today’s insurance market |
| An inability to maintain insurance at an acceptable cost, or at all, could result in a breach of terms of our product license agreements or could prevent or inhibit the clinical testing or commercialization of our products or otherwise affect our financial condition |
| A claim, particularly resulting from a clinical trial, on any of our insurance policies or a product recall could have a material adverse effect on our business, results of operations, financial condition and cash flow |
| Our business, financial condition and results of operations could suffer as a result of future strategic acquisitions and investments |
| We may engage in future acquisitions or investments that could dilute our existing stockholders or cause us to incur contingent liabilities, commitments, debt or significant expense |
| From time to time, in the ordinary 22 _________________________________________________________________ [75]Table of Contents course of business, we may evaluate potential acquisitions or investments in related businesses, products or technologies, although we currently have no commitments or agreements for any such acquisitions or investments |
| We may not be successful with any strategic acquisition or investment |
| Any future acquisition or investment could harm our business, financial condition and results of operations |
| If we engage in future acquisitions, we may not be able to fully integrate the acquired companies and their intellectual property or personnel |
| Our attempts to do so may place additional burdens on our management and infrastructure |
| Future acquisitions will also subject us to a number of risks, including: • the loss of key personnel and business relationships; • difficulties associated with assimilating and integrating the new personnel and operations of the acquired companies; • the potential disruption of our ongoing business; • the expense associated with maintenance of diverse standards, controls, procedures, employees and clients; • the diversion of resources from the development of our own proprietary technology; and • our inability to generate revenue from acquired technology sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs |
| Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist activity and other events beyond our control, which could result in a material adverse effect on our business |
| Our facilities in California have, in the past, been subject to electrical blackouts as a result of a shortage of available electrical power |
| Future blackouts could disrupt the operations of our facilities |
| In addition, we do not carry sufficient business interruption insurance to compensate us for actual losses from interruption of our business that may occur, and any losses or damages incurred by us could have a material adverse effect on our business |
| We are vulnerable to a major earthquake and other calamities |
| Most of our facilities are located in seismically active regions |
| We have not undertaken a systematic analysis of the potential consequences to our business and financial results from a major earthquake and do not have a recovery plan for fire, earthquake, power loss, terrorist activity or similar disasters |
| We are unable to predict the effects of any such event, but the effects could be seriously harmful to our business |
| We depend on our key technical and management personnel to advance our technology, and the loss of these personnel could impair the development of our products |
| We rely and will continue to rely on our key management and scientific staff, all of whom are employed at-will |
| The loss of key personnel or the failure to recruit necessary additional qualified personnel could have a material adverse effect on our business and results of operations |
| There is intense competition from other companies, research and academic institutions and other organizations for qualified personnel |
| We may not be able to continue to attract and retain the qualified personnel necessary for the development of our business |
| We will need to continue to recruit experts in the areas of clinical testing, manufacturing, finance, marketing and distribution and to develop additional expertise in our existing personnel |
| If we do not succeed in recruiting necessary personnel or developing this expertise, our business could suffer significantly |
| Various materials that we use are purchased from single qualified suppliers, which could result in our inability to secure sufficient materials to conduct our business |
| Most of the materials which we purchase for use in our manufacturing operations are subject to a supplier qualification program |
| In the event that we or the supplier deems the proffered material or the supplier no longer appropriate to support our cGMP operations, we may face significant additional expenses to find and qualify alternate materials and/or suppliers |
| Depending on the magnitude of the potential difference between materials and/or suppliers currently used and alternate materials and/or suppliers which may be identified, 23 _________________________________________________________________ [76]Table of Contents there is no guarantee that FDA or other health authorities will deem the alternative materials and/or suppliers to be comparable, which may require us to perform additional and/or extended clinical studies and could delay product approval |
| Some of the materials which we purchase for use in our manufacturing operations are sole-sourced, meaning only one known supplier exists |
| In the event of a significant interruption of sole-sourced supplies, the quantity of our inventory may not be adequate to complete our clinical trials or to launch our potential products |
| Inventions or processes discovered by our outside scientific collaborators may not become our property, which may affect our competitive position |
| We rely on the continued availability of outside scientific collaborators performing research |
| These relationships generally may be terminated at any time by the collaborator, typically by giving 30 days notice |
| These scientific collaborators are not our employees |
| As a result, we have limited control over their activities and can expect that only limited amounts of their time will be dedicated to our activities |
| Our arrangements with these collaborators, as well as those with our scientific consultants, provide that any rights we obtain as a result of their research efforts will be subject to the rights of the research institutions for which they work |
| In addition, some of these collaborators have consulting or other advisory arrangements with other entities that may conflict with their obligations to us |
| For these reasons, inventions or processes discovered by our scientific collaborators or consultants may not become our property |
| The prices of our common stock and convertible senior notes are likely to continue to be volatile in the future |
| The stock prices of biopharmaceutical and biotechnology companies, including ours, have historically been highly volatile |
| Since January 1, 2003, our stock price has fluctuated between a high closing price of dlra15dtta93 on March 4, 2004 and a low closing price of dlra4dtta48 on October 12, 2005 |
| The market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies |
| In addition, as our convertible senior notes are convertible into shares of our common stock, volatility or depressed prices of our common stock could have a similar effect on the trading price of the notes |
| Also, interest rate fluctuations can affect the price of our convertible senior notes |
| The following factors, among others, may affect the prices of our common stock and notes: • announcements of data from, or material developments in, our clinical trials or those of our competitors, including delays in the commencement, progress or completion of a clinical trial; • fluctuations in our financial results; • the potential of an unfavorable future resolution with the IRS with respect to their audit of our fiscal 2000 federal tax return, or to other potential tax assessments; • announcements of technological innovations or new therapeutic products by us or our competitors, including innovations or products by our competitors that may require us to redesign, and therefore delay, our clinical trials to account for those innovations or products; • announcements of changes in governmental regulation affecting us or our competitors; • announcements of regulatory approval or disapproval of our or our competitors’ products; • announcements of new collaborative relationships by us or our competitors; • developments in patent or other proprietary rights affecting us or our competitors; • public concern as to the safety of products developed by us or other biotechnology and pharmaceutical companies; • general market conditions; • material developments related to our minority interest in Ceregene, Inc |
| ; 24 _________________________________________________________________ [77]Table of Contents • fluctuations in price and volume in the stock market in general, or in the trading of the stock of biopharmaceutical and biotechnology companies in particular, that are unrelated to our operating performance; • issuances of securities in equity, debt or other financings or issuances of common stock upon conversion of our convertible senior notes; • unforeseen litigation; • sales of common stock by existing stockholders; and • the perception that such issuances or sales could occur |
| Our stockholders may be diluted by the conversion of outstanding convertible senior notes |
| In October and November 2004 we issued and sold dlra145dtta0 million aggregate principal amount of notes which are convertible into our common stock, initially at the conversion price of dlra9dtta10 per share, equal to a conversion rate of approximately 109dtta8901 shares per dlra1cmam000 principal amount of notes, subject to adjustment |
| The holders of the notes may choose at any time to convert their notes into common stock |
| The number of shares of common stock issuable upon conversion of the notes, and therefore the dilution of existing common stockholders, could increase as a result of an event triggering the antidilution rights of the notes, including certain acquisitions of the Company in which 10prca or more of the consideration paid for our common stock in the transaction is in the form of cash or securities that are not freely tradable |
| Conversion of our convertible senior notes would result in issuance of additional shares of common stock, diluting existing common stockholders |
| Our stockholders may be diluted, or our common stock price may be adversely affected, by the exercise of outstanding stock options or other issuances of our common stock |
| We may issue additional common stock, preferred stock, or securities convertible into or exchangeable for our common stock |
| Furthermore, substantially all shares of common stock for which our outstanding stock options are exercisable are, once they have been purchased, eligible for immediate sale in the public market |
| The issuance of common stock, preferred stock or securities convertible into or exchangeable for our common stock or the exercise of stock options would dilute existing investors and could adversely affect the price of our common stock |
| We have adopted anti-takeover defenses that could make it difficult for another company to acquire control of us or could limit the price investors might be willing to pay for our stock |
| Certain provisions of our certificate of incorporation, bylaws, debt instruments and Delaware law could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders |
| These provisions include the adoption of a Stockholder Rights Plan, commonly known as a “poison pill |
| ” Under the Stockholder Rights Plan, we made a dividend distribution of one preferred share purchase right for each share of our common stock outstanding as of August 21, 1995 and each share of our common stock issued after that date |
| In July 2000, we made certain technical changes to amend the plan and extended the term of such plan until 2010 |
| The rights are exercisable only if an acquirer purchases 15 percent or more of our common stock or announces a tender offer for 15 percent or more of our common stock |
| Upon exercise, holders other than the acquirer may purchase our stock at a discount |
| Our Board of Directors may terminate the rights plan at any time or under certain circumstances redeem the rights |
| Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, the plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding such acquisition |
| These provisions and certain provisions of the Delaware General Corporation Law may have the effect of deterring hostile takeovers or otherwise delaying or preventing changes in our management or in the control of our company, including transactions in which our stockholders might otherwise receive a premium over the fair market value of our common stock |
| 25 _________________________________________________________________ [78]Table of Contents Due to the potential value of our strategic investments, we could be determined to be an investment company, and if such a determination were made, we would become subject to significant regulation that would adversely affect our business |
| Our non-controlling position in Ceregene, along with investments of our available cash resources in certain types of fixed-income securities, could be considered “investment securities” under the Investment Company Act of 1940, raising a question of whether we are an investment company required to register and be regulated under the Investment Company Act |
| Regulation under the Investment Company Act, or a determination that we failed to register when required to do so, could materially and adversely affect our business |
| We believe that we are primarily engaged in the research, development and commercialization of biological cancer therapies and that any investment securities are ancillary to our primary business |
| Nevertheless, possible required dispositions of non-controlling investments could adversely affect our future reported results |
| If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, maintain investor confidence or prevent fraud |
| Effective internal controls are necessary for us to provide reliable financial reports, maintain investor confidence and prevent fraud |
| As our operations have grown, as well as part of our examination of our internal systems in response to Sarbanes-Oxley requirements, we have discovered in the past, and may in the future discover, areas of our internal controls that could be improved |
| None of these issues have risen to the level that we were unable to attest to the effectiveness of our internal controls when we were required to do so |
| During fiscal 2005, we took a number of steps to improve our internal controls |
| Although we believe that all of these efforts have strengthened our internal controls, we continue to work to improve our internal controls |
| We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future |
| Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations |
| Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock |
| Recent accounting pronouncements will impact our future results of operations |
| In December 2004, the Financial Accounting Standards Board, or FASB, issued a revision of Financial Accounting Standards Nodtta 123, or SFAS 123R, which requires all share-based payments to employees and directors, including grants of employee stock options, to be recognized in the income statement based on their values |
| We expect to calculate the value of share-based payments under SFAS 123R on a basis substantially consistent with the fair value approach of SFAS 123 |
| We will adopt SFAS 123R in our fiscal quarter beginning January 1, 2006, using the modified prospective method |
| We expect the adoption of SFAS 123R will have a material impact on our results of operations in that fiscal quarter and in each subsequent quarter, although it will have no impact on our overall liquidity |
| We cannot reasonably estimate the impact of adoption because it will depend on levels of share-based payments granted in the future as well as certain assumptions that can materially affect the calculation of the value share-based payments to employees and directors |
| However, had we adopted SFAS 123R in prior periods, the impact of the standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net loss and pro forma loss per common share in Note 1 of Notes to Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K The adoption of SFAS 123R may affect the way we compensate our employees or may cause other changes in the way we conduct our business |
| 26 _________________________________________________________________ [79]Table of Contents Risks Related to Our Industry In order for our products to be offered to the public, they must undergo extensive clinical testing and receive approval from the FDA and other regulatory agencies, which could delay or prevent the commercialization of our products |
| Human therapeutic products must undergo rigorous preclinical and clinical testing and other premarket approval procedures by the FDA and similar authorities in foreign countries |
| Preclinical tests include laboratory evaluation of potential products and animal studies to assess the potential safety and efficacy of the product and its formulations |
| Initiation of clinical trials requires approval by health authorities |
| Clinical trials involve the administration of the investigational new drug to healthy volunteers or to patients under the supervision of a qualified principal investigator |
| Clinical trials must be conducted in accordance with FDA and ICH Good Clinical Practices and the European Clinical Trial Directive under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated |
| Other national, foreign and local regulations may also apply |
| The developer of the drug must provide information relating to the characterization and controls of the product before administration to the patients participating in the clinical trials |
| This requires developing approved assays of the product to test before administration to the patient and during the conduct of the trial |
| In addition, developers of pharmaceutical products must provide periodic data regarding clinical trials to the FDA and other health authorities, and these health authorities or our Independent Data Monitoring Committees may issue a clinical hold upon a trial if they do not believe, or cannot confirm, that the trial can be conducted without unreasonable risk to the trial participants |
| We cannot assure you that US and foreign health authorities will not issue a clinical hold with respect to any of our clinical trials in the future |
| The results of the preclinical testing and clinical testing, together with chemistry, manufacturing and controls information, are submitted to the FDA and other health authorities in the form of a new drug application for a pharmaceutical product, and in the form of a biologics license application for a biological product, requesting approval to commence commercial sales |
| In responding to a new drug application or a biologics license application, the FDA or foreign health authorities may grant marketing approvals, request additional information or further research, or deny the application if it determines that the application does not satisfy its regulatory approval criteria |
| Regulatory approval of a new drug application, biologics license application, or supplement is never guaranteed, and the approval process can take several years and is extremely expensive |
| The FDA and foreign health authorities have substantial discretion in the drug and biologics approval processes |
| Despite the time and expense incurred, failure can occur at any stage, and we could encounter problems that cause us to abandon clinical trials or to repeat or perform additional preclinical, clinical or manufacturing-related studies |
| Approvals may not be granted on a timely basis, if at all, and if granted may not cover all the clinical indications for which we may seek approval |
| Also, an approval might contain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of use |
| Even if our products are approved by regulatory authorities, if we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market |
| Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval pre-clinical, manufacturing, clinical and safety data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies |
| Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product |
| Later discovery of previously unknown problems with our products including unanticipated adverse events of unanticipated severity or frequency, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures or detention, injunctions or the imposition of civil or criminal penalties |
| 27 _________________________________________________________________ [80]Table of Contents We are subject to federal, state, local and foreign laws and regulations, and complying with these may cause us to incur significant costs |
| We are subject to laws and regulations enforced by the FDA, the DEA, the California Department of Health Services, foreign health authorities and other regulatory statutes including: • the Occupational Safety and Health Act; • the Environmental Protection Act; • the Toxic Substances Control Act; • the Food, Drug and Cosmetic Act; • the Resource Conservation and Recovery Act; and • other current and potential federal, state, local or foreign laws and regulations |
| In particular with respect to environmental laws, product development activities involve the use of hazardous materials, and we may incur significant costs as a result of the need to comply with these laws |
| Our research, development and manufacturing activities involve the controlled use of hazardous materials, chemicals, viruses and radioactive compounds |
| We are subject to federal, foreign, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and waste products |
| Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by applicable laws and regulations, we cannot completely eliminate the risk of contamination or injury, by accident or as the result of intentional acts of terrorism, from these materials |
| In the event of an accident, we could be held liable for any damages that result, and any resulting liability could exceed our resources |
| We do not carry insurance for potential exposures which could result from these risks |
| We may also be required to incur significant costs to comply with environmental laws and regulations in the future |
| Reimbursement from third-party payers may become more restricted in the future, which may reduce demand for our products |
| There is uncertainty related to the extent to which third-party payers will cover and pay for newly approved therapies |
| Sales of our future products will be influenced by the willingness of third-party payers to provide reimbursement |
| In both domestic and foreign markets, sales of our potential products will depend in part upon coverage and payment amounts from third-party payers, including: • government agencies; • private health care insurers and other health care payers such as health maintenance organizations; and • self-insured employee plans |
| There is considerable pressure to reduce the cost of biotechnology and pharmaceutical products |
| Reimbursement from government agencies, insurers and large health organizations may become more restricted in the future |
| Our potential products represent a new mode of therapy, and while the cost-benefit ratio of the products may be favorable, we expect that the costs associated with our products will be substantial |
| Our proposed products, if successfully developed, may not be considered cost-effective by third-party payers |
| Insurance coverage might not be provided by third-party payers at all or may be provided only after substantial delay |
| Even if such coverage is provided, the approved third-party payment amounts might not be sufficient to permit widespread acceptance of our products |
| The continuing efforts of governmental and third-party payers to contain or reduce the costs of healthcare may impair our future revenues and profitability |
| The pricing of our future products may be influenced in part by government controls |
| For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control |
| In the United States, there have been, and we expect that there will continue to be, a number of 28 _________________________________________________________________ [81]Table of Contents federal and state proposals to implement more rigorous provisions relating to government payment levels |
| While we cannot predict whether the government will adopt any such legislative or regulatory proposals, the announcement or adoption of these proposals could have a material adverse effect on our business, results of operations, financial condition and cash flow |