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GERN > SEC Filings for GERN > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for GERON CORP


15-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto included in Part II, Item 8 of this annual report on Form 10-K.

We are a biopharmaceutical company developing first-in-class therapies for cancer. Imetelstat, a novel, first-in-class telomerase inhibitor, is our product candidate in clinical development. Imetelstat is based on our core expertise in telomerase and telomere biology. Telomerase is an enzyme that enables cancer cells to maintain telomere length, which provides them with the capacity for limitless cellular replication. Imetelstat is a potent and specific inhibitor of telomerase. Based on clinical data we obtained in late 2012, we may develop imetelstat to treat one or more hematologic myeloid malignancies such as myelofibrosis, or MF, myelodysplastic syndromes, or acute myelogenous leukemia. We are also evaluating the impact of a recent updated analysis that included a more mature follow-up of clinical data and a re-test of patient tumor samples using a refined, prospective assay to measure telomere length from our randomized Phase 2 trial of imetelstat in advanced non-small cell lung cancer, or NSCLC, on our plans for the potential development of imetelstat to treat one or more solid tumors, such as NSCLC.

We have incurred operating losses every year since our operations began in 1990. 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. For the years ended December 31, 2012, 2011 and 2010, we incurred net losses of $68.9 million, or $0.54 per share, $96.9 million, or $0.78 per share, and $111.4 million, or $1.14 per share, respectively. As of December 31, 2012, we had an accumulated deficit of $854.4 million.

Substantially all of our revenues to date have been research support payments under collaboration agreements and milestones, royalties and other revenues from our licensing arrangements. Revenues generated from these arrangements will not be sufficient alone to continue or expand our research or development activities and otherwise sustain our operations.

As of December 31, 2012, we had cash, restricted cash, cash equivalents and marketable securities of $96.3 million compared to $154.2 million at December 31, 2011 and $221.3 million at December 31, 2010. We estimate that our existing capital resources, amounts available to us under our equipment financing facility and future interest income will be sufficient to fund our current level of operations through at least the next 12 months.

2012 Phase 2 Top-Line Results: Hematologic Malignancies

We evaluated imetelstat in two single-arm Phase 2 trials in hematologic, or blood-based, cancers: essential thrombocythemia, or ET, and multiple myeloma. Top-line data from the ET trial that we


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presented in December 2012 at the American Society of Hematology annual meeting showed durable hematologic and molecular responses in patients, suggesting that imetelstat inhibited the progenitor cells of the malignant clone believed to be responsible for the underlying disease in a relatively selective manner. In addition, preliminary data from the multiple myeloma trial showed a rapid and significant decrease in myeloma progenitor cells that were detected in blood over the course of imetelstat treatment. The Phase 2 trials of imetelstat in ET and multiple myeloma are no longer enrolling patients and we are continuing to follow patients previously enrolled in the trials. We believe the clinical results in ET provide the rationale to pursue development of imetelstat in other hematologic myeloid malignancies, most of which are driven by clonal proliferation of malignant progenitor cells.

2012 Phase 2 Top-Line Results: Solid Tumors

We also evaluated imetelstat in two randomized, controlled Phase 2 clinical trials in solid tumors: one evaluated imetelstat in combination with paclitaxel compared to paclitaxel alone in patients with metastatic breast cancer, or MBC, and the other tested imetelstat as maintenance treatment compared to observation following induction treatment with platinum-based doublet chemotherapy in patients with advanced NSCLC.

In September 2012, we discontinued the MBC trial because the median progression-free survival, or PFS, in the imetelstat-treatment arm was shorter than in the comparator arm. In the NSCLC trial, a modest, although not statistically significant, trend in PFS in favor of the imetelstat-treatment arm was observed. Enrollment in the Phase 2 NSCLC trial was completed in May 2012, and we are continuing to follow patients previously enrolled in the trial.

In December 2012, we completed a sub-group analysis of the clinical data from the NSCLC trial in which we analyzed the effect of imetelstat on tumors with various tumor telomere lengths. The data from this sub-group analysis showed that the imetelstat-treated patients with short tumor telomere length experienced an increase in PFS compared to patients in the comparator arm. This treatment effect was not observed in patients whose tumors had medium-to-long telomeres.

In March 2013, we completed an updated analysis of the sub-group based on tumor telomere length that included a more mature follow-up of clinical data and a re-test of patient tumor samples using a refined, prospective assay to measure telomere length. In the updated analysis, the magnitude of the treatment effect in patients whose tumors had short telomeres was not reproduced. Data from the NSCLC trial have been accepted for presentation at the American Association for Cancer Research annual meeting to be held in April 2013.

Future Development of Imetelstat

Based on the data from our Phase 2 ET clinical trial, in November 2012, Dr. Ayalew Tefferi at the Mayo Clinic initiated an investigator-sponsored trial to evaluate the safety and efficacy of imetelstat in patients with MF and determine the optimal dose and schedule for further evaluation. Data from this trial will inform any future Geron-sponsored clinical trial in patients with MF. In addition, we intend to expand our directed program of investigator-sponsored trials to other hematologic myeloid malignancies, including myelodysplastic syndromes and acute myelogenous leukemia. We are also working with expert advisors to assess the potential for further development of imetelstat in ET.

We are evaluating the impact of the March 2013 updated sub-group analysis on our plans for potential development of imetelstat in solid tumors, including NSCLC. In addition, in order to explore the hypothesis that patients with NSCLC whose tumors have short telomeres may have an improved outcome when treated with imetelstat, we are refining and evaluating candidate assays to prospectively measure tumor telomere length, and have commenced the procedures for screening multiple tumor banks (e.g., small cell lung cancer, ovarian cancer and sarcomas) to identify other solid tumor types


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with a significant number of patients that have tumors with short telomeres. Results of these activities may help us understand the potential for imetelstat in the treatment of solid tumors outside of NSCLC.

Discontinuation of GRN1005 and Company Restructuring

In December 2012, we discontinued development of GRN1005, a novel peptide-drug conjugate designed to treat cancers that have metastasized to the brain, based on an interim analysis for futility for GRABM-B, our Phase 2 trial in patients with brain metastases arising from breast cancer, and study enrollment challenges with GRABM-L, our Phase 2 trial in patients with brain metastases arising from non-small cell lung cancer. The GRABM-B and GRABM-L trials have been closed to further patient enrollment and we continue to follow the patients remaining in the trials. In connection with the decision to discontinue development of GRN1005, we provided to Angiochem, Inc. notice of termination of both the exclusive license agreement under which we received rights to GRN1005 and an associated research collaboration and option agreement. Under the terms of the license agreement, the effective date of the termination is June 1, 2013. However, our obligations to complete the GRABM-B and GRABM-L trials may continue beyond that date.

In connection with the discontinuation of GRN1005, we reduced our workforce from 107 positions to 64 full-time positions, resulting in restructuring charges of approximately $2.7 million related to one-time termination benefits and impairment of various assets which were recognized in the fourth quarter of 2012. The remaining restructuring charge is expected to be recorded in the first half of 2013. We plan to sell the GRN1005 manufacturing equipment, the net proceeds of which may offset some of these future charges. We expect the restructuring will result in aggregate cash expenditures of approximately $2.5 million, of which $375,000 related to one-time termination benefits that were paid as of December 31, 2012 and approximately $2.1 million relates to one-time termination benefits to be paid during 2013.

Discontinuation of Human Embryonic Stem Cell Programs and Divestiture of Human Embryonic Stem Cell Assets

In November 2011, we discontinued further development of our stem cell programs. With this decision, a total of 66 full-time positions were eliminated, resulting in restructuring charges of approximately $5.4 million related to one-time termination benefits and write-downs of excess lab equipment and leasehold improvements that were recognized in the fourth quarter of 2011.

In January 2013, we entered into an Asset Contribution Agreement, or the Agreement, with BioTime, Inc., or BioTime, and BioTime's recently formed subsidiary, BioTime Acquisition Corporation, or BAC, providing for the divestiture of all of our human embryonic stem cell assets, including intellectual property, proprietary technology, materials, equipment and reagents, contracts, regulatory filings, our Phase 1 clinical trial of oligodendrocyte progenitor cells, or GRNOPC1, in patients with acute spinal cord injury, and our autologous cellular immunotherapy program, including data from the Phase 2 clinical trial of the autologous immunotherapy in patients with acute myelogenous leukemia, or our stem cell assets, to BAC upon the closing of the transaction.

As consideration for the contribution of our human embryonic stem cell assets to BAC, upon the closing, BAC will issue to Geron approximately 6.5 million shares of its Series A common stock, which we will distribute to our stockholders on a pro rata basis following the closing. BAC will also pay royalties to us on the sale of products that are commercialized, if any, in reliance upon our patents acquired by BAC. In addition, BioTime will contribute to BAC certain cash, stock and warrants. Some of these warrants will be distributed by BAC, after the closing of the transaction, to the holders of BAC Series A common stock. The transaction, which is expected to close no later than September 30, 2013, is subject to negotiated closing conditions, including certain approvals by BioTime's shareholders, the effectiveness of certain registration statements to be filed by BioTime and BAC with the United


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States Securities and Exchange Commission, or the SEC, with respect to the securities to be distributed as contemplated by the Agreement, and other customary closing conditions.

Prior to the closing, we are subject to certain obligations, including the obligation to exercise reasonable best efforts to preserve intact and maintain the assets to be contributed by us to BAC upon the closing of the transaction, including our intellectual property rights and the continuation of patents in-licensed from third parties. If we are unable to preserve intact and maintain the assets to be contributed by us to BAC, or if BioTime or BAC are unable to satisfy their obligations with respect to the transaction contemplated by the Agreement, including the obligation to obtain the effectiveness of certain registration statements to be filed by them with the SEC, we may be unable to fully complete the transaction with BioTime and BAC, which could have a material adverse effect on our business.

Upon the closing, BAC will assume all post-closing costs with respect to all of the assets contributed by us, including any costs related to the GRNOPC1 clinical trial. Additionally, upon the closing, BAC will be substituted for us as a party in an appeal by us of two rulings by the U.S. Patent and Trademark Office's Board of Patent Appeals and Interferences in favor of ViaCyte, Inc. related to two of our patent applications covering the production of endoderm from human embryonic stem cells (part of the process for making pancreatic islet cells), and BAC will assume all costs arising after the closing with respect to the appeal.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 of Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

A critical accounting policy is defined as one that is both material to the presentation of our consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: (i) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (ii) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.

Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and meaningfully present our financial condition and results of operations.


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We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements:

Fair Value of Financial Instruments

We categorize financial instruments recorded at fair value on our consolidated balance sheet based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows:

Level 1-Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2-Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument's anticipated life.

Level 3-Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used for instruments measured at fair value on our consolidated balance sheet, including the category for such instruments.

We classify inputs to derive fair values for marketable securities available-for-sale as Level 1 and 2. Instruments classified as Level 1 include money market funds, representing 17% of our total financial instruments measured at fair value classified as assets as of December 31, 2012. Instruments classified as Level 2 include U.S. government-sponsored enterprise securities, commercial paper and corporate notes, representing 83% of our total financial instruments measured at fair value classified as assets as of December 31, 2012. The price for each security at the measurement date is derived from various sources. Periodically, we assess the reasonableness of these sourced prices by comparing them to the prices provided by our portfolio managers from broker quotes as well as reviewing the pricing methodologies used by our portfolio managers. Historically, we have not experienced significant deviation between the sourced prices and our portfolio manager's prices.

Warrants to purchase common stock and non-employee options are normally traded less actively, have trade activity that is one way, and/or traded in less-developed markets and are therefore valued based upon models with significant unobservable market parameters, resulting in Level 3 categorization. Instruments classified as Level 3 include derivative liabilities from non-employee options, representing all of our financial instruments measured at fair value classified as liabilities as of December 31, 2012. The fair value for these instruments is calculated using the Black Scholes option-pricing model. The model's inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction. Use of this model requires us to make assumptions regarding stock volatility, dividend yields, expected term of the non-employee options and risk-free interest rates. Changes to the model's inputs are not changes to valuation methodologies, but instead reflect direct or indirect impacts from changes in market conditions. Accordingly, results from the valuation model in one period may not be indicative of future period measurements. Expected volatilities are based on historical volatilities of our stock. The expected term of non-employee options represents the remaining contractual term of the instruments. The risk-free interest rate is based on the U.S. Zero Coupon Treasury Strip Yields for the remaining term of the instrument. If factors change and we employ different assumptions in future periods, the fair value of these non-employee options reflected as of


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each balance sheet date and the resulting change in fair value that we record may differ significantly from what we have recorded in previous periods. As of December 31, 2012, we have not revised the method in which we derive assumptions in order to estimate fair values of non-employee options classified as assets or liabilities, and we do not expect revisions in the future.

For a further discussion regarding fair value measurements, see Note 2 on Fair Value Measurements in Notes to Consolidated Financial Statements of this Form 10-K.

Revenue Recognition

Since our inception, a substantial portion of our revenues has been generated from collaboration agreements and licensing arrangements. Revenue under such agreements typically includes upfront signing or license fees, cost reimbursements, milestone payments and royalties on future product sales.

We recognize upfront non-refundable signing, license or non-exclusive option fees as revenue when rights to use the intellectual property related to the license have been delivered and over the term of the agreement if we have continuing performance obligations. We recognize cost reimbursement revenue under collaborative agreements as the related research and development costs for services are rendered. We recognize revenue from milestone payments, which are subject to substantive contingencies, upon completion of specified milestones, which represents the culmination of an earnings process, according to contract terms. Royalties are generally recognized as revenue upon the receipt of the related royalty payment. Deferred revenue represents the portion of research or license payments received which has not been earned. When payments are received in equity securities, we do not recognize any revenue unless such securities are determined to be realizable in cash.

We estimate the projected future term of license agreements over which we recognize revenue. Our estimates are based on contractual terms, historical experience and general industry practice. Revisions in the estimated terms of these license agreements have the effect of increasing or decreasing license fee revenue in the period of revision. As of December 31, 2012, no revisions to the estimated future terms of license agreements have been made and we do not expect revisions to the currently active agreements in the future.

Clinical Trial Accruals

Substantial portions of our preclinical studies and all of our clinical trials have been performed by third-party contract research organizations, or CROs, and other vendors. We accrue expenses for preclinical studies performed by our vendors based on certain estimates over the term of the service period and adjust our estimates as required. We accrue expenses for clinical trial activities performed by CROs based upon the estimated amount of work completed on each study. For clinical trial expenses, the significant factors used in estimating accruals include the number of patients enrolled, the number of active clinical sites, and the duration for which the patients will be enrolled in the study. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, review of contractual terms and correspondence with CROs. We base our estimates on the best information available at the time. However, additional information may become available to us which will allow us to make a more accurate estimate in future periods. In this event, we may be required to record adjustments to research and development expenses in future periods when the actual level of activity becomes more certain.

Valuation of Stock-Based Compensation

We measure and recognize compensation expense for all stock-based awards to our employees and directors, including stock options, restricted stock awards and employee stock purchases related to our Employee Stock Purchase Plan, or ESPP, based on estimated fair values. We use the Black Scholes option-pricing model to estimate the grant-date fair value of our stock options and employee stock plan purchases. Option-pricing valuation model assumptions such as expected volatility, risk-free interest rate and expected term impact the fair value estimate.


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Further, the estimated forfeiture rate impacts the amount of aggregate stock-based compensation expense recognized during the period. The fair value of stock options and employee stock purchases is amortized over the vesting period of the awards using a straight-line method.

Expected volatilities are based on historical volatilities of our stock since traded options on Geron stock do not correspond to option terms and trading volume of options is limited. The expected term of options represents the period of time that options granted are expected to be outstanding. In deriving this assumption, we reviewed actual historical exercise and cancellation data and the remaining outstanding options not yet exercised or cancelled. The expected term of employees' purchase rights under our ESPP is equal to the purchase period. The risk-free interest rate is based on the U.S. Zero Coupon Treasury Strip Yields for the expected term in effect on the date of grant. Forfeiture rates are estimated based on historical data and are adjusted, if necessary, over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from their estimate.

We grant restricted stock awards to employees and non-employee directors with three types of vesting schedules: (i) service-based, (ii) performance-based or (iii) market-based. Service-based restricted stock awards generally vest annually over four years. Performance-based stock awards vest only upon achievement of discrete strategic goals within a specified performance period, generally three years. Market-based stock awards vest only upon achievement of certain market price thresholds of our common stock within a specified performance period, generally three years.

The fair value for service-based restricted stock awards is determined using the fair value of our common stock on the date of grant. Stock-based compensation expense is amortized over the requisite service period of the award on a straight-line basis and reduced for estimated forfeitures, as applicable.

The fair value for performance-based restricted stock awards is determined using the fair value of our common stock on the date of grant. Stock-based compensation expense is recognized over the period from the date the performance condition is determined to be probable of occurring through the date the applicable condition is expected to be met and reduced for estimated forfeitures, as applicable. If the performance condition is not considered probable of being achieved, no expense is recognized until such time as the performance condition is considered probable of being met, if ever. We evaluate whether performance conditions are probable of occurring, as well as the expected performance period, on a quarterly basis.

The fair value for market-based restricted stock awards is determined using a lattice valuation model with a Monte Carlo simulation. The model takes into consideration the historical volatility of our stock and the risk-free interest rate at the date of grant. In addition, the model is used to estimate the derived service period for the awards. The derived service period is the estimated period of time that would be required to satisfy the market condition, assuming the market condition will be satisfied. Stock-based compensation expense is recognized over the derived service period using the straight-line method and reduced for estimated forfeitures, as applicable, but is accelerated if the market condition is achieved earlier than estimated.

We evaluate the assumptions used in estimating fair values of our stock-based awards by reviewing current trends in comparison to historical data on an annual basis. We have not revised the methods by which we derive assumptions in order to estimate fair values of our stock-based awards. If factors change and we employ different assumptions in future periods, the stock-based compensation expense that we record for awards to employees and directors may differ significantly from what we have recorded in the current period.

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