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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K (Mark One) þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
for the Fiscal Year Ended December 31,
2004 oro
    
    Transition Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Period From

to
 Commission File Number: 0-19986  CELL GENESYS, INC. (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of
incorporation or organization)
    
    94-3061375(I.R.S. employer
identification number)
 500 Forbes Blvd., South San Francisco, CA 94080
(Address of principal executive offices and zip code)  Registrants telephone number, including area code:
(650) 266-3000  Securities registered pursuant to Section 12 (b) of the Act:
None  Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.001 Par Value
Preferred Shares Purchase Rights  Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes þ No o As of June 30, 2004, the last business day of the Registrants most recently completed second
fiscal quarter, there were 38,391,481 shares of the Registrants voting stock outstanding, and the
approximate aggregate market value of such shares held by non-affiliates of the Registrant (based
on the closing sale price of such shares on the Nasdaq National Market on June 30, 2004) was $399.0
million. Shares of Common Stock held by each executive officer and director and by each person
known to the Registrant who owns 5% or more of the outstanding voting stock have been excluded in
that such persons may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. As
of March 10, 2005, the number of outstanding shares of the Registrants Common Stock
was 45,360,819. Portions of the Registrants Proxy Statement for the 2005 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Annual Report on Form 10-K. Such Proxy Statement
will be filed within 120 days of the end of the fiscal year covered by this Annual Report on Form
10-K.




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TABLE OF CONTENTS PagePART IItem 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    16Item 3.
    
    Legal Proceedings
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    16PART IIItem 5.
    
    Market for
Registrants Common Equity and Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    17Item 6.
    
    Selected Consolidated Financial Data
    
    
    17Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 8.
    
    Consolidated Financial Statements and Supplementary Data
    
    
    38Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    58Item 9A.
    
    Controls and Procedures
    
    
    58Item 9B
    
    Other Information
    
    
    58PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    59Item 11.
    
    Executive Compensation
    
    
    59Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    59Item 13.
    
    Certain Relationships and Related Transactions
    
    
    59Item 14.
    
    Principal Accountant Fees and Services
    
    
    59PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    60SIGNATURES
    
    
    
    
    63EXHIBIT 12.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 32.1
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PART I Statements made in this document other than statements of historical fact, including
statements about us and our subsidiaries and our respective clinical trials, research programs,
product pipelines, current and potential corporate partnerships, licenses and intellectual
property, the adequacy of capital reserves and anticipated operating results and cash expenditures,
are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. As such, they are subject to a number of
uncertainties that could cause actual results to differ materially from the statements made,
including risks associated with the success of research and product development programs, the
issuance and validity of patents, the development and protection of proprietary technologies, the
ability to raise capital, operating expense levels and the ability to establish and retain
corporate partnerships. Reference is made to discussions about risks associated with product
development programs, intellectual property and other risks which may affect us under Other
Factors Affecting Future Operations below. We do not undertake any obligation to update
forward-looking statements. The following should be read in conjunction with our consolidated
financial statements located elsewhere in this Annual Report onForm 10-Kfor the year ended
December 31, 2004 and other documents filed by us from time to time with the Securities and
Exchange Commission. 
  ITEM 1.
    BUSINESS Overview We are a biotechnology company focused on the research, development and commercialization of
biological therapies for patients with cancer. We are currently developing cell-based cancer
vaccines, oncolytic virus therapies and antiangiogenesis therapies to treat different types of
cancer. Our clinical stage cancer programs involve cell- or viral-based products that have been
genetically modified during product development to impart disease-fighting characteristics that are
not found in conventional therapeutic agents. As part of our GVAX® cancer vaccines
program, we are conducting a Phase 3 clinical trial in prostate cancer, are in ongoing Phase 2
clinical trials in lung cancer, pancreatic cancer and leukemia, and are in a Phase 1/2 clinical
trial for multiple myeloma. We initiated our Phase 3 clinical trial for GVAX® prostate
cancer vaccine in July 2004. In our oncolytic virus therapies program, which we are developing in
part through a global alliance with Novartis AG, we initiated a Phase 1/2 clinical trial of CG7870
in combination withchemotherapy in advanced prostate cancer during 2004. We also expect
to initiate a Phase 1 clinical trial of CG0070 in recurrent bladder cancer during the first half of
2005. We also have other preclinical oncolytic virus therapy programs as well as preclinical
antiangiogenesis therapy programs evaluating potential therapies for multiple types of cancer. Cell Genesys was incorporated in the State of Delaware in 1988. Our common stock trades on the
Nasdaq National Market under the symbol CEGE. Our principal executive offices are located at 500
Forbes Boulevard, South San Francisco, California 94080, and our phone number is (650) 266-3000.
Our Internet home page is located at http://www.cellgenesys.com;however, the information in, or
that can be accessed through, our home page is not part of this report. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports
are available, free of charge, on or through our Internet home page as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the Securities and
Exchange Commission, or SEC. During 2004, we continued to increase our focus on developing cancer therapies and
establishing our product development and manufacturing infrastructure for Phase 3 clinical trials.
Our goal is to emphasize off-the-shelf products and, when possible, therapies that can be
administered in the outpatient setting. However, we are also developing a patient-specific vaccine
product for lung cancer. We are currently evaluating cancer therapies based on biological therapy technologies in human
clinical studies. These include studies of GVAX® cancer vaccines, which employ
genetically modified tumor cells to induce an immune system response against malignant cells, as
well as studies of oncolytic virus therapies, which employ genetically modified adenoviruses
engineered to selectively replicate in and kill targeted cancer cells. During 2004, we obtained
encouraging data from several of our GVAX® programs including prostate cancer,
pancreatic cancer, leukemia and myeloma. We also are currently conducting research on antiangiogenesis therapies, which may prevent
tumor blood vessel growth as a strategy for the treatment of cancer. Ceregene, Inc., which was
formed in January 2001 and in which we now have a minority ownership position, is continuing to
develop gene therapies for the treatment of neurological disorders including Alzheimers disease,
Parkinsons disease and Amyotrophic Lateral Sclerosis (ALS), commonly known as Lou Gehrigs
disease. We ended 2004 with approximately $175.0 million in cash, cash equivalents and short-term
investments, including approximately $3.3 million of restricted cash and investments. We have
maintained our financial position through strategic management of our resources, including our
holdings of Abgenix, Inc. common stock (of which we continue to hold approximately 6.6 million
shares) and by relying on funding from various corporate collaborations and licensing agreements.
Additionally, in February 2003, our shelf registration statement was declared effective by the Securities and
Exchange Commission under the Securities Act of 1933, as amended, which initially allowed us to
offer up to $150.0 million of securities on short notice in one or 3




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more public offerings. We used
this shelf registration in March 2004 to complete a public offering of 4,887,500 shares of our
common stock (including the entire over-allotment option), resulting in gross proceeds of $61.1
million. Although up to $88.9 million may still be offered under the shelf registration, there can
be no assurance that we will be able to issue any of the remaining securities under this shelf
registration on acceptable terms, or at all. In October and November 2004, we sold a total of $145.0 million aggregate principal amount of
our 3.125% Convertible Senior Notes due 2011 in a private placement. We used the net proceeds to
repay bank debt totaling $95.0 million, thereby eliminating restrictions on $60.0 million of cash. We may finance certain of our operations through corporate collaborations with established
pharmaceutical and biotechnology companies in order to develop our technologies as broadly as
possible, to fund product development and to accelerate the commercialization of certain product
opportunities. Such alliances are intended to provide financial resources, research, development
and manufacturing capabilities and marketing infrastructure to aid in the commercialization of
potential disease therapies. We also evaluate, on an ongoing basis, opportunities to in-license or
acquire products and/or technologies that complement our portfolio. There can be no assurance that
we will be able to enter into additional collaborative relationships or obtain new products and/or
technologies on acceptable terms, if at all, or that if such actions occur, they will lead to
successful products. Failure to enter into new corporate relationships or expand our product and
technological base may limit our future success. A major portion of our operating expenses to date is related to the research and development
of products either on our own behalf or under contracts, including primarily research and
development of our GVAX® cancer vaccines and oncolytic virus therapy programs. During
2004, 2003, and 2002, our research and development expenses were $92.1 million, $85.3 million and
$75.1 million, respectively. We expect that our research and development expenditures and headcount
will continue to increase in future years to support expanded, more advanced and more numerous
clinical trials, including an anticipated second Phase 3 trial of our GVAX® prostate
cancer vaccine in 2005, additional manufacturing and office facilities, and additional product
development activities. We intend to maintain our strong commitment to research and development as
an essential component of our oncology product development effort involving biological therapies
for cancer. Licensed technology developed by outside parties is an additional source of potential
products. Our
GVAX®Cancer Vaccines Program Our GVAX® vaccines are cancer treatment vaccines designed to stimulate the
patients immune system to effectively fight cancer. This program was added to our product
portfolio through our acquisition of Somatix Therapy Corporation in 1997. GVAX® vaccines
are comprised of tumor cells that are genetically modified to secrete an immune-stimulating hormone
known as granulocyte-macrophage colony stimulating factor, or GM-CSF, and are then irradiated for
safety. Since GVAX® vaccines consist of whole tumor cells, the cancer patients immune
system can be activated against multiple tumor cell components (antigens), potentially resulting in
greater clinical benefit than if the vaccine consisted of only a single tumor cell component.
Additionally, the secretion of GM-CSF by the modified tumor cells enhances the immune response by
activating dendritic cells at the vaccination site, a critical step in the optimal response by the
immune system to any vaccine product. The activation of dendritic cells in turn triggers both of
the key components of the immune responsethe activation of antitumor immune cells and the
production of antitumor antibodies. Both components of the immune response are believed to be
essential for achieving optimal benefit from treatment with a cancer vaccine product, and
GVAX® vaccines have been shown in clinical trials to both activate immune cells and
cause the production of antibodies directed against the patients tumor. The antitumor immune
response which occurs throughout the body following vaccination with a GVAX® product can
potentially result in the destruction of tumor cells that persist or recur following surgery,
radiation therapy or chemotherapy treatment. More than 600 patients have received our GVAX® vaccines in multiple clinical trials
to date, and the vaccines have been shown to have a favorable side effect profile that does not
include the toxicities associated with conventional cancer therapies. The most consistent
treatment-related side effects appear to be inflammation at the injection site and occasional
flu-like symptoms. In addition, risks have been identified in connection with the surgical removal
of tumor cells used to produce our patient-specific lung cancer vaccine. GVAX® vaccines
can be conveniently administered in an outpatient setting as an injection into the skin, a site
where immune cells, including in particular dendritic cells, can be optimally accessed and
activated. Our GVAX® cancer vaccines are generally being tested in non patient-specific
configurations, and we intend to develop these vaccines as off-the-shelf pharmaceutical products.
We are also developing a lung cancer product, which is currently being tested in a patient-specific
configuration that requires us to obtain a tumor sample from the patient. We are currently
manufacturing GVAX® cancer vaccines in our Hayward, California and Memphis, Tennessee
facilities, which operate in accordance with the United States Food and Drug Administrations (FDA)
current Good Manufacturing Practices, or cGMP, regulations. 4




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GVAX®Prostate Cancer Vaccine Our GVAX® prostate cancer vaccine is a non patient-specific product comprised of
two prostate cancer cell lines. We intend to develop and manufacture this vaccine initially as an
off-the-shelf pharmaceutical for use after hormonal therapy for advanced-stage prostate cancer.
Prostate cancer is the second leading cause of cancer death in men in the United States, with
approximately 30,000 men dying each year from the disease. When a man is diagnosed with early-stage
prostate cancer, he is treated with either a prostatectomy (surgical removal of the prostate) or
radiation therapy. If the patient relapses, he is treated with hormone therapy to suppress
testosterone in order to reduce the growth of the tumor. When the hormone therapy fails, the
patient may or may not be treated with chemotherapy depending upon whether the disease has spread,
or metastasized, to other parts of the body. We have designed our Phase 3 clinical trials to
evaluate whether GVAX® prostate cancer vaccine can benefit patients who have become
refractory to hormone therapy and have metastatic disease. We have completed five Phase 1 and 2 clinical trials of our GVAX® prostate cancer
vaccine in over 200 patients with various stages of recurrent prostate cancer, and the vaccine has
had a favorable safety profile in each trial. These clinical trials include two Phase 2 clinical
trials in hormone-refractory prostate cancer patients with radiologic evidence of metastatic
disease (metastatic HRPC), which is the target population for current Phase 3 trial. These trials
were designed to evaluate the safety and efficacy of the vaccine, as well as treatment regimens for
Phase 3 clinical trials. In September 2002, we reported final data from our first Phase 2 multicenter clinical trial of
the prostate cancer vaccine in metastatic HRPC. Thirty-four patients were entered in the trial and
were assigned to receive either low dose (24 patients) or high dose (10 patients) of the vaccine
treatment as their only cancer therapy for up to a six-month period. In updated results reported in
January 2005, patients receiving the higher dose level of the vaccine had a median survival of 34.9
months, and patients receiving the lower dose of the vaccine had a median survival of 24.0 months.
The combined median survival for both dose groups was 26.2 months. These results compare favorably
to those reported for Taxotere® (docetaxel) chemotherapy in combination with prednisone.
This Taxotere® treatment regimen was recently approved by the FDA for the treatment of
patients with this stage of prostate cancer and is now the currently approved standard of care. Preliminary data from the second Phase 2 clinical trial were reported at the June 2004
American Society of Clinical Oncology (ASCO) meeting. The fully enrolled study includes 80 patients
with metastatic HRPC with evidence of metastasis (spreading) to the bone and other sites. Patients
enrolled in this Phase 2 clinical trial were monitored for safety and for evidence of vaccine
activity with serial measurements of PSA, or prostate-specific antigen, a marker for prostate
cancer; ICTP, or carboxy-terminal telopeptide of type I collagen, an independent biochemical marker
of the bone destruction that occurs when prostate cancer spreads into the bone; bone scans; and
prostate cancer-associated antibodies induced by the vaccine. The median follow-up of patients was
12 months and median survival was not yet reached for the study. The preliminary findings indicate
the safety and activity of the vaccine, and confirmed the dose for Phase 3 clinical trials. We
expect to update these results during 2005. We are planning to conduct two Phase 3 clinical trials of GVAX® prostate cancer
vaccine in metastatic HRPC, including patients with high-risk tumors based on their Gleason score,
a measure of the aggressiveness of a patients tumor. The first Phase 3 clinical trial, referred to
as the VITAL-1 trial, commenced in July 2004, and compares GVAX® prostate cancer vaccine
to Taxotere® chemotherapy administered with prednisone with respect to survival benefit
in metastatic HRPC patients who are asymptomatic with respect to cancer-related pain. The VITAL-1
trial is designed to demonstrate an approximately 33% improvement in median survival in the
patients receiving GVAX®vaccine compared to patients receiving Taxotere®
plus predinsone therapy and is expected to enroll approximately 600 patients. We received a Special
Protocol Assessment, or a SPA, from the FDA for this trial in May 2004. Under this procedure, a
sponsor may seek the FDAs agreement on the design and analysis of a clinical trial intended to
form the primary basis of an effectiveness claim. If the FDA agrees in writing, its agreement may
not be changed after the trial begins except in limited circumstances, such as the FDA determining
that a substantial scientific issue essential to determining the safety or effectiveness of the
product was identified after the trial had begun. If the outcome of the trial is successful, the
sponsor will ordinarily be able to rely on it as the basis for approval with respect to
effectiveness. While we have received FDAs agreement on a SPA for this Phase 3 trial assessing
GVAX® prostate cancer vaccine, there can be no assurance that this trial will have a
successful outcome or that we will ultimately receive approval for this product. The second Phase 3
clinical trial, referred to as the VITAL-2 trial, will compare GVAX® prostate cancer
vaccine plus Taxotere® chemotherapy to Taxotere® chemotherapy alone with
respect to survival benefit in metastatic HRPC patients with cancer-related pain. We are currently
finalizing the protocol for this second Phase 3 clinical trial and expect to
begin the trial in the first half of 2005. We plan to manufacture GVAX® prostate
cancer vaccine for Phase 3 clinical trials and potential market launch in our Hayward, California
manufacturing facility, which operates in accordance with cGMP regulations. GVAX®Lung Cancer Vaccine Our GVAX® lung cancer vaccine targets non small-cell lung cancer and is a
patient-specific product made directly from tumor cells that are surgically removed from each
treated patient. After surgical removal of a patients tumor, the GVAX® lung cancer
vaccine is prepared by genetically modifying the patients tumor cells to secrete GM-CSF. The cells
are then irradiated for safety prior 5




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to vaccinating the patient. The vaccines are manufactured at
our Memphis, Tennessee manufacturing facility, which operates in accordance with cGMP regulations,
in a semiautomated closed system designed to maximize sterility and quality control of the
individualized vaccines. Based on the encouraging results of an initial Phase 1/2 clinical trial of GVAX®
lung cancer vaccine in patients with advanced non small-cell lung cancer, the majority of whom had
failed radiation and/or chemotherapy, we initiated an expanded multicenter Phase 2 clinical trial
of this product in advanced non small-cell lung cancer in 2003 using a new semiautomated closed
system to produce the vaccine. This trial is fully enrolled with approximately 100 patients, and we
expect to report preliminary results from this trial during 2005. In addition to the above Phase 2
clinical trial of GVAX® lung cancer vaccine, a second Phase 2 clinical trial commenced
in June 2004 that is being sponsored and partially funded by the Southwest Oncology Group (SWOG), a
cooperative clinical trials group of the National Cancer Institute. This clinical trial is
enrolling patients with bronchoalveolar carcinoma, a subtype of non small-cell lung cancer that,
based on our data, may be particularly responsive to GVAX® lung cancer vaccine. This
trial may enroll up to approximately 100 patients. In the case of patient-specific therapies such
as our GVAX® lung cancer vaccine, the risks of any surgical procedure that may be
required to prepare the vaccine must be considered in the evaluation of the products safety
profile. All surgical procedures, particularly those in advanced disease settings, involve some
element of risk to the patient, which must be evaluated in the context of the patients condition
and therapeutic alternatives. Our ongoing clinical studies are now designed to exclude patients at
higher risk of post-operative complications. Nonetheless, in past and current clinical trials
involving patients with very advanced stages of lung cancer, a small number of patients with
progressive disease have died during the period following surgical removal of their tumors and
prior to administration of GVAX® vaccine. Such events will continue to be included in an
ongoing assessment of the overall risk/benefit profile of this product and could adversely
influence the continuation of the current study and the products future development. An initial Phase 1/2 clinical trial of GVAX® lung cancer vaccine was conducted in
advanced non small-cell lung cancer patients, the majority of whom had failed radiation and/or
chemotherapy. In February 2004, final data from this trial were published in the Journal of the
National Cancer Institute. Of the 33 patients who received vaccination, three patients (9 percent)
achieved a complete response, or a complete disappearance of tumor at all disease sites, with a
median duration of 17.8 months. Another seven patients (21 percent) had stable disease or minor
responses with an overall median duration of 7.7 months. The median survival of all 33 treated
patients was 11.6 months, measured from the initiation of vaccine manufacturing. As noted above,
the results of this trial also suggested that one type of non small-cell lung cancer,
bronchoalveolar carcinoma, may be more responsive to GVAX® lung cancer vaccine, in that
two of the three patients with this type of lung cancer enrolled in the trial experienced complete
responses following vaccine therapy. These results will be further evaluated in the Phase 2
clinical trial sponsored by SWOG. GVAX®Pancreatic Cancer Vaccine Our GVAX® pancreatic cancer vaccine is a non patient-specific product. We are
currently conducting a Phase 2 clinical trial of GVAX® pancreatic cancer vaccine in
combination with surgery and standard adjuvant radiation and chemotherapy. The targeted enrollment
of 60 patients was completed in January 2005. Preliminary results from this Phase 2 trial may be
available in late 2005. The trial was prompted by results from an initial Phase 1 clinical trial
conducted at the Sidney Kimmel Comprehensive Cancer Center at Johns Hopkins. Data from this trial,
which evaluated GVAX® pancreatic cancer vaccine in combination with surgery and standard
adjuvant radiation and chemotherapy, demonstrated prolongation of disease-free survival in three of
eight patients who received the two highest vaccine doses after surgical resection of their tumors
followed by standard adjuvant radiation and chemotherapy. The most recently updated data revealed
that these three patients remained alive and disease-free between 7 and 8 years after their
respective diagnoses. In July 2004, studies were published in The Journal of Experimental Medicine
describing the immune response to the vaccine in these three patients which indicated that
patient-specific T cell immunity had been induced in these patients, but not in patients whose
disease had progressed and who died. Finally, in June 2004, we reported the results of a Phase 2
clinical trial of GVAX®pancreatic cancer vaccine in 50 patients with inoperable
metatastic pancreatic cancer. While the results of this trial demonstrate the safety and
potentially enhanced clinical activity of the vaccine when administered in combination with low,
immunomodulatory doses of cyclophosphamide chemotherapy, we have no current plans to conduct
further studies of this vaccine in inoperable pancreatic cancer patients. GVAX®Vaccines for Hematologic Malignancies Our GVAX® vaccines for hematologic malignancies combine a non patient-specific
GVAX® cancer vaccine product that we manufacture with the patients malignant cells
collected at the treatment center. We are conducting clinical trials evaluating this
GVAX®
vaccine administered after initial chemotherapy pre- and post-bone marrow stem cell
transplantation in patients with newly-diagnosed acute myelogenous leukemia and multiple myeloma. A
Phase 2 clinical trial of GVAX® leukemia vaccine and the Phase 1/2 clinical trial of
GVAX ® myeloma vaccine have both completed enrollment. The goal of GVAX®
vaccine therapy in this setting is to stimulate an immune response directed against the patients
tumor cells and to prolong the remission induced by standard chemotherapy and bone marrow stem cell
transplantation, and the preliminary findings from both trials indicate that vaccine treatment may
reduce laboratory measures of residual disease. 6




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Interim data from the Phase 2 clinical trial of GVAX® leukemia vaccine, which has
enrolled 54 patients, were updated at the December 2004 meeting of the American Society of
Hematology. The preliminary findings of this trial indicate that vaccine therapy is well tolerated
and may reduce residual leukemic cells that persist after chemotherapy, as indicated by decreased
levels of WT-1, a leukemia-associated genetic marker that is detectable in over 95 percent of
patients with active acute myelogenous leukemia. Eleven of 16 patients tested to date were reported
to have decreased WT-1 levels in their peripheral blood following the initiation of vaccine therapy
and the median magnitude of this decrease was approximately 90%. Furthermore, relapse-free
survival after a single pre-transplant vaccine was greater in these 11 patients compared to those
that did not have decreases in WT-1 (80% v. 0%, p=0.02). We expect to update these results during
2005 and potentially announce further development plans for this product. The Phase 1/2 clinical trial of GVAX® myeloma vaccine enrolled 22 patients, and 16
patients received at least one GVAX® vaccination. Interim data were updated at the
December 2004 American Society of Hematology meeting. Combination therapy with chemotherapy
followed by a transplantation and GVAX® vaccine resulted in six complete responses, five
partial responses, three patients with stable disease and two patients with progression. Three
patients with early progression after transplantation demonstrated potential antitumor activity
following initiation of vaccination, as measured by reductions in the myeloma-associated
circulating protein (M-spike) of 92 percent, 37 percent and 25 percent. Treatment with
GVAX® myeloma vaccine in clinical trials to date has been safe and well tolerated. We
expect to update these results in late 2005. Our Oncolytic Virus Therapies Program Our oncolytic virus therapies program utilizes adenovirus, one of the viruses responsible for
the common cold, to create viruses that can kill cancer cells. Virus is engineered to selectively
replicate in targeted cancer cells, thereby killing these cells, leaving healthy normal cells
largely unharmed. The virus replicates in cancer cells until the cancer cell can no longer contain
the virus and bursts. The tumor cell is destroyed and the newly created virus is believed to spread
to neighboring cancer cells to continue the cycle of viral replication and tumor cell destruction.
Compared with traditional therapies, oncolytic virus therapies may have a higher therapeutic index
(greater specificity) with respect to their ability to kill tumor cells. We are currently
manufacturing oncolytic virus therapies and other viral-based products in our San Diego, California
facility, which operates in accordance with cGMP regulations. In July 2003, we announced a global alliance with Novartis for the development and
commercialization of oncolytic virus therapies. Under the agreement, we also acquired exclusive
worldwide rights to the oncolytic virus therapy products and certain related intellectual property
of Genetic Therapy, Inc. (GTI), an affiliate of Novartis, as well as related intellectual property
of Novartis. Our alliance with Novartis thereby provided us with additional oncolytic virus therapy
product opportunities at the preclinical stage of development. CG7870 Oncolytic Virus Therapy for Prostate Cancer CG7870, an oncolytic virus therapy for prostate cancer, has been evaluated in Phase 1/2
clinical trials, and has been shown to have activity following intraprostatic and intravenous
administration as measured by reduction or stabilization of PSA. In December 2002, data from a
Phase 1/2 clinical trial of intraprostatically administered CG7870 in patients with localized,
recurrent prostate cancer were announced at the International Conference on Gene Therapy of Cancer.
Data demonstrated reductions and stabilization of serum levels of PSA. Similar findings have also
been reported for CG7870 administered as a single intravenous injection. During 2003, we initiated
a Phase 1/2 clinical trial of intraprostatic CG7870 in combination with external beam radiation in
patients with localized intermediate-risk prostate cancer. As a result of changing treatment
paradigms for this stage of prostate cancer, however, we discontinued development of this
combination therapy in early 2005 and elected to focus our attentions on our Phase 1/2 clinical
trial of intravenous CG7870 in combination with Taxotere® chemotherapy in patients with
advanced-stage prostate cancer, which was initiated in July 2004. Preclinical studies of CG7870 in
combination with Taxotere® chemotherapy, the currently approved treatment for patients
with advanced-stage prostate cancer, demonstrated significant synergistic antitumor activity in
mouse tumor models of prostate cancer. CG0070 Oncolytic Virus Therapy for Recurrent Bladder Cancer CG0070, an oncolytic virus therapy with specificity for multiple cancers, has been evaluated
in extensive preclinical studies. CG0070 is the first armed oncolytic virus therapy developed by
Cell Genesys, so-named because it has been engineered to include the therapeutic gene for GM-CSF.
As a result, CG0070 can potentially destroy cancer cells by two different mechanisms: direct
cell-killing by the virus and immune-mediated cell-killing stimulated by GM-CSF. In early 2005, we
announced that an Investigational New Drug (IND) application filed with the FDA for CG0070 had
become effective. We expect to begin a Phase 1 clinical trial in patients with recurrent bladder
cancer during the first half of 2005. Our GVAX® cancer vaccines and oncolytic virus therapies are novel therapies which
must undergo rigorous human testing regulated by the FDA. There is no assurance that
GVAX® cancer vaccines or oncolytic virus therapies will be proven safe or efficacious
or, if approved by the FDA, that such products can be successfully commercialized. Although
preliminary results reported 7




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to date from our clinical trials of GVAX® vaccines for
prostate cancer, lung cancer, pancreatic cancer, leukemia and myeloma as well as clinical trials of
our oncolytic virus therapy, CG7870, can be considered encouraging, our therapies may eventually be
shown to have unacceptable toxicities and/or clinical efficacy may not be demonstrated in later
stage testing. Any conclusion as to whether our GVAX® cancer vaccines and oncolytic
virus therapies can potentially play a role in the treatment of multiple types of cancer will be
based on both the results of ongoing clinical trials as well as future Phase 2 and Phase 3 clinical
trials. Our Preclinical Programs Our preclinical programs are focused on additional studies of GVAX® cancer vaccines
and the evaluation of new product opportunities in oncolytic virus therapy and antiangiogenesis
therapy for multiple types of cancer. Moreover, with our increasing focus on cancer, we continue to
execute our plan to pursue gene therapies for neurological disorders through our former subsidiary,
Ceregene, Inc. Oncolytic Virus Therapies Our pipeline of preclinical oncolytic virus therapy products increased in 2003 through our
global alliance with Novartis. Our current pipeline of preclinical oncolytic virus therapy products
includes CG0070, which is equipped with the GM-CSF gene, as well as CG5757 and CG4030, which are
equipped with a telomerase promoter, which provides the potential to target multiple types of
cancer. We expect to initiate a clinical trial for CG0070, an oncolytic virus therapy with multiple
cancer specificity, in bladder cancer in the first half of 2005. Antiangiogenesis Therapy We are conducting research on antiangiogenesis therapies that are designed to interfere with
cancer cell growth or spread by either directly or indirectly blocking tumor blood vessel or
lymphatic vessel growth. We are currently conducting preclinical studies to evaluate the gene-based
delivery of several potential antiangiogenic proteins to determine whether this has any potential
as anticancer therapy. Government Regulations FDA Regulation Prescription pharmaceutical products and biologics are subject to extensive pre- and
post-marketing regulation by the FDA, including regulations that govern the testing, manufacturing,
safety, efficacy, labeling, storage, record-keeping, advertising and promotion of the products
under the Federal Food, Drug and Cosmetic Act and the Public Health Services Act, and by comparable
agencies in most foreign countries. The process required by the FDA before a new drug or biologic
may be marketed in the U.S. generally involves the following: completion of preclinical laboratory
and animal testing; submission of an Investigational New Drug (IND) application, which must become
effective before clinical trials may begin; performance of adequate and well controlled human
clinical trials to establish the safety and efficacy of the proposed drugs or biologics intended
use; and approval by the FDA of a New Drug Application (NDA), in the case of a new drug, or of a
Biologics License Application (BLA) for a biologic. The activities required before a pharmaceutical agent may be marketed in the United States
begin with preclinical testing. Preclinical tests include laboratory evaluation of potential
products and animal studies to assess the potential safety and efficacy of the product and its
formulations. The results of these studies and other information including chemistry, manufacturing
and controls information must be submitted to the FDA as part of an IND application, which must be
reviewed and approved by the FDA before proposed clinical testing can begin. 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 are
conducted in accordance with Good Clinical Practices under protocols that detail the objectives of
the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated.
Each protocol must be submitted to the FDA as part of the IND application. Further, each clinical
study must be conducted under the auspices of an independent institutional review board at the
institution at which the study is conducted. The institutional review board considers, among other
things, ethical factors and the safety of human subjects. In addition, certain protocols involving
the use of genetically modified products must also be reviewed by the Recombinant DNA Advisory
Committee of the National Institutes of Health. Typically, human clinical trials are conducted in three phases that may overlap. In Phase 1,
clinical trials are conducted with a small number of subjects to determine the early safety profile
and pharmacology of the new therapy. In Phase 2, clinical trials are conducted with groups of
patients afflicted with a specific disease in order to determine preliminary efficacy, optimal
dosages and expanded evidence of safety. In Phase 3, large scale, multicenter, comparative clinical
trials are conducted with patients afflicted with a target disease in order to provide enough data
for the statistical proof of efficacy and safety required by the FDA and other regulatory agencies.
In the case of products for life-threatening diseases, the initial human testing is generally done
in the target 8




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patients rather than with healthy volunteers. Since these patients are already
afflicted with the target disease, it is possible that such studies may provide some results
traditionally obtained in Phase 2 clinical trials. These trials are frequently referred to as Phase
1/2 clinical trials. Although the preliminary Phase 1/2 and Phase 2 clinical trials of our
GVAX® cancer vaccines and oncolytic virus therapies have shown a generally favorable
safety profile to date, there can be no assurance that such therapies or products will be tolerated
at higher doses or that the clinical efficacy or safety of such therapy or product will be
demonstrated in later stage testing. The results of the preclinical and clinical testing, together with chemistry, manufacturing
and controls information, are submitted to the FDA in the form of an NDA for a pharmaceutical
product, and in the form of a BLA for a biologic product, in order to obtain approval to commence
commercial sales. In responding to an NDA or a BLA, the FDA 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. Patient-specific therapies such as
our GVAX® lung cancer vaccine may be subject to additional risk with respect to the
regulatory review process. FDA approval for a pharmaceutical or biologic product may not be granted
on a timely basis, if at all, or if granted may not cover all the clinical indications for which
approval is sought or may contain significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use. We have utilized the procedure called Special Protocol Assessment (SPA) for GVAX®
prostate cancer vaccine. Under this procedure, a sponsor may seek the FDAs agreement on the design
and analysis of a clinical trial intended to form the primary basis of an effectiveness claim. If
the FDA agrees in writing, its agreement may not be changed after the trial begins except in
limited circumstances, such as the FDA determining that a substantial scientific issue essential in
determining the safety or effectiveness of the product was identified after the trial had begun. If
the outcome of the trial is successful, the sponsor will ordinarily be able to rely on it as the
basis for approval with respect to effectiveness. While we have received FDAs agreement on a SPA
for the Phase 3 trial comparing GVAX® prostate cancer vaccine to Taxotere®
chemotherapy administered with prednisone with respect to survival benefit in asymptomatic patients
without cancer-related pain, there can be no assurance that this trial will have a successful
outcome or that we will ultimately receive approval for this product. Satisfaction of FDA premarket approval requirements for new drugs and biologics typically
takes several years, and the actual time required may vary substantially based upon the type,
complexity and novelty of the product or targeted disease. Government regulation may delay or
prevent marketing of potential products for a considerable period of time and impose costly
procedures upon our activities. Success in early stage clinical trials or with prior versions of
products does not assure success in later stage clinical trials. Data obtained from clinical
activities are not always conclusive and may be susceptible to varying interpretations that could
delay, limit or prevent regulatory approval. Once approved, the FDA may withdraw the product approval if compliance with pre- and
post-marketing regulatory standards is not maintained or if problems occur after the product
reaches the marketplace. In addition, the FDA may require post-marketing studies, referred to as
Phase 4 studies, to monitor the effect of an approved product, and may limit further marketing of
the product based on the results of these post-market studies. The FDA has broad post-market
regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend
or delay issuance of approvals, seize or recall products, or withdraw approvals. Facilities used to manufacture drugs and biologics are subject to periodic inspection by the
FDA, the United States Drug Enforcement Administration (DEA) and other authorities where
applicable, and must comply with the FDAs cGMP regulations. Manufacturers of biologics also must
comply with FDAs general biological product standards. Failure to comply with the statutory and
regulatory requirements subjects the manufacturer to possible legal or regulatory action, such as
suspension of manufacturing, seizure of product, or mandatory or voluntary recall of a product.
Adverse experiences with the product must be reported to the FDA and could result in the imposition
of market restriction through labeling changes or in product removal. Product approvals may be
withdrawn if compliance with regulatory requirements is not maintained or if problems
concerning safety or efficacy of the product occur following approval. With respect to post-market product advertising and promotion, the FDA imposes a number of complex
regulations on entities that advertise and promote pharmaceuticals and biologics, which include,
among other things, standards and regulations relating to direct-to-consumer advertising, off-label
promotion, industry sponsored scientific and educational activities, and promotional activities
involving the Internet. The FDA has very broad enforcement authority under the Federal Food, Drug
and Cosmetic Act, and failure to abide by these regulations can result in penalties including the
issuance of a warning letter directing the entity to correct deviations from FDA standards, a
requirement that future advertising and promotional materials be pre-cleared by the FDA, and state
and federal civil and criminal investigations and prosecutions. Other Government Regulations We are subject to various laws and regulations regarding laboratory practices, the
experimental use of animals, and the use and disposal of hazardous or potentially hazardous
substances in connection with our research. In each of these areas, as above, the government has
broad regulatory and enforcement powers, including the ability to levy fines and civil penalties,
suspend or delay issuance of approvals, seize or recall products, and withdraw approvals, any one
or more of which could have a material adverse effect upon us. 9




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In addition to laws and regulations enforced by the FDA, we are also subject to regulation
under National Institutes of Health guidelines, as well as under the Controlled Substances Act, the
Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control
Act, the Resource Conservation and Recovery Act and other present and potential future federal,
state or local laws and regulations, as our research and development involves the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds. Manufacturing Manufacture of our products for clinical trials does not require an FDA license, although the
FDA may at any time inspect our manufacturing facilities. We have three leased manufacturing
facilities, including a 51,000 square-foot facility in Hayward, California, a 35,000 square-foot
facility in Memphis, Tennessee, and a 48,000 square-foot facility in San Diego, California, all of
which are operated according to cGMP regulations. We believe that our three manufacturing
facilities will have the capacity to manufacture products for Phase 3 trials and market launch of
our products. We are manufacturing non patient-specific GVAX® cancer vaccine products
such as GVAX® prostate cancer vaccine in our Hayward facility, patient-specific
GVAX® lung cancer vaccines in our Memphis facility and oncolytic virus therapy products
in our San Diego facility. Corporate Collaborations Novartis AG In July 2003, we announced a global alliance between Novartis AG and ourselves for the
development and commercialization of oncolytic virus therapies. Under the agreement, we also
acquired exclusive worldwide rights to the oncolytic virus therapy products and related
intellectual property of Genetic Therapy, Inc. (GTI), an affiliate of Novartis, as well as certain
related intellectual property of Novartis. We also received a payment of $28.5 million from
Novartis to be dedicated to the further development of several oncolytic virus therapy products by
both ourselves and GTI, for which Novartis has certain marketing options. In exchange, we issued to
Novartis and GTI 1,999,840 shares of our common stock, with the result that Novartis became the
holder of approximately five percent (as of the time of the issuance) of our outstanding common
stock. In addition, the agreement provides the basis for the sharing of future additional
development costs and potential profits for certain oncolytic virus products on a worldwide basis.
Upon the exercise of certain options by Novartis, development costs and profits would be shared on
an approximately equal basis in the United States. Novartis will be responsible for the development
costs for markets outside the United States and pay us a royalty on potential future sales outside
the United States. Novartis will also reimburse us on a cost-plus basis for products that we
manufacture for them to sell outside of the United States. In September 2004, the terms of our agreement with Novartis were amended to include the grant
of a non-exclusive worldwide perpetual license to all patent rights of Novartis relating to
Granulocyte Macrophage Colony Stimulating Factor (GM-CSF),a component of our GVAX®cancer vaccines, in the Field of Gene Therapy. This license bears a low single digit royalty.
Also included in the agreement was acknowledgment that certain GVAX® vaccine products,
such as our GVAX® prostate cancer vaccine, would not require this license and hence
would not be subject to future royalty payments to Novartis. Medarex,
Inc. In May 2003, we entered into a research and development collaboration with Medarex, Inc. to
evaluate combination therapy with our GVAX® prostate cancer vaccine and Medarexs
anti-CTLA-4 antibody. Preclinical studies indicate that anti-CTLA-4 antibody may stimulate the
immune system and enhance the activity of GVAX® vaccines. We initiated a Phase 1 trial
of this combination therapy in September 2004. Under the research and development collaboration
agreement, both companies will share the cost of this clinical trial equally. Abgenix, Inc. In November 1997, we entered into a gene therapy rights agreement with Abgenix, Inc. The
agreement provides us with certain rights to utilize Abgenixs XenoMouse® technology in
the field of gene therapy. We are obligated to make certain payments to Abgenix for these rights,
including license fees and royalties on future product sales. The agreement also prohibits Abgenix
from granting any third-party licenses for antibody products based on antigens nominated by Abgenix
for its own purposes where the primary field of use is gene therapy. In the case of third-party
licenses granted by Abgenix where gene therapy is a secondary field, Abgenix is obligated to share
with us a portion of the cash milestone payments and royalties resulting from any products in the
field of gene therapy. 10




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Other Collaborations We have licensing agreements relating to our proprietary viral vector technologies. These
agreements enable us to receive monetary reimbursement for providing viral vector technologies to
companies that commercialize these technologies for the research market. Examples include
agreements with the Clontech division of Becton, Dickinson and Company and with Invitrogen
Corporation for specific vector technologies. We also have an ongoing license agreement with the
Ludwig Institute for Cancer Research for gene therapy rights to vascular endothelial growth factor
receptor-3 (VEGFR-3), a novel protein that we believe plays a key role in the spread of cancer to
lymph glands. Cell Genesys Assets Outside of its Core Business Investment in Abgenix Abgenix is developing antibody therapies for multiple disease indications, including cancer
and inflammatory diseases. Abgenixs core technology includes strains of transgenic mice capable of
generating fully human antibodies. We formed Abgenix as a wholly-owned subsidiary in June 1996.
Abgenix completed its initial public offering in July 1998. As of December 31, 2004, we held
approximately 6.6 million shares of Abgenix common stock, or approximately 7.4 percent of
outstanding shares. We expect to sell these shares of Abgenix stock over time to provide additional
funding for our business. Ceregene In January 2001, we launched a new majority-owned subsidiary, Ceregene, located in San Diego,
California, which is focused on gene therapies for central nervous system (CNS) disorders such as
Alzheimers disease, Parkinsons disease and ALS. Ceregenes goal is to use gene therapy as a drug
delivery strategy to deliver neurologic growth factors to specific sites in the nervous system to
prevent the nerve degeneration associated with these disorders. Ceregene was formed in part through
the acquisition of Neurologic Gene Therapeutics, a private San Diego-based start-up company. We
initially contributed $10.0 million to Ceregene together with access to certain of our technologies
and patents in the CNS area, in exchange for approximately 60 percent ownership of the new company.
Following the completion of Ceregenes recent $32.0 million Series B financing, in which we
participated through conversion of an existing bridge loan, our ownership percentage decreased to
approximately 25 percent calculated on a fully diluted basis. We have the right to appoint two of
the six members of Ceregenes board. Stephen A. Sherwin, M.D., our chairman and chief executive
officer, has served as chairman of Ceregene since its inception, and Eugene L. Step, our director,
also serves on the Ceregene board. Ceregenes operations have significantly expanded in recent
years and included the appointment of Dr. Jeffrey M. Ostrove, Ph.D., as president and chief
operating officer. During 2001, the first-ever study of Alzheimers disease gene therapy was initiated at the
University of California, San Diego (UCSD) School of Medicine based on technology exclusively
licensed to Ceregene. The Phase 1 clinical trial employed ex vivogene therapy and is fully
enrolled with eight patients. An initial report on this trial was presented at the American Academy
of Neurology Meeting in April 2004. Preliminary results confirm safety and tolerability of the gene
therapy, as well as biologic activity evidenced by a reduction in the rate of decline of cognitive
function. Ceregene is currently developing CERE-110 in its Alzheimers disease gene therapy
program, which is an in vivogene therapy comprised of a nerve growth factor gene and an
adeno-associated viral gene
delivery system. A Phase 1/2 clinical trial of CERE-110 was initiated in mid 2004. Ceregene is
also developing CERE-120 for Parkinsons disease gene therapy and CERE-130 for ALS gene therapy.
In 2003, Ceregene announced that it had signed a licensing agreement with Genentech, Inc. for
exclusive worldwide rights to two growth factor genes for use in neurological gene therapy,
including nerve growth factor and neurotrophic factor 4/5. Additionally, in August 2003, Ceregene
signed an option agreement with the Salk Institute for Biological Studies for exclusive worldwide
rights to the Salk Institutes ALS gene therapy technology. Gene Activation Technology We have developed a novel and proprietary method for protein production referred to as gene
activation. Gene activation involves the insertion of genetic regulatory elements at specific
sites in cell chromosomes in order to simulate the human gene responsible for the expression of a
therapeutic protein. Gene activation licensing agreements have provided us $57.6
million in revenues to date. Since February 1997, we have had a license agreement with Hoechst
Marion Roussel, now sanofi-aventis Group, for gene-activated erythropoietin (EPO). As of December 31,
2004, we have received $23.2 million under this license agreement, which includes
certain milestone payments relating to the development of
gene-activated EPO, which sanofi-aventis Group
is developing in collaboration with Transkaryotic Therapies, Inc. (TKT). The agreement also
provides for royalties on future sales of gene-activated EPO in any territory. In June 2002, we
announced the completion of a separate licensing agreement under which we exclusively licensed to
TKT, our intellectual property relating to gene activation technology for certain therapeutic
proteins. In exchange, we received an up-front license fee of $26.0 million. 11




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Patents and Trade Secrets The patent positions of pharmaceutical and biotechnology firms, including Cell Genesys, are
generally uncertain and involve complex legal and factual questions. As of December 31, 2004 we had
approximately 325 patents issued or granted to us or available to us based on licensing
arrangements and approximately 318 applications pending in our name or available to us based on
licensing arrangements. We are currently prosecuting our patent applications, but 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 will not be invalidated. Our commercial success will also depend in part on not infringing the patents or proprietary
rights of others and not breaching licenses granted to us. We are aware of competing intellectual
property relating to both our programs in cancer vaccines and oncolytic viruses. While we currently
believe that we have freedom to operate in these areas, there can be no assurance that others will
not challenge our position in the future. We may be required to obtain licenses to certain
third-party technologies or genes necessary in order to market our products. Any failure to license
any technologies or genes required to commercialize our technologies or products at reasonable cost
may have a material adverse effect on our business, results of operations or financial condition. Litigation, which could result in substantial cost to us, may also be necessary to enforce any
patents issued to us or to determine the scope and validity of other parties proprietary rights.
To determine the priority of inventions, interference proceedings are frequently declared by the
U.S. Patent and Trademark Office (USPTO), which could result in substantial costs to us and may result in
an adverse decision as to the priority of our inventions. We are currently involved in interference
and/or opposition proceedings related to our current product portfolio and certain of our core
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 N.V. (ARS)
concerning a patent and patent application related to gene activation technology. ARS has also
appealed the decision. The outcomes of these proceedings cannot be predicted. 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. While the current court proceeding
does not involve our core technology, we may also be involved in other interference and/or
opposition proceedings in the future. 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 believe there will continue to be significant
litigation in the industry regarding patent and other intellectual property rights. We also rely on unpatented trade secrets and improvements, unpatented know-how and continuing
technological innovation to develop and maintain our competitive position. No assurance can be
given that others will not independently develop substantially equivalent proprietary information
and techniques, or otherwise gain access to our trade secrets or disclose such technology, or that
we can meaningfully protect our rights to our unpatented trade secrets. We require our employees and consultants to execute confidentiality agreements upon the
commencement of employment and 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 conceived by the individual, while
employed by us, relating to our business 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. Competition We face substantial competition in the development of products for cancer and other diseases.
This competition, from other manufacturers of the same types of products and from manufacturers of
different types of products designed for the same uses, is expected to continue in both U.S. and
international markets. Cancer vaccines, oncolytic virus therapies and antiangiogenesis therapies,
our three primary focus areas, are rapidly evolving areas in the biotechnology industry and are
expected to undergo many changes in the coming years as a result of technological advances. We are
currently aware of a number of groups that are developing cancer vaccines, oncolytic virus
therapies and antiangiogenesis therapies including early-stage and established biotechnology
companies, pharmaceutical companies, academic institutions, government agencies and research
institutions. Examples in the cancer vaccine area include Dendreon Corporation, which has commenced
Phase 3 trials in prostate cancer, and Antigenics, Inc. and CancerVax, Inc., which are developing
products for kidney cancer and/or melanoma, which are types of cancer not currently targeted by us.
We face competition from these groups in areas such as recruiting employees, acquiring technologies
that might enhance our ability to market products, establishing relationships with certain research
and academic institutions, enrolling patients in clinical trials and seeking program partnerships
and collaborations with larger pharmaceutical companies. It is possible that our competitors could
achieve earlier market commercialization, could have superior patent protection, or could have
safer, more effective or more cost-effective products. These factors could render our potential
products less competitive, which could have a material adverse effect on our business. 12




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Human Resources As of December 31, 2004, we employed 377 people, of whom 34 hold Ph.D. degrees and 11 hold
M.D. degrees. Approximately 324 employees are engaged in research, development and manufacturing
operations, and 53 employees support business development, intellectual property, finance and other
administrative functions. Many of our management have had prior product development experience in
the biotechnology and pharmaceutical industries. Our success will depend in large part upon our ability to attract and retain employees. We
face competition in this regard from other companies, research and academic institutions,
government entities and other organizations. We believe that our employee relations are good. Executive Officers Our executive officers and their ages as of March 1, 2005, are as follows: Name
    
    Age
    
    Position With Cell GenesysStephen A. Sherwin, M.D.
    
    
    56
    
    
    Chairman of the Board and Chief Executive OfficerJoseph J. Vallner, Ph.D.
    
    
    58
    
    
    President and Chief Operating OfficerMatthew
J. Pfeffer *
    
    
    47
    
    
    Vice President and Chief Financial OfficerRobert J. Dow, MBChB
    
    
    54
    
    
    Senior Vice PresidentMedical AffairsMichael W. Ramsay
    
    
    48
    
    
    Senior Vice PresidentOperationsRobert H. Tidwell
    
    
    61
    
    
    Senior Vice PresidentCorporate DevelopmentPeter K. Working, Ph.D.
    
    
    56
    
    
    Senior Vice PresidentResearch and DevelopmentCarol C. Grundfest
    
    
    50
    
    
    Vice PresidentRegulatory Affairs and Project ManagementKristen M. Hege, M.D.
    
    
    41
    
    
    Vice PresidentClinical ResearchChristine McKinley
    
    
    51
    
    
    Vice PresidentHuman Resources
 *  
On March 11, 2005, Mr. Pfeffer announced his intention to resign as our vice
president and chief financial officer; however, he will remain in his
position until a successor is appointed. Dr. Sherwin, chairman of the board and chief executive officer, joined Cell Genesys in March
1990. Dr. Sherwin has served as chief executive officer since inception, and in March 1994 he was
elected to the additional position of chairman of the Board of Directors. Dr. Sherwin also served
as president until July 2001, at which time Dr. Vallner was appointed president. From 1983 to 1990,
Dr. Sherwin held various positions at Genentech, Inc., a biotechnology company, most recently as
vice president of clinical research. Prior to 1983, Dr. Sherwin was on the staff of the National
Cancer Institute. Dr. Sherwin currently serves as the chairman of the board of Ceregene, Inc., a
former subsidiary of Cell Genesys, which he co-founded in 2001. Dr. Sherwin was also a co-founder
of Abgenix, Inc, a former subsidiary of Cell Genesys. He is also a director of Neurocrine
Biosciences, Inc. and Rigel Pharmaceuticals,
Inc. Dr. Sherwin, who also serves as a board member of the Biotechnology Industry
Organization, holds a B.A. in biology from Yale University, an M.D. from Harvard Medical School and
is board-certified in internal medicine and medical oncology. Dr. Vallner, president and chief operating officer, joined Cell Genesys in October 1999. Dr.
Vallner also served as executive vice president and chief operating officer from October 1999 to
July 2001. He currently manages our research, development, clinical, regulatory, manufacturing and
operations departments. Prior to joining Cell Genesys, Dr. Vallner was with SEQUUS Pharmaceuticals
from 1992 to 1999 where he was instrumental in the product launch of two products including
Doxil®, a liposome-based cancer therapeutic. In addition, Dr. Vallner helped transition
SEQUUS through its merger with ALZA Corporation. Prior to that, he held various positions with
Syntex Corporation and G.D. Searle and Company from 1984 to 1992, and was an associate professor of
pharmaceutics at the University of Georgia. Dr. Vallner, who serves as a board member of the
California Healthcare Institute, received his Ph.D. in pharmaceutics, his M.S. in physical
chemistry and his B.S. in pharmacy from the University of Wisconsin, Madison. Mr. Pfeffer, vice president and chief financial officer, joined Cell Genesys in June 1996. Mr.
Pfeffer has served as vice president since April 1999 and as chief financial officer since
September 1998. Prior to that, Mr. Pfeffer also served as director of finance since June 1996. From
1989 to 1996, Mr. Pfeffer held a variety of positions at Diasonics Ultrasound, Inc., most recently
as corporate controller. From 1987 to 1989, he was in the finance department at ComputerLand
Corporation. From 1981 to 1987, Mr. Pfeffer was in the audit and consulting groups at Price
Waterhouse, where he obtained his CPA certificate. Mr. Pfeffer graduated with a B.S. degree in
business administration from the University of California, Berkeley. Dr. Dow, senior vice president, medical affairs, joined Cell Genesys in March 2005. Prior to
joining Cell Genesys, from 2002 to 2005, Dr. Dow served as chief executive officer at biolitec
pharma ltd, a UK biotechnology company wholly-owned by biolitec AG of
Germany. From 1997 to 2002,
Dr. Dow held senior executive positions with Quantanova and Scotia Holdings, plc. From 1995 to
1997, Dr. Dow was Global Head of Global Drug Development with Hoffman la Roche, and from 1982 to
1995 he held senior executive positions in drug development with Syntex Corporation. Dr. Dow holds
a B.Sc. in Medical Science from the University of St. Andrews and his medical qualification, an
MBChB degree, from the University of Dundee in Scotland. He also is a Fellow of the Royal College
of Physicians of Edinburgh. 13




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Mr. Ramsay, senior vice president, operations, joined Cell Genesys in January 2002. Prior to
joining Cell Genesys, Mr. Ramsay served as a vice president of manufacturing at ALZA Corporation
from 1999 to 2001. Mr. Ramsay also held various positions from 1992 to 1999 with SEQUUS
Pharmaceuticals, including vice president of manufacturing operations, as well as various positions
at Syntex Corporation focusing on manufacturing, product development and regulatory affairs from
1978 to 1991. Mr. Ramsay holds a Bachelor of Pharmacy from the University of Nottingham in the
United Kingdom. Mr. Tidwell, senior vice president, corporate development, joined Cell Genesys in August 2000.
Prior to joining Cell Genesys, Mr. Tidwell was vice president of business development at Calydon,
Inc. from 1998 to 2000. Mr. Tidwell has also held various management positions with such companies
as Boston Life Sciences, where he served as chief operating officer from 1993 to 1994, Genetics
Institute, where he was vice president of marketing and business development from 1988 to 1993, and
Eli Lilly and Company, where he held various positions including director of worldwide
pharmaceutical licensing, between 1969 and 1985. Mr. Tidwell holds an M.B.A. from The Ohio State
Graduate School of Business and a Bachelor of Pharmacy from The Ohio State School of Pharmacy. Dr. Working, senior vice president, research and development, joined Cell Genesys in September
2001. Prior to joining Cell Genesys, from 1999 to 2001, Dr. Working served as vice president of
analytical and non-clinical sciences and principal scientist at ALZA Corporation. From 1992 to
1999, Dr. Working was with SEQUUS Pharmaceuticals, where the last position he held was vice
president of research and development. From 1988 to 1992 he was with Genentech, Inc. where he
served as a senior toxicologist and head of the Experimental Toxicology Group in the Department of
Safety Evaluation. Dr. Working holds Ph.D., M.S. and B.S. degrees from the University of
California, Davis and an M.A. degree from the University of California, San Francisco. Ms. Grundfest, vice president, regulatory affairs and project management, joined Cell Genesys
in July 2003. Prior to joining Cell Genesys, Ms. Grundfest served as an independent consultant
providing advice, analysis and recommendations regarding the regulation and approval of
pharmaceutical products in the United States from 2000 to 2003. From 1998 to 2000, Ms. Grundfest
served as executive director of project management and strategic planning at Systemix, Inc. and
Genetic Therapy, Inc. (affiliates of Novartis AG). Ms. Grundfest also held senior regulatory
positions with Roche Global Development and Syntex from 1990 to 1996, as well as served as
assistant vice president, research and development at the Pharmaceutical Research and Manufacturers
of America from 1982 to 1990. Ms. Grundfest received an M.H.S. in environmental health sciences
from The Johns Hopkins University, School of Public Health and a B.S. in biology from Stanford
University. Dr. Hege was promoted to the position of vice president, clinical research in July 2004. Dr.
Hege joined Cell Genesys in January 1994 as a medical post-doctoral research fellow, working on
preclinical studies of hematopoietic stem cell gene therapy. For the past eight years, she has
worked in the clinical research department, most recently as senior director, clinical research. In
addition to her work at Cell Genesys, Dr. Hege has held a clinical faculty appointment at
University of California, San Francisco (UCSF) since 1997 in the adult leukemia and bone marrow
transplant program. Dr. Hege received a B.A. in biochemistry from Dartmouth College, an M.D. from
UCSF, and is board-certified in internal medicine, medical oncology and hematology. Ms. McKinley, vice president, human resources, joined Cell Genesys in August 1994. From 1985
to 1994, she was with Nellcor Puritan Bennett, Inc. where the last position she held was corporate human resources director. Previously, Ms. McKinley also worked at Genentech, Inc. from 1978 to 1984
in various human resource positions. She received a B.A. in psychology from the University of
California, Santa Barbara. 14




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Medical Advisory Board We have established a Medical Advisory Board that includes several prominent leaders in the
field of oncology. As of December 31, 2004, the board consisted of the following individuals: Name
    
    Scientific PositionBruce Chabner, M.D.
    
    Clinical DirectorMassachusetts General Hospital Cancer CenterProfessor of MedicineHarvard Medical SchoolJordan U. Gutterman, M.D.
    
    Department of Molecular TherapeuticsProfessor of MedicineUniversity of TexasM.D. Anderson Cancer CenterCraig Henderson, M.D.
    
    Adjunct Professor of Hematology/OncologyUniversity of California, San FranciscoRonald Levy, M.D.
    
    Robert K. Summy and Helen K. SummyProfessor of MedicineChief of the Division of OncologyStanford University School of MedicineWilliam Nelson, M.D., Ph.D.
    
    Associate Professor of Oncology, Pathology,Pharmacology and Medicine, and UrologySidney Kimmel Comprehensive Cancer CenterThe Johns Hopkins UniversityJohn T. Potts, Jr., M.D.
    
    Physician-in-Chief and Director of
Research EmeritusMassachusetts General HospitalJackson Distinguished Professor of Clinical MedicineHarvard Medical School
 Dr. Potts, who is also a member of our Board of Directors, serves as a liaison between the
Medical Advisory Board and the Board of Directors, making periodic reports on the findings of the
Medical Advisory Board to the Board of Directors. Scientific Advisory Board We have established a Scientific Advisory Board that includes several prominent leaders in the
fields of cancer immunotherapy and gene therapy. As of December 31, 2004, the board consisted of
the following individuals: Name
    
    Scientific PositionBernard A. Fox, Ph.D.
    
    Chief, Laboratory of Molecular and Tumor ImmunologyEarle A. Chiles Research InstituteProvidence Portland Medical CenterAssociate Professor, Molecular MicrobiologyOregon Health & Science UniversityCarl H. June, M.D.
    
    Professor, Pathology & Laboratory MedicineDirector, Translational Research ProgramsThe Leonard and Madlyn Abramson FamilyCancer Research Institute at the University of PennsylvaniaJohn T. Potts, Jr., M.D.
    
    Physician-in-Chief and Director of
Research EmeritusMassachusetts General HospitalJackson Distinguished Professor of Clinical MedicineHarvard Medical School
 15




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Name
    
    Scientific PositionThomas E. Shenk, Ph.D.
    
    Elkins ProfessorChairman of the Department of Molecular BiologyProfessor, Princeton UniversityInder M. Verma, Ph.D.
    
    Professor of Molecular Biology and VirologyThe Salk Institute
 Dr. Verma, who is also a member of our Board of Directors, serves as a liaison between the
Scientific Advisory Board and the Board of Directors, making periodic reports on the findings of
the Scientific Advisory Board to the Board of Directors. 
  ITEM 2.
    PROPERTIES We maintain our headquarters in South San Francisco, California and have three cGMP
manufacturing facilities, each designed to produce one or more types of products at a scale
suitable for Phase 3 trials and potential commercial market launch and all of which are now in
service. We lease all of our facilities. Our Hayward, California manufacturing facility, which
consists of 51,000 square feet of manufacturing space and 50,000 square feet of laboratory and
office space, is currently producing our non patient-specific GVAX® prostate cancer
vaccine. Our 48,000 square-foot viral-based product manufacturing facility in San Diego, California
is manufacturing oncolytic virus therapy products for clinical trials and has also produced viral
vector product for clinical trials being conducted by our minority-owned subsidiary Ceregene.
Finally, our 35,000 square-foot manufacturing facility in Memphis, Tennessee is currently
manufacturing patient-specific GVAX® lung cancer vaccines for our ongoing Phase 2
clinical trial. The Memphis facility provides us with a centrally located facility to receive and
process tumor cells obtained from patient biopsies, manufacture the patient-specific vaccine
products, carry out quality control testing and ship the vaccine products back to the patient
treatment centers. The Memphis facility may also be used in the future as a centralized product
distribution center for other products. Our headquarters facility consists of approximately 156,000 square feet of research and
development and administrative space. We moved to this location in March 2003 from our previous
leased facilities in Foster City, California. We are actively pursuing the subleasing of our former
headquarter facilities in Foster City until these leases expire in 2006. 
  ITEM 3.
    LEGAL PROCEEDINGS Not applicable. 
  ITEM 4.
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 16




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##### Table of Contents



PART II 
  ITEM 5.
    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES Our common stock is traded on the Nasdaq National Market under the symbol CEGE. The
following table sets forth, for the periods indicated, the high and low closing prices per share of
our common stock as reported by the Nasdaq National Market. We did not pay any cash dividends with
respect to our common stock during any of the periods indicated below. 2004
    
    High
    
    
    LowFirst Quarter
    
    $
    15.93
    
    
    $
    11.03Second Quarter
    
    $
    12.98
    
    
    $
    9.45Third Quarter
    
    $
    10.40
    
    
    $
    6.61Fourth Quarter
    
    $
    9.34
    
    
    $
    6.38
 2003
    
    High
    
    
    LowFirst Quarter
    
    $
    11.50
    
    
    $
    6.43Second Quarter
    
    $
    11.32
    
    
    $
    7.54Third Quarter
    
    $
    15.10
    
    
    $
    8.87Fourth Quarter
    
    $
    14.04
    
    
    $
    11.68
 As of January 31, 2005, there were approximately 670 holders of record and approximately
24,500 beneficial holders of our common stock. On January 31, 2005, the last reported sales price
on the Nasdaq National Market for our common stock was $7.00. The market for our common stock is
highly volatile. As of December 31, 2004, we had 152 shares of Series B redeemable convertible preferred stock
outstanding, held by two holders of record. As of December 31, 2004, the carrying value was
approximately $1.9 million. On January 18, 2005, all of the 152 then outstanding shares of our
Series B redeemable convertible preferred stock automatically converted into an aggregate of
275,622 shares of our common stock at an effective conversion price of $6.895 per share. For a
description of the terms of the preferred stock and details regarding the recent conversion of the
preferred stock into common stock, see Note 8 of Notes to Consolidated Financial Statements
included under Item 8 of this Annual Report on Form 10-K. We did not repurchase any shares of our equity securities during the fourth quarter of the
year ended December 31, 2004. The information required by this item regarding equity compensation plans is incorporated by
reference to the information set forth in Item 12 of this Annual Report on Form 10-K. 
  ITEM 6.
    SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial information has been derived from the audited consolidated
financial statements. The information set forth below is not necessarily indicative of results of
future operations, and should be read in conjunction with Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operationsand the consolidated financial
statements and related notes thereto included in Item 8 of this Form 10-K in order to fully
understand factors that may affect the comparability of the information presented below. Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands, except per share amounts)Consolidated Statement of Operations Data:Revenue
    
    $
    11,458
    
    
    $
    18,128
    
    
    $
    39,141
    
    
    $
    28,317
    
    
    $
    24,209Total operating expenses
    
    
    110,061
    
    
    
    111,276
    
    
    
    95,649
    
    
    
    80,644
    
    
    
    37,458Gain on sale of Abgenix, Inc. common stock
    
    
    12,160
    
    
    
    12,638
    
    
    
    2,246
    
    
    
    
    
    
    
    239,660Net income (loss)
    
    
    (97,411
    )
    
    
    (56,406
    )
    
    
    (26,599
    )
    
    
    (28,673
    )
    
    
    168,920Income (loss) attributed to common stockholders
    
    
    (97,511
    )
    
    
    (56,636
    )
    
    
    (27,301
    )
    
    
    (29,458
    )
    
    
    168,164Basic income (loss) per common share
    
    
    (2.23
    )
    
    
    (1.48
    )
    
    
    (0.76
    )
    
    
    (0.85
    )
    
    
    4.99Diluted income (loss) per common share
    
    
    (2.23
    )
    
    
    (1.48
    )
    
    
    (0.76
    )
    
    
    (0.85
    )
    
    
    4.55
 17




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December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands)Consolidated Balance Sheet Data:Cash, cash equivalents and short-term
investments, including restricted cash and
investments
    
    $
    174,971
    
    
    $
    160,288
    
    
    $
    166,905
    
    
    $
    258,649
    
    
    $
    259,647Total assets
    
    
    435,139
    
    
    
    460,502
    
    
    
    419,197
    
    
    
    615,310
    
    
    
    793,716Total current liabilities
    
    
    77,923
    
    
    
    94,296
    
    
    
    76,353
    
    
    
    149,690
    
    
    
    239,002Long-term obligations, excluding current portion
    
    
    51,013
    
    
    
    146,634
    
    
    
    104,064
    
    
    
    60,000
    
    
    
    1,350Convertible senior notes
    
    
    145,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Redeemable convertible preferred stock
    
    
    1,897
    
    
    
    2,706
    
    
    
    7,632
    
    
    
    17,970
    
    
    
    17,185Accumulated deficit
    
    
    (243,973
    )
    
    
    (146,562
    )
    
    
    (90,156
    )
    
    
    (63,557
    )
    
    
    (34,883
    )Stockholders equity
    
    
    159,306
    
    
    
    216,866
    
    
    
    231,148
    
    
    
    387,554
    
    
    
    536,179
 
  ITEM 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements made in this Item other than statements of historical fact, including statements
about us and our subsidiaries and our respective clinical trials, research programs, product
pipelines, current and potential corporate partnerships, licenses and intellectual property, the
adequacy of capital reserves and anticipated operating results and cash expenditures, are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. As such, they are subject to a number of
uncertainties that could cause actual results to differ materially from the statements made,
including risks associated with the success of research and product development programs, the
issuance and validity of patents, the development and protection of proprietary technologies, the
ability to raise capital, operating expense levels and the ability to establish and retain
corporate partnerships. Reference is made to discussions about risks associated with product
development programs, intellectual property and other risks which may affect us under Other
Factors Affecting Future Operations below. We do not undertake any obligation to update
forward-looking statements. The following should be read in conjunction with our consolidated
financial statements located elsewhere in this Annual Report onForm 10-Kfor the year ended
December 31, 2004 and other documents filed by us from time to time with the Securities and
Exchange Commission. Overview We are a biotechnology company focused on the research, development and commercialization of
biological therapies for patients with cancer. We are currently developing cell-based cancer
vaccines, oncolytic virus therapies and antiangiogenesis therapies to treat different types of
cancer. Our clinical stage cancer programs involve cell- or viral-based products that have been
genetically modified during product development to impart disease-fighting characteristics that are
not found in conventional therapeutic agents. As part of our GVAX®cancer vaccines
program, we are conducting a Phase 3 clinical trial in prostate cancer, are in ongoing Phase 2
clinical trials in lung cancer, pancreatic cancer and leukemia, and are in a Phase 1/2 clinical
trial for multiple myeloma. We initiated our Phase 3 clinical trial for GVAX® prostate
cancer vaccine in July 2004. In our oncolytic virus therapies program, which we are developing in
part through a global alliance with Novartis AG, we are conducting a Phase 1/2 clinical trial in
combination with Taxotere® chemotherapy in advanced-stage prostate cancer patients. We
expect to initiate a Phase 1 clinical trial in bladder cancer using our CG0070 oncolytic adenovirus
in the first half of 2005. We also have other preclinical oncolytic virus therapy programs as well
as preclinical antiangiogenesis therapy programs evaluating potential therapies for multiple types
of cancer. Critical Accounting Policies We consider certain accounting policies related to revenue recognition, lease accounting,
income taxes and stock option valuation to be critical policies. Revenue recognition Since our inception, a substantial portion of our revenues has been generated from research
and licensing agreements with collaborators. Revenue under such collaboration agreements typically
includes upfront payments, cost reimbursements and milestone payments. Revenue from non-refundable upfront license fees and other payments under collaboration
agreements where we continue involvement throughout development is recognized over the development
period based upon when the underlying development expenses are incurred. We recognize cost reimbursement revenue under collaborative agreements
as the related research and development costs are incurred, as provided for under the terms of
these agreements. 18




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Incentive milestone payments under collaborative arrangements are recognized as revenue upon
achievement of the incentive milestone events, which represent the culmination of the earnings
process. Incentive milestone payments are triggered either by the results of our research efforts
or by events external to us, such as regulatory approval to market a product or the achievement of
specified sales levels by a marketing partner. As such, the incentive milestones are substantially
at risk at the inception of the contract, and the amounts of the payments assigned thereto are
commensurate with the milestone achieved. Upon the achievement of an incentive milestone event, we
have no future performance obligations related to that payment. Amounts received under license agreements relating to our intellectual property are recognized
as revenue upon execution of the technology licensing agreement, if we have no future performance
obligations. Deferred revenue represents the portion of upfront payments received that has not been earned. Lease accounting We record our obligations under facility operating lease agreements as rent expense. As of
December 31, 2004, we have accrued approximately $6.1 million for estimated lease exit costs
associated with the move of our corporate headquarters to South San Francisco, California in March
2003 and the related vacancy in Foster City, California. This amount reflects the net remaining
lease payments due under related lease contracts. We will actively pursue subleasing of our former
headquarter facilities in Foster City, California until these leases expire in 2006. If we are
able to sublease additional portions of our Foster City properties, our net lease costs may be less
than the amount accrued as of December 31, 2004. Income taxes The Company establishes accruals for certain tax contingencies when, despite the belief that
the Companys tax positions are fully supported, the Company believes that certain positions may be
challenged and that the Companys positions may not be fully sustained. The tax contingency
accruals are adjusted in light of changing facts and circumstances, such as the progress of tax
audits, case law and emerging legislation. The IRS is currently examining the 2000 tax year. As
of December 31, 2004, the Companys accrual for income taxes payable is sufficient to cover any
expected liabilities arising from this examination. As of December 31, 2004 and 2003 respectively,
we had accrued approximately $30.0 million in tax contingencies and related interest. The Companys
tax contingency accruals have been reclassified from noncurrent income tax liabilities to current
liabilities within the balance sheet. The nature of these matters is uncertain and subject to change. As a result, the amount of
our liability for certain of these matters could exceed or be less than the amount of our current
estimates, depending on the outcome of these matters. An outcome of such matters different than
previously estimated could materially impact our financial position or results of operations in the
year of resolution. Our income tax benefits during the past three years have been based on our determination of
deferred tax assets and liabilities and any valuation allowances that might be required against
these deferred tax assets. We record valuation allowances to reduce deferred tax assets to the
amounts that are more likely than not to be realized. We have considered anticipated future taxable
income, including future taxable income that may result from future sales of holdings of our
Abgenix common stock, and potential tax planning strategies in assessing the need for valuation
allowances. Certain of these determinations require judgment on the part of management. If we
determine that we will be able to realize our deferred tax assets in the future in excess of the
carrying value of our net deferred tax assets, adjustments to the deferred tax assets will increase
income by reducing tax expense in the period that we make such determination. Likewise, if we
determine that we will not be able to realize all or part of the carrying value of our net deferred
tax assets in the future, adjustments to the deferred tax assets will decrease income by increasing
tax expense in the period that we make such determination. If our investment in Abgenix common
stock were to suffer a significant decline in value, we may be required to reverse tax benefits in
future periods that were previously recorded. Significant estimates are required in determining our
income tax benefits. Various internal and external factors may have favorable or unfavorable
effects on our future effective tax rate. These factors include, but are not limited to, changes in
tax laws and regulations, our future levels of spending for research and development, and changes
in our overall level of pre-tax earnings or losses. We believe that our reserves for these
uncertainties are adequate. Stock option valuation The preparation of the financial statement footnotes requires us to estimate the fair value of
stock options granted to employees. While fair value may be readily determinable for awards of
stock, market quotes are not available for long-term, nontransferable stock options because these
instruments are not traded. We currently use the Black-Scholes option pricing model to estimate
the fair value of employee stock options. However, the Black-Scholes model was developed for use
in estimating the fair value of traded options, which have no vesting restrictions and are fully
transferable. Option valuation models require the input of highly subjective 19




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assumptions,
including the stock price volatility. Because our stock options have characteristics significantly
different from those of traded options and changes to the subjective input assumptions can
materially affect the fair value estimate, in managements opinion, the existing models do not
provide a reliable single measure of the fair value of our employee stock options. We are
currently evaluating our option valuation methodologies and assumptions in light of evolving
accounting standards related to employee stock options. Results of Operations Revenue Revenues were $11.5 million in 2004 compared to $18.1 million in 2003 and $39.1 million in
2002, as shown in the following table (in thousands): 2004
    
    
    2003
    
    
    2002Novartis AG
    
    $
    5,846
    
    
    $
    2,104
    
    
    $
    Japan Tobacco Inc.
    
    
    
    
    
    
    14,145
    
    
    
    11,640sanofi-aventis Group
    
    
    3,173
    
    
    
    1,000
    
    
    
    1,130Transkaryotic Therapies, Inc.
    
    
    250
    
    
    
    
    
    
    
    26,000Ceregene, Inc. (since August 4, 2004)
    
    
    998
    
    
    
    
    
    
    
    Other
    
    
    1,191
    
    
    
    879
    
    
    
    371$
    11,458
    
    
    $
    18,128
    
    
    $
    39,141
 Revenues for 2004 included $5.8 million from Novartis recognized in connection with our global
alliance for the development and commercialization of oncolytic virus therapies. We received an
upfront payment of $28.5 million from Novartis in July 2003, $10.0 million of which was initially
recorded to deferred revenue, of which $2.0 million remains as deferred revenue at December 31,
2004. We expect to recognize the remaining $2.0 million as revenue in 2005. Revenues for 2004 also
included $3.2 million in connection with our gene activation technology license agreement with
sanofi-aventis Group for gene activated erythropietin. We have recorded contract revenue of $0.8 million for manufacturing work performed for Ceregene
since August 3, 2004, the date as of which our ownership of Ceregene became a minority ownership
position. We also recognized $0.2 million in technology license fees from Ceregene in the fourth
quarter of 2004. We recognized as other revenue in 2004 approximately $1.0 million in grants
received by Ceregene on their Alzheimers disease and ALS research projects during the period it
was a consolidated subsidiary. In August 2003, we announced that an agreement had been reached regarding outstanding clinical
and patent-related milestone and wind down payments from Japan Tobacco Inc. (JT), in connection
with the termination in 2002 of a collaboration agreement for certain GVAX® cancer
vaccines, for which we now hold all worldwide commercial rights. In connection with this final
agreement, JT paid us approximately $8.3 million in cash and waived future repayment obligations
for capital expenditures associated with our manufacturing facilities in Hayward, California and in
Memphis, Tennessee. We recorded $14.1 million in revenue associated with this final agreement in
2003. Revenues for 2002 included $26.0 million associated with a license agreement with
Transkaryotic Therapies, Inc. (TKT) for our gene activation technology and $11.6 million from our
since-terminated GVAX® collaboration agreement with JT. Revenues for 2002 also included
$1.1 million pursuant to the sanofi-aventis Group license agreement. Research and development expenses Research and development expenses were $92.1 million in 2004 compared to $85.3 million in 2003
and $75.1 million in 2002. These increases can be attributed to our expanding clinical trials and
other product development activities in both our GVAX® cancer vaccines and oncolytic
virus therapy programs. In July 2004, we announced the commencement of our first Phase 3 clinical
trial, which compares GVAX® prostate cancer vaccine to Taxotere®chemotherapy
in patients with advanced prostate cancer without cancer-related pain. Our second Phase 3 clinical
trial, planned for the first half of 2005, will compare GVAX® prostate cancer vaccine
plus Taxotere® chemotherapy to Taxotere® chemotherapy alone in advanced
prostate cancer patients with cancer-related pain. We expect that our research and development
expenditures and headcount will continue to increase in future years to support expanded,
more advanced and more numerous clinical trials, and associated manufacturing and product
development activities. The rate of increase depends on a number of factors, including progress in
research and development and clinical trials. Biopharmaceutical products, such as those being developed by us, may take 10 to 15 years to
research, develop and bring to market in the United States. Drug development in the U.S. is a
process that includes several steps regulated by the FDA. The process begins with the filing of an
IND application, which, if successful, allows opportunity for clinical study of the potential new
medicine. Clinical development typically involves three phases of study: Phase 1, 2 and 3. Costs
for each phase are generally larger than the 20




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preceding phase, as the size of the clinical trial
(number of patients) grows. The most significant costs associated with clinical development are the
Phase 3 trials, as they tend to be the longest and largest studies conducted during the drug
development process. We currently have one product in development for which we have initiated a
Phase 3 study. However, the successful development of our products is highly uncertain. Estimates
of product completion dates and completion costs can vary significantly for each product and are
difficult to predict. Completion of clinical trials, including the Phase 3 trials that we initiated
in July 2004 and a second Phase 3 that we plan to initiate in the first half of 2005, may take
several years or more. The length of time generally varies substantially according to the type,
complexity, novelty and intended use of the product candidate. However, we estimate that clinical
trials of the type we generally conduct are usually completed over the following timelines: EstimatedClinical Phase
    
    Completion PeriodPhase 1
    
    1-3 yearsPhase 2
    
    1-3 yearsPhase 3
    
    2-5 years
 Many factors may delay our commencement and speed of completion of clinical trials, including
the size and number of patients participating in the trial, the duration of patient follow-up
required, the number of clinical sites at which the trial is conducted, and the length of time
required to locate and enroll suitable patient subjects. Various statutes and regulations also
govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of
each product. The lengthy process of seeking these approvals, and the subsequent compliance with
applicable statutes and regulations, require the expenditure of substantial resources. Any failure
by us to obtain, or any delay in obtaining, regulatory approvals could materially adversely affect
our business. In responding to an NDA or a BLA, the FDA may grant marketing approval, request
additional information or deny the application if it determines that the application does not
provide an adequate basis for approval. There can be no assurance that any approval required by the
FDA or other regulatory body will be obtained on a timely basis, if at all. For additional
discussion of the risks and uncertainties associated with completing development of potential
products, see Other Factors Affecting Future Operations below. Included below is a summary of products and the related stage of development for each product
in clinical development. The information in the column labeled Estimated Completion of Ongoing
Phase constitutes forward-looking statements regarding timing of completion of product development
phases. Our estimates of timing of completion of these trials are based on typical times of
completion for trials of that type at such phases of development. The actual timing of completion
of these phases of our clinical trials could differ materially from the estimates provided in the
table due to the number of patients enrolled in the trial, the number of clinical trial sites
involved, the time needed to fully enroll the trial, the time required for patient follow-up and
other factors. Longer time frames for the completion of certain trials may be the result of
requirements to measure patient survival. In addition, it is possible that any of these ongoing
clinical trials may never be completed due to the occurrence of unacceptable treatment-related side
effects, lack of clinical efficacy, insufficient supply of product for these clinical trials and
other factors. For a discussion of the risks and uncertainties associated with the timing of
completing a product development phase, see Other Factors Affecting Future Operations below. EstimatedCompletionPhase of
    
    of OngoingProduct
    
    Indication
    
    Development
    
    PhaseGVAX® Prostate
    
    Prostate cancer
    
    Phase 3
    
    2007-2009GVAX® Lung
    
    Non small-cell lung cancer
    
    Phase 2
    
    2005-2006GVAX® Pancreatic
    
    Pancreatic cancer
    
    Phase 2
    
    2006-2007GVAX® Leukemia
    
    Acute leukemia
    
    Phase 2
    
    2006-2007GVAX® Myeloma
    
    Multiple myeloma
    
    Phase 1/2
    
    2006-2007CG7870 Oncolytic Virus
    
    Prostate cancer
    
    Phase 1/2
    
    2006-2007
 General and administrative expenses General and administrative expenses were $17.9 million in 2004 compared to $26.0 million in
2003 and $20.7 million in 2002. Excluding the lease exit costs accrual of $1.8 million in 2004 and
$5.3 million in 2003 associated with the move of our corporate headquarters to South San Francisco,
California in March 2003, the general and administrative expenses decreased by approximately $4.6
million from 2003 to 2004. The higher expenses in 2003 reflected approximately $2.3 million of
facility costs, $1.5 million for Ceregene, our previously majority-owned subsidiary, and
approximately $0.9 million of non-recurring facility start-up and close-down costs in connection
with the move from the former headquarters in Foster City, California partially offset by increased
costs associated with compliance with the Sarbanes-Oxley Act of 2002 and other corporate governance
requirements. Future spending for general and administrative costs is expected to increase in
order to support our growing infrastructure needs, particularly in the areas of manufacturing and
other functions. 21




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Purchased in-process technology During 2002, we recorded a credit of $186,000 to purchased in-process technology related to
our acquisition of Calydon, Inc. in 2001. The adjustment related to the return to us of a portion
of the purchase price held in escrow in accordance with the terms of the purchase agreement. We
continue to conduct research using the technology acquired in the acquisition of Calydon. Gain on sale of Abgenix common stock During 2004, we recorded a gain of $12.2 million associated with our sale of 819,210 shares of
Abgenix common stock. At December 31, 2004, we continued to hold approximately 6.6 million shares
of Abgenix common stock, which had a fair market value of approximately $68.5 million as of that
date. During 2003 we recorded a gain of $12.6 million associated with the sale of 1,250,000 shares
of Abgenix common stock. During 2002 we recorded a gain of $2.2 million associated with the sale of
approximately 260,000 shares of Abgenix common stock. Interest and other income Interest and other income was $2.7 million in 2004 compared to $4.8 million in 2003 and $9.9
million in 2002. The decrease in 2004 compared to 2003, and compared to 2002 is attributed in each
case to lower average cash balances and lower interest rates than during the prior period. Interest expense Interest expense was $9.9 million in 2004 compared to $5.4 million in 2003 and $1.0 million in
2002. The increase in 2004 compared to 2003 and 2002 includes increased interest expense from the
capital lease obligation for our headquarters facility in South San Francisco, California, which we
occupied in March 2003. Interest expense associated with the facility lease was $5.4 million in
2004 and $5.2 million in 2003. In September 2003, the Company borrowed $35.0 million from Silicon
Valley Bank under a term-loan agreement, which was then fully paid off in late October 2004. As a
result of that facility, interest expense was $1.1 million higher in 2004 than during 2003, and the
early repayment of this loan resulted in a $0.7 million prepayment penalty in October 2004, which
was accounted for as interest expense during 2004. We capitalized interest expense of $0.8 million
and $0.8 million in 2003 and 2002, respectively, in connection with the construction of our
manufacturing facility in Hayward, California. Income taxes We recorded a tax provision of $3.7 million in 2004 compared to $24.6 million tax benefit in
2003 and $18.6 million tax benefit in 2002. The tax provision recorded in 2004 relates to the
realized gain on the sale of 819,210 shares of Abgenix common stock. Net operating losses that we
have concluded are realizable are based on our estimate of future taxable income, including future
taxable income that may result from future sales of holdings of our Abgenix common stock. The
carrying value of our deferred tax assets is based on our ability to carry-forward these net
operating losses to offset that potential future taxable income. The tax benefit recorded in 2003
primarily related to net operating losses that we have concluded are realizable based on our
estimate of future taxable income, including future taxable income that may result from sales of
our Abgenix common stock. The tax benefit recorded in 2002 primarily related to our ability to
carry-back 2002 net operating losses to the 2000 tax year. If our investment in Abgenix were to
suffer a decline in value of more than 47% from the fair value as of December 31, 2004, we may be
required to reverse tax benefits in future periods that were previously recorded. At December 31,
2004, we had federal net operating loss carryforwards of approximately $266.6 million. The 2004 net
operating losses will expire in the years beginning 2007 through 2024, if not utilized. Liquidity and Capital Resources At December 31, 2004, we had approximately $175.0 million in cash, cash equivalents and
short-term investments, of which $3.3 million is classified as restricted cash, primarily related
to a letter of credit on our corporate headquarters facility in South San Francisco, California and
cGMP facilities in Hayward, California. Information regarding the classification of these assets is
included in Note 5 of Notes to Consolidated Financial Statementsincluded under Item 8 of this
Annual Report on Form 10-K. We have maintained our financial position through strategic management
of our resources including our holdings in Abgenix common stock, funding from various corporate
collaborations and licensing agreements and the availability of debt financing. At December 31,
2004 we continued to hold approximately 6.6 million shares of Abgenix common stock, which had a
fair market value of approximately $68.5 million as of that date. Additionally, in February 2003,
our shelf registration statement was declared effective by the Securities and Exchange Commission
under the Securities Act of 1933, as amended, which allowed us to offer up to $150.0 million of
securities on short notice in one or more public offerings. We used this shelf registration in
March 2004 to complete a public offering of 4,887,500 shares of our common stock, resulting in
gross proceeds of $61.1 million. Although up to $88.9 million may still be offered under the shelf
registration, there can be no assurance that we will be able to issue any of the remaining
securities under this shelf registration on acceptable terms, or at all. 22




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In October and November 2004, we sold a total of $145.0 million aggregate principal amount of
our 3.125% Convertible Senior Notes due 2011 in a private placement. We used a portion of the net
proceeds of $139.9 million to repay bank debt totaling $95.0 million, thereby eliminating
restrictions on $60.0 million of cash. Net cash used in operating activities was $93.8 million in 2004 compared to $46.7 million in
2003 and $30.3 million in 2002. This increase in 2004 was due primarily to $41.0 million in
increased net loss. In 2003 we recorded the receipt of an aggregate of $16.5 million in tax refunds
from the Internal Revenue Service and California Franchise Tax Board from the income tax paid in
2000 and 2001 for the gain on sale of Abgenix common stock. Also, we received $15.0 million in
2003 from a license agreement with Transkaryotic Therapies, Inc. Cash requirements for operating
activities are expected to increase in future periods, due in part to significant costs related to
the Phase 3 trial that we initiated in 2004 and a second Phase 3 trial that we expect to initiate
in the first half of 2005, partially offset by reduced costs in other programs. The timing of these
cash requirements may vary from period to period depending on our research and development
activities, including our planned preclinical and clinical trials, obligations related to our
existing manufacturing and headquarter facilities, and future requirements to establish
manufacturing and marketing capabilities for any products that we may develop. Net cash provided by investing activities, which includes capital expenditures, was $39.9
million in 2004 compared to $37.7 million net cash used by investing activities in 2003 and net
cash used by investing activities of $9.4 million in 2002. Cash provided by net short-term
investments activities was $56.5 million higher in 2004 compared to 2003. Cash flows for the 2004
period also include $12.9 million in net proceeds from the sale of 819,210 shares of Abgenix common
stock. Capital expenditures were $5.1 million in 2004 compared to $27.7 million in 2003 and $66.1
million in 2002. In 2004 we completed construction of additional research areas in the corporate
headquarters in South San Francisco, California. Capital expenditures for 2003 and 2002 consisted
primarily of expenses incurred in connection with the construction of our cGMP manufacturing
facilities for our Phase 3 trials and potential future market launch in Hayward and San Diego,
California and in Memphis, Tennessee, which were completed in late 2003. Leasehold improvements for
our corporate headquarters in South San Francisco, California were completed in March 2003. We
currently have three cGMP manufacturing facilities located in Hayward and San Diego, California and
Memphis, Tennessee. We have completed the construction necessary at our cGMP manufacturing facility
for non patient-specific GVAX® cancer vaccines located in Hayward, California for
initiation of our first Phase 3 trial, and manufacturing is currently underway at this facility.
Patient-specific GVAX® lung cancer vaccines are being manufactured for an ongoing Phase
2 clinical trial at our cGMP manufacturing facility in Memphis, Tennessee. In 2002, we completed
modifications of our cGMP manufacturing facility in San Diego, California for the manufacture of
viral-based products and have since used this facility to supply product for clinical trials. Net cash provided by financing activities was $102.3 million in 2004 compared to $55.2 million
in 2003 and $2.0 million in 2002. The increase includes net proceeds of $139.9 million from the
private placement of our 3.125% Convertible Senior Notes issuance in October and November 2004 and
net proceeds of $57.2 million in connection with our public offering of 4,887,500 shares of common
stock in March 2004. In October, we used part of the proceeds from our note issuance to repay
loans of an aggregate of $95.0 million to Fleet Bank and Silicon Valley Bank. In July 2003, we
received a $28.5 million upfront payment from Novartis AG, of which $18.5 million was attributed to
the issuance of an aggregate of 1,999,840 shares of our common stock to Novartis and GTI, and the
remaining $10.0 million was attributed to deferred revenue. In September 2003, we borrowed $35.0
million from Silicon Valley Bank under a five-year term loan agreement. We did not enter into any
significant financing activities in 2002. We have financed our operations primarily through the sale of equity securities, funding under
collaborative arrangements, sales of Abgenix common stock, sales of convertible notes, and secured
and unsecured debt financing. During 2004 and 2003, we received $12.9 million and $13.9 million in
net proceeds from the sale of 819,210 and 1,250,000 shares of Abgenix common stock, respectively.
In 2002, we sold approximately 260,000 shares of Abgenix common stock and received net proceeds of
$2.5 million. Our retained ownership of Abgenix common stock represents a material portion of our working
capital. The common stock price of Abgenix has proven to be highly volatile, which has a direct
impact on our liquidity and capital resources. To the extent that we continue to hold a substantial
amount of these shares, our working capital position can be expected to continue to fluctuate in
future periods. The value of our investment in Abgenix common stock was $68.5 million at December
31, 2004 and $91.9 million at December 31, 2003. In connection with a gain on sale of Abgenix common stock in 2000, we paid $42.5 million in
federal and state income taxes. Since 2000 we have received $35.7 million in tax refunds from the
carryback of losses. We have additional unutilized net operating loss (NOL) carryforwards, although
the future utilization of these NOL carryforwards is limited by Internal Revenue Code Section 382,
which imposes an annual limitation on taxable income that can be offset by NOLs following a change
in control. For IRS purposes we experienced a change in control during our acquisition of Somatix
in 1997. It is our current intention to minimize future tax liabilities on sales of Abgenix common
stock by offsetting gains against current operating losses and the NOL carryforwards allowed under
Section 382. In addition, we have certain research and development tax credits that we may utilize
to offset the tax effects of such gains. However, under some circumstances we may sell more Abgenix
common stock, and consequently recognize gains in excess of the amount we can offset with net
operating losses and credit carryforwards. 23




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In July 2003, we received $28.5 million from Novartis in connection with a global alliance for
the development and commercialization of oncolytic virus therapies. As a result of this agreement,
we recorded $10.0 million in deferred revenue to be recognized over the development periods of
certain specified oncolytic virus programs. In 2004, we recognized revenue of $5.8 million from
the deferred revenue and $2.0 million remained deferred as of December 31, 2004 for future
recognition. We expect to spend these remaining funds in 2005. Our operating lease commitments
include rent payments through January 2006 for our Foster City location of $6.9 million, of which
$6.1 million was accrued at December 31, 2004 as part of the estimated facility exit costs
associated with the move to our South San Francisco, California headquarters building in March
2003. We expect to receive $1.1 million in aggregate future rentals under related existing
subleases through January 2006. We lease certain of our facilities and equipment under non-cancelable operating leases. These
leases, including the Hayward, Foster City, San Diego and Memphis facility leases, expire at
various dates through 2017, and some contain options for renewal. The South San Francisco
headquarters facility lease is recorded as a capital lease as a result of certain amendments that
required us to fund the costs of certain structural components of the facility. The increase in leasehold improvements and the decrease in construction in process in 2004
reflect the completion of the corporate headquarters facility in South San Francisco, California
and the completion of the cGMP manufacturing facility in Hayward, California. The Hayward facility
was built to manufacture non patient-specific GVAX® cancer vaccines, and was placed in
service during 2003. In 2003, we moved our corporate headquarters to South San Francisco from
Foster City, California. As a result, we retired approximately $14.3 million and $1.0 million of
leasehold improvements and other assets related to the former corporate headquarters in Foster
City, California, and approximately $13.6 million and $1.0 million of related accumulated
depreciation, in 2003 and in 2004, respectively. The decrease in construction in process also
reflects the deconsolidation of Ceregene in August 2004 subsequent to Ceregenes Series B preferred
stock financing. Our long-term contractual obligations at December 31, 2004 were as follows (in thousands): Payment due2010 andTotal
    
    
    2005
    
    
    2006 and 2007
    
    
    2008 and 2009
    
    
    thereafterConvertible senior notes
    
    $
    145,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    145,000South San Francisco facility lease obligation
    
    
    99,676
    
    
    
    6,087
    
    
    
    12,820
    
    
    
    13,766
    
    
    
    67,003Operating leases
    
    
    41,399
    
    
    
    10,294
    
    
    
    6,192
    
    
    
    4,768
    
    
    
    20,145$
    286,075
    
    
    $
    16,381
    
    
    $
    19,012
    
    
    $
    18,534
    
    
    $
    232,148
 In October and November 2004, we issued and sold a total of $145.0 million aggregate principal
amount of 3.125% Convertible Senior Notes due 2011in a private placement. We received approximately
$139.9 million in proceeds after deducting the initial purchasers discount and estimated offering
expenses. We used a portion of the proceeds from the sale of the notes to repay $95.0 million of
outstanding bank loans, thereby eliminating restrictions on $60.0 million of cash. We intend to
use the remainder of the proceeds for general corporate purposes. Under certain circumstances, we may redeem some or all of the convertible senior notes on or
after November 1, 2009 at a redemption price equal to 100% of the principal amount of the notes.
Holders of the notes may require us to repurchase some or all of their notes if a fundamental
change (as defined in the indenture) occurs, at a repurchase price equal to 100% of the principal
amount of the notes, plus accrued and unpaid interest (and additional amounts, if any) to, but not
including, the repurchase date. The notes are convertible into our common stock, initially at the
conversion price of $9.10 per share, equal to a conversion rate of approximately 109.8901 shares
per $1,000 principal amount of notes, subject to adjustment. We estimate that our cash to be used in operating activities during 2005 will be approximately
$95.0 million. This estimated use of cash does not include capital expenditures or the cost of any
potential acquisitions, nor does it reflect the potential offset by future gains on sales of
Abgenix stock, equity or debt financings or major new collaborations ventures. Our capital
requirements depend on numerous factors, including: the progress of our research and development
programs and our preclinical and clinical trials; clinical and commercial scale manufacturing
requirements; the extent of funding from collaborative partners; the acquisition of new products or
technologies; and the cost and outcome of litigation, patent interference proceedings or other
legal proceedings. Our ongoing development programs and any increase in the number and size of
programs and trials will reduce our current cash resources and potentially create further need to
raise additional capital. Therefore, we will continue to consider financing alternatives, including
collaborative ventures and potential equity and debt financings in addition to periodic sales of
our holdings of Abgenix stock. 24




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While we believe that our current liquidity position will be sufficient to meet our cash needs
for at least the next year, we may need to raise substantial additional funds in order to complete
our pending and planned trials over their multi-year course before we will obtain product revenue,
if any, from such products. Accordingly, we may entertain the possibility of raising additional
capital to preserve our liquidity, depending on a number of conditions, including conditions in the
capital markets. The sources of liquidity available to us include the sale of Abgenix common stock,
payments from potential partners and/or licensees of our potential products and technologies, and
private or public placement of Cell Genesys equity securities, warrants, debt securities or
depositary shares. We regularly consider the conditions of capital markets, dilution, stockholder
value and tax consequences of each type of financing on stockholders. Certain of the financing
options available to us may have negative consequences to stockholders such as dilution. Given the
volatile nature of the capital markets, decisions to raise capital may require actions that would
impose a negative consequence in order to reduce or minimize a more significant negative
consequence to stockholders. 25




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OTHER FACTORS AFFECTING FUTURE OPERATIONS 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 onForm 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 vaccines, oncolytic virus therapies and antiangiogenesis therapy
products are in research and development. We have not generated any revenues from the sale of
products. 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 vaccines, oncolytic virus therapies and antiangiogenesis therapy products 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 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 other 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 vaccines and oncolytic virus
therapies are currently being tested in human clinical trials to determine their safety and
efficacy. None of our other products or therapies under development is in human clinical trials.
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. In the case of patient-specific therapies such as our
GVAX® lung cancer vaccine, the risks of any surgical procedure that may be required to
prepare the vaccine must be considered in the evaluation of the products safety profile. All
surgical procedures, particularly those in advanced disease settings, involve some element of risk
to the patient, which must be evaluated in the context of the patients condition and therapeutic
alternatives. Our ongoing clinical studies are now designed to exclude patients at higher risk of
post-operative complications. Nonetheless, in past and current clinical trials involving patients
with very advanced stages of lung cancer, a small number of patients with progressive disease have
died during the period following surgical removal of their tumor and prior to administration of
GVAX® vaccine. Such events will continue to be included in an ongoing assessment of the
overall risk/benefit profile of this product and could adversely influence the continuation of the
current study and the products future development. Clinical trials are very costly and time-consuming, especially the typically larger Phase 3
clinical trials such as the recently initiated VITAL-1 trial of our GVAX® prostate
cancer vaccine. We cannot exactly predict if and when our current clinical trials will be
completed. We also cannot exactly predict when other planned clinical trials, including additional
Phase 3 clinical trials of our
GVAX® cancer vaccines, will begin or be completed. The VITAL-1 trial of our
GVAX® prostate cancer vaccine is our first Phase 3 clinical trial. Though we anticipate
commencing our second Phase 3 clinical trial of GVAX® prostate cancer vaccine, the
VITAL-2 26




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trial, during the first half
of 2005, we cannot guarantee that we will be able to begin the VITAL-2 Phase 3
clinical trial within that timeframe. 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 and other applicable 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® prostate cancer vaccine 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 in our operations (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, 2004, our
accumulated deficit was $244.0 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, 2004, we recorded a net loss of $97.4 million, which included $12.2 million in gains on sales
of our Abgenix common stock. 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 research and
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 new 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 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. 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 and commercialization activities;
    our ability to establish new collaborations and the terms of those collaborations;
    competing technological and market developments;
    the time and cost of regulatory approval;
    the extent to which we choose to commercialize our future products through our own sales and marketing capabilities;
    the costs we incur in obtaining 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 or clinical activities. 27




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We plan to raise additional funds through collaborative business relationships, sales of some
portion or all of our investment in Abgenix common stock, 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, by selling our holdings of Abgenix common stock and/or 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 out licensing 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 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
vaccines. Although we are in active discussions with potential partners for our GVAX®
prostate cancer vaccine, 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 certain 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. 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 facilities 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 product candidates. We are under significant
lease obligations for each of our facilities. We may be unable to establish and maintain our
manufacturing facilities within our planned time and budget, which could have a material adverse
effect on our product development timelines. Our manufacturing facilities will be subject to
ongoing, periodic inspection by the FDA and state agencies 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;
    quality control and assurance;
    shortages of qualified manufacturing personnel;
    shortages of raw materials;
    shortages of key contractors; and
    ongoing compliance with FDA and other regulations. 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 expanded facilities. The manufacturing techniques and process controls, as well as the product
release specifications, required for our GVAX® cancer vaccines
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 our products effectively to meet the demands of regulatory agencies, clinical testing
and commercial production. 28




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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 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 facilities are subject to licensing requirements of the United States Drug
Enforcement Administration (DEA), the California Department of Health Services and the Tennessee
Department of Commerce and Insurance, Board of Pharmacy, referred to as the Tennessee Board of
Pharmacy. While not yet subject to license by the FDA, these facilities are subject to inspection
by the FDA, as well as by the DEA, the California Department of Health Services and the Tennessee
Board of Pharmacy. Failure to 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, 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. 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, 2004 we had approximately 325
patents issued or granted to us or available to us based on licensing arrangements and
approximately 318 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 our intellectual property infringes
upon the rights of others. Our intellectual property may be challenged by our competitors in the future, which may have a
material adverse effect on our business, results of operations, financial condition and cash flow. Our commercial success depends in part on not infringing the patents or proprietary rights of
others and not breaching licenses granted to us. We are aware of competing intellectual property
relating to both our programs in cancer vaccines and oncolytic virus therapies. While we currently
believe we have freedom to operate in these areas, others may challenge our position in the future.
We may be required to obtain licenses to third-party technologies or genes necessary in order to
market our products. Any failure to license any technologies or genes 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. 29




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We are involved in one interference and several opposition proceedings related to our current
product portfolio and certain 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 N.V. (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 are also currently involved
in European opposition proceedings, some of which relate to our current product portfolio and
certain of our core technologies. 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 pharmaceutical companies, such as Bristol-Myers Squibb, 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 with similar experience and
resources to ours, but which may have programs that are in a later stage of clinical testing than
ours, such as Dendreon Corporation, Antigenics, Inc. and CancerVax, Inc. Some competitors are pursuing product development strategies that are similar to ours,
particularly with respect to our cancer vaccine 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
approval 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 to commence commercial sales of products, we will also be competing with
respect to 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; 30




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
    availability;
    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, 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 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 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. 31




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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, 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. 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 for the conduct
of human clinical trials for our GVAX® cancer vaccine programs and oncolytic virus
therapies. The early termination of any of these clinical trial arrangements or the failure of
these institutions to comply with the regulations and requirements governing clinical trials would
hinder the progress of our clinical trial program. If any of these relationships are terminated,
the clinical trials might not be completed, and the results might not be evaluable. 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. Our stock price is influenced by the market price of Abgenix stock, which has been highly volatile. Our retained ownership of Abgenix common stock represents a material portion of the total
assets on our balance sheet. The common stock price of Abgenix has proven to be highly volatile.
During the year ended December 31, 2004, the per share price of Abgenix common stock fluctuated
between a high closing price of $18.55 and low closing price of $7.77. The value of our holdings of
Abgenix common stock was $68.5 million at December 31, 2004 compared to $91.9 million at December
31, 2003. Movements in the price of Abgenix common stock, up or down, may exert corresponding
influences on the market price of our stock. 32




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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, 2002, our stock price has fluctuated between a
high closing price of $22.99 on January 3, 2002 and a low
closing price of $5.27 on
March 10, 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. 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 of a clinical trial;
    fluctuations in our financial results;
    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;
    fluctuations in the price of Abgenix common stock;
    material developments related to our minority interest in Ceregene, Inc.;
    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;
    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 senior notes. In October and November 2004, we issued and sold $145.0 million aggregate principal amount of
senior notes, which are convertible into our common stock, initially at the conversion price of
$9.10 per share, equal to a conversion rate of approximately 109.8901 shares per $1,000 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 in which 10%
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. 33




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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 securities. 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 and, in turn, the price
of our convertible senior notes. 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. 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 positions in Abgenix and 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, to address
any uncertainty in this regard, we have invested a portion of our portfolio in money market funds
and U.S. government securities and limited the level of investment in corporate bonds and other
instruments that could be considered investment securities. In addition, over time we plan to
reduce the level of our investment securities by periodic sales of our holdings in Abgenix. These
dispositions may be effected under unfavorable market conditions. The lower rates of return
realized after the reinvestment of our investment portfolio, and any required dispositions of
non-controlling investments, could adversely affect our future reported results. 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, 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. 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 Good Clinical Practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be evaluated. 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 and after administration to the patient.
In addition, developers of pharmaceutical products must provide periodic data regarding clinical
trials to the FDA, and foreign regulatory authorities, as appropriate. These health authorities 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 these
regulatory 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. 34




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In responding to a new drug application or a biologics license application, the FDA and other
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, new drug application
supplement or biologics license application is never guaranteed, and the approval process typically
takes several years and is extremely expensive. Regulatory 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 or clinical 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 clinical 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. We are subject to federal, state and local 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, the Tennessee Board of Pharmacy and other regulatory statutes including:  
    the Occupational Safety and Health Act;
    the Environmental Protection Act;
    the Toxic Substances Control Act;
    the Resource Conservation and Recovery Act; and
    other current and potential future federal, state or local 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 and development activities involve the controlled use of hazardous
materials, chemicals, viruses and radioactive compounds. We are subject to federal, 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 may also be required to incur significant costs to comply with environmental laws and
regulations in the future. Failure to comply with foreign regulatory requirements governing human clinical trials and
marketing approval for drugs and devices could prevent us from selling our products in foreign
markets, which may adversely affect our operating results and financial condition. For marketing 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 additional testing. 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 35




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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 develop
foreign markets for our products and may have a material adverse effect on our results of
operations and financial condition. Reimbursement from third-party payors 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 payors will cover and pay for
newly approved drugs. Sales of our future products will be influenced by the willingness of
third-party payors 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 payors,
including:  
    government agencies;
    private health care insurers and other health care payors such as health maintenance organizations;
    self-insured employee plans; and
    Blue Cross/Blue Shield and similar 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 payors. Insurance coverage might not be provided by
third-party payors 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 payors 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 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. 36




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ITEM 7A.
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Equity Price Risk We are subject to risk associated with our retained ownership in Abgenix common stock. The
value of our holdings of Abgenix common stock was $68.5 million at December 31, 2004 compared to
$91.9 million at December 31, 2003. Each 10% decrease in market value of these securities would
result in a decrease in value of approximately $6.9 million and $9.2 million from the fair value of
those investments at December 31, 2004 and 2003, respectively. Interest Rate Risk We are exposed to interest rate sensitivity on our investments in debt securities and our
outstanding fixed rate debt. The objective of our investment activities is to preserve principal,
while at the same time maximizing yields without significantly increasing risk. To achieve this
objective, we invest in highly liquid, investment grade and government debt securities. Our
investments in debt securities are subject to interest rate risk. To minimize the exposure due to
an adverse shift in interest rates, we invest in short-term securities and our goal is to maintain
an average maturity of less than one year. The following table provides information about our
financial instruments that are sensitive to changes in interest rates. Interest Rate Sensitivity
Principal Amount by Expected Maturity and Average Interest Rate
(dollars in thousands) Fair Value2009
    
    
    
    
    
    
    December 31,As of December 31, 2004
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    Thereafter
    
    
    Total
    
    
    2004Total Investment Securities
    
    $
    115,112
    
    
    $
    37,340
    
    
    $
    10,976
    
    
    $
    
    
    
    $
    
    
    
    $
    163,428
    
    
    $
    162,779Average Interest Rate
    
    
    2.39
    %
    
    
    2.27
    %
    
    
    2.46
    %
    
    
    
    
    
    
    
    
    
    
    2.37
    %
    
    
    Fixed Interest Rate Convertible Senior
Notes (1)
    
    $
    4,531
    
    
    $
    4,531
    
    
    $
    4,531
    
    
    $
    4,531
    
    
    $
    157,838
    
    
    $
    175,962
    
    
    $
    145,000Average Interest Rate
    
    
    3.125
    %
    
    
    3.125
    %
    
    
    3.125
    %
    
    
    3.125
    %
    
    
    3.125
    %
    
    
    3.125
    %
    
    
    
 Fair Value2008
    
    
    
    
    
    
    December 31,As of December 31, 2003
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    Thereafter
    
    
    Total
    
    
    2003Total Investment Securities
    
    $
    44,666
    
    
    $
    72,232
    
    
    $
    14,358
    
    
    $
    1,950
    
    
    $
    14,573
    
    
    $
    147,779
    
    
    $
    148,339Average Interest Rate
    
    
    1.53
    %
    
    
    2.19
    %
    
    
    2.64
    %
    
    
    5.55
    %
    
    
    1.35
    %
    
    
    1.99
    %
    
    
    Variable Interest Rate Debt Financing,
including Current Portion
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    60,000
    
    
    $
    60,000
    
    
    $
    60,000Average Interest Rate(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.80
    %
    
    
    1.80
    %
    
    
    Fixed Interest Rate Debt Financing,
including Current Portion
    
    $
    961
    
    
    $
    4,323
    
    
    $
    4,475
    
    
    $
    4,639
    
    
    $
    21,398
    
    
    $
    35,796
    
    
    $
    35,796Average Interest Rate
    
    
    6.86
    %
    
    
    6.75
    %
    
    
    6.73
    %
    
    
    6.73
    %
    
    
    6.73
    %
    
    
    6.74
    %
    
    
    
   (1)
    
    In connection with our issuance of our 3.125% convertible senior notes due 2011, we fully
repaid both our variable interest rate debt financing and our fixed interest rate debt
financing concurrent with the initial closing on October 20, 2004.(2)
    
    Interest rate was based upon LIBOR rate index plus a spread of 0.625 percent, and can be
reset on a quarterly or semi-annual basis. 37




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ITEM 8.
    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent
Registered Public Accounting Firm on Internal Control Over Financial
Statements The Board of Directors and Stockholders
Cell Genesys, Inc. We have audited managements assessment, included in the accompanying Managements Annual
Report on Internal Control Over Financial Reporting included in Item 9A, that Cell Genesys, Inc.
maintained effective internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control  Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cell Genesys, Incs
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that Cell Genesys maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, Cell Genesys maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Cell Genesys as of December 31,
2004 and 2003, and the related consolidated statements of operations, stockholders equity and cash
flows for each of the three years in the period ended December 31, 2004 and our report dated
February 24, 2005 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Palo Alto, California
February 24, 2005 38




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##### Table of Contents



Report of Independent
Registered Public Accounting Firm on Consolidated Financial Statements The Board of Directors and Stockholders
Cell Genesys, Inc, We have audited the accompanying consolidated balance sheets of Cell Genesys, Inc. as of
December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders
equity and cash flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of Cell Genesys, Inc.s management. Our responsibility
is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Cell Genesys at December 31, 2004 and 2003, and
the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Cell Genesyss internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 24, 2005 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Palo Alto, California
February 24, 2005 39




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##### Table of Contents



CELL GENESYS, INC. 
 CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    58,324
    
    
    $
    9,867Short-term investments
    
    
    113,347
    
    
    
    87,062Current portion of restricted cash and investments
    
    
    3,300
    
    
    
    3,359Investment in Abgenix, Inc. common stock
    
    
    68,503
    
    
    
    91,936Prepaid expenses and other current assets
    
    
    1,184
    
    
    
    1,173Total current assets
    
    
    244,658
    
    
    
    193,397Restricted cash and investments
    
    
    
    
    
    
    60,000Property and equipment, net
    
    
    159,663
    
    
    
    172,102Noncurrent deferred tax assets
    
    
    25,177
    
    
    
    34,247Deposits and other assets
    
    
    5,641
    
    
    
    756$
    435,139
    
    
    $
    460,502LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,888
    
    
    $
    2,567Accrued compensation and benefits
    
    
    5,071
    
    
    
    4,106Deferred revenue
    
    
    2,031
    
    
    
    7,877Accrued facility exit costs
    
    
    6,092
    
    
    
    9,459Other accrued liabilities
    
    
    5,924
    
    
    
    4,610Accrued income taxes
    
    
    29,954
    
    
    
    29,954Deferred tax liabilities
    
    
    25,177
    
    
    
    34,247Current portion of debt financings
    
    
    
    
    
    
    961Current portion of facility lease obligation
    
    
    786
    
    
    
    515Total current liabilities
    
    
    77,923
    
    
    
    94,296Noncurrent portion of debt financings
    
    
    
    
    
    
    94,835Noncurrent portion of facility lease obligation
    
    
    51,013
    
    
    
    51,799Convertible senior notes
    
    
    145,000
    
    
    
    Redeemable
convertible preferred stock, $.001 par value: 5,000,000 shares authorized; 152 and 226 shares issued
and outstanding in 2004 and 2003, respectively
    
    
    1,897
    
    
    
    2,706CommitmentsStockholders equity:Common stock, $.001 par value: 75,000,000 shares
authorized; 44,978,226 and 39,671,521 shares
issued and outstanding in 2004 and 2003,
respectively
    
    
    45
    
    
    
    40Additional paid-in capital
    
    
    372,014
    
    
    
    312,017Accumulated other comprehensive income
    
    
    31,220
    
    
    
    51,371Accumulated deficit
    
    
    (243,973
    )
    
    
    (146,562
    )Total stockholders equity
    
    
    159,306
    
    
    
    216,866$
    435,139
    
    
    $
    460,502
 See accompanying notes 40




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##### Table of Contents



CELL GENESYS, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) Year ended December 31,2004
    
    
    2003
    
    
    2002Revenue
    
    $
    11,458
    
    
    $
    18,128
    
    
    $
    39,141Operating expenses:Research and development
    
    
    92,133
    
    
    
    85,296
    
    
    
    75,138General and administrative
    
    
    17,928
    
    
    
    25,980
    
    
    
    20,697Credit for purchased in-process technology
    
    
    
    
    
    
    
    
    
    
    (186
    )Total operating expenses
    
    
    110,061
    
    
    
    111,276
    
    
    
    95,649Loss from operations
    
    
    (98,603
    )
    
    
    (93,148
    )
    
    
    (56,508
    )Gain on sale of Abgenix, Inc. common stock
    
    
    12,160
    
    
    
    12,638
    
    
    
    2,246Interest and other income
    
    
    2,662
    
    
    
    4,832
    
    
    
    9,942Interest expense
    
    
    (9,885
    )
    
    
    (5,360
    )
    
    
    (1,011
    )Loss before minority interest and income taxes
    
    
    (93,666
    )
    
    
    (81,038
    )
    
    
    (45,331
    )Loss attributed to minority interest
    
    
    
    
    
    
    
    
    
    
    96Loss before income taxes
    
    
    (93,666
    )
    
    
    (81,038
    )
    
    
    (45,235
    )Income tax benefit (provision)
    
    
    (3,745
    )
    
    
    24,632
    
    
    
    18,636Net loss
    
    
    (97,411
    )
    
    
    (56,406
    )
    
    
    (26,599
    )Dividend in kind to preferred stockholders
    
    
    100
    
    
    
    230
    
    
    
    702Loss attributed to common stockholders
    
    $
    (97,511
    )
    
    $
    (56,636
    )
    
    $
    (27,301
    )Basic and diluted loss per common share
    
    $
    (2.23
    )
    
    $
    (1.48
    )
    
    $
    (0.76
    )Weighted average shares of common stock
outstanding-basic and diluted
    
    
    43,682
    
    
    
    38,177
    
    
    
    35,889
 See accompanying notes 41




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##### Table of Contents



CELL GENESYS, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net loss
    
    $
    (97,411
    )
    
    $
    (56,406
    )
    
    $
    (26,599
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    16,773
    
    
    
    12,159
    
    
    
    4,366Loss (gain) on disposal of property and equipment
    
    
    (19
    )
    
    
    634
    
    
    
    50Gain on sale of Abgenix, Inc. common stock
    
    
    (12,160
    )
    
    
    (12,638
    )
    
    
    (2,246
    )Issuance of common stock related to Somatix acquisition
    
    
    
    
    
    
    
    
    
    
    396Non-employee stock based compensation
    
    
    105
    
    
    
    81
    
    
    
    238Credit for purchased in-process technology
    
    
    
    
    
    
    
    
    
    
    (186
    )Changes to:Prepaid expenses and other assets
    
    
    788
    
    
    
    636
    
    
    
    9,489Receivable from Transkaryotic Therapies, Inc.
    
    
    
    
    
    
    15,000
    
    
    
    (15,000
    )Noncurrent deferred tax assets
    
    
    3,745
    
    
    
    (20,682
    )
    
    
    (13,153
    )Accounts payable
    
    
    411
    
    
    
    (1,413
    )
    
    
    2,002Accrued compensation and benefits
    
    
    1,134
    
    
    
    495
    
    
    
    974Deferred revenue
    
    
    (5,846
    )
    
    
    2,006
    
    
    
    2,115Accrued facility exit costs
    
    
    (3,367
    )
    
    
    3,281
    
    
    
    6,178Other accrued liabilities
    
    
    2,064
    
    
    
    (2,260
    )
    
    
    (3,334
    )Minority interest in equity of subsidiary
    
    
    
    
    
    
    
    
    
    
    (96
    )Noncurrent income tax liabilities
    
    
    
    
    
    
    12,386
    
    
    
    4,476Net cash used in operating activities
    
    
    (93,783
    )
    
    
    (46,721
    )
    
    
    (30,330
    )Cash flows from investing activities:Purchases of short-term investments
    
    
    (227,651
    )
    
    
    (265,905
    )
    
    
    (235,669
    )Maturities of short-term investments
    
    
    8,543
    
    
    
    15,520
    
    
    
    Sales of short-term investments
    
    
    251,661
    
    
    
    226,468
    
    
    
    290,741Purchases of restricted cash and investments
    
    
    
    
    
    
    
    
    
    
    (945
    )Capital expenditures
    
    
    (5,087
    )
    
    
    (27,658
    )
    
    
    (66,074
    )Proceeds from disposal of property and equipment
    
    
    67
    
    
    
    65
    
    
    
    107Proceeds from sale of Abgenix, Inc. common stock
    
    
    12,918
    
    
    
    13,859
    
    
    
    2,487Cash effect related to the deconsolidation of Ceregene
    
    
    (521
    )
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    39,930
    
    
    
    (37,651
    )
    
    
    (9,353
    )Cash flows from financing activities:Proceeds from issuances of common stock
    
    
    59,088
    
    
    
    20,249
    
    
    
    1,202Net proceeds from convertible senior note-financing
    
    
    139,912
    
    
    
    
    
    
    
    Proceeds from term loan financings
    
    
    
    
    
    
    35,237
    
    
    
    926Payments under Ceregene financing
    
    
    (482
    )
    
    
    (272
    )
    
    
    (95
    )Payments under facility lease obligation
    
    
    (515
    )
    
    
    (47
    )
    
    
    Payments under debt financings
    
    
    (95,693
    )
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    102,310
    
    
    
    55,167
    
    
    
    2,033Net increase (decrease) in cash and cash equivalents
    
    
    48,457
    
    
    
    (29,205
    )
    
    
    (37,650
    )Cash and cash equivalents at the beginning of the year
    
    
    9,867
    
    
    
    39,072
    
    
    
    76,722Cash and cash equivalents at the end of the year
    
    $
    58,324
    
    
    $
    9,867
    
    
    $
    39,072
 See accompanying notes 42




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##### Table of Contents



CELL GENESYS, INC. 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands) AccumulatedAdditional
    
    
    Other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Comprehensive
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Par Value
    
    
    Capital
    
    
    Income (loss)
    
    
    Deficit
    
    
    EquityBalances at December 31, 2001
    
    
    35,596
    
    
    
    36
    
    
    
    274,365
    
    
    
    176,710
    
    
    
    (63,557
    )
    
    
    387,554Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,599
    )
    
    
    (26,599
    )Change in net unrealized holding gain on available for sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (141,991
    )
    
    
    
    
    
    
    (141,991
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (168,590
    )Cancellation of common stock upon settlement of the outstanding
Calydon acquisition
    
    
    (10
    )
    
    
    
    
    
    
    (186
    )
    
    
    
    
    
    
    
    
    
    
    (186
    )Issuance of common stock upon exercise of stock options and pursuant
to the Employee Stock Purchase Plan
    
    
    149
    
    
    
    
    
    
    
    1,202
    
    
    
    
    
    
    
    
    
    
    
    1,202Issuance of common stock related to the 1997 Somatix acquisition
    
    
    99
    
    
    
    
    
    
    
    396
    
    
    
    
    
    
    
    
    
    
    
    396Income tax benefit from stock option deductions
    
    
    
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    
    
    
    
    196Non-employee stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    238
    
    
    
    
    
    
    
    
    
    
    
    238Conversion of 904 preferred shares into common shares
    
    
    1,048
    
    
    
    1
    
    
    
    11,039
    
    
    
    
    
    
    
    
    
    
    
    11,040Dividend to preferred stockholders
    
    
    
    
    
    
    
    
    
    
    (702
    )
    
    
    
    
    
    
    
    
    
    
    (702
    )Balances at December 31, 2002
    
    
    36,882
    
    
    
    37
    
    
    
    286,548
    
    
    
    34,719
    
    
    
    (90,156
    )
    
    
    231,148Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,406
    )
    
    
    (56,406
    )Change in net unrealized holding gain on available for sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,652
    
    
    
    
    
    
    
    16,652Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,754
    )Issuance of common stock upon exercise of stock options and pursuant
to the Employee Stock Purchase Plan
    
    
    223
    
    
    
    
    
    
    
    1,730
    
    
    
    
    
    
    
    
    
    
    
    1,730Income tax benefit from stock option deductions
    
    
    
    
    
    
    
    
    
    
    216
    
    
    
    
    
    
    
    
    
    
    
    216Non-employee stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    81
    
    
    
    
    
    
    
    
    
    
    
    81Conversion of 439 preferred shares into common shares
    
    
    567
    
    
    
    1
    
    
    
    5,155
    
    
    
    
    
    
    
    
    
    
    
    5,156Issuance of common stock to Novartis/GTI
    
    
    2,000
    
    
    
    2
    
    
    
    18,517
    
    
    
    
    
    
    
    
    
    
    
    18,519Dividend to preferred stockholders
    
    
    
    
    
    
    
    
    
    
    (230
    )
    
    
    
    
    
    
    
    
    
    
    (230
    )Balances at December 31, 2003
    
    
    39,672
    
    
    
    40
    
    
    
    312,017
    
    
    
    51,371
    
    
    
    (146,562
    )
    
    
    216,866Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (97,411
    )
    
    
    (97,411
    )Change in net unrealized holding gain on available for sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,151
    )
    
    
    
    
    
    
    (20,151
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (117,562
    )Issuance of common stock upon exercise of stock options and pursuant
to the Employee Stock Purchase Plan
    
    
    284
    
    
    
    
    
    
    
    1,897
    
    
    
    
    
    
    
    
    
    
    
    1,897Issuance of common stock in follow on offering, net of issuance costs
of $3.9 million
    
    
    4,887
    
    
    
    5
    
    
    
    57,186
    
    
    
    
    
    
    
    
    
    
    
    57,191Non-employee stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    105Conversion of 74 preferred shares into common shares
    
    
    135
    
    
    
    
    
    
    
    909
    
    
    
    
    
    
    
    
    
    
    
    909Dividend to preferred stockholders
    
    
    
    
    
    
    
    
    
    
    (100
    )
    
    
    
    
    
    
    
    
    
    
    (100
    )Balances at December 31, 2004
    
    
    44,978
    
    
    $
    45
    
    
    $
    372,014
    
    
    $
    31,220
    
    
    $
    (243,973
    )
    
    $
    159,306
 See accompanying notes 43




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##### Table of Contents



CELL GENESYS, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies Organization and basis of presentation Cell Genesys, Inc. (Cell Genesys or the Company) has focused its research and product
development efforts on biological therapies for patients with cancer. The Companys objective is to
develop and commercialize cell-based cancer vaccines, oncolytic virus therapies and
antiangiogenesis therapies to treat different types of cancer. Cell Genesys current clinical-stage
programs include GVAX® cancer vaccines and oncolytic virus therapies. The consolidated financial statements include the accounts of Cell Genesys and its
majority-owned subsidiary, Ceregene, Inc. through August 3, 2004, after which, as a result of a
decline in ownership, Ceregene was no longer consolidated, but is accounted for under the equity
method. All significant intercompany balances and transactions have been eliminated. Concentration of risk Cash and cash equivalents, short-term investments and accounts receivables are financial
instruments, which potentially subject the Company to concentrations of credit risk. The Company
maintains and invests in high credit quality investment-grade securities that bear minimal credit
risk. The Company has not experienced any significant credit losses and does not generally require
collateral on receivables. Revenue recognition The Companys revenues are derived principally from research and licensing agreements with
collaborators. Revenue under such collaboration agreements typically includes upfront payments,
cost reimbursements and milestone payments. We evaluate whether the delivered element under these
arrangements has value to our customer on a stand-alone basis and whether objective and reliable
evidence of fair value of the undelivered item exists. Deliverables that do not meet these
criteria are treated as one unit of accounting for the purposes of revenue recognition. Revenue from non-refundable upfront license fees and other payments under collaboration
agreements where the Company continues involvement throughout development is recognized over the
development period based upon when the underlying development expenses are incurred. The Company
recognizes cost reimbursement revenue under collaborative agreements as the related research and
development costs are incurred, as provided for under the terms of these agreements. Incentive milestone payments under collaborative arrangements are recognized as revenue upon
achievement of the incentive milestone events, which represent the culmination of the earnings
process. Incentive milestone payments are triggered either by the results of the Companys research
efforts or by events external to the Company, such as regulatory approval to market a product or
the achievement of specified sales levels by a marketing partner. As such, the incentive milestones
are substantially at risk at the inception of the contract, and the amounts of the payments
assigned thereto are commensurate with the milestone achieved. Upon the achievement of an incentive
milestone event, the Company has no future performance obligations related to that payment. Amounts received under license agreements relating to the Companys intellectual property are
recognized as revenue upon execution of the technology licensing agreement, if the Company has no
future performance obligations. Deferred revenue represents the portion of upfront payments received that has not been earned. Depreciation and amortization Cell Genesys records property and equipment at cost and depreciates it using the straight-line
method over the estimated useful lives of the assets, generally five years. Computer equipment is
depreciated over a life of three years. Furniture and equipment leased under capital leases is amortized over the shorter of the
useful lives or the lease term. Leasehold improvements are amortized over the shorter of the useful
lives or the lease term, generally 15 to 17 years. Amortization of leased assets is included in
depreciation and amortization expense and is combined with accumulated depreciation and
amortization of the Companys owned assets. Intangible assets, which consist of patents,
are amortized using the straight-line method over the estimated useful lives of the assets, generally 10 years. 44




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CELL GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Cash, cash equivalents and short-term investments Cell Genesys places its cash, cash equivalents and short-term investments, including
restricted cash and investments, with high credit quality United States and foreign financial
institutions, government and corporate issuers and limits the amount of credit exposure to any one
issuer. The Company considers all highly liquid investments with insignificant interest rate risk
with a maturity of less than three months when purchased to be cash equivalents. All investments
are denominated in U.S. dollars. Short-term investments include equity securities classified as
available-for-sale. The Company records its investments at fair market value, based on quoted
market prices. The Companys debt and marketable equity securities are classified as available-for-sale and
carried at fair value. Management considers the investments in debt securities to be available for
use in current operations. As a result, all investments in debt securities are classified as
current assets, even if the remaining maturity of the investment is more than one year beyond the
balance sheet date. The cost of securities sold is based on the specific identification method.
Realized gains and losses and declines in value, judged to be other than temporary, on
available-for-sale securities are included in interest and other income (loss). Unrealized holding
gains and losses on securities classified as available-for-sale are recorded in accumulated other
comprehensive income, net of tax. The Company determines the appropriate classification of debt
securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Restricted cash and investments relate to the Companys $3.3 million letter of credit on the
Companys corporate headquarters facility in South San Francisco, California, and its cGMP
manufacturing facility in Hayward, California. Reclassifications Certain prior year balances, relating to income tax liabilities, have been reclassified to
current from long term taxes payable to conform to the current year presentation. Stock-based compensation In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation (SFAS 123), the Company has elected to follow
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25)
and related interpretations and to adopt the disclosure only alternative described in SFAS 123.
Under APB 25, when the exercise price of the Companys employee stock options equals or exceeds the
fair market value on the date of the grant or the fair value of the underlying stock on the date of
the grant as determined by the Companys Board of Directors, no compensation expense is recognized. The following table illustrates, pursuant to SFAS 123, as amended by SFAS No. 148, the effect
on net loss and loss per common share, had compensation costs for stock-based employee compensation
plans been determined based upon the fair value method prescribed under SFAS 123 using the
straight-line method of accounting for vesting (see Note 9 of Notes to Consolidated Financial
Statements): Year ended December 31,2004
    
    
    2003
    
    
    2002(in thousands except per share data)Loss attributed to common stockholders
    
    $
    (97,511
    )
    
    $
    (56,636
    )
    
    $
    (27,301
    )Deduct:Stock-based employee
compensation expense determined
under SFAS 123, net of related taxes
    
    
    (13,516
    )
    
    
    (12,700
    )
    
    
    (11,836
    )Pro forma net loss
    
    $
    (111,027
    )
    
    $
    (69,336
    )
    
    $
    (39,137
    )Basic and diluted loss per share, as reported
    
    $
    (2.23
    )
    
    $
    (1.48
    )
    
    $
    (0.76
    )Basic and diluted pro forma loss per share
    
    $
    (2.54
    )
    
    $
    (1.82
    )
    
    $
    (1.09
    )
 Loss per share Basic loss per share is calculated using the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share includes the impact of potentially dilutive
securities. As the Companys potentially dilutive securities (stock options, redeemable convertible
preferred stock and convertible debt) were anti-dilutive for all periods presented, they have been
excluded from the computation of shares used in computing diluted loss per share. 45




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CELL GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) The Company had securities outstanding which could potentially dilute basic earnings per share
in the future, but were excluded from the computation of diluted net loss per share, as their
effect would have been antidilutive. These outstanding securities consisted of the following (in
thousands, except per share data): Year Ended December 31,
    
    2004Convertible senior notes
    
    
    15,934Redeemable convertible preferred stock
    
    
    253Outstanding stock options
    
    
    7,822Weighted average exercise price of stock options
    
    $
    12.23
 Use of estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. Management makes estimates when preparing the financial
statements which affect revenue recognition, accrued but unbilled expenses for clinical trials,
accrued facility exit costs and lease accounting, expenses for certain outside experts and
consultants, useful lives of property and equipment, income taxes, stock option valuation and other
items. Comprehensive income (loss) Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss).
Other comprehensive income (loss) includes certain changes to stockholders equity of the Company
that are excluded from net loss. Other comprehensive income (loss) includes solely unrealized gains
or losses on the Companys available-for-sale securities, including the Companys holdings of
Abgenix, Inc. common stock, net of tax. The following table presents the calculation of
comprehensive income (loss) (in thousands): Year ended December 31,2004
    
    
    2003
    
    
    2002Net loss
    
    $
    (97,411
    )
    
    $
    (56,406
    )
    
    $
    (26,599
    )Other comprehensive income (loss):Increase (decrease)
in unrealized gain on
investments, net of tax
benefit/(provision) of
$(9.6) million, $11.1
million and $(94.7)
million in 2004, 2003,
and 2002, respectively
    
    
    (12,779
    )
    
    
    25,411
    
    
    
    (138,627
    )Less: reclassification
adjustment for gains
recognized in net loss,
net of related tax of
$4.9 million, $5.8
million, and $2.2 million
in 2004, 2003, and 2002,
respectively
    
    
    (7,372
    )
    
    
    (8,759
    )
    
    
    (3,364
    )Comprehensive loss
    
    $
    (117,562
    )
    
    $
    (39,754
    )
    
    $
    (168,590
    )
 Segment reporting The Companys operations are treated as one operating segment, as it reports profit and loss
information only on an aggregate basis to the chief operating decision-makers. Recent Accounting Pronouncements In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R,
Share-Based Payment, which is a revision of SFAS 123. SFAS 123R supersedes APB 25 and amends SFAS
No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123R is similar to the approach
described in FASB Statement 123. SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the statement of operations based
on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123R must be adopted
no later than July 1, 2005. Early adoption will be permitted in periods in which financial
statements have not yet been issued. We expect to adopt SFAS 123R on July 1, 2005. 46




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CELL GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) SFAS 123R permits public companies to adopt its requirement using one of two methods: 1) A
modified prospective method in which compensation cost is recognized beginning with the effective
date (a) based on the requirements of SFAS 123R for all share-based payments granted after the
effective date and (b) based on the requirements of SFAS 123R for all awards granted to employees
prior to the effective date of SFAS 123R that remain unvested on the effective date; or 2) A
modified retrospective method which includes the requirements of the modified prospective method
described above, but also permits entities to restate based on the amounts previously recognized
under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or
(b) prior interim periods of the year of adoption. The Company plans to adopt SFAS 123R using the
modified prospective method. As permitted by SFAS 123, the Company currently accounts for share-based payments to employees
using APB 25s intrinsic value method and, as such, generally recognizes no compensation cost for
employee stock options. Accordingly, the adoption of Statement 123Rs fair value method will have
a significant impact on our result of operations, although it will have no impact on our overall
financial position. The impact of adoption of Statement 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future. However, had we
adopted Statement 123R in prior periods, the impact of that standard would have approximated the
impact of Statement 123 as described in the disclosure of pro forma net loss and loss per share in
Note 9 to our consolidated financial statements. Statement 123R also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods after adoption.
The Company cannot estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise stock options, and whether the Company will be in a taxable
position). There is no tax impact related to the prior periods since the Company is in a net loss
position. 2. Statement of Cash Flows Supplemental disclosure to the Consolidated Statements of Cash Flows is as follows (in
thousands): Year ended December 31,2004
    
    
    2003
    
    
    2002Cash paid for interest
    
    $
    9,155
    
    
    $
    5,887
    
    
    $
    1,762Cash refunded for income taxes
    
    $
    
    
    
    $
    (16,532
    )
    
    $
    (10,161
    )
 The Company capitalized interest expense of $0.8 million in each of 2003 and 2002 in
connection with the construction of its manufacturing facility in Hayward, California. In 2002, the
Company capitalized $52.4 million of property and equipment in connection with the classification
of the South San Francisco, California headquarters facility as a capital lease. 3. Acquisitions In 2002, Cell Genesys recorded a credit of $186,000 to the original purchased in-process
technology charge in 2001 related to the Companys acquisition of Calydon, Inc., a private
biotechnology company focused on the treatment of cancer using genetically engineered oncolytic
virus therapies. The credit recorded in 2002 related to a claim made by Cell Genesys against the
portion of the Calydon purchase price held in escrow. The claim resulted from undisclosed
liabilities assumed in the purchase. Additionally in 2002, Cell Genesys recorded a non-cash
purchase price adjustment in the amount of $396,000 related to common stock issued to former
shareholders of a subsidiary of Somatix, Inc., an entity acquired by Cell Genesys in 1997. 4. Collaborative and License Agreements The Company derives substantially all of its revenues from collaborative and license
agreements, as shown in the following table (in thousands): Year ended December 31,2004
    
    
    2003
    
    
    2002Novartis AG
    
    $
    5,846
    
    
    $
    2,104
    
    
    $
    Japan Tobacco Inc.
    
    
    
    
    
    
    14,145
    
    
    
    11,640sanofi-aventis Group
    
    
    3,173
    
    
    
    1,000
    
    
    
    1,130Transkaryotic Therapies, Inc.
    
    
    250
    
    
    
    
    
    
    
    26,000Ceregene, Inc.
    
    
    998
    
    
    
    
    
    
    
    Other
    
    
    1,191
    
    
    
    879
    
    
    
    371$
    11,458
    
    
    $
    18,128
    
    
    $
    39,141
 47




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CELL GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Global alliance with Novartis AG On July 23, 2003, the Company announced a global alliance with Novartis AG for the development
and commercialization of oncolytic virus therapies. Under the agreement, the Company acquired
exclusive worldwide rights to the oncolytic virus therapy products and related intellectual
property of Genetic Therapy, Inc. (GTI), an affiliate of Novartis, as well as certain related
intellectual property of Novartis, and received an upfront payment of $28.5 million from Novartis.
This payment is to be dedicated to the further development of certain existing oncolytic virus
therapy products of the Company and those acquired from GTI, in each case for which the Company and
Novartis both have future commercialization rights. In exchange, the Company issued to Novartis and
GTI 1,999,840 shares of Cell Genesys, Inc. common stock. Of the $28.5 million upfront payment
received from Novartis, the Company recorded approximately $18.5 million to the 1,999,840 common
shares issued, based upon the market value of such shares, and approximately $10.0 million to
deferred revenue, which the Company will recognize as revenue over the related development period.
The agreement also provides the basis for the sharing of future additional development costs and
profits related to the potential products on a worldwide basis. The Company recognized $5.8 million
and $2.1 million in revenue under this agreement in 2004 and 2003, respectively, and $2.0 million
remained as deferred revenue at December 31, 2004. The Company expects to recognize the remaining
$2.0 million as revenue in 2005. Collaborative agreement with Japan Tobacco Inc. On December 17, 1998, Cell Genesys entered into a worldwide collaboration agreement with the
pharmaceutical division of Japan Tobacco Inc. (JT) for certain of the Companys GVAX®
cancer vaccines. In October 2002, the remaining portion of the agreement with JT was terminated
with the result that Cell Genesys reacquired full commercial rights to the entire GVAX®
cancer vaccine portfolio. In August 2003, the Company announced that an agreement had been reached
regarding outstanding clinical and patent-related milestone and wind down payments arising from
this terminated collaboration agreement. In connection with this final agreement, JT paid Cell
Genesys approximately $8.3 million in cash and waived future repayment obligations for capital
expenditures associated with Cell Genesys manufacturing facilities in Hayward, California and
Memphis, Tennessee, resulting in revenue of $14.1 million for 2003. The Company did not record any
revenue associated with this agreement in 2004. Gene activation technology licenses Cell
Genesys executed a license agreement with Aventis, now sanofi-aventis Group, in February 1997
for gene-activated erythropoietin (EPO) and a second undisclosed protein. In late 2000,
sanofi-aventis Group informed the Company of its intention to terminate this license agreement as it
relates to the second undisclosed protein. The agreement provides for up to $26 million in
milestone payments and fees, in addition to any royalties on future sales of gene-activated EPO
anywhere in the world. As of December 31, 2004. Cell Genesys had received approximately $23.2
million under this license agreement, which included certain milestone payments relating to the
development of gene-activated EPO which sanofi-aventis Group is developing in collaboration with
Transkaryotic Therapies, Inc (TKT). The Company recognized revenues of $3.2 million, $1.0 million
and $1.1 million in 2004, 2003 and 2002, respectively, pursuant to the agreement. In June 2002, Cell Genesys completed a license agreement with TKT under which Cell Genesys
exclusively licensed intellectual property relating to the development of gene-activated EPO. In
exchange, Cell Genesys received an upfront license fee of $26.0 million, which was to have been
comprised of $11.0 million in cash and $15.0 million in shares of TKT common stock. An amendment to
the original license agreement provided for the substitution of a cash payment in lieu of the TKT
stock, and in January 2003, Cell Genesys received a cash payment of $15.0 million from TKT. In
addition, Cell Genesys may receive additional payments, in an aggregate amount of up to $17.0
million in cash and TKT common stock, upon the achievement of certain patent-related milestones,
but Cell Genesys can make no assurances that any of these patent-related milestones will ever be
achieved or that any additional payments will be received. No ongoing royalty payments will be made
by TKT to Cell Genesys under the terms of this agreement. In 2004, the Company received and
recorded $0.3 million in revenue as a result of patent-related milestones achieved under this
agreement. Gene therapy rights agreement with Abgenix In November 1997, Cell Genesys entered into a gene therapy rights agreement (the GTRA) with
Abgenix. The GTRA provides Cell Genesys with certain rights to Abgenixs XenoMouse®
technology in the field of gene therapy. Cell Genesys is obligated to make certain payments to
Abgenix for these rights including reimbursement of license fees and royalties on future product
sales. The GTRA also prohibits Abgenix from granting any third-party licenses for antibody products
based on antigens nominated by Abgenix for its own purposes where the primary field of use is gene
therapy. In the case of third-party licenses granted 48




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CELL GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) by Abgenix where gene therapy is a secondary
field, Abgenix is obligated to share with Cell Genesys a portion of the cash milestone payments and
royalties resulting from any products in the field of gene therapy. Other collaborations Cell Genesys has licensing agreements relating to its proprietary viral vector technologies.
These collaborations enable Cell Genesys to receive monetary reimbursement for providing viral
vector technologies to companies that commercialize these technologies for the research market.
Examples include agreements with the Clontech division of Becton, Dickinson and Company and
Invitrogen Corporation. 5. Investments The following is a summary of the Companys available-for-sale securities at December 31, 2004
and 2003 (in thousands): Gross Unrealized
    
    
    Gross Unrealized
    
    
    EstimatedDecember 31, 2004
    
    Amortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    2,744
    
    
    $
    
    
    
    $
    
    
    
    $
    2,744Corporate notes
    
    
    11,743
    
    
    
    
    
    
    
    (3
    )
    
    
    11,740U.S. government and its agencies
    
    
    148,941
    
    
    
    6
    
    
    
    (652
    )
    
    
    148,295Abgenix common stock
    
    
    6,131
    
    
    
    62,372
    
    
    
    
    
    
    
    68,503$
    169,559
    
    
    $
    62,378
    
    
    $
    (655
    )
    
    $
    231,282Classified as:Cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    49,432Short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113,347Abgenix common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,503$
    231,282
 Gross Unrealized
    
    
    Gross Unrealized
    
    
    EstimatedDecember 31, 2003
    
    Amortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    2,040
    
    
    $
    
    
    
    $
    
    
    
    $
    2,040Corporate notes
    
    
    87,230
    
    
    
    368
    
    
    
    (41
    )
    
    
    87,557Municipal bonds
    
    
    12,506
    
    
    
    75
    
    
    
    
    
    
    
    12,581U.S. government and its agencies
    
    
    46,003
    
    
    
    168
    
    
    
    (10
    )
    
    
    46,161Abgenix common stock
    
    
    6,889
    
    
    
    85,047
    
    
    
    
    
    
    
    91,936$
    154,668
    
    
    $
    85,658
    
    
    $
    (51
    )
    
    $
    240,275Classified as:Cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,277Restricted cash and investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,000Short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,062Abgenix common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,936$
    240,275
 As of December 31, 2004, unrealized losses set forth above were primarily due to increases in
interest rates. The gross unrealized losses in our portfolio of investments represent less than
0.3% of the total fair value of the portfolio. We have concluded that unrealized losses in our
investment securities are other-than-temporary, and we have the intent and ability to hold impaired
securities to maturity or call date. Gross realized gains on the sale of investment securities were
$12.3 million, $14.6 million, and $5.6 million for the years ended December 31, 2004, 2003 and
2002, respectively. The Company sold 819,210, 1,250,000, and 260,000 shares of Abgenix stock
resulting in net proceeds of $12.9 million, $13.9 million and $2.5 million in 2004, 2003 and 2002,
respectively. The amortized cost and estimated fair value of the Companys available-for-sale debt
securities by contractual maturity are shown below (in thousands): December 31, 2004
    
    Amortized Cost
    
    
    Estimated Fair ValueDue in one year or less
    
    $
    115,112
    
    
    $
    114,900Due in one to three years
    
    
    48,316
    
    
    
    47,879$
    163,428
    
    
    $
    162,779
 49




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CELL GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 6. Property and Equipment Property and equipment consists of the following (in thousands): December 31,2004
    
    
    2003Machinery, furniture and equipment
    
    
    27,111
    
    
    
    24,947Leasehold improvements
    
    
    119,811
    
    
    
    116,590Property and equipment under facility lease obligation
    
    
    52,361
    
    
    
    53,343Construction in process
    
    
    3,864
    
    
    
    5,673203,147
    
    
    
    200,553Accumulated depreciation and amortization
    
    
    (43,484
    )
    
    
    (28,451
    )$
    159,663
    
    
    $
    172,102
 7. Leases and Debt Operating leases The Company leases certain of its facilities and equipment under non-cancelable operating
leases. These leases, including the Hayward, Foster City, San Diego and Memphis facility leases,
expire at various dates through 2017 and some contain options for renewal. Rent expense under
operating leases was $5.0 million in 2004, $9.1 million in 2003 and $9.6 million in 2002. In 2002, the Company recorded accrued expense for estimated lease exit costs associated with
the planned move of its corporate headquarters to South San Francisco, California in March 2003 and
the related vacancy in Foster City, California. Based upon updated estimates of the rental market
for comparable laboratory and office space, the Company subsequently revised its estimate of
accrued lease exit costs and recorded an additional $5.3 million of general and administrative
expense in 2003 and further recorded another $1.8 million in 2004 based on the continuing decline
in market conditions related to subleasing this space. As of December 31, 2004, the Company has
approximately $6.1 million accrued related to lease exit costs. Debt financing In October 2004, the Company entered into a purchase agreement with initial purchasers
relating to the private placement of $110.0 million aggregate principal amount of its 3.125%
Convertible Senior Notes due 2011. The Company granted the initial purchasers a 30-day option to
purchase up to an additional $35.0 million principal amount of the notes, which the purchasers
elected to exercise in full in November 2004. We received approximately $139.9 million in net
proceeds after deducting the initial purchasers discount and estimated offering expenses. The
Company used a portion of the net proceeds to repay bank debt of $60.0 million in asset-backed debt
financing obligation acquired from Fleet Bank in December 2001 in connection with the construction
of the Companys manufacturing facility in Hayward, California. Liquid financial instruments,
including cash and marketable securities, which are classified as restricted cash and investments
on the consolidated balance sheet, secured the debt financing, which bore interest based on LIBOR
(London Interbank Offering Rate) plus 0.625 percent and was scheduled to mature in January 2008.
The repayment eliminated restrictions on $60.0 million of cash. In addition, the Company used the
net proceeds of the note issuance to repay $35.0 million in term loans acquired in September 2003
from Silicon Valley Bank, which bore interest at 6.73 percent and was scheduled to mature in
September 2008. The loan was secured by certain of the Companys assets, excluding the Companys
intellectual property assets, deposits in certain investment accounts and the Companys holdings of
Abgenix, Inc. common stock. As of December 31, 2004, the Company recorded accrued interest expense
of $0.8 million under the convertible senior notes. Interest on the notes is payable in May of
2005 and every six months thereafter until the notes are due in 2011. Under certain circumstances, the Company may redeem some or all of the notes on or after
November 1, 2009 at a redemption price equal to 100% of the principal amount of the notes. Holders
of the notes may require the Company to repurchase some or all of their notes if a fundamental
change (as defined in the indenture governing the notes) occurs, at a repurchase price equal to
100% of the principal amount of the notes, plus accrued and unpaid interest (and additional
amounts, if any) to, but not including, the repurchase date. 50




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CELL GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Facility lease obligation During 2002, the Company amended the lease for its headquarters facility in South San
Francisco, California to fund the costs of certain structural components of the facility. As a
result of this lease amendment, the Company is required to account for the lease as a capital lease
obligation. At December 31, 2004, the Company had approximately $51.8 million of facility lease
obligations and $38.8 million of related leasehold improvement assets, net of accumulated
amortization. Future minimum payments under non-cancelable operating leases and facility lease obligation at
December 31, 2004 were as follows (in thousands), net of sublease rental amounts expected to be
received: Operating
    
    
    Facility LeaseLeases *
    
    
    ObligationYears ending December 31:2005
    
    $
    10,294
    
    
    $
    6,0872006
    
    
    3,856
    
    
    
    6,3002007
    
    
    2,336
    
    
    
    6,5202008
    
    
    2,430
    
    
    
    6,7482009
    
    
    2,338
    
    
    
    7,0172010 and beyond.
    
    
    20,145
    
    
    
    67,003Total minimum payments
    
    $
    41,399
    
    
    
    99,675Less: Amount representing interest and
executory costs
    
    
    
    
    
    
    (47,876
    )Present value of future debt payments
    
    
    
    
    
    
    51,799Less: Current portion of future payments.
    
    
    
    
    
    
    (786
    )Noncurrent portion of future payments
    
    
    
    
    
    $
    51,013
   *
    
    Total operating lease commitments include rent payments for the Foster City location of $6.9
million, of which $6.1 million was accrued at December 31, 2004 as part of the estimated
facility exit costs associated with the move to the South San
Francisco, California headquarters building in March 2003. The Company expects to receive $1.1 million in
aggregate future rentals under related subleases through January 2006. 8. Redeemable Convertible Preferred Stock In January 2000, the Company issued shares of Series B redeemable convertible preferred stock
pursuant to a call option granted in connection with a previous offering. The number of shares of
common stock issuable upon conversion of the shares of Series B preferred stock issued in January
2000 was determined by dividing the market value of the shares to be converted by the lower of a
fixed conversion price of $14.53 per share (subject to antidilution provisions), or the average of
certain trading prices during the 10 trading days preceding such date of conversion. As of December 31, 2004, 152 shares of the Series B redeemable convertible preferred stock
remained outstanding by two holders of record and were convertible into 252,917 shares of the
Companys common stock based on an effective conversion price of $7.50 per share. As of December
31, 2004, the carrying value of the outstanding Series B redeemable convertible preferred stock,
including imputed dividends, was approximately $1.9 million. On January 18, 2005, all of the 152 then-outstanding shares of our Series B redeemable
convertible preferred stock automatically converted into an aggregate of 275,622 shares of our
common stock at a conversion price of $6.895 per share. This conversion occurred in accordance
with their terms on the five-year anniversary of their issuance, according to a predetermined
formula. Following the conversion, no shares of the Companys Series B preferred stock remained
outstanding. 9. Stockholders Equity Common Stock In March 2004, the Company completed a public offering of its common stock. In the offering,
the Company sold 4,250,000 shares along with an additional 637,500 shares pursuant to the exercise
over-allotment option by the underwriters, resulting in gross proceeds of $61.1 million. The
offering was pursuant to the Companys shelf registration statement filed in February 2003, which 51




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CELL GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) allows the Company to sell shares of its common stock up to a total dollar amount of an additional
$88.9 million, although there can be no assurance that we will be able to issue any of the
remaining securities under this shelf registration on acceptable terms, or at all. Stock Option Plans Under the Cell Genesys 1998 Incentive Stock Option Plan (the 1998 Plan), 3,760,000 shares of
common stock were authorized for issuance as of December 31, 2004. The 1998 Plan provides for the
issuance of common stock and granting of options for common stock to employees, officers and
consultants of the Company. Cell Genesys grants options to purchase shares of common stock for
issuance under the 1998 Plan with exercise prices at no less than the fair market value of the
underlying common stock as of the date of grant. Options granted under the 1998 Plan have a maximum
term of 10 years and generally vest over four years at the rate of 25 percent one year from the
grant date and 1/48 monthly thereafter. Cell Genesys previously sponsored the 1989 Incentive Stock
Option Plan, which expired and was retired in 1999, and the 1992 Incentive Stock Option Plan, which
expired and was retired in 2002. As of December 31, 2004, there were 2,681,154, 787,740 and 31,000
options outstanding under the 1998, 1989 and 1992 Incentive Stock Option Plans, respectively, and
746,668 options available for grant under the 1998 Incentive Stock Option Plan. Under the Companys 2001 Nonstatutory Option Plan (the 2001 Plan), 5,500,000 shares of
common stock have been authorized for issuance as of December 31, 2004. The 2001 Plan provides for
the issuance of common stock and granting of options for common stock to employees (excluding
executive officers) and consultants of the Company. The Company generally grants options to
purchase shares of common stock for issuance under the 2001 Plan at no less than the fair market
value of the stock as of the date of grant. Options granted under the 2001 Plan have a maximum term
of 10 years and generally vest over four years at the rate of 25 percent one year from the grant
date and 1/48 monthly thereafter. As of December 31, 2004, there were 4,074,979 options outstanding
and 1,355,227 options available for grant under the 2001 Plan. Under the Companys 2001 Non-Employee Directors Stock Option Plan (the Directors Plan),
300,000 shares of common stock have been authorized for issuance as of December 31, 2004. The
Directors Plan provides for the issuance of common stock and granting of options for common stock
to non-employee directors of the Company. The Company grants options to purchase common stock for
issuance under the Directors Plan at no less than the fair market value of the stock as of the date
of grant. Options granted under the Directors Plan have a maximum term of 10 years. Each
non-employee director is automatically granted an option to purchase 30,000 shares upon initial
appointment or election to the Board and an option to purchase 7,500 shares each year thereafter.
Stock options granted upon appointment or election to the Board vest at the rate of 25 percent
annually on each anniversary of the date of grant. Subsequent grants for continued
service on the Board vest fully on the date of grant. As of December 31, 2004, there
were 247,500 options outstanding and 52,500 options available
for grant under the Directors Plan. 52




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##### Table of Contents



CELL GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) The following table summarizes information about the plans (share numbers in thousands): Outstanding Stock OptionsShares
    
    
    Number of
    
    
    Weighted AverageAvailable
    
    
    Shares
    
    
    Exercise PriceBalances, December 31, 2001
    
    
    6,168
    
    
    
    4,446
    
    
    $
    13.91Authorized
    
    
    3,000
    
    
    
    
    
    
    
    Granted
    
    
    (1,807
    )
    
    
    1,807
    
    
    $
    14.14Exercised
    
    
    
    
    
    
    (83
    )
    
    $
    5.16Expired
    
    
    (4,273
    )
    
    
    
    
    
    
    Forfeited
    
    
    408
    
    
    
    (408
    )
    
    $
    18.09Balances, December 31, 2002
    
    
    3,496
    
    
    
    5,762
    
    
    $
    13.82Authorized
    
    
    500
    
    
    
    
    
    
    
    Granted
    
    
    (1,674
    )
    
    
    1,674
    
    
    $
    9.85Exercised
    
    
    
    
    
    
    (97
    )
    
    $
    7.41Expired
    
    
    (31
    )
    
    
    
    
    
    
    Forfeited
    
    
    704
    
    
    
    (704
    )
    
    $
    16.70Balances, December 31, 2003
    
    
    2,995
    
    
    
    6,635
    
    
    $
    12.62Authorized
    
    
    500
    
    
    
    
    
    
    
    Granted
    
    
    (2,131
    )
    
    
    2,131
    
    
    $
    11.50Exercised
    
    
    
    
    
    
    (123
    )
    
    $
    6.33Expired
    
    
    (31
    )
    
    
    
    
    
    
    Forfeited
    
    
    821
    
    
    
    (821
    )
    
    $
    14.44Balances, December 31, 2004
    
    
    2,154
    
    
    
    7,822
    
    
    $
    12.23Exercisable at December 31, 2004
    
    
    
    
    
    
    4,951
    
    
    $
    12.68Exercisable at December 31, 2003
    
    
    
    
    
    
    4,056
    
    
    $
    12.22Exercisable at December 31, 2002
    
    
    
    
    
    
    3,114
    
    
    $
    11.66Weighted average fair value of options granted during 2004*
    
    
    
    
    
    
    
    
    
    $
    11.50Weighted average fair value of options granted during 2003*
    
    
    
    
    
    
    
    
    
    $
    5.66Weighted average fair value of options granted during 2002*
    
    
    
    
    
    
    
    
    
    $
    8.21
 *Fair value of the stock options was based on the Black-Scholes model. See below for
information regarding the assumptions applied to the model in each of the years. The following table summarizes information about stock options outstanding at December 31,
2004: Options Outstanding
    
    
    
    
    
    
    Options ExercisableWeighted-AverageNumber
    
    
    Remaining
    
    
    Weighted-
    
    
    Number
    
    
    Weighted-Range of
    
    Outstanding
    
    
    Contractual
    
    
    Average
    
    
    Exercisable
    
    
    AverageExercise Prices
    
    (in thousands)
    
    
    Life
    
    
    Exercise Price
    
    
    (in thousands)
    
    
    Exercise Price$3.50-7.21
    
    
    1,566
    
    
    
    5.4
    
    
    $
    5.59
    
    
    
    1,069
    
    
    $
    5.05$7.34-9.50
    
    
    1,642
    
    
    
    6.7
    
    
    $
    8.77
    
    
    
    1,103
    
    
    $
    8.69$9.95-14.04
    
    
    2,278
    
    
    
    8.7
    
    
    $
    12.77
    
    
    
    838
    
    
    $
    12.51$14.07-19.63
    
    
    1,812
    
    
    
    6.8
    
    
    $
    16.90
    
    
    
    1,455
    
    
    $
    17.21$19.88-42.63
    
    
    524
    
    
    
    6.2
    
    
    $
    24.40
    
    
    
    486
    
    
    $
    25.547,822
    
    
    
    
    
    
    
    
    
    
    
    4,951
 Employee Stock Purchase Plans The 2002 Employee Stock Purchase Plan (the Purchase Plan) was approved by stockholders in
June 2002. The Purchase Plan allows eligible employees to purchase common stock at 85 percent of
its fair value at certain specified dates. Employee contributions are limited to 10 percent of
compensation or $25,000, whichever is less. As of December 31, 2004, a total of 400,000 shares of
common stock have been authorized for issuance under the Purchase Plan. The Purchase Plan also
allows for annual increases in the number of shares authorized for issuance under the Purchase Plan to be added on the first day
of each of the Companys fiscal years beginning in 2003, equal to the lesser amount of (a) 100,000
shares, (b) 1/2 percent of the outstanding additional shares on such date, or
(c) an amount determined by the Board of Directors. Pursuant to this annual provision, 100,000
shares were authorized for issuance effective January 1, 2004, and an additional 100,000 shares
were authorized for issuance 53




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CELL GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) effective January 1, 2005. As of December 31, 2004, 286,727 shares
have been issued pursuant to the Purchase Plan. The 1992 Employee Stock Purchase Plan (1992 Plan) expired in 2002. A total of 650,000 shares
of common stock had been authorized for issuance under the 1992 Plan. As of December 31, 2002,
620,411 shares had been issued pursuant to the 1992 Plan. Pro forma information Pro forma information regarding net loss and net loss per share is required by SFAS 123, and
has been determined as if the Company had accounted for options granted under its employee stock
option plans and the Purchase Plan under the fair value method of SFAS 123. The fair value of
options granted in 2004, 2003 and 2002 was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted-average assumptions: Year Ended December 31,2004
    
    
    2003
    
    
    2002Risk free interest rates
    
    
    2.67
    %
    
    
    1.53
    %
    
    
    1.70
    %Volatility factors
    
    
    0.68
    
    
    
    0.76
    
    
    
    0.79Expected life
    
    
    3.9
    
    
    
    3.9
    
    
    
    3.9
 The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including the expected stock
price volatility. Because the Companys employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee stock options. Stockholder Rights Plan In July 1995, the Board of Directors approved a stockholder rights plan under which
stockholders of record on August 21, 1995 received one preferred share purchase right for each
outstanding share of the Companys common stock. In July 2000, the Company made certain technical
changes to amend the plan and extend the life of the plan until 2010. The rights are exercisable
only if an acquirer purchases 15 percent or more of the Companys common stock or announces a
tender offer for 15 percent or more of the Companys common stock. Upon exercise, holders other
than the acquirer may purchase Cell Genesys stock at a discount. The Board of Directors may
terminate the rights plan at any time or under certain circumstances redeem the rights. Common shares reserved for future issuance At December 31, 2004, the Company had reserved shares of common stock for potential future
issuance as follows: 15,934,066 shares upon conversion of convertible senior notes, 2,743,931 upon
conversion of Series B preferred stock and 10,090,041 for exercises under the Companys stock
option plans and stock purchase plan. Non-employee stock-based compensation In 2004, 2003 and 2002, Cell Genesys recorded $105,123, $81,000 and $238,000, respectively,
for non-employee stock-based compensation for grants of stock options to consultants. These amounts
were based upon the fair value of the vested portion of the grants. Additional compensation will be
recorded in future periods for the remaining unvested portion of the grants. 10. Income Taxes The Companys benefit (provision) for income taxes consists of the following (in thousands): Year Ended December 31,2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    
    
    
    $
    3,726
    
    
    $
    10,286State
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,726
    
    
    
    10,286
 54




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##### Table of Contents



CELL GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Year Ended December 31,2004
    
    
    2003
    
    
    2002Deferred:Federal
    
    
    (3,745
    )
    
    
    20,906
    
    
    
    8,350State
    
    
    
    
    
    
    
    
    
    
    (3,745
    )
    
    
    20,906
    
    
    
    8,350Benefit (provision) for income taxes
    
    $
    (3,745
    )
    
    $
    24,632
    
    
    $
    18,636
 The tax provision recorded in 2004 relates to the realized gain on the sale of the shares of
Abgenix common stock. The tax benefit recorded in 2003 primarily relates to net operating losses
that the Company has concluded are realizable based on the Companys estimate of future taxable
income, including future taxable income that may result from sales of its Abgenix common stock. The
tax benefit recorded in 2002 primarily related to the Companys ability to carry-back 2002 net
operating losses to the 2000 tax year. A reconciliation of the Companys recorded income tax benefit (provision) to the U.S.
statutory rate follows (in thousands): Year Ended December 31,2004
    
    
    2003
    
    
    2002Tax benefit at U.S. statutory rate of 35%
    
    $
    32,783
    
    
    $
    28,363
    
    
    $
    15,832Change in valuation allowance
    
    
    (45,789
    )
    
    
    (11,826
    )
    
    
    (1,594
    )Research and development tax credits
    
    
    4,180
    
    
    
    4,396
    
    
    
    4,350Tax effect of unrealized losses on
availablefor-sale-securities recorded in
other comprehensive income
    
    
    5,094
    
    
    
    
    
    
    
    In-process research and development
    
    
    
    
    
    
    
    
    
    
    74Prior year items
    
    
    
    
    
    
    3,726
    
    
    
    Other
    
    
    (13
    )
    
    
    (27
    )
    
    
    (26
    )Benefit (provision) for income taxes
    
    $
    (3,745
    )
    
    $
    24,632
    
    
    $
    18,636
 As of December 31, 2004, the Company had net operating loss carryforwards for federal income
tax purposes of approximately $266.6 million, which will expire on various dates between 2007 and
2024, if not utilized. As of December 31, 2004, the Company had federal R&D tax credits of $13.4
million, which will expire on various dates between 2018 and 2024. As of December 31, 2004, the
Company had net operating loss carryforwards for California state income tax purposes of $71.4
million, which will expire on various dates between 2005 and 2014. As of December 31, 2004, the
Company had California state R&D tax credits of $12.6 million, which do not expire. The Company
also had Manufacturer Investment Credits of $149 thousand which expire in 2010 and 2011.
Utilization of the net operating loss and credit carryforwards may be subject to substantial annual
limitation due to ownership change provisions of the Internal Revenue Code of 1986 and similar
state provisions. The annual limitation may result in the expiration of net operating losses and
credits before utilization. Prior year items relate to changes in estimates to the net operating
loss carrybacks to the 2000 year tax returns that were filed during 2003. Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Companys deferred tax assets and
liabilities are as follows (in thousands): December 31,2004
    
    
    2003Deferred tax assets:Net operating loss carryforwards
    
    $
    96,895
    
    
    $
    57,464Research credit carryforwards
    
    
    21,673
    
    
    
    17,675Capitalized research and development, net of amortization
    
    
    8,405
    
    
    
    2,526Other accruals and reserves
    
    
    (452
    )
    
    
    4,617Net deferred tax assets
    
    
    126,521
    
    
    
    82,282Valuation allowance
    
    
    (101,344
    )
    
    
    (48,035
    )25,177
    
    
    
    34,247Deferred tax liabilities:Unrealized gain on investments, including Abgenix, Inc.
    
    
    (25,177
    )
    
    
    (34,247
    )Net deferred tax
    
    $
    
    
    
    $
    
 Realization of deferred tax assets is dependent upon future earnings, if any, the timing and
amount of which are uncertain. The valuation allowance increased by $53.3 million, $24.9 million
and $9.2 million in 2004, 2003 and 2002 respectively. 55




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CELL GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) The Company establishes accruals for certain tax contingencies when, despite the belief that
the Companys tax positions are fully supported, the Company believes that certain positions may be
challenged and that the Companys positions may not be fully sustained. The tax contingency
accruals are adjusted in light of changing facts and circumstances, such as the progress of tax
audits, case law and emerging legislation. The IRS is currently examining the 2000 tax year. As
of December 31, 2004, the Companys accrual for income taxes payable is sufficient to cover any
expected liabilities arising from this examination. As of December 31, 2004 and 2003 respectively,
we had accrued approximately $30.0 million in tax contingencies and related interest. The Companys
tax contingency accruals have been reclassified from noncurrent income tax liabilities to current
liabilities within the balance sheet. The nature of these matters is uncertain and subject to change. As a result, the amount of
our liability for certain of these matters could exceed or be less than the amount of our current
estimates, depending on the outcome of these matters. An outcome of such matters different than
previously estimated could materially impact our financial position or results of operations in the
year of resolution. 11. 401(k) Plan Cell Genesys sponsors a defined-contribution savings plan under Section 401(k) of the Internal
Revenue Code covering all full time employees (the Cell Genesys 401K Plan). Participating
employees may contribute up to the annual Internal Revenue Service contribution limit. The Cell
Genesys 401K Plan also provides for employer matching contributions up to an annual limit of
$3,000. The Cell Genesys 401K Plan is intended to qualify under Section 401 of the Internal Revenue
Code so that contributions by the employees and by Cell Genesys, and income earned on the
contributions, are not taxable to employees until withdrawn from the plan. Contributions by Cell
Genesys are tax deductible by Cell Genesys when made. At the discretion of each participant, the
assets of the Cell Genesys 401K Plan are invested in any of twelve different investment options. The employer matching contribution is invested in the same investment options selected by the
employee for their individual contributions. The employer matching contributions vest ratably over
three years. The Company contributed $942,050, $843,000 and $777,000 in employer matching
contributions in 2004, 2003 and 2002, respectively. 12. Selected Quarterly Financial Information (Unaudited) Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,Quarterly Results of Operations
    
    2004
    
    
    2004
    
    
    2004
    
    
    2004(Unaudited)
    
    
    
    
    
    (in thousands, except per share amounts)Revenues
    
    $
    2,584
    
    
    $
    2,462
    
    
    $
    3,228
    
    
    $
    3,184Research and development
    
    
    22,644
    
    
    
    24,097
    
    
    
    21,686
    
    
    
    23,706General and administrative(1)
    
    
    5,549
    
    
    
    5,115
    
    
    
    3,772
    
    
    
    3,492Net loss(2)
    
    
    (20,919
    )
    
    
    (26,019
    )
    
    
    (24,049
    )
    
    
    (26,424
    )Basic and diluted loss per share
    
    
    (0.52
    )
    
    
    (0.58
    )
    
    
    (0.54
    )
    
    
    (0.59
    )
   (1)
    
    The quarters ended March 31 and June 30, 2004 include facility exit costs of $1.0
million and $0.8 million, respectively.(2)
    
    The quarters ended March 31, June 30 and September 30, 2004 include gains on sales
of Abgenix, Inc. common stock of $5.5 million, $6.5 million and $0.2 million, respectively. Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,Quarterly Results of Operations
    
    2003
    
    
    2003
    
    
    2003
    
    
    2003(Unaudited)
    
    
    
    
    
    (in thousands, except per share amounts)Revenues(1)
    
    $
    1,038
    
    
    $
    13
    
    
    $
    15,710
    
    
    $
    1,367Research and development
    
    
    21,058
    
    
    
    22,578
    
    
    
    20,371
    
    
    
    21,289General and administrative(2)
    
    
    5,041
    
    
    
    6,930
    
    
    
    6,439
    
    
    
    7,570Net loss (3)
    
    
    (17,375
    )
    
    
    (19,096
    )
    
    
    (2,914
    )
    
    
    (17,021
    )Basic and diluted loss per share
    
    
    (0.47
    )
    
    
    (0.51
    )
    
    
    (0.07
    )
    
    
    (0.43
    )
   (1)
    
    The quarter ended September 30, 2003 includes $14.1 million in connection with a
terminated collaboration agreement with Japan Tobacco Inc. 56




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CELL GENESYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)   (2)
    
    The quarters ended June 30, September 30 and December 31, 2003 include facility exit
costs of $1.6 million, $1.2 million and $2.5 million, respectively.(3)
    
    The quarters ended June 30, September 30 and December 31, 2003 include gains on
sales of Abgenix, Inc. common stock of $7.3 million, $2.6 million and $2.7 million,
respectively. Basic and diluted loss per share is computed independently for each of the quarters presented.
Therefore, the sum of quarterly basic and diluted per share amounts may not equal annual basic and
diluted loss per share amounts. 13. Related Party In August 2004, Ceregene, Inc., previously a majority-owned subsidiary of the Company,
announced an initial closing of a $32.0 million Series B preferred stock financing. The Company
participated in the financing through the conversion of a bridge loan into shares of Ceregenes
Series B preferred stock. Immediately following that financing, the Company owned approximately
25% of Ceregenes capital stock on a fully diluted basis. Neither the financial position nor
operating results for Ceregene have been consolidated by Cell Genesys subsequent to August 3, 2004.
As of and for the four months ended December 31, 2004, the Companys investment in Ceregene was
accounted for under the equity method of accounting as a result of the Companys reduced ownership
position in Ceregene. As of December 31, 2004, the Companys cost basis in its investment in
Ceregene had been reduced to zero; consequently, the Company does not expect to recognize future
losses from Ceregene under the equity method of accounting. At the time of the deconsolidation, the
Company recorded a liability of approximately $0.2 million for a Cell Genesys guarantee of certain
secured indebtedness of Ceregene. The guarantee extends into the year 2006. The liability that the
Company initially recognized for the guarantee will be reduced, by a credit in the statement of
operations, as the Company and as the risk of payment under the guarantee decreases. Commencing August 4, 2004, Ceregene is considered to be a related party. For the four months
ended December 31, 2004, the Company recorded revenue of $0.8 million from Ceregene under a
contract manufacturing arrangement and technology license revenue of $0.2 million under the same
agreement. 57




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##### Table of Contents



ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE Not applicable. 
  ITEM 9A.
    CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures An evaluation was performed under the supervision and with the participation of our management
team, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, our management, including our Chief Executive
Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures were
effective as of December 31, 2004 to provide reasonable assurance that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms. Managements Annual Report on Internal Control Over Financial Reporting The Companys management is responsible for establishing and maintaining adequate internal
control over the Companys financial reporting. The Companys internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that:  
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect
on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. In addition, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions and that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Companys internal control over financial reporting as
of December 31, 2004. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.Based on the assessment using those criteria, management believes
that, as of December 31, 2004, our internal control over financial reporting was effective. Our independent registered public accountants, Ernst & Young LLP, audited the consolidated
financial statements included in this Annual Report on Form 10-K and have issued an audit report on
managements assessment of our internal control over financial reporting as well as on the
effectiveness of the Companys internal control over financial
reporting. Their report on the audit
of internal control over financial reporting appears on page 38 of this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting There were no significant changes in our internal control over financial reporting that
occurred during the year ended December 31, 2004, that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. 
  ITEM 9B.
    OTHER INFORMATION Not applicable. 58




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##### Table of Contents



PART III 
  ITEM 10.
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) The information required by this Item concerning our directors is incorporated by
reference to our Definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission within 120 days after the end of our 2004 fiscal year
(the 2005 Proxy Statement). (b) The information required by this Item concerning our executive officers is set forth in
the section entitled Executive Officers in Part I of this Form 10-K and is incorporated by
reference into this section. We have adopted a code of ethics that applies to all of our employees, including our principal
executive officer, our principal financial officer and our principal accounting officer. This code
of ethics, which is part of our Code of Business Conduct and Ethics that applies to all of our
employees, is posted on our website and can be accessed from the following link: Cell Genesys Code
of Business Conduct and Ethics-Corporate Governance. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding any
amendment to, or waiver from, a provision of this code of ethics by posting such information on our
website, at the address and location specified above. 
  ITEM 11.
    EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to our 2005 Proxy
Statement. 
  ITEM 12.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS The information required by this item regarding security ownership of certain beneficial
owners and management, as well as equity compensation plans, is incorporated by reference to the
information set forth in the sections Beneficial Owners and Managements Ownership of Cell Genesys
Stock and Equity Compensation Plan Information in our 2005 Proxy Statement. 
  ITEM 13.
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to our 2005 Proxy
Statement. 
  ITEM 14.
    PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated by reference to our 2005 Proxy
Statement. 59




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##### Table of Contents



PART IV 
  ITEM 15.
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Index to Financial Statements PageConsolidated Balance Sheets at December 31, 2004 and 2003
    
    
    40Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002
    
    
    41Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    
    42Consolidated Statements of Stockholders Equity for the years ended December 31, 2004, 2003 and 2002
    
    
    43Notes to Consolidated Financial Statements
    
    
    44
 2. Index to Financial Statement Schedules All financial statement schedules are omitted because they are not applicable or not required
or because the required information is included in the financial statements or notes thereto. (b) Exhibits Number
    
    Note
    
    Description2.1
    
    
    (1
    )
    
    Agreement and plan of merger and reorganization, dated as of January 12, 1997, among Cell Genesys, S Merger
Corp. and Somatix Therapy Corporation.2.2
    
    
    (2
    )
    
    Asset Purchase Agreement dated January 8, 2001 between Cell Genesys and Chiron Corporation, pursuant to
which Cell Genesys purchased operating assets of Chiron Corporations gene therapy operations.2.3
    
    
    (3
    )
    
    Series A Preferred Stock Purchase Agreement dated January 10, 2001, pursuant to which Cell Genesys
purchased shares of Series A Preferred Stock of Ceregene, Inc.2.4
    
    
    (4
    )
    
    Agreement and Plan of Reorganization dated as of August 1, 2001 by and among Cell Genesys, Satellite
Acquisition Corporation, Calydon, Inc., Kenneth Socha as shareholder representative (with respect to
Articles VII and IX only) and Chase Manhattan Bank and Trust Company, N.A., as escrow agent.3.1
    
    
    (5
    )
    
    Restated Certificate of Incorporation.3.2
    
    
    (5
    )
    
    Certificate of Amendment to Restated Certificate of Incorporation.3.3
    
    
    (5
    )
    
    Certificate of Designation of Series A Participating Preferred Stock.3.4
    
    
    (5
    )
    
    Certificate of Amendment to Certificate of Designation of Series A Participating Preferred Stock.3.5
    
    
    (5
    )
    
    Certificate of Designation of Series B Redeemable Convertible Preferred Stock.3.6
    
    
    (28
    )
    
    Bylaws.4.1
    
    
    (6
    )
    
    Amended and Restated Preferred Shares Rights Agreement, dated as of July 26, 2000 between Cell Genesys and
Fleet National Bank.4.2
    
    
    (29
    )
    
    Indenture dated as of October 20, 2004 by and between Cell Genesys and U.S. Bank National Association.10.1
    
    
    (7
    )
    
    Form of Indemnification Agreement for Directors and Officers.10.2
    
    
    (8
    )
    
    Amended 1989 Incentive Stock Plan.10.3
    
    
    (8
    )
    
    Amended 1992 Employee Stock Purchase Plan.10.4
    
    
    (7
    )
    
    Representative Preferred Stock Purchase Agreement.10.5
    
    
    (9
    )
    
    Fourth Amended and Restated Stockholder Rights Agreement.10.6
    
    
    (7
    )
    
    License Agreement dated August 13, 1990 between Cell Genesys and the University of North Carolina at Chapel
Hill.10.8
    
    
    (10
    )
    
    License Agreement dated June 28, 1991 between Cell Genesys and the University of Utah Research Foundation.10.9
    
    
    (11
    )
    
    Amended Employment Agreement with Stephen A. Sherwin, M.D.
 60




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##### Table of Contents



Number
    
    Note
    
    Description10.10
    
    
    (11
    )
    
    Research and Development Leases dated November 1, 1994 between Cell Genesys and Vintage Park Associates and
Addendums thereto.10.11*
    
    
    (12
    )
    
    Amendment No. 1 dated June 7, 1996 to Vintage Park Research and Development Lease.10.12
    
    
    (13
    )
    
    Amended 1998 Incentive Stock Plan.10.13
    
    
    (14
    )
    
    Research and Development Leases Amendment dated February 12, 2001 between Cell Genesys and Vintage Park
Associates.10.14
    
    
    (15
    )
    
    Research and Development Leases between Cell Genesys and Drawbridge/Forbes LLC, dated March 3, 2001.10.15
    
    
    (16
    )
    
    Lease Agreement dated June 21, 2001, between Alexandria Real Estate Equities, Inc., and Cell Genesys for
property located at 11055 Roselle Street in San Diego, California.10.16
    
    
    (17
    )
    
    Lease Agreement dated June 21, 2001, between Alexandria Real Estate Equities, Inc., and Cell Genesys for
property located at 11075 Roselle Street in San Diego, California.10.17*
    
    
    (18
    )
    
    Amended and Restated GVAX® Agreement by and between Japan Tobacco Inc. and Cell Genesys dated
November 26, 2001.10.18
    
    
    (18
    )
    
    Credit Agreement between Cell Genesys and Fleet National Bank dated as of December 27, 2001.10.19
    
    
    (18
    )
    
    Industrial Lease Agreement dated February 1, 2002, between Shelby Drive Corporation, and Cell Genesys for
property located at 4600 Shelby Drive, Suite 108, Memphis, Tennessee.10.20
    
    
    (18
    )
    
    Lease Agreement dated January 7, 2002, between F & S Hayward, LLC, and Cell Genesys for property located at
the Adjacent Park of Bridgeview Tech Park of 24570 Clawiter Road, Hayward, California.10.21*
    
    
    (19
    )
    
    License Agreement dated June 7, 2002 between Transkaryotic Therapies, Inc. and Cell Genesys, Inc.10.22
    
    
    (20
    )
    
    2002 Employee Stock Purchase Plan.10.23
    
    
    (20
    )
    
    2001 Nonstatutory Stock Option Plan.10.24
    
    
    (21
    )
    
    Change of Control Severance Agreement.10.25
    
    
    (22
    )
    
    Amendment No. 2 dated June 12, 2003 to the Credit Agreement between Cell Genesys and Fleet National Bank.10.26
    
    
    (23
    )
    
    Amended and Restated 1998 Incentive Stock Plan.10.27*
    
    
    (24
    )
    
    Patent Assignment and License Agreement dated July 23, 2003 between Cell Genesys, Novartis AG and Genetic
Therapy Inc.10.28*
    
    
    (25
    )
    
    Product Development and Option Agreement dated July 23, 2003 between Cell Genesys and Novartis Pharma AG.10.29
10.30
    
    
    (26
(27
    )
)
    
    Standstill and Registration Rights Agreement dated July 23, 2003 between Cell Genesys, Novartis AG and
Genetic Therapy, Inc.
Loan and Security Agreement dated September 29, 2003 between Cell Genesys, Inc. and Silicon Valley Bank.10.31
    
    
    (30
    )
    
    Resale Registration Rights Agreement dated as of October 20, 2004 among Cell Genesys and J.P. Morgan
Securities Inc. and Lehman Brothers Inc., as representatives of the initial purchaser.12.1   
23.1
    
    
    
    
    
    Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements.
Consent of Independent Registered Public Accounting Firm.31.1
    
    
    
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    
    
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished, not filed).
   *
    
    Confidential treatment has been granted with respect to specific portions of this exhibit.
    
    Management compensatory plan or arrangement required to be filed as an exhibit pursuant to
Item 15(c) of Form 10-K.(1)
    
    Incorporated by reference to Exhibit 2.1 filed with the Companys Form 8-K dated January 12,
1997. 61




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##### Table of Contents



(2)
    Incorporated by reference to Exhibit 10.3 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2001.(3)
    Incorporated by reference to Exhibit 10.4 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2001.(4)
    Incorporated by reference to Exhibit 10.1 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2001.(5)
    Incorporated by reference to the same numbered exhibit filed with the Companys Registration
Statement on Form S-3/A (Reg. No. 333-102122) filed with the SEC on January 30, 2003.(6)
    Incorporated by reference to the Companys Form 8-A12G/A dated July 28, 2000.(7)
    Incorporated by reference to the same numbered exhibit filed with the Companys Registration
Statement on Form S-1 (Reg. No. 33-46452) as amended.(8)
    Incorporated by reference to the same numbered exhibit filed with the Companys Annual Report
on Form 10-K for the year ended December 31, 1995.(9)
    Incorporated by reference to the same numbered exhibit filed with the Companys Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995.(10)
    Incorporated by reference to the same numbered exhibit filed with the Companys Annual Report
on Form 10-K for the year ended December 31, 1992.(11)
    Incorporated by reference to the same numbered exhibit filed with the Companys Annual Report
on Form 10-K for the year ended December 31, 1994.(12)
    Incorporated by reference to Exhibit 10.40 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.(13)
    Incorporated by reference to Exhibit 4.1 filed with the Companys Registration Statement Form
S-8 filed July 31, 2000.(14)
    Incorporated by reference to Exhibit 10.1 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2001.(15)
    Incorporated by reference to Exhibit 10.2 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2001.(16)
    Incorporated by reference to Exhibit 10.1 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2001.(17)
    Incorporated by reference to Exhibit 10.2 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2001.(18)
    Incorporated by reference to the same numbered exhibit filed with the Companys Annual Report
on Form 10-K for the year ended December 31, 2001.(19)
    Incorporated by reference to the same numbered exhibit filed with the Companys Quarterly
Report on Form 10-Q/A for the quarter ended June 30, 2002 (filed July 30, 2003).(20)
    Incorporated by reference to Exhibit 4 filed with the Companys Registration Statement on
Form S-8 filed with the SEC on July 2, 2002.(21)
    Incorporated by reference to Exhibit 10.26 filed with the Companys Annual Report on Form
10-K for the year ended December 31, 2002.(22)
    Incorporated by reference to Exhibit 10.1 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.(23)
    Incorporated by reference to Exhibit 10.2 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.(24)
    Incorporated by reference to Exhibit 10.3 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.(25)
    Incorporated by reference to Exhibit 10.4 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.(26)
    Incorporated by reference to Exhibit 10.5 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.(27)
    Incorporated by reference to Exhibit 10.1 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2003.(28)
    Incorporated by reference to the same numbered exhibit filed with the Companys Annual Report
on Form 10-K for the year ended December 31, 2003.(29)
    Incorporated by reference to Exhibit 4.1 filed with the Companys Registration Statement on
Form S-3 (Reg. No. 333-121732) filed with the SEC on December 29, 2004.(30)
    Incorporated by reference to Exhibit 10.1 filed with the Companys Registration Statement on
Form S-3 (Reg. No. 333-121732) filed with the SEC on December 29, 2004. 62




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, this
14thday of March 2005. Cell Genesys, Inc.By:
    /s/ Matthew J. PfefferMatthew J. PfefferVice President and Chief
Financial Officer(Principal Financial and Accounting
Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the capacities and on the dates
indicated. Signature
    

Title
    

Date/s/Stephen A. Sherwin, M.D.
Stephen A. Sherwin, M.D.
    
    Chairman of the Board and Chief Executive
Officer(Principal Executive Officer)
    
    March 14, 2005/s/
Matthew J. Pfeffer
Matthew J. Pfeffer
    
    Vice President and Chief Financial Officer(Principal Financial and Accounting
Officer)
    
    March 14, 2005/s/
David W. Carter
David W. Carter
    
    Director
    
    March 14, 2005/s/
Nancy M. Crowell
Nancy M. Crowell
    
    Director
    
    March 14, 2005/s/
James M. Gower
James M. Gower
    
    Director
    
    March 14, 2005/s/
John T. Potts, Jr.,
M.D.
John T. Potts, Jr., M.D.
    
    Director
    
    March 14, 2005/s/
Thomas E. Shenk, Ph.D.
Thomas E. Shenk, Ph.D.
    
    Director
    
    March 14, 2005/s/
Eugene L. Step
Eugene L. Step
    
    Director
    
    March 14, 2005/s/
Inder M. Verma, Ph.D.
Inder M. Verma, Ph.D.
    
    Director
    
    March 14, 2005/s/
Dennis L. Winger
Dennis L. Winger
    
    Director
    
    March 14, 2005
 
 63




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##### Table of Contents



EXHIBIT INDEX Number
    
    Note
    
    Description2.1
    
    
    (1
    )
    
    Agreement and plan of merger and reorganization, dated as of January 12, 1997, among Cell Genesys, S Merger
Corp. and Somatix Therapy Corporation.2.2
    
    
    (2
    )
    
    Asset Purchase Agreement dated January 8, 2001 between Cell Genesys and Chiron Corporation, pursuant to
which Cell Genesys purchased operating assets of Chiron Corporations gene therapy operations.2.3
    
    
    (3
    )
    
    Series A Preferred Stock Purchase Agreement dated January 10, 2001, pursuant to which Cell Genesys
purchased shares of Series A Preferred Stock of Ceregene, Inc.2.4
    
    
    (4
    )
    
    Agreement and Plan of Reorganization dated as of August 1, 2001 by and among Cell Genesys, Satellite
Acquisition Corporation, Calydon, Inc., Kenneth Socha as shareholder representative (with respect to
Articles VII and IX only) and Chase Manhattan Bank and Trust Company, N.A., as escrow agent.3.1
    
    
    (5
    )
    
    Restated Certificate of Incorporation.3.2
    
    
    (5
    )
    
    Certificate of Amendment to Restated Certificate of Incorporation.3.3
    
    
    (5
    )
    
    Certificate of Designation of Series A Participating Preferred Stock.3.4
    
    
    (5
    )
    
    Certificate of Amendment to Certificate of Designation of Series A Participating Preferred Stock.3.5
    
    
    (5
    )
    
    Certificate of Designation of Series B Redeemable Convertible Preferred Stock.3.6
    
    
    (28
    )
    
    Bylaws.4.1
    
    
    (6
    )
    
    Amended and Restated Preferred Shares Rights Agreement, dated as of July 26, 2000 between Cell Genesys and
Fleet National Bank.4.2
    
    
    (29
    )
    
    Indenture dated as of October 20, 2004 by and between Cell Genesys and U.S. Bank National Association.10.1
    
    
    (7
    )
    
    Form of Indemnification Agreement for Directors and Officers.10.2
    
    
    (8
    )
    
    Amended 1989 Incentive Stock Plan.10.3
    
    
    (8
    )
    
    Amended 1992 Employee Stock Purchase Plan.10.4
    
    
    (7
    )
    
    Representative Preferred Stock Purchase Agreement.10.5
    
    
    (9
    )
    
    Fourth Amended and Restated Stockholder Rights Agreement.10.6
    
    
    (7
    )
    
    License Agreement dated August 13, 1990 between Cell Genesys and the University of North Carolina at Chapel
Hill.10.8
    
    
    (10
    )
    
    License Agreement dated June 28, 1991 between Cell Genesys and the University of Utah Research Foundation.10.9
    
    
    (11
    )
    
    Amended Employment Agreement with Stephen A. Sherwin, M.D.




---



##### Table of Contents



Number
    
    Note
    
    Description10.10
    
    
    (11
    )
    
    Research and Development Leases dated November 1, 1994 between Cell Genesys and Vintage Park Associates and
Addendums thereto.10.11*
    
    
    (12
    )
    
    Amendment No. 1 dated June 7, 1996 to Vintage Park Research and Development Lease.10.12
    
    
    (13
    )
    
    Amended 1998 Incentive Stock Plan.10.13
    
    
    (14
    )
    
    Research and Development Leases Amendment dated February 12, 2001 between Cell Genesys and Vintage Park
Associates.10.14
    
    
    (15
    )
    
    Research and Development Leases between Cell Genesys and Drawbridge/Forbes LLC, dated March 3, 2001.10.15
    
    
    (16
    )
    
    Lease Agreement dated June 21, 2001, between Alexandria Real Estate Equities, Inc., and Cell Genesys for
property located at 11055 Roselle Street in San Diego, California.10.16
    
    
    (17
    )
    
    Lease Agreement dated June 21, 2001, between Alexandria Real Estate Equities, Inc., and Cell Genesys for
property located at 11075 Roselle Street in San Diego, California.10.17*
    
    
    (18
    )
    
    Amended and Restated GVAX® Agreement by and between Japan Tobacco Inc. and Cell Genesys dated
November 26, 2001.10.18
    
    
    (18
    )
    
    Credit Agreement between Cell Genesys and Fleet National Bank dated as of December 27, 2001.10.19
    
    
    (18
    )
    
    Industrial Lease Agreement dated February 1, 2002, between Shelby Drive Corporation, and Cell Genesys for
property located at 4600 Shelby Drive, Suite 108, Memphis, Tennessee.10.20
    
    
    (18
    )
    
    Lease Agreement dated January 7, 2002, between F & S Hayward, LLC, and Cell Genesys for property located at
the Adjacent Park of Bridgeview Tech Park of 24570 Clawiter Road, Hayward, California.10.21*
    
    
    (19
    )
    
    License Agreement dated June 7, 2002 between Transkaryotic Therapies, Inc. and Cell Genesys, Inc.10.22
    
    
    (20
    )
    
    2002 Employee Stock Purchase Plan.10.23
    
    
    (20
    )
    
    2001 Nonstatutory Stock Option Plan.10.24
    
    
    (21
    )
    
    Change of Control Severance Agreement.10.25
    
    
    (22
    )
    
    Amendment No. 2 dated June 12, 2003 to the Credit Agreement between Cell Genesys and Fleet National Bank.10.26
    
    
    (23
    )
    
    Amended and Restated 1998 Incentive Stock Plan.10.27*
    
    
    (24
    )
    
    Patent Assignment and License Agreement dated July 23, 2003 between Cell Genesys, Novartis AG and Genetic
Therapy Inc.10.28*
    
    
    (25
    )
    
    Product Development and Option Agreement dated July 23, 2003 between Cell Genesys and Novartis Pharma AG.10.29
10.30
    
    
    (26
(27
    )
)
    
    Standstill and Registration Rights Agreement dated July 23, 2003 between Cell Genesys, Novartis AG and
Genetic Therapy, Inc.
Loan and Security Agreement dated September 29, 2003 between Cell Genesys, Inc. and Silicon Valley Bank.10.31
    
    
    (30
    )
    
    Resale Registration Rights Agreement dated as of October 20, 2004 among Cell Genesys and J.P. Morgan
Securities Inc. and Lehman Brothers Inc., as representatives of the initial purchaser.12.1   
23.1
    
    
    
    
    
    Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements.
Consent of Independent Registered Public Accounting Firm.31.1
    
    
    
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    
    
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished, not filed).
   *
    
    Confidential treatment has been granted with respect to specific portions of this exhibit.
    
    Management compensatory plan or arrangement required to be filed as an exhibit pursuant to
Item 15(c) of Form 10-K.(1)
    
    Incorporated by reference to Exhibit 2.1 filed with the Companys Form 8-K dated January 12,
1997.




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##### Table of Contents



(2)
    Incorporated by reference to Exhibit 10.3 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2001.(3)
    Incorporated by reference to Exhibit 10.4 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2001.(4)
    Incorporated by reference to Exhibit 10.1 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2001.(5)
    Incorporated by reference to the same numbered exhibit filed with the Companys Registration
Statement on Form S-3/A (Reg. No. 333-102122) filed with the SEC on January 30, 2003.(6)
    Incorporated by reference to the Companys Form 8-A12G/A dated July 28, 2000.(7)
    Incorporated by reference to the same numbered exhibit filed with the Companys Registration
Statement on Form S-1 (Reg. No. 33-46452) as amended.(8)
    Incorporated by reference to the same numbered exhibit filed with the Companys Annual Report
on Form 10-K for the year ended December 31, 1995.(9)
    Incorporated by reference to the same numbered exhibit filed with the Companys Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995.(10)
    Incorporated by reference to the same numbered exhibit filed with the Companys Annual Report
on Form 10-K for the year ended December 31, 1992.(11)
    Incorporated by reference to the same numbered exhibit filed with the Companys Annual Report
on Form 10-K for the year ended December 31, 1994.(12)
    Incorporated by reference to Exhibit 10.40 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.(13)
    Incorporated by reference to Exhibit 4.1 filed with the Companys Registration Statement Form
S-8 filed July 31, 2000.(14)
    Incorporated by reference to Exhibit 10.1 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2001.(15)
    Incorporated by reference to Exhibit 10.2 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2001.(16)
    Incorporated by reference to Exhibit 10.1 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2001.(17)
    Incorporated by reference to Exhibit 10.2 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2001.(18)
    Incorporated by reference to the same numbered exhibit filed with the Companys Annual Report
on Form 10-K for the year ended December 31, 2001.(19)
    Incorporated by reference to the same numbered exhibit filed with the Companys Quarterly
Report on Form 10-Q/A for the quarter ended June 30, 2002 (filed July 30, 2003).(20)
    Incorporated by reference to Exhibit 4 filed with the Companys Registration Statement on
Form S-8 filed with the SEC on July 2, 2002.(21)
    Incorporated by reference to Exhibit 10.26 filed with the Companys Annual Report on Form
10-K for the year ended December 31, 2002.(22)
    Incorporated by reference to Exhibit 10.1 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.(23)
    Incorporated by reference to Exhibit 10.2 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.(24)
    Incorporated by reference to Exhibit 10.3 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.(25)
    Incorporated by reference to Exhibit 10.4 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.(26)
    Incorporated by reference to Exhibit 10.5 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.(27)
    Incorporated by reference to Exhibit 10.1 filed with the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2003.(28)
    Incorporated by reference to the same numbered exhibit filed with the Companys Annual Report
on Form 10-K for the year ended December 31, 2003.(29)
    Incorporated by reference to Exhibit 4.1 filed with the Companys Registration Statement on
Form S-3 (Reg. No. 333-121732) filed with the SEC on December 29, 2004.(30)
    Incorporated by reference to Exhibit 10.1 filed with the Companys Registration Statement on
Form S-3 (Reg. No. 333-121732) filed with the SEC on December 29, 2004.