| STEMCELLS INC ITEM 1A RISK FACTORS Risks Related to our Business Any adverse development in the initial clinical trial for our stem cell technology could substantially depress our stock price and prevent us from raising the capital we will need to further develop our stem cell technology |
| To an unusual extent, our ability to progress as a company is significantly dependent on a single early stage clinical trial |
| Any clinical, regulatory or other development that prevents or delays us from conducting our initial clinical trial for Batten disease, or any safety issue or adverse side effect to any patient that occurs during the trial, or the failure of this initial trial to enroll patients and proceed to completion as anticipated or to show the results expected by investors, would likely significantly depress our stock price and could prevent us from raising the substantial additional capital we will require to further develop our stem cell technologies |
| 20 _________________________________________________________________ [69]Table of Contents Our financial situation is precarious and, based on currently estimated operating expenses, our existing capital resources may not be sufficient to fund our operations beyond the next eighteen months |
| We have incurred significant operating losses and negative cash flows since inception |
| We have not achieved profitability and may not be able to realize sufficient revenues to achieve or sustain profitability in the future |
| We do not expect to be profitable in the next several years, but rather expect to incur additional and increasing operating losses |
| We have limited liquidity and capital resources and must obtain significant additional capital resources in order to sustain our product development efforts and for acquisition of technologies and intellectual property rights, preclinical and clinical testing of our anticipated products, pursuit of regulatory approvals, acquisition of capital equipment, laboratory and office facilities, establishment of production capabilities, maintaining and enforcing our intellectual property portfolio, general and administrative expenses and other working capital requirements |
| We rely on cash reserves and proceeds from equity and debt offerings, proceeds from the transfer or sale of our intellectual property rights, equipment, facilities or investments, and government grants and funding from collaborative arrangements, if obtainable, to fund our operations |
| If we exhaust our cash reserves and are unable to realize adequate financing, we may be unable to meet operating obligations and be required to initiate bankruptcy proceedings |
| Our existing capital resources may not be sufficient to fund our operations beyond the next eighteen months |
| We intend to pursue opportunities to obtain additional financing in the future through equity and debt financings, corporate alliances, grants and collaborative research arrangements |
| The source, timing and availability of any future financing will depend principally upon market conditions, interest rates and, more specifically, on our progress in our exploratory, preclinical and future clinical development programs |
| Lack of necessary funds may require us to delay, scale back or eliminate some or all of our research and product development programs and/or our capital expenditures or to license our potential products or technologies to third parties |
| Our product development programs are based on novel technologies and are inherently risky |
| We are subject to the risks of failure inherent in the development of products based on new technologies |
| The novel nature of the therapies creates significant challenges in regards to product development and optimization, manufacturing, government regulation, third party reimbursement and market acceptance |
| For example, the FDA has relatively little experience with stem cell-based therapeutics, and the pathway to regulatory approval for our product candidates may accordingly be more complex and lengthy than the pathway for new conventional drugs |
| These challenges may prevent us from developing and commercializing products on a timely or profitable basis or at all |
| Our technology is at an early stage of discovery and development, and we may fail to develop any commercially acceptable or profitable products |
| Before we may market any product, we must obtain regulatory approval from the FDA and equivalent foreign agencies after conducting extensive preclinical studies and clinical trials that demonstrate that our product candidates are safe and effective for each disease for which we seek approval |
| We expect that none of our cellular therapy product candidates will be commercially available for several years, if at all |
| Our programs are still at the preclinical phase for our candidate human liver stem cell, and at the discovery phase for our candidate human pancreas stem cell |
| While the US Food and Drug Administration (FDA) has permitted us to go forward with our proposed Phase I clinical trial of our proprietary neural stem cell therapy product — HuCNS SC — in Batten disease, and the Institutional Review Board of the Oregon Health & Science University has approved the protocol, that trial has not yet enrolled or treated any patients and there can be no assurance that the clinical investigators will be able to identify suitable candidates for the trial or of a successful outcome of the trial if candidates are enrolled |
| We may fail to discover the stem cells we are seeking, to develop any products, to obtain regulatory approvals, to enter clinical trials, or to commercialize any products |
| We may elect to delay or discontinue preclinical studies or clinical trials based on unfavorable results |
| Any product using stem cell technology may fail to: • survive and persist in the desired location; • provide the intended therapeutic benefits; 21 _________________________________________________________________ [70]Table of Contents • properly integrate into existing tissue in the desired manner; or • achieve therapeutic benefits equal to or better than the standard of treatment at the time of testing |
| In addition, our products may cause undesirable side effects |
| Results of preclinical research may not be indicative of the results that will be obtained in later stages of preclinical or clinical research |
| If regulatory authorities do not approve our products or if we fail to maintain regulatory compliance, we would be unable to commercialize our products, and our business and results of operations would be harmed |
| Furthermore, because stem cells are a new form of therapy, the marketplace may not accept any products we may develop |
| If we do succeed in developing products, we will face many potential obstacles such as the need to obtain regulatory approvals and to develop or obtain manufacturing, marketing and distribution capabilities |
| In addition, we will face substantial additional risks such as product liability claims |
| Moreover, because our cell therapy treatments will be derived from tissue of individuals other than the patient (that is, they will be “non-self” or “allogeneic” transplant products), patients will require the use of immunosuppressive drugs such as cyclosporine, FK506, or others to prevent rejection of the cells |
| While immunosuppression is now standard in connection with allogeneic transplants of various kinds, long-term maintenance on immunosuppressive drugs can produce complications that include infection, cancer, cardiovascular disease, renal dysfunction and other side effects depending upon which immunosuppressive regimen is employed |
| Immunosuppression has not been tested with our therapies since we have not yet conducted any clinical trials |
| Our success will depend in large part on our ability to develop and commercialize products that treat diseases other than Batten disease |
| Although we have initially focused on evaluating our neural cell therapy product for the treatment of infantile and late infantile forms of NCL (Batten disease), this disease is rare, and the market for treating this disease is small |
| Accordingly, even if we obtain marketing approval for HuCNS-SC for Batten disease, in order to achieve profitability, if at all, we will need to obtain approval for HuCNS-SC and other potential products to treat additional diseases that present more significant market opportunities |
| We have payment obligations resulting from real property owned or leased by us in Rhode Island, which diverts funding from our stem cell research and development |
| Prior to our reorganization in 1999 and the consolidation of our business in California, we carried out our former encapsulated cell therapy programs in Lincoln, Rhode Island, where we also had our administrative offices |
| Although we have vacated the Rhode Island facilities, we remain obligated to make lease payments and payments for operating costs for our former science and administrative facility, which we have leased through June 30, 2013 |
| These costs, before sub-tenant rental income, amounted to approximately dlra1cmam450cmam000 in 2005; our rent payments will increase over the term of the lease, and our operating costs may increase as well |
| In addition to these costs of our former science and administrative facility, we are obligated to make debt service payments and payments for operating costs of approximately dlra450cmam000 per year for our former encapsulated cell therapy pilot manufacturing facility, which we own |
| We have currently subleased a portion of the science and administrative facility, and are seeking to sublease the remaining portion, but we cannot be sure that we will be able to keep any part of the facility subleased for the duration of our obligation |
| We have currently subleased the entire pilot manufacturing facility to a privately-held biotechnology company, but may not be able to sublease or sell the facility in the future once the current sublease agreements expire |
| These continuing costs significantly reduce our cash resources and adversely affect our ability to fund further development of our stem cell technology |
| In addition, changes in real estate market conditions and assumptions regarding the length of time it may take us to either fully sublease, assign or sell our remaining interest in the our former research facility in Rhode Island may have a significant impact on and cause large variations in our quarter to quarter results of operations |
| In 1999, in connection with exiting our former research facility in Rhode Island, we created a reserve for the estimated lease payments and operating expenses related to it |
| The reserve is periodically re-evaluated and adjusted based on assumptions relevant to real estate market conditions and the estimated time until we can either fully sublease, assign or sell our remaining interests in the property |
| At December 31, 2005, the reserve was dlra7cmam306cmam000 |
| In 2005 and 2004, we incurred dlra1cmam079cmam000 and dlra1cmam152cmam000 in operating expenses net of sub-tenant income for this facility |
| Expenses for this facility will fluctuate based on changes in tenant occupancy rates and other operating expenses related to the lease |
| Even though it is our intent to sublease, assign, sell or otherwise divest ourselves of our interests in the facility at the earliest possible time, we cannot determine 22 _________________________________________________________________ [71]Table of Contents with certainty a fixed date by which such events will occur |
| In light of this uncertainty, based on estimates, we will periodically re-evaluate and adjust the reserve, as necessary, and we may make significant adverse adjustments to the reserve in the future |
| We may need but fail to obtain partners to support our stem cell development efforts and to commercialize our technology |
| Equity and debt financings alone may not be sufficient to fund the cost of developing our stem cell technologies, and we may need to rely on our ability to reach partnering arrangements to provide financial support for our stem cell discovery and development efforts |
| In addition, in order to successfully develop and commercialize our technology, we may need to enter into a wide variety of arrangements with corporate sponsors, pharmaceutical companies, universities, research groups and others |
| While we have engaged, and expect to continue to engage, in discussions regarding such arrangements, we have not reached any agreement, and we may fail to obtain any such agreement on terms acceptable to us |
| Even if we enter into these arrangements, we may not be able to satisfy our obligations under them or renew or replace them after their original terms expire |
| Furthermore, these arrangements may require us to grant certain rights to third parties, including exclusive marketing rights to one or more products, may require us to issue securities to our collaborators or may contain other terms that are burdensome to us |
| If any of our collaborators terminates its relationship with us or fails to perform its obligations in a timely manner, the development or commercialization of our technology and potential products may be adversely affected |
| Because the patient population for NCL, or Batten disease, is very small, we may encounter difficulties in enrolling subjects in our first planned clinical trial |
| The first clinical application we are pursuing — NCL (also known as Batten disease) — has a very small patient population |
| From this small population, we must locate and enroll patients that satisfy the specific enrollment criteria for our planned clinical trial for this indication |
| This clinical trial may be delayed significantly or terminated if we are unable to enroll a sufficient number of qualified patients |
| We have a history of operating losses, and we may fail to obtain revenues or become profitable |
| We expect to continue to incur substantial operating losses in the future in order to conduct our research and development activities, and, if those activities are successful, to fund clinical trials and other expenses |
| These expenses include the cost of acquiring technology, product testing, acquiring regulatory approvals, establishing production, marketing, sales and distribution programs and administrative expenses |
| We have not earned any revenues from sales of any product |
| All of our past revenues have been derived from, and any revenues we may obtain for the foreseeable future are expected to be derived from, cooperative agreements, research grants, investments and interest on invested capital |
| We currently have no cooperative agreements, we have only one current research grant for our stem cell technology, and we may not obtain any such agreements or additional grants in the future or receive any revenues from them |
| If we are unable to protect our patents and proprietary rights, our business, financial condition and results of operations will be harmed |
| We own or license a number of patents and pending patent applications related to various stem and progenitor cells and methods of deriving and using them, including human neural stem cell cultures |
| Patent protection for products such as those we propose to develop is highly uncertain and involves complex and continually evolving factual and legal questions |
| The governmental authorities that consider patent applications can deny or significantly reduce the patent coverage requested in an application before or after issuing the patent |
| Consequently, we do not know whether any of our pending applications will result in the issuance of patents, if any existing or future patents will provide sufficient protection or significant commercial advantage or if others will circumvent these patents |
| We cannot be certain that we were the first to discover the inventions covered by each of our pending patent applications or that we were the first to file patent applications for such inventions because patent applications are secret until they are published, and because publication of discoveries in the scientific or patent literature often lags behind actual discoveries |
| Patents may not issue from our pending or future patent applications or, if issued, may not be of 23 _________________________________________________________________ [72]Table of Contents commercial benefit to us |
| In addition, our patents may not afford us adequate protection from competing products |
| Third parties may challenge our patents or governmental authorities may declare them invalid or reduce their scope |
| In the event that a third party has also filed a patent application relating to inventions claimed in our patent applications, we may have to participate in proceedings to determine priority of invention |
| Even if a patent issues, a court could decide that the patent was issued invalidly |
| Because patents issue for a limited term, our patents may expire before we utilize them profitably |
| Our most important patents begin to expire in 2015 |
| Under the procedures of the European Patent Office, third parties may oppose our issued European patents during the relevant opposition period |
| These proceedings and oppositions could result in substantial uncertainties and cost for us, even if the eventual outcome is favorable to us, and the outcome might not be favorable to us |
| One party has opposed two of our granted European patents |
| Both oppositions were heard in 2005, and the patents were maintained in somewhat altered form |
| The time for appeal has not yet run and there can be no assurance that the opposing party will not appeal |
| While we are confident that, should the decision be appealed by the opposing party, it will be upheld, there can be no guarantee of this |
| If we are ultimately unsuccessful in our defense of the opposed patents, all claimed rights in the opposed patents will be lost in Europe |
| US counterparts to these patents are part of our issued patent portfolio; they are not subject to opposition, since that procedure does not exist under US patent law, but other types of proceedings may be available to third parties to contest our US patents |